Joint Venture or Enterprise: Understanding the Concept and its Importance

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Lesson Objectives

By the end of the lesson, students should be able to:

1. Define joint ventures or enterprises.
2. Identify and explain the sources of finance for business enterprises.
3. Highlight and discuss the major problems faced by business enterprises.

Definition of Joint Venture.

A joint venture or enterprise is a business arrangement where two or more individuals, groups, or companies agree to come together by contributing their resources, such as money, skills, or equipment, in order to start and run a business.

In this type of arrangement, the parties involved share both the profits and the risks of the business.

Joint ventures are often formed for a specific purpose or project and allow partners to benefit from each other’s strengths while reducing the burden of operating alone.

 

Key Features of Joint Ventures

1. Shared Ownership:

In a joint venture, two or more people or organisations come together to own the business. This means that no single person has full control over everything.

Instead, ownership is divided among the partners, depending on how much each one contributes.

For example, if two friends start a poultry farm and both bring in money, they both become owners. This shared ownership helps reduce the burden on one person and makes the business stronger.

 

2. Shared Risks and Rewards:

Every business has risks, such as loss of money, theft, or failure to make profits. In a joint venture, these risks are not carried by one person alone.

Instead, they are shared among all the partners. At the same time, when the business makes profit, the reward is also shared according to their agreement.

For instance, if three people join to open a shop and the shop loses money, each one bears part of the loss. But if the shop makes profit, they also share it fairly.

 

3. Usually Set Up for a Specific Purpose or Project:

Most joint ventures are formed to achieve a particular goal or carry out a specific project. Once that goal is achieved, the joint venture may come to an end.

For example, a Nigerian construction company may join with a foreign company to build a bridge. After completing the project, the partnership may dissolve.

This makes joint ventures flexible and useful for special projects that need more than one person’s resources or expertise.

 

Sources of Finance for Joint Venture

Businesses need money (capital) to start and continue operations. Finance can come from different sources:

1. Personal Savings –

This is the most common source of finance, especially for small businesses. It refers to the money an individual has kept aside from previous earnings, salaries, or allowances.

Many entrepreneurs start their businesses with personal savings because it is easy to access and does not involve paying interest. However, the amount may be limited and might not be enough for big projects.

 

2. Family and Friends –

Sometimes business owners raise money from relatives or friends who are willing to help them. This type of finance is usually informal and may not require strict repayment terms.

It is a quick and flexible way to get funds, but it can cause misunderstandings or conflicts if the business fails or repayment is delayed.

 

3. Bank Loans –

Banks provide loans to individuals and businesses who need capital to start or expand. These loans must be repaid with interest within an agreed time.

Bank loans are a reliable source of large amounts of money, but the borrower needs to provide collateral (such as land, house, or other valuable assets). For small businesses, high interest rates can be a major challenge.

 

4. Trade Credit –

This occurs when a supplier allows a business to collect goods or raw materials and pay for them later.

It helps businesses to continue production or sales even when they do not have enough cash immediately.

Trade credit is especially useful for retailers and wholesalers. However, failure to pay on time may damage the business relationship or lead to legal action.

 

5. Partnership Contributions –

In a joint venture or partnership, each partner contributes money or assets to start the business.

By combining their resources, they can raise more funds than one person could on their own. The advantage is that risks and responsibilities are shared.

However, problems may arise if partners disagree on how much each person should contribute or how profits should be shared.

 

6. Government Grants or Loans –

Governments sometimes provide financial support to encourage business growth, especially in agriculture, manufacturing, or small-scale industries.

Grants may not need to be repaid, while government loans are often given with lower interest rates compared to banks.

The challenge is that such support may not always be available or may involve strict conditions before it is granted.

 

7. Sale of Shares –

Big companies (public limited companies) can raise finance by selling shares to members of the public. Each shareholder becomes part-owner of the company and receives dividends as a reward.

This method allows businesses to raise very large amounts of money. However, it reduces the control of the original owners because shareholders have a say in the company’s decisions.

 

8. Retained Profits –

This is when a business uses part of its previous profits to fund expansion instead of sharing all the profit among owners.

It is a cheap and safe source of finance since it does not involve borrowing or interest payments. However, small businesses may not always make enough profit to rely on this source regularly.

 

Problems of Joint Venture

Business enterprises, including joint ventures, face many challenges. Common ones include:

1. Lack of Capital –

One of the biggest problems facing many businesses is not having enough money to start or expand.

Without sufficient capital, enterprises cannot buy the equipment they need, pay workers, or produce goods in large quantities.

For example, a small shop may want to expand into a supermarket but cannot afford to rent a bigger space or stock more goods. This financial limitation often prevents businesses from growing.

 

2. Poor Management –

Many enterprises fail because the people managing them lack the knowledge and skills required to run a business successfully. Poor management can lead to wrong decisions, wastage of resources, and low productivity.

For instance, a business owner who does not keep proper records may lose track of profits and losses, leading to collapse.

Good managers are needed to plan, organise, and control business activities effectively.

 

3. Conflict Between Partners –

In joint ventures or partnerships, disagreements may arise between owners over how profits should be shared, who makes decisions, or what direction the business should take.

These conflicts can weaken cooperation and reduce efficiency. If not properly managed, they may even cause the business to break apart.

For example, two friends who start a poultry farm together may argue over reinvesting profits or using them for personal needs.

 

4. Competition –

Businesses often face stiff competition from others offering the same products or services. When many businesses sell similar goods, they must struggle to attract customers, sometimes by reducing prices.

This reduces profit margins and may even force weaker businesses to close down. For example, if many food vendors are located in the same area, each one may struggle to make enough sales.

 

5. Government Policies –

Sometimes, the rules and policies made by the government create problems for enterprises.

High taxes, strict licensing requirements, or sudden changes in trade policies can make it difficult for businesses to operate smoothly.

For instance, when import duties are raised, the cost of raw materials may increase, making it more expensive for businesses to produce goods.

 

6. Economic Conditions –

The general state of the economy also affects business enterprises. Problems such as inflation (rising prices), poor electricity supply, bad roads, or insecurity increase the cost of running a business.

For example, in areas where there is no stable electricity, businesses are forced to buy fuel for generators, which makes their products more expensive. This reduces profit and discourages growth.

 

7. Lack of Skilled Labour –

Enterprises also face problems when they cannot find enough trained workers to handle specialised tasks.

Skilled workers are needed to operate machines, manage accounts, or provide quality services. If workers are not well-trained, the quality of goods and services will be poor, and customers may look for better alternatives.

For example, a factory without skilled machine operators may produce substandard products that cannot compete in the market.

 

Final Thoughts

A joint venture is when two or more parties come together to run a business, share risks, and share profits.

Businesses can get money from savings, banks, government, or other sources. They also face problems such as lack of capital, poor management, and competition.

 

 

 

 

Read Also: Reasons For Government Ownership Of Enterprises