How to Start a Small Business in Informal Settlements

How to Start a Small Business in Informal Settlements

Entrepreneurship and small businesses are not necessarily concepts that come to mind when thinking about informal settlements in South Africa. However, many entrepreneurial skills and business concepts are used in everyday life of informal settlements. Community members run shops and small trade businesses from their homes that require some knowledge of business operations, bookkeeping and entrepreneurial skills. There are many resources that fully outline the business start-up process in South Africa. In general, the start up is comprised of five major steps. These steps are: reasoning for starting the business, developing entrepreneurial skills, choosing a business model, developing a business plan and formally registering the business. The following sections explain each of these steps in detail.

Steps to starting a small business in informal settlements

What Are the Reasons for Starting a Small Business?

Establishing goals and reasons for starting a business is the first step in the start up process. Before any group of entrepreneurs decides to start a business, they must first decide on what they want to accomplish by creating this business. These reasons may be financial, social, political or sometimes personal. In the case of the Langrug informal settlement, there are many different contributors to the business our team aims to establish. This group includes the community, savings group members, sponsors and our project team. Each group that contributes to this business project will have different reasons for starting this business (Empire).

While the project team could not speak to the reasons the community, savings group members or our sponsors had for starting this business before our arrival, the team had created its own list of reasons why we wished to start this business. The first reason our team had for starting the business in the Langrug WaSH facility is to improve the sustainability of the WaSH station. Our team was hopeful that the implementation of this business would bring in revenue that will continue to support the operations and maintenance of the WaSH facility. Another reason the team had for starting this business is to increase job opportunities and increase the livelihood of the Langrug community.

Additionally, the team hoped to start this business to create job opportunities and increase the livelihood of the Langrug community. Creating more jobs in the community would create more opportunities for community members to generate income for their families. Also, this would allow the community members to generate more savings to purchase goods and for emergency use.

Characteristics of an Entrepreneur

An entrepreneur is defined as “a person who starts a business and is willing to risk loss in order to make money” (Merriam-Webester 2014). There are many key characteristics that make a person an entrepreneur. To begin, an entrepreneur should be willing to take risks. Starting a business involves many risks that include social risks and economic risks. An entrepreneur should understand the risks he/she is taking and be ready to deal with adverse outcomes. Secondly, an entrepreneur must be willing to reach outside of his/her comfort zone. Entrepreneurship requires reaching out to other companies, people in the community, and often times making tough decisions. An entrepreneur should be willing to put themselves in uncomfortable situations for the sake of his/her success. Additionally, an entrepreneur should have strong problem solving skills. Starting a business can be a very complex process and often times, especially in areas like informal settlements, problems arise. An entrepreneur should be flexible and be able to think quickly to resolve problems that he/she encounters. Lastly, an entrepreneur should be motivated and able to communicate well with others. Starting a business requires a tremendous amount of time and effort and it is unlikely that an entrepreneur will succeed in his/her business endeavors if he/she is not motivated. Also, business startups require a great deal of communication between company executives, suppliers, banks and many other groups. An entrepreneur should have the ability to communicate effectively with different groups of people to obtain or relay necessary information.

The characteristics of an entrepreneur were ideas that our project team kept in mind when working at the Langrug WaSH-UP centre. Our group would be important in providing entrepreneurial education, but the savings group members themselves would be the key entrepreneurs involved in the start up of this business. The most important concept is that all of these skills of an entrepreneur can be learned. While many of the savings group members had some of the skills required of an entrepreneur, they could learn the ones they were lacking either from our project team or through working with one another (Empire).

Decide on a Business Structure

Once the reasons for starting the business had been established and entrepreneurial skills had been developed, the next step in the start up process would be choosing the appropriate business model. In the United States as well as in South Africa, there are many different structures for a small business. These structures include private companies, cooperations, savings groups and more. Due to the complex nature of this project, our team needed to consider the combination of multiple models, rather than the use of one single model. There is currently an established savings group in the Langrug community, which we hoped would serve as the foundation for this business. However, business operations in informal settlements are not well developed and there are no clear guidelines as to what model would best fit the community. Our project team would later work to determine what aspects of small businesses, cooperations and social enterprises would create the most efficient model for this business.

Create a Business Plan

After choosing the appropriate business structure, the next step in the start up process is writing a business plan. A business plan is a formal statement of the goals of a business and how those goals will be achieved. This can be thought of as a “roadmap” of the business. A formal business plan helps entrepreneurs to go through the detailed processes of starting a business and plan out the day-to-day operations of the business. Additionally, business plans are common requirements of banks, investors and government agencies when applying for financial services.

Business plans are written according to a specific format. This format includes six major sections: an executive summary, business operations overview, marketing plan, company management, assets and infrastructure and financial analysis. The first section of the business plan, the executive summary, is a well-written overview of the business. This section will elaborate on what the purpose of the business is, what its operations will be, who it will benefit and why it will be successful. The second section, business operations overview, will give a more detailed explanation of the daily operations of the business, how the products will be sold and how the business will generate profits. The third section, marketing plan, discusses why the product(s) being sold will be successful, how the business will advertise and what competition exists in the market. The next section is company management which lays out the chain of command in the business and who will be in charge of what areas. The section about assets and infrastructure describes where the business will be, what the facilities will look like and what other services/facilities will be needed to support the business. The last section, and perhaps the most complex, is the financial analysis of the business. This section contains three subsections, which are the income statement, cash flow statement and balance sheet. The income statement explains the profits and losses the business will have and show the income and expenses for the first few months or first year of operation. The cash flow statement is used to show the actual profit gained by the business should it operate on a credit system. Lastly the balance sheet denotes a list of assets and liabilities at the end of each month.

Business plans are essential to acquiring funds when starting a business, and are often required by agencies that offer funding. It was important for the team to keep in mind the key sections of a business plan when beginning work in Langrug. The project team, sponsors and savings group members would have to work together within the first week to devise a business plan that could be used to apply for start-up funding (Empire).

Begin the Registration Process

Once all the preliminary steps have been taken, the business can then be registered through the formal registration process. The registration process for small business varies from country to country, however the process in South Africa is somewhat similar to the system in the United States. The first step in the registration process is registering the business at the Companies and Intellectual Property Commission (CIP), or in our case registering the business on the Municipality of Stellenbosch database. Next, a bank account should be opened for the company. In addition, the company would need to file tax clearance forms and potentially a contractor registration form (Group 2014). All of these files can be found online on the Municipality of Stellenbosch website.

Common Problems Faced When Starting a Business in South Africa

As with many new undertakings, there are many common problems that arise when starting a small business in South Africa. The first and most prominent problem faced by small business entrepreneurs is a lack of money. Small startups in South Africa are often undertaken by entrepreneurs with limited funds or with little access to private and government loans. Unfortunately, insufficient funding often leads to business failure. The entrepreneur should first have enough startup funding to initiate the business, and then he/she must also have a plan or existing funding to support the continuation of the business operations.

The second most common problem faced by small business entrepreneurs is the risk. When deciding to start a small business, entrepreneurs must take into account the risks they are takings. Often times these risks are financial, however these risks can also be social risks and personal risks. It is important that entrepreneurs weigh the risks of starting their businesses and whether or not the risks will outweigh the benefits. The third problem commonly faced by small business entrepreneurs is lack of business knowledge. Many business owners in informal settlements do not have formal training on business operations. Before starting a business, entrepreneurs should gain a solid background of business knowledge to increase their likelihood of success. Lastly, the fourth most common issue faced by small business owners is administrative work. Owning a business involves a great deal of bookkeeping and management skills.