S .6 ENT 1 NOTES

Explain the conditions neces s ary for employees to receive high

payments in an enterpris e The following are conditions neces s ary for employees to receive higher wages

- There s hould an increas e in the numbers of hours offered for work

- There s hould a decreas e/ low s upply of particular employees in an enterpris e

- There s hould be an increas e in profits earned by the enterpris e

- There s hould an increas e in productivity of workers

- There s hould an increas e in s kills acquired by workers

- There s hould a high minimum wage legis lation by the government

- There s hould an increas e in experience of workers

- There s hould a high cos t of living

- There s hould increas ed demand for pay ris e by trade unions

- There s hould high ris ks involved in the job

Under what s ituations may employees demand for better payments ?

The following are circums tances under which an entrepreneur may pay higher wages

for his / her employees

- When there an increas e in profits earned by the enterpris e

- Incas e there is an increas e in productivity of workers

- Incas e there is an increas e in s kills acquired by workers

- Incas e of high minimum wage legis lation by the government

- When there is an increas e in experience of workers

- Incas e of high cos t of living

- Incas e of increas ed demand for pay ris e by trade unions

- When there high ris ks involved in the job

- When there is an increas e in the number of hours offered for work

- Incas e there is a decreas e/ low s upply of particular employees in an enterpris e

BUS INES S TAXES / TAXATION

TAXATION

This refers to a legal compuls ory trans fer of money from the public to the government

as a s ource of revenue without corres ponding goods or s ervices rendered.

A tax is a compuls ory contribution charged on people by the public authority with no

reciprocal benefits (corres ponding goods or s ervices rendered). Or

A tax is a compuls ory charge or levy impos ed by the government or any other

competent authority on pers ons (individuals , corporate or other legal entities ) or on

bus ines s es in order to finance government activities .

COMMON TERS M US ED IN TAXATION

a. Tax rate. This is the general amount of tax that the government intends to charge

on each unit or value of the tax bas e.

b. Tax avoidance. This refers to a s ituation where the tax payer dodges to pay tax

impos ed on him or her by exploiting loop holes (weaknes s es ) in the tax s ys tem.

OR

Is a s ituation where a tax payer us es illegal means not to pay the tax impos ed on

him like a pers on avoiding buying a commodity on which a tax has been impos ed

c. Tax evas ion. Is the deliberate refus al of a tax payer to pay the tax as s es s ed or

impos ed on him. Like a pers on hiding at the time of collecting the tax.

Caus es of tax evas ion

- To retain all the earnings

- Un fair as s es s ments

- Low income levels

- Political s ubs tance

- Dis contentment about the s ervices provided by the government

- Inadequate information about advantages of paying taxes .

- Relaxity in the tax s ys tem

d. Tax bas e. This refers to the range of economic activities , or items on which taxes

are levied.

e. Tax capacity. This is the ability of a tax payer to pay the tax left without

negatively affecting the tax payer’s s tandards of living.

f. Tax burden. It refers to how a tax payer feels when the tax is impos ed on him or

her in form of money los s , or goods and s ervices fore gone.

g. Incidence of the tax. It refers to the final res ting place of a tax. That is , who

actually bears the money value of the tax.

h. Impact of a tax. This is the immediate pers on or a firm on which a tax is impos ed.

i. Tax liability. This refers to the amount of money a tax payer is required to pay

with in a given period of time.

PRINCIPLES / CANONS OF GOOD TAXATION/ RULES

According to Adam S mith, the canons of taxation are the criteria by which a tax

s ys tem s hould be judged. Thes e are rules that provide guidelines to be followed

when des igning the s ys tem of taxation. Thes e include the following;

REVIS ION QUES TIONS

Explain the principles or canons of taxation in an economy

What are the qualities of good taxation in an economy?

1. Principle of convenience. This rule s tates that, the as s es s ed tax s hould be

collected at ideal times convenient for the tax payer to pay the tax in res pect

to time, s eas on or availability of income for example at harves ting periods or

end of the month for civil s ervants . And the method of how to pay the tax s

hould be well known by the tax payer.

2. The principle of s implicity. The nature of tax, method of as s es s ment and tax

collection s hould be s imple and eas y to be unders tood by tax payers and tax

collectors . Becaus e a complicated tax leads to mis unders tandings , dis putes

and delays in payments

3. Principle of certainty. This rule emphas izes that the nature of the tax, bas e

and the amount s hould be clearly unders tood to the tax payer and tax

collector without any doubt

4. Principle of economy or cheapnes s . The cos t of collection and adminis

tration of the tax s hould be low compared to the tax revenue collected (yield

of a tax). I.e. the cos t of collection ought no to exceed 5% of the tax yield

5. Principle of productivity. The government s hould be able to calculate in

advance what it will yield and at what rate the revenue would flow inform of

taxes . A good tax s hould be able to encourage effort and initiate and not to

dis courage inves tments in the country

6. Principle equity. This canon is bas ed on humanitarian cons ideration the

burden of the tax s hould fall equitably on the tax payer and amount to be

paid s hould be in relation with the income level. There s hould be vertical

equity (different payments according to incomes ). People with higher

incomes s hould pay higher taxes than thos e with low incomes or there s

hould be horizontal equity where people of the s ame incomes and s ituations

are placed under equal treatment in taxation. Equity als o cons iders

minimum s ocial s acrifice and maximum s ocial benefit i.e. the tax payer s

hould s acrifice les s when paying a tax but benefit more from the tax paid

7. Principle of elas ticity/ flexibility. The tax s hould change according to the

prevailing conditions in the economy or s hould be able to res pond eas ily to

changing economic circums tances

8. Principle of divers ity (comprehens ivenes s ). A good tax s ys tem s hould have

a wide bas e or s ource i.e. have a variety of s ources and s hould cover

different incomes or pros perity of individuals in the economy

9. Principle of cons is tence. A good tax s hould be in line with the national

policies and economic objectives of a country es pecially in allocation of

res ources

10. Principle of low net res training effect. It s hould leave a tax payer in a

des irable economic s tatus without greatly affecting his cons umption and

inves tment decis ions

11. Automatic s tabilization of the economy. A good tax s hould s tabilis ethe

economy in terms of inves tment, employment and others

CHARACTERIS TICS OF A GOOD TAXATION S YS TEM

1. It s hould be comprehens ive i.e. taxes s hould be levied on as many tax bas es

as pos s ible and s hould be of many types . It s hould therefore cover different

people earning incomes in different ways

2. It s hould impos e a minimum tax burden on the tax payer i.e. a tax payer

s hould be able to pay the as s es s ed tax with the leas t burden

3. A good taxation s ys tem s hould be efficient i.e. cheap in its as s es s ment,

adminis tration and collection. Therefore, the tax impos ed s hould be eas ily

adminis tered without involving high adminis trative cos ts in terms of time,

efforts and financial res ources

4. A good taxation s ys tem s hould be optimal i.e. a maximum balance s hould

be maintained between tax revenue s ervices rendered through public

expenditure and the work effort forth coming from tax payers in order to

increas e output

5. A good taxation s ys tem s hould cons ider the principle of double taxation i.e.

s hould not impos ed on the tax payer on the s ame bas e more than once

6. It s hould promote equity, s ocial and economic jus tice. It s hould be

progres s ive in order to dis tribute the tax burden equitably (the higher the

income the higher the tax charged and the lower the income the lower the

tax charged)

7. A good taxation s ys tem s hould channel and direct res ources to priority

areas

8. It s hould help to achieve national objectives . It s hould promote economic s

tability, economic growth (inject revenue in areas which are productive and s

hould expand incomes and employment)

9. It s hould be convenient i.e. collected at s uch a time when the tax payer is

able to pay (when he/ s he has the money to pay)

10. Is s hould be buoyant/ flexible i.e. the revenue s hould change with changes in

national income of the economy or the rates s hould adjus t according to the

economic changes

11. Neutrality. the tax s ys tem s hould have minimum dis tortion for example on

cons umption, relative prices , production and inves tment

TYPES OF TAXES

Taxes can be clas s ified according to;

(i) Tax income ration or average rate of a tax

(ii) Final tes ting place or tax incidence.

ACCORDING TO TAX INCOME RATIO.

This is the volume of the tax amount paid divided by the income (how much of the

income will be paid in terms of tax. In this clas s .

Proportional tax.

This is a tax where average rate is cons tant irres pective of the level of the income of

individuals on which it is levied. That is , it can be 50% on individual’s income.

Progres s ive tax

This is the tax whos e average rate increas es with an increas e in the income level of

the tax payer. People of different incomes have to pay different rates of taxes and

this implies that high income earners will pay high taxes thos e with low incomes

will pay lower taxes for example Pay as You Earn (PAYE)

Mention any two effects of a progres s ive tax.

- Increas es government revenue

- It leads to equitable dis tribution of income and wealth

- Trends to dis courage s ome s ectors

- S avings are dis couraged s ince it leaves people with les s income

- It is dis incentive to work s ince it increas es with increas e in income levels

Regres s ive tax.

This is a tax whos e rates fall as income or s pending power of an individual increas

es . This is when the burden of the tax follows more heavily on low income earners .

S uch a tax is us ually an indirect tax like expenditure tax. For example if it is

charged on a certain commodity, a lower income earner will pay a higher ratio in

relation to his income compared to a high income earner

Example:

Example, s uppos e the price of a bicycle is 10,000/ = and the tax impos ed is 6000/ =.

On buying the lower income earner of 5000/ = pays the s ame tax as that one

earning 70000/ =. Calculate the tax ratio of low income earner and that of a high

income earner

Price of bicycle = 10000 + 6000 = 16000/ =

Tax ratio of low Y Earner = 16000/ 5000x 100 = 320%

Tax ratio of high Y Earner = 16000/ 7000 x 100 = 228.6%

Outline the effects of a regres s ive tax.

i. Low tax revenue is realized due to tax avoidance

ii. It encourages tax evas ion in that people with low income may deliberately

dodge taxes as s es s ed on them

iii. S ocial unres ts may res ult i.e. people can res ort to s trikes , riots etc

iv. Income gap is widened between the low-income earners and high-income

group

v. It reduces the cons umption of goods

vi. It widens the income gap between poor and the rich

Digres s ive tax. This happens when the tax is only mildly regres s ive up to a particular

rate beyond which the s ame tax rate is charged

CLAS IFICATION OF TAXES ACCODING TO FINAL RES ITING PLACE

DIRECT TAXES .

DIRECT TAXES

Thes e are taxes impos ed on income or property of individuals or firms who directly

pay them. The burden and the incidence of tax cannot be s hifted to another pers on

EXAMPLES / TYPES OF DIRECT TAXES

1. Income tax. This is a tax levied on individuals ’ income like Pay As You Earn

(PAYE). Its advantageous in that fit can be progres s ive as well as

proportional if well as s es s ed

2. Corporation/ company tax. This is a tax impos ed on company’s profits . In

Uganda this tax is at 30%

3. Es tate duty/ Death duty. This is a tax impos ed on the property of the

deceas ed

4. Capital gains tax. This is a tax impos ed on the gains made by a s eller of

capital as s ets whos e value have appreciated over time

5. Gift tax. This is a tax impos ed on the value of wealth being trans ferred from

one pers on to another. However, there have been academic arguments as

regards who s hould pay, the tax the dower or the donee

6. Property tax. This is a tax as s es s ed by the tax authority on the as s ets owned

by the individuals for example hous es , land, machinery etc

7. S ur tax. This is a tax impos ed on individuals with a very high level of income

exceeding a certain s pecified limit

8. Graduated tax. It is a tax levied on the citizens or res idents of the country

bas ing on one’s income and property

9. Poll tax. It is the tax impos ed at a fixed rate on every head of the family

10. Wealth tax. This is a tax impos ed on wealth or accumulated s avings .

ADVANTAGES OF DIRECT TAXES

1. Direct taxes are more certain as the tax payers are more informed with the

amount of tax they are going to pay, the time and mode of payment. Even the

government is certain of how much revenue it is likely to collect. Hence s atis

fying the principle of certainty

2. They are equitable i.e. they s atis fy the quality of equity as one of the

principles of a good tax. This is becaus e they are progres s ive in nature and

they increas e with increas e in ones ’ income and do fall directly to the pers

ons according to how much income/ wealth they have

3. They are elas tic (flexible) s ince they can be changed depending on the

needs of the economy i.e. it can be increas ed or decreas ed to achieve the

des ired goals of a country

4. They s atis fy the canon of s implicity i.e. they do not have any complication in

their as s es s ment, adminis tration and collection as compared to the indirect

taxes . Tax collectors and tax payers can eas ily unders tand the calculations

and the mode of payment

5. They are economical i.e. eas y to collect and at relatively low cos ts like pay

as you earn which is deducted at the s ource by the employer

6. Certain direct taxes are convenient s ince they can be paid in ins tallments or

after income has been realized like s alary earners pay at the end of the

month

7. They facilitate automatic s tabilization of the economy for example direct

taxes can be us ed to s tabilize price levels and employment in the economy.

Hence reducing inflation and economic ins tabilities

8. They cultivate a s ens e of civic res pons ibility among the tax payers . They are

concerned about the affairs of the s tate and how their taxes are being us ed

in the collection and this can help to check on government expenditure

9. They reduce income inequality among the people. It tends to redis tribute

income with in an economy s ince they are progres s ive in nature

10. Like any other tax, they contribute to government revenue which is us ed to

provide s ocial s ervices to its people like medical facilities , road construction,

power s upply etc

DIS ADVANTAGES OF DIRECT TAXES

1. They encourage tax evas ion and avoidance s ince they are a big burden to

the tax payer. Tax payers may unders tate their incomes s o as to dodge

paying the taxes

2. They dis courage production mos t es pecially the corporate tax and wealth

tax s ince they act as a dis incentive to effort and initiative. If s uch taxes are

high, people may prefer to tax their incomes inform of leis ure which is not

taxed

3. They caus e capital flight in the country as foreign capital holders trans fer

their capital to other les s taxed countries . Hence lowering government

revenue, employment opportunities etc

4. S ome times direct taxes inconvenience the tax payers particularly when they

are paid in lump s um and in advance. There fore s ince they are very difficult

to pay and the formalities as s ociated with them further inconvenience the

tax payer

5. Direct taxes are dis criminative in nature es pecially income tax which may

not be paid by low income earners hence leading to los s of revenue to the

government. This als o dis courages s aving by the rich people

6. At times , direct taxes are un economical s ince the cos t of collection es

pecially in the developing countries and particularly in the rural areas is

very high

7. Direct taxes create res entment s ince the burden of the tax is heavily held by

the tax payer

8. Direct taxes reduce the level of inves tments and s avings in the country s ince

individuals and bus ines s firms are left with s mall amount of money for re-

inves tment

9. Direct taxes are generally un popular among the population es pecially in

developing countries with high rates of poverty

INDIRECT TAXES

Thes e are taxes levied on goods and s ervices . They are als o known as outlays /

expenditure taxes / cons umption taxes or hidden taxes . It can be either s pecific

or advalorem tax

A s pecific tax is a tax impos ed on each unit of out put provided while advalorem

tax is the tax calculated according to the value of the commodity. For example if

the value of a good is 3000/ =, and the Advalorem tax is 20% of the value, then the

tax is 20/ 100 x 3000 = 600/ =

Examples of indirect taxes include:

i. Excis e duty

ii. Cus toms duty

iii. S umptuary tax

iv. Octroi tax

v. S ales tax/

vi. Turn over tax etc

vii. Value Added Tax (VAT)

EXCIS E TAX/ DUTY. This is a tax impos ed on home made goods and s ervices like

tax on s ugar beer etc

Objectives of levying excis e duty in Uganda i. To rais e revenue for the government

ii. To dis courage the cons umption of certain goods like cigarettes

Effects of excis e duties i. Increas ed cos ts of production that res ult in inflation due to high prices

ii. Producer’s and cons umer’s choices are dis torted res ulting in inflation due to

high prices

iii. It is regres s ive and hence res ult in widened income inequality s ince it affects

the poor more

iv. If properly levied can provide fairly high revenue with minimal public protes t

CUS TOMS DUTY/ TAX. This is a tax impos ed on goods either entering or leaving

the country i.e. a tax either on imports or exports .

Import duty: This is a tax impos ed on goods entering a country

Objectives of levying import duties in Uganda i. To rais e government revenue

ii. To protect domes tic and infant indus tries agains t completion and dumping

iii. To improve the country’s BOP pos ition through reducing imports

iv. To retaliate agains t import duties impos ed by other countries on Uganda’s

exports

v. To dis courage imports es pecially luxuries and s ocially un des irable goods

for example taxes on s econd hands vehicles

Export duties . Thes e are taxes impos ed on goods leaving a country i.e. taxes on

exports

Objectives of export duties i. To rais e government revenue

ii. To control the volume of exports s o as to avoid s hortages at home

Effects i. Increas ed government revenue

ii. Reduced demand pull inflation due to availability of goods in the domes tic

market

S UMPTUARY TAX. This is a tax impos ed on commodities cons idered harmful to

the health to dis courage their cons umption and production for example a tax on

alcohol drinks . It is als o known as prohibitive tax Effects of s umptuary tax

i. They help to generate relatively high government revenue with minimal

public protes t s ince they are levied on commodities with inelas tic demand

ii. Improved s tandard of living of the people

iii. Increas ed problems of income inequality s ince they are regres s ive

OCTROI TAX. This is a tax impos ed by a country on goods pas s ing through

its territory in trans it to another country for example Kenya impos es octroi tax

on imported goods pas s ing through its territory to Uganda

TURN OVER TAX. This is a tax impos ed on the total s ales of a bus ines s regardles s

of the s tage of production and dis tribution. In Uganda this tax has been replaced by

Value Added Tax (VAT)

VALUE ADDED TAX. This is a tax impos ed on the value of a commodity at each s

tage of production. In Uganda VAT is charged at 18% of the increas e in the value

of a commodity

Advantages of VAT in Uganda i. It is difficult to evade s ince it is hidden in the price of the commodity

ii. It brings efficiency in bus ines s management s ince it encourages proper

maintenance of books of accounts

iii. It is not a dis incentive to res ource allocation s ince it does not lead to s hifting

of res ources to other s ectors

iv. It encourages exports and taxes on exports are refundable

v. It leads to increas ed government revenue becaus e it is comprehens ive

vi. It is economical in terms of adminis tration and collection

vii. It reduces corruption s ince it is paid through banks

Dis advantages i. It requires proper record keeping by individuals / firms but Uganda s till has

poor record keeping

ii. It is quite complicated and not too eas y to unders tand es pecially in

developing countries like Uganda

iii. VAT tends to be regres s ive s ince all taxable goods are treated equally

iv. It is quite expens ive es pecially to s mall firms in terms of record keeping

expens es and payments

v. It increas es cos t of production which finally leads to cos t pus h inflation

vi. It may encourage tax evas ion s ince it’s highly dependant on cooperation,

hones ty and good will of the tax payers

vii. It requires mas s ive education to tax payers in Uganda

Outline the limitations of VAT in Uganda i. Mos t bus ines s people in Uganda do not keep proper accounting records

ii. It is difficult to unders tand and complicated to calculate

iii. Inefficiency and dis hones ty by the tax collectors and the government tax

organizations which lead to increas ed los s of tax revenue to the government

iv. Limited cooperation among the tax payers hence res ulting into increas ed tax

evas ion

TYPES OF GOODS UNDER VAT

Zero rated goods : thes e are goods where there is no payment of VAT on out put

but producers can claim any VAT on inputs or thes e are goods that do not bear any

tax (VAT) but the s upplier of s uch goods can claim a tax refund if he paid taxes on

outputs for example drugs , foods tuffs etc

Exempt goods : thes e are goods which are not liable to VAT and no credits is given

for any tax paid on inputs for example hous es (immovable)

S tandard rated goods : thes e are goods which mus t have Value Added Tax paid on

them like motor vehicles , beer, s ugar etc

S ALES TAX. This is a tax levied on the level of trans actions which take place

between the buyers and the s ellers . S ales tax include s ingle s tage s ales tax: this is

levied once at the firs t s ales and purchas e

Multi-s tage s ales tax: this is levied every time a s ale of the s ame units of the

commodity takes place. It is difficult to adminis ter

ADVANTAGES OF LEVYING INDIRECT TAXES

1. They are us ed by the government in its economic policies like protection of

home indus tries agains t dumping and improving on terms of trade

2. Indirect taxes are more comprehens ive and there fore they are reliable

s ources of government s ince they cover many goods and s ervices

3. Indirect taxes are difficult to avoid and evade s ince they are part of the price

of the commodity bought and cons umed

4. Indirect taxes are more convenient to the tax payers becaus e they are paid

when the cons umers s pend on goods and s ervices

5. They are a s ource of revenue to the government hence enabling it to finance

its expenditures

6. They help to check on cons umption of harmful goods like cigarettes which

res ult in improved health of the people

7. Indirect taxes are more economical in collection s ince they are collected by

the s ellers and producers and pas s ed into the government thus reducing

government expenditure on man power

8. Generally Indirect taxes are les s felt i.e. the burden of is les s felt and

res ented s ince they are part of the prices of the commodities bought

9. Indirect taxes help to correct the BOP pos ition through increas ing import

duties res ulting in reduced volume of imports

10. Indirect taxes are flexible (elas tic) s ince their rates can eas ily be adjus ted

upwards or down words to meet the economy’s requirements

11. When indirect taxes are s electively impos ed they can help in income re- dis

tribution by levying increas ing taxes on commodities cons umed by rich

people and us ing revenue to s ubs idize for the poor

12. They are impartial (neutral) or do not dis criminate cons umers . They are paid

by all groups of cons umers and this helps to increas e tax revenue

13. They guide in res ource allocation i.e. priority areas are les s taxed and non

priority areas are heavily taxed. S avings and inves tment activities in priority

areas are guided by indirect taxes

Revis ion ques tions : Pres ent the advantages of indirect taxes over direct taxes in an economy or your country What are advantages of direct taxes over indirect taxes in an economy?

DIS ADVANTAGES OF INDIRECT TAXES

1. They are regres s ive in nature (the rate of a tax increas es with a decreas e in

the tax bas e0. This is mainly with low income earners and they are very

much affected plus the poor. Mos t es pecially if they are impos ed on es s

ential cons umer goods like fuel, s oap, s alt s ugar etc the rich will not feel the

effect of indirect taxes and there fore create income inequality

2. They are inflationary in nature i.e. they ris e price of commodities , cos ts of

production, wages etc becaus e of tax s hifting

3. Unlike direct taxes , thes e do not cultivate a s ens e of civic res pons ibility and

cons cious nes s to the tax payer. This is becaus e the tax payer that does not

know that he is paying a tax becaus e it is contained in the prices of goods he

buys

4. It involves the government in ins pecting and checking the records , the s tock

of the producer, wholes alers and retailers to as certain whether they are

paying taxes

5. Revenue collected in the financial year can not be predicted with certainty.

This is due to the difficulty of es timating the effects of indirect taxes and the

demand for products

6. They are s ometimes difficult to unders tand for example VAT and this violate

the principle of s implicity

7. They have advers e effects on production and employment in a country. Their

impos ition rais es the prices of commodities and if thes e have elas tic

demand, then the quantity demanded decreas es as well as production and

employment

8. Their effects on res ource maybe negative for res ources will move away from

taxed to non taxed areas or low taxed areas

9. The more people cons ume, the more indirect taxes they pay

WHY UGANDA RELY MORE ON INDIRECT TAXES THAN DIRECT TAXES

In s pite of the above dis advantages , Uganda rely more on indirect taxes as a s

ource of government revenue, this can de explained by the following reas ons :

1. Indirect taxes are comprehens ive and therefore they are more liable s ource

of government revenue unlike direct taxes which only cover s ome incomes

and property of individuals

2. Unlike direct taxes which are eas y to evade and avoid leading to limited s

cope of revenue mobilization makes Uganda to depend on indirect taxes

which are difficult to evade and avoid s ince they form part of the price of the

commodity bought

3. Indirect taxes are convenient to the tax payers s ince they are only paid when

the cons umers s pend money unlike direct taxes which inconvenience the tax

payers s ince they are at times paid in advance and lump s um

4. Unlike the direct taxes which are expens ive to collect, indirect taxes are

economical to collect s ince they do not require large man power and others

expens es

5. Indirect taxes help to improve the peoples ’ health s tandards s ince they

check on cons umption of demerit goods like cigarettes unlike direct taxes

which can not reduce cons umption of harmful goods

6. Indirect taxes are les s felt and res ented s ince they are part of the price of the

commodities bought unlike direct taxes which directly affect the incomes

and property

7. Unlike direct taxes . Indirect taxes particularly high import duties help to

correct the country’s ’ BOP pos ition by reducing volume of imports

8. Unlike direct taxes which are les s flexible, indirect taxes in Uganda are more

flexible s ince their rate can be adjus ted to meet the changing requirements

of the country

9. Unlike direct taxes which dis courage hard work, indirect taxes in Uganda are

not a dis incentive to effort and initiative s ince they encourage hard work s o

as to afford commodities

10. Indirect taxes in Uganda increas e tax revenue s ince they are impartial they

are paid by all groups of cons umers unlike direct taxes which dis criminate

s ome people from paying the taxes

11. Indirect taxes help to re-dis tribute income in Uganda when s electively

impos ed un like direct taxes which can not eas ily be us ed to re-dis tribute

income s ince the are us ually rejected

12. Unlike direct taxes , indirect taxes can be us ed to protect the domes tic and

infant indus tries from well es tablis hed foreign firms

13. The narrow tax bas e in Uganda partly due to the abs ence of large s cale

bus ines s units and the big s ize of the s ubs is tence s ector. Thes e limits the

opportunities for rais ing adequate revenue through the direct taxes hence

the reliance on indirect taxes

OBJ ECTIVES OR RATIONALE OR REAS ONS OR J US TIFICATIONS OR PURPOS ES OR

NEEDS FOR TAXES

1. To generate government revenue. Taxes are charged in order to get

government revenue needed to provide better s ocial s eries to the public in form

of better roads , hos pitals , s chools , power s upply etc.

2. To protect domes tic firms and producers from aggres s ive foreign competition.

The government impos es taxes in form of import duties s o as to increas e the

price of imports and reduce their importation to protect domes tic infant indus

tries .

3. To ens ure equitable dis tribution of income. (Income equality). The government

impos es progres s ive taxes in order to reduce the high incomes of rich people s o

as to s ubs idize the poor and improve on their s tandards of living.

4. To dis courage production or cons umption of harmful products . The government

charges high taxes on harmful products s o as to reduce or dis courage their

level of cons umption in order to protect peoples ’ health in the country.

5. To dis courage dumping. The government charges high taxes on certain

products that are s old at the home market at a lower price compared to the

price in their home country s o as to dis courage their importation.

6. To control monopoly power in the country. S pecific and lamp s um taxes are

charged in order to reduce profit levels of monopolis ts and their advers e effects

of over exploitation of cons umer products of poor quality goods .

7. To improve on the country’s balance of payment pos ition. The government

charges heavy import duties to dis courage imports and charges low taxes on

exports to encourage exportation of goods and s ervices s o as to have earnings

on exports exceeding expenditure on imports

8. To control demand pull inflation. High direct taxes are charged on incomes of

individuals to reduce their dis pos able income and purchas ing power (demand)

which is not matched with the level of output produced.

9. To influence res ource allocation in an economy. The government impos es low

taxes on s ome s ectors like education, health s o as to attract people to inves t in

s uch s ectors and charges high taxes on s ome s ectors to dis courage inves

tments in s uch s ectors .

10. To retaliate agains t taxes impos ed by other countries . Taxes are impos ed as a

way of revenge agains t other countries that would have earlier on impos ed

heavy duties on goods coming from other countries or home countries .

11. To promote regional economic integration. The government charges low taxes

on products of member countries s o as to encourage trade among the member

s tates .

12. To provide a mechanis m through which the government charges thos e who us e

its facilities like roads , public toilets , policy etc.

13. To recover community wealth which individuals have obtained not as a res ult of

their efforts but as a res ult of the efforts of other people e.g. death duty is

charged for this purpos e.

Revis ion Ques tions

- Why is it neces s ary to levy taxes in your country?

- Why is there need to impos e taxes in your country?

- Explain the reas ons of impos ing taxes in your country.

Explain the merits or benefits or advantages or pos itive effects or impacts or

importance of paying taxes in your country.

Approach: Us e ‘es ’ tens es on merits

ADVANTAGES OF PAYING OR LEVYING TAXES .

1. Paying taxes helps to generate government revenue which is us ed in cons

tructing infras tructures like roads , hos pitals , s chools and s o many others .

2. Paying taxes helps to protect domes tic funds and procedures from aggres s ive

foreign competition through the government impos ing taxes in form of import

duties s o as to increas e the price of imports .

3. Buying taxes helps to ens ure repeatable dis tribution of income or income

inequality through the government impos ing progres s taxes to reduce on the

high incomes of rich people.

4. Paying taxes helps to dis courage production of harmful products through the

government impos ing high taxes on harmful products .

5. Paying taxes helps to improve on the country’s balance of payment pos ition

through the government charging heavy import duties .

6. Paying taxes helps to control the demand full inflation through direct taxes

being charged on incomes of individuals .

7. Paying taxes helps to dis courage dumping s ince the government charges high

taxes on certain products that are being s old at the home market.

8. Paying taxes helps to influence res ource allocation in a given economy s ince

the government impos es low taxes on s ome s ectors like education health and

s o many others .

9. Paying taxes helps to provide a method through which the government charges

thos e who us e its facilities like roads , public toilets and s o many others .

10. Paying taxes helps to recover community wealth in which individuals .....

DEMERITS OR DIS ADVANTAGES OR NEGATIVE EFFECTS OF PAYING TAXES OF

TAXATION

1. It reduces the welfare of people. Direct taxes charged reduce the dis pos able

income of taxe payers and their purchas ing power hence s ubjecting them to

poor quality goods and s ervices .

2. S ome taxes wors en the problem of income inequality. Heavy taxes impos ed on

commodities which are cons umed by the poor widen the gap between the rich

and the poor.

3. They encourage s muggling of trade malpractices . Uniform taxes charged force

the dis advantaged groups to practice s muggling which retards development of

the country.

4. They dis courage inves tments . This caus es the country to reduce pers onal

s avings due to reduced dis pos able income.

5. High taxes make the ruling government unpopular and this leads to political

ins ecurity in the country in form of s trikes etc.

6. S ome taxes dis courage hard work or kill the incentive to work high taxes reduce

the attitude of hard work in people.

7. Import duties s hield or protect domes tic indus tries which lead to production of

poor quality good s ince they reduce direct competition from direct firms .

The Uganda Revenue Authority (URA) The URA and local government Adminis tration are two tax authorities in Uganda. The

URA is res pons ible for the central government revenue and the local government

adminis tration is res pons ible for the collection of local government revenue. The URA

was formed by the government on 5th

S eptember 1991 to modernize the proces s of tax

adminis tration and reduce the revenue leakage and corruption in the tax

adminis tration.

ROLES OF URA

- To as s es s and collect taxes .

- To account revenue collected by the minis try of finance.

- To facilitate trade and inves tment and advice government on matters of policy

related to tax and revenue adminis tration.

TAXES COLLECTED BY URA

a)International trade taxes . Thes e are collected on goods entering or leaving the

country. In Uganda, this role is performed by the cus toms and excis e department. The

taxes collected include import duty, export duty, VAT, withholding tax, excis e duty and

environmental levy.

b) Domes tic taxes . Thes e are collected by URA under the domes tic Taxes Department.

They include income tax, VAT and excis e duty.

Taxes collected by local authorities

All local government adminis tration authorities are res pons ible for collecting local

government revenue. They include the dis tricts , town councils , city councils and

municipalities . Thes e local authorities collect taxes like property tax in cities and

towns ; s ign pos t fees and trading licens es among others

TAX CLEARANCE PROCES S

Tax clearance refers to the proces s of certifying that one has completed his / her tax

obligation i.e. has cleared the tax. Tax clearance proces s involves the following:

Tax identification number (TIN). It refers to the computer number as s igned to the tax

payer for identification purpos es . It is important for purpos es of reference, is s uing tax

clearances etc

Tax authorities . Thes e are bodies res pons ible for levying/ impos ing taxes on the tax

payers . In Uganda we have the central government repres ented by URA and the dis trict

adminis tration authorities

TAX COMPLIANCE

Tax compliance refers to the degree to which the tax paying community/ tax payers

meet the tax obligations as s et by the appropriate legal and regulatory authorities .

Or

This is the degree to which tax paying community meets the tax obligations as s et out

in the appropriate legal and regulatory provis ion

Tax payers who are complaint make timely, accurate and proper deliberations to the

tax authority and voluntarily s ettle all the due tax liability. Tax payers who are not

compliant avoid taxes

Levels of tax compliance

The level of tax compliance depends on the tax payers ’ attitude and knowledge and

there are principally four levels ;

1. Taxpayers who are fully compliant and are willing to fulfill their obligations

voluntarily.

2. Taxpayers who reluctantly comply. Thes e know that non-compliance would be

expens ive and accordingly comply

3. Taxpayers who s how s light res is tance to compliance. This mos tly aris es from

lack of knowledge. When s uch are advis ed and pres s ure is put on them, they

pay.

4. Thos e who are non-compliant and exhibit outright res is tance to meeting their

obligations . This includes s ome who take pride in failing the tax authority.

FACTORS INFLUENCING/ DETERMINING/ AFFECTING TAX COMPLIANCE

1. The extent to which a tax s ys tem is equitable. Equitable tax s ys tem encourages

tax compliance s ince people who earn the s ame level of income are s ubjected

to the s ame tax rate but inequitable tax s ys tem dis courages tax compliance s

ince it favours s ome and affect others

2. The extent to which tax laws and the tax regulatory framework is eas y to

unders tand. A tax s ys tem which is eas y to unders tand by both the tax payers

and collectors promote tax compliance but complicated tax laws and long

adminis tration proces s es dis courage tax compliance s ince tax payers and

collectors do not unders tand why it s hould be paid, how to pay etc.

3. The extent to which the laws and rules are applied cons is tently and fairly.

Cons is tence in application of tax laws and rules promotes tax compliance s ince

tax payers know the effects of not paying the taxes in time but incons is tent

application of the rules leads to non-tax compliance becaus e tax payers us e

loopholes in the tax s ys tem to evade paying taxes impos ed on them

4. The quality of tax adminis tration/ the extent to which tax adminis tration is

qualitative is als o very important factor. Tax adminis tration which reflects t

profes s ionalis m, integrity and good cus tomer care exhibited by the tax

collectors encourages tax compliance becaus e it builds trus t and confidence of

the tax payer in the tax authority. But poor quality of tax adminis tration with

high levels of corruption and poor methods of collection leads to low tax

compliance

5. The level of popularity of the government and quality of governance/ the extent

to which the government is popular. A popular government encourages tax

compliance s ince people develop trus t and confidence in it due to its good

governance, hones ty and accountability for public revenue. But a government

which is unpopular or corrupt dis courages tax compliance.

6. The quality of bus ines s management by the tax payers / the extent to which the

bus ines s is managed well. A bus ines s which practices proper record keeping,

bus ines s organization and bus ines s ethics promotes tax compliance but a bus

ines s mis managed by the tax payer with poor record keeping leads to low tax

compliance becaus e it is difficult to fulfill the tax compliance in time

7. The extent to which the bus ines s is well funded/ Availability of funds . Firms with

financial problems tend to have low tax compliance but a bus ines s which is

adequately funded promotes tax compliance.

8. The extent to which the tax rates are favourable/ level of tax rates . Low tax rates

impos ed on tax payers encourage tax compliance s ince tax payers are les s

burdened but high tax rates dis courage tax compliance s ince they heavily fall

on tax payers

9. The extent to which the tax s ys tem is productive. A product tax yield i.e. us ed to

provide s ocial s ervices to people encourages tax compliance s ince tax payers

benefit from it but unproductive tax yield/ s ys tem dis courages tax compliance

s ince tax payers do not s ee the benefits of paying the tax

10. The extent to which the tax s ys tem is convenient. The level of tax compliance is

high for a tax s ys tem that is convenient i.e. collected at a time when the tax

payer has the means to pay for during harves ting periods for farmers or at the

end of the month for s alary earners but inconvenient tax s ys tem dis courages

tax compliance s ince it collected at inappropriate time

11. The extent to which the tax s ys tem is certain. A tax s ys tem which is certain to

the tax payers i.e. when they are aware of the amount to pay, reas ons for paying

it, when to pay it and the method to us e while paying it encourages tax

compliance but uncertainty of the tax s ys tem dis courages tax compliance

12. The extent to which the tax s ys tem is comprehens ive. A comprehens ive tax s ys

tem i.e. that one charged on varoius entities / activities encourages tax

compliance s ince it pos s es s les s effect on the paying community but a narrow

tax s ys tem dis courages / leads to low tax compliance s ince it heavily falls on the

tax payers

13. The extent to which the tax s ys tem is flexible. A flexible tax s ys tem i.e. that one

which changes with the prevailing economic conditions of the tax payer

encourages tax compliance but a tax s ys tem which does not change with the

changing economic conditions of the tax payer leads to low tax compliance

14. The extent to which the burden of tax is dis tributed to all potential tax payers .

Equal dis tribution of the tax burden to all potential tax payers promotes tax

compliance but uneven dis tribution of the tax burden dis courages tax

compliance

15. The extent to which the tax s ys tem is economical. An economical tax s ys tem i.e.

that one which involves les s cos ts in collecting it compared to the tax yield

encourages tax payers to pay the taxes impos ed on them hence leading to high

tax compliance but uneconomical tax s ys tem which involve paying a lot of

money to tax collectors than what is collected creates res entment in tax payers

hence leading to low tax compliance

REVIS ION QUES TIONS

- Examine the factors influencing the level of tax compliance in your country

- Account for low tax compliance/ non tax compliance in your country

- S ugges t ways of encouraging tax compliance in your country

The following are reas ons for low tax compliance in my country

1. Unpopularity of the government

2. Poor quality of management of the bus ines s

3. Poor quality of tax adminis tration

4. High tax rates

5. Uncertainty of the tax s ys tem

6. Inconvenient tax s ys tem

7. The tax bas e is narrow

8. Inequality in the dis tribution of the tax burden

9. Incons is tence in implementing tax laws and rules

10. Non economical tax s ys tem

11. Ignorance of people about the benefits of paying taxes

12. Low level of income of the tax paying community

13. Rigidity of the tax s ys tem

The following are ways of encouraging tax compliance in my country

1. Ens uring trans parency in the tax s ys tem/ reducing corruption and

embezzlement of tax revenue

2. S implifying the tax s ys tem

3. S ens itizing the mas s es on the role of taxation

4. By making the tax s ys tem equitable

5. Developing a tax payer friendly s ys tem of tax collection

6. Ens uring a high degree of political s tability s o as to boos t economic activities

7. Making the tax s ys tem more productive

8. Charging lower tax rates

9. Widening the tax bas e

10. S hortening the tax payment procedure

11. Being cons is tent in implementing tax laws / impos ing tax penalties

12. Prais ing and rewarding compliant tax payers

13. Publis hing a s hame lis t of non compliant tax payers

14. Employing trained pers onnel to as s es s and collect the tax

Explain the problems / challenges facing tax adminis tration in your country

The following are challenges facing tax adminis trators in my country

1. Inadequate funding by the government. This makes trans portation of tax

collectors difficult, paying tax collectors and adminis trators etc

2. High levels of unemployment/ low level of income of tax payers . This leads to

low tax yield and a high level of tax evas ion s ince potential tax payers luck the

means to pay the taxes impos ed on them

3. High levels of corruption and embezzlement of public revenue among tax

collectors . This has led to los s of confidence by the tax payers in tax

adminis trators

4. Inadequate s killed labour to as s es s and collect the tax. This has affected the

implementation of tax laws , collection and as s es s ment

5. Ignorance of the public about benefits of taxation. This has created res is tance

in the tax paying community

6. High levels of tax evas ion. This has increas ed the cos ts of tax collection in the

country becaus e of high expenditure on tracing tax evaders

7. Trade mal practices like s muggling of goods which leads to low tax yield

8. Political ins tabilities in s ome parts of the country. The increas ed riots , demons

trations and s trikes in the country have made the tax collection proces s very

difficult

9. Poor management of bus ines s es by tax payers . This is manifes ted in the poor

book record keeping and unethical behaviors which lead to high non tax

compliance

10. Language barrier. This is due to many tribes in the country and yet taxes are

as s es s ed in all parts of the country

11. Unfavourable climatic conditions for example heavy rains , floods , land s lides

etc which make tax collection difficult

12. Conflict of interes t between politicians and tax authorities . This leads to s

abotage of taxation bills in the parliament and mobilizing people by politicians

not to pay the taxes impos ed on them

13. Exis tence of a large s ubs is tence s ector. This limits economic activities which

can be taxed leading to a narrow tax bas e

14. High rate of inflation. This reduces the taxable income of tax payers due to high

expenditure on goods and s ervices

15. Complicated tax laws and s ys tems . S ome tax s ys tems are difficult to unders

tand by the tax payers hence facing challenges in implementing them

S ugges t pos s ible ways of overcoming the above challenges

BUS INES S COMPETITION

Competition is the battle between bus ines s es to win cons umer acceptance and loyalty.

It is an art, a s cience and a practice. It is all about creating value, capturing and

retaining it.

TYPES OF COMPETITION IN BUS INES S

There are many things one can do to win the competition. Thes e include the following.

i) Pricing competition. This type of competition involves charging different prices for

the s ame commodity s o as to win cus tomers for example charging low prices

compared to competitors

ii) Product pres entation and appearance competition. This type of competition

includes the way one decorates his bus ines s premis es , the way the s ales pers on

dres s es , color of the product, wrappers or containers and neatnes s in packaging.

There are many us eles s products on the market that s ell like hot cakes due to the

way they are packaged. It is therefore important to pay great attention to the way

you package your goods .

iii) Quality competition. His type of competition involves producing a product that

s atis fies the needs of cus tomers . The quality of the product is the mos t s ignificant

competitive advantage over other people in one’s bus ines s . The quality of the

product determines the precis ion of the work done. The better the product, the

more s uitable for us e .Als o, good quality products live longer than poor quality

ones and attract more cus tomers and thus a larger s hare of the market is attracted

by the enterpris e.

iv) Added convenience competition. This competition includes s taying open late or

during lunch when other bus ines s es are clos ed. E.g. s ome commercial banks work

for long hours on weekends . One could als o offer s omething for nothing to the

cus tomer.

v) Cus tomer care competition. This type of competition involves winning cus tomers

in terms of treating them well One s hould always treat cus tomers with res pect

becaus e people always choos e to go where they are treated with dignity.

FACTORS TO CONS IDER IN ANALYS ING COMPETITION

The following are s ome of the things that s hould be cons idered when analyzing

competition:-

• S ize of competition/ number of competitors . A large number of competitors

implies a high level of competition but a s mall number of competitors implies a

low level of competition

• Profitability of competitors . High profits earned by competitors means that

there is s tiff competition with the entrepreneurs ’ bus ines s but low profits earned

by competitors means low competition with the competitors , bus ines s

• Quality of s ubs titute products or s ervices . High quality products produced by

competitors indicates a s tiff competition with the entrepreneurs ’ bus ines s but

low quality products produced by competitors implies low competition with the

entrepreneurs ’ bus ines s

• Hours of operation. Added hours of operation for example early morning and

late evening indicates a high level of competition among bus ines s es but normal

hours of s erving cus tomers implies low competition exis ting between

bus ines s es

• S kills / quality of pers onnel employed. Us e of highly s killed pers onnel for

example s ales pers onnel indicates a high level of competition among bus ines s

but us e of uns killed/ s emi-s killed pers onnel implies low competition

• S ervicing, warranting and packaging

• Methods of s elling and dis tribution channels . Us e of pers onal s elling and a

long dis tribution channel s hows s tiff competition in bus ines s es but s elling

directly to cus tomers implies low level of competition

• Location of bus ines s es . S trategic location of bus ines s es in a particular place

implies s tiff competition but locating bus ines s es in inacces s ible places / les s

s trategic places implies low competition among bus ines s es

• Level / nature of advertis ing. Pers uas ive advertis ing in bus ines s es implies s tiff

competition/ high level of competition but informative or no advertis ing in

bus ines s es implies low competition in s uch bus ines s es

• Promotional methods / level of product promotion. A high level of product

promotion among bus ines s es implies a high level of competition but low

promotional activities in the bus ines s implies les s competition

• Level of reputation of the company. A high level of reputation of the bus ines s

implies a low competition with other bus ines s es but a low level of reputation of

the bus ines s implies high competition with competing bus ines s es

• Inventory levels . High inventory levels implies high competition due to the need

for continuous s upply of products but low inventory levels implies low

competition among employees

• Quality of cus tomer care. Good cus tomer care in bus ines s es implies high

competition but poor cus tomer care among bus ines s es indicates low

competition among bus ines s es

• Price charged on s imilar products . Low prices charged on s imilar products

indicates high competition among bus ines s es but high prices charged on

s imilar products by the entrepreneur’s bus ines s indicate low completion of the

bus ines s with other bus ines s es

• Product added advantages / warrantees offered. Exces s ive benefits attached on

a commodity imply high level of competition among the bus ines s es but les s

benefits attached on commodities imply low competition

INDICATORS OF AN INCREAS E IN THE LEVEL OF COMPETITION

• Decreas e in the demand for the bus ines s products

• Decreas e in s ales

• Increas ed advertis ing/ s ales promotion by competitors

• Increas ed complaints by cus tomers

• Increas ed labour turnover in the enterpris e

• Improved cus tomer care

• Increas ed product added advantaged

• Increas ed cus tomer convenience

• Improved methods of s elling

• Improved after s ales s ervices

• Increas ed number of rival firms

• Increas ed in-s ervice training for workers

• Demand for wage increment by employees

8a) The following are the as pects an entrepreneur can addres s to win competition

- Pricing. A s imilar s ervice/ product s hould be offered at a cheaper price, one

s tands a better chance of winning the cus tomer’s loyalty.

- Pres entation and appearance. This includes the way one decorates his bus

ines s premis es , the way the s ales pers on dres s es , color of the product,

wrappers or containers and neatnes s in packaging.

- Production of good quality products . Good quality products live longer than

poor quality ones and attract more cus tomers and thus a larger s hare of the

market is attracted by the enterpris e.

- Added convenience. This includes s taying open late or during lunch when other

bus ines s es are clos ed. E.g. s ome commercial banks work for long hours on

weekends . One could als o offer s omething for nothing to the cus tomer.

- Pos itive attitude towards the cus tomers . One s hould always treat cus tomers

with res pect. People always choos e to go where they are treated with dignity.

- Rewarding loyal and regular cus tomers like by giving them gifts , prizes , inviting

them to get together parties etc

- Offering credit to loyal and credit worthy cus tomers

- Communicating regularly with the cus tomers like by communicating to them

major changes in the bus ines s , availability of new products etc

- Maintaining up to date records of regular, loyal and big cus tomers and

recognizing them when they call or come to the bus ines s

- Providing appropriate after s ales s ervices like offering delivery s ervices , proper

packing of goods bought for eas y carrying, helping to ins tall the product bought

at the cus tomer’s premis es

b) The following are factors affecting competition

Give neutral points and explain them on both s ides

i) Mobility and acces s ibility overlap. Travelling opens up a wider geographical

area for competition hence high level of completion but immobility/ s horter

dis tances reduce competition.

ii) Product overlap. This refers to the s elling of products by different kinds of

es tablis hments that are s imilar or identical to each other. Big dis count s tores ,

s ome times combined with grocery s tores provide one-s top s hopping for all

cus tomers ’ needs . This reduces completion but dealing in one product

increas es competition

iii) S ubs titution. Availability of many s ubs titutes increas es competition but few

s ubs titutes in the market reduce competition

iv) Public awarenes s . Increas ed awarenes s of the product, its quality and other

features creates brand loyalty hence reducing the level of competition but

ignorance of cus tomers about the product features increas es the level of

competition

v) Product priority. A preferred product reduces competition but un preferred

product leads to high competition

How can entrepreneurs improve on their competitive advantage in bus ines s ?

• Through intens ive advertis ing

• Improving cus tomer care s ervices

• Improving cus tomer convenience

• Through competitive pricing

• Through every day low pricing

• Through product over lap

• Us ing attractive packaging materials

• Improving the quality of products

• Offering credit facilities

• Giving dis counts

• Carrying out promotional s ales

• Motivating bus ines s employees

• Training employees

• Merging with weak competitive firms

• Face lifting/ painting bus ines s premis es

• Maintain good corporate image

Effects of competition

- It leads to better cus tomer s atis faction/ production of better quality products .

The producers and s ellers ens ure that they produce high quality goods and

s ervices and any other activity that ens ures maximum cus tomer s atis faction in

order to attract more cus tomers

- It promotes more efficient production; it makes producers more pro-active in

dis covering more efficient production methods like us e of fewer raw materials

and time to produce better goods .

- It res ults in better employee remuneration/ payments . It forces employers to pay

their highly s killed employees better s alaries es pecially when they are likely to

be taken away by competitors .

- It res ults in more product variation. It makes producers vary their products in

order to make them different from thos e of competitors hence increas ed

cus tomer s atis faction.

- It res ults in lower or cheaper prices of commodities . competition makes

producers and s ellers to try to lower the prices of their goods or s ervices , thus

making cons umers enjoy lower prices

- It enables bus ines s es to earn more profits . Competition makes bus ines s es that

enjoy better competitive advantage over rival ones to s ell more which in turn

makes them to earn more profits that can be re-inves ted

- It leads to expans ion of market for s ome bus ines s es . Competition allows s ome

bus ines s es to expand the market for their goods or s ervices through pers uas ive

advertis ing, hence generating more incomes

Negatives effects

- It res ults into was tage of res ources . Competition makes bus ines s es to

duplicate activities or s ervices as a way of attracting more cus tomers , which

res ults in was tages of the limited res ources

- It leads to poor relations hip between bus ines s competitors

- It leads to collaps e of s mall or inefficient bus ines s es / It res ults in

unemployment when the inefficient firms are out competed

- It makes res ources to become more expens ive. Competition makes bus ines s es

to compete or s truggle to acquire the limited res ources like s killed workers , high

quality raw materials etc

- It lowers profits of bus ines s es . Competitive advertis ing increas es the operation

cos ts of bus ines s es and thus lowers their profits

- It reduces the market s hare per bus ines s . Competition from many bus ines s es

divide the limited number of cus tomers to different bus ines s es and this reduces

the market s hare per bus ines s , res ulting in low s ales income

- S ome times it mis leads cus tomers . Pers uas ive advertis ing due to competition

s ome times forces cus tomers to buy products they do not really need or which

may be of low benefit to them

MONITORING AND MAINTAINING A COMPETITIVE POS ITION.

1. S us tainable competitive Advantage. This allows the maintenance and

improvement of the enterpris es competitive pos ition in the market. It is an

advantage that enables bus ines s to s urvive agains t its competition over a long

period of time. It includes the following.

2. Advertis ing. This is extremely important in competing effectively. It is the key to

attracting public attention and building priority to your products . Advertis ing is

the firs t s tep in competing after you build the bas ic condition of the bus ines s .

3. Image. Once the cus tomer is attracted by s ome type of advertis ing, he/ s he is

influenced by the bus ines s image. Image can be critical in competing effectively.

The cus tomer is attracted by the image reflected in the bus ines s s urroundings ,

pers onnel, product dis plays , etc. Good cus tomer relation techniques , dres s

requirements , can be taught to s ales pers onnel. Location is als o part of image

that can make a difference in cus tomers ’ reactions and buying patterns .

4. Cus tomer convenience and s ervices . Location is related to convenience and

good cus tomer relations are part of good s ervice. It als o includes attractions

like s ervice delivery, repair s ervices , acceptance of returns and exchanges and

extens ion of pers onal credit. Thes e factors als o help s ell a product and create

loyal cus tomers as well as competing effectively.

5. Competitive pricing. Bus ines s es that operate efficiently can us ually afford to

price competitively becaus e their cos ts are lower. Nevertheles s , one mis take

that s mall bus ines s es make is to try to undercut the competition before they get

their cos ts down. That kind of pricing can lead to los s es or very low profits and

res ult in a decreas e in a bus ines s ’ competitive pos ition.

6. S ales prices . The theory behind s eas onal or new s ales is that new cus tomers

will be attracted to the s hops by the s ale. They will buy other products at regular

prices while they are in the s hop, and the quantity s old at the s ale price will

make up for the lower unit profit. Thes e principles can be effective if the s ale is

handled properly. However, the s ale can attract wrong cus tomers who may only

buy s ale items and nothing els e rather than your loyal cus tomers . And if s ale

prices are low, you may not gain from the s ale.

7. Everyday low prices . S ome s hops have a s tandard policy of competitive pricing

at all times without advertis ing s pecific s ales . While they may los e s ome bus

ines s while other s tores feature ‘’lead items ’’ at cos t, in general, they maintain a

s teady cus tomer. Clearance s ales may als o be us ed to unload s eas onal or out-

of-date items or other odds and ends at cos t or les s .

EVALUATING BUS INES S COMPETITION

In forecas ting and monitoring changes and competition in your bus ines s , make s ure

that the following areas are carefully monitored and that clear up-to-date records are

available

i) S ales decline or increas e (may be due to many reas ons including competition.

ii) Production order may be reducing due to competition.

iii) Flow of cus tomers . The number of cus tomers flowing into the enterpris e in a

day ( this is always affected by competition.

iv) Cas h flow (movement of cas h in and out of the enterpris e) may be influenced by

competition.

v) Movement of pers onnel. Employees in non-competitive firms often leave to join

other firms which look more competitive, for higher payment and other

employment benefits .

vi) Technology. Enterpris es which pos s es s modern machinery and knowledge are

more competitive than thos e with old technology.

Clear records of the above items will enable an entrepreneur to devis e means for

dealing with his competitors .

METHODS US ED TO EVALUATE CHANGES AND COMPETITION IN BUS INES S . There

are two methods us ed by entrepreneurs to evaluate changes in competition. Firs t, an

entrepreneur is required to take an over view of how well his bus ines s venture is going

to match with his potential cus tomers ’ needs . This will force him to identify

his bus ines s ’ s trength and weaknes s es in relation to his market.

The features which are important to cus tomers include colour, tas te, eas e of us e,

pres entation and appearance, delivery, opening times , payment terms and price.

When the entrepreneur has graded each attribute, he s hould join up the res pective

ratings with a pencil line to obtain two clear profiles , one of the cus tomer’s reference

and another of the s trength and weaknes s es of the bus ines s .

This profiling method can be put in a table as follows . Lis t of features / attributes

that potential cus tomers

will be looking for in the

bus ines s product or

s ervice.

S core how important each

attribute is to cus tomers .

S core bus ines s product or

s ervice on each attribute.

1. Colour 1 2 3 4 5 1 2 3 4 5

2. Tas te 1 2 3 4 5 1 2 3 4 5

3. S mell 1 2 3 4 5 1 2 3 4 5

4. Quality 1 2 3 4 5 1 2 3 4 5

S econdly, an entrepreneur mus t try and be as objective and cons is tent as pos s ible.

Avoid the temptation to pretend your bus ines s idea is s omething other than what it is .

An entrepreneur can compile a more detailed analys is by extending and modifying the

profile to s uit his particular bus ines s . Furthermore, it is a good idea to compile a

number of profiles , one for each of your major market s egments . This will enable the

entrepreneur clearly identify;

• Which market s egment he/ s he s atis fies bes t?

• Which market s egment he/ s he s atis fies better than his / her competitors ?

By us ing the s ame format, as the previous table, the entrepreneur s hould analyze the

s trength and weaknes s es that the competitors pres ent.

Features The

bus ines s

Competitor 1

Competitor 2

Competitor 3, etc

Average

s core of

competition

1 Colour 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

2 Price 3 Eas y us e

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

Total

Another profiling method which has an advantage over the firs t is that it takes into

account the relative importance of each feature to the market.

Procedure for s econd method.

• Give each feature a weighing from 1to 5, to s ignify its importance to the market

s egment.

• Award points , on a s cale of 1 to 5, to each bus ines s including your own, on how

s trong they are in each area.

• Multiply the importance weighing by the points awarded for each bus ines s to

obtain its s core.

• Total each bus ines s ’ s core and analyze the res ults .

Featur

es

Importan

ce

Your

bus ine

s s

Competitor

1

1

Competit

or

2,etc

Points s core Point

s

S cor

e

Points S cor

e

Total

In an entrepreneur can identify a market s egment where he/ s he is s trong in both areas ,

he/ s he is likely to take a larger market s hare aware from the competition than would

otherwis e be the cas e. This will improve the entrepreneur’s pos ition concerning

finance, pers onnel, technology and profitability

CAPITAL MARKETS

Capital markets are markets that trade in long term financial products known as s

ecurities (e.g. s hares , bonds ). They are a facility for rais ing long term capital, which is

done through the s elling of debt ( bonds , commercial paper) and equity ins truments (s

hares ).They provide avenues for thos e who require additional capital and others who

wis h to inves t their money.

KEY PLAYERS IN CAPITAL MARKETS .

Different people, groups of people or companies play different roles on the s tock

exchange. The roles of each are very vital in the s mooth running of the market. S ome

of thes e players include the following.

Different people/ groups / companies play different roles in the s tock exchange markets

as explained below

1. Brokers / dealers . Thes e are licens ed financial profes s ionals authorized to buy and

s ell s hares on behalf of their clients . Brokers execute trade deals on behalf of their

clients and receive a commis s ion for matching buyers and s ellers

Dealers buy s hares and later s ell them for a profit. They als o provide advice to their

clients on management of inves tment. Dealers can be bulls , bears or s tags . A bull is a

dealer who buys s hares when they are cheap hoping to s ell them when the price ris es .

A bear is one who s ells s hares when prices are high hoping to buy them back at a

much lower price to make profits . A s tag is one who deals in new is s ues (s hares ) is s

ued by the company

2. Regis trar. This is a pers on in charge of keeping records in res pect of s tocks and s

hares of a floated company, a floated company is one which goes public by is s uing

its s hares for s ale

3. Inves tment advis ors . Thes e are licens ed pers ons who advis e their clients about the

profitability of s elling and buying s ecurities . They als o manage a range of inves tments

under a contact or on agreement with inves tors

4. S hare holders . Thes e are individuals or companies that purchas e s hares in a

company or bus ines s and own a part of that company. They earn dividends for the

s hares bought

5. Capital Markets Authority (CMA). This is a government es tablis hed body which

ens ures the regulation and development of capital market indus try. The capital

markets indus try in Uganda is regulated by the capital markets authority (CMA). CMA

was es tablis hed in 1996 following the enactment of the Capital Markets Authority Act

Cap 84. It is an autonomous body res pons ible for promoting, developing and

regulating the capital markets indus try in Uganda, with the overall objectives of inves

tor protection and market efficiency

Objectives of capital markets authority

Functions of the capital market Authority in Uganda

− To regulate and promote the development of capital market in Uganda

− To approve s tock exchange and s ecurities central depos itory s ys tem

− To licens e brokers or dealers , inves tment advis ors , fund’s managers and

trus tees

− To approve collective inves tment s chemes

− To advice government on rules and regulations governing operations of capital

market

− To provide protection to both local and foreign inves tor

− To create market in which s ecurities are is s ued and trade

− To provide facilities for rais ing long term capital (funds )

− To act as a barometer/ yards tick/ guidance to company’s performances

− To provide avenues for thos e who require additional capital and others who

wis h to inves t their money

− To regulate the operation of a compens ation fund

To approve all offers of s ecurities to the public

6. Fund managers ’ .Are companies who under a contract of management with a client

undertaking the management of a portfolio of inves tments (portfolio refres to the

funds managed on behalf of clients at the dis cretion of a fund manager).

7. Cus todians . Thes e perform the actual role of holding or s afekeeping the as s ets or

s ecurities (including cas h) on behalf of the owners (inves tors )

Major players in capital Capital

markets

Brokers / dealers Regis tra Inves tment Cus todian S hare Fund

PRODUCTS / INS TRUMENTS IN UGANDA’S CAPITAL MARKETS .

Capital markets us e different ins truments to rais e capital which include the following:

1.Bonds . A bond is a long term debt ins trument that is us ed to borrow a s tated amount

of money for a fixed period of time and gives a s tated rate of interes t or it is a debt or

loan ins trument is s ued by the government or corporate body that carries a fixed rate of

interes t and with a maturity of longer than one year and gives the holder claim on the

interes t and principle promis ed by the is s uer. Or it is a borrowing arrangement in

which the is s uer makes an obligation to pay back interes t and principle at s pecified

times and intervals (maturity date)

There are two types of a bond namely:

Government bonds . Are is s ued by the government to borrow a s tated amount of

money from the public, for a fixed period of time at a s tated rate of interes t

Corporate bonds are bonds is s ued by private or public companies that wis h to borrow

a s tated amount of money from the public for a fixed period of time at a s tated rate of

interes t

Features of a bond

- It has a maturity date. It is a period of time over which the bond contract is

extended at the endof which the bond contract expires

- It has a bond coupon. It is the periodic interes t paid on a bond the is s uer to the

bond holder

- It has a principle. This is the fixed period value of the bond initially paid by the

creditor when buying the bond and paid at the maturity date

- It has name of the lender

- It includes name of the borrower

NB. Treas ury bills . Thes e are s hort term financial ins truments is s ued by the

government to rais e money from the public with a maturity date of les s than one year

2.S hares . A s hare is a unit of owners hip in a limited liability company and gives the

holder claim over any dividends that the company may pay. Or it is a unit of capital of

a joint s tock company. S hare holders become part of the company where they have

bought s hares

3.Debentures . A debenture is a unit of a joint s tock company. Or it is a document or

certificate is s ued by a company evidencing that it has borrowed a s pecified amount of

money from a named pers on and promis es to pay back the principle with interes t rate

at the maturity date

Types of debentures

- Naked debentures Thes e are debentures which have no s ecurity or property

declared agains t them. This means that if the company fails to pay, the

debenture holder has no powers to take over the company’s property or to s uit it.

- S ecured / mortgaged debentures . Thes e are debentures which have s ecurity

tied to them i.e. if the company fails to pay, the debenture holder can s ell off the

company’s property to recover the loan.

- Redeemable debentures . Thes e are debentures that can be paid back by the

company after a s pecific period of time i.e. the money borrowed is returned by

the company within a given period of time.

- Irredeemable debentures . Thes e are debentures which are never paid back by

the company until it is liquidated or ended i.e. the money borrowed remains

outs tanding or unpaid until the company winds up.

4. Commercial paper. This is a s hort-term uns ecured promis s ory note is s ued by a

company or even a bank with a s horter- term maturity date (us ually one to nine months )

indicating a promis e by the is s uer to repay the among borrowed a agains t it on a s

pecified date with a s pecified rate of interes t. Commercial papers are us ually is s ued

by large companies or banks to get money to meet their s hort term debt obligations

and are not backed by collateral s ecurity

Role of capital markets

1. Providing market to s hares being s old. Capital market for s hares being s old

hence enabling companies and individuals to buy s uch s hares

2. Improving on people’s s tandards of living. People who buy s hares get dividends

which increas e their income levels and hence improved s tandards of living

3. Providing employment opportunities . Capital markets provide jobs to dealers /

blockers , regis trar of companies and inves tment advis ors . This enables them to

earn a living

4. Encouraging inflow of international capital. Capital markets enable inves tors

from abroad to inves t their capital in the country by buying s hares being floated

or s old

5. Providing revenue to the government. Capital markets provide revenue to the

government in form of taxes impos ed on them

6. Promoting inves tments . Capital provide technical advice to inves tors , identify

inves tment opportunities and encourage people to s ave through buying s hares

hence increas ing inves tment levels

Advantages of capital markets

1. They provide market to s hares being s old. Capital markets provide market for

s hares being s old hence enabling companies and individuals to buy s uch s

hares

2. They improve on people’s s tandards of living. People who buy s hares get

dividends which increas e their income levels and hence improved s tandards of

living

3. They provide employment opportunities . Capital markets provide jobs to dealers

/ blockers , regis trar of companies and inves tment advis ors . This enables them

to earn a living

4. They encourage inflow of international capital. Capital markets enable inves tors

from abroad to inves t their capital in the country by buying s hares being floated

or s old

5. They provide revenue to the government. Capital markets provide revenue to the

government in form of taxes impos ed on them

6. They promote inves tments . Capital provide technical advice to inves tors ,

identify inves tment opportunities and encourage people to s ave through buying

s hares hence increas ing inves tment levels

Objectives of promoting capital markets

1. To provide market to s hares being s old. Capital markets provide market for

s hares being s old hence enabling companies and individuals to buy s uch s

hares

2. To improve on people’s s tandards of living. People who buy s hares get

dividends which increas e their income levels and hence improved s tandards of

living

3. To provide employment opportunities . Capital markets provide jobs to dealers /

blockers , regis trar of companies and inves tment advis ors . This enables them to

earn a living

4. To encourage inflow of international capital. Capital markets enable inves tors

from abroad to inves t their capital in the country by buying s hares being floated

or s old

5. To provide revenue to the government. Capital markets provide revenue to the

government in form of taxes impos ed on them

6. To promote inves tments . Capital provide technical advice to inves tors , identify

inves tment opportunities and encourage people to s ave through buying s hares

hence increas ing inves tment levels

The s tock exchange. Is where already is s ued out s hare or s ecurities are formally

traded and s old or it is an arrangement through which the already is s ued out s hares

are traded. In Uganda they are traded under Uganda s ecurities exchange

THE UGANDA S ECURITIES EXCHANGE. This is the market place in Uganda where

s ecurities are traded. The Uganda S ecurities Exchange (US E) was licens ed to operate

as an approved s tock exchange in J une 1997 by the CMA. The US E began formal

trading operations in J anuary 1998 following the lis tings of the firs t ins trument, the

Eas t African Development Bank (EADB) Bond.

The bas ic function of US E is to provide a facility for rais ing funds for inves tment in

long-term as s ets and is regulated by the CMA

FUNCTIONS OF S TOCK EXCHANGE

i) It provides ready market for s hares already is s ued out in the primary market to

be trans ferred

ii) S tock exchange market facilitates low income earners to s ave in order to inves t

in companies lis ted on s toch exchange

iii) S tock exchange market helps companies in need of long-term finance to rais e

the required finances through s elling their s hares to the public

iv) It creates a means through which natives of a country can attain owners hip in

the various companies es pecially the privatized companies

IDENTIFYING INVES TMENT OPPORTUNITIES THROUGH CAPITAL MARKETS .

INVES TMENT refers to purchas e of as s ets that are us ed to generate more income or

financial gains . The capital markets indus try offers various avenues for s aving and

inves tments covered below.

Types of inves tors

Private inves tors . Thes e are people who hold s ecurities for their own benefit in terms

of either interes t on lent funds or dividends on s hares . They tend to hold a s mall

percentage of s hares in a lis t company

Corporate inves tors . Are companies that hold s hares in other companies for their own

benefit

Ins titutional inves tors . Thes e are private or ins titutions that inves t money in s ecurities

in the capital market on behalf of others e.g. ins urance companies , pens ion funds etc

a)Inves ting in s hares . A s hare or s tock is a unit of owners hip in a company. When you

buy a s hare, you become a part owner or s hareholder of the company. S hares can be

bought either during the offer period or from exis ting s hareholders . New is s ues of s

hares take the form of initial public offerings (IPOs ), where s hares are s old in a

primary market.

The IPO refers to the firs t time a company offers its s hares to the public. To buy

s hares , there proces s es / s teps taken as dis cus s ed below

S TEPS TAKEN IN BUYING S HARES

1. Finding and contacting the broker. The buying proces s begins with finding and

contacting a s tock broker and the s ervices he/ s he offers . This helps the buyer to find

out whether the broker has the type of s hares he/ s he wants

2. Deciding on the type of s hares to buy. The buyer decides on the type of s hares and

the company from which to buy s hares depending on its financial performance and

future pros pects as advis ed by the broker

3. Deciding on the price and number of s hares to buy. This involves deciding on the

price to pay for each s hare and number of s hares to buy after getting the prevailing

market prices of s hares

4. Placing an order. After guidance by the broker and making a decis ion on the type of

s hares to buy. The buyer is s ues a market order or a limit order to the broker. Market

orders are s imple buy or s ell orders that are to be executed immediately at current and

bes t market prices . The limit orders on the other hand are thos e in which inves tors or

buyers s pecify the price at which they are willing to buy s hares . The inves tor or buyer

is s uppos ed to fill

1. The s ecurity central depos itory account opening forms

2. A client information form,

3. An order form and als o s igns a purchas e trans fer form

5. Receiving a copy of the pros pectus . A pros pectus is a legal document that gives

general and material information on the company’s his tory and operations or

performance. The intending buyer receives this document and takes time to read it

carefully

6. Paying for the s hares to the broker. The buyer makes for payment of the s hares to

the broker and in turn gets a receipt from the broker who then delivers the payment to

the clearing hous e on the s ettlement day

7. Receiving a contract note. This is a document that s pells out the number of s hares

bought, the price at which they are bought, amount of commis s ion to pay to the broker,

details of government taxes which include the contract s tamp, trans fer duty and

capital gains tax and the total amount which the inves tors or client owes to the broker

which has to be paid on the s ettlement day indicated on the contact note.

It is a legal document that acts as proof owners hip of the s hares until a s hare

certificate is is s ued

Payment of the total amount. This involves paying the total s hown on the contract note

on the s ettlement day

8. Receiving the s hare certificate from the regis trar. This is a document is s ued to a

pers on as evidence that he/ s he has bought s hares of the is s uing company and there

fore has claim to the dividends on the s hares indicated on it

THE PROCES S OF S ELLING S HARES

Below are the s teps involved in s elling s hares

1. Finding out how much s hares are s elling in the market through brokers / dealers

2. Contacting a broker/ dealer to s ell the s hares at a s atis factory price

3. Pres s ing an order to s ell the s hares

4. S ending a s ales contact note after s elling the s hares by the broker to the s eller.

It s hows the net s ales payable to the s eller

5. Receiving the cheque by the s eller as advis ed by his / her broker ADVANTAGES OF INVES TING IN S HARES .

i) It is a s ource of income to s hare holders in form of dividends . When a

company that is s ued s hares makes a profit , the board of directors gives a

percentage of the profit to its s hare holders (dividends )

ii) It increas es the value of capital. When s hares are s old at a price that is higher

than the price at which they were purchas ed, this repres ents a profit called

capital gain.

iii) Inves ting in s hares gives s hare holders voting rights . S hares give a

s hareholder the right to attend and vote on important company decis ions at the

companies ’ annual General meetings .

iv) S hares act as collateral s ecurities . S hares certificates are us ed as collateral

s ecurities to obtain credit facilities like loans , credit s upplies etc.

v) S hare are trans ferrable. S hares can be pas s ed on from one pers on to another

and can als o be inherited.

DIS ADVANTAGES OF INVES TING IN S HARES .

i) It res ults in depreciation in the value of inves tment. S hare prices s ometimes fall

due to changes in demand and s upply conditions or when the company’s

performance declines

ii) S hare are not freely trans ferrable in private limited companies hence limiting

trans fer of the holder’s funds to other new priority areas due to failure of s elling

the s hares to another interes ted pers on

iii) Decis ions are made on the bas is of rule of the majority in the annual general

meetings hence the minority s hare holders with contras ting and oppos ing views

are not treated fairly

iv) S hare holders es pecially in public limited companies lack direct control over

their inves tments or day-to-day activities of the bus ines s

v) It leads to fluctuation in the value of s hare capital. This is due to fall and ris e in

prices of s hares

vi) If the company goes into liquidation, s hareholders are the las t to be paid after

all other creditors and debtors .

b). Inves ting in bonds

A bond is es s entially a loan an inves tor makes to the is s uer of a bond. The inves tor

receives regular interes t payments on the loan until the bond matures or is called,

at which point the is s uer repays you the principal. Certain bonds have s pecial

provis ions . Bond funds pool money from many inves tors to buy individual bonds

that meet the fund’s inves tment objective. Mos t bonds pay regular interes t until the

bond matures .

HOW BONDS WORK.

Bonds have three major components .

• The firs t is the face value (par value). This is the value of the bond as given on

the certificate or ins trument. It is the value the bond holder will at maturity

unles s the is s uer defaults . Inves tors pay face value when they buy the bond at

its original face value and the price may be more or les s than the par.

• S econd is a coupon rate. This is the annual rate of interes t payable on the bond.

The higher the coupon rate, the higher the interes t payments the owner receives .

The rate is s et at the time the bond is is s ued and does not change.

• The third is the maturity. This is the date upon which the is s uer pays back the

face value of the bond. The bond terminates at maturity.

Example;

A typical bond- a company is s ues a s hs 300,000 10- year bond with a 6% coupon

rate. Each year, the owner receives s hs 18,000 (6% of s hs 300,,000) paid in two

s emi-annual ins tallments of s hs 9000.

Advantages of inves ting in bonds .

i) Bonds are predictable. You know how much interes t you can expect to receive,

how often to receive it, and when the bond’s face value will mature.

ii) Bonds are s teadier than s tocks (which can fluctuate in s hort-term).S ome

inves tors prefer bonds to equity inves tments s ince they are les s volatile.

iii) People on a fixed income and retirement will receive a predictable amount of

regular income from bonds . Mos t bonds pay interes t to bondholders on a

regular bas is , with the exception of zero coupon bonds .

iv) The interes t rates paid by bonds typically exceed thos e paid by banks on

s avings accounts , es pecially s hort-term bonds .

Dis advantages of inves ting in bonds .

i) Bond los e value mos t es pecially when companies and municipalities go

bankrupt

ii) Long-term bonds tied up money in low yielding bonds .

iii) Unlike s tocks , bonds don’t offer the pos s ibility of high long-term returns .

Younger inves tors and thos e with s everal years to go until retirement would be

better s erved by liming their bond purchas es and opting for equity buys ins tead.

iv) Although bonds are les s volatile than s tocks , they are not immune from price

fluctuation. Bonds from ris kier companies can be very volatile. It is als o

pos s ible for a company to default on bonds is s ued hence a los s of principal for

the bond holder.

c. Collective Inves tment S chemes .

This is a type of inves tment s cheme that involves collecting money from different

inves tors and then combining all the money and inves ting in various products . Or are

private financial arrangements that pool together res ources of many s mall s avers ,

generating a large pool of res ources which is managed profes s ionally and inves ted in

various as s ets s uch as s hares and bonds with a purpos e of making profits . It may als o

be called a mutual fund. There are two types of collective inves tment s chemes .

i. Unit trus t s chemes . Thes e are types of s chemes where inves tors buy units ,

which repres ent the various holdings of the s cheme. One’s inves tment is

repres ented by the units they hold in the s cheme.

ii. Inves tment Companies with Variable Capital (ICVC). Where one’s inves tments

are repres ented by the s hares they hold. The s cheme takes the form of an

ordinary company. However, unlike other companies , it is allowed to buy back

s hares when an inves tor wis hes to pull out.

Advantages of inves ting in collective inves tment s chemes .

i) It leads to divers ification of ris k. Inves tors can s ecure a much wider

divers ification of ris k, becaus e thes e funds us ually inves t in different

inves tments . The greater the divers ification, the lower the ris k in relation to

return.

ii) It enables private individuals to acces s s ecurities inves tments . Collective

inves tment s chemes help the individual inves tors acces s inves tment in

s ecurities which would be difficult for individual inves tors

iii) It lowers trans actions cos ts -. By inves ting in CIS , inves tors incur lower cos ts

than if they were to buy and s ell bonds directly. This is becaus e trans action

cos ts are generally related to the s ize of the trans action and inves tors benefit

from the fund managers ’ ability to deal in large quantities of s hares at lower

average dealing cos ts .

iv) They promote profes s ional management-. CIS s provide full time profes s ional

management in a direct and s imple form and this is es pecially important where

market information is not widely available.

v) It protects inves tors . People need to have confidence that their money is

protected from fraud, thieves and other abus es . The CIS Act and regulations

made under it provide the des ired regulatory framework that will protect

inves tors in Uganda.

vi) It makes Liquidity eas y. It gives an opportunity to eas ily liquidate inves tments

by s elling your units back to the manager.

DIS ADVANTAGES OF COLLECTIVE INVES TMENT S CHEMES (CIS s )

i) Los s of control/ owners hip rights . When you inves t in CIS s , you are not involved

directly in deciding how your money is inves ted. As long as the unit trus tee

manager inves ts your money in the s cheme, there is little that you the unit

holder can do if you dis agree with their inves tment decis ions . The unit trus t

fund managers are more likely to make right inves tment decis ion than s mall

inves tors .

ii) It leads to high operational cos ts due to fees and charges . The s ervices

provided by the fund managers are not free. There are fees and charges paid by

the unit holders to the collective inves tment s chemes .

COLLECTIVE INVES TMENT S CHEMES – PURCHAS E PROCES S .

i) Going to Unit Trus t Manager – African Alliance (Workers Hous e Floor 1).

ii) Filling in an account opening form.

iii) S electing the type of unit trus t account; s hort term or long term.

iv) Depos iting money on account given.

v) S ending copy of depos it s lip to African Alliance.

vi) You become a unit trus t account holder.

RAIS ING LONG TERM FINANCE THROUGH CAPITAL MARKETS .

Many bus ines s es s truggle with financing es pecially long term financing. Ques tions

aris e as to how to expand a bus ines s .

Advantages of rais ing long term finance through capital markets .

i) Rais ing funds . Through the s ale of s hares on the capital markets , bus ines s es

are enabled to rais e funds . Un like in commercial banks , interes t rates may be

very high, s ecurity required, and others . but in capital markets the rais ing of

funds is cheaper, eas ier and fas ter

ii) Provis ion of market to s ell and buy s hares . They provide members of the public

or company a chance to buy s hares . This provides them an alternative method

of inves ting their s avings . They can als o s ell their s hares in cas e they would like

to opt out of the company.

iii) Inflow of international capital. Foreign inves tors who may wis h to inves t in the

country will find it eas ier to do s o through the capital market where they will

eas ily buy s hares . This leads to inflow of international capital for a country’s

economic growth.

iv) Better s tandards of living. A well organized increas ed inves tment by companies

due to the exis tence of capital market will lead to more employment

opportunities being created, more income generated and more dis pos able

income that people may us e for cons umption and s aving. By this , people’s

s tandards of living are expected to increas e.

AVENUES OF RIS ING LONG TERM FINANCING THROUGH CAPITAL MARKETS .

There are two avenues for rais ing finance through capital markets .

i) Equity financing; Here, the bus ines s rais es finance by is s uing s hares to the

general public. Thos e who buy s hares of the company then become part

owners of the company and hence s hareholders . However, a company

s hould firs t apply and then s eek approval from the CMA before it offers them

to the public.

DEBT FINANCING.

A bus ines s can als o rais e finance by borrowing from the public and ins titutions

through capital markets . The examples of debt ins truments include;

i) Corporate bonds ; which is an arrangement that enables a company to borrow

money from the public for a long period of time.

ii) Government bonds / municipal bonds which is an arrangement that enables

both government and local councils to borrow funds from the public for a long

period of time.

iii) Commercial paper (an arrangement that enables a company to borrow money

for a s hort period of time.)

ADVANTAGES OF DEBT FINANCING;

i) The company does not have to give up any owners hip of the company.

ii) The lender has no control over how to run the company whos e bond he has

purchas ed. All that the lender requires of the company is that the loan and

interes t s hould be paid back.

iii) The company is not required to pay the lender dividends when it makes a profit,

as is the cas e with s hareholders .

DIS ADVANTAGES .

i) The company is required to pay back the principal and interes t regardles s of its

financial pos ition

ii) The company mus t have s ufficient cas h flow to repay the loan and interes t.

Other s ources of long-term finance for Bus ines s in Uganda.

Rais ing capital is one of the major ques tions that an entrepreneur needs to deal with.

Other s ources include;

i) J oint venture; Find an individual or organization to both inves t in and work with

a company in its bus ines s project.

ii) Banks for working capital; S hort-term finance neces s ary to fund the day-to-day

running of the bus ines s . This can take the form of an agreed overdraft, where

the interes t will be calculated on your daily outs tanding balance and charged on

a monthly or quarterly bas is .

iii) Banks for medium term loans . A loan paid back over an agreed term (typically

three to ten years )’ where principal and interes t are paid off monthly. This type

of loan is us ed mainly to inves t in equipment, expans ion, and development.

iv) Banks for long term loans ; This type of loan is normally us ed to purchas e

as s ets s uch as a bus ines s , land, buildings , plant, etc that can be s hown to

directly or indirectly add to profit over a number of years .

v) Leas ing. Provides finance for the acquis ition of s pecific as s ets , s uch as cars

and machinery. Leas ing involves a depos it and repayments over typically 3 to

10 years . The financier purchas es the equipment you require and then leas ens

it to you in return for regular payments for the duration of the leas e period.

vi) Pers onal loans . If it is impos s ible to obtain a loan in your bus ines s ’ name, you

could cons ider obtaining a pers onal loan. However, the conditions s hould not

jeopardize control of the bus ines s and that you are very confident of being able

to repay or you may los e as s ets put up as collateral.

vii) Family and friends . You can borrow money from friends and family, however, to

avoid mis unders tandings or res olve any dis pute if things go wrong, it is better to

make an agreement including the loan time period and interes t payments .

The advantage of rais ing finance is that it helps to avoid the dis s olution of

bus ines s control or s hare capital.

Dis advantages

i) J oint ventures can often res ult in the los s of control over as pects s uch as policy

and development.

ii) Banks have the power to place a bus ines s into adminis tration or bankruptcy if it

defaults on debt interes t or repayment.

iii) Borrowing from family or friends can lead to dis putes or interference in the

management of the venture.

iv) When s eeking financing, cons ider what s ource and type of finance s uits your

needs . Then match the method of funding and the term of the loan the reas on

for the finance. You may have an impact on bus ines s cas h flow and other

obligations s uch as taxation.

Advantages of Equity S hares

Equity s hares are the mos t common and univers ally us ed s hares to mobilize finance

for

the company. It cons is ts of the following advantages .

1. Permanent s ources of finance: Equity s hare capital is belonging to long-term

permanent nature of s ources of finance, hence, it can be us ed for long-term or

fixed capital requirement of the bus ines s concern.

2. Voting rights : Equity s hareholders are the real owners of the company who have

voting rights . This type of advantage is available only to the equity s hareholders .

3. No fixed dividend: Equity s hares do not create any obligation to pay a fixed

rate of dividend. If the company earns profit, equity s hareholders are eligible for

30 Financial Management

profit, they are eligible to get dividend otherwis e, and they cannot claim any

dividend from the company.

4. Les s cos t of capital: Cos t of capital is the major factor, which affects the value

of the company. If the company wants to increas e the value of the company,

they have to us e more s hare capital becaus e, it cons is ts of les s cos t of capital (Ke)

while compared to other s ources of finance.

5. Retained earnings : When the company have more s hare capital, it will be s

uitable for retained earnings which is the les s cos t s ources of finance while

compared to other s ources of finance.

Dis advantages of Equity S hares

1. Irredeemable: Equity s hares cannot be redeemed during the lifetime of the

bus ines s concern. It is the mos t dangerous thing of over capitalization.

2. Obs tacles in management: Equity s hareholder can put obs tacles in management

by manipulation and organizing thems elves . Becaus e, they have power to contras t

any decis ion which are agains t the wealth of the s hareholders .

3. Leads to s peculation: Equity s hares dealings in s hare market lead to s ecularis m

during pros perous periods .

4. Limited income to inves tor: The Inves tors who des ire to inves t in s afe s ecurities

with a fixed income have no attraction for equity s hares .

5. No trading on equity:When the company rais es capital only with the help of

equity, the company cannot take the advantage of trading on equity.

Advantages of Retained Earnings

Retained earnings cons is t of the following important advantages :

1. Us eful for expans ion and divers ification: Retained earnings are mos t us eful

to expans ion and divers ification of the bus ines s activities .

2. Economical s ources of finance: Retained earnings are one of the leas t cos tly

s ources of finance s ince it does not involve any floatation cos t as in the cas e of

rais ing of funds by is s uing different types of s ecurities .

3. No fixed obligation: If the companies us e equity finance they have to pay

dividend and if the companies us e debt finance, they have to pay interes t. But

if the company us es retained earnings as s ources of finance, they need not pay

any fixed obligation regarding the payment of dividend or interes t.

4. Flexible s ources : Retained earnings allow the financial s tructure to remain

completely flexible. The company need not rais e loans for further requirements ,

if it has retained earnings .

5. Increas e the s hare value: When the company us es the retained earnings as the s

ources of finance for their financial requirements , the cos t of capital is very cheaper

than the other s ources of finance; Hence the value of the s hare will increas e.

6. Avoid exces s ive tax: Retained earnings provide opportunities for evas ion of

exces s ive tax in a company when it has s mall number of s hareholders .

7. Increas e earning capacity: Retained earnings cons is t of leas t cos t of capital and als

o it is mos t s uitable to thos e companies which go for divers ification and expans ion.

Dis advantages of Retained Earnings

Retained earnings als o have certain dis advantages :

1. Mis us es : The management by manipulating the value of the s hares in the s tock

market can mis us e the retained earnings .

2. Leads to monopolies : Exces s ive us e of retained earnings leads to monopolis tic

attitude of the company.

3. Over capitalization: Retained earnings lead to over capitalization, becaus e if the

company us es more and more retained earnings , it leads to ins ufficient s ource

of finance.

4. Tax evas ion: Retained earnings lead to tax evas ion. S ince, the company reduces

tax burden through the retained earnings .

S ources of Financing 37

5. Dis s atis faction: If the company us es retained earnings as s ources of finance, the

s hareholder can’t get more dividends . S o, the s hareholder does not like to us e

the retained earnings as s ource of finance in all s ituations . Advantages of Debenture

Debenture is one of the major parts of the long-term s ources of finance which of

cons is ts

the following important advantages :

1. Long-term s ources : Debenture is one of the long-term s ources of finance to the

company. Normally the maturity period is longer than the other s ources of finance.

2. Fixed rate of interes t: Fixed rate of interes t is payable to debenture holders ,

hence it is mos t s uitable of the companies earn higher profit. Generally, the rate

of interes t is lower than the other s ources of long-term finance.

3. Trade on equity: A company can trade on equity by mixing debentures in its

capital s tructure and thereby increas e its earning per s hare. When the company

apply the trade on equity concept, cos t of capital will reduce and value of the

company will increas e.

4. Income tax deduction: Interes t payable to debentures can be deducted from the

total profit of the company. S o it helps to reduce the tax burden of the company.

5. Protection: Various provis ions of the debenture trus t deed and the guidelines

is s ued by the S EB1 protect the interes t of debenture holders .

Dis advantages of Debenture

Debenture finance cons is ts of the following major dis advantages :

1. Fixed rate of interes t: Debenture cons is ts of fixed rate of interes t payable to

s ecurities . Even though the company is unable to earn profit, they have to pay

the fixed rate of interes t to debenture holders , hence, it is not s uitable to thos e

company earnings which fluctuate cons iderably.

S ources of Financing 35

2. No voting rights : Debenture holders do not have any voting rights . Hence, they

cannot have the control over the management of the company.

3. Creditors of the company: Debenture holders are merely creditors and not the

owners of the company. They do not have any claim in the s urplus profits of

the company.

4. High ris k: Every additional is s ue of debentures becomes more ris ky and cos tly

on account of higher expectation of debenture holders . This enhanced financial

ris k increas es the cos t of equity capital and the cos t of rais ing finance through

debentures which is als o high becaus e of high s tamp duty.

5. Res trictions of further is s ues : The company cannot rais e further finance

through debentures as the debentures are under the part of s ecurity of the as s ets

already mortgaged to debenture holders .

INTERNAL BUS INES S TRANS ACTIONS

Thes e refer to dealings between two parties that involve exchange of value (goods and

s ervices or goods for goods ).

TYPES OF BUS INES S TRANS ACTIONS

There are majorly two types of bus ines s trans actions namely:-

(a) Cas h trans action. This is the dealing between two parties that involves

exchange of goods or s ervices and payment for them is at that particular time.

(b) Credit trans action. This refers to the dealing between two parties that involves

exchange of goods and s ervices and payment is made at a later date.

CAS H S ALES AND CREDIT S ALES .

Cas h s ales is when goods and s ervices are s old and payment for them is made there

an then.

OR

Cas h s ales are s ale that involve exchange of goods and s ervices whos e is made there

and then.

Credit s ales . This is when goods and s ervices are s old and payment for hem is

expected at a future time i.e. the s eller and the buyer agree on when payment s hould

be made.

OR

Credit s ales are s ales that involve exchange of goods and s ervices whos e payment is

expected at a future time.

ADVANTAGES OR MERITS OF S ELLING ON CAS H BAS IS .

1. It helps or enables an entrepreneur to get cas h needed to meet immediate cas h

requirements hence facilitating the s mooth running of the bus ines s .

2. It provides cons tant s upply of working capital and this helps the bus ines s in

s hort of cas h and s aves it from unneces s ary delays .

3. It enables proper management of s tock and cons tant s upply s ince cas h is

always available thus avoiding s hortages in s upplies of goods and s ervices .

4. It s aves the bus ines s from bad debts hence reducing los s es which could have

been caus ed by bad debtors .

5. It helps the bus ines s to avoid adminis trative expens es and debts as s ociated

with credit s ales e.g. trans port cos ts .

6. S elling on cas h bas is helps the bus ines s to reduce procedural formalities e.g.

documentation (involving recording debts ), time etc as s ociated with credit s ales .

7. It enables the bus ines s to s ell goods to buyers from unknown or unfixed places

e.g. travelers .

8. Enables an entrepreneur to s ell goods whos e value is low or s mall

9. Enables an entrepreneur to s ell goods or s ervices effectively to new cus tomers .

This reduces los s es from bad debts .

10. S elling on cas h bas is helps the bus ines s to eas ily expand and grow due to

cons tant flow of cas h in the bus ines s .

11. It enables the bus ines s to achieve the s et goals and objectives e.g. quality

improvement, brand awarenes s .

DIS ADVANTAGES

1. It dis courages cus tomers who may not have ready cas h.

2. It reduces s ales and competitive advantage of the bus ines s s ince s alary

earners may not be accommodated.

3. It weakens / limits relations hips between the bus ines s and its cus tomers who

may want to buy goods on credit

S ample ques tions

(a) Explain the objectives of s elling on cas h bas is in an enterpris e.

(b) Why is it neces s ary to s ell on cas h bas is in a bus ines s

(c) Of what neces s ity is cas h s elling in an enterpris e

(d) Why is there a need to s ell on cas h bas is .

Ans wers

1. To enable an entrepreneur to meet the immediate requirements in the bus ines s

that requires cas h e.g. purchas ing raw materials .

2. To provide cons tant s upply of working capital to enable enterpris e not to run out

of cas h.

3. To reduce on the chances of bad debts in an enterpris e

4. To ens ure proper management and cons tant s upply of goods to the bus ines s .

5. To ens ure proper growth and development of an enterpris e

6. To enable the bus ines s to achieve the s et goals and objectives s ince to

implement s uch goals , money to cas h form is highly needed.

7. To enable the bus ines s to avoid adminis trative expens es as s ociated with

s elling on credit.

8. To reduce on procedural formalities which may aris e from s elling on credit?

That is to s ay, reducing on the procedures taken up or gone through while

recovering the money e.g. writing invoices , writing mes s ages , calling on

telephones etc or preparing s ome documents which are being written

9. To enable the bus ines s to s ell goods to new cus tomers .

Qn: Under what circums tances may an entrepreneur s ell goods on cas h bas is ? (Us e

when, if, incas e. E.g.)

1. When there is need to meet immediate cas h requirements

2. When the entrepreneur wants to s ell goods of low value

3. When an entrepreneur is dealing with new cus tomers

4. In cas e an entrepreneur wants to reduce bad debts in the bus ines s

5. In cas e an entrepreneur wants to reduce on procedural formalities

6. When the entrepreneur is in need of working capital

7. In cas e an entrepreneur wants to achieve the s et goals .

WAYS OF ENS URING PROPER CAS H MANAGEMENT

The following are the ways through which an entrepreneur can manage cos t s ales in

his or her enterpris e.

1. By documenting (receipting) all the cas h received in the bus ines s . All cas h

received in the bus ines s s hould be documented and accounted for by balancing

phys ical cas h and cas h records by the end of each day.

2. By banking all the bus ines s cas h. Bus ines s es s hould run current accounts with

creditable banking ins titutions s o as to avoid fraud (embezzlement)

3. By s toring all cas h receipts and other documents related to accountability.

Proper s torage of all receipts in the bus ines s s hould be done s ince they are

us ed for reference purpos es .

4. By making proper accountability whenever expenditure is made to enable

proper planning.

5. By keeping cas h at the bus ines s premis es under lockers and the entrepreneurs

s hould avoid or keeping a lot of cas h for the daily expenditure

6. By avoiding s pending bus ines s cas h on pers onal matters s ince this reduces the

bus ines s working capital.

7. By authorizing and documenting all documents to do with cas h and cas h

dis burs ements by the entrepreneur pers onality.

8. Through receiving bank s tatements on a regular bas is is proper accountability

in the bus ines s .

ADVANTANGES OF S ELLING ON CREDIT

An entrepreneur enjoys the following advantages for s elling his or her goods on credit.

1. It enables an entrepreneur to s ell goods at high prices which increas es profits in

the bus ines s . This is becaus e goods s old on credit are highly priced than goods

s old on cas h bas is .

2. It enables an entrepreneur (s eller) to meet the buyers ’ requirements es pecially

thos e without ready cas h. This crates cus tomer loyalty in the bus ines s .

3. Acts as a marketing tool and this increas es s ales in the bus ines s . It enables an

entrepreneur to market his or her products s ince it attracts many cus tomers .

4. Enables an entrepreneur to get rid of goods which are about to expire or whos e

fas hion is about to change. This reduces huge los es that would have been

incurred if s uch goods expire.

5. It builds a good and long term relations hip between the entrepreneur and the

debtor. This improves on the image of the bus ines s in the community.

6. It enables an entrepreneur to compete favourably with rivals s ince s elling goods

on credit creates cus tomers ’ loyalty which enables the enterpris e to retain its

cus tomers .

7. It increas es the bargaining power of the buying party s ince the s ys tem is

convenient to him or her. This is due to the enough time given to the buyer to

s ettle the debt.

8. It reduces the s torage cos ts of the enterpris e s ince s ome goods are taken on

credit.

9. It enables an entrepreneur to s ell off s low moving goods in an enterpris e s ince it

accommodates all cus tomers ’ i.e. low income earners , middle and high income

earners .

10. It enables an entrepreneur to dis pos e of the highly valued goods that can not be

s old eas ily to cas h bas is .

11. It attracts new cus tomers into the bus ines s thus expanding the market s hare.

12. It creates s pace for new s tock as the old s tock is cleared.

DIS ADVANTAGES OF CREDIT S ALES

1. It ties up working capital of the bus ines s in debts . This limits the effective

operation of the bus ines s activities .

2. It may s poil the relations hip between the bus ines s and the cus tomer incas e of

the debtors failure to pay. This may reduce the number of cus tomers .

3. It involves a lot of paper work and record keeping which increas es adminis

trative cos t in the enterpris e. This is becaus e s ellers are required to prepare

invoices , producer’s notes which all require printing and s tationery cos ts .

4. Credit s ales lead to los s of value of money in cas e of inflation s ituations . S ince

cus tomers s pend time with the money and by the time they pay back its value is

les s than the value of the tiem of taking goods .

5. Incas e of death of a cus tomer who has bought goods or s ervices on credit, the

bus ines s may find it very difficult to recover the money us ed

6. S ome times the goods s old on credit by s ellers , buyers are of poor quality hence

reducing on the s tandards of living of the cus tomers .

CIRCUMS TANCES UNDER WHICH AN ENTREPRENUER MAY S ELL GOODS ON

CREDIT

Qn: Under what circums tances may an entrepreneur s ell goods on credit

Explain the conditions under which an entrepreneur may s ell goods on credit.

E.g. approach us e when/ incas e/ where etc

1. When the goods are about to expire. An entrepreneur may s ell goods on credit

s o as to clear old s tock that is yet to expire in order to avoid los es .

2. When the entrepreneur can als o buy goods on credit. Buying goods on credit by

the entrepreneur from his or her s upplier enables his or her to als o s ell on credit.

3. In cas e the entrepreneur expects prices to fall in the near by future. This may

force him or her to s ell old s tock s o as to avoid los s es .

4. When there are s trong laws to enforce recovery of the debts . This may enable

an entrepreneur to s ell goods on credit s ince he or s he is accus ed of the pay

back.

5. Incas e the entrepreneur with pres s ure form competitors who s ell goods on

credit. This may force an entrepreneur to s ell goods on credit s o as to compete

favourably with other entrepreneurs .

6. In cas e an entrepreneur has carefully as s es s ed the credit worthines s of the

cus tomer. An entrepreneur may s ell goods to trus t worthy cus tomers becaus e

he is expecting them to pay back.

7. In cas e the entrepreneur wants to market his or her products . This helps to

attract more cus tomers in bus ines s .

8. In cas e the entrepreneur wants to reduce s torage cos ts or to create new s pace

in the s tore for new s tock. The entrepreneur may s ell goods on credit in order to

reduce cos ts incurred on keeping old s tock and create s pace for the new s tock

in the bus ines s .

9. When the entrepreneur wants to meet the buyers requirements es pecially s alary

earners (thos e without ready cas h).

10. When the entrepreneur has s ufficient working capital to carryout bus ines s

operations . This allows an entrepreneur to cons tantly s upply goods or s ervices

to cus tomers with ready cas h.

11. Incas e the entrepreneur wants to maintain and improve the exis ting relations hip

between the bus ines s and cus tomers s ince s elling on credit increas es cus

tomer’s trus t in the bus ines s .

(a) Why is it neces s ary to s ell goods on credit in an enterpris e

(b) Explain the objectives of s elling goods on credit

(c) Explain the reas ons of s elling goods on credit

(d) Why may an entrepreneur s ell goods on credit.

Approach

Us e to, in order to, at the beginning of every point

1. To increas e profits in the bus ines s . This is becaus e goods s old on credit

2. To meet the buyer’s requirements

3. To mark the entrepreneurs products

4. To get rid of goods which are about to expire

5. To build a good and long term relations hip between an entrepreneur and the

cus tomer

6. To compete favourably with rivals .

MANAGEMENT OF CREDIT S ALES

The following are ways of managing credit s ales .

1. By identifying and educating people who s hould approve credit s ales and the

amounts would be approved. An entrepreneur s hould educate people and make

them known to people and cus tomers in charge of credit s ales .

2. By documenting all the credit s ales properly e.g. invoices s hould be prepared to

s how the goods that have been s old on credit and delivery notes to s ow that

goods have delivered and received by the cus tomers .

3. By depos iting all credit s ales to the debtor’s ledger for eas y follow up.

4. Through recording all the cas h received from the debtors in the cas h book

immediately when the debt is cleared.

5. By giving a s hort payback period s o as to enable the bus ines s to receive the

money in time.

CREDIT PURCHAS ES

Refers to s ituation where an entrepreneur obtains goods from a given s upplier and

pays for them at a future date

ADVANTAGES OF CREDIT PURCHAS ES

1. Buying on credit is a s ource of funding (working capital) for the bus ines s s ince

the bus ines s acces s and us e goods it has not paid for.

2. It enables an entrepreneur to s olve or pay for goods or s ervices bought.

3. It encourages hard work in the bus ines s s ince the entrepreneur work hard in

order to get the money out of the goods purchas ed on credit to pay creditors

4. It enhances a good relations hip between the entrepreneur (purchas er) and the

s upplier

DIS ADVANTAGES

1. The goods and s ervices purchas ed on credit are normally charged a high price

than goods or s ervices bought on cas h bas is .

2. It may lead to buying of poor quality goods or low quality goods s ince the

entrepreneur has no choice.

3. The des ire to take advantage of credit facility offered reduces the entrepreneur’s

choices