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CHINHOYI UNIVERSITY OF TECHNOLOGY
School of Entrepreneurship & Business
Sciences
Department of Entrepreneurship and Business
Management
CUEB 203 – APPLIED ENTREPRENEURSHIP
NOTES
‘Application is the beauty of Theory’
“Be practical, pragmatic & experience.”
PREPARED BY MANYADZE T
Applied Entrepreneurship
CUEB 203
Define Applied Entrepreneurship
An entrepreneur‘s dream is to build a venture that becomes successful, enduring and
large.
Entrepreneurs recognize opportunity, gather the resources required to act on the
opportunity, and drive the opportunity to completion.
An entrepreneur recognizes a business opportunity and devotes his / her full attention
and resources to bringing it to fruition.
The only characteristic of entrepreneurs that is intrinsic is passion or the drive to
achieve something.
Passion cannot be taught or practiced; it simply exists when the right elements come
together.
Entrepreneurship is a mindset or way of thinking that is opportunity – focused,
innovative, and growth oriented.
The passion and drive to executing a business opportunity
Entrepreneurship
Scott Shane
―Entrepreneurship is an activity that involves the discovery, evaluation and
exploitation of opportunities to introduce new goods and services, ways of organizing,
markets, processes, and new materials through organizing efforts that previously had
not existed.‖
Applied Entrepreneurship
It refers to the pragmatic process of;
Creating, managing and growing a business venture
Using entrepreneurial skills to develop and implement innovative business ideas.
Practising the mindset of oneself as an entrepreneur (skills and behaviours being
applied).
It is that process of business creation and business development through skills both
intrinsic and acquired.
Creating value for the society
Prudent risk taking
Creative thinking
Social skills
Fundamentals of Applied Entrepreneurship
Idea / opportunity
Environmental analysis
Business plan/ Action Plan
Execution of the plan/ Creation of a business
Growing the venture through innovation
Entrepreneurship is a Multi-step Process
Creating Opportunity
Seeking Information
Observing the surroundings
Paying attention to the cues that are around
Asking questions on many issues that many people take for granted
Alertness helps to identify good opportunities
There are some methods that can be used to help generate ideas and opportunities.
Alex Osborne a pioneer in the field of creativity coined an acronym known as SCAMPER
that helps trigger new ideas for business.
Recognize
Opportunities
Evaluate
Exploit
SCAMPER
S - substitute think of what you might substitute for something else to form a new
idea.
C - combine think of possible combinations you can make that result in something
entirely different.
A - adapt think about what could be adapted from products or services that
already exist.
M - magnify or modify taking an existing product and changing its appearance
or adding more features or increasing the hours you store is open or making
advertising more dramatic are some ways you could magnify or modify your idea.
P - put to other uses - think of ways you could generate a high number of
opportunities for your product or service beyond what it s traditionally used for
E - eliminate search for opportunities that arise when you get rid of something or
stop doing something.
R - rearrange or reverse Using reverse psychology or paradox to challenge old
ways of thinking.
Ideas come from a variety of sources which include some of the following;
work experience,
similar businesses,
hobby or interests,
chance happening,
family and friends or
education and expertise.
Sources of New Ideas
Consumers
Informally monitor potential ideas and needs.
Formally arrange for consumers to express their opinions.
Existing Products and Services
Analysis uncovers ways to improve offerings that may result in a new product
or service.
Distribution Channels
Channel members can help suggest and market new products.
The Government
Files of the Patent Office can suggest new product possibilities.
New product ideas can come in response to government regulations.
Research and Development
A formal endeavor connected with one‘s current employment.
An informal lab in a basement or garage.
Idea Generation and Evaluation for New Venture Creation
Identifying and evaluating new ideas
Avoiding the wrong ideas
Some interesting trends and ideas
Using brainstorming to generate ideas
Avoiding the wrong ideas
Some interesting trends and ideas
Using brainstorming to generate ideas
Sources of new business ideas
Forces, trends and mega-trends tech, macro, social, political
Changing market structures and needs
Market inefficiencies
Products in the market
Personal experience, hobbies and pastimes, personal passions
Cross regional, discipline or industry
Evaluating new ideas
Original?
Feasible?
Marketable?
Profitable?
Assessing feasibility of a new venture
Use an idea checklist
Basic Feasibility
- Will it work? Is it legal?
Competitive Advantage
- Advantages, competitors
Buyer Decisions
- Who are the likely customers?
- How will they be serviced?
Marketing of Goods & Services
- How much budget for advertising and selling? Pricing? Distribution?
Production of Goods & Services
- Make or buy or both? QA?
Staffing Decisions
– Who, when and competence?
Financing
– How much is needed, where will it come from, ROE, exit strategy?
Evaluation and Assessment
Once you decide that you want to be an entrepreneur, determine your business idea‘s
chance for success.
Opportunity Assessment
Market Assessment
After carefully evaluating the opportunity, study the overall market landscape.
Financing Assessment
Profitability Assessment
Cost-effective Analysis
Legal Assessment
Risk Assessment
Managing Risk in Entrepreneurial Ventures
Definition of Risk
Classification of risks
Managing risks
Why manage risks
What is risk?
• Risk is a condition in which loss (losses) is (are) possible (Athearn & Pritchett 1984:
4).
• Risk is the objectified uncertainty about the occurrence of an undesirable event
(Ritchie & Marshall 1993:142 with reference to the work of Willet 1901).
• Essinger and Rosen (1991:4) define risk as "…a measure of the anticipated difference
between expectations and reality".
• This difference exists because the future is unknown, thus making it all the more
important to manage risk.
• Is defined as a deviation from the expected value.
• It implies the presence of uncertainty.
• There may be uncertainty as to the occurrence of an event producing a loss, and
uncertainty as regards the outcome of the event.
• The degree is interpreted with reference to the degree of variability and not with
reference to the probability that it will display a particular outcome.
• Risk is a combination of hazards measured by probability.
• Risk is a condition in which loss or losses are possible
• Standard deviation becomes a good measure of risk.
Risk could therefore be defined as:
The deviation or variability of actual results from desired or expected results.
• Thus in business if risk increases, the possible return that is desired will also increase.
Risk and Uncertainty
• Uncertainty arises from imperfect information about the future events.
• There is uncertainty in decision-making situations where the decision maker lacks
complete knowledge or information on or understanding of the decision and its
possible consequences.
• The perceived level of uncertainty depends on information that an individual can use
to evaluate the likelihood of outcomes and his or her ability to evaluate this
information.
• Uncertainty is present in level or degrees.
What is risk summary
• Risk is the deviation of the actual from the expected results.
• Risk implies the presence of uncertainty
• There may be uncertainty about the occurrence of an event and uncertainty about its
outcome.
• The degree of risk is calculated as the frequency with which an event, namely the
deviation from the expected outcome, occurs and the probability that it will display
this particular outcome.
Sources of risk
1. Change in competitor‘s strategy
2. Change in government policy
3. Change in the structure of an organisation
4. Change in the economic environment
5. Change in Sales due to change in demand
6. Change in Technology
• Entrepreneurs are exposed to risk in many different ways depending on the economic
activity they undertake.
• For example exporter and importers could suffer from exchange rate changes and
loose money due to currency depreciation.
• Individuals, banks and manufacturing industries experience different risks.
Types of Risk Entrepreneurs Face
• Strategic or Market risks
• Financial/Economic risks
• Operational risks
• Acts of God or Natural Disasters
Strategic Risk
Strategic risks are the business‘s exposure to changes in market conditions
– Defining the wrong target market
– Pricing the product incorrectly
– Incorrectly estimating demand (over/under)
– Not understanding the customer
• Competitor actions that impact demand, pricing, marketing strategy or new
product/service development
• Technological Changes in manufacturing or service delivery
• Product Obsolescence
• Research & Development Investment
Economic and Financial Risks
• Economic risks are outside the control of the entrepreneurs
– Changes in the economy
• Inflation, recession, unemployment, etc.
– Changes in supply and demand
– Changes in the level of competition
• Financial Risks
Financial risks include:
• Interest rate changes, which affect the cost of capital for a growing company
• Foreign exchange rates when the company is doing business globally
• The availability of credit
• Product liability and warranty claims
• Cash flow/liquidity problems
• Loss of Revenues
• Probability of default
– Look at debt service coverage ratios and leverage through life of project
• Check to see if internal rate of return is consistent with (at least) the financial risks
Operational Risk
Operational risk is the exposure of an enterprise to losses resulting from internal
failures of people, processes and systems.
a) People:
• There is always a human factor to consider in undertaking any business activity.
• The knowledge, experience, capability and reliability of the persons involved in all of
the business processes are critical risk factors.
• Operational Risk
Examples of peoples risk
• Inexperienced, incompetent, unsuitable, negligent staff.
• A working culture that creates low morale, high staff turnover, poor concentration,
low productivity and industrial action
• Theft and fraud
• Poor decision
• Labour action risk
• Operational Risk
b) Processes:
• Process risk is the risk of a business process being inadequate and causing unexpected
losses.
• Processes form part of the operations environment and therefore have a strong
interactive relationship with people and systems.
• Any changes in processes affect people and systems.
• Operational Risk
Examples of processes risk:
• Enterprise procurement process
• Enterprise accounting process
• Enterprise inventory management process
• Staff appointment process
• Operational Risk
c) Systems:
• Systems risks refer to the risks resulting from systems failures and they are primarily
based upon enterprises‘ reliance on technology.
• For example computer systems.
• Economic activities such as accounting, engineering, supply and purchase and/or
ordering all use systems.
• Operational Risk
Examples of systems:
• Implementation failure
• Insufficient systems capacity
• Poor data integrity
• Security breaches
• System failure
Operational Risk
Operational risk is exposure to loss due to poor systems and controls
– Supply Chain Control and Disruptions
– Leases
– A Poor Business Plan
– Ineffective Quality Assurance Program
– Information System Data Loss
– Dependence on Independent Contractors
– Employee theft and incompetence
Operational Risk
• When starting up the venture
– Resources available (quality/quantity)
– Technological risk (proven technology?)
– Timing risks (failure to meet milestones)
– Completion risk
• Handling cash flows and/or industry adjustment.
Operational Risk
• When growing the venture
– Market risks (prices of outputs)
– Supply/input risk (availability)
– Throughput risk (material put through plus efficacy of systems operations)
– Operating cost
Other Operational Risks
• Legal risk (litigation)
• Regulations and/or compliance risk
- Such as insurance issues, resolving disputes, contractual breaches, non-compliance
with regulations, and liabilities
Compliance risks
• Compliance risks are part of the laws and regulations you must meet, such as taxation,
employment, health and safety, and fair trading.
•
• Some potential risks are:
• · regulations might increase your production costs, e.g. higher quality standards
• · health and safety changes could add to your costs, e.g. having to provide safety
equipment to your workers
• Possible consequences: fines or legal problems.
Acts of God – Natural Disasters
Crises which are outside the control of entrepreneurs
• The exposure of an enterprise to potential losses, resulting from external factors
and/or from shortcomings and/or failures in the natural environment.
Acts of God – Natural Disasters
– Fire
– Flood/water damage
– Tornados and earthquakes
– Terrorism and war
– Loss of facilities (building)
– Loss of utilities (water and electricity)
• It is neither possible nor desirable to completely eliminate risk from business
activities because aggressive as well as preventative actions are required for success.
• Focusing entirely on preventative measures ( thus viewing risk from the downside
only) may help to restrain risk effectively but will also reduce profits.
• What is required is an understanding of all the risks that arise from a particular
business as well as their consequences and then effective management of these risks.
Risk management
• It is a managerial function aimed at protecting the organisation, its people, assets, and
profits against the physical and financial consequences of risk.
• It involves planning, coordinating and directing the risk control and the risk financing
activities in the organisation.
• It is the identification, assessment, and prioritization of risks followed by coordinated
and economical application of resources to minimize, monitor, and control the
probability and/or impact of unfortunate events or to maximize the realization of
opportunities.
• Risks can come from uncertainty in financial markets, threats from project failures (at
any phase in design, development, production, or sustainment life-cycles), legal
liabilities, credit risk, accidents, natural causes and disasters as well as deliberate
attack from an adversary, or events of uncertain or unpredictable root-cause.
THE RISK MANAGEMENT PROCESS/ RISK MANAGEMENT STEPS
The risk management steps
1. Establishing goals and context (i.e. the risk environment),
2. Identifying risks and analysing the identified risks
3. Assessing or evaluating the risks/ Measure the probability of the risk
4. Prepare strategies to mediate the risk
5. Execute tactics to carry out the strategies/ Treating or managing the risks
6. Monitoring and reviewing the risks and the risk environment regularly, and
7. Continuously communicating, consulting with stakeholders and reporting.
Managing Risks
• Entrepreneurs face typical business risks but can reduce these risks and their personal
liability through focusing on specific risk-reduction measures.
• Businesses of all sizes face risks regarding development of products, manufacturing
them, selling them, earning a profit on these operations and managing growth.
• If the entrepreneur is a sole proprietor, she faces additional personal liability risks and
financial risks from guaranteeing business loans.
• Risk management techniques include risk reduction, risk transfer and risk avoidance.
An entrepreneur can apply these techniques to the business and personal risk s/he
faces.
Strategies to Mediate the Risk
Risk control
Preventive approaches
Avoidance
Eliminate the activity, thus eliminate the risk
Not undertaking the activity that is likely to trigger the risk.
Reduction
Change the activity to reduce the probability of loss/risk
Controlling the likelihood of the risk occurring, or controlling the impact of the
consequences if the risk occurs.
Risk sharing
• Entrepreneurs can reduce their exposure to risks by operating in diverse industries.
• Other available risk treatments include sharing where risk is transferred or outsourced,
and retention where a business anticipates and budgets for risk
– Outsourcing/Independent Contractors/Suppliers
Risk communication
Educating employees, customers, etc about the risks
• Remind employees often about proper conduct
• Use written agreements to protect the company
• Be proactive about seeking information about problems in the workplace and make it
easy for ―whistle-blowers‖ to report improper conduct.
• Base decisions about conduct on facts to avoid lawsuits.
Methods to Manage Risks
Risk Financing
Making funds available to cover losses that cannot be managed by risk control
Risk Transfer
• Buying insurance or making contractual agreements with others to transfer risk
• Transfer risk to insurance companies by insuring against major risks such as damage
to your facilities, product liability, injuries to customers or suppliers and death or
incapacity of company principals.
Risk Retention
• Retaining (accepting) the risk
• Choosing—whether consciously or unconsciously, voluntarily or involuntarily—to
manage risk internally
Self-Insurance
– Designating part of a firm‘s earnings as a cushion against possible future
losses
Managing Risks
• Reduce financial risk by managing your accounts receivable to minimize outstanding
balances and identify poor credit risks.
• Implement credit and payment standards, specifying which credit scores and payment
records are acceptable.
• Evaluate customer payments and ask for advance payment from customers who don't
meet the standards
• Reduce financial risk by keeping outstanding loans and financing needs to a
minimum.
• Control growth at a rate that the company can finance internally.
• If the company can't pay off some loans, replace short-term credit with long-term,
fixed-rate loans.
• Reduce risk of surprises by keeping accurate records and instituting effective controls.
• Put in place a system that limits who can authorize specific actions and how much
they can spend.
• Implement a reporting system that gives you key information about company
performance.
• Evaluate the controls and reporting system by comparing actual practice and
performance to the control procedures and the reported information.
• Reduce risk from product failure and warranty claims by implementing a quality
assurance program.
• Develop a system of reporting from customer service to identify problems.
• Structure the quality assurance program to document production tasks and product
testing.
• Link the problems reported by customer service to specific failures in production or
testing procedures and institute corrective action.
• Transfer the risk of activities with severe and likely consequences but high benefits to
other parties.
• Create a new, independent company to carry out these activities or assign them to
suppliers or partners.
• Select a business structure that limits personal liability.
• Change your business structure from a sole proprietorship in which you are personally
liable for business operations to a corporation or limited liability company where you
have limited liability.
The Wheel of Misfortune
• An Entrepreneur cannot eliminate all risk but assessing and managing risk will
insure that the company has fewer surprises that might damage the business
significantly.
• Why manage Risks!!!
• Class Discussion
Accounts Receivable Management
• What are accounts receivables?
• What are debtors?
Accounts receivable
Fire
Property
Risks
Natural
Disasters
Burglary and Business
Swindles
Shoplifting
On-Premise
Injury
Competition
from
Former
Employees
Loss of
Key
Executives
Employee
Dishonesty
Bad Debts
Product
Liability
Personnel Risks
Customer
Risks
Ba
• Entrepreneurs can sell the goods on credit or cash
• Cash sale is inflow of cash and it is controlled under cash flow analysis.
• Credit sale creates sundry debtors.
• Company has to receive money from them.
• If an entrepreneur promotes credit sale, it can increase the risk of bad debts.
• So, it is required to control and to manage debtors.
Accounts receivable
Accounts receivable is a legally enforceable claim for payment held by a business against its
customer/ clients for goods supplied and/or services rendered in execution of the customer's
order.
Accounts receivable is the money that a company has a right to receive because it had
provided customers with goods and/or services.
• These are generally in the form of invoices raised by a business and delivered to the
customer for payment within an agreed time frame.
Accounts receivable
• Trade credit arises when goods sold under delayed payment terms
• Value can be added by managing three areas:
– aggregate investment in receivables
– credit terms
– credit standards
• Over-investing in receivables can be costly
• ...but, if credit terms are not competitive, then lost sales can be costly
Why manage debtors?
• Minimize bad debts and outstanding receivables
• Maintain financial flexibility
• Optimize mix of company assets
• Convert receivables to cash in a timely manner
• Analyze customer risk
• Respond to customer needs
Why Extend Credit?
• Financial Motive
• Operating Motive
• Contracting Motive
• Pricing Motive
• All reasons are related to market imperfections
Financial Motive
• Potential of getting a higher price/ sales
• Sellers raise capital at lower rates than customers and have cost advantages due to:
– similarity of customers
– the information gathered in the selling process
– lower probability of default (the goods purchased are an essential element of
the buyer‘s business)
– seller can more easily resell product if payment is not made.
Operating Motive
• Respond to variable and uncertain demand
• Change credit terms rather than:
– install extra capacity,
– building or depleting inventories,
– or forcing customers to wait.
Contracting Cost Motive
• Buyer gets to inspect goods prior to payment
• Seller has less theft with separation of collection and product delivery
Pricing Motive
• Change price by changing credit terms
Basic Credit Granting Model
S - EXP(S)
• NPV = ----------------- - VCR(S)
1 + iCP
• Where:
• NPV = net present value of the credit sale
• VCR = variable cost ratio
• S = dollar amount of credit sale
• EXP = credit administration and collection expense ratio
• i = daily interest rate
• CP = collection period for sale
Managing the Credit Policy
• Should we extend credit?
• Credit policy components
• Credit-granting decision
Should We Extend Credit?
• Follow industry practice
• Extent and form of credit offer
– in-house credit card
– sell receivables to a factor
– captive finance company?
Components of Credit Policy
Development of credit standards
– profile of minimally acceptable credit worthy customer
• Credit terms
– credit period
– cash discount
• Credit limit
– maximum dollar level of credit balances
Collection procedures
– how long to wait past due date to initiate collection efforts
– methods of contact
– whether and at what point to refer account to collection agency
Credit-Granting Decision
• Development of credit standards
• Gathering necessary information
• Credit analysis: applying credit standards
• Risk analysis
Credit Standards
• Based on five C's of Credit
– Character
– Capital
– Capacity
– Collateral
– Conditions
• Determine risk classification system
• Link customer evaluations to credit standards
• Creditors look at your ability to pay debt and willingness to do so.
• Creditors also speak of the three Cs: capacity, character and collateral.
Capacity.
• Can you pay the debt?
• Entrepreneurs ask for employment information: your occupation, how long you've
been with your current employer and how much you earn.
• They also want to know about your expenses and the amount of your other
obligations.
Character
• Will you pay the debt?
• Entrepreneurs will look at your credit history: how much you owe, how often you
borrow, whether you pay your bills on time, and whether you live within your means.
• They also look for signs of stability: how long you've lived at your present address,
whether you own or rent your home, and how long you have been in your present
employment.
Collateral
• In some instances creditors also look for protection or collateral to cover their risk.
• In these instances they would want to know: are they fully protected if you fail to
repay them?
• They also want to know what assets you have that could be used to back up or secure
debts and other resources you have for repaying debt other than income, such as
savings, investments or property.
• entrepreneurs use different combinations of this information to reach their decisions.
• Some set unusually high standards.
• They also use different rating systems. Some rely strictly on their own instinct and
experience.
• Others use a "credit-scoring" or statistical system to predict whether you're a good
credit risk.
• They assign a certain number of points to each of the characteristics that have proved
to be reliable signs that a client will pay.
• Then they rate you on this scale.
Gathering Information
• credit reporting agencies
• credit bureaus
• bank letters
• references from other suppliers
• financial statements
• field data gathered by sales reps
Credit Analysis: Applying the Standards
• Nonfinancial - concerned with willingness to pay, character
• Financial - ability to pay, financial ratios etc.. (other C‘s of credit)
• Credit scoring models
– Example:
Y = .000025(INCOME) + 0.50(PAYHIST) + 0.25(EMPLOYMT)
• Factors Affecting Credit Terms
• Competition
• Operating cycle
• Type of good (raw materials vs finished goods, perishables, etc.)
• Seasonality of demand
• Consumer acceptance
• Cost and pricing
• Customer type
• Product profit margin
Debtor management
• Enforcing payments
• Commitment required on the part of debtors
• Reminders need to be send regularly
• Put in place payment plans
Factoring
• Factoring is similar to invoice discounting but the unpaid debts are sold to a factoring
company.
• Customers are made aware that the factoring company has responsibility for debt
collection.
• Some debtors will pay a factoring company faster if they fear their credit rating will
be downgraded.
• How the factoring company deals with your customers will affect what customers
think of you.
• Make sure you use a reputable company that will not damage your reputation.
Debt collection options
• When an individual or business owes you money, you can:
• use a debt collector
• engage in mediation
• make a minor debt claim
• take steps to collect an outstanding debt in the event of a debtor bankruptcy.
• These options should be considered when all other efforts to chase a debtor have
failed.
Using a debt collector
• Debtors are often moved to pay at the prospect of having their credit rating
downgraded.
• Engaging a debt collector to contact a customer about an outstanding payment can put
an end to payment delays.
• All debt collectors in Queensland must be licensed. They are also bound by a code of
conduct that sets down standards, provides a complaint resolution system and ensures
consumers do not feel unduly harassed by the debt collector.
• By law, a debt collector cannot threaten to have the debtor sent to jail, as a person
cannot be jailed for an unpaid civil debt in Queensland.
Mediation
• Consider using mediation as an alternative to having a magistrate settle minor debt
claims.
• Mediation can save you time and settle the matter in a way that suits both you and
your debtor.
• If a solution is not reached, the magistrate will make the final decision.
Minor debt claims
• If someone owes you $25,000 or less and will not pay, you can make a claim through
the Civil and Administrative Courts.
Bankruptcy
• If someone who owes you money is declared bankrupt, they are usually freed from
debts they cannot pay.
• As a creditor, you can make a claim called a provable debt.
• This entitles you to share in the distribution of debtor funds and vote at meetings
related to the bankruptcy.
Debtor management
• It is central to the effective cash flow of your business.
• Without an effective debtor control system, you leave your finances vulnerable.
• Small-to-medium enterprises are often guilty of failing to establish an appropriate
debtor management system.
• Even if a company simply started with tallying debtor days, it's an important first step
in the right direction and a key performance indicator that, ideally, businesses should
monitor monthly.
• The following guidelines will also help to establish an effective debt management
system:
• Ensure all payment arrangements with debtors are always confirmed in writing
• For overdue payments, contact the debtor promptly to confirm they received their
invoice
• Create a monthly debtors aged analysis
• Make sure your invoices meet your customers' format requirements
• Create a debtors day outstanding chart to identify potential cash flow improvements if
your business could minimise overdue payments
• In addition to being proactive about debt management relating to existing clients, it's
important for businesses of all sizes to investigate the financial history of prospective
clients to ensure they are not high credit risks.
Managing Creditors
• What are creditors?
• Why do we need to manage creditors?
• How do we manage your accounts payable to improve
cash flow?
Managing Creditors
• It is vital that all of your suppliers value your business.
• Of course, the best way of keeping them loyal is to pay them on time.
• When your own circumstances do not allow this, you need to communicate with them
early and regularly.‖
• Philip King, Institute of Credit Management
Managing Creditors
• You must maximise the time from when you receive goods and services from
your suppliers to when you pay them, without damaging your relationship with
them.
• If you manage the situation well, your creditors will have more trust and confidence
in you than before.
• But managed badly, the situation can develop into a crisis.
Managing Creditors
• To achieve your objective you need to:
• Pay as late as possible without infringing invoice payment terms
• Make sure the person responsible for paying ensures nothing is being paid before it
has to be
• Agree clear terms of payment with your suppliers
• Consider paying for non-current assets over a longer period rather than on delivery.
• Entrepreneurs rely on good relations with creditors for the smooth operation of their
businesses.
• Suppliers (trade creditors), the bank, and statutory bodies all affect the cash-flows of
most businesses
What is a creditor?
• A person, bank or other enterprise that has lent money or extended credit to another
party.
• An expression used in the accounting world to specify a party who has delivered a
product, service or loan and is due to be paid/ owed money by one or more debtors.
• An entity, a company or a person of a legal nature that has provided goods, services or
a monetary loan to a debtor due to be paid latter.
Managing Creditors
• Identifying your key creditors.
• Deciding your objectives for each creditor.
• Handling your bank and the taxman.
Key creditors
• Identify which creditors are vital to the survival and growth of your business.
• Decide which suppliers are mission critical, on the basis that there is no alternative
supplier immediately available.
• Then work out tactics to win their support.
• Your financial backers are usually top of the list.
• Treat your bank as an investor, by providing regular information (accounts).
• Suppliers of commodity items, which you can buy elsewhere, are bottom of the list
• Make sure you are aware of what would happen if you were unable to make a
payment on time.
• Identify which creditors are likely to be inflexible, and could seriously damage your
business as a result.
• Statutory bodies such as ZIMRA can automatically charge you for late payment.
• Your local authority can sue you for non-payment of business licenses/ rates.
• Utilities suppliers can cut off your telephones, electricity, water.
• One problem is that these organisations are large and impersonal, so it is hard to build
a supplier relationship.
• If you hold back payment because of a dispute, you may be penalised immediately.
• You may have to pay up first and argue your case afterwards.
Works out your purchasing objectives
• The priority is usually reliability, followed by quality, price and then their credit
terms.
• Shop around. If you have a choice of good suppliers for a particular product, your
supplier may be prepared to extend the credit period to keep your business.
• Agree these objectives with your accounts department, and train them in how to treat
your creditors.
Managing Creditors
• Find reliable and competitively priced suppliers
• Negotiate clear, written agreements from the outset
• Communicate with Suppliers
• Improve systems for paying suppliers
• Make prompt payments only when worthwhile discounts apply
• Keep good records
• Improve efficiency
• Spread Out Your Payments
Keep good records
Keeping track of what you owe and when it is due will enable you to establish good credit
and hold onto your money as long as possible.
• The accounts payable aging schedule is an important tool for keeping track of your
payables on a monthly or weekly basis.
• Review your creditors regularly.
• Review aging schedules weekly.
• Are you paying the right amount, including any discounts?
• Payments should be made in accordance with purchase order terms and discounts
taken where allowed.
• Match all supplier invoices against goods received notes and purchase orders.
• Analyse real-time information about sales, orders or market trends so that you can
forecast and react quickly to changes in demand.
Find reliable and competitively priced suppliers
• Finding good suppliers and maintaining solid relations with them can be an
invaluable tool in the quest for good cash flow management and business success.
• The right suppliers could be your route to a competitive edge through their pricing,
quality, service, delivery, so do your research.
• Review your suppliers’ performance to ensure you are getting the best deal.
• Question their price, quality, delivery, account management, new product innovations
to find out if there are better deals to be had.
Building a relationship
• Suppliers are often good at coming up with ideas for how to improve your product or
your whole business, as they supply other companies like your own.
• Keep them informed, to build up their trust in you. Otherwise small problems can
escalate into large ones.
• A common example is the situation where you withhold payment because you received
damaged goods. It is not enough
• Negotiate clear, written agreements from the outset
• Contracts and service agreements are essential business tools for professional
trading and business relationships.
• Without clearly defined and agreed contracts, misunderstandings can develop,
expectations of client and provider fail to match, and all sorts of problems can occur.
• It is a good policy to document, agree and sign important supply arrangements.
• If cash flow is tight, re-negotiate payment dates and credit limits with your main
suppliers.
• Be aware of your supplier‘s right to charge interest on late payments.
Set out a general policy on payment
• Make sure your suppliers understand your payment terms.
• For example, you might pay within 30 days of receipt of invoice.
• If you generate cash, like some entrepreneurs do, you can afford to pay quickly in return for
price or settlement discounts.
Write down your terms of trade and ask any new supplier to agree to them by signing
and returning them.
• If the supplier‘s terms of trade conflict with yours, come to a (written) agreement
before you order.
• If you manage your cash flow well, you should be able to pay your suppliers on time
Allow for some flexibility
• Be prepared to trade off credit in return for other concessions (or vice versa) from your
suppliers.
• Some suppliers operate on a cash-up-front basis, or require a deposit, communicate the
benefits to your suppliers, so they support you in the future.
• If you pay promptly, your suppliers should expect to do you a favour in return when you
need one.
• If you negotiate extra credit, show the suppliers what they get in return.
Communicate with Suppliers
• Communicate with your suppliers to improve your purchasing process.
• Keep them informed so small problems don‘t escalate into big problems.
• When cash is low, the temptation is to pay your suppliers last but this can endanger
the relationship you‘ve built up over the years.
• If you ever need to delay a payment, you'll need their trust and understanding.
• Get to know the people who manage your account and make sure they are easily
contactable.
• Identify the creditors that are vital to the survival and growth of your business and
work out tactics to win their trust and confidence.
• Try to be as honest as you can. You may just be encountering a minor blimp but
know things will get back on track soon.
Review your terms regularly
• Check whether other suppliers would offer better terms.
• If they would, ask your existing suppliers to improve theirs.
• Make sure that your financial controller is following the policy.
• There is a tendency to delay payments to creditors even when it is not necessary to do
so.
Improve efficiency
• Accurate information on stock means you will only order the supplies you need.
Efficient stock control allows you to have the right amount of stock in the right place at the
right time.
• It ensures capital is not tied up unnecessarily, and protects production if problems
arise with the supply chain.
• Good stock control improves efficiency, lowers costs and ensures you meet
fluctuations in customer demands.
Make prompt payments only when worthwhile discounts apply
• Check out supplier deals.
• Some will entice/ lure you with special offers, promotions and discounts. Use them
wherever you can.
• NOTE: Be careful of buying in bulk just because there is a discount on it.
• Holding large quantities of stock may cost you more in the long-run.
Dealing with creditors when you are in financial difficulties.
Your payment policy
• A well thought-out payment policy is a vital part of building a strong and trusting
relationship with your suppliers and other creditors.
• Agree these objectives with your staff, and train them in how to treat your creditors.
Debt Consolidation
• Debt Consolidation entails taking out a new loan (called a debt consolidation loan) to
pay off your existing debts.
• The term ―consolidate‖ means to group several things together into one, which makes
sense, since debt consolidation groups all your existing debts into a new loan.
• This helps to streamline your payments – you‘ll pay just one bill every month instead
of many.
• It can also allow you to get a lower interest rate and lower monthly payments than
what you‘re currently paying.
• Here is what to expect if you choose to get a debt consolidation loan:
• You contact a bank or peer-to-peer lender.
• You work with the lender to set terms for your new loan. Since the bank or lender
who is offering the debt consolidation loan will be your new (and only) creditor, you
need to work with them to ensure the interest rate and monthly payments are going to
work for you.. And don‘t forget to calculate the total cost of the loan (including all the
interest you will pay).
• Your debts are transferred to the new lender. Once this happens, you no longer
owe your previous creditors anything. You now owe the new lender the total amount
of your balance.
Debt Management
• These two terms debt management and debt consolidation are often mixed up,
because many companies advertise both
• In reality, debt consolidation only refers to getting a new loan that pays off your old
debts and gives you one payment.
• A debt management plan (DMP) is a program offered by companies or non-profit
groups that helps you negotiate a new payment plan with your current creditors.
• So unlike debt consolidation, you still have the same debts (with the same balances)
but you negotiate for lower interest rates and, if necessary, lower monthly payments.
• Here are the steps you can expect to go through if you do a DMP:
1. You make an appointment with a credit counselor. At this meeting, you will go over
your entire financial picture and the credit counselor will try to give you practical ways of
improving your monthly budgeting so that you‘ll have money leftover to pay off your debt.
2. They help you make a plan for paying it off. Based on the number of accounts you owe,
and your ability to make monthly payments, they will create a debt management plan that‘s
tailored to your situation.
To do this, they will communicate with your creditors and ask them to lower your interest
rates and your monthly payments.
3. The DMP usually takes 3 to 6 years to complete. Of course, the timeline depends on
your total debt and how much income you‘re directing toward getting out of debt.
If you finish the DMP, you should have no remaining debt obligations, and, although your
credit score may be lower, it will better than if you had gone through bankruptcy or debt
settlement.
Debt settlement
Debt settlement is a more drastic option than either debt consolidation or debt management.
• With debt settlement, you are telling your creditors ―Sorry, I can‘t pay the entire
amount I owe, but I can pay a fraction of it to you right now if you‘ll cancel the debt.‖
• As you can imagine, doing debt settlement will hurt your credit score pretty
significantly.
• It‘s not something you should do before considering other options. However, for some
people, it will be the best option.
• While there are many debt settlement companies out there, it‘s worth pointing out that
you can attempt to negotiate settlements on your own.
• Here are the steps you can expect to go through if you use a debt settlement
company:
1. You contact the debt settlement company. They will ask you for the details of your
situation, including the amount of debt you owe and the different types of debt you have, as
well as the amount of funds you have that can be used to pay off debt.
2. They ask you to sign a contract. If you agree, you will have to begin paying them
each month instead of paying your creditors. The money you pay will be held in an
―escrow‖ account, which means it will not be given to your creditors immediately.
Instead, the debt settlement company waits until you have accumulated enough
money in your escrow account to make a lump sum offer to settle your debts.
Sometimes this can take months.
• 3. The company attempts to negotiate with your creditors. Once you have enough
money in the escrow account, the company will begin to contact each of your
creditors (the banks and supplier companies that you owe money to) and attempt to
negotiate a settlement where you pay some percentage of your outstanding balance as
a lump sum in return for having the debt cancelled.
• 4. If it works, your debt is reduced.
• Assuming you‘re working with a legitimate debt settlement company, they might be
able to negotiate lower balances on some or all of your debts. For example, if you
owed $5,000 on your Bank, it might be settled for $4,000. That‘s the potential
positive impact of debt settlement.
NB: The current Zimbabwean situation does not permit this kind of transactions.
• 5. If it doesn’t work, you’ll be in worse shape. Why? Because you will potentially
lose two things you can‘t afford: time and money. If the settlement offers are not
accepted by your creditors (or very few of them) you will be months or years behind
on your payments. Legally, the company must give you back the money in the escrow
account if they fail to settle any of your debts. However, if they settle some of your
debts they will be able to take a fee (which can be a flat fee or a percentage) from that
escrow account.
• What Is Bankruptcy and How Does It Work?
Summary
• Will the supplier go the extra mile for you when you need a rush delivery, or extended
credit?
• Negotiate clear, written agreements at the outset. Then stick to them.
• Be aware of your supplier‘s right to interest on late payments.
• Involve your suppliers in your business, so that they understand your needs.
• Also keep informed about developments at your suppliers.
• For example, a change of ownership can mean a drastic reduction in the credit a
supplier extends to you.
Evaluating financial performance and financial position
Ratio Analysis
Introduction
A sustainable business and mission requires effective planning and financial management.
Ratio analysis is a useful management tool that will improve your understanding of financial
results and trends over time, and provide key indicators of organizational performance.
Entrepreneurs use ratio analysis to pinpoint strengths and weaknesses from which strategies
and initiatives can be formed.
Investors may use ratio analysis to measure your results against other organizations or make
judgments concerning management effectiveness and mission impact.
Ratio analysis
Ratio analysis is used to evaluate various aspects of a business‘ operating and financial
performance such as its efficiency, liquidity, profitability and solvency.
The trend of these ratios over time is studied to check whether they are improving or
deteriorating.
Ratios are also compared across different businesses in the same sector to see how they stack
up, and to get an idea of comparative valuations.
For ratios to be useful and meaningful, they must be:
Calculated using reliable, accurate financial information (does your financial information
reflect your true cost picture?)
Calculated consistently from period to period
Used in comparison to internal benchmarks and goals
Used in comparison to other companies in your industry
Viewed both at a single point in time and as an indication of broad trends and issues over
time
Carefully interpreted in the proper context, considering there are many other important
factors and indicators involved in assessing performance.
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick
indication of a firm's financial performance in several key areas.
The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset
Management Ratios, Profitability Ratios, and Market Value Ratios.
Importance of Ratio Analysis
Analyzing Financial Statements
Ratio analysis is an important technique of financial statement analysis.
Accounting ratios are useful for understanding the financial position of the company.
Different users such as investors, management, bankers and creditors use the ratio to analyze
the financial situation of the company for their decision making purpose.
Judging Efficiency
Accounting ratios are important for judging the company's efficiency in terms of its
operations and management.
They help judge how well the company has been able to utilize its assets and earn profits.
Importance of Ratio Analysis cont...
Locating Weakness
Accounting ratios can also be used in locating weakness of the company's operations even
though its overall performance may be quite good.
Management can then pay attention to the weakness and take remedial measures to overcome
them.
Formulating Plans
Although accounting ratios are used to analyze the company's past financial performance,
they can also be used to establish future trends of its financial performance.
As a result, they help formulate the company's future plans.
Importance of Ratio Analysis cont...
Comparing Performance
It is essential for a company to know how well it is performing over the years and as
compared to the other firms of the similar nature.
Besides, it is also important to know how well its different divisions are performing among
themselves in different years. Ratio analysis facilitates such comparison.
Ratios can be divided into four major categories
Profitability Sustainability
Operational Efficiency
Liquidity
Leverage (Funding- Debt, Equity, Grants)
Four categories of ratios
Operational Efficiency/ Activity ratios - the liquidity of specific assets and the efficiency of
managing assets
Liquidity ratios - firm's ability to meet cash needs as they arise;
Debt and Solvency ratios - the extent of a firm's financing with debt relative to equity and
its ability to cover fixed charges
Profitability ratios - the overall performance of the firm and its efficiency in managing
investment (assets, equity, capital)
Liquidity Measurement Ratios
a) Current Ratio
b) Quick Ratio
c) Cash Ratio
d) Cash Conversion Cycle
Profitability Indicator Ratios
a) Profit Margin Analysis
b) Effective Tax Rate
c) Return On Assets
d) Return On Equity
e) Return On Capital Employed
Debt Ratios
a) Overview of Debt
b) Debt Ratio
c) Debt-Equity Ratio
d) Capitalization Ratio
e) Interest Coverage Ratio
f) Cash Flow To Debt Ratio
Operating Performance Ratios
a) Fixed Asset Turnover
b) Sales/Revenue Per Employee
c) Operating Cycle
Cash Flow Indicator Ratios
a) Operating Cash Flow/Sales Ratio
b) Free Cash Flow/Operating Cash Ratio
c) Cash Flow Coverage Ratio
d) Dividend Payout Ratio
Investment Valuation Ratios
a) Per Share Data
b) Price/Book Value Ratio
c) Price/Cash Flow Ratio
d) Price/Earnings Ratio
e) Price/Earnings To Growth Ratio
f) Price/Sales Ratio
Liquidity Measurement Ratios
Liquidity ratios attempt to measure a company's ability to pay off its short-term debt
obligations.
This is done by comparing a company's most liquid assets (or, those that can be easily
converted to cash), its short-term liabilities.
Liquidity Measurement Ratios
In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a
clear signal that a company can pay its debts that are coming due in the near future and still
fund its ongoing operations.
On the other hand, a company with a low coverage rate should raise a red flag for investors as
it may be a sign that the company will have difficulty meeting its running operations, as well
as meeting its obligations.
Liquidity Measurement Ratios
The biggest difference between each ratio is the type of assets used in the calculation.
While each ratio includes current assets, the more conservative ratios will exclude some
current assets as they aren't as easily converted to cash.
Current Ratio
• The current ratio is a popular financial ratio used to test a company's liquidity (also
referred to as its current or working capital position) by deriving the proportion of
current assets available to cover current liabilities.
• The concept behind this ratio is to ascertain whether a company's short-term assets
(cash, cash equivalents, marketable securities, receivables and inventory) are readily
available to pay off its short-term liabilities (notes payable, current portion of term
debt, payables, accrued expenses and taxes).
• In theory, the higher the current ratio, the better.
Quick Ratio
• The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity
indicator that further refines the current ratio by measuring the amount of the most
liquid current assets there are to cover current liabilities.
• The quick ratio is more conservative than the current ratio because it excludes
inventory and other current assets, which are more difficult to turn into cash.
• Therefore, a higher ratio means a more liquid current position.
• As previously mentioned, the quick ratio is a more conservative measure of liquidity
than the current ratio as it removes inventory from the current assets used in the ratio's
formula.
• By excluding inventory, the quick ratio focuses on the more-liquid assets of a
company.
• The basics and use of this ratio are similar to the current ratio in that it gives users an
idea of the ability of a company to meet its short-term liabilities with its short-term
assets.
• Another beneficial use is to compare the quick ratio with the current ratio.
• If the current ratio is significantly higher, it is a clear indication that the company's
current assets are dependent on inventory.
Cash Ratio
• The cash ratio is an indicator of a company's liquidity that further refines both the
current ratio and the quick ratio by measuring the amount of cash, cash equivalents or
invested funds there are in current assets to cover current liabilities.
• The cash ratio is the most stringent and conservative of the three short-term liquidity
ratios (current, quick and cash).
• It only looks at the most liquid short-term assets of the company, which are those that
can be most easily used to pay off current obligations.
• It also ignores inventory and receivables, as there are no assurances that these two
accounts can be converted to cash in a timely matter to meet current liabilities.
• Very few companies will have enough cash and cash equivalents to fully cover
current liabilities, which isn't necessarily a bad thing, so don't focus on this ratio being
above 1:1.
• The cash ratio is seldom used in financial reporting or by analysts in the fundamental
analysis of a company.
• It is not realistic for a company to purposefully maintain high levels of cash assets to
cover current liabilities.
• The reason being that it's often seen as poor asset utilization for a company to hold
large amounts of cash on its balance sheet, as this money could be returned to
shareholders or used elsewhere to generate higher returns.
Cash Conversion Cycle (CCC)
• This liquidity metric expresses the length of time (in days) that a company uses to sell
inventory, collect receivables and pay its accounts payable.
• The cash conversion cycle (CCC) measures the number of days a company's cash is
tied up in the production and sales process of its operations and the benefit it gets
from payment terms from its creditors.
• The shorter this cycle, the more liquid the company's working capital position is.
• The CCC is also known as the "cash" or "operating" cycle.
C C C – DIO
DIO is computed by:
1. Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;
2. Calculating the average inventory figure by adding the year's beginning (previous year end
amount) and ending inventory figure (both are in the balance sheet) and dividing by 2 to
obtain an average amount of inventory for any given year; and
3. Dividing the average inventory figure by the cost of sales per day figure.
• DIO gives a measure of the number of days it takes for the company's inventory to
turn over, i.e., to be converted to sales, either as cash or accounts receivable.
CCC - DSO
DSO is computed by:
1. Dividing net sales (income statement) by 365 to get a net sales per day figure;
2. Calculating the average accounts receivable figure by adding the year's beginning
(previous year end amount) and ending accounts receivable amount (both figures are in the
balance sheet) and dividing by 2 to obtain an average amount of accounts receivable for any
given year; and
3. Dividing the average accounts receivable figure by the net sales per day figure.
• DSO gives a measure of the number of days it takes a company to collect on sales that
go into accounts receivables (credit purchases).
C C C - DPO
DPO is computed by:
1. Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;
2. Calculating the average accounts payable figure by adding the year's beginning (previous
yearend amount) and ending accounts payable amount (both figures are in the balance sheet),
and dividing by 2 to get an average accounts payable amount for any given year; and
3. Dividing the average accounts payable figure by the cost of sales per day figure.
• DPO gives a measure of how long it takes the company to pay its obligations to
suppliers.
C C C
An often-overlooked metric, the cash conversion cycle is vital for two reasons.
1. It's an indicator of the company's efficiency in managing its important working capital
assets; 2. It provides a clear view of a company's ability to pay off its current liabilities.
It does this by looking at how quickly the company turns its inventory into sales, and its sales
into cash, which is then used to pay its suppliers for goods and services.
Again, while the quick and current ratios are more often mentioned in financial reporting,
investors would be well advised to measure true liquidity by paying attention to a company's
cash conversion cycle.
C C C
• The longer the duration of inventory on hand and of the collection of receivables,
coupled with a shorter duration for payments to a company's suppliers, means that
cash is being tied up in inventory and receivables and used more quickly in paying off
trade payables.
• If this circumstance becomes a trend, it will reduce, or squeeze, a company's cash
availabilities.
• By tracking the individual components of the CCC (as well as the CCC as a whole),
an investor is able to discern positive and negative trends in a company's all-important
working capital assets and liabilities.
• For example, an increasing trend in DIO could mean decreasing demand for a
company's products.
• Decreasing DSO could indicate an increasingly competitive product, which allows a
company to tighten its buyers' payment terms.
As a whole, a shorter CCC means greater liquidity, which translates into less of a need to
borrow, more opportunity to realize price discounts with cash purchases for raw
materials, and an increased capacity to fund the expansion of the business into new
product lines and markets.
• Conversely, a longer CCC increases a company's cash needs and negates all the
positive liquidity qualities just mentioned.
PROFITABILITY INDICATOR RATIOS
• These ratios give users a good understanding of how well the business utilizes its
resources in generating profit and shareholder value.
• They look at different measures of business profitability and financial performance
• The long-term profitability of a business is vital for both the survivability of the
company as well as the benefit received by shareholders.
• It is these ratios that can give insight into the all important "profit".
• These ratios look at four important profit margins, which display the amount of profit
a company generates on its sales at the different stages of an income statement.
Return on Assets, Return on Equity and Return on Capital Employed - detail how effective a
company is at generating income from its resources.
Profit Margin Analysis
o In the income statement, there are four levels of profit or profit margins - gross profit,
operating profit, pretax profit and net profit.
o The term "margin" can apply to the absolute number for a given profit level and/or the
number as a percentage of net sales/revenues.
o Profit margin analysis uses the percentage calculation to provide a comprehensive
measure of a company's profitability on a historical basis (3-5 years) and in
comparison to peer companies and industry benchmarks.
o Basically, it is the amount of profit (at the gross, operating, pretax or net income
level) generated by the company as a percent of the sales generated.
o The objective of margin analysis is to detect consistency or positive/negative trends in
a company's earnings.
o Positive profit margin analysis translates into positive investment quality.
o To a large degree, it is the quality, and growth, of a company's earnings that drive its
stock price.
Profit Margin Analysis
Gross Profit Margin
o A company's cost of sales, or cost of goods sold, represents the expense related to
labour, raw materials and manufacturing overheads involved in its production
process.
o This expense is deducted from the company's net sales/revenue, which results in
a company's first level of profit, or gross profit.
o The gross profit margin is used to analyze how efficiently a company is using its
raw materials, labour and manufacturing-related fixed assets to generate profits.
o A higher margin percentage is a favourable profit indicator.
Return On Assets
This ratio indicates how profitable a company is relative to its total assets. The return on
assets (ROA) ratio illustrates how well management is employing the company's total assets
to make a profit. The higher the return, the more efficient management is in utilizing its asset
base. The ROA ratio is calculated by comparing net income to average total assets, and is
expressed as a percentage.
Return On Equity
This ratio indicates how profitable a company is by comparing its net income to its average
shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders
earned for their investment in the company. The higher the ratio percentage, the more
efficient management is in utilizing its equity base and the better return is to investors.
Widely used by investors, the ROE ratio is an important measure of a company's earnings
performance. The ROE tells common shareholders how effectively their money is being
employed. In general, financial analysts consider return on equity ratios in the 15-20% range
as representing attractive levels of investment quality.
Return On Capital Employed
The return on capital employed (ROCE) ratio, expressed as a percentage, complements the
return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity
to reflect a company's total "capital employed". This measure narrows the focus to gain a
better understanding of a company's ability to generate returns from its available capital base.
By comparing net income to the sum of a company's debt and equity capital, investors can get
a clear picture of how the use of leverage impacts a company's profitability. Financial
analysts consider the ROCE measurement to be a more comprehensive profitability indicator
because it gauges management's ability to generate earnings from a company's total pool of
capital.
• The return on capital employed is also an important measure of a company's
profitability.
• Factoring debt into a company's total capital provides a more comprehensive
evaluation of how well management is using the debt and equity it has at its disposal.
• Investors would be well served by focusing on ROCE as a key, if not the key, factor
to gauge a company's profitability.
• An ROCE ratio, as a very general rule of thumb, should be at or above a company's
average borrowing rate.
Debt Ratios
These ratios give users a general idea of the company's overall debt load as well as its mix of
equity and debt. Debt ratios can be used to determine the overall level of financial risk a
company and its shareholders face. In general, the greater the amount of debt held by a
company the greater the financial risk of bankruptcy.
Debt Ratios
• Will give some background information on the debt of a company which gives a
general idea of a company's financial leverage.
• The capitalization ratio details the mix of debt and equity while the interest coverage
ratio and the cash flow to debt ratio show how well a company can meet its
obligations.
• The debt ratio compares a company's total debt to its total assets, which is used to
gain a general idea as to the amount of leverage being used by a company.
• A low percentage means that the company is less dependent on leverage, i.e., money
borrowed from and/or owed to others.
• The lower the percentage, the less leverage a company is using and the stronger its
equity position.
• In general, the higher the ratio, the more risk that company is considered to have
taken on.
• The debt ratio gives users a quick measure of the amount of debt that the company has
on its balance sheets compared to its assets.
• The more debt compared to assets a company has, which is signalled by a high debt
ratio, the more leveraged it is and the riskier it is considered to be.
Debt-Equity Ratio
The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its
total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors
and obligors have committed to the company versus what the shareholders have committed.
To a large degree, the debt-equity ratio provides another vantage point on a company's
leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed
to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a
company is using less leverage and has a stronger equity position.
• The debt-equity ratio appears frequently in investment literature.
• However, like the debt ratio, this ratio is not a pure measurement of a company's debt
because it includes operational liabilities in total liabilities.
• Nevertheless, this easy-to-calculate ratio provides a general indication of a company's
equity-liability relationship and is helpful to investors looking for a quick take on a
company's leverage.
• Generally, large, well-established companies can push the liability component of their
balance sheet structure to higher percentages without getting into trouble.
Procurement
Definition of Key Terms
Broad function of acquiring goods, services, works, personnel including the hiring of
contractors and consultants to carry out services
A complete process from planning to contract management that involves the
acquisition of products from third parties and/or in-house providers
Includes purchase function, seeking aid or donations or some other contractual
arrangements e.g. lend-lease by which a product passes from one party to the other;
stores; transportation; receiving; inspection and salvage
Procurement is the process of acquiring goods or services in order to satisfy the needs
of a person, group or organisation
It is a complete process ranging from materials requisition to materials acquisition involving:
the right materials
from the right source
in the right quantity
in the right condition
at the right price
with the right service
Things procured
1. MATERIALS: i) Raw materials
ii) Semi-finished goods or work-in- progress
iii) Finished goods
Materials may also be classified as follows:
(i) Current assets
(ii) Non-current assets
(iii) Consumer goods (durable, non-durable/perishable)
(iv) Capital goods
2 FINANCE/FUNDS/CAPITAL
I) Equity
II) Debt
III) Other
3 INFORMATION: i) Data
ii) Information
iii) Ideas
4 HUMAN RESOURCES: i) Board of Directors (or by whatever name they
be called)
ii) CEO and top managers)
iii) Managers and supervisors
iv) Workers
v) Contracted third parties/jobbers or 3PL and
4PL firms
5 SERVICES: e.g. external auditing, management and technical consultancy
services, market research etc.
SOURCES OF THE THINGS PROCURED
Types of Sources
1. Internal e.g. i) inter-departmental
ii) inter-ministerial
iii) inter-branch
2. Domestic i.e. country-specific sources of materials, funds, information and human
resources
3 International:
i) Transnational as in a bilateral trade agreement
e.g. between Zimbabwe and the Republic of South Africa.
ii) Regional e.g. SADC,EU, COMESA, NAFTA
iii) International….involving many countries and
regions of the world
iv) Global i.e. encompassing virtually all countries and regions of the
world
Other different types of sources of the things procured may be identified e.g. wherefrom the
organisation obtains
Capital or financing e.g. private or public
Information e.g. primary or secondary
Materials e.g. original equipment manufacturer (OEM) or an alternate e.g. product
imitator
RESPONSIBILITY FOR PROCUREMENT
1. Profit-oriented organisations---Board of Directors within the constraints imposed
by law and relevant articles of association
2. State controlled institutions e.g. Ministries, government departments, parastatals,
state-owned enterprises…government as represented by the cabinet of ministers
within the constraints imposed by the national constitution, Procurement Act and
Regulations and other statutes
3. NGOs, CBOs---- Board of Trustees within the constraints imposed by the Voluntary
Organisations Act and Regulations
The above mentioned managing and directing bodies generally keep for execution by
themselves some of the strategic procurement functions whilst delegating some to their
preferred/statutory agents (Procurement Board/Committee, 3PL firm, etc)
Procurement process
Step 1: Conduct a needs analysis
Identify the need(s) actual vs. imagined needs, routine vs.emergent needs
Determine user (internal customer, external customer and/or end user) requirements
Step 2: Conduct a make or buy decision
Straight rebuy
Modified rebuy
New buy
Step 3: Determine the necessary levels of investment
Financial resources
Time
Information
Step 4: Prudently Select vendor/seller
Conduct a market analysis
Identify potential suppliers e.g. ASL
Prescreen / short list potential suppliers
Evaluate the remaining sources
Step5: Negotiate purchase and sale contract
Step 6: Enter into a valid contract with the preferred seller
Step 7: Ensure product/ service delivery
Step 8: Conduct a post-purchase evaluation
Steps in a straight re-buy of a normally stocked item
1. Purchase order (PO) prepared by user
2. Request for quote (RFQ) sent to
3. Vendor/seller returns the quote
4. Purchase order issued by user to the product Vendor
5. Vendor returns acknowledgement copy of PO
6. Vendor ships the ordered item and invoice
7. Receipt of the purchased consignment reported/recorded in internal records
8. Receiving Department pays the billing invoice
Steps in re-ordering standard items
1. Purchase requisition prepared by function needing the item
2. PO prepared by procurement and sent to the vendor
3. Vendor ships item and invoice
4. Receipt of item recorded
5. Invoice paid
Steps in a new buy
1. User originates purchase requisition
2. Request for quotation (RFQ) or request for proposal (RFP)
3. Vendor returns quote
4. PO sent to selected vendor
5. Vendor acknowledges PO
6. Vendor ships item and invoice
7. Receipt reported/ recorded
8. Invoice is paid
Make or Buy Decision Making
A make or buy decision, where circumstances warrant, should precede any
buy/purchase decision.
Comparative cost to make or buy an item is the primary evaluation criterion so that
product acquisition cost is minimized per quotation:
TCmin=CiD ⁺ √2CbD(1-D/R)
Where:
C1= item cost
Cb= buying cost
Ch = holding cost
D = demand
R = Replenishment rate
as in example below:
Make Buy
Item cost ($) 6.00 6.10
Lead time (days) 12 16
Order setup cost ($) 50.00 8.00
Replenishment rate/ day 18 ∞ (unlimited)
Demand/ period 3 3
Holding cost/ period ($) 0.004 0.004
TCmin=CiD + √2CbD(1-D∕R)
Make = $6.00 (3) + √2 (50) ($0.004) (3) (1-3 ∕ 18)= $19.00
Buy = $6.10 (3) + √2 (8) (0.004) (3) = $18.74 minimum cost
Procurement Methods
Competitive bidding
Informal tender
Special-formal tender
Formal tender
Direct Purchases
Special Procurement Methods
Counter-purchase or Reciprocal Purchasing Agreements (RPA).
Systems contracting or blanket purchasing e.g. for MRO items needed several times a
day
Purchase Order Draft (POD)- purchase order sent with blank cheque to the vendor
Cash- in- first (CIF)
Vendor managed inventory
Public procurement
The acquisition of goods, services and works by any method using public funds and
executed by the procuring entity or on its behalf where public entity means Ministry,
Departments, local government authority, statutory body, Executive agency, public
company or any other agency in which government owns controlling interest or in
which government is in a position to direct the policy of the entity (Handbook of
Public Sector Procurement Procedures-Jamaica, 2008)
Public Procurement in Zimbabwe
The State Procurement Board
Functions- procure goods and services on behalf of government departments all
Ministries and public enterprises for purchase value exceeding US$300 000, and
ensure compliance with procurement laws by procuring entities (formal tender).
Management- consist of a chairman and not less than seven or more than ten other
members appointed by the President and sits every Thursday for tender adjudication
and new supplier registration
Public Procurement Methods
Competitive bidding- for amounts upto US$10 000. User departments are mandated
to source at least three or more competitive quotations, fairly evaluate them on a fair
basis and ward supply contract on basis of best product and service conditions
Informal tender- for amounts ranging from US$10 000 TO US$50 000. Procurement
entity publishes tender invitation in local newspapers. Adjudicate tender bids in terms
of Procurement Regulations, Statutory Instrument 171 Section b
Special-formal tender- for amounts above the US$50 000 threshold. SI 171 (7) (2)
special-formal tenders may be invited in urgent requirements, local interest,
proprietary nature and names of likely suppliers are known, no response to previous
formal tender, service of a specialist nature and services concerning national security
Formal tender- similar to the special-formal tender except that it is published in the
government Gazette and in national newspapers
Direct Purchases- purchasing entity directly contacts the supplier of a product
without inviting potential suppliers. The chairman of SPB gives the approval after
receiving a convincing justification for such a purchase.
Non-state sector procurement
Profit-oriented organisations:
Regulated in terms of the law (Companies Act and Regulations) and the entity‘s own
memorandum of association
Short term objective is profit maximization and long term goal is wealth
maximization for the benefit of shareholders
Non-profit oriented organisations:
Short term objectives are social welfare-oriented e.g. relief from vagaries of starvation
and drought
Long term goal is sustainable human livelihoods development
International Purchasing
Definition:
PROCUREMENT/PURHASING ACROSS NATIONAL FRONTIERS/BORDERS AND
INVOLES THE IMPORTING AND EXPORTING OF GOODS AND/OR SERVICES.
International Purchasing/ Procurement Actors
Individual citizens
Body Corporates such as companies, public international organisations, Non-
governmental Organisations and states
Reasons for International PROCUREMENT/Purchasing
i) Unavailability of required products on the local market
ii) Cost benefit
iii) Non-economic factors e.g. political considerations
iv) Foreign market entry strategies
Objectives of International Purchasing
i) Profitability in the case of companies
ii) Maximising social welfare in the case of humanitarian relief aid purchases by NGOs
iii) Public procurement should be done in the national interests
Economy –acquiring products of the least cost and on a timely basis
Fostering competition as a way of promoting public accountability
Political-legal dimension
Protecting the interests of citizens
Challenges in International Public Purchasing
i. Sheer magnitude of procurement outlays has on the national economy
ii. Perception of public procurement as an area of waste and corruption
iii. Finding/crafting strategies that comply with the government‘s procurement
legislations and regulations without violating regional and international trade law e.g.
Procurement Act, Indeginization Act
iv. Ensuring that public procurement facilitates the achievements of national objectives
i.e. economic, politico-legal, socio-cultural, etc.
v. Satisfying both the procurement management requirements such as
quality, timeliness, cost, financial and technical risk, maintaining integrity
maximising competition and procurement policy requirements that include economic
goals, social goals, environmental protection, international trade and other terms.
Risk Management (in International Purchasing)
Financial risk ladder
Sovereign guarantee
Managing environmental risks
Terrorism
Political constraints
Technological risks, etc.
Cost Management
Types of costs involved
i. Procurement costs
ii. Agency costs arising from the use of 3 PL firms
iii. Transportation and consignment handling costs
iv. Customs clearance costs ( in the case of imports/ exports)
v. In-transit country costs
vi. Storage costs
Strategies for managing costs
i. Spreading insurable risk to 3PL firms
ii. Insuring property bought
iii. Total quality management (GIGO Principle)
iv. Use of upgradable production transportation and distribution technologies
v. Implementing e-business strategies e.g. e-procurement/ e-purchasing
vi. Eliminating non-value additive functions e.g. storage through the use of JIT
Purchasing manufacturing and in-transit to customer storage
Contract design
Definition
Responsibility
Characterististics of a well designed procurement contract
Contract Management
Contract- legally enforceable agreement between two or more parties.
Performance- must be exact performance
i. Pre-contract negotiations
ii. Formalising the contract
iii. Performance of contractual obligations
iv. Receipt of contractual entitlements or benefits
v. Discharge of the contract
NEGOTIATION
―Refers to the process of communicating with the objective of reaching an agreement by
means, where appropriate, of compromise." (CIPS),
Advantages of Negotiation
The advantages of negotiation include:
It is a relatively expedient method of obtaining a value-for money solution
It is a useful method of maintaining value for money in a single source situation i.e.
where there is no real competition
It is useful when the requirement is difficult to specify
It is relatively inexpensive to undertake
It is flexible and not prescriptive
It should be confidential
Disadvantages of negotiations
Negotiation may foster close relations between suppliers and public procurement
officials
Outcomes of negotiations are often determined/influenced by other factors such as
political considerations, market structures, costs in terms of time, resources, etc
10 Best practices in negotiations
1) Be prepared
2) Diagnise the fundamental structure of the negotiation
3) Work the BATNA
4) Be willing to walk away
5) Master paradoxes
6) Remember the intangibles
7) Actively manage coalitions
8) Savour and protect your reputation
9) Remember that rationality and fairness are relative
10) Continue to learn from experience
Prerequisites for successful negotiations
• Planning
• Communication
• Clarity of purpose
• Appropriate venue
• Strategy
• Resources
• Time
• Empathy
• Good faith
• Empowerment
Planning in negotiations
The extent of the planning should be a function of value and risk.
The planning process should include:
i. A diagnosis of the situation
ii. An accurate appraisal of the buying organisation's expectations
iii. An assessment of both parties' bargaining power
iv. The setting of objectives for the negotiation e.g. the ideal, realistic and fall back
positions need to be identified and agreed
v. The development of a strategy for the negotiation i.e. approach, style, ommunication,
concessions, baseline even venue e.g. a neutral venue may prove more appropriate
than the offices of one of the parties to the negotiation
vi. The factors to be traded need to be identified i.e. those things which the buying
organisation can trade for things they would like to obtain from the supplier and those
things which can be conceded etc. It is advisable to try to anticipate the suppliers'
perception of such factors.
Clarity of purpose
i. Value creation e.g. a contract for the construction of a public road/school‘s
administrative office building
ii. Value sharing e.g. a purchase and sale contract,, a contract for the provision of a
service such as externally auditing corporate financial statements and reports
STRATEGY
A strategy is a game plan or a set of activities by which given goals and objectives are
achieved
Who negotiates
The principal or
The principal‘ duly appointed agent(s)
The principal‘s duties
The agent‘s authority
The agent‘s duties
Types of Interests in negotiations
Substantive
Process
Relationship
Interests of principle
Nature of interests
Always more than one interest underlying a negotiation
Parties have more than one interest at stake
Interests often stem from deeply rooted human needs and values
Interests can change
Surfacing interests
Surfacing interests is not always easy or to one‘s best advantage
Issues negotiated about in procurement
Everything that will form the letter and spirit of the procurement contract e.g. type of
contract, the merx, price, quality, lead time, delivery terms, payment terms, sharing of
risks attached to the contract, penalties for breach of contract, the respective parties‘
powers, obligations, duties and rights/entitlements, the law applicable to the contract,
etc.
Sources of power in negotiations
Reward
Coercive
Expect power
Legitimate
Referent or
Personal (personal, cognitive,motivational, dispositional skills)
Informational
Position
Relationship-based
contextual
Negotiation Strategies
i. Compromise
ii. Collaboration
iii. Abandonment
iv. Competitive
v. avoidance
Process of negotiating
Assembling issues and defining bargaining mix
Defining interests
Defining resistance points
Defining alternatives
Defining one‘s own objectives (targets) & opening bids
Assessing constituents and their social context in which negotiations occur
Analysing the other party
Planning the issue presentation and defense
Defining protocol
LEGISLATION FOR PROCUREMENT IN ZIMBABWE
The National Constitution
The Procurement Act and Regulations
The relevant enabling Act and Regulations for the different Zimbabwean parastatal
organisations
Companies Act Chapter 24:03 and Regulations
Other relevant statutes e.g. Sale of Goods Act, Customs and Excise Act and
Regulations etc.
International Trade Law
Regional Trade Law
In-transit State Laws
Supply Chain Management defined
It is the system of connected logistics networks between original vendors/ suppliers
and ultimate final customer
It is synonymous with:
Demand chain management ( Independent demand for finished goods and
dependent or derived demand for components or sub-assemblies)
Demand flow management
Value chain management
Value networks
Synchronisation management
It is extended enterprise or pipeline/ conduit management for the efficient and
effective flow of products/ materials, services, information and finances from
suppliers‘ suppliers through the various intermediate organisations/ companies out to
the customers‘ customers.
SCM as a concept involves three basic activities:
Coordination
Co-operation
Collaboration
Rationale for Supply Chain Management
Efficient customer response (ECR) with consequential huge costs savings in inventory
costs and landed prices
Best-in-class (BIC) or top ten concept showing link between sales/ revenue and SC-
related costs
Complexity of the SC…not linear but has more SC participants and companies such
as IBM are part of several SC
Growing importance of reverse logistics
Extended enterprise/ supply chain that needs to function like one organisation in
satisfying the ultimate customer
Modern information flows…helping to eliminate the bull effect that is associated with
SC inventories
Enhanced inventory visibility e.g.:
Advanced shipment notices (ASNs)
Order status information
Inventory availability information
Which all together contribute to reducing uncertainty about order replenishment and safety
stock
Faster cash-to- cash, order cycle times or cash-to-order cycle which positively impact
on corporate profitability e.g. Dell computers
Supply Chain Strategy
Formulated to meet the needs of the market and integrate them with technology to
generate the highest level of consumer satisfaction while delivering the highest value
to the shareholders ( Alteka R.V, 2009)
SC strategy is based on:
Collaboration strategy
Demand flow strategy
Customer service strategy
Technology integration
Manufacturer /supplier collaboration in:
Product development
Order fulfillment
Capacity planning
Manufacturer /customer collaboration in:
Demand planning and forecasting using time series, simulation and
casual environmental analysis of the state of the economy or interests
rates
Collaboration with third party of fourth part logistics providers
Supply Chain Strategy
Procurement fraud
Procurement fraud is a deliberate deception intended to influence any stage of the
procure-to-pay lifecycle in order to make a financial gain or cause a loss
Fraud in the pre-contract award phase
The pre-contract award phase generally involves the core stages of pre-tendering – defining
the requirement, developing the specification, producing a business case and tendering –
market engagement, bidder selection and bidder evaluation. This phase ends in the award of a
contract.
Case Study – False invoicing
A member of the tinance team in a Government department created eight invoices
(five of which were paid into his bank account, in total £246,000) for a non-existent
supplier quoting a virtual office address and fictitious Companies House and VAT
registrations. The employee created invoices for the supplier,. The employee was a
registered approver of invoices and a senior member of the finance management team.
Weakness found was that New suppliers were found to be automatically set up on the
payment system simply for submitting an invoice, with no checks being undertaken
on the validity of the invoice and company.
CHALLENGES WITH TACKLING PROCUREMENT FRAUD
Difficulty in detecting fraud :
(i) The complex and diverse nature of procurement fraud means it is difficult to detect
(ii) Difficulty in measuring procurement fraud
means that there can be little confidence that detected cases reflect the true extent of
the threat.
(iii) Lack of consistent and proactive risk assessment
Lack of awareness and understanding of the nature of procurement fraud
It forms the basis of preventing this type of fraud. It also creates an environment
where procurement fraud can flourish.
Absence of procurement fraud strategy
The traditional enforcement model of investigation, prosecution and sanction is time
consuming, expensive and often does not result in conviction or recovery of lost funds
Lacking a consistent, comprehensive and flexible counter-fraud strategy
What actually will be lacking is a consistent, comprehensive and flexible strategy
involving all elements of a counter fraud response including prevention, detection,
disruption, investigation and sanction that keeps ahead of constant change in dynamic
business, technological and socio-psychological environments
Counter fraud strategy
(i) Spend and recovery audits
IMMEDIATE INTERVENTIONS
(a) Spend and recovery audits on the organisation‘s accounts payable system to detect
overpayments to suppliers. The provider examined six years of external expenditure
(b) Procurement fraud training
e.g. since 2006, the US Procurement Fraud Taskforce has trained 36,000 procurement
specialists, auditors and prosecutors to tackle procurement fraud. They view procurement
fraud training as crucial to detecting, investigating and prosecuting fraudsters.
The British Airports Authority (BAA) take the same view, and run fraud awareness
training programmes with forensic auditors which all procurement staff attend. BAA also
publicises fraud cases, which it believes has a positive impact on supplier behaviour
c) Changes to Government procurement policy
in order to reduce autonomy of statal entities centralisation of procurement especially
in the case of major procurement contracts
Transparency especially on the part of suppliers
The need to create a hub for the collection, collation and circulation of intelligence
alerts on fraud against public enterprises
Lean procurement
Lean procurement pilots present an opportunity to assess the risk of
THE MEDIUM TERM STRATEGY
The develop a counter fraud culture in public procurement especially amongst
procurement specialists is important in disrupting and preventing procurement fraud.
The elements of an effective counter fraud culture should include awareness of the
problem, an understanding of how and why the problem should be mitigated, and the
creation of suitable incentives to prevent, detect and report suspicions of fraud.
Procurement fraud training will provide a basis for embedding a counter fraud culture.
Undertake fraud risk assessments before and after embarking on procurement.
Data analytics here structured data on procurement is available, must be deployed to
detect and subsequently prevent fraud.
The exercise should go beyond payments and detect links between employees in
organisations and criminal networks as well as should be deployed to detect
anomalous behaviour and/or insider-enabled procurement fraud.
Whistle-blowing and fraud reporting
Where risk assessments and the use of analytics detect suspected fraud, it is crucial that
suspicions are reported and properly investigated whilst at the same time guaranteeing the
anonymity necessary to give staff and other persons the confidence to report their suspicions.
Measurement of procurement fraud, error and debt losses
Sharing information and intelligence
Stress in Entrepreneurial Ventures
• Stress Management
• Should we avoid stress at all costs?
• Stress in Entrepreneurial Ventures
Causes of stress
Outcomes of stress
How our personality affects stress levels
Coping with stress
• Stress can motivate people to get the job done; too much stress can cause brown-
or burn-out.
What is stress
A complex series of reactions, both psychological and physical, in response to demanding or
threatening situations
A physical, mental, or emotional response to events that causes bodily or mental tension.
Simply put, stress is any outside force or event that has an effect on our body or mind.
• Situations, activities, and relationships that cause ‗trauma‘ to one‘s physical,
emotional, or psychological self
• Stressors—events that produce physical and psychological demands on a person
Business Stressors
• Psychological Environment Stressors
– Organizational injustice, interpersonal conflict
– Psychological contract
– Job insecurity
– Organizational change
• Physical Environment Stressors
– Excessive noise
– Poor lighting
– Safety hazards
• Work – Non-work Stressors
Time conflict
• Time required for non-work activities interferes with work
• E.g., family responsibilities (e.g., caring for sick parents), volunteer
work etc.
Strain conflict
• Stress from one domain spills into other
• Relationships, finances, new responsibilities, etc.
• Attitudes can be transmitted to other people
Outcomes of Stress
• Psychological reactions
• Physiological reactions
– High blood pressure, sweatiness, heart palpitations, dizziness, more cortisone,
etc.
• Behavioural reactions
– Attempts to cope (e.g., shopping, exercise)
• Emotional exhaustion
– Lack of energy, difficulty emoting
– Compassion fatigue: no longer able to empathize
• Cynicism / depersonalization
– Indifferent attitude to work
– Treating individuals as objects / callousness
– Strict adherence to rules and regulations
• Reduced professional accomplishment
– Lower self-efficacy
– No longer see value of extra effort
Too much stress can lead to:
• Job dissatisfaction
• Occupational injuries and illnesses
• Decision-making, cognitive abilities, task performance
• Absenteeism, turnover
• A personality pattern that includes aggressiveness, ambitiousness, competitiveness,
hostility, impatience, and a sense of time urgency.
• Typically, stressed out people feel:
– Depressed and anxious
– Frustrated
– Irritable and angry
• The “stressed out” person may:
– Eat too much food
– Abuse substances
– Have difficulty focusing attention, making decisions, and sleeping
Signs of Stress
• Physical
– Headache
– Back Pain
– Fatigue
– Aches and Pains
• Mental
– Difficulty Concentrating
– Increased Errors
– Poor Decision Making
Reducing or Coping with Stress
• Some of the things that entrepreneurs can do to reduce workplace stress and assist
employees in coping with stress include:
– Job redesign
– Social support
– Family-friendly human resource policies
– Stress management programs
– Work-life balance programs
• Coping strategies are behavioral responses and thought processes that people use to
deal actively with sources of stress.
– Problem-focused (e.g., planning, confronting, problem solving, time
management)
– Emotion-focused (e.g., use of defense mechanisms, humor)
– Social support (e.g., seeking assistance from friends, relative, support
groups, spiritual help, pets)
Job Redesign
• Entrepreneurs can redesign jobs to reduce their stressful characteristics.
• Most formal job redesign efforts involve enriching operative-level jobs to make them
more stimulating and challenging.
• There is growing evidence that providing more autonomy in how service is delivered
can alleviate stress and burnout.
Social Support
• Social support refers to having close ties with other people.
• A social network acts as a buffer against stress.
• The buffering aspects of social support are most potent when they are directly
connected to the source of stress.
• Co-workers and superiors are the best sources of support for dealing with work-
related stress.
“Family Friendly” Human Resource Policies
• Family friendly‖ human resource policies include some combination of formalized
social support, material support, and increased flexibility to adapt to employee needs.
• A common form of material support is corporate daycare centres.
• Flexibility is also important and includes flex-time, telecommuting, job sharing, and
family leave policies.
Stress Management Programs
• Programs designed to help employees ―manage‖ work-related stress.
• Stress management programs involve techniques such as meditation, training in time
management, and biofeedback training.
• They can be useful in reducing physiological arousal, sleep disturbances, and self-
reported tension and anxiety.
Time management
• Get organized
• Get structured
• Set short term goals
• Set long term goals
• Use a planner:
– daily schedule and ―To Do‖ list
• There are different styles to managing conflict but no style is inherently superior
(contextual)
• Stress isn‘t necessarily a bad thing but it depends on how we cope with it
Relaxation Techniques
• Deep breathing
• Progressive muscle relaxation
• Meditation
• Imagery
• Self-talk
• Physical exercise
What is “Time Management?”
Time management
Definition
This refers to the principles and techniques designed to help people make the best use
of their time. In short, time management is about the use of the time available. It is
about working smarter and not harder.
Time management‖ refers to the way that you organize and plan how long you spend
on specific activities.
Time Management and Personal effectiveness.
Time management is a vital component of personal effectiveness. The point is that the
individual who is able to manage his/her time effectively will be:-
a. Highly productive
b. Able to meet deadlines or targets
c. Able to work without inconveniencing others i.e. he/she will be an effective team
player
d. Able to prevent stressful situations and therefore have the strength to carry out several
tasks
e. NB. He/she will be able to plan i.e. setting clear goals and coming up with activities
and action plans to achieve those goals.
f. Highly organised and therefore be able to be flexible and achieve many goals
g. Able to create a good impression in other people and in this way be able to influence
others
h. Able to be highly creative and innovative, this is highly essential for continuous
improvements and the attainment of excellence.
It may seem counter-intuitive to dedicate precious time to learning about time
management, instead of using it to get on with your work, but the benefits are
enormous:
Greater productivity and efficiency.
A better professional reputation.
Less stress.
Increased opportunities for advancement.
Greater opportunities to achieve important life and career goals.
Failing to manage your time effectively can have some very undesirable consequences:
Missed deadlines.
Inefficient work flow.
Poor work quality.
A poor professional reputation and a stalled career.
Higher stress levels.
Spending a little time learning about time-management techniques will have huge benefits
now – and throughout your career.
General Principle of Time management
The fact about personal effectiveness is that the way we use our time has an effect on the
success or failure of our effort. There are some general principles which are very useful in
choosing the approach, strategies, techniques and practices on the best use of time. The main
principles are:-
a. Valuing time
b. Taking time to plan i.e spending time to save time
c. Analysing and prioritising
1. Valuing Time
The starting point is to realise that time is a scarce resource and that there are so many things
which complete for the time available and that time lost cannot be recovered. Two facts are
clear from this fact:-
a. The use of time has an opportunity cost i.e it must be analysed in relation to the value
of an activity or task which has been foregone
b. People are paid for the time they spend working
What it therefore means is that it is possible to cost time and the use of that time. For
example, for the working person it is possible to calculate the cost of every minute which one
spends at work and therefore be able to establish whether the time was spent well or not. The
steps to do this will be as follows:-
i. Establish the monthly salary
ii. Establish the number of working days in a month
iii. Establish the number of hours in a working day
iv. Establish the working rate
2. Spending time to save time
This refers to the need to be organised. What it calls for is for the individual to take time to
get organised, to ensure that everything falls into place i.e. so that there won‘t be any
hinderances. The fact is that when we start of organised then we are able to prevent a
situation where we find ourselves in a vicious circle of fire fighting. We have a perpetual
crisis. People who are not organised will find themselves in the following traps:-
a. They do not plan their time
b. They over commit themselves and then without warning fail to deliver
c. They do not pass on work to others who could do just as well as themselves or even
better i.e. they delegate
d. They waste time on tasks that they will later abandon
e. They are perpetually surprised by the deadlines
f. They do not file things properly and frequently cannot file them
g. They go into meetings poorly prepared such that in the end nothing is achieved
therefore necessitating another meeting to be arranged
h. They waste other people`s time.
The bottom line is that the person who is good at time management should be able to
organise his/her work, papers, diaries, documents, set up of office, configuration of
equipment etc.
3. Analysing and prioritising
This principle relates to proper planning for the best use of time. It requires that the
individual should not leave things to happen by chance or thrive on fire fighting. This
requires the following from the individual:-
a. Clarify one`s role
b. Setting goals
c. Coming up with strategies of how to achieve the goals
d. Prioritising the goals or strategies
e. Coming up with detailed activities of how to achieve the goals
f. Ensuring that the resources needed to achieve goals are determined made available
g. Ensuring that the key success requirements have been established
h. Ensuring that performance indicators have been established i.e. the individual should
be able to establish how they would measure a success towards the achievement of
goals and in the process also be able to come up with a clear planning cycle ,for
instance, a week, a fortnight, a month, quarter or annual.
Time Management Practices
There are several basic practices individuals can use to ensure effective management.
1. Time structuring
This involves making sure that every segment of time has been effectively used. What this
entails is breaking up time into blocks and then going on to determine how to use each block.
Having done this the individual would be able to enhance effectiveness in several ways:-
a. It will then be possible to make maximum use of the times when the individual has a
lot of energy to concentrate on crucial tasks. This is called time blocking.
b. Ensuring that there is a match between the type of work and the conditions prevailing.
For instance, it is always prudent to ensure that critical tasks are not carried out during
times when one expects interruptions.
c. Ensuring that some protected time is put aside to tackle important issues.
d. The individual is able to reduce stress and therefore enhance the chances to ensure
that they have energy and the right levels of concentration.
2. Negotiating commitments
This involves exercise and control over the demands placed on the individual. This is done
through matching the time available to the commitments. The idea is to avoid over
committing oneself. Failure to do this will mean that the individual will find himself/herself
hectic and pressurised schedules i.e. they will be overloaded resulting in burnout which
reduces effectiveness and can be damaging to health. The individual becomes very irritable
and fails to interact well with people. What therefore ought to be done is that the individual
should be able to determine how much they can take or do in any given block of time and
should be able to say no to further commitments. To be able to do this the individual should
be able to do work practices based on the knowledge of the types of demands placed on their
time. Rosemary Stewart (1982), in her book The Choices for Managers identified 6 demands
that are placed on the time that managers have.
a. External Demands i.e. demands from other people outside the organisation. E.g.
customers, government, suppliers, financial institutions
b. Pear Demands i.e. demands made by people with whom one works in the same
organisation but in a different department.
c. Demands from above i.e. the demands from superior or from committees constituted
by superiors of the department.
d. Demands from below i.e. demands from people subordinate to the individual
e. Systems Demands i.e. demands placed on the time of the individual from the
operations of the whole system i.e. such demands arise because someone belongs to
the organisation.
f. Self imposed Demands: - These are the kind of demands which arise as a result or
either the goals which one sets for him/herself or because of the expectations which
one creates in other people e.g. promises made.
The lessons drawn from the concept of demands is that the individual should be aware of the
nature of demands on his/her time and be able to rank them and create time for them. It is
essential that none of these demands are neglected.
3. Regular Work Planning
This practice calls for the need to keep track of all the things the individual does and to set
goals for all the things. It is therefore necessary to take time to plan. Several practices can be
used which include:-
a. Keeping a diary which will show commitments and therefore guide the individual on
what should be done.
b. Using a personal organiser
c. Planning ahead over a long period such as several months or even a year in order to
map out the implications of major events or commitments. Having such plans will
ensure that the individual will be aware or what lies ahead.
d. Regular review of plans. This will afford the individual to take stock of the use of
time and therefore get lessons for the future.
4. Ensuring that time is saved
Tip/Techniques for Saving Time
a. Avoid procrastination i.e. do it now
b. Single touching: - This relates to paperwork. The tip is that you must handle a paper
once and process it.
c. Doubling: - this refers to maximising the use of time by doing two things at the same
time.
d. Avoid diminishing returns by ensuring that you do something that is good enough
i. Delegate: - this refers to the process of practise of passing own authority to
subordinates so that they can do part or the whole task which the individual should
have done. The individual however remains accountable for the task being done by
the subordinate. There are several benefits of delegation:-
ii. It frees the time of the individual therefore allowing him/her to concentrate on crucial
issues.
iii. It affords or enhances the execution of complex tasks
iv. It is a way of training and developing subordinates.
v. It enhances over overall effectiveness because it makes the individual to thing very
hard about their roles and how these roles can be effectively played with the
assistance of the other people.
The way to delegate effectively is to follow a systematic process requiring the following
steps:-
a. Identify the need for delegating. For instance, when one is overloaded or lack of
expertise, a task is complex, want to develop subordinates.
b. Clearly defining the objective of delegating. Why is it that I want to delegate?
c. Identify the task to be delegated.
d. Identify the person to delegate to. In doing this the individual should take note of
several factors e.g. the reason for delegating, the people available to delegate to
especially in relation to their capabilities and the time available for everything they
have to do.
e. Assigning the task to an individual. This should involve clearly specifying what ought
to be done, where it should be done, when it should be done and how it should be
done. In addition, the subordinate should be told when the results are expected and in
what form i.e. the means for feedback must be clear.
f. Meeting with the subordinates and reviewing progress.
Why people fail to delegate
Many people fail to delegate as a result of several factors, some of which are as follows:
1. Failure to appreciate the benefits of delegating
2. Failure to take time to plan for delegating.
3. The reluctance to let go
4. The fear of others make mistakes
5. A feeling of indispensability
Identifying how time is wasted.
There are several ways in which time is wasted, these include the following;
1. Prolonged and unnecessary meetings are only called when they are necessary.
a) There should be a strict agenda which must be strictly followed.
b) There should be a chairperson who should stand his/her authority ensuring that the
meeting flows smoothly by keeping order, summarising areas for agreements,
avoiding diverging and avoiding personal dialogue.
c) Ensuring that the meeting has been properly timed so that all the people who should
be there are present and had been notified on time and have all the necessary papers.
2. Interruptions: - these can come from one‘s own staff, colleagues, boss, phone or
outsiders. The tip is for the individual to make people aware of when they have the
time to attend to them. It might also be necessary to work in a location where there are no
interruptions e.g. library, boardroom etc.
3. Idle conversations (chit-chat)
The ideal thing is to identify time for informal meetings.
4. Unnecessary paperwork
Factors affecting time management
What this diagram shows is that there are many factors which affect the use of time. The
individual has control over some of these factors but no control over others. The most
important thing therefore is to be able to categorise these factors. Having done this the
individual should then make sure that the controllable factors are well managed while at the
same time the uncontrollable factors are well manipulated. The ability to do this is the
hallmark of effective time management which will then lead to high levels of personal
effectiveness. Covey (1989) in his book The Seven Habits of Highly Effective People
identified 7 habits of highly effective people who are also good time managers. These are
people who are:
a) Highly proactive
b) They begin with the end in mind
c) They are people who put first things first (can prioritise even the use of time)
d) They focus on mutually acceptable solutions (they think win/win)
e) They seek first to understand (where am I going?)
f) They seek to synergise (want to make the best of any given situation)
g) They sharpen the saw (taking time to reflect and seek renewal)
Organisation Culture
Personality
and Skills of
Individual
Nature of Job
Demands made
by Staff
TIME
MANAGEMEN
Practice the following techniques to become the master of your own time:
1. Carry a schedule and record all your thoughts, conversations and activities for a week.
This will help you understand how much you can get done during the course of a day and
where your precious moments are going. You'll see how much time is actually spent
producing results and how much time is wasted on unproductive thoughts, conversations
and actions.
2. Any activity or conversation that's important to your success should have a time assigned
to it. To-do lists get longer and longer to the point where they're unworkable.
Appointment books work. Schedule appointments with yourself and create time blocks for
high-priority thoughts, conversations, and actions. Schedule when they will begin and
end. Have the discipline to keep these appointments.
3. Plan to spend at least 50 percent of your time engaged in the thoughts, activities and
conversations that produce most of your results.
4. Schedule time for interruptions. Plan time to be pulled away from what you're doing.
Take, for instance, the concept of having "office hours." Isn't "office hours" another way
of saying "planned interruptions?"
5. Take the first 30 minutes of every day to plan your day. Don't start your day until you
complete your time plan. The most important time of your day is the time you schedule to
schedule time.
6. Take five minutes before every call and task to decide what result you want to attain. This
will help you know what success looks like before you start. And it will also slow time
down. Take five minutes after each call and activity to determine whether your desired
result was achieved. If not, what was missing? How do you put what's missing in your
next call or activity?
7. Put up a "Do not disturb" sign when you absolutely have to get work done.
8. Practice not answering the phone just because it's ringing and e-mails just because they
show up. Disconnect instant messaging. Don't instantly give people your attention unless
it's absolutely crucial in your business to offer an immediate human response. Instead,
schedule a time to answer email and return phone calls.
9. Block out other distractions like Face book and other forms of social media unless you use
these tools to generate business.
10. Remember that it's impossible to get everything done. Also remember that odds are good
that 20 percent of your thoughts, conversations and activities produce 80 percent of your
results.
Waste management
Waste management is a set of activities that include the following:[1]
1. collection, transport, treatment and disposal of waste;
2. control, monitoring and regulation of the production, collection, transport, treatment
and disposal of waste; and
3. prevention of waste production through in-process modification, reuse and recycling.
The term usually relates to all kinds of waste, whether generated during the extraction of raw
materials, the processing of raw materials into intermediate and final products, the
consumption of final products, or other human activities,[1]
including municipal (residential,
institutional, commercial), agricultural, and special (health care, household hazardous wastes,
sewage sludge).[2]
Waste management is intended to reduce adverse effects of waste
on health, the environment or aesthetics.
Issues relating to waste management include:
Generation of waste
Waste minimization
Waste removal
Waste transportation
Waste treatment
Recycling and reuse
Storage, collection, transport, and transfer
Treatment
Landfill disposal
Environmental considerations
Financial and marketing aspects
Policy and regulation
Education and training
Planning and implementation.
Total Quality Management
Total Quality Management (TQM) is the integration of function and processes to
achieve customer satisfaction through continuous improvement of quality of products.
TQM is a people-focused management system that aims at continual increase in
customer satisfaction at lower cost. It involves all staff across functions in the supply
and customer chains.
Key words: functions, processes, integration Continuous improvement =
customer satisfaction
Customer satisfaction means repeat business, competitiveness, business excellence,
profitability
Joseph Juran calls TQM a major phenomenon in this age
Japan‘s economic miracle is attributed to the wholesale application of the TQM
philosophy in industry
Requirements for TQM
Evident commitment and example from top management,
Obsession with quality,
An approach which focuses on the customer,
Must be customer driven,
A participative environment and teamwork,
Employee empowerment and involvement,
Unity of purpose,
Pursuit of continuous improvement,
Continued education and improvement,
Proper systems and tools,
Quality suppliers of raw materials,
Conducive environment free from negative and punitive culture
TQM will help you to:
Focus clearly on needs of customers, internal and external
Achieve top quality performance in all areas
Operate simple procedures necessary for achievement of quality performance
Critically examine processes and to remove non-productive activities and wastes
Improve and develop measures of performance
Develop the team approach to problem solving
Develop procedures, good communication and work
Develop strategies of never ending improvement
Benefits of TQM include
1. Enhanced customer loyalty, increased customer satisfaction and leading to new and
repeat business.
2. Reduction in costs through the initiatives geared at getting things right first time and
cutting wastes.
3. Less frustrated happier and motivated employees who transmit the pleasant feeling to
customers.
4. Better feedback from both internal and external customers.
5. Reduced staff turnover and recruitment costs
6. Enhanced corporate image. Greater pride and self-worth as reputation of organization
grows.
7. Large market share, lower quality costs, and higher profitability
8. Foster internal customer/supply relationship through employee participation.
Rationale of Total Quality Management
Fierce competition in the global market
Threat of bankruptcy, extinction or business decline through loss of goodwill,
customer loyalty
Quest for business viability and company longevity
Competitive countries experience growth in GNP and corresponding improvement in
the standard of living.
Customers were demanding higher quality than in the post-war era
Consumer patterns have changed further; customers can get a combination of high
quality and low price. Thus advocating a strict regime of controlling non-
conformance (rework, scrap)
The unbelievable magnitude of hidden quality costs e.g. quality costs can claim 15 –
25% of total of turnover in manufacturing companies. Service companies spend 40 –
50% of turnover on their operational costs on the management of quality. 80% of
quality costs originate from non-manufacturing areas.
Evidence of superiority of companies but have adopted the tenets of TQM: the
majority firms such as Nissan, Hitachi, JVC, National Panasonic, Toyota (Japan),
Rank Xerox (USA)
Definitions and Core Concepts
What is Quality?
1. Customer satisfaction
2. Fitness for purpose or use – Joseph Juran
3. The totality of features and characteristics of a product that bear on it ability to satisfy
stated or implied needs – BS4778, 1987 (ISO 8402, 1986) Quality Vocabulary: Part 1,
International Terms.
4. Quality should be aimed at the needs of the customer, present and future – Edwads
Deming
5. The total composite product characteristics of marketing, engineering, manufacture
and maintenance through which the product in use will meet the expectation by the
customer – Armand Feigenbaum.
6. Conformance to requirements – Philip Crosby
7. Quality is the best for the customer use and selling price-Armand Fiegenbaum.
Two types of customers:
1. Internal customers include divisions of the company that receive materials for
processing and ancillary service departments e.g. Engineering.
2. External customers include tertiary processors, merchants and final users or
consumers of a product, including some interested parties such as government
regulatory bodies e.g. SAZ and CCZ
A product is the output of any process, i.e.
- Goods e.g. furniture, crockery, radios, cars
- Services e.g. banking, insurance, transport
- Software e.g. computer program, report, instruction
Customer satisfaction is achieved by appealing ―product features,‖ which denote the
grade of quality desired; and ―freedom from deficiencies,‖ causing major reduction of
costs via reduced scrap, rework etc.
Product Features
Manufacturing Services
Performance Accuracy
Reliability Timeliness, response
Durability Completeness
Serviceability Friendliness, courtesy
User-friendliness Foresight, Knowledge
Available options Reputation
Extras, Aesthetics Honesty
Perceived quality Technology
Other features: cost-effectiveness, price, value for money, short delivery times,
Maintainability
Freedom from Deficiencies
Manufacturing Services
Defect-free product Error-free service
Error-free delivery Service satisfactory
Error-free billing, invoices Correct transactions
The Concept of TQM
An organization is a system. Departments or organizational functions constitute
subsystems.
Subsystems include all stages in the cycle of a product:
(1) design, (2) planning, (3) production, (4) distribution, (5) field service
TQM espouses a systems approach. It integrates functions within the organization.
The overall effectiveness of a system becomes higher than the sum of the individual
output.
A TQM organization is one that continuously seeks and exploits opportunities for
improvement at all levels.
The modern market place is increasingly becoming fiercely competitive.
Monopolistic tendencies of large corporations have broken down with the advent of
downsizing, followed by the creation of smaller organizations working in direct
competition.
Customers continue to enjoy the privilege of choice of products.
The criterion of customer preference for a product is quality.
Consequently, organizations that are not quality-oriented invariably become moribund
and eventually fold.
Reputation and goodwill are priceless commodities.
Once an organization acquires a poor reputation for quality, it takes a very long time to
rebuild customer confidence.
The major objective of almost all business enterprises is to extend their longevity at a
profitable level, hence the need for such companies to adopt a quality-oriented character.
Meeting customer requirements
It is essential for supplier to find out what the customer requirements are i.e. listening to
the voice of the customer.
There is also need for the marketers to establish the ability of their organizations to meet
those expectations (Process Capability).
There is a tendency to accept orders beyond practicable capacity in bid to win the market.
E.g. a requirement placed for someone to run 1 500 metres in 4 minutes may be possible
to meet until the performance is improved (by raising the capability index). This
requirement may still be impossible to achieve.
Customers can be internal or external i.e. within or without.
Meeting requirements of internal or external customers is equally important although
there is a general tendency to trivialize internal customers, e.g some managers do not
leave clear instructions to their secretaries. Their handwriting may be poor and illegible,
do not tell where they can be contacted. Equally, a secretary may not pay attention to
detail to produce neat, error-free typing.
Such disregard of the needs of internal customers results in generation of wastes such as
repeats or re-work, spent time and effort. Worse still, errors if undetected may end up on
the customer‘s desk!
Quality Costs
Definition and Explanation of Quality Costs:
A product that meets or exceeds its design specifications and is free of defects that mar its
appearance or degrade its performance is said to have high quality of conformance. Note
that if an economy car is free of defects, it can have a quality of conformance that is just as
high as defect-free luxury car. The purchasers of economy cars cannot expect their cars to be
as opulently as luxury cars, but they can and do expect to be free of defects.
Preventing, detecting and dealing with defects cause costs that are called quality costs or
costs of quality. The use of the term "quality cost" is confusing to some people. It does not
refer to costs such as using a higher grade leather to make a wallet or using 14K gold instead
of gold plating in jewelry. Instead the term quality cost refers to all of the costs that are
incurred to prevent defects or that result from defects in products.
Quality costs can be broken down into four broad groups. These four groups are also termed
as four (4) types of quality costs. Two of these groups are known as prevention costs and
appraisal costs. These are incurred in an effort to keep defective products from falling into the
hands of customers. The other two groups of costs are known as internal failure costs and
external failure costs. Internal and external failure costs are incurred because defects are
produced despite efforts to prevent them therefore these costs are also known as costs of poor
quality.
The quality costs do not just relate to just manufacturing; rather, they relate to all the
activities in a company from initial research and development (R & D) through customer
service. Total quality cost can be quite high unless management gives this area special
attention.
Four types of quality cost are briefly explained below:
Prevention Costs:
Generally the most effective way to manage quality costs is to avoid having defects in the
first place. It is much less costly to prevent a problem from ever happening than it is to find
and correct the problem after it has occurred. Prevention costs support activities whose
purpose is to reduce the number of defects. Companies employ many techniques to prevent
defects for example statistical process control, quality engineering, training, and a variety of
tools from total quality management (TQM).
Prevention costs include activities relating to quality circles and statistical process control.
Quality circles consist of small groups of employees that meet on a regular basis to discuss
ways to improve quality. Both management and workers are included in these circles.
Statistical process control is a technique that is used to detect whether a process is in or out
of control. An out of control process results in defective units and may be caused by a
miscalibrated machine or some other factor. In statistical process control, workers use charts
to monitor the quality of units that pass through their workstations. With these charts,
workers can quickly spot processes that are out of control and that are creating defects.
Problems can be immediately corrected and further defects prevented rather than waiting for
an inspector to catch the defect later.
Some companies provide technical support to their suppliers as a way of preventing defects.
Particularly in just in time (JIT) systems, such support to suppliers is vital. In a JIT system,
parts are delivered from suppliers just in time and in just the correct quantity to fill customer
orders. There are no stockpiles of parts. If a defective part is received from a supplier, the part
cannot be used and the order for the ultimate customer cannot be filled in time. Hence every
part received from suppliers must be free from defects. Consequently, companies that use just
in time (JIT) often require that their supplier use sophisticated quality control programs such
as statistical process control and that their suppliers certify that they will deliver parts and
materials that are free of defects.
Appraisal Costs:
Any defective parts and products should be caught as early as possible in the production
process. Appraisal costs, which are sometimes called inspection costs, are incurred to
identify defective products before the products are shipped to customers. Unfortunately
performing appraisal activates doesn't keep defects from happening again and most managers
realize now that maintaining an army of inspectors is a costly and ineffective approach to
quality control.
Employees are increasingly being asked to be responsible for their own quality control. This
approach along with designing products to be easy to manufacture properly, allows quality to
be built into products rather than relying on inspections to get the defects out.
Internal failure Costs:
Failure costs are incurred when a product fails to conform to its design specifications. Failure
costs can be either internal or external. Internal failure costs result from identification of
defects before they are shipped to customers. These costs include scrap, rejected products,
reworking of defective units, and downtime caused by quality problem. The more effective a
company's appraisal activities the greater the chance of catching defects internally and the
greater the level of internal failure costs. This is the price that is paid to avoid incurring
external failure costs, which can be devastating.
External Failure Costs:
When a defective product is delivered to customer, external failure cost is the result.
External failure costs include warranty, repairs and replacements, product recalls, liability
arising from legal actions against a company, and lost sales arising from a reputation for poor
quality. Such costs can decimate profits.
In the past, some managers have taken the attitude, "Let's go ahead and ship everything to
customers, and we'll take care of any problems under the warranty." This attitude generally
results in high external failure costs, customer ill will, and declining market share and profits.
External failure costs usually give rise to another intangible cost. These intangible costs are
hidden costs that involve the company's image. They can be three or four times greater than
tangible costs. Missing a deadline or other quality problems can be intangible costs of quality.
Internal failure costs, external failure costs and intangible costs that impair the goodwill
of the company occur due to a poor quality so these costs are also known as costs of poor quality by some persons.
Examples of four types of quality cost are given below:
Prevention Costs Internal Failure Costs Systems development
Quality engineering
Quality training
Quality circles
statistical process control
Supervision of prevention activities
Quality data gathering, analysis, and reporting
Quality improvement projects
Technical support provided to suppliers
Audits of the effectiveness of the quality system
Net cost of scrap
Net cost of spoilage
Rework labor and overhead
Re-inspection of reworked products
Retesting of reworked products
Downtime caused by quality problems
Disposal of defective products
Analysis of the cause of defects in production
Re-entering data because of keying errors
Debugging software errors
Appraisal Costs External Failure Costs
Test and inspection of incoming materials
Test and inspection of in-process goods
Final product testing and inspection
Supplies used in testing and inspection
Supervision of testing and inspection activities
Depreciation of test equipment
Maintenance of test equipment
Plant utilities in the inspection area
Field testing and appraisal at customer site
Cost of field servicing and handling complaints
Warranty repairs and replacements
Repairs and replacements beyond the warranty
period
Product recalls
Liability arising from defective products
Returns and allowances arising from quality
problems
Lost sales arising from a reputation for poor
quality.
PRACTICE QUESTIONS
1. Distinguish between Business Risks and Financial Risks and recommend mitigatory
measurers for each risk.
2. Entrepreneurs are always faced with stress to create, run and manage new ventures.
Identify the sources of stress and recommend possible ways of handling such stress.
3. Write brief notes on the following;
i) Applied Entrepreneurship
ii) Creativity
iii) Innovation
iv) Benchmarking
v) Networking
4. Critically examine five (5) major factors which affect the practice of entrepreneurship in
Zimbabwe.
5. A successful entrepreneur is measured against his/her ability to manage time well.
i) Identify and explain the possible time stealers entrepreneurs face.
ii) Advice a colleague on the best strategies to apply to manage his/her schedules.
iii) Recommend possible ways to reduce time wasting.
6. Identify and explain the steps you would follow in a benchmarking exercise.
7. Time management is a challenging task to most people. Longer waiting periods can be
very frustrating to customers and bring uncertainty and absent-mindedness in the customer
such that by the time they receive goods or services, their mind would be wondering away.
Customer waiting-period also affects the quality of a service. Explain eight (8) principles of
managing customer waiting period.
8. Briefly explain the following concepts in entrepreneurship development.
a) Benchmarking
b) Empowerment
c) Innovation
d) Creativity
e) Customer participation
9. Identify and explain five types of customers entrepreneurs face and recommend strategies
to manage them.
10. i) Explain the concept of Quality in Entrepreneurship.
ii) Explain any 5 principles of TQM
iii) Explain the drivers of quality in an organisation.
iv) Identify and explain the quality cost an entrepreneur might incur in business.
11. Explain the factors taken into consideration/account to rate a supplier.
12. Discuss the Buyer-Seller relationship.
13. i) Identify and explain factors to be considered when undertaking a supply
environment scan.
ii) Discuss any five (5) legal aspects of purchasing.
14. Discuss the considerations that might influence an organisation to outsource.
15. What functions are served by questions during negotiation?
16. What type of questions i) are often useful in negotiations; ii) often cause difficulty during
talks? Give examples.
17. Outline the modified Tuckman‘s business negotiation framework/model. Briefly
elaborate on the essential elements of each phase.
18. Explain the following terms
a) Stock reconciliation
b) Stock obsolescence
c) Stores management
d) Central stores
e) Stores layout
19. Discuss the view that stores management and procurement management are inseparable.
20. Discuss the challenges of stores management.
21. Detail the characteristics one would look for when recruiting members into a negotiation
team. Motivate your criteria.
22. By way of comparative analysis of the various types of questions, show how questioning
is an important strategy in negotiation.
23. You have been approached by an upcoming entrepreneur seeking advice on how to
conduct an Annual General Meeting. Advise.
24. Citing practical examples, explain the following terms as applied in meetings
a) Quorum
b) Ex-officio
c) Proxy
d) Sine-dine
25. Give detail to the business duties that a secretary of a meeting has to undertake for a
meeting to be a success.
26. Identify and explain factors to consider when undertaking a supply environment scan.
27. Explain how innovation is a key dimension of entrepreneurship
28. Management of waste is an important issue in entrepreneurship. Explain how waste can
be managed.
29. Explain the following types of benchmarking:
a) Functional benchmarking
b) Competitive benchmarking
c) Internal benchmarking.
30. Explain how Mr Rivers can use the following to enhance his business:
a) Acquisition
b) Diversification
c) Merger
d) Integration