2325-training manuals - english

7/23/2019 2325-Training Manuals - EnGLISH

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THE DAR ES SALAAM STOCK EXCHANGE (DSE)ENTERPRISE GROWTH MARKET (EGM):

Te Financing Solution for SMEs

TRAINING MODULES


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TRAINING MANUAL ITHE DAR ES SALAAM STOCK EXCHANGE (DSE)I i

FOREWORD BY DSE CHAIRMAN ON ENTERPRISE GROWTH MARKET TRAINING MANUAL .............. iiABBREVIATIONS AND ACRONYMS ................................................................................................................. iii

MODULE 1: AN OVERVIEW OF SMEs IN TANZANIA ..................................................................................... 1

MODULE 2: BUSINESS LEGAL STRUCTURES ................................................................................................... 7

MODULE 3: BUSINESS PLANNING AND EVALUATION ................................................................................. 18

MODULE 4: FINANCIAL MANAGEMENT AND RECORDKEEPING .............................................................. 30

MODULE 5: CORPORATE GOVERNANCE AND COMPLIANCE .................................................................... 38

MODULE 6: FINANCING OPTIONS FOR SMEs ............................................................................................... 52

MODULE 7: DSEs ENTERPRISE GROWTH MARKET ....................................................................................... 60

MODULE 8: LISTING REQUIREMENTS AND CONTINUOUS LISTING OBLIGATIONS ............................. 68

LIST OF FIGURES

Figure 1: Types of Companies ........................................................................................................................ 9

Figure 2: Diagram of Relationships within Companies .............................................................................. 14

LIST OF TABLES

Table 1: Categories of SMEs in Tanzania .................................................................................................... 2

Table 2: Key Features of Legal Business Entities in Tanzania ................................................................. 15

Table 3: Sample SWOT ................................................................................................................................... 24

Table 4: Example of a Balance Sheet .......................................................................................................... 34

Table 5: Example of an Income Statement .................................................................................................. 35

Table 6: Example of a Cash Flow Statement .............................................................................................. 36

Table 7: Eligibility Conditions for Listing on the EGM ............................................................................. 64

Table of Contents


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I THE DAR ES SALAAM STOCK EXCHANGE (DSE)I TRAINING MANUALii

Small and Medium Enterprises (SMEs) play a crucial role in employment creation and incomegeneration and contribute substantially to development in Tanzania. SMEs have beenestablished in both rural and urban settings to cover both farming and non-farming economicactivities, thus, playing an important role in utilising and adding value to local resources. Indeed,SMEs development can be closely associated with a more equitable distribution of income andis thus an important factor in poverty alleviation and economic empowerment initiatives.

Tanzania has many different policy initiatives that aim at developing the SME sector, but itsfull potential has yet to be tapped due to a number of constraints hampering its development.Financial literacy and access to nance are among the major constraints facing SMEs in Tanzania.According to the Micro, Small and Medium Enterprises (MSME) Survey Report of 2010, the twobiggest challenges to growth in Tanzania are insufficient working capital and lack of access tonancial markets. In the recent past, nancial institutions and other stakeholders in the countrysnancial markets have developed different solutions aimed at addressing these challenges, butthey continue to hinder SME development.

In an effort to address the nancing challenge that faces Tanzanian SMEs, the Capital Marketsand Securities Authority (CMSA) carried out a study that recommended introduction of a marketsegment at the Dar es Salaam Stock Exchange (DSE) that will cater to SMEs capital-raisingneeds. To implement this initiative, the DSE developed a Training Program to create publicawareness and provide education on basic business and managerial skills, to ultimately createan environment conducive to attracting the capital essential for SMEs expansion and growth.Simply put, the purpose of this training is to enable SMEs to attract capital from potentialinvestors.

This publication contains eight training modules that will be delivered at different workshopsaimed at medium-sized enterprises in the country. The training will be held throughout thewhole country using a regional or zone approach. The training material is a revised version ofearlier materials prepared by specialists or experts from academia, the business industry, andpractitioners. The revised material takes into account new developments in Tanzanias nancialmarkets, particularly new developments in the capital markets and stock exchange operations.

On behalf of the DSE Board, I wish to take this opportunity to express my sincere appreciationto: the projects nanciers Financial Sector Deepening Trust (FSDT); the DSE management andstaff; the CMSA; and the other experts involved. Their cooperation and dedication made thispublication possible.

Pius A. ManenoChairmanDar es Salaam Stock ExchangeAugust 2013

Foreword by DSE Chairman on EnterpriseGrowth Market Training Manual


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TRAINING MANUAL ITHE DAR ES SALAAM STOCK EXCHANGE (DSE)I iii

BEST Business Environment Strengthening for TanzaniaCIS Collective Investment SchemeCBT Capital Budgeting TechniqueCGS Credit Guarantee SchemeCMSA Capital Markets and Securities AuthorityCSR Corporate Social ResponsibilityDSE Dar es Salaam Stock ExchangeEGM Enterprise Growth MarketFSDT Financial Sector Deepening Trust

IFRS International Finance Reporting StandardsIPO Initial Public OfferIRR Internal Rate of ReturnLDM Licensed Dealing MemberMEMARTS Memorandum and Articles of AssociationMIMS Main Investment Market SegmentMNC Multinational CorporationsMSME Micro, Small, and Medium EnterprisesNBAA National Board of Accountants and AuditorsNPV Net Present ValueOECD Organisation for Economic Co-operation and DevelopmentOEM Original Equipment ManufacturersR&D Research and DevelopmentSIDO Small Industry Development OrganizationSME Small and Medium EnterprisesSWOT Strengths, Weaknesses, Opportunities and ThreatsTIC Tanzania Investment CentreTRA Tanzania Revenue AuthorityTZS Tanzania Shillings

WACC Weighted Average Cost of Capital

Abbreviations and Acronyms


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I THE DAR ES SALAAM STOC

6

MODULE ONE

AN OVERVIEW OF SMEs

IN TANZANIA


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TRAINING MANUAL ITHE DAR ES SALAAM STOCK EXCHANGE (DSE)I 1

MODULE OUTLINE

(i) Introduction

(ii) Purpose of the Module

To describe the importance of SMEs in Tanzanias economy; To present the position and role played by SMEs in the economy; and To convey the importan ce of SMEs in the creation and distribution of wealth.

(iii) Key Issues to be Addressed by the Module Constraints facing SMEs and various interventions to address them; Government policies on SMEs; Financing opportunities available in the capital market; and The role of the Dar es Salaam Stock Exchange (DSE) in providing investment

opportunities.

(iv) Methodology

Presentations by capital market experts; Practical examples/case studies of actual situations; Interactions with entrepreneurs to share their experiences; and Discussion of practical issues.

(v) Expected Outcome(s)

Entrepreneurs should understand various policy initiatives related to SMEs andtheir objectives in addressing the challenges faced by SMEs;

Entrepreneurs should be aware of available opportunities and solutions toconstraints facing their businesses; and

Entrepreneurs should understand the available nancing opportunities in thecapital market and hence understand how to access the Enterprise GrowthMarket segment of the DSE.

Module Outline


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I THE DAR ES SALAAM STOCK EXCHANGE (DSE)I TRAINING MANUAL2

1.0 AN OVERVIEW OF SMEs IN TANZANIA

1.1 Introduction

1.1.1 Denition of SMEsThe term SMEs stands for Small and Medium Enterprises. The commonly used factorsin dening the term are: total number of employees; total capital investment; and salesturnover. The Organisation for Economic Co-operation and Development (OECD)denes SMEs as non-subsidiary, independent rms that employ less than a givennumber of employees (between 250 and 500). As per the Small Industry Development

Organization (SIDO) denition, SMEs in Tanzania are mostly formal undertakingsengaging up to 100 employees, with a capital investment of up to TZS 800 million. Tobe listed on the Enterprise Growth Market (EGM) segment of the Dar es Salaam StockExchange (DSE), SMEs must have net assets (issued and paid up capital) of at least TZS200 million.

1.1.2 Classication of SMEsFor the purposes of the Tanzanias SMEs Development Policy, SMEs are categorized asfollows:

Table 1: Categories of SMEs in Tanzania

Category Employees Capital Investment in Machinery (TZS)

Micro enterprise 1 4 Up to 5 million

Small enterprise 5 49 Above 5 million to 200 million

Medium enterprise 50 - 99 Above 200 million to 800 million

Large enterprise 100+ Above 800 million

1.1.3 Attributes of SMEsSMEs possess a number of attributes that make them potential contributors toeconomic growth, including the following:

Compared to large enterprises, SMEs are usually more in number and thereforetake up a larger share of the labour force. According to the MSME Survey Report of2010, there are more than 3 million small businesses in Tanzania;

They are creators of employment opportunities. The MSME Survey Report showsthat small businesses have over time employed more 5 million people;

They are a potential source of innovation, entrepreneurial talent, and exportcompetitiveness;

Their existence increases competition and hence economic dynamism; and

Their support of entrepreneurial spirit and skills in diverse geographical areas

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contributes towards the reduction of economic disparities between urban andrural areas.

1.2 The Importance of SMEs in the EconomySMEs play a crucial role in employment creation and income generation in Tanzania.SMEs all over world and in Tanzania in particular can be easily established, since theirrequirements for seed capital, technology, and management are relatively minimal.SME development is closely associated with a more equitable distribution of incomeand is thus an important factor in poverty alleviation. At the same time, SMEs serve asa training ground for emerging entrepreneurs.

1.3 Policy Framework for SMEs in TanzaniaIn recognition of the importance of the private sector and SMEs in particular, theGovernment of Tanzania has put in place many supportive policies and programs.These are intended to create the necessary enabling environment for the privatesector by addressing some of the key constraints it faces. Such policies and programsinclude, but are not limited to, the following:

Small and Medium Enterprise Development Policy The policy outlines priorities/strategies and improves the operations and

competitiveness of existing SMEs while also helping to establish new ones. Itsmain mission is to stimulate development and growth of SMEs activities throughimproved infrastructure, enhanced service provision, and creation of supportivelegal and institutional framework so as to achieve competitiveness.

National Micro nance Policy This policys overall objective is to provide a basis for the evolution of an efficientand effective micro-nancial system in the country, and thus to provide a frameworkfor ensuring coordinated interventions by the different players in the system.

Sustainable Industrial Development Policy

This policy helps to create the overall framework for the countrys future industrialdevelopment (including SMEs). Furthermore, it provides for government supportin enhancing SMEs capacities by improving the legal and regulatory frameworkand access to nance.

National Strategy for Growth and Reduction of Poverty This policy builds on interventions in the following areas: economic growth;reduction of income poverty; improvement of social life and wellbeing as wellas governance and accountability; and addressing the challenges faced by theprivate sector (including SMEs) with respect to access to nance. The policy

further outlines initiatives to improve the investment environment and providesfor the governments intention to support innovation, product development, and


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quality marketing strategies by local rms, including SMEs, to make them morecompetitive and enhance their capacity to respond to global marketing conditions.

Program on Business Environment Strengthening for Tanzania (BEST)This program aims at: achieving better regulation; improving commercial disputeresolution; strengthening the Tanzania Investment Centre (TIC); changing theculture of government; and empowering private sector advocacy.

1.4 Major Constraints to the Development of SMEsThree major constraints contribute to the underdevelopment of SMEs in developing

countries, including Tanzania: A non-supportive business environment; A lack of managerial and technical skills; and A lack of access to capital for growth.

For the SME sector to grow in a sustainable manner, all three areas need to beaddressed. However, this manual addresses only the third constraint: access to capital.This area has received relatively more attention than the other constraints faced bySMEs, but nevertheless remains a major constraint for the SME sector. So far, effortsto enhance access to nance by SMEs have focused mainly on commercial banks,micro nance institutions, and government/donor-funded programs. However, thesefunding sources have provided mostly short-term nancing and, in some cases, havenot been sustainable. Consequently, SMEs have not been able to obtain long-termfunding for growth. There is, therefore, a need to identify additional sources of fundsto provide long-term nancing.

1.5 Financing Opportunities Available in the Capital MarketAs key stakeholders in the implementation of the government policy on SMEs,Tanzanias capital market institutions have put in place an institutional framework toaddress the constraints to capital, management, and technical skills development. The

capital market institutions intervention is intended to enable prospective qualiedSMEs to enhance their business management capacities as well as to expose them tosustainable sources of nance.

The Enterprise Growth Market (EGM) on the DSEA stock market is a vital part of economic development as it encourages savings, helpschannel savings into productive investment, and encourages entrepreneurs to improvethe efficiency of their investments. The introduction of the EGM segment on the DSEwill serve founders and developers of enterprises by ensuring that capital is availableto start or expand any project.


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Medium enterprises are the target group of the EGM. The selection of this targetgroup is based on the following factors:

Their size makes it possible for them to attain economies of scale and as such, theyhave the necessary absorptive capacity and can fully capitalize on the technologyand technical assistance provided to them;

They are potential sources of innovation; They have the growth potential to access funding through capital markets and thus

can facilitate wealth creation through wider share ownership among Tanzanians;and

As entities with listing potential, they have the potential to provide a demonstrationeffect and to bring about a multiplier effect.

1.6 ConclusionSMEs are considered among the key vehicles for wealth creation, with the potentialto make a substantial contribution towards real economic growth depending on theirgrowth orientation. In Tanzania, the full potential of SMEs sector has yet to be tappeddue to the existence of a number of constraints (e.g., limited access to nance). Themain focus of this module was to highlight the capital nancing options currentlyavailable to SMEs in Tanzania, with emphasis on the role of capital markets. The moduleintroduced the DSEs EGM platform as one of the preferred long-term capital nancingoptions for SMEs in Tanzania.


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BUSINESS LEGAL STRUCTURES


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(i) Introduction


To help entrepreneurs understand the main forms of entities used in conductingbusiness and the cost implications of each form of business;

To convey to entrepreneurs the comparative advantages of each form of businessand to provide a comparative analysis of each; and

To enable entrepreneurs to make better, more informed choices of business legal

structures (recognizing their importance in wealth creation and distribution).

(iii) Key Issues to be Addressed by the Module

A comparative analysis of a variety of legal forms of business and what it takes toestablish each form of business entity;

The factors that business persons need to take into account when choosing a legalstructure and the post-establishment obligations of each form of business; and

The most appropriate legal structure for SMEs growth and sustainability.

(iv) Methodology

Presentations by consultants; Practical examples/case studies of actual situations; Participants experiences/interactions; and Discussion of practical issues.

(v) Expected Outcome(s)

Entrepreneurs should understand the di erences between the legal implicationsof a variety of business entities;

Entrepreneurs should be able to assess which form of legal structure will attractcapital most easily (compared to other forms);

Entrepreneurs should be able to describe how limited liability companies makeoperational decisions; and

Entrepreneurs should understand the importance of the separation of powersbetween shareholders and management.

Course Outline


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2.0 BUSINESS LEGAL STRUCTURES

2.1 Introduction

2.1.1 What is a Business?A business is an enterprise or operation that produces commodities or rendersservices. It involves the performance of activities or functions such as buying,selling, and producing. These activities are conducted in a physical, political, andeconomic environment. The main motive for carrying out a business is prot-making.

2.1.2 Types of Business EntitiesThe entrepreneur or owner of a business can choose any formal manner in whichhe or she will operate the business. There are four main forms of legal entitiesby which business can be conducted: sole proprietorship, partnership, company(private, public, or listed), and commercial trust.

The critical characteristics of each relate to:

Ownership: Who owns the business? Control: Who runs and manages the business? Responsibility: Who is responsible for the businesss performance? Accountability: To whom is the leadership accountable for the businesss

performance? Liability: Who is liable for the businesss debts? Taxation: Who pays the businesss taxes?

2.2 Considerations in Choosing the Form of Business Structure

2.2.1 Formality in Setting Up

A sole proprietorship can be established easily with no need to prepare anyconstitutive documents, as is the case with partnerships, companies, andcommercial trusts.

A partnership: forming partnerships involve preparing agreements and lingconstitutive documents to provide for the comprehensive treatment of allpresent and future aspects of the relationship.

A company: The Companies Act, 2002 imposes a number of formalities on theformation of a company, such that prescribed documents must be prepared

and lodged with the Registrar of Companies.

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Figure 1: Types of Companies

2.2.2 Liability for DebtsIn sole proprietorships and most partnerships, sole proprietors and partners arefully liable for all the debts of the business. A partner has a right of contributionfrom his fellow partners but if they are unable to contribute, he is liable withoutlimit. In limited partnerships, partners are liable up to the amount of authorizedcapital.

The liability of a shareholder in a limited company is limited to paying the agreedprice for his shares; usually this is paid in full at or within a short time afterallotment by the company. A company provides the best cushion for liability toits owners compared to the other two forms of business organization. However,in certain circumstances (e.g., fraudulent or wrongful trading, personalguarantees, breach of duty to the company, and penalties under the CompaniesAct), directors are personally liable for what they have done or failed to do.

2.2.3 Raising Finance

(i) LoansA lender extending a loan to any person will usually seek security forrepayment of the loan. Companies, partnerships, and sole proprietorshipscan all create xed charges over their assets as security. However, only acompany is able to create a oating charge (for example, its stock-in-tradeand future assets) as security for its borrowing and therefore a companyhas greater scope than a partnership or a sole proprietorship for raisingloan nance.

COMPANIES

Private CompanyLtd. (2 minimumshareholders:maximum 50shareholders)

Public Company Ltd.Shareholders (minimum 7,maximum - no limit)

Public Company Ltd.- Listed on a StockExchange


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(ii) CapitalA limited liability company that asks a person to introduce capital bybecoming a shareholder has the benet of being able to assure theinvestor of limited liability not offered by general partnership. It follows,therefore, that companies have a wider range of alternatives for raisingcapital than do partnerships and sole proprietorships. For example, onlycompanies can access capital through capital markets; partnerships andsole proprietorships cannot.

2.2.4 Perpetual Life

Legally, a company has a perpetual life unless stated otherwise in its constitution.A company is expected to survive the deaths of its shareholders. Althoughthis is the legal position, experience has shown that many companies collapseimmediately after the death of their founders. A partnership comes to an endwith the death of one partner. The death of the sole proprietor also brings toan end the sole proprietorship. For continuity purposes, a company is the mostappropriate vehicle for ensuring sustainability.

2.2.5 Management StructureA sole proprietorship is a one-man-show. As such, it is vulnerable to a numberof shortcomings as stated above.

A partnership is at liberty to organize itself in such a way that certain partnersexercise management functions while others are only consulted on major issues.However, as far as an outsider is concerned, any partner may have apparentauthority to act in management and may therefore bind the rm.

In contrast, a company has a prescribed structure that facilitates the separationof management functions from capital investment in the company. Managementfunctions are broadly exercised by the directors and relatively few functionsare reserved for the shareholders in a general meeting. This arrangement

provides the exibility to hire competent persons both on the board and at themanagement level.

2.2.6 Tax ConsiderationsBefore deciding on the form of business vehicle to use, the tax relief availablefor each form is normally considered. There are many differences between thetreatment of an unincorporated business (sole proprietorship or partnership)and that of a company and its directors and shareholders. Some favour the formerwhile others favour the latter. Consideration is then given to the signicantdifferences in treatment.


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2.2.7 Disclosure of InformationA company must make public a range of information about its affairs, its directors,and its shareholders by ling returns and documents with the Registrar ofCompanies or the stock exchange (in case of a listed company). This informationincludes audited accounts. Partnerships and sole proprietorships are entitledto maintain privacy in all their affairs, with the exception that, in the case ofpartnerships, the identity of all partners and an address for service of documentsmust be revealed. Investors prefer business organizations that are transparent;thus, companies are better at attracting investors on this score.

2.2.8 Statutory Obligations and ControlThroughout its life, a company must comply with several statutory obligationsregarding maintenance and ling of records and information. Examples includethe completion of minutes of meetings and statutory registers and the ling ofannual returns and audited accounts. These obligations call for administrativediscipline and some expense. The Companies Act, 2002 also imposes controlsand directives on certain activities, like dividend distribution to shareholders.

2.3 Control and Ownership of a BusinessInformed by the choice of entity, the fundamental issues of ownership and controlinuence all future strategic business decisions.

2.3.1 Non-Incorporated Businesses: Proprietorships and PartnershipsIn the case of sole proprietorships and partnerships, ownership and control arevested in the owners: They own the business; They run the business; They enjoy the benets of ownership; i.e., capital and wealth creation, as

well as remuneration for running and managing the business; They are personally responsible for the debts and liabilities of the business; There is no separate legal entity; There is no separation of ownership and control; They may employ individual managers to run the business on their behalf; They are responsible for paying taxes on all pro ts of the business; They make all decisions a ecting the business; and They may be operated under the owners names or registered business

names.

2.3.2 Incorporated Businesses: CompaniesAn incorporated business is an entity that is a listed public company, a non-listed

public company, or a private company. Incorporated businesses have ownership


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structures and control that reect the essence of modern corporations and goodcorporate governance. In simple terms, the relationship between owner(s) andmanagement is as follows: The shareholders or members own the business; The shareholders do not directly own the company, but appoint directors to

manage and run the business on their behalf; The directors are responsible to the company and accountable to the

shareholders; The directors are the agents of the shareholders; The directors are trustees of the company;

Companies are separate legal entities from the shareholders; and The assets of the business are owned by the company, not by the shareholders.

2.4 Decision Making in Companies

2.4.1 Shareholders Decisions

(i) Shareholders are the owners of the company as they raise the money/capitalto establish the company. Shareholders are responsible for making thefollowing decisions: Altering any aspect of the companys constitution; Appointing directors of the board; Dismissing directors from the board; and Condoning any breach of duty to the company by its directors.

(ii) Shareholders decisions are normally made through resolutions in aprescribed percentage (e.g. 75%) or just a simple majority.

2.4.2 Directors Decision-Making Powers

(i) Typically, directors are responsible for making the following decisions:

Entering into contracts (including sales and purchases, borrowing,contracts of employment);

Calling general meetings; Taking legal proceedings in the companys name; and Approving transfers of shares (and the consequent changes in

membership).

(ii) Directors also have limited authority for the following decisions, in the sensethat they must rst seek approval from shareholders in a general meeting: Issuing new shares in the company;

Entering into contracts with individual directors by which the companywill buy from or sell to that director something of signicant value; and


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Awarding to individual directors service contracts of signi cant duration.

iii) Directors decisions are made through resolutions passed on the basis of onevote per director and a simple majority suffices. The Board of Directors isgenerally allowed to delegate its decision making to one or more individualdirectors or committees.

In all types of legal structures (listed public companies, non-listed publiccompanies, and private companies), there are four principal role players (seeFigure 2):

Shareholders/members/investors: Those who form(s) the company andprovide(s) the start-up and risk capital;

The company itself: The separate legal business entity; Directors: Agents of owners/members/investors; and Management: Individual persons who run the company.


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Shareholders/Members

Separate Legal Entity (with itsown Rights, Responsibilities,

Assets, LIabilities, Risk, Returns) -independent of its shareholders

Executive DirectorsTop ManagementMiddle Management

DIRECTORS

Control over leadership Voting Power

Agents of the owners Trustees of the Company Control over Management Leadership power

Focus on Strategy and Governance

1.0 Control over employees2.0 Management power3.0 Focus on operations, tactics and

systems

OWNERSHIP

Company

Leadership

Management

Employees


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1. Formation Natural person Partnership Memorandum Trust Deed; begins trading Agreement and Articles of Certicate of Association; Incorporation Certicate of

Incorporation

2. Incorporation N/A N/A On registration On registration (Legal Personality)

3. Existence Ceases when the sole Ceases when Perpetual Perpetual sole proprietor there is a succession succession stops carrying on membership unless stated unless stated business change otherwise otherwise

4. Termination Ceases when the By agreement, Deregistration Deregistration sole proprietor change of or winding-up or winding-up stops carrying on partners or by dissolution/ by dissolution/ business when a liquidation liquidation partners estate is sequestrated

5. Ownership of One natural person Natural or Shareholders: Trustees on Business legal persons (a) Private (2 to 50) behalf of (2 to 20) (b) Public (7 to beneciaries unlimited)

6. Management The Sole proprietor Owned jointly by The directors The Trustees all partners

7. Representation The Sole proprietor The partners The directors The Trustees

8. Capital Own resources of Partners Issues shared Initial

contribution the proprietor contribute captial of the contribution by (money/property) (money, property shareholders the settlor or services)

9. Regulation N/A Partnership, Shareholders Trust Deed & (Agreements) agreement Agreement & Regulations Articles of

Association

10. Disposal or N/A As per Agreement As per Articles As per the Trust transfer of Deed interests

S/No CRITERIASOLE

PROPRIETORSHIPCOMMERCIAL

TRUSTPARTNERSHIP COMPANY

2.5 Comparative Analysis of Various Business EntitiesTable 2 provides a comparison of the key features of the main legal business entities:

Table 2: Key Features of Legal Business Entities in Tanzania


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11. Liability to Liable for all the Partners are Debts of the Trustees are creditors debts of the business jointly and company are its liable for all severally liable shareholders Trust debts for the partnership debts

12. Audit No audit required No credit required Audit Audit requirements requirements requirements by independent by independent auditors auditors

13. Accounting N/A N/A Speci c Speci c requirments accounting accounting by law requirements requirements -disclosure & -disclosure & record records

14. Insolvency of Results in Results into Does not lead Does not lead business entity bankruptcy of the bankruptcy of to bankruptcy into owner the partners of the bankruptcy of shareholders the Trustees

15. Tax Entity Not separate - Not a separate Separate tax Separate tax taxed in the hands entity - partners entity entity of the proprietor partners taxed (25% - 30%) (30% or 10%) (30%) (30%)

16. Salaries to N/A - cash taken is Salary to an If a shareholder If a trustee is owners drawings and not equity partner is employed, employed, deductible is an advance salary is salary is against deductible deductible partnership prots

For Salaried partner, it is just a business expenses

S/No CRITERIA SOLEPROPRIETORSHIPCOMMERCIAL

TRUSTPARTNERSHIP COMPANY


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MODULE THREE

BUSINESS PLANNING

AND EVALUATION


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(i) Introduction


To help entrepreneurs understand the importance of business planning inestablishing new businesses and maintaining/expanding existing businesses;

To teach entrepreneurs how to develop excellent business plans for di erentbusiness sizes;

To convey to entrepreneurs the importance of and need for excellent business

plans for SMEs; and To teach entrepreneurs how to develop business plans for SMEs that can be usedto attract capital and/or business nancing.


Business planning and its importance in establishing new businesses and expandingexisting businesses;

Business plan creation and how plans can used to attract capital and other availablesources of business nancing; and

The bene ts to SMEs of business planning.

(iv) Methodology

Presentations by consultants; Practical examples/case studies of actual situations; and Participants interactions/experiences and discussion of practical issues.

(v) Expected Outcomes

Entrepreneurs should understand the importance of business planning inestablishing and expanding businesses;

Entrepreneurs should understand what to include in a business plan and how,when, and why to prepare one; and

Entrepreneurs should understand how a well-written business plan can help SMEsattract capital and different sources of funding.

Course Outline


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3.0 BUSINESS PLANNING

3.1 IntroductionA business plan is a very important tool for guiding new businesses to success. Itallows entrepreneurs to test if a business idea is feasible and if, when put into use; itcan be sustained in the foreseeable future. For a business idea to get off the ground,decisions about products, market, location, size, nancing, infrastructure, etc. shouldbe thoroughly examined in a business plan. The business planning process shouldbe given adequate time to satisfactorily answer if the product(s) or service(s) to be

offered: lls a gap in the market; provides something different from other businessesin the same industry; and will have a demand in the market that is greater than thecurrent supply.

3.2 Why Prepare a Business Plan?Business planning gives entrepreneurs an opportunity to identify a target market,a product, and customers. It also helps entrepreneurs study the market to establishclear benets for the customers who ultimately choose to deal with them. Amongother things, a good business plan: Serves as an opportunity to prepare a review of planned operations; Provides further insights into the detailed working of the company; Reveals strengths and weaknesses that may not be immediately apparent; Signals to potential investors the businesss prospects and opportunities for the

future; and Is a document (required) to be presented to the CMSA for capital raising and listing

to get regulatory approval.

3.3 Guide to Writing a Good Business PlanA business plan generally projects three to ve years ahead and outlines the route

the company intends to take to grow revenues. The plan should be reviewed regularlyand changed when necessary to ensure that it (and the business) stays focused on theobjectives. A good business plan will include, among other things, the following:

3.3.1 An Overview of the BusinessThe business overview section should provide a high-level review of thebusinesss current position. Key historic milestones and information about thecompany should be clearly stated here. This section should help nanciers,current and potential investors, and the public understand the position, goals,

and future plans of the business and its unique proposition.

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A brief summary of the following items should be included in the businessoverview: The nature of the business and when/how it was established, the industry,

and the current market demand for the businesss product(s) or service(s); The business philosophy and how its marketplaces logistical needs will be

served; The current number of sta /outlets and the businesss geographic spread,

acquisitions, mergers, and large contracts; The speci c and targeted consumers, organizations, or businesses the

business serves or will serve; The businesss main di erence from competitors i.e., its comparative

advantages, such as better location, cheaper price, better service, and/ormore efficient operations, and the key benets to consumers; and

Where the business will be three to ve years in the future and how this willbe achieved.

3.3.2 The Nature of the BusinessThis section describes exactly what the business sells or produces and how it is(will be) produced. It provides a brief overview of the services/products in termsof branding, special features, packaging, key supplies, and on-going serviceor product development. It highlights the benets to potential and currentcustomers and focuses on how the businesss particular product/service will lla need for its target customers.

The description of what is offered to customers should include: A description of the product/service and life cycle; Intellectual property rights held by the business; The price and how it is determined (considering production costs, labour,

and other overhead expenses); The competitive operational advantage; Research and development (R&D) activities; and Key suppliers and special dealings with supplier/s, if any.

3.3.3 The Business Structure and ManagementThe purpose of this section is to give stakeholders and investors assurance thatthe business structure and management team can deliver on the prospects andforecasts contained in the business plan. It provides information to regulatory

bodies and the public on who does what in the business, the respective


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backgrounds of key employees, and evidence of their ability to manage thebusiness and comply with laws and regulations.

This section should include: The businesss organizational and ownership structure; Details about ownership of the business, pro les of the management team,

and qualications of Board of Directors members; Other relevant elements such as trademarks, patents, and intellectual

property that may need to be protected; Other key information about legal agreements and senior sta and their

involvement/responsibilities; and The businesss exit strategy (if any).

3.3.4 Market AnalysisThe market analysis of the business plan should briey outline what market thebusinesss product/service will serve and why. It should clearly illustrate thenature of the industry, using market knowledge and data from internal researchor from external trusted sources like business magazines, government reports,and consumer surveys.

The market analysis should include: The state of the market is it growing, declining, or segmented? Analysis of who will buy the product or service and where the market is (will

be) located; Identi cation of current customers (if any) and their average buying

volumes; Information regarding positive/negative feedback from customer surveys; Details of current large contracts and their prospects going forward;

The state of the industry and its outlook the current size and historic andprojected growth rate;

Information about the targeted market distinguishing character, size ofthe primary market, how much market share can be gained, etc.;

Market in uences such as seasonal price uctuations or trends; The price range: based on the target market, will it be high, low or in the

middle? and Barriers (e.g., regulatory restrictions, technology, personnel, cost), if any,

that might restrict/hinder production/sales of planned services or products,

and the window of opportunity to overcome them.


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3.3.5 Industry OverviewThe industry overview section should show how the industry is currentlyperforming, present the market forecast going forward, and ascertain theopportunities available within the market forecast.

3.3.6 Competitive AnalysisThe competitive analysis should identify the businesss competition by productline, service, and market segment. The analysis should assess the followingcharacteristics of the competitive landscape:

Market share how the businesss products/services feature against thecompetition and an analysis of the businesss competitive edge;

The bene ts of the businesss services/products to consumers; A comparative analysis of the businesss pricing, promotion, and distribution

strategies; Evaluation of the importance of the target market to competitors; Assessment of any indirect or secondary competitors who may enter the

market and impact the businesss success; An identi cation of competitors and how they are faring in the marketplace

in comparison; A description of how the business will position its product or service against

competitors; and Opportunities available based on the analysis.

3.3.7 Marketing and Sales AnalysisMarketing is the process of creating and maintaining customers, as customersare the lifeblood of any business. This section describes how customers will ndout about the businesss products or services, and should include:

Where, how, and when products/services will be promoted (e.g., shoppingcentre promotions, point of sale, viral marketing, billboard, loyalty schemes,etc.);

The types of printed materials, if any, that will be created; The businesss website or online presence; Details and cost of advertising, including print, online, TV, and radio; Product/service launch plans; How the success of the marketing strategy and various promotions will be

measured; and

How pricing will encourage sales (e.g., selling in bulk).


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A good marketing analysis should include the following four strategies:

A marketing penetration strategy how to enter, capture, gain, and maintainthe market;

A growth strategy an internal strategy for how to increase humanresources, buy another business, or branch out, and how to differentiateand segment the market if necessary;

A channels of distribution strategy how to physically move products/services to consumers (choices for distribution channels could include

original equipment manufacturers (OEMs), an internal sales force,distributors, or retailers); and A communication strategy how to reach customers (usually best achieved

with a combination of promotions, advertising, public relations, personalselling, and printed materials such as brochures, catalogues, yers, etc.).

3.3.8 SWOT AnalysisA strategic SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysishelps turn knowledge into strategy, which can then be turned into actions.It provides direction to the business and its marketing strategies. The SWOTanalysis should be used to describe the businesss strengths and weaknessesand to develop strategies to help eliminate or mitigate them. Table 3 illustratesthe generic elements of a SWOT:


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Financial projections, including how much is needed to break even, whenthe business is anticipated to make a prot, and any growth expectations;and

Financial statements (including income statements, balance sheet, currentcash ow and projections, etc.) to validate the summary.

3.3.10 Action PlanThe action plan should clearly explain how business plan objectives are to beachieved, and should be regularly reviewed and used to control decisions and

actions taken. The action plan should list actions by key areas (such as Legal,Finance, Establishment, and Marketing). It should clearly state how key taskswill be done, by whom, and by when. If they are too detailed, they may becomeunworkable.

3.3.11 An Executive SummaryThe executive summary is often considered the most important section of abusiness plan. It briey tells the reader where the company is, where it intendsto go, and why the business idea will be successful. If the business is seekingnancing, the executive summary is also a rst opportunity to interest potentialinvestors. As it highlights the strengths of the overall business plan, it shouldbe the last section written (even though it usually appears rst in a businessplan document). Depending on the stage of the business, several key points toinclude in the executive summary are as follows:

For an established business, the following information should be included: The mission statement a few sentences to a paragraph that explain what

the business is all about; Company information a short statement that covers when the business

was formed, the names of the founders and their roles, the number ofemployees, and the businesss location(s);

Growth highlights examples of company growth, such as nancial ormarket highlights (e.g., increased sales, prot margins and market shareyear over year for x years); graphs and charts can be helpful in this section;

A brief description of the businesss products/services; Financial information any information about the businesss current bank

and investors, especially if nancing is being sought; and A summary of future plans where the business is headed.


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The information in the executive summary should be covered in a concise fashionusing clear language. This is the rst (and sometimes only) part of the business planthat many people will read, so each word should count.

A start-up or new business wont have as much information as an established company.Thus, its executive summary should include: A focus on the owners personal experience and background as well as the decisions

that led to creation of the enterprise; Clear demonstration of a thorough market analysis by including information about

the identied need or gap in the target market, and how the businesss particularsolutions can ll this; A convincing argument that the business will succeed in its target market; and An exposition of future plans (accompanied by nancing options).

3.4 Investment EvaluationRunning a business requires regular evaluation of the business. It is very importantto know the current value of the business before making an investment or nancingdecision or changing products and production techniques. For investment decisions,business owners and managers must assess whether the alternative proposedinvestment will give the best return at minimum risk. Some of the tools commonlyused for business or investment evaluation include:

3.4.1 Capital Budgeting Technique (CBT)This is the process by which a business determines whether projects such asbuilding a new plant or investing in a long-term venture are worth pursuing.Oftentimes, a prospective projects lifetime cash inows and outows areassessed to determine whether the returns generated meet a sufficient targetbenchmark.

Also known as investment appraisal, CBT is the nancial managementtechnique used to analyse whether it is worthwhile to invest in certain types ofxed assets, as this type of investment can have a long-term effect on businessaffairs and often involves relatively large outlays. Ideally, businesses shouldpursue all projects and opportunities that enhance shareholder value. However,because the amount of capital available at any given time for new projects islimited, management can use CBT to determine which projects will yield thegreatest return over an applicable period of time.


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3.4.2 Net Present Value (NPV)The NPV is the difference between the present value of cash inows and thepresent value of cash outows. The NPV is used in capital budgeting to analysethe protability of an investment or project. The NPV compares the value ofan investment outlay (in money terms) today to the value of that same outlayof money in the future, taking ination and returns into account. If the NPV ofa prospective project is positive, it should be accepted. However, if the NPV isnegative, the project should probably be rejected because cash ows will alsobe negative. If two or more projects are being considered, the one with the

highest NPV should be selected.

3.4.3 Internal Rate of Return (IRR)The IRR is the discount rate often that makes the NPV of all cash ows from aparticular project equal to zero. Generally speaking, the higher a projects IRR,the more desirable it is to undertake the project. As such, the IRR can be usedto rank several prospective projects considered by a rm. Assuming all otherfactors are equal among the various projects, the project with the highest IRRwould probably be considered the best and undertaken rst.

The IRR is used to evaluate the attractiveness of a project or investment. If theIRR of a new project exceeds a companys required rate of return, that projectis desirable. If the IRR falls below the required rate of return, the project shouldbe rejected. IRRs can also be compared against prevailing rates of return in thesecurities market. If a rm cant nd any projects with IRRs greater than thereturns that can be generated in the nancial markets, it may simply choose toinvest its retained earnings in the market.

3.4.4 Weighted Average Cost of Capital (WACC)

A companys assets are nanced by either debt or equity. The WACC is theaverage of the costs of these sources of nancing, each of which is weighted byits respective use in the given situation. A rms WACC is the overall requiredreturn on the rm as a whole and, as such, it is often used internally by companydirectors to determine the economic feasibility of expansionary opportunitiesand mergers. It is the appropriate discount rate to use for cash ows with risksimilar to that of the overall rm.

3.4.5 Payback Period

The payback period is the length of time required to recover the cost of an


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investment. The payback period of a given investment or project is an importantdeterminant of whether to undertake the position or project, as longer paybackperiods are typically not desirable for investment positions. There are two mainproblems with the payback period method: (i) it ignores any benets that occurafter the payback (i.e., it does not measure protability); and (ii) it ignoresthe time value of money. Because of these reasons, other methods of capitalbudgeting, like the NPV, the IRR, or the discounted cash ow; are generallypreferred.

3.5 ConclusionBusiness planning is part of the long process of introducing a business into the market.It is a very important step in the overall process of establishing new or expandingexisting businesses. A good business plan should: explain the businesss productsor services; protect ideas (intellectual property); provide an understanding of themarket; assess the businesss skills and ability to develop products/services; help in thedesign and completion of a working business prototype; develop a marketing and salesstrategy, and explore the possibility and availability of better funding and nancingoptions. In the end, a well-written business plan should turn a business concept or ideainto a real business opportunity.


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MODULE FOUR

FINANCIAL MANAGEMENT AND RECORD KEEPING


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(i) Introduction

(ii) Purpose of the Module To help entrepreneurs understand the importance of nancial management and

recordkeeping for running their businesses efficiently; and To help entrepreneurs understand and make use of the nancial management and

recordkeeping process.


Key elements of nancial management ( nancial planning, nancial control, anddecision making) and recordkeeping; and How to implement the key elements of nancial management and recordkeeping.

(iv) Methodology Presentations by consultants; Practical examples/case studies of actual situations; Interactions with entrepreneurs to share their experiences; and Discussion of practical issues.

(v) Expected Outcome(s) Entrepreneurs should understand the di erent elements, processes, and

importance of nancial planning and recordkeeping; and Entrepreneurs should be able to collect, process, safely store, and consequently

make use of nancial data to make decisions on all nance-related issues.

Module Outline


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4.0 FINANCIAL MANAGEMENT AND RECORDKEEPING

4.1 IntroductionFinancial management is the operational activity of a business that is responsiblefor obtaining and effectively and efficiently utilizing economic resource (funds) toaccomplish the businesss objectives. It is the area of business management devotedto the judicious use of capital and careful selection of sources of capital to enablethe business to reach its goals. Financial management therefore plays a vital role inbusiness development (including that of SMEs) by enhancing competitiveness and

the ability to withstand business risks. Standard nancial management and properrecordkeeping systems can also help enterprises be nancially exible enough toreadily fund investments when opportunities arise.

4.2 Importance of Financial Management Financial management is critical to business development because nance is thebackbone of businesses. Sound nancial management enables businesses to: Improve protability with the help of strong nancial control tools such as

investment evaluation and cost management; Increase the value of the rm with strong performance, protability and a better

nancial position, a higher asset position and valuation are achieved; and Promote savings as a result of (and/or in conjunction with) strong nancial

performance.

4.3 Financial Planning, Control, and Decision MakingFinancial planning, control, and decision making are the three key elements of nancialmanagement processes:

4.3.1 Financial Planning

The nancial planning process is used to determine the current nancial statusand current/future nancial needs of businesses. This ensures that enoughfunding is available at the right time to meet the businesss needs. In the shortterm, funds may be needed to invest in equipment and stocks, pay employees,and pay for purchases made on credit. In the medium to long term, funding maybe required for major production expansions or acquisitions.

4.3.2 Financial ControlFinancial control is an important tool that helps businesses measure and

meet their objectives. Proper use and allocation of funds leads to improved

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operational efficiency, reduced capital costs, and increased value of the rm.Strong nancial control measures should address whether: assets are beingused efficiently; business assets are secure; and choices and decisions madeare in the best interest of shareholders and in accordance with rules.

4.3.3 Financial Decision MakingThe interdependent nature of some business units (e.g., marketing, production,personnel) necessitates nancial decisions to consider their different (andrelated/likewise) needs. Decisions on how, where, and when to invest, hire,pay dividends, raise wages, fund new programs, etc. should be thoroughlyinvestigated before any conclusions are reached.

4.4 Importance of Recordkeeping and Accounting Information

4.4.1 RecordkeepingOne of the most fundamental components of achieving business successis keeping good nancial records. The importance of keeping good nancialrecords is always clear during tax lings, loan applications, monitoring ofbusiness performance, and the selling of business shares, as it is important toknow where, when, and how the money is going.

The minimum requirement of a good recordkeeping system is that it lists moniesthat come into the businesss possession and monies that leave its possession.

4.4.2 Accounting InformationAccounting information is simply the data a business entity is able to makeknown to its users. Business entities require accounting data and relatedinformation to manage and control activities and their respective performances

productivity/pro tability levels, di erences between marginal liabilities andmarginal assets, etc. A sound accounting system in an organization dependson the existence of a good recordkeeping system. Therefore, a business musthave system(s) in place for monitoring and managing nances that is bothcomprehensive and easy to understand.

Accounting information should help businesses: Manage cash ow to optimize cash ow; Handle supplier queries to avoid double/late payments;

Maintain accurate records of past and current activities; and


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Forecast business activities to make more informed decisions on whetherthe business has su cient capital/funds to invest, produce, hire, or buy.

4.5 Management AccountingManagement accounting is the use of information from bookkeeping and otherrecords to determine how well the business is doing. Management accounting providesinformation on how monies came in and went out, what the business owns and what itowes, and how monies will come in and go out in the future. It also helps in:

4.5.1 Operational ControlA business entity requires management accounting information to enable it tomanage and control its nances and resources. This will also allow the businessto measure, control, and improve its operational activities.

4.5.2 Performance MeasuringThe constant ow of accounting data relevant to income, purchases,investments and overhead is used as a tool to gauge actual performance forthe year. It is also critical in creating the budget for the coming year.

4.5.3 Financing DecisionsAccounting data are usually used to determine funding needs for theorganization. Potential investors and lenders look at business assets andliabilities to determine if the target business is a safe investment.

4.5.4 Expansion DecisionsWhen business entities work on their growth plans and try to make the rightdecisions to expand their protability, they use accounting data to determinehow much they can take on in liabilities and costs.

4.6 Financial StatementsEvery business of any size will have assets and liabilities of varying forms and will incurnumerous transactions in the course of even one week. These must be recorded forvarious reasons apart from maintaining corporate memory. They are best captured bythe preparation of nancial statements the balance sheet, the income statement,and the cash ow statement:

4.6.1 The Balance Sheet

The balance sheet is used to report on the nancial position of the business to


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the owner and other stakeholders. It provides a good picture of the nancialhealth of a business and is a tool used to evaluate a businesss liquidity. Thedifference between the assets (what a business owns) and liabilities (owes) isthe net worth of the business (owners equity).

Table 4 Example of a Balance Sheet ASSETS LIABILITIESCurrent Assets Amounts Current Liabilities AmountsCash Accounts Payable

Accounts Receivable Wages PayableInventory Interest PayableTemporary Investments Taxes PayableSupplies Unearned RevenueOther current Assets Other current LiabilitiesTotal Current Assets Total Current Liabilities

Fixed Assets Long-term LiabilitiesLand Bond PayableBuilding Notes PayableMachinery & Equipment Contingent LiabilitiesFurniture & Fixtures LoansTotal Fixed Assets Total long-term liabilities

Intangibles Owners EquityMarket Research Common StockGoodwill Retained EarningsPatents Capital ReserveResearch & DevelopmentOther intangiblesTotal Intangibles Total Owners Equity

TOTAL ASSETS LIABILITIES + EQUITY


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4.6.2 The Income StatementThe income statement is a summary of the nancial performance of the businessover time (monthly, quarterly, or annually). It reects the past performanceof the business and is the report most often used by owners to track howtheir business is performing. The net income (loss) is derived by subtractingexpenses from revenues.

Table 5 Example of an Income Statement

Income Statement for the year ended Revenue AmountSales RevenueInterest IncomeOther Earned Revenues

Total Revenue

Expenditures Cost of goods soldSelling, general and administration expenses

Research and Development expensesInterest ExpensesOther Expenses

Total Expenses

Pre-tax Income (Revenue-Expenditures)- Income Tax Expenses

Net Income

4.6.3 The Cash Flow StatementBecause the income statement does not provide the cash position of thebusiness, the cash ow statement is usually prepared to report inows andoutows of cash. It describes the causes of changes in cash reported on thebalance sheet from the end of last period to the end of the current period.Reported revenues do not always equal cash collected from sales becausesome sales may be on credit. Also, expenses reported may not be equal to thecash paid out.


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Table 6 Example of a Cash Flow Statement

Statement of Cash Flow for the year ended Cash ows from operating activities AmountCash collected from customers- Cash paid to suppliers and employees- Cash paid for interests- Cash paid for taxes

Net cash ows from operating activities

Cash ows from investing activities Cash collected from investments- Cash paid to purchase manufacturing equipment

Net cash ows from investing activities

Cash ows from nancing activities Cash received from a bank loan- Cash paid for dividendsNet cash ows from nancing activities

Net increase (decrease) in cash during the periodCash at the beginning of the periodCash at the end of the period

4.7 ConclusionSound nancial management skills and good recordkeeping of accounting informationultimately help businesses make more informed and better decisions in terms of

investments, production, prot sharing and allocation, personnel, expansion, etc.The three nancial management elements nancial planning, control, and decisionmaking can be achieved only with sound recordkeeping and use of accounting dataand information.


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MODULE FIVE

CORPORATE GOVERNANCE AND COMPLIANCE


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(i) Introduction


To help entrepreneurs understand the genesis and importance of corporategovernance in business entities (companies);

To explain to entrepreneurs the various stakeholders involved in companiesoperations (internal and external) and their divergent interests;

To convey to entrepreneurs the separation of powers between and functions of

shareholders, Board of Directors members, and management; To describe the corporate governance challenges facing SMEs and variousapproaches to address them;

To underscore the importance of compliance with laws in doing business; and To present the obligations and rights established by various laws.


Corporate governance and its importance in attracting capital; The separation of powers and decision-making roles exclusively vested to

shareholders, directors, and management and the manner in which they areexercised;

Ways to harmonize the con icting interests of stakeholders for the betterfunctioning of the company;

Basic laws that businesses must observe; The rights, obligations, and compliance requirements imposed by each law; The pros and cons of legal compliance; and The consequences of non-compliance such as penalties (monetary/ imprisonment).

(iv) Methodology

Presentations by consultants; Practical examples/case studies of actual situations; and Participants interactions/experiences and discussion of practical issues.

(v) Expected Outcome(s) Entrepreneurs should understand the importance of corporate governance in

attracting capital;

Course Outline


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Entrepreneurs should understand how the mandates for power and decisionmaking are divided in companies;

Entrepreneurs should understand the advantages of opening up family businessesto other stakeholders;

Entrepreneurs should understand the bene ts of complying with the laws and theconsequences of non-compliance;

Entrepreneurs should understand the importance of registering their businesses,inventions, trademarks, and copy rights; and

Entrepreneurs should understand the legal interests protected by each law.


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5.0 CORPORATE GOVERNANCE AND COMPLIANCE

5.1 IntroductionCompanies are legal persons with special governance structures set up to serve and meetthe interests and expectations of various stakeholders. Stakeholders can be groupedinto two broad categories internal and external stakeholders. Internal stakeholdersinclude directors, employees, management, and shareholders. External stakeholdersinclude customers, suppliers, contractors, environmentalists, governments, and otherparties indirectly associated with the company. All of these stakeholders have different

interests which must be reconciled for the prosperity and continuity of the company.Reconciliation can be achieved by the existence of corporate governance.

5.2 Denition of Corporate GovernanceCorporate governance refers to the systems by which corporations are directed,controlled, and held to account. Corporate governance involves systems that assistcompanies in improving their management, their board structures, and their proceduresto make them more accountable to shareholders and other stakeholders. Issues such asnancial reporting, transparency and auditing, remuneration of directors, separationof powers, and minority shareholders rights are included in these systems.

Corporate governance covers the full suite of relationships between a companysmanagement, its board, and its stakeholders including, but not exclusively, shareholders.In the broader sense, a company is not responsible to shareholders alone. It is alsoresponsible to other stakeholders such as society, its employees, the government, andthe public at large. Corporate governance involves the following three organs:

5.2.1 Shareholders Decide on changes in Memorandum and Articles of Association of the

company; Decide on the capital structure of the company; Approve dividends, annual nancial statements, and the annual report; Appoint auditors and directors of the company; and Approve directors remunerations.

Module Five

2 Cadbury (1992) denes corporate governance as the system by which companies are directed and controlled; see SirAdrian Cadbury Report on UK corporate failures.


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5.2.2 Directors Approve the business plan; Hire executive management; Are responsible for preparation of nancial statements and the annual

report; and Recommend the amount of dividend to be paid.

5.2.3 Management Implements the business plan;

Oversees day-to-day activities of the company; and Hires low-level cadre management.

5.3 Why is Corporate Governance Needed?The need for corporate governance has evolved in the recent past due to the followingfactors: Corporations are required (expected) to comply with legal requirements; Corporations are required to be accountable to all stakeholders with whom they

interact; Corporations are expected to be sustainable institutions, viable and competitive in

society, and able to survive the demise of their founders; Well-managed corporations are well-positioned and able to attract nance from

different investors from within the country and from outside, thus increasinginvestment, growth, and employment;

As corporations interact with society daily, they must account for the manner inwhich they serve society at large, despite their prot motives; and

The expectations of shareholders for transparency, protection of their rights, fairand equitable treatment, and maximization of their returns must be met.

5.4 Drivers of Corporate GovernanceThe importance of corporate governance worldwide has increased due to: Globalisation and economic integration throughout the world; Increased pressure to conserve the environment; Increased separation of the ownership and control of corporations; More competitive global markets, which force corporations to look for more

optimal means of enhancing shareholders value so as to attract investment fundsfrom both local and international sources; and

Evidence that good corporate governance structures can lead to higher economic

payoff.


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To have an effective board, it is important to select appropriate members who willcarry the company forward to the level desired by stakeholders. It is importantto determine in advance the skills needed of members. The use of a nominationcommittee is recommended to interview applicants and recommend the bestcandidates.

5.6.2 Board CompositionThe right number of Board of Directors members depends on the company.An appropriate mix of age, gender, ethnicity, geographic spread, experience,and team roles should be maintained. The board should also have sufficientand diverse skills relevant to the industry, leadership, governance, technology,communication, and marketing to lead the company into value creation. Boardmembers should have good common sense, business acumen, integrity, andthe ability and willingness to learn, with additional special competencies asrelevant.

There must also be a balance of power through the use of executive, non-executive, and independent directors. An executive director is a director who isalso a member of the management (executive) team. A non-executive directoris not a member of the management team. An independent (outside) directoris a director who, other than serving on the board, has no direct connectionswith the company. For a Board of Directors to be effective, it should have bothexecutive and non-executive members (numbers will differ from one companyto another). There are usually more non-executive members than executivemembers to ensure independence in the boards decision-making process.

5.6.3 RemunerationsRemunerations of board members are usually set at prescribed rates and paid

either annually, hourly, or per meeting. Remunerations should be sufficient toattract outstanding people. Remunerations should also take into considerationthe legal responsibilities of directors and the workload required to direct thecompany. Remunerations are recommended to the board by a RemunerationCommittee and approved by shareholders in the Annual General Meeting.

5.6.4 Making Boards More EffectiveAt the beginning of each year, the board should collectively determine andagree on its role and functions in the context of the companys needs, strategic

thrust, competitiveness, and viability. The board should also determine, agree


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upon, and articulate the activities necessary for its operations and prioritise thetiming of such activities. The board should ensure that the identied activitiesare consistent with statutory requirements and its calendar of meetings.

5.6.5 Committees of the BoardThe board should establish appropriate committees to facilitate the companysoperations. Examples include audit, remunerations, and risk managementcommittees.

5.6.6 Board EvaluationEvaluation of the board should be seen as a positive process, an instrument forthe improvement of the boards functioning, and a healthy process meant toensure effectiveness and achievement of corporate objectives.

5.7 Corporate Governance: Corporate Social ResponsibilityThere is no universally accepted denition of Corporate Social Responsibility (CSR)in place at the moment. The U.S.-based network Business for Social Responsibilitysuggests that CSR implies operating in a manner that meets or exceeds the ethical, legal,commercial and public expectations that society has of business. The CommonwealthAssociation for Corporate Governance suggests that CSR is the distinctive contributiona company makes to the advancement of a society or alleviation of social concerns,usually through some form of investment in partnership with the community, whichmay include the government.

On a global scale, corporations are increasingly taking into consideration the needto contribute to the society in which they operate, recognizing the role otherstakeholders play in the very existence of companies. Companies spend some of theirprots contributing to the social needs of the areas in which they operate. Sometimes

called Corporate Social Investment, this can include supporting education, health care,water, and social activities. CSR generally encompasses the areas of: accountability;community economic development and involvement; the environment; and ethics andhuman rights.

5.8 Corporate Governance: Strategic Management for Value CreationThe corporations strategy is a combination of competitive moves and approachesto compete successfully, please customers, and achieve organizational objectives.A businesss sole purpose is to create value and wealth for its owners (primarily),

shareholders, and stakeholders at large (secondarily). Corporate executives can create


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value for stakeholders by selecting the most appropriate eld in which to operate andby utilizing their assets in the most effective way. The strategic management processinvolves a clear denition and implementation of the following:

The mission, or the overriding purpose of the rm. Whatever the rm statesto the public implies maximizing value primarily to the shareholders and otherstakeholders;

The objectives of the rm, or targets the rm establishes for the attainment of itsmission. Objectives are selected for their impact in achieving value creation andare the means of evaluating progress towards fullment of the corporate mission;

The strategy, or the selection of markets in which to operate and how to compete.This can be done by pursuing a cost advantage or product differentiation to remaincompetitive in the market; and

The tactics, or the implementation of the best (available) operating policies tosecure the chosen competitive advantage.

5.9 A Case for Corporate Governance in SMEsGood corporate governance by SMEs will facilitate a clear separation between ownersand managers of SMEs. It will also inuence transparency, separation of personal andbusiness activities, and better governance of SMEs, hence contributing to wealthcreation. Proper procedures and good governance will enhance SMEs ability to accessfunding through capital markets, as good governance is a prerequisite for entry intocapital markets.

5.10 Corporate Governance: Transforming Family Businesses into CorporationsFamily-owned rms have great potential for transforming the economy if they openup to other stakeholders. Opening up companies to other stakeholders will facilitatethe entry of investors who seek to maximize returns, and in the process will facilitate

wealth creation for all stakeholders. Successful multinational corporations (MNC)such as SONY, Michelin, Microsoft, TATA, and others started as family businesses.Opening them up brought in new skills and talents, which revolutionized them tobecome todays MNC.

5.10.1 Position of Major Shareholders (and/or Founders)Founder shareholders in SMEs consider themselves owners, and hencethey have an upper hand in major decisions of the company. Institutingcorporate governance will mean delegating some of the roles performed by

major shareholders to the Board of Directors and attendees of the General


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Meeting. Such decisions include appointment of senior staff, alteration of theMemorandum and Articles of Association (MEMARTS), and dividend decisions.These members should realize that the moment the company goes public, theywill no longer have the nal say in many decisions. SMEs need to appreciatethat establishing a formal organizational structure will result in the rest ofthe members involvement, as represented by the Board of Directors, in thedecision-making process of the company.

5.10.2 Outside Investors Expectations

Investors wishing to participate in an SMEs ownership will want to see changesin the ownership structure that conform to the best corporate governancepractices. These changes include the following: A signi cant reduction of family ownership by inviting outside investors

though a public offer of securities; Greater involvement of the non-executive directors in the management of

the SME; Establishment of committees for good corporate governance; Disclosure of nancial statements in compliance with the law this includes

publication of nancial statements in the press; and Listing on the stock exchange to facilitate a fair and transparent price

discovery mechanism.

5.11 The Legal Compliance of SMEsSimply put, laws are a set of rules that regulate relations between people and groups ofpeople in a society. General compliance with the law is thus a necessary pre-conditionfor orderly existence in any society. In business, it is perhaps even more necessary tocomply with relevant laws. Such compliance ensures that the business legally exists,that it enters into relationships that are legally recognized and enforceable, and that

the business is generally run in accordance with the law. Compliance with the lawensures an orderly manner of doing business and that no act or omission runs the riskof being rendered invalid due to a legal problem.

The following is a selection of some of the laws currently relevant in the day-to-daymanagement of SMEs in Tanzania:

5.11.1 Companies Act (2002)Upon registration, a company acquires an independent legal existence regulated


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by the law, which imposes certain requirements with which the company andits officials must comply. These include:

The ling of annual returns, which consist of all the relevant particularsof the company, including information on shareholding, directorship,debentures, and other charges;

The ling of audited accounts; The ling of any changes in the particulars of the company, such as change

in the name of the company, its aims and objectives, the Board of Directors,

the nominal share capital, the classes of shares, address of registered office,debentures and other charges in relation to the company, appointmentof receivers, managers, and administrative officers, and winding upproceedings; and

Payment of various taxes to the central and local government.A company (and its officers) that does not comply with the above and other

requirements may be penalized by way of payment of monetary penalties,and sometimes even by criminal action. Compliance will give credibility tothe company, make it more creditworthy when such status is at issue, andwill generally render the company in good standing both in business andsocial circles.

5.11.2 Contract LawCompanies are required to comply with the terms and conditions of thecontracts to which they are a party. If the legal requirements are not compliedwith, the contract becomes either void or voidable, depending on the legalconsequences of the specic failure. It is thus important to ensure that anyagreement entered is legally enforceable by complying with all requirementsof the law. There may be a need to consult a lawyer beforehand to ensure that

the business acts within the law.

5.11.3 Labour LawAny sizeable business is conducted with the aid of persons who are not ownersof the business but who are instead workers paid wages for their services.Labour law governs the relations between the business (as employer) and itsworkers (as employees). It also creates a procedure for dealing with labourdisputes and their settlement, and matters of pensions and other benets foremployees. A positive labour relation is an important aspect in an enterprise of

any type, SMEs being no exception


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5.11.4 Licencing LawDoing business entails compliance with licensing laws. Depending on the natureof the business, the law sets down particular requirements. These are primarilyunder the Business Licensing Act, Cap 208. The law prohibits the conduct ofbusiness without a licence. Every license issued is for a particular business andat a particular place, unless there is a principal place of business, whereupona subsidiary licence will be issued, or where no fee is prescribed in relation tothe business. Licensing authorities have the power to close the premises of abusiness operating without a licence, and in doing so, an authority may requestthe assistance of a police officer or other authorised agent.

5.11.5 Land LawLand law (otherwise known as the law of real property) is one of the mostimportant branches of law in any country. The main land legislation in Tanzaniais the Land Act, Cap 113. It is the basic law in relation to land in Tanzania otherthan village land, and it governs the management of land and the settlement ofland disputes and related matters. The other main legislation, the Village LandAct, Cap 114, deals with the management and administration of land in villages.

Every enterprise business has a location. For that reason, it must either ownits land or property or rent it or part of it from an owner. Thus, the businessenterprise will either be a landlord or a tenant. Land law determines thisrelationship. To raise capital, a business may need some form of security to actas collateral. Mortgages in land are the most common form of security. Land lawprovides for the creation, registration,

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