2325-Training Manuals - EnGLISH

THE DAR ES SALAAM STOCK EXCHANGE (DSE)
ENTERPRISE GROWTH MARKET (EGM):
The Financing Solution for SMEs
TRAINING MODULES
Table of Contents
FOREWORD BY DSE CHAIRMAN ON ENTERPRISE GROWTH MARKET TRAINING MANUAL ..............
ii
ABBREVIATIONS AND ACRONYMS .................................................................................................................
iii
MODULE 1: AN OVERVIEW OF SMEs IN TANZANIA .....................................................................................
MODULE 2: BUSINESS LEGAL STRUCTURES ...................................................................................................
MODULE 3: BUSINESS PLANNING AND EVALUATION .................................................................................
18
MODULE 4: FINANCIAL MANAGEMENT AND RECORDKEEPING ..............................................................
30
MODULE 5: CORPORATE GOVERNANCE AND COMPLIANCE ....................................................................
38
MODULE 6: FINANCING OPTIONS FOR SMEs ...............................................................................................
52
MODULE 7: DSEs ENTERPRISE GROWTH MARKET .......................................................................................
60
MODULE 8: LISTING REQUIREMENTS AND CONTINUOUS LISTING OBLIGATIONS .............................
68
LIST OF FIGURES
Figure 1:
Types of Companies ........................................................................................................................
Figure 2:
Diagram of Relationships within Companies ..............................................................................
14
LIST OF TABLES
Table 1:
Categories of SMEs in Tanzania ....................................................................................................
Table 2:
Key Features of Legal Business Entities in Tanzania .................................................................
15
Table 3:
Sample SWOT ...................................................................................................................................
24
Table 4:
Example of a Balance Sheet ..........................................................................................................
34
Table 5:
Example of an Income Statement ..................................................................................................
35
Table 6:
Example of a Cash Flow Statement ..............................................................................................
36
Table 7:
Eligibility Conditions for Listing on the EGM .............................................................................
64
TRAINING MANUAL I THE DAR ES SALAAM STOCK EXCHANGE (DSE) I
Foreword by DSE Chairman on Enterprise

Growth Market Training Manual
mall and Medium Enterprises (SMEs) play a crucial role in employment creation and income
generation and contribute substantially to development in Tanzania. SMEs have been
established in both rural and urban settings to cover both farming and non-farming economic
activities, thus, playing an important role in utilising and adding value to local resources. Indeed,
SMEs development can be closely associated with a more equitable distribution of income and
is thus an important factor in poverty alleviation and economic empowerment initiatives.
Tanzania has many different policy initiatives that aim at developing the SME sector, but its
full potential has yet to be tapped due to a number of constraints hampering its development.
Financial literacy and access to finance are among the major constraints facing SMEs in Tanzania.
According to the Micro, Small and Medium Enterprises (MSME) Survey Report of 2010, the two
biggest challenges to growth in Tanzania are insufficient working capital and lack of access to
financial markets. In the recent past, financial institutions and other stakeholders in the countrys
financial markets have developed different solutions aimed at addressing these challenges, but
they continue to hinder SME development.
In an effort to address the financing challenge that faces Tanzanian SMEs, the Capital Markets
and Securities Authority (CMSA) carried out a study that recommended introduction of a market
segment at the Dar es Salaam Stock Exchange (DSE) that will cater to SMEs capital-raising
needs. To implement this initiative, the DSE developed a Training Program to create public
awareness and provide education on basic business and managerial skills, to ultimately create
an environment conducive to attracting the capital essential for SMEs expansion and growth.
Simply put, the purpose of this training is to enable SMEs to attract capital from potential
investors.
This publication contains eight training modules that will be delivered at different workshops
aimed at medium-sized enterprises in the country. The training will be held throughout the
whole country using a regional or zone approach. The training material is a revised version of
earlier materials prepared by specialists or experts from academia, the business industry, and
practitioners. The revised material takes into account new developments in Tanzanias financial
markets, particularly new developments in the capital markets and stock exchange operations.
On behalf of the DSE Board, I wish to take this opportunity to express my sincere appreciation
to: the projects financiers Financial Sector Deepening Trust (FSDT); the DSE management and
staff; the CMSA; and the other experts involved. Their cooperation and dedication made this
publication possible.
Pius A. Maneno
Chairman
Dar es Salaam Stock Exchange
August 2013
ii
I THE DAR ES SALAAM STOCK EXCHANGE (DSE) I TRAINING MANUAL
Abbreviations and Acronyms

BEST
CIS
CBT
CGS
CMSA
CSR
DSE
EGM
FSDT
IFRS
IPO
IRR
LDM
MEMARTS
MIMS
MNC
MSME
NBAA
NPV
OECD
OEM
R&D
SIDO
SME
SWOT
TIC
TRA
TZS
WACC
Business Environment Strengthening for Tanzania

Collective Investment Scheme
Capital Budgeting Technique
Credit Guarantee Scheme
Capital Markets and Securities Authority
Corporate Social Responsibility
Dar es Salaam Stock Exchange
Enterprise Growth Market
Financial Sector Deepening Trust
International Finance Reporting Standards
Initial Public Offer
Internal Rate of Return
Licensed Dealing Member
Memorandum and Articles of Association
Main Investment Market Segment
Multinational Corporations
Micro, Small, and Medium Enterprises
National Board of Accountants and Auditors
Net Present Value
Organisation for Economic Co-operation and Development
Original Equipment Manufacturers
Research and Development
Small Industry Development Organization
Small and Medium Enterprises
Strengths, Weaknesses, Opportunities and Threats
Tanzania Investment Centre
Tanzania Revenue Authority
Tanzania Shillings
Weighted Average Cost of Capital
iii
MODULE ONE
I THE DAR ES SALAAM STOCK
AN OVERVIEW OF SMEs
IN TANZANIA
6
Module Outline
MODULE OUTLINE
(i) Introduction
(ii)
(iii)
Purpose of the Module

To describe the importance of SMEs in Tanzanias economy;
To present the position and role played by SMEs in the economy; and
To convey the importance of SMEs in the creation and distribution of wealth.
Key Issues to be Addressed by the Module

Constraints facing SMEs and various interventions to address them;
Government policies on SMEs;
Financing opportunities available in the capital market; and
The role of the Dar es Salaam Stock Exchange (DSE) in providing investment
opportunities.
(iv) Methodology
(v)
Presentations by capital market experts;
Practical examples/case studies of actual situations;
Interactions with entrepreneurs to share their experiences; and
Discussion of practical issues.
Expected Outcome(s)

Entrepreneurs should understand various policy initiatives related to SMEs and

their objectives in addressing the challenges faced by SMEs;
Entrepreneurs should be aware of available opportunities and solutions to

constraints facing their businesses; and
Entrepreneurs should understand the available financing opportunities in the

capital market and hence understand how to access the Enterprise Growth
Market segment of the DSE.
Module One
1.0 AN OVERVIEW OF SMEs IN TANZANIA
1.1 Introduction
1.1.1 Definition of SMEs
The term SMEs stands for Small and Medium Enterprises. The commonly used factors
in defining the term are: total number of employees; total capital investment; and sales
turnover. The Organisation for Economic Co-operation and Development (OECD)
defines SMEs as non-subsidiary, independent firms that employ less than a given
number of employees (between 250 and 500). As per the Small Industry Development
Organization (SIDO) definition, SMEs in Tanzania are mostly formal undertakings
engaging up to 100 employees, with a capital investment of up to TZS 800 million. To
be listed on the Enterprise Growth Market (EGM) segment of the Dar es Salaam Stock
Exchange (DSE), SMEs must have net assets (issued and paid up capital) of at least TZS
200 million.
1.1.2 Classification of SMEs
For the purposes of the Tanzanias SMEs Development Policy, SMEs are categorized as
follows:
Table 1: Categories of SMEs in Tanzania
Category
Employees
Capital Investment in Machinery (TZS)
Micro enterprise
1 4
Up to 5 million
Small enterprise
5 49
Above 5 million to 200 million
Medium enterprise
50 - 99
Above 200 million to 800 million
Large enterprise
100+
Above 800 million
1.1.3 Attributes of SMEs

SMEs possess a number of attributes that make them potential contributors to
economic growth, including the following:
Compared to large enterprises, SMEs are usually more in number and therefore
take up a larger share of the labour force. According to the MSME Survey Report of
2010, there are more than 3 million small businesses in Tanzania;
They are creators of employment opportunities. The MSME Survey Report shows
that small businesses have over time employed more 5 million people;
They are a potential source of innovation, entrepreneurial talent, and export
competitiveness;
Their existence increases competition and hence economic dynamism; and
Their support of entrepreneurial spirit and skills in diverse geographical areas
contributes towards the reduction of economic disparities between urban and

rural areas.
1.2 The Importance of SMEs in the Economy
SMEs play a crucial role in employment creation and income generation in Tanzania.
SMEs all over world and in Tanzania in particular can be easily established, since their
requirements for seed capital, technology, and management are relatively minimal.
SME development is closely associated with a more equitable distribution of income
and is thus an important factor in poverty alleviation. At the same time, SMEs serve as
a training ground for emerging entrepreneurs.
1.3
Policy Framework for SMEs in Tanzania

In recognition of the importance of the private sector and SMEs in particular, the
Government of Tanzania has put in place many supportive policies and programs.
These are intended to create the necessary enabling environment for the private
sector by addressing some of the key constraints it faces. Such policies and programs
include, but are not limited to, the following:
Small and Medium Enterprise Development Policy
The policy outlines priorities/strategies and improves the operations and
competitiveness of existing SMEs while also helping to establish new ones. Its
main mission is to stimulate development and growth of SMEs activities through
improved infrastructure, enhanced service provision, and creation of supportive
legal and institutional framework so as to achieve competitiveness.
National Microfinance Policy
This policys overall objective is to provide a basis for the evolution of an efficient
and effective micro-financial system in the country, and thus to provide a framework
for ensuring coordinated interventions by the different players in the system.
Sustainable Industrial Development Policy
This policy helps to create the overall framework for the countrys future industrial
development (including SMEs). Furthermore, it provides for government support
in enhancing SMEs capacities by improving the legal and regulatory framework
and access to finance.
National Strategy for Growth and Reduction of Poverty
This policy builds on interventions in the following areas: economic growth;
reduction of income poverty; improvement of social life and wellbeing as well
as governance and accountability; and addressing the challenges faced by the
private sector (including SMEs) with respect to access to finance. The policy
further outlines initiatives to improve the investment environment and provides
for the governments intention to support innovation, product development, and
quality marketing strategies by local firms, including SMEs, to make them more
competitive and enhance their capacity to respond to global marketing conditions.
Program on Business Environment Strengthening for Tanzania (BEST)
This program aims at: achieving better regulation; improving commercial dispute
resolution; strengthening the Tanzania Investment Centre (TIC); changing the
culture of government; and empowering private sector advocacy.
1.4 Major Constraints to the Development of SMEs
Three major constraints contribute to the underdevelopment of SMEs in developing
countries, including Tanzania:

A non-supportive business environment;

A lack of managerial and technical skills; and
A lack of access to capital for growth.
For the SME sector to grow in a sustainable manner, all three areas need to be
addressed. However, this manual addresses only the third constraint: access to capital.
This area has received relatively more attention than the other constraints faced by
SMEs, but nevertheless remains a major constraint for the SME sector. So far, efforts
to enhance access to finance by SMEs have focused mainly on commercial banks,
microfinance institutions, and government/donor-funded programs. However, these
funding sources have provided mostly short-term financing and, in some cases, have
not been sustainable. Consequently, SMEs have not been able to obtain long-term
funding for growth. There is, therefore, a need to identify additional sources of funds
to provide long-term financing.
1.5
Financing Opportunities Available in the Capital Market

As key stakeholders in the implementation of the government policy on SMEs,
Tanzanias capital market institutions have put in place an institutional framework to
address the constraints to capital, management, and technical skills development. The
capital market institutions intervention is intended to enable prospective qualified
SMEs to enhance their business management capacities as well as to expose them to
sustainable sources of finance.
The Enterprise Growth Market (EGM) on the DSE
A stock market is a vital part of economic development as it encourages savings, helps
channel savings into productive investment, and encourages entrepreneurs to improve
the efficiency of their investments. The introduction of the EGM segment on the DSE
will serve founders and developers of enterprises by ensuring that capital is available
to start or expand any project.
Medium enterprises are the target group of the EGM. The selection of this target
group is based on the following factors:

Their size makes it possible for them to attain economies of scale and as such, they
have the necessary absorptive capacity and can fully capitalize on the technology
and technical assistance provided to them;
They are potential sources of innovation;
They have the growth potential to access funding through capital markets and thus
can facilitate wealth creation through wider share ownership among Tanzanians;
and
As entities with listing potential, they have the potential to provide a demonstration
effect and to bring about a multiplier effect.
1.6 Conclusion
SMEs are considered among the key vehicles for wealth creation, with the potential
to make a substantial contribution towards real economic growth depending on their
growth orientation. In Tanzania, the full potential of SMEs sector has yet to be tapped
due to the existence of a number of constraints (e.g., limited access to finance). The
main focus of this module was to highlight the capital financing options currently
available to SMEs in Tanzania, with emphasis on the role of capital markets. The module
introduced the DSEs EGM platform as one of the preferred long-term capital financing
options for SMEs in Tanzania.
BUSINESS LEGAL STRUCTURES
Course Outline
(i) Introduction
(ii) Purpose of the Module
To help entrepreneurs understand the main forms of entities used in conducting
business and the cost implications of each form of business;
To convey to entrepreneurs the comparative advantages of each form of business
and to provide a comparative analysis of each; and
To enable entrepreneurs to make better, more informed choices of business legal
structures (recognizing their importance in wealth creation and distribution).
(iii) Key Issues to be Addressed by the Module
A comparative analysis of a variety of legal forms of business and what it takes to
establish each form of business entity;
The factors that business persons need to take into account when choosing a legal
structure and the post-establishment obligations of each form of business; and
The most appropriate legal structure for SMEs growth and sustainability.
(iv) Methodology

Presentations by consultants;
Participants experiences/interactions; and
(v) Expected Outcome(s)

Entrepreneurs should understand the differences between the legal implications
of a variety of business entities;
Entrepreneurs should be able to assess which form of legal structure will attract
capital most easily (compared to other forms);
Entrepreneurs should be able to describe how limited liability companies make
operational decisions; and
Entrepreneurs should understand the importance of the separation of powers
between shareholders and management.
Module Two
2.0 BUSINESS LEGAL STRUCTURES
2.1 Introduction
2.1.1 What is a Business?
A business is an enterprise or operation that produces commodities or renders
services. It involves the performance of activities or functions such as buying,
selling, and producing. These activities are conducted in a physical, political, and
economic environment. The main motive for carrying out a business is profitmaking.
2.1.2 Types of Business Entities
The entrepreneur or owner of a business can choose any formal manner in which
he or she will operate the business. There are four main forms of legal entities
by which business can be conducted: sole proprietorship, partnership, company
(private, public, or listed), and commercial trust.
The critical characteristics of each relate to:

Ownership: Who owns the business?

Control: Who runs and manages the business?
Responsibility: Who is responsible for the businesss performance?
Accountability: To whom is the leadership accountable for the businesss
performance?
Liability: Who is liable for the businesss debts?
Taxation: Who pays the businesss taxes?
2.2 Considerations in Choosing the Form of Business Structure
2.2.1 Formality in Setting Up
A sole proprietorship can be established easily with no need to prepare any
constitutive documents, as is the case with partnerships, companies, and
commercial trusts.
A partnership: forming partnerships involve preparing agreements and filing
constitutive documents to provide for the comprehensive treatment of all
present and future aspects of the relationship.
A company: The Companies Act, 2002 imposes a number of formalities on the
formation of a company, such that prescribed documents must be prepared
and lodged with the Registrar of Companies.
Figure 1: Types of Companies

COMPANIES
Private Company
Ltd. (2 minimum
shareholders:
maximum 50
shareholders)
Public Company Ltd.

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

- Listed on a Stock
Exchange
2.2.2 Liability for Debts

In sole proprietorships and most partnerships, sole proprietors and partners are
fully liable for all the debts of the business. A partner has a right of contribution
from his fellow partners but if they are unable to contribute, he is liable without
limit. In limited partnerships, partners are liable up to the amount of authorized
capital.
The liability of a shareholder in a limited company is limited to paying the agreed
price for his shares; usually this is paid in full at or within a short time after
allotment by the company. A company provides the best cushion for liability to
its owners compared to the other two forms of business organization. However,
in certain circumstances (e.g., fraudulent or wrongful trading, personal
guarantees, breach of duty to the company, and penalties under the Companies
Act), directors are personally liable for what they have done or failed to do.
2.2.3 Raising Finance
(i) Loans
A lender extending a loan to any person will usually seek security for
repayment of the loan. Companies, partnerships, and sole proprietorships
can all create fixed charges over their assets as security. However, only a
company is able to create a floating charge (for example, its stock-in-trade
and future assets) as security for its borrowing and therefore a company
has greater scope than a partnership or a sole proprietorship for raising
loan finance.
(ii) Capital
A limited liability company that asks a person to introduce capital by
becoming a shareholder has the benefit of being able to assure the
investor of limited liability not offered by general partnership. It follows,
therefore, that companies have a wider range of alternatives for raising
capital than do partnerships and sole proprietorships. For example, only
companies can access capital through capital markets; partnerships and
sole proprietorships cannot.
2.2.4 Perpetual Life
Legally, a company has a perpetual life unless stated otherwise in its constitution.
A company is expected to survive the deaths of its shareholders. Although
this is the legal position, experience has shown that many companies collapse
immediately after the death of their founders. A partnership comes to an end
with the death of one partner. The death of the sole proprietor also brings to
an end the sole proprietorship. For continuity purposes, a company is the most
appropriate vehicle for ensuring sustainability.
2.2.5 Management Structure
A sole proprietorship is a one-man-show. As such, it is vulnerable to a number
of shortcomings as stated above.
A partnership is at liberty to organize itself in such a way that certain partners
exercise management functions while others are only consulted on major issues.
However, as far as an outsider is concerned, any partner may have apparent
authority to act in management and may therefore bind the firm.
In contrast, a company has a prescribed structure that facilitates the separation
of management functions from capital investment in the company. Management
functions are broadly exercised by the directors and relatively few functions
are reserved for the shareholders in a general meeting. This arrangement
provides the flexibility to hire competent persons both on the board and at the
management level.
2.2.6 Tax Considerations
Before deciding on the form of business vehicle to use, the tax relief available
for each form is normally considered. There are many differences between the
treatment of an unincorporated business (sole proprietorship or partnership)
and that of a company and its directors and shareholders. Some favour the former
while others favour the latter. Consideration is then given to the significant
differences in treatment.
10
2.2.7 Disclosure of Information

A company must make public a range of information about its affairs, its directors,
and its shareholders by filing returns and documents with the Registrar of
Companies or the stock exchange (in case of a listed company). This information
includes audited accounts. Partnerships and sole proprietorships are entitled
to maintain privacy in all their affairs, with the exception that, in the case of
partnerships, the identity of all partners and an address for service of documents
must be revealed. Investors prefer business organizations that are transparent;
thus, companies are better at attracting investors on this score.
2.2.8 Statutory Obligations and Control
Throughout its life, a company must comply with several statutory obligations
regarding maintenance and filing of records and information. Examples include
the completion of minutes of meetings and statutory registers and the filing of
annual returns and audited accounts. These obligations call for administrative
discipline and some expense. The Companies Act, 2002 also imposes controls
and directives on certain activities, like dividend distribution to shareholders.
2.3 Control and Ownership of a Business
Informed by the choice of entity, the fundamental issues of ownership and control
influence all future strategic business decisions.
2.3.1 Non-Incorporated Businesses: Proprietorships and Partnerships
In the case of sole proprietorships and partnerships, ownership and control are
vested in the owners:
They own the business;
They run the business;
They enjoy the benefits of ownership; i.e., capital and wealth creation, as
well as remuneration for running and managing the business;
They are personally responsible for the debts and liabilities of the business;
There is no separate legal entity;
There is no separation of ownership and control;
They may employ individual managers to run the business on their behalf;
They are responsible for paying taxes on all profits of the business;
They make all decisions affecting the business; and
They may be operated under the owners names or registered business
names.
2.3.2 Incorporated Businesses: Companies
An incorporated business is an entity that is a listed public company, a non-listed
public company, or a private company. Incorporated businesses have ownership
11
structures and control that reflect the essence of modern corporations and good
corporate governance. In simple terms, the relationship between owner(s) and
management is as follows:
The shareholders or members own the business;
The shareholders do not directly own the company, but appoint directors to
manage and run the business on their behalf;
The directors are responsible to the company and accountable to the
shareholders;
The directors are the agents of the shareholders;
The directors are trustees of the company;
Companies are separate legal entities from the shareholders; and
The assets of the business are owned by the company, not by the shareholders.
2.4 Decision Making in Companies
2.4.1 Shareholders Decisions
(i) Shareholders are the owners of the company as they raise the money/capital
to establish the company. Shareholders are responsible for making the
following decisions:
Altering any aspect of the companys constitution;
Appointing directors of the board;
Dismissing directors from the board; and
Condoning any breach of duty to the company by its directors.
(ii) Shareholders decisions are normally made through resolutions in a
prescribed percentage (e.g. 75%) or just a simple majority.
2.4.2 Directors Decision-Making Powers
(i) Typically, directors are responsible for making the following decisions:
Entering into contracts (including sales and purchases, borrowing,
contracts of employment);
Calling general meetings;
Taking legal proceedings in the companys name; and
Approving transfers of shares (and the consequent changes in
membership).
(ii) Directors also have limited authority for the following decisions, in the sense
that they must first seek approval from shareholders in a general meeting:
Issuing new shares in the company;
Entering into contracts with individual directors by which the company
will buy from or sell to that director something of significant value; and
12
Awarding to individual directors service contracts of significant duration.

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

In all types of legal structures (listed public companies, non-listed public

companies, and private companies), there are four principal role players (see
Figure 2):
Shareholders/members/investors: Those who form(s) the company and
provide(s) the start-up and risk capital;
The company itself: The separate legal business entity;
Directors: Agents of owners/members/investors; and
Management: Individual persons who run the company.
13
OWNERSHIP
Shareholders/
Members
Control over leadership

Voting Power
Company
Separate Legal Entity (with its
own Rights, Responsibilities,
Assets, LIabilities, Risk, Returns) independent of its shareholders
Leadership
DIRECTORS
Agents of the owners

Trustees of the Company
Control over Management
Leadership power
Focus on Strategy and Governance
Management
Executive Directors
Top Management
Middle Management
Employees
14
1.0 Control over employees

2.0 Management power
3.0 Focus on operations, tactics and
systems
2.5 Comparative Analysis of Various Business Entities

Table 2 provides a comparison of the key features of the main legal business entities:
Table 2: Key Features of Legal Business Entities in Tanzania
S/No
CRITERIA
SOLE
PROPRIETORSHIP
PARTNERSHIP
COMPANY
COMMERCIAL
TRUST
1.
Formation
Natural person
Partnership

begins trading
Agreement

Memorandum
Trust Deed;
and Articles of
Certificate of
Association; Incorporation
Certificate of
Incorporation
2.

N/A
On registration
On registration
Ceases when
there is a
membership
change
Perpetual
succession
unless stated
otherwise
Perpetual
succession
unless stated
otherwise
By agreement,
change of
partners or
when a
partners estate
is sequestrated
Deregistration
or winding-up
by dissolution/
liquidation
Deregistration
or winding-up
by dissolution/
liquidation
Incorporation
N/A
(Legal Personality)
3.
Existence

Ceases when the sole

sole proprietor
stops carrying on
business
4.
Termination
Ceases when the

sole proprietor

stops carrying on

business

5.
Ownership of
One natural person
Natural or

Business
legal persons

(2 to 20)

Shareholders:
Trustees on
(a) Private (2 to 50) behalf of
(b) Public (7 to
beneficiaries
unlimited)
6.
Management
The Sole proprietor

Owned jointly by
all partners
The directors
The Trustees
7.
The partners
The directors
The Trustees
Partners
contribute
(money, property
or services)
Issues shared
captial of the
shareholders
Initial
contribution by
the settlor
Shareholders
Agreement &
Articles of
Association
Trust Deed &

Regulations
Representation
The Sole proprietor
8.
Capital
Own resources of

contribution
the proprietor

(money/property)

9.
Regulation
N/A
Partnership,

(Agreements)
agreement

10.
Disposal or
N/A
As per Agreement As per Articles
As per the Trust

transfer of Deed
interests
15
S/No
CRITERIA
SOLE
PROPRIETORSHIP
11.
Liability to
Liable for all the

creditors
debts of the business

16
PARTNERSHIP
Partners are
jointly and
severally liable
for the partnership
debts
COMPANY
COMMERCIAL
TRUST
Debts of the
company are its
shareholders
Trustees are
liable for all
Trust debts
12.
Audit
No audit required
No credit required
requirements

Audit
requirements
by independent
auditors
Audit
requirements
by independent
auditors
13.
Accounting
N/A
N/A
requirments

by law

Specific
accounting
requirements
-disclosure &
record
Specific
accounting
requirements
-disclosure &
records
14.
Insolvency of
Results in
Results into

business entity
bankruptcy of the
bankruptcy of

owner
the partners

Does not lead

to bankruptcy
of the
shareholders
Does not lead

into
bankruptcy of
the Trustees
15.
Tax Entity

Not separate -
taxed in the hands
of the proprietor
(30%)
Not a separate
entity - partners
partners taxed
(30%)
Separate tax
entity
(25% - 30%)
Separate tax
entity
(30% or 10%)
16.
Salaries to
N/A - cash taken is

owners
drawings and not

deductible

Salary to an
equity partner
is an advance
against
partnership
profits
If a shareholder
is employed,
salary is
deductible
If a trustee is
employed,
salary is
deductible
For Salaried
partner, it is
just a business
expenses
MODULE THREE
BUSINESS PLANNING
AND EVALUATION
17
Course Outline
(i) Introduction
To help entrepreneurs understand the importance of business planning in
establishing new businesses and maintaining/expanding existing businesses;
To teach entrepreneurs how to develop excellent business plans for different
business sizes;
To convey to entrepreneurs the importance of and need for excellent business
plans for SMEs; and
To teach entrepreneurs how to develop business plans for SMEs that can be used
to attract capital and/or business financing.
Business planning and its importance in establishing new businesses and expanding
existing businesses;
Business plan creation and how plans can used to attract capital and other available
sources of business financing; and
The benefits to SMEs of business planning.
(iv) Methodology
Practical examples/case studies of actual situations; and
Participants interactions/experiences and discussion of practical issues.
(v) Expected Outcomes
Entrepreneurs should understand the importance of business planning in
establishing and expanding businesses;
Entrepreneurs should understand what to include in a business plan and how,
when, and why to prepare one; and
Entrepreneurs should understand how a well-written business plan can help SMEs
attract capital and different sources of funding.
18
Module Three
3.0 BUSINESS PLANNING
3.1 Introduction
A business plan is a very important tool for guiding new businesses to success. It
allows entrepreneurs to test if a business idea is feasible and if, when put into use; it
can be sustained in the foreseeable future. For a business idea to get off the ground,
decisions about products, market, location, size, financing, infrastructure, etc. should
be thoroughly examined in a business plan. The business planning process should
be given adequate time to satisfactorily answer if the product(s) or service(s) to be
offered: fills a gap in the market; provides something different from other businesses
in the same industry; and will have a demand in the market that is greater than the
current supply.
3.2 Why Prepare a Business Plan?
Business planning gives entrepreneurs an opportunity to identify a target market,
a product, and customers. It also helps entrepreneurs study the market to establish
clear benefits for the customers who ultimately choose to deal with them. Among
other things, a good business plan:
Serves as an opportunity to prepare a review of planned operations;
Provides further insights into the detailed working of the company;
Reveals strengths and weaknesses that may not be immediately apparent;
Signals to potential investors the businesss prospects and opportunities for the
future; and
Is a document (required) to be presented to the CMSA for capital raising and listing
to get regulatory approval.
3.3 Guide to Writing a Good Business Plan
A business plan generally projects three to five years ahead and outlines the route
the company intends to take to grow revenues. The plan should be reviewed regularly
and changed when necessary to ensure that it (and the business) stays focused on the
objectives. A good business plan will include, among other things, the following:
3.3.1 An Overview of the Business
The business overview section should provide a high-level review of the
businesss current position. Key historic milestones and information about the
company should be clearly stated here. This section should help financiers,
current and potential investors, and the public understand the position, goals,
and future plans of the business and its unique proposition.
19
A brief summary of the following items should be included in the business

overview:
The nature of the business and when/how it was established, the industry,
and the current market demand for the businesss product(s) or service(s);
The business philosophy and how its marketplaces logistical needs will be
served;
The current number of staff/outlets and the businesss geographic spread,
acquisitions, mergers, and large contracts;
The specific and targeted consumers, organizations, or businesses the
business serves or will serve;
The businesss main difference from competitors i.e., its comparative
advantages, such as better location, cheaper price, better service, and/or
more efficient operations, and the key benefits to consumers; and
Where the business will be three to five years in the future and how this will
be achieved.
3.3.2 The Nature of the Business
This section describes exactly what the business sells or produces and how it is
(will be) produced. It provides a brief overview of the services/products in terms
of branding, special features, packaging, key supplies, and on-going service
or product development. It highlights the benefits to potential and current
customers and focuses on how the businesss particular product/service will fill
a need for its target customers.
The description of what is offered to customers should include:
A description of the product/service and life cycle;
Intellectual property rights held by the business;
The price and how it is determined (considering production costs, labour,
and other overhead expenses);
The competitive operational advantage;
Research and development (R&D) activities; and
Key suppliers and special dealings with supplier/s, if any.
3.3.3 The Business Structure and Management
The purpose of this section is to give stakeholders and investors assurance that
the business structure and management team can deliver on the prospects and
forecasts contained in the business plan. It provides information to regulatory
bodies and the public on who does what in the business, the respective
20
backgrounds of key employees, and evidence of their ability to manage the

business and comply with laws and regulations.
This section should include:
The businesss organizational and ownership structure;
Details about ownership of the business, profiles of the management team,
and qualifications of Board of Directors members;
Other relevant elements such as trademarks, patents, and intellectual
property that may need to be protected;
Other key information about legal agreements and senior staff and their
involvement/responsibilities; and
The businesss exit strategy (if any).
3.3.4 Market Analysis
The market analysis of the business plan should briefly outline what market the
businesss product/service will serve and why. It should clearly illustrate the
nature of the industry, using market knowledge and data from internal research
or from external trusted sources like business magazines, government reports,
and consumer surveys.
The market analysis should include:
The state of the market is it growing, declining, or segmented?
Analysis of who will buy the product or service and where the market is (will
be) located;
Identification of current customers (if any) and their average buying
volumes;
Information regarding positive/negative feedback from customer surveys;
Details of current large contracts and their prospects going forward;
The state of the industry and its outlook the current size and historic and
projected growth rate;
Information about the targeted market distinguishing character, size of
the primary market, how much market share can be gained, etc.;
Market influences such as seasonal price fluctuations or trends;
The price range: based on the target market, will it be high, low or in the
middle? and
Barriers (e.g., regulatory restrictions, technology, personnel, cost), if any,
that might restrict/hinder production/sales of planned services or products,
and the window of opportunity to overcome them.
21
3.3.5 Industry Overview

The industry overview section should show how the industry is currently
performing, present the market forecast going forward, and ascertain the
opportunities available within the market forecast.
3.3.6 Competitive Analysis
The competitive analysis should identify the businesss competition by product
line, service, and market segment. The analysis should assess the following
characteristics of the competitive landscape:
Market share how the businesss products/services feature against the
competition and an analysis of the businesss competitive edge;
The benefits of the businesss services/products to consumers;
A comparative analysis of the businesss pricing, promotion, and distribution
strategies;
Evaluation of the importance of the target market to competitors;
Assessment of any indirect or secondary competitors who may enter the
market and impact the businesss success;
An identification of competitors and how they are faring in the marketplace
in comparison;
A description of how the business will position its product or service against
competitors; and
Opportunities available based on the analysis.
3.3.7 Marketing and Sales Analysis
Marketing is the process of creating and maintaining customers, as customers
are the lifeblood of any business. This section describes how customers will find
out about the businesss products or services, and should include:
Where, how, and when products/services will be promoted (e.g., shopping
centre promotions, point of sale, viral marketing, billboard, loyalty schemes,
etc.);
The types of printed materials, if any, that will be created;
The businesss website or online presence;
Details and cost of advertising, including print, online, TV, and radio;
Product/service launch plans;
How the success of the marketing strategy and various promotions will be
measured; and
How pricing will encourage sales (e.g., selling in bulk).
22
A good marketing analysis should include the following four strategies:

A marketing penetration strategy how to enter, capture, gain, and maintain
the market;
A growth strategy an internal strategy for how to increase human
resources, buy another business, or branch out, and how to differentiate
and segment the market if necessary;
A channels of distribution strategy how to physically move products/
services to consumers (choices for distribution channels could include
original equipment manufacturers (OEMs), an internal sales force,
distributors, or retailers); and
A communication strategy how to reach customers (usually best achieved
with a combination of promotions, advertising, public relations, personal
selling, and printed materials such as brochures, catalogues, flyers, etc.).
3.3.8 SWOT Analysis
A strategic SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis
helps turn knowledge into strategy, which can then be turned into actions.
It provides direction to the business and its marketing strategies. The SWOT
analysis should be used to describe the businesss strengths and weaknesses
and to develop strategies to help eliminate or mitigate them. Table 3 illustrates
the generic elements of a SWOT:
23
Table 3: Sample SWOT

Strengths Weaknesses
Advantages the
business can exploit, e.g.
good customer service
innovative edge
unique products
Areas of the business that need to

be acted on, e.g.
poor website
not enough staff training
Opportunities

Strategies to use strengths

to address opportunities
Strategies to reverse weakness

to address opportunities
Marketplace areas taht can

be built on, e.g.
gaps in the market
competitor closure

Ways to take advantage

of business strengths,
promoting good customer
service to attract
competitors customer
Ways to ensure weaknesses dont

hamper opportunities, e.g.
hire experienced trainer(s)
to up skill staff
provide better customer service
Threats

Strategic to counter
threats with strengths
Strategies to fix vulnerabilities
External issues that could affect

Ways to use business
Ways to address areas where the
the success of the business, e.g.
strengths so threats are
where the business may be
decrease in consumer demand
launching new product
utilizing new technologies or
sudden increase in costs
to revitalize consumer
social media to reach potential
demand customers
3.3.9 Financial Performance and Projection

This section of the business plan should provide in detail the current financial
position of the business (if any) and future projections of its financial position
(and the basis used). It should include comments regarding key ratios such as:
revenue growth, profit margins, and other major industry-specific ratios. The
purpose is to highlight the positive factors that will enable the business to grow
sustainably for the foreseeable future.
It is important to include a short analysis of the businesss financial information
a ratio and trend analysis for all financial statements (both historical and
prospective). Graphs of trend analyses (especially if they are positive) and
pictures to make the business plan easy to read and understand should be
included if possible.
The businesss financial situation should be summarized with the following:
How the business will be financed (e.g., business loan, personal funds, or
investment capital);
Costing, including start-up costs, salaries, and fixed overheads;
24
Financial projections, including how much is needed to break even, when

the business is anticipated to make a profit, and any growth expectations;
and
Financial statements (including income statements, balance sheet, current
cash flow and projections, etc.) to validate the summary.
3.3.10 Action Plan
The action plan should clearly explain how business plan objectives are to be
achieved, and should be regularly reviewed and used to control decisions and
actions taken. The action plan should list actions by key areas (such as Legal,
Finance, Establishment, and Marketing). It should clearly state how key tasks
will be done, by whom, and by when. If they are too detailed, they may become
unworkable.
3.3.11 An Executive Summary
The executive summary is often considered the most important section of a
business plan. It briefly tells the reader where the company is, where it intends
to go, and why the business idea will be successful. If the business is seeking
financing, the executive summary is also a first opportunity to interest potential
investors. As it highlights the strengths of the overall business plan, it should
be the last section written (even though it usually appears first in a business
plan document). Depending on the stage of the business, several key points to
include in the executive summary are as follows:
For an established business, the following information should be included:
The mission statement a few sentences to a paragraph that explain what
the business is all about;
Company information a short statement that covers when the business
was formed, the names of the founders and their roles, the number of
employees, and the businesss location(s);
Growth highlights examples of company growth, such as financial or
market highlights (e.g., increased sales, profit margins and market share
year over year for x years); graphs and charts can be helpful in this section;
A brief description of the businesss products/services;
Financial information any information about the businesss current bank
and investors, especially if financing is being sought; and
A summary of future plans where the business is headed.
25
The information in the executive summary should be covered in a concise fashion

using clear language. This is the first (and sometimes only) part of the business plan
that many people will read, so each word should count.
A start-up or new business wont have as much information as an established company.
Thus, its executive summary should include:
A focus on the owners personal experience and background as well as the decisions
that led to creation of the enterprise;
Clear demonstration of a thorough market analysis by including information about
the identified need or gap in the target market, and how the businesss particular
solutions can fill this;
A convincing argument that the business will succeed in its target market; and
An exposition of future plans (accompanied by financing options).
3.4 Investment Evaluation
Running a business requires regular evaluation of the business. It is very important
to know the current value of the business before making an investment or financing
decision or changing products and production techniques. For investment decisions,
business owners and managers must assess whether the alternative proposed
investment will give the best return at minimum risk. Some of the tools commonly
used for business or investment evaluation include:
3.4.1 Capital Budgeting Technique (CBT)
This is the process by which a business determines whether projects such as
building a new plant or investing in a long-term venture are worth pursuing.
Oftentimes, a prospective projects lifetime cash inflows and outflows are
assessed to determine whether the returns generated meet a sufficient target
benchmark.
Also known as investment appraisal, CBT is the financial management
technique used to analyse whether it is worthwhile to invest in certain types of
fixed assets, as this type of investment can have a long-term effect on business
affairs and often involves relatively large outlays. Ideally, businesses should
pursue all projects and opportunities that enhance shareholder value. However,
because the amount of capital available at any given time for new projects is
limited, management can use CBT to determine which projects will yield the
greatest return over an applicable period of time.
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3.4.2 Net Present Value (NPV)

The NPV is the difference between the present value of cash inflows and the
present value of cash outflows. The NPV is used in capital budgeting to analyse
the profitability of an investment or project. The NPV compares the value of
an investment outlay (in money terms) today to the value of that same outlay
of money in the future, taking inflation and returns into account. If the NPV of
a prospective project is positive, it should be accepted. However, if the NPV is
negative, the project should probably be rejected because cash flows will also
be negative. If two or more projects are being considered, the one with the
highest NPV should be selected.
3.4.3 Internal Rate of Return (IRR)
The IRR is the discount rate often that makes the NPV of all cash flows from a
particular project equal to zero. Generally speaking, the higher a projects IRR,
the more desirable it is to undertake the project. As such, the IRR can be used
to rank several prospective projects considered by a firm. Assuming all other
factors are equal among the various projects, the project with the highest IRR
would probably be considered the best and undertaken first.
The IRR is used to evaluate the attractiveness of a project or investment. If the
IRR of a new project exceeds a companys required rate of return, that project
is desirable. If the IRR falls below the required rate of return, the project should
be rejected. IRRs can also be compared against prevailing rates of return in the
securities market. If a firm cant find any projects with IRRs greater than the
returns that can be generated in the financial markets, it may simply choose to
invest its retained earnings in the market.
3.4.4 Weighted Average Cost of Capital (WACC)
A companys assets are financed by either debt or equity. The WACC is the
average of the costs of these sources of financing, each of which is weighted by
its respective use in the given situation. A firms WACC is the overall required
return on the firm as a whole and, as such, it is often used internally by company
directors to determine the economic feasibility of expansionary opportunities
and mergers. It is the appropriate discount rate to use for cash flows with risk
similar to that of the overall firm.
3.4.5 Payback Period
The payback period is the length of time required to recover the cost of an
27
investment. The payback period of a given investment or project is an important

determinant of whether to undertake the position or project, as longer payback
periods are typically not desirable for investment positions. There are two main
problems with the payback period method: (i) it ignores any benefits that occur
after the payback (i.e., it does not measure profitability); and (ii) it ignores
the time value of money. Because of these reasons, other methods of capital
budgeting, like the NPV, the IRR, or the discounted cash flow; are generally
preferred.
3.5 Conclusion
Business planning is part of the long process of introducing a business into the market.
It is a very important step in the overall process of establishing new or expanding
existing businesses. A good business plan should: explain the businesss products
or services; protect ideas (intellectual property); provide an understanding of the
market; assess the businesss skills and ability to develop products/services; help in the
design and completion of a working business prototype; develop a marketing and sales
strategy, and explore the possibility and availability of better funding and financing
options. In the end, a well-written business plan should turn a business concept or idea
into a real business opportunity.
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MODULE FOUR
FINANCIAL MANAGEMENT
AND RECORD KEEPING
29
Module Outline
(i) Introduction
To help entrepreneurs understand the importance of financial management and
recordkeeping for running their businesses efficiently; and
To help entrepreneurs understand and make use of the financial management and
recordkeeping process.
Key elements of financial management (financial planning, financial control, and
decision making) and recordkeeping; and
How to implement the key elements of financial management and recordkeeping.
(iv) Methodology
Interactions with entrepreneurs to share their experiences; and
Entrepreneurs should understand the different elements, processes, and
importance of financial planning and recordkeeping; and
Entrepreneurs should be able to collect, process, safely store, and consequently
make use of financial data to make decisions on all finance-related issues.
30
Module Four
4.0 FINANCIAL MANAGEMENT AND RECORDKEEPING
4.1 Introduction
Financial management is the operational activity of a business that is responsible
for obtaining and effectively and efficiently utilizing economic resource (funds) to
accomplish the businesss objectives. It is the area of business management devoted
to the judicious use of capital and careful selection of sources of capital to enable
the business to reach its goals. Financial management therefore plays a vital role in
business development (including that of SMEs) by enhancing competitiveness and
the ability to withstand business risks. Standard financial management and proper
recordkeeping systems can also help enterprises be financially flexible enough to
readily fund investments when opportunities arise.
4.2 Importance of Financial Management
Financial management is critical to business development because finance is the
backbone of businesses. Sound financial management enables businesses to:
Improve profitability with the help of strong financial control tools such as
investment evaluation and cost management;
Increase the value of the firm with strong performance, profitability and a better
financial position, a higher asset position and valuation are achieved; and
Promote savings as a result of (and/or in conjunction with) strong financial
performance.
4.3 Financial Planning, Control, and Decision Making
Financial planning, control, and decision making are the three key elements of financial
management processes:
4.3.1 Financial Planning
The financial planning process is used to determine the current financial status
and current/future financial needs of businesses. This ensures that enough
funding is available at the right time to meet the businesss needs. In the short
term, funds may be needed to invest in equipment and stocks, pay employees,
and pay for purchases made on credit. In the medium to long term, funding may
be required for major production expansions or acquisitions.
4.3.2 Financial Control
Financial control is an important tool that helps businesses measure and
meet their objectives. Proper use and allocation of funds leads to improved
31
operational efficiency, reduced capital costs, and increased value of the firm.
Strong financial control measures should address whether: assets are being
used efficiently; business assets are secure; and choices and decisions made
are in the best interest of shareholders and in accordance with rules.
4.3.3 Financial Decision Making
The interdependent nature of some business units (e.g., marketing, production,
personnel) necessitates financial decisions to consider their different (and
related/likewise) needs. Decisions on how, where, and when to invest, hire,
pay dividends, raise wages, fund new programs, etc. should be thoroughly
investigated before any conclusions are reached.
4.4 Importance of Recordkeeping and Accounting Information
4.4.1 Recordkeeping
One of the most fundamental components of achieving business success
is keeping good financial records. The importance of keeping good financial
records is always clear during tax filings, loan applications, monitoring of
business performance, and the selling of business shares, as it is important to
know where, when, and how the money is going.
The minimum requirement of a good recordkeeping system is that it lists monies
that come into the businesss possession and monies that leave its possession.
4.4.2 Accounting Information
Accounting information is simply the data a business entity is able to make
known to its users. Business entities require accounting data and related
information to manage and control activities and their respective performances
productivity/profitability levels, differences between marginal liabilities and
marginal assets, etc. A sound accounting system in an organization depends
on the existence of a good recordkeeping system. Therefore, a business must
have system(s) in place for monitoring and managing finances that is both
comprehensive and easy to understand.
Accounting information should help businesses:
Manage cash flow to optimize cash flow;
Handle supplier queries to avoid double/late payments;
Maintain accurate records of past and current activities; and
32
Forecast business activities to make more informed decisions on whether

the business has sufficient capital/funds to invest, produce, hire, or buy.
4.5 Management Accounting

Management accounting is the use of information from bookkeeping and other
records to determine how well the business is doing. Management accounting provides
information on how monies came in and went out, what the business owns and what it
owes, and how monies will come in and go out in the future. It also helps in:
4.5.1 Operational Control
A business entity requires management accounting information to enable it to
manage and control its finances and resources. This will also allow the business
to measure, control, and improve its operational activities.
4.5.2 Performance Measuring
The constant flow of accounting data relevant to income, purchases,
investments and overhead is used as a tool to gauge actual performance for
the year. It is also critical in creating the budget for the coming year.
4.5.3 Financing Decisions
Accounting data are usually used to determine funding needs for the
organization. Potential investors and lenders look at business assets and
liabilities to determine if the target business is a safe investment.
4.5.4 Expansion Decisions
When business entities work on their growth plans and try to make the right
decisions to expand their profitability, they use accounting data to determine
how much they can take on in liabilities and costs.
4.6 Financial Statements
Every business of any size will have assets and liabilities of varying forms and will incur
numerous transactions in the course of even one week. These must be recorded for
various reasons apart from maintaining corporate memory. They are best captured by
the preparation of financial statements the balance sheet, the income statement,
and the cash flow statement:
4.6.1 The Balance Sheet
The balance sheet is used to report on the financial position of the business to
33
the owner and other stakeholders. It provides a good picture of the financial
health of a business and is a tool used to evaluate a businesss liquidity. The
difference between the assets (what a business owns) and liabilities (owes) is
the net worth of the business (owners equity).
Table 4 Example of a Balance Sheet

ASSETS
LIABILITIES
Current Assets
Amounts Current Liabilities
Cash
Accounts Payable
Accounts Receivable
Wages Payable
Inventory
Interest Payable
Temporary Investments
Taxes Payable
Supplies
Unearned Revenue
Other current Assets
Other current Liabilities
Total Current Assets
Total Current Liabilities

Fixed Assets
Long-term Liabilities
Land
Bond Payable
Building
Notes Payable
Machinery & Equipment
Contingent Liabilities
Furniture & Fixtures
Loans
Total Fixed Assets
Total long-term liabilities

Intangibles
Owners Equity
Market Research
Common Stock
Goodwill
Retained Earnings
Patents
Capital Reserve
Research & Development
Other intangibles
Total Intangibles
Total Owners Equity

TOTAL ASSETS
LIABILITIES + EQUITY
34
Amounts
4.6.2 The Income Statement

The income statement is a summary of the financial performance of the business
over time (monthly, quarterly, or annually). It reflects the past performance
of the business and is the report most often used by owners to track how
their business is performing. The net income (loss) is derived by subtracting
expenses from revenues.
Table 5 Example of an Income Statement

Income Statement for the year ended
Revenue Amount

Sales Revenue
Interest Income
Other Earned Revenues

Total Revenue

Expenditures
Cost of goods sold
Selling, general and administration expenses
Research and Development expenses
Interest Expenses
Other Expenses

Total Expenses

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

Net Income
4.6.3 The Cash Flow Statement

Because the income statement does not provide the cash position of the
business, the cash flow statement is usually prepared to report inflows and
outflows of cash. It describes the causes of changes in cash reported on the
balance sheet from the end of last period to the end of the current period.
Reported revenues do not always equal cash collected from sales because
some sales may be on credit. Also, expenses reported may not be equal to the
cash paid out.
35
Table 6 Example of a Cash Flow Statement

Statement of Cash Flow for the year ended

Cash flows from operating activities
Cash collected from customers
- Cash paid to suppliers and employees
- Cash paid for interests
- Cash paid for taxes

Net cash flows from operating activities

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

Net cash flows from investing activities

Cash flows from financing activities
Cash received from a bank loan
- Cash paid for dividends
Net cash flows from financing activities

Net increase (decrease) in cash during the period
Cash at the beginning of the period
Cash at the end of the period
Amount
4.7 Conclusion
Sound financial management skills and good recordkeeping of accounting information
ultimately help businesses make more informed and better decisions in terms of
investments, production, profit sharing and allocation, personnel, expansion, etc.
The three financial management elements financial planning, control, and decision
making can be achieved only with sound recordkeeping and use of accounting data
and information.

36
MODULE FIVE
CORPORATE GOVERNANCE
AND COMPLIANCE
37
Course Outline
(i) Introduction
To help entrepreneurs understand the genesis and importance of corporate
governance in business entities (companies);
To explain to entrepreneurs the various stakeholders involved in companies
operations (internal and external) and their divergent interests;
To convey to entrepreneurs the separation of powers between and functions of
shareholders, Board of Directors members, and management;
To describe the corporate governance challenges facing SMEs and various
approaches to address them;
To underscore the importance of compliance with laws in doing business; and
To present the obligations and rights established by various laws.
Corporate governance and its importance in attracting capital;
The separation of powers and decision-making roles exclusively vested to
shareholders, directors, and management and the manner in which they are
exercised;
Ways to harmonize the conflicting interests of stakeholders for the better
functioning of the company;
Basic laws that businesses must observe;
The rights, obligations, and compliance requirements imposed by each law;
The pros and cons of legal compliance; and
The consequences of non-compliance such as penalties (monetary/ imprisonment).
(iv) Methodology
Entrepreneurs should understand the importance of corporate governance in
attracting capital;
38
Entrepreneurs should understand how the mandates for power and decision
making are divided in companies;
Entrepreneurs should understand the advantages of opening up family businesses
to other stakeholders;
Entrepreneurs should understand the benefits of complying with the laws and the
consequences of non-compliance;
Entrepreneurs should understand the importance of registering their businesses,
inventions, trademarks, and copy rights; and
Entrepreneurs should understand the legal interests protected by each law.
39
Module Five
5.0 CORPORATE GOVERNANCE AND COMPLIANCE
5.1 Introduction
Companies are legal persons with special governance structures set up to serve and meet
the interests and expectations of various stakeholders. Stakeholders can be grouped
into two broad categories internal and external stakeholders. Internal stakeholders
include directors, employees, management, and shareholders. External stakeholders
include customers, suppliers, contractors, environmentalists, governments, and other
parties indirectly associated with the company. All of these stakeholders have different
interests which must be reconciled for the prosperity and continuity of the company.
Reconciliation can be achieved by the existence of corporate governance.
5.2 Definition of Corporate Governance
Corporate governance refers to the systems by which corporations are directed,
controlled, and held to account. Corporate governance involves systems that assist
companies in improving their management, their board structures, and their procedures
to make them more accountable to shareholders and other stakeholders. Issues such as
financial reporting, transparency and auditing, remuneration of directors, separation
of powers, and minority shareholders rights are included in these systems.
Corporate governance covers the full suite of relationships between a companys
management, its board, and its stakeholders including, but not exclusively, shareholders.
In the broader sense, a company is not responsible to shareholders alone. It is also
responsible to other stakeholders such as society, its employees, the government, and
the public at large. Corporate governance involves the following three organs:
5.2.1 Shareholders
Decide on changes in Memorandum and Articles of Association of the
company;
Decide on the capital structure of the company;
Approve dividends, annual financial statements, and the annual report;
Appoint auditors and directors of the company; and
Approve directors remunerations.
40
Cadbury (1992) defines corporate governance as the system by which companies are directed and controlled; see Sir
Adrian Cadbury Report on UK corporate failures.
5.2.2 Directors
Approve the business plan;
Hire executive management;
Are responsible for preparation of financial statements and the annual
report; and
Recommend the amount of dividend to be paid.
5.2.3 Management
Implements the business plan;
Oversees day-to-day activities of the company; and
Hires low-level cadre management.
5.3 Why is Corporate Governance Needed?
The need for corporate governance has evolved in the recent past due to the following
factors:
Corporations are required (expected) to comply with legal requirements;
Corporations are required to be accountable to all stakeholders with whom they
interact;
Corporations are expected to be sustainable institutions, viable and competitive in
society, and able to survive the demise of their founders;
Well-managed corporations are well-positioned and able to attract finance from
different investors from within the country and from outside, thus increasing
investment, growth, and employment;
As corporations interact with society daily, they must account for the manner in
which they serve society at large, despite their profit motives; and
The expectations of shareholders for transparency, protection of their rights, fair
and equitable treatment, and maximization of their returns must be met.
5.4 Drivers of Corporate Governance
The importance of corporate governance worldwide has increased due to:
Globalisation and economic integration throughout the world;
Increased pressure to conserve the environment;
Increased separation of the ownership and control of corporations;
More competitive global markets, which force corporations to look for more
optimal means of enhancing shareholders value so as to attract investment funds
from both local and international sources; and
Evidence that good corporate governance structures can lead to higher economic
payoff.
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5.5 Principles of Corporate Governance

According to the Organisation for Economic Co-operation and Development (OECD),
the key principles of corporate governance deal with:
The rights of shareholders;
The equitable treatment of shareholders;
The role of stakeholders in corporate governance;
Disclosure and transparency; and
The responsibilities of the Board of Directors.
5.6 Corporate Governance: The Board of Directors
The Board of Directors should fulfil certain key functions, including:
Reviewing and guiding corporate strategy, major plans of action, risk policy,
annual budgets, and the business plan; setting performance objectives; monitoring
implementation and corporate performance; and overseeing major capital
expenditures, acquisitions, and divestitures;
Selecting, compensating, monitoring, and, when necessary, replacing key executives
and overseeing succession planning;
Reviewing key executive and board remunerations and ensuring a formal and
transparent board nomination process;
Monitoring and managing potential conflicts of interest between management,
board members, and shareholders, including misuse of corporate assets and abuse
in related party transactions;
Ensuring the integrity of the corporations accounting and financial reporting
systems, including the independent audit, and ensuring that appropriate systems
of control are in place, in particular, systems for monitoring risk, financial control,
and compliance with the law;
Monitoring the effectiveness of the governance practices under which it operates
and making changes as needed;
Overseeing the process of disclosure and communications; and
Exercising objective judgment on corporate affairs independent, in particular, of
management.
5.6.1 Appointment of the Board of Directors
Appointment of directors is a crucial exercise that should be done with care
to optimize the functions of the board. The best practices demand that there
should be formal and transparent appointment of directors to the board and all
persons appointed or offering themselves for appointment as directors should
disclose any potential area of conflict that may undermine their position or
service as a director.
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To have an effective board, it is important to select appropriate members who will

carry the company forward to the level desired by stakeholders. It is important
to determine in advance the skills needed of members. The use of a nomination
committee is recommended to interview applicants and recommend the best
candidates.
5.6.2 Board Composition
The right number of Board of Directors members depends on the company.
An appropriate mix of age, gender, ethnicity, geographic spread, experience,
and team roles should be maintained. The board should also have sufficient
and diverse skills relevant to the industry, leadership, governance, technology,
communication, and marketing to lead the company into value creation. Board
members should have good common sense, business acumen, integrity, and
the ability and willingness to learn, with additional special competencies as
relevant.
There must also be a balance of power through the use of executive, nonexecutive, and independent directors. An executive director is a director who is
also a member of the management (executive) team. A non-executive director
is not a member of the management team. An independent (outside) director
is a director who, other than serving on the board, has no direct connections
with the company. For a Board of Directors to be effective, it should have both
executive and non-executive members (numbers will differ from one company
to another). There are usually more non-executive members than executive
members to ensure independence in the boards decision-making process.
5.6.3 Remunerations
Remunerations of board members are usually set at prescribed rates and paid
either annually, hourly, or per meeting. Remunerations should be sufficient to
attract outstanding people. Remunerations should also take into consideration
the legal responsibilities of directors and the workload required to direct the
company. Remunerations are recommended to the board by a Remuneration
Committee and approved by shareholders in the Annual General Meeting.
5.6.4 Making Boards More Effective
At the beginning of each year, the board should collectively determine and
agree on its role and functions in the context of the companys needs, strategic
thrust, competitiveness, and viability. The board should also determine, agree
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upon, and articulate the activities necessary for its operations and prioritise the
timing of such activities. The board should ensure that the identified activities
are consistent with statutory requirements and its calendar of meetings.
5.6.5 Committees of the Board
The board should establish appropriate committees to facilitate the companys
operations. Examples include audit, remunerations, and risk management
committees.
5.6.6 Board Evaluation
Evaluation of the board should be seen as a positive process, an instrument for
the improvement of the boards functioning, and a healthy process meant to
ensure effectiveness and achievement of corporate objectives.
5.7 Corporate Governance: Corporate Social Responsibility
There is no universally accepted definition of Corporate Social Responsibility (CSR)
in place at the moment. The U.S.-based network Business for Social Responsibility
suggests that CSR implies operating in a manner that meets or exceeds the ethical, legal,
commercial and public expectations that society has of business. The Commonwealth
Association for Corporate Governance suggests that CSR is the distinctive contribution
a company makes to the advancement of a society or alleviation of social concerns,
usually through some form of investment in partnership with the community, which
may include the government.
On a global scale, corporations are increasingly taking into consideration the need
to contribute to the society in which they operate, recognizing the role other
stakeholders play in the very existence of companies. Companies spend some of their
profits contributing to the social needs of the areas in which they operate. Sometimes
called Corporate Social Investment, this can include supporting education, health care,
water, and social activities. CSR generally encompasses the areas of: accountability;
community economic development and involvement; the environment; and ethics and
human rights.
5.8 Corporate Governance: Strategic Management for Value Creation
The corporations strategy is a combination of competitive moves and approaches
to compete successfully, please customers, and achieve organizational objectives.
A businesss sole purpose is to create value and wealth for its owners (primarily),
shareholders, and stakeholders at large (secondarily). Corporate executives can create
44
value for stakeholders by selecting the most appropriate field in which to operate and
by utilizing their assets in the most effective way. The strategic management process
involves a clear definition and implementation of the following:
The mission, or the overriding purpose of the firm. Whatever the firm states
to the public implies maximizing value primarily to the shareholders and other
stakeholders;
The objectives of the firm, or targets the firm establishes for the attainment of its
mission. Objectives are selected for their impact in achieving value creation and
are the means of evaluating progress towards fulfilment of the corporate mission;
The strategy, or the selection of markets in which to operate and how to compete.
This can be done by pursuing a cost advantage or product differentiation to remain
competitive in the market; and
The tactics, or the implementation of the best (available) operating policies to
secure the chosen competitive advantage.
5.9 A Case for Corporate Governance in SMEs
Good corporate governance by SMEs will facilitate a clear separation between owners
and managers of SMEs. It will also influence transparency, separation of personal and
business activities, and better governance of SMEs, hence contributing to wealth
creation. Proper procedures and good governance will enhance SMEs ability to access
funding through capital markets, as good governance is a prerequisite for entry into
capital markets.
5.10 Corporate Governance: Transforming Family Businesses into Corporations
Family-owned firms have great potential for transforming the economy if they open
up to other stakeholders. Opening up companies to other stakeholders will facilitate
the entry of investors who seek to maximize returns, and in the process will facilitate
wealth creation for all stakeholders. Successful multinational corporations (MNC)
such as SONY, Michelin, Microsoft, TATA, and others started as family businesses.
Opening them up brought in new skills and talents, which revolutionized them to
become todays MNC.
5.10.1 Position of Major Shareholders (and/or Founders)
Founder shareholders in SMEs consider themselves owners, and hence
they have an upper hand in major decisions of the company. Instituting
corporate governance will mean delegating some of the roles performed by
major shareholders to the Board of Directors and attendees of the General
45
Meeting. Such decisions include appointment of senior staff, alteration of the

Memorandum and Articles of Association (MEMARTS), and dividend decisions.
These members should realize that the moment the company goes public, they
will no longer have the final say in many decisions. SMEs need to appreciate
that establishing a formal organizational structure will result in the rest of
the members involvement, as represented by the Board of Directors, in the
decision-making process of the company.
5.10.2 Outside Investors Expectations
Investors wishing to participate in an SMEs ownership will want to see changes
in the ownership structure that conform to the best corporate governance
practices. These changes include the following:
A significant reduction of family ownership by inviting outside investors
though a public offer of securities;
Greater involvement of the non-executive directors in the management of
the SME;
Establishment of committees for good corporate governance;
Disclosure of financial statements in compliance with the law this includes
publication of financial statements in the press; and
Listing on the stock exchange to facilitate a fair and transparent price
discovery mechanism.
5.11 The Legal Compliance of SMEs
Simply put, laws are a set of rules that regulate relations between people and groups of
people in a society. General compliance with the law is thus a necessary pre-condition
for orderly existence in any society. In business, it is perhaps even more necessary to
comply with relevant laws. Such compliance ensures that the business legally exists,
that it enters into relationships that are legally recognized and enforceable, and that
the business is generally run in accordance with the law. Compliance with the law
ensures an orderly manner of doing business and that no act or omission runs the risk
of being rendered invalid due to a legal problem.
The following is a selection of some of the laws currently relevant in the day-to-day
management of SMEs in Tanzania:
5.11.1 Companies Act (2002)
Upon registration, a company acquires an independent legal existence regulated
46
by the law, which imposes certain requirements with which the company and
its officials must comply. These include:

The filing of annual returns, which consist of all the relevant particulars
of the company, including information on shareholding, directorship,
debentures, and other charges;
The filing of audited accounts;
The filing of any changes in the particulars of the company, such as change
in the name of the company, its aims and objectives, the Board of Directors,
the nominal share capital, the classes of shares, address of registered office,
debentures and other charges in relation to the company, appointment
of receivers, managers, and administrative officers, and winding up
proceedings; and
Payment of various taxes to the central and local government.
company (and its officers) that does not comply with the above and other
requirements may be penalized by way of payment of monetary penalties,
and sometimes even by criminal action. Compliance will give credibility to
the company, make it more creditworthy when such status is at issue, and
will generally render the company in good standing both in business and
social circles.
5.11.2 Contract Law

Companies are required to comply with the terms and conditions of the
contracts to which they are a party. If the legal requirements are not complied
with, the contract becomes either void or voidable, depending on the legal
consequences of the specific failure. It is thus important to ensure that any
agreement entered is legally enforceable by complying with all requirements
of the law. There may be a need to consult a lawyer beforehand to ensure that
the business acts within the law.
5.11.3 Labour Law
Any sizeable business is conducted with the aid of persons who are not owners
of the business but who are instead workers paid wages for their services.
Labour law governs the relations between the business (as employer) and its
workers (as employees). It also creates a procedure for dealing with labour
disputes and their settlement, and matters of pensions and other benefits for
employees. A positive labour relation is an important aspect in an enterprise of
any type, SMEs being no exception
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5.11.4 Licencing Law

Doing business entails compliance with licensing laws. Depending on the nature
of the business, the law sets down particular requirements. These are primarily
under the Business Licensing Act, Cap 208. The law prohibits the conduct of
business without a licence. Every license issued is for a particular business and
at a particular place, unless there is a principal place of business, whereupon
a subsidiary licence will be issued, or where no fee is prescribed in relation to
the business. Licensing authorities have the power to close the premises of a
business operating without a licence, and in doing so, an authority may request
the assistance of a police officer or other authorised agent.
5.11.5 Land Law
Land law (otherwise known as the law of real property) is one of the most
important branches of law in any country. The main land legislation in Tanzania
is the Land Act, Cap 113. It is the basic law in relation to land in Tanzania other
than village land, and it governs the management of land and the settlement of
land disputes and related matters. The other main legislation, the Village Land
Act, Cap 114, deals with the management and administration of land in villages.
Every enterprise business has a location. For that reason, it must either own
its land or property or rent it or part of it from an owner. Thus, the business
enterprise will either be a landlord or a tenant. Land law determines this
relationship. To raise capital, a business may need some form of security to act
as collateral. Mortgages in land are the most common form of security. Land law
provides for the creation, registration, and enforcement of such arrangements.
5.11.6 Intellectual Property Law
Under the Patents Registration Act, Cap 217, a patents register of patentable
inventions is maintained at the office of the Registrar of Patents. An invention
is a solution to a specific problem in the field of technology and may relate
to a product or process. An invention is patentable if it is new, involves an
inventive step, and is industrially applicable. The right to a patent belongs to
the inventor. The Copyrights and Neighbouring Rights Act, Cap 218 is another
relevant branch of the law on intellectual property.
Patents law provides protection for inventors so that their inventions can be
used commercially. An enterprise may only use a patent upon agreement with
its owner. The inventor may agree to let a manufacturer use his patents and
48
may even assign his rights under it to the enterprise. Trade and service marks
are another type of intellectual property. The law gives entrepreneurs the
opportunity to register their trade and service marks to protect their markets
and reputations with respect to the quality of their products. A prudent
manufacturer should make full use of this law by registering his trade and
service marks. At the same time, it is pertinent to avoid using other peoples
marks, as this may result in disputes and litigation with potentially adverse
consequences.
5.11.7 Insurance Law
In business, it is advisable to have a form of protection against risk. Insurance
laws provide the mechanism to such protection by setting out rules governing
insurance contracts between insurers and the insured. Fire insurance, theft and
burglary insurance, motor vehicle insurance, and workmens compensation are
among the risks relevant to businesses that can be covered.
5.11.8 Law of Succession
The law of succession refers to transmission of the rights and obligations of a
deceased person to his heirs. Succession also signifies the estate and debts left
by a person after his death, whether the value of his property exceeds his debts
or vice versa or whether he has left only debts without property. Succession
not only includes the rights and obligations of the deceased as they exist at the
time of his death, but all that accrues after opening of the succession. Finally,
succession signifies the right by which an heir can take possession of the estate
of the deceased, such as it may be. The law has thus devised a set of rules
providing for substantive rights to cater to the rights of successors of estates.
Some business enterprises die with their owners. Companies, on the other hand,
survive the death of their shareholders. While the assets of sole proprietorships
or partnerships are inheritable, those of companies are not; only their shares
can be inherited.
5.12 Conclusion
The framework for good governance exists in Tanzania in all aspects. The legal and
operating systems to foster good governance have been established and are working.
The burden is on SMEs to improve their governance structures to tap into the huge,
unexploited capital market potential in Tanzania. An SME should be able to survive the
demise of its founders. This can only be achieved with the existence of good corporate
49
governance, effective management information systems, a corporate management

structure, and limited intervention in corporate operations by family members.
Employment of corporate executives will help eliminate family intervention and
enhance good governance. Family businesses that adopt the highest standards of
corporate governance, modern management and technology, and performancefocused strategies will survive globalization and will attract international capital
and contribute to wealth creation. This module shed some light on the legal regimes
governing SMEs to give entrepreneurs an opportunity to weigh and consider the
advantages and disadvantages of compliance and non-compliance and thus to
inculcate them with the right attitude towards legal compliance.
50
MODULE SIX
FINANCING OPTIONS FOR SMEs

51
Course Outline
(i) Introduction
To help entrepreneurs understand different financing sources for SMEs and their
attendant characteristics;
To describe the costs associated with each source of capital;
To convey to entrepreneurs the factors normally considered by investors (including
venture capitalists); and
To help entrepreneurs understand the importance of gearing in any capital invested
(debt versus equity) and the consequences of poor gearing.
Sources, characteristics, costs, and access to capital financing;
Financial planning to secure additional working capital or capital expenditure; and
Ways for SMEs in Tanzania to access these sources of finance and to identify the
best sources of capital for wealth creation and distribution.
(iv) Methodology
Discussion of practical issues; and
Participants experiences/interactions.
Entrepreneurs should be able to determine which source of capital finance best fits
them according to the size and level of their business; and
Entrepreneurs should understand how to access finance through capital markets,
including knowing when to do so, how long it will take, who to involve, and
specifically what steps to take.
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Module Six
6.0 FINANCING OPTIONS FOR SMEs
6.1 Introduction
As a business moves beyond the start-up phase, the entrepreneurs focus has to
change. Identifying opportunities for growth and sustainability must become a priority
for managers/owners. It is important that they keep looking for ways to develop and
promote the businesss growth. Failure to do so will allow competitors to grow and
take the entitys market share, which could seriously weaken its position.
Sound financial planning is the foundation of any growth strategy. This process entails
establishing how much investment will be required and when and identifying possible
sources of funding. One of the major hurdles to business expansion faced by SMEs in
Tanzania, and indeed all over the world, is securing financing be it to fund additional
working capital or capital expenditure. The most common sources of finance available
to SMEs in Tanzania are examined next.
6.2 Different Sources of Finance Available to SMEs
6.2.1 Owners Personal Savings
In most cases, this is the first point of call whenever a business requires an
additional cash infusion. Owners funding may take the form of a loan or
an additional equity contribution from shareholders/directors. The main
distinction between the two is that it is expected that the loan will be repaid by
the business at a future date. Not only is this a cheaper source of funding (no
interest), but it is also an indication of personal commitment to the venture on
the part of entrepreneur(s). In practice, however, this option may be severely
limited, as the entrepreneur may have already invested a substantial portion of
personal resources in the business.
6.2.2 Bank Loans
Bank loans remain the most commonly used source of credit for most SMEs.
Bank borrowing has the following common features:
The borrower is expected to have a banking relationship with a lender;
There is a contractual repayment date;
There is payment of a specified rate of interest; and
The debt may be unsecured or secured on the assets of the business. In
the event of default, the lender has the right to sell these assets to redeem
the debt.
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Bank lending may be in the form of:

(i) Bank Overdraft
An overdraft simply allows a business to spend over the balance on its bank
current account. The facility is available for a specific time period, after which
it has to be repaid or renegotiated and rolled over. Technically, banks have the
right to call in an overdraft at any point in time. Generally, the rate of interest on
overdraft accounts is much higher than for equivalent sums borrowed on fixed
loans.
(ii) Trade Finance
This particular facility is common with agricultural exports and crop finance.
Banks facilitate trade finance through the use of collateral managers, who verify
that the money advanced is used to purchase the intended crops during the
harvest season when the prices are low and to subsequently sell them during the
off-season when prices are high.
Trade finance is also used for pre-financing of export commodities with confirmed
orders from reputable importers. The exporter is facilitated to purchase the
export crop and repay the bank once the importer has received and fully paid
for the commodity. The collateral management company manages the entire
transaction chain, ensuring that the borrower purchases the crop and exports it
and that the lending bank is paid from the export proceeds.
(iii) Term Loans
Banks tend to provide term debt only to solid, creditworthy companies. By
nature of their business, banks generally have not adequately supported SMEs
medium- to long-term capital needs due to several factors, including:
Stringent collateral requirements and high interest rates;
Lack of innovative and well-structured facilities to meet the unique demands
of some of SME activities, e.g., agriculture;
Overdependence on (short-term sources) customer deposits for lending by
commercial banks, which reduces their appetite for long-term lending; and
The view by some that Tanzania is still a relatively risky lending environment,
and one likely to intensify the risk of long term lending.
6.2.3 Governments SMEs Credit Guarantee Scheme
The objective of Tanzanias SMEs Credit Guarantee Scheme (SME-CGS) is to
54
facilitate access to credit by SMEs. The arrangement is in line with the National
Policy on SMEs Development, which is geared towards the promotion and
support of SMEs in Tanzania. Specifically, the SME-CGS aims at providing
credit guarantees to participating financial institutions relating to short- and
medium-term financing, as well as cooperating with various stakeholders in
promoting SMEs in the area of entrepreneurial skills.
6.2.4 Asset Leasing
Paying cash up front to purchase equipment can be a significant drain on
businesses working capital. Leasing an asset, however, gives businesses access
to assets without having to pay for them up front. Asset leasing is an agreement
used to finance the use of equipment or assets. A financing company or bank
(lessor) makes an investment in equipment for the benefit of its customer
(lessee) with expectations to recover the full cost of its investment in the
asset through regular rental payments. Payments are calculated in a manner
that enables the finance company to recover the full cost of its investment in
the asset, plus a margin of profit or interest.
Leasing offers various advantages over other means of financing. The most
important ones suitable for SMEs are:
No collateral requirements collateral/security is seldom required in leasing
because the leased asset serves as security for the finance advanced. The
lessor retains legal ownership over the asset, and in the event of default,
the lessor can repossess the equipment;
Leasing allows technological advancement and therefore offers a way to
modernize production and develop small businesses; and
Low transaction cost a lease can be concluded more quickly and simply
than a bank loan. The lessor is usually only interested in determining the
ability of the leased goods to generate sufficient cash flow to pay monthly
rentals throughout the lease term.
6.2.5 Venture Capital Funds
Venture capital is another source of finance for SMEs facing expansion funding
constraints. Venture capital funds primarily collaborate with entrepreneurs
by providing high-risk equity financing for business opportunities that can be
profitably harvested eventually. Venture capital has been described as the
maternity ward and incubation center for wealth creation. Unlike banks,
55
venture capitalists are not passive providers of capital but active coaches for
the entrepreneurs with whom they partner. Venture capital firms seek to add
value in several ways, by:
Identifying and evaluating business opportunities, including management,
entry, or growth strategies;
Monitoring and coaching company management;
Providing technical and strategic input;
Attracting additional capital, directors, management, suppliers, and other
key stakeholders and resources;
Participating actively in managing companies; and
Assisting in the development of new products or services.
Venture capital firms usually seek a high return on their investments to
compensate for the various associated risks. Factors considered requirements
by venture capitalists before they invest in any venture include:

Significant growth potential of the business;

Sustainability on a long-term basis;
Good and well-researched business plans;
Strong management teams;
Length of investment to recoup profit; and
Existence of an exit mechanism (e.g., an Initial Public Offer (IPO), merger, or
acquisition).
To the venture capitalist, the success of an investment is contingent upon

being able to profitably divest from (or harvest) the investment at a future date.
Possible exit mechanisms include sale of the shares to the entrepreneur, an
over-the-counter sale to a third party, an IPO, and liquidation. The availability
of a proper, clear exit route, such as an IPO through the DSE, therefore becomes
an added attraction for venture capital financing.
6.2.6 Capital Markets
The capital market is the medium through which a company can obtain its
supply of long-term investment funds. The capital market is an economic
market, not a physical market, as it is fixed neither in time nor place. It merely
represents the aggregate activity of investors (all organizations and individuals
with surplus funds to invest) and issuers (all with available use for those funds
56
and the ability to pay the necessary rate of return to investors).

A company can raise fresh capital from the market, provided it meets the
requirements set out by the CMSA, by offering its shares to the general public.
This is usually done through an IPO, whereby the issuer company, with the
assistance of an investment advisor, compiles a prospectus; the prospectus
gives full details of the shares to be offered, background information about
the company and its business prospects, and what it intends to do with the
funds to be raised. In exchange for the funds they subscribe to the company,
investors receive a title of part ownership in the issuing company in form of a
share certificate. These shares are then listed and traded on the DSE.
To facilitate increased access to the capital market by SMEs, the DSE launched
a second market segment specifically designed to cater to and meet SMEs
capital financing needs. This segment is known as the Enterprise Growth
Market (EGM). The DSEs EGM is discussed more in Module 7. It is hoped that
the EGM will become a nursing ground for SMEs, which can eventually move
on to the main segment of the DSE. In the context of a prospective issuer, the
perceived benefits of the EGM are that:
Companies that cannot meet the listing criteria of the main segment of the
DSE will be able to list on the second segment (the EGM);
Companies will have a less expensive way of raising capital than obtaining
term finance from banks;
Investors will have a greater choice of securities in which to invest;
It fits nicely with the governments objectives of supporting SMEs; stronger
SMEs will contribute to employment creation and, in the longer term, will
generate increased tax revenues for the government; and
The EGM will serve as a logical exit route for venture capital investments in
SMEs.
6.3 Capital Structure and Financial Gearing
Gearing, or leverage, is a term used to describe the relationship between the debt
capital and equity capital applied to finance the operations of a business. Gearing is
sometimes expressed as a ratio of debt:equity (e.g., 40:60), or alternatively as debt as
a percentage of the total funding (e.g., 40/ 40+60 = 40%). Gearing is said to be high
when there is a large proportion of debt in the capital structure of a company and
low when the equity interest comprises a large proportion of the capital. The more
57
highly geared a company becomes, therefore, the greater the chance that a poor years
trading performance will result in a default on its debt service obligations, with dire
consequences.
Businesses are usually advised to keep a low gearing ratio (low in debts) because debts
involve a contractual commitment on the part of a borrower to pay interest and repay
capital on the due date. Nonpayment of debt interest is a serious matter in that the
majority of commercial loan agreements give lenders the right to use legal procedures
to recover the debt. On the other hand, if a company fails to pay a dividend on equity,
all that is likely to happen is that its share price will decline as disgruntled investors
sell their shares. However, this is not likely to threaten the immediate survival of the
business.
6.4 Conclusion
Given the above scenario, it is important that SMEs strive to ensure that a significant
proportion of the entitys finance is provided by shareholders, who are the legal
owners of the business. This can be achieved through inviting venture capital equity
participation or through the capital market. Moreover, the existence of a sizeable fund
of permanent capital invested in the business will increase the confidence of lenders,
whereas overdependence on debt finance might not only be seen as sign of weakness,
but also as a potential threat to the future sustainability of the business.
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MODULE SEVEN
DSEs ENTERPRISE GROWTH

MARKET (EGM)
59
Course Outline
(i) Introduction
To help entrepreneurs understand the position and role of capital markets in the
financial system and the economy;
To convey to entrepreneurs the role the stock exchange plays in capital raising; and
To describe to entrepreneurs what it takes to go public and eventually obtain a
listing in the DSEs Enterprise Growth Market (EGM) segment.
The importance, role, and position of capital markets and financial systems in the
economy;
The functions and roles of a stock exchange in relation to capital raising; and
Basic requirements for raising capital through capital markets and listing at the
DSE.
(iv) Methodology
Entrepreneurs should understand the importance of raising capital through capital
markets;
Entrepreneurs should know what their business should do to access capital through
capital markets;
Entrepreneurs should know how to undertake the process for going public and
getting listed on the DSE; and
Entrepreneurs should understand the incentives available to issuers as well as
investors in capital markets.
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Module Seven
7.0 DSEs ENTERPRISE GROWTH MARKET
7.1 Introduction
It is universally accepted that no modern economy can flourish without the backing
of a strong, efficient financial system. Such a system plays the role of intermediation
by facilitating the movement of funds from savers (surplus spending units) to users
(deficit spending units), thereby increasing the efficiency of economic resource
allocation and deployment.
In an effort to modernize and develop Tanzanias capital markets, the Capital Markets
and Securities Authority (CMSA) carried out a study in 2006 on the appropriate
market structure for Tanzania. The study identified the need to change the existing
structure to align it with the then existing economic functions and activities of the
country (dominated by SMEs) as well as to facilitate the implementation of national
policies aimed at empowering Tanzanians.
Before the study, the DSE had one market segment that served established (i.e.,
medium to large) companies in the country the Main Investment Market Segment
(MIMS). The study recommended creation of a second segment the Enterprise
Growth Market (EGM) to help SMEs mobilize funds to meet their capital needs
through the DSE.
7.2 Functions of a Stock Exchange
7.2.1
Facilitates Raising of Capital for Enterprises

A stock exchange facilitates companies to sell new shares/bonds at better
prices (than prices randomly offered by buyers in informal and unorganized
markets), which consequently lowers the cost of capital to such companies and
improves their chances of increasing operating profits.
7.2.2 Provides a Market for Listed Securities

It enables those wishing to join or leave listed companies to do so. A stock
exchange therefore provides liquidity by way of providing a continuous market
for securities, whereby securities are exchanged for cash.
7.2.3 Facilitates Price Discovery
A stock exchanges pricing mechanism ensures that buyers and sellers can do
so at a price determined by demand and supply forces. Neither the exchange
61
nor brokers determine the prices of securities traded on the stock exchange.
7.2.4 Facilitates Transparency
Disclosure requirements put in place by the DSE require listed companies to
promptly disclose all price-sensitive information so that investors may make
informed decisions. This is achieved at two levels: (i) at the initial offering
period, when companies have to meet listing requirements relating to offering
documents; and (ii) through continuous listing obligations. In this context, the
DSE becomes an information clearing point between listed companies and
investors (an information hub).
7.2.5
Facilitates Privatization and Wider Ownership of Resources

The DSE has facilitated and continues to facilitate the privatization of parastatals
hitherto under the control of the government whose shares have been sold by
the government through the DSE.
7.2.6 Creates Wealth Via Investments in Listed Securities

Shares listed on the DSE have performed very well, with rates of return above
the inflation rate, when compared with rates earned on bank deposits. Shares
are not passive stores of value like bank deposits. While shares do increase in
value over time if/when their prices go up, bank deposits do not increase in size
during the lock-in period.
7.3 Benefits of the EGM
7.3.1 Benefits to Issuers
The EGM helps companies that cannot access capital markets through
MIMS to do so fairly and conveniently;
Enterprises can obtain needed capital for expansion;
The financing options available to companies are expanded;
Enterprises wishing to raise capital after being listed on the EGM know the
price at which new shares will be issued;
The EGM has a built-in system that assists potential listing companies with
planning and managing the company from the time the idea of running the
company is conceived to its actualization; and
Valuation of shares is simplified, as there is a price discovery of these
shares.
7.3.2 Benefits to Investors
62
7.3.3
Investors have a wider choice of companies in which to invest their funds;

Investors in EGM companies are able to unlock their investment values
when market prices go up; and
Investors are in a position to use EGM company shares as collateral against
bank loans, as the worth of such shares is known.
Benefits to the Economy

The EGM facilitates more transparency and accountability to listed
companies and enhances the accountability of corporate leaders of the
companies listed on EGM, which in turn fosters stability and growth;
The EGM facilitates formalization of the informal business sector, as upon
listing, these companies become formally recognized in the financial system
and are consequently able to access funding through capital markets;
The EGM enables more efficient tax collection, as EGM-listed companies
business activities are usually immediately recognized and formalized,
such that these companies can be easily identified for the purpose of tax
collection; and
More employment is created as a result of expanded operations; as EGMlisted companies access capital through capital markets and expand their
operations, they will increase employment both directly and indirectly.
7.4 EGM: Fiscal Incentives

The government has deliberately provided several incentives to encourage active
participation in capital markets by issuers and investors.
7.4.1
Incentives for Issuers

Reduced corporate tax from 30% to 25% for a period of three years where
the issuer has issued at least 35% of the issued shares held by the public.
The reduced rate is applicable for five years, starting from the listing date;
and
Tax deductibility of all IPO costs for the purposes of income tax
determination. All IPO costs are accepted by the Tanzania Revenue
Authority (TRA) as acceptable expenses used in the generation of income
and profits, and therefore are taken into consideration when determining
profit for tax purposes.
7.4.2 Incentives for Investors

Zero capital gain tax, as opposed to 10% for unlisted companies;
63
Zero stamp duty on transactions executed at the DSE, compared to 6% for

unlisted companies;
Withholding tax of 5% on dividend income, as opposed to 10% for unlisted
companies;
Zero withholding tax on interest income from listed bonds whose maturities
are three years and above;
Exemption of withholding tax on income accruing to fidelity funds
maintained by the DSE for investor protection; and
Tax exemption for income received by Collective Investment Scheme (CIS)
investors.
7.5 Eligibility Conditions for the EGM

Table 7 identifies the eligibility conditions for companies applying to issue and list
shares on the EGM:
Table 7: Eligibility Conditions for Listing on the EGM
64
S/NO
CRITERIA
ENTERPRISE GROWTH MARKET SEGMENT
Track record of existence
None. But if the applicant has no track record, has to
show that funds are required to support a project which
has been fully researched with indicated costs.
Profitability Track record
None
Issued and paid-up capital
200 million
Incorporation Status
Issuers must be incorporated in Tanzania as public
companies or else where the companies law is in
conformity with the law of Tanzania (for cross-listing
companies).
The company shall have at least 50% of its net assets
Net Tangible Assets
situated within Tanzania.
Issuer Type
Growth companies of all sizes.
Method of offering new
Public offering, underwriting, private placement or
issue of shares
combination of all.
Business Operations
Detailed profile of planned operations including the
following: 5 years business plan and independent
technical feasibility report for companies with less
than 12 months of operating history.
Public shareholding spread
At least 20% of its shares must be held by public
10
Minimum number of
At least 100 shareholders
shareholders upon listing
S/NO
CRITERIA
11
Period moratorium

If the Issuer has less than three years track record,
promoters to be locked-in for up to 3 years.
12
Utilization process of
Disclose the estimated amount of the proceeds from
proceeds
the offer (net of the expenses of the offer) broken
down into each principal intended use. If the
anticipated proceeds will not be sufficient to fund all
of the intended uses, disclose the amount and sources
of other funds needed. Where specific uses are not
known for any portion of the proceeds, disclose the
general uses for which the proceeds are proposed to
be applied. State the minium amount which, in the
reasonable opinion of the directors of the relevant
corporation, must be raised by the offer.
13
Nominated Advisors
Must have a Nominated Advisor at all time of listing.
14.
Directors and Management
Suitable senior management with relevant experience
of one year prior to listing.
15.
Must be IFRS compliant and must have been audited by
Financial Statements
authorized auditor.
16.
Auditors
Registered by NBAA
17.
Same Management
No need. Emphasis should be on competence of the
Management team.
18.
Issuers must have audit Committee as per CMSA
Audit Committees
guidelines on Corporate Governance
19.
Directors of the Issuer to give opinion on adequacy of
Working capital adequacy
working capital for at least 12 months.
20.
Certificate of comfort
Issuers to obtain comfort letters from institutions
from relevant regulators
regulating their operations.
21.
Articles and Memorandum
They must provide for public issuance of securities
of Association
as well as protection of minority shareholders,
transferability of shares, borrowing powers of directors,
corporate governance principles.
22.
At least one third of the board members must be non-
Composition of board of
Directors executive directors.
23.
Prospectus approved by
Prospectus to be approved by the Authority
a regulator
65
S/NO
CRITERIA
24.
Compliance to other
All applicants to undertake to comply with other
Corporate Governance
corporate governance principle as per CMSA guidelines
Issues
for corporate governance as improved from time to
time.
25.
Issuer to disclose clear dividend policy.
Clear dividend policy
26. Publication in the Press
Applicants to prepare Abridged Prospectuses.
7.6 Conclusion
This module introduced the EGM segment of the DSE to entrepreneurs. It showed
them the importance and benefits of mobilizing capital through the DSE and explained
the whole process of going public and eventually getting listed on the DSE. It should
be clearly stated here that this market calls for sophisticated investors who can assess
the market and make informed decisions about the companies in which they invest.
Those who cannot carry out the necessary assessment should consult investment
advisors before investing in EGM-listed companies.
66
MODULE EIGHT
LISTING REQUIREMENTS AND

CONTINUOUS LISTING OBLIGATIONS
67
Course Outline
(i) Introduction
To help entrepreneurs understand the functions and roles of the DSE in relation to
capital raising (issuing) and listing;
To convey to entrepreneurs the initial issuing and listing procedures and
requirements of the DSE; and
To enable entrepreneurs to understand the continuous listing procedures and
obligations of the DSEs EGM segment.
Functions of a stock exchange for and during issuing and listing;
The processes of raising capital (issuing) and listing using capital markets; and
Continuous listing obligations of the DSE.
(iv) Methodology
Participants interactions/experiences; and
Entrepreneurs should understand the importance of raising capital through capital
markets;
Entrepreneurs should understand the process and requirements of capital raising
(and listing) through a stock exchange;
Entrepreneurs should know the continuous listing obligations of listed companies
at the DSE; and
Entrepreneurs should know how to comply with the capital raising and listing
requirements of the DSE.
68
Module Eight
8.0 LISTING REQUIREMENTS AND CONTINUOUS LISTING OBLIGATIONS
8.1 Introduction
The DSE Listing Rules for the EGMs are less onerous compared to those for the Main
Market segment in order to enable small and start-up companies to raise capital
through the capital markets and list their shares at the Stock Exchange.
An issuer who has met the initial issuing and listing eligibility conditions must:
Appoint a team of consultants to prepare the company for public issue of securities
and the listing of these securities on the stock exchange;
Appoint a Nominated Advisor, who will nurture the company from the time the
idea of raising capital arises;
Retain a Nominated Advisor to advise the company throughout its listed life on
the EGM;
Submit to the CMSA and DSE an application for a Nominated Adviser for approval
by both institutions; and
Prepare a prospectus for the purpose of public offer and listing as required by
CMSA Prospectus Regulations. Approval of this prospectus will then allow the
issuer to start selling securities to the public.
8.2 Listing Requirements: The Nominated Advisor
8.2.1 Roles and Responsibilities
A Nominated Advisor acts as a consultant to companies that may have bright
business ideas but lack capital and management capacity. The Nominated
Advisor operates on the EGM because some companies listed there are new
ventures. The Advisor guides the company on all initial listing requirements,
preparation of the prospectus, and compliance with the continuous listing
requirements. Companies wishing to obtain a listing on the EGM will not
be permitted to list if they have not appointed a Nominated Advisor. The
appointment is mandatory for the listing to be approved.
8.2.2 Conditions for Appointment as a Nominated Advisor
The Nominated Advisor stays with a company for its entire listing life unless
the company is de-listed or graduates to the main market. Individuals and firms
wishing to be appointed as a Nominated Advisor must:
Be incorporated as a public company under the Companies Act;
Have enough professionals who are licensed by the CMSA;
69
Have adequate capital as prescribed by the CMSA; and

Have professional indemnity insurance.
8.3 Listing Requirements: The Initial Public Offering (IPO) Process

A private company intending to go public must:
(i) Make a presentation of the proposal to its Board of Directors: The IPO process
begins with management making a presentation to the Board of Directors,
complete with business plan and financial projections, proposing that the company
enter the public market.
(ii) Obtain approval of the proposal: If the board approves the proposal to go public,
the proposal should be forwarded to the companys General Meeting to secure
shareholders approval. Once approved at the General Meeting, the companys
books and records should be reviewed for the past five years and financial
statements restated, if necessary, to adhere to International Finance Reporting
Standards (IFRS) to be certified.
(iii) Select a team of advisors: The private company may already have one or more
members of the IPO team serving it on a regular basis (e.g., accounting firm,
auditing firm, law firm, and an investment bank/advisor). However, the company
may need to either review existing relationships or establish new ones that will
serve the company throughout the IPO process. Formalization of the relationship
with advisors through appointment letters and agreement on fees will follow
after appointments. After the IPO advisors are appointed, an IPO schedule or
timetable of events can be prepared.
8.4 DSE Listing Requirements
The rules lay down the procedure to be followed by applicants for listing. This
includes: obtaining approval from the CMSA, naming a Nominated Advisor; obtaining
sponsorship by a Licensed Dealing Member (LDM) of the exchange by submitting
an application in the prescribed form; and satisfying documentary requirements
(confirmation of being duly constituted as a public company from the legal advisor,
confirmation of compliance from sponsor, 10 copies of the prospectus, 10 copies of
audited accounts, 10 copies of applicants constitutive documents, details of existing
and intended distribution of ordinary shares, etc.).
8.5 Continuous Listing Obligations
The issuers continuing obligations are essential for maintaining an orderly market in
securities and ensuring that all users of the market have simultaneous access to the
70
same information. Continuing obligations of issuers cover the following:

General obligations of disclosure;

Disclosure of periodic financial information; and
Miscellaneous provisions.
Every issuer shall comply with the continuing listing obligations prescribed by the
CMSA and DSE rules. Every issuer must also retain a Nominated Advisor to advise the
company throughout its listed life on EGM.
An issuer shall, as soon as possible but not later than 24 hours, release an announcement
giving details of:

Circumstances or events that have or are likely to have a material effect on the
financial results, the financial position, or cash flow of the issuer and/or information
necessary to enable holders of the issuers listed securities and the public to make
informed decisions on the issuers performance and operations; and
New developments which impact the issuers operations, trading, and financial
performance or any information whatsoever considered by the issuer to be price
sensitive or that could lead to material movements in the prices of its listed
securities.
Lastly, an issuer shall submit to the DSE and the CMSA any material price-sensitive
information and shall publish a cautionary announcement as soon as possible after it is
in possession of such information, if at any time the necessary degree of confidentiality
of such information cannot be maintained, or if the issuer suspects that confidentiality
has or may have been breached.
8.6 Conclusion
This module illustrated to entrepreneurs the whole process of accessing long-term
capital through capital markets. It explained the process and key requirements for
any company that intends to float securities for public subscription. Furthermore, the
process and available alternatives through which long-term funds for investments are
raised were explained.
71
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THE DAR ES SALAAM STOCK EXCHANGE (DSE)

ENTERPRISE GROWTH MARKET (EGM):

The Financing Solution for SMEs

ABBREVIATIONS AND ACRONYMS .................................................................................................................

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

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

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

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

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

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

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

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

Types of Companies ........................................................................................................................

Diagram of Relationships within Companies ..............................................................................

Categories of SMEs in Tanzania ....................................................................................................

Key Features of Legal Business Entities in Tanzania .................................................................

Sample SWOT ...................................................................................................................................

Example of a Balance Sheet ..........................................................................................................

Example of an Income Statement ..................................................................................................

Example of a Cash Flow Statement ..............................................................................................

Eligibility Conditions for Listing on the EGM .............................................................................

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

Foreword by DSE Chairman on Enterprise

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

Abbreviations and Acronyms

Business Environment Strengthening for Tanzania

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

I THE DAR ES SALAAM STOCK

Purpose of the Module

To describe the importance of SMEs in Tanzanias economy;

To convey the importance of SMEs in the creation and distribution of wealth.

Key Issues to be Addressed by the Module

Constraints facing SMEs and various interventions to address them;

Government policies on SMEs;

Financing opportunities available in the capital market; and

Presentations by capital market experts;

Practical examples/case studies of actual situations;

Interactions with entrepreneurs to share their experiences; and

Discussion of practical issues.

Entrepreneurs should understand various policy initiatives related to SMEs and

Entrepreneurs should be aware of available opportunities and solutions to

Entrepreneurs should understand the available financing opportunities in the

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

Capital Investment in Machinery (TZS)

Above 5 million to 200 million

Above 200 million to 800 million

Above 800 million

1.1.3 Attributes of SMEs

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

contributes towards the reduction of economic disparities between urban and

Policy Framework for SMEs in Tanzania

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

A non-supportive business environment;

Financing Opportunities Available in the Capital Market

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

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

BUSINESS LEGAL STRUCTURES

(v) Expected Outcome(s)

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

Ownership: Who owns the business?

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

Figure 1: Types of Companies

Public Company Ltd.

Public Company Ltd.