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GST 311 � GENERAL ENTREPRENEURSHIP
CHAPTER
1: Introduction to Entrepreneurship and Problem Solving Behaviour
The
World of the Entrepreneur
-
Welcome to the world of the entrepreneur! Across the
globe, growing numbers of people are realizing their dreams of owning and
operating their own businesses.
-
Interest in entrepreneurship has never been higher
than it has been at the beginning of the twenty-first century
-
Capitalist societies depend on entrepreneurs to
provide the drive and risk taking necessary for the system to supply people
with the goods and services they need.
-
Entrepreneurship
plays a significant role in the business world by:
i.
Introducing
innovative products
ii.
Pushing back
technological frontiers
iii.
Creating new
jobs
iv.
Opening foreign
markets
Who is
an Entrepreneur?
An
entrepreneur is one who��������������������������������������������������������������������
- creates a business in the
face of risk and uncertainty
- for the purpose of
achieving profit and growth
- by identifying significant
opportunities
- and assembling the
necessary resources to capitalize on them.
Entrepreneur is a person who
either creates new combinations of production factors such as
New methods of production,
new products, new market, find new sources of supply and new organizational
forms. OR as a person who is willing to take risks OR a person who by
exploiting market opportunities, eliminates disequilibrium between aggregate
supply and aggregate demand OR as one who owns and operates a business. ( Tyso,
Petrin, Rogers, 1994, p.2-4).
Characteristics
of Entrepreneur (Entrepreneurial profile)
i.
Desire for
responsibility
ii.
Preference for
moderate risk (Minimize risk by building a solid business plan)
iii.
Confidence in
their ability to succeed
iv.
Desire for
immediate feedback
v.
High level of
energy
vi.
Future
orientation (A focus on future opportunities, rather than focus on past events)
vii.
Skill at
organizing
viii.
Value of
achievement over money
ix.
High degree of
commitment
x.
Tolerance for
ambiguity (willingness to take risks)
xi.
Flexibility
(adapt their businesses to meet changing tastes and trends)
xii.
Tenacity (Try,
try and try again)
The
Benefits of Entrepreneurship
i.
Opportunity to create your own destiny
ii.
Opportunity to make a difference (combining concern
for social issues and a desire to earn a good living).
iii.
Opportunity to reach your full potential
iv.
Opportunity to reap impressive profits
v.
Opportunity to contribute to society and be recognized
for your efforts
vi.
Opportunity to do what you enjoy and have fun at it
The
Potential Drawbacks of entrepreneurship
i)
Uncertainty of income
ii) Risk of losing your entire investment
iii) Long hours and hard work
iv) Lower quality of life until the business gets established
v) Complete responsibility (have to make all decisions)
vi) Discouragement (Face many obstacles along the way).
The
Cultural Diversity of Entrepreneurship
-
Anyone has the potential to become an entrepreneur.
-
Indeed, diversity is a hallmark of entrepreneurship,
and the following represent the diverse mix of people who make up the rich
fabric of entrepreneurship:
a) Young Entrepreneurs
b) Women Entrepreneurs
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d) Immigrant Entrepreneurs
e) Part-Time Entrepreneurs
f) Home-Based Business
g) Family-owned business
h) Copreneurs (entrepreneurial couples who work together as co-owners of
their business)
i)
Corporate Castoffs (People who lose their company jobs
and start their own businesses)
j)
Corporate dropouts
The
Power of �Small� Business
-
A small business is one that employs fewer than 100
people.
-
�Gazelles� refer to very successful small businesses
that are growing at 20% or more per year with at least $100,000 in annual
sales; they create 70% of net new jobs in the economy.
-
The small business sector�s contributions are many:
a. They make up 99% of all businesses
b. They employ 51% of the private sector workforce
c. They create two-thirds to three-fourths of the net new jobs in the
economy
d. They produce 51% of the country�s private gross domestic product (GDP)
e. They account for 47% of all business sales.
The
10 Deadly Mistakes of Entrepreneurship
1. Management Mistakes (primary cause of business failure)
2. Lack of Experience
3. Poor Financial Control
4. Weak Marketing Efforts
5. Failure to Develop a Strategic Plan (Failure to plan is planning to
fail)
6. Uncontrolled Growth (As the business increases in size and complexity,
problems increase in magnitude, and the entrepreneur must learn to deal with
them)
7. Poor Location
8. Improper Inventory Control
9. Incorrect Pricing (Small businesses usually underprice their products
and services. The first step in establishing accurate prices is too know what a
product or service costs to make or provide)
10. Inability to Make the �Entrepreneurial Transition� (Once a business is
started and starts to grow, it usually requires a radically different style of
management, one that entrepreneurs are not necessary good at)
Putting
Failure into Perspective
-
Because they are building businesses in an environment
filled with uncertainty and shaped by rapid change, entrepreneurs recognize
that failure is likely to be part of their lives, but they are not paralyzed by
that fear.
-
Failure is a natural part of the creative process. The
only people who never fail are those who never do anything or never attempt
anything new.
-
One hallmark of successful entrepreneurs is the
ability to fail intelligently, learning why they failed so that they can avoid
making the same mistake again.
-
Entrepreneurial success requires both persistence and resilience,
the ability to bounce back from failure.
How
to Avoid the Pitfalls
1. Know Your Business in Depth
2. Develop a Solid Business Plan
3. Manage Financial Resources
4. Understand Financial Statements (To truly understand what is going on in
the business, an owner must have at least a basic understanding of accounting
and finance)
5. Learn to Manage People Effectively (No matter what kind of business you
launch, you must learn to mange people. Every business depends on a foundation
of well-trained, motivated employees. No business owner can do everything
alone.)
6. Keep in Tune with Yourself (Monitor your health, manage your time, and
have passion for what you do).
CHAPTER
2: INSIDE THE ENTREPRENEURIAL MIND: FROM IDEAS TO REALITY
Creativity,
Innovation, and Entrepreneurship
-
What is the
entrepreneurial �secret� for creating value in the marketplace? In reality, the
�secret� is no secret at all: It is applying creativity and innovation to solve
problems and to exploit opportunities to enhance or to enrich people�s lives.
-
Creativity is
the ability to develop new ideas and to discover new ways of looking at
problems and opportunities.
-
Innovation is
the ability to apply creative solutions to problems and opportunities to
enhance or to enrich people�s lives.
-
Successful entrepreneurs
come up with ideas and then find ways to make them work to solve a problem or
to fill a need.
-
Entrepreneurship
is thus the result of a disciplined, systematic process of applying creativity
and innovation to needs and opportunities in the marketplace.
Creativity � A
Necessity for Survival
-
In this fiercely competitive, fast-faced, global
economy, creativity is not only and important source for building a competitive
advantage, but it also is a necessity for survival.
-
A paradigm is a
preconceived idea of what the world is, what it should be like, and how it
should operate.
-
Entrepreneurs
must always be on guard against existing paradigms because they are obstacles
to creativity. Successful entrepreneurs often go beyond conventional wisdom as
they ask �why not�?�
-
Success � even
survival � in this fiercely competitive, global environment requires
entrepreneurs to tap their creativity and that of their employees constantly.
Barriers to
Creativity
-
The number of
potential barriers to creativity is limitless, but entrepreneurs commonly face
10 �mental locks� on creativity:
i.
Searching for
the one �right� answer
-
Deeply ingrained
in most educational systems is the assumption that there is one �right� answer
to a problem.
-
In reality,
however, depending on the question one asks, there may be (and usually are)
several �right� answers.
ii.
Focusing on
�being logical�
-
Focusing too
much on being logical discourages the use of one of the mind�s most powerful
creations: intuition.
-
Intuition is a
crucial part of the creative process because using it often requires one to
think about things in new and different ways.
iii.
Blindly
following the rules
-
Sometimes
creativity depends on our ability to break the existing rules so that we can
see new ways of doing things.
iv.
Constantly being
practical
-
Suspending
practicality for a while frees the mind to consider creative solutions that
otherwise might never arise. (Consider the invention of the airplane).
v.
Viewing play as
frivolous (not important)
-
A playful
attitude is fundamental to creative thinking
-
Children learn
when they play, and so can entrepreneurs
-
Watch children
playing and you will see them invent new games, create new ways of looking at
old things, and learn what works and what doesn�t in their games.
vi.
Becoming overly
specialized
-
Creative
thinkers do not limit their search for ideas in areas in which they have
expertise. They search for ideas outside their areas of specialty.
vii. Avoiding ambiguity (uncertainty)
-
�Avoiding uncertain situations often stifles
creativity
-
Ambiguity can be
a powerful creative stimulus; it encourages us to �think something different�.
viii. Fearing looking foolish
-
People tend
toward the status quo because they don�t want to look foolish.
-
Entrepreneurs
perform a vital function � �creative destruction� � in which they look at old
ways of doing things and ask, �Is there a better way?� By destroying the old,
they create the new.
ix.
Fearing mistakes
and failure
-
Creative people
realize that trying something new often leads to failure; however they do not
see failure as an end. It represents a learning experience on the way to
success.
x.
Believing that �
I�m not creative�
-
Some people
limit themselves because they believe creativity belongs only to a select few.
-
Everyone has
within themselves the potential to be creative.
How to enhance
creativity
-
Entrepreneurs can stimulate creativity in their
companies by:
i.
Embracing
diversity (Hire a diverse workforce)
ii.
Expecting
creativity
iii.
Expecting and
tolerating failure
iv.
Encouraging
creativity
v.
Viewing problems
as challenges
vi.
Providing
creativity training
vii. Providing support (Employees should be given the tools
and the resources they need to be creative).
viii.
Rewarding
creativity
ix.
Modeling
creativity (Entrepreneurs must set an example to employees by being creative
themselves).
-
Entrepreneurs
can enhance their own creativity by:
i.
Allowing
themselves to be creative
ii.
Giving their
minds fresh input everyday
iii.
Keeping a
journal handy to record their thoughts and ideas
iv.
Reading books on
stimulating creativity
v.
Taking some time
off to relax
The Creative
Process
-
Although
creative ideas may appear to strike as suddenly as a bolt of lightning, they
are actually the result of the creative process, which involves seven steps
i.
Preparation:
-
involves getting
the mind ready for creative thinking
-
Preparation
might include a formal education, on-the-job training, work experience, and
taking advantage of other learning opportunities
ii.
Inves/spantigation:
-
Requires the
individual to develop a solid understanding of the problem or decision
iii.
Transformation:
-
Involves viewing
the similarities (convergent thinking) and the differences in the information
collected
iv.
Incubation:
-
Allows the
subconscious to reflect on the information collected
v.
Illumination:
-
Occurs at some
point during the incubation period when a spontaneous breakthrough causes �the
light bulb to go on�
vi.
Verification:
-
Involves
validating the idea as accurate and useful
-
For
entrepreneurs, this may include conducting experiments, running simulations,
test marketing a product or service, etc, to verify that the new idea will work
and is practical to implement.
vii. Implementation:
-
Involves
transforming the idea into a business reality
Techniques for
Improving the Creative Process
-
Three techniques
are especially useful for improving the creative process:
i.
Brainstorming
-
A process in
which a small group of people interact with very little structure with the goal
of producing a large quantity of novel and imaginative ideas
-
As group members
interact, each idea sparks the thinking of others, and the spawning of ideas
becomes contagious.
ii.
Mind-mapping
-
A graphical
technique that encourages thinking on both sides of the brain, visually
displays the various relationships among ideas, and improves the ability to
view a problem from many sides
iii.
Rapid
Prototyping
-
Based on the
premise that transforming an idea into an actual model will point out flaws in
the original idea and will lead to improvements in its designs
-
Developing a
model of an idea enables the entrepreneur to determine what works and what does
not.
��������������������������������������������������������������
Protecting Your
Ideas
-
Once
entrepreneurs come up with an innovative idea for a product or service that has
market potential, their immediate concern should be to protect it from
unauthorized use.
-
This is where
patents, trademarks and copyrights become very useful.
-
Patents: A
patent is a grant from the federal government that gives an inventor exclusive
rights to an invention for 20 years.
-
Trademark: A
trademark is any distinctive word, symbol, or trade dress that a company uses
to identify its product and to distinguish it from other goods. It serves as
the company�s �signature� in the market place.
-
Copyright: A
copyright protects original works of authorship. It covers only the form in
which an idea is expressed, not the idea itself, and lasts for 70 years beyond
the creator�s death.
CHAPTER 3: FORMS
OF BUSINESS OWNERSHIP AND FRANCHISING
a) Three major
forms of business ownership (advantages and disadvantages)
I) The Sole
Proprietorship
- a business
owned and managed by one individual
Advantages
of a proprietorship
i.
Simple to create
ii. Least costly form of ownership to begin
iii. Profit incentive (owner keeps all profits)
iv. Total decision-making authority
v. No special legal restriction (has very few rules for establishing and
running, unlike corporation)
vi. Easy to discontinue.
Disadvantages
of a proprietorship
i.
Unlimited personal liability (owner responsible for
all debts of the business)
ii. Limited skills and capabilities (owner may not possess all the skills
necessary for successfully running the business).
iii. Feelings of isolation (no one to turn for help in solving problems or
getting feedback on a new idea).
iv. Limited access to capital (difficulty in raising additional money to
grow and expand business).
v. Lack of continuity for the business (if the proprietor dies, retires or
becomes incapacitated, the business usually automatically terminates).
II) The
Partnership
-
An association of two or more people who co-own a
business for the purpose of making a profit.
-
A good partnership requires a partnership agreement,
which is a document that states in writing all of the terms of operating the
partnership and protects the interest of each partner
Advantages of the Partnership
i.
Easy to establish
ii. Complementary skills (In successful partnerships, the parties� skills
and abilities usually complement one another, strengthening the company�s
managerial foundations).
iii. Division of profits (no restr/uictions on how profits should be shared as
long as all partners agree).
iv. Larger pool of capital
v. Ability to attract limited partners
-
General partners: partners who share in owning,
operating and managing a business and who have unlimited personal liability for
the partnership�s debts
-
Limited partners: partners who do not take an active
role in managing a business and whose liability for the partnership�s debts is
limited to the amount they have invested.
-
A limited partnership can attract investors by
offering them limited liability and the potential to realize a substantial
return on their investments if the business is successful.
vi. Little government regulation
vii. Flexibility
viii. Taxation (not subject to federal taxation; like the proprietorship,
avoids the �double taxation� disadvantage associated with the corporate form of
ownership)
Disadvantages of the Partnership
i.
Unlimited liability of at least one partner (at least
one member of every partnership must be a general partner, and every general
partner has unlimited personal liability).
ii.
Capital accumulation ( not as effective as corporate
form of ownership which can raise capital by selling shares).
iii. Difficulty in disposing of partnership interest without dissolving the
partnership (when a partner withdraws from the partnership, it ceases to exist
unless there are specific provisions in the partnership agreement)
iv. Lack of continuity (if a partner dies, partnership interest is often
nontransferable through inheritance because the remaining partners may not want
to be in a partnership with the person who inherits the deceased partner�s
interest).
v.
Potential for personality and authority conflicts (No
matter how compatible partners are, friction among them is inevitable. The
demise of many partnerships can often be traced to interpersonal conflicts and
the lack of a procedure to resolve those conflicts).
Other forms of partnerships
i.
Limited partnership � a partnership composed of at
least one general partner and at least one limited partner.
ii.
Limited liability partnership (LLP) � a special type
of limited partnership in which all partners, who in many states must be
professionals (e.g. attorneys, physicians, dentists and accountants), are
limited partners.
iii. Master limited partnership (MLP) � a partnership whose shares are traded
on stock exchanges, just like a corporation�s; behave much like a corporation,
and in 1987 U.S. legislation provided that any MLPs not involved in natural
resources or real estate be taxed as corporations).
III) Corporations
-Most complex of the three major forms of business ownership
- A Corporation is a separate legal entity apart from its own owners
that receives the right to exist from the state in which it is incorporated.
-� A domestic corporation is one
doing business in the state in which it is incorporated.
- A foreign corporation is one doing business in a state other than the
one in which it is incorporated
- An alien corporation is one formed in one country and doing business
in another country.
How to
Incorporate
-
Every state requires a certificate of incorporation or
charter to be filed with the secretary of state,
-
The following information is generally required to be
included in the certificate of incorporation:
i)
The corporation�s name
ii)
The corporation�s statement of purpose
iii) The corporation�s time horizon (mostly formed with no specific
termination date)
iv) Names and addresses of the incorporators
v)
Place of business
vi) Capital stock authorization (The articles of incorporation must include the
amount and type of capital stock the corporation wants to be authorized to
issue; a corporation can issue any number of issues up to the amount
authorized).
vii) Capital required at the time of incorporation (some states require a
newly formed corporation to deposit in a bank a specific percentage of the
stock�s par value prior to incorporating)
viii) Restrictions on transferring shares
-
Many closely-held corporations (those owned by a few
shareholders, often family members) require shareholders interested in selling
their stock to offer it first to the corporations.
-
Treasury stock: the shares of its own stock that a
corporation owns
-
Right to first refusal: a provision requiring
shareholders who want to sell their stock to offer it first to the corporation.
ix) Names and addresses of the officers and directors of the corporation
x)
Rules under which the corporation will operate
(Bylaws)
The Advantages of the Corporation
i.
Limited liability of stockholders( because it is a
separate legal entity, a corporation allows investors to limit their liability
to the total amount of their investment in the business
ii.
Ability to attract capital
iii. Ability to continue indefinitely
iv. Transferable ownership
The Disadvantages of Corporations
i.
Cost and time involved in the incorporation process
ii.
Double taxation (corporation�s profits are taxed
twice: at the corporate rate and at the individual rate [on the portion of
profits distributed as dividends]).
iii. Potential for diminished managerial incentives
-
Professional managers the entrepreneur brings in to help
run the business as it grows do not always have the same degree of interest in
or loyalty to the company. As a result, the business may suffer without the
founder�s energy, care, and devotion.
-
One way to minimize this potential problem is to link
managers� compensation to the company�s financial performance through a
profit-sharing or bonus plan.
iv. Legal requirements and regulatory red tape
v.
Potential loss of control by the founder
-
When entrepreneurs sell shares of ownership in their
companies, they relinquish some control.
-
When large amount of capital is needed, entrepreneurs
may have to give up significant amounts of control, so much, in fact, that the
founders become minority sharehol/spanders.
Franchising
-
Franchising is a system of distribution in which semi-independent
business owners (franchisees) pay fees and royalties to a parent company
(franchiser) in return for the right to become identified with its trademark,
to sell its products or services, and often to use its business format and
system.
-
Franchisees do not establish their own autonomous
businesses; instead they buy a �success package� from the franchiser, who shows
them how to use it.
-
Franchisees, unlike independent business owners, don�t
have the freedom to change the way they run their businesses, but they do have
a formula for success that the franchiser has worked out.
Types of Franchising
i.
Trade-name franchising: a system of franchising in
which a franchisee purchases the right to use the franchiser�s trademark
without distributing particular products under the franchiser�s name.
ii. Product distribution franchising:
-
A system of franchising in which a franchiser licenses
a franchisee to sell its products under the franchiser�s brand name and
trademark through a selective, limited distribution network.
-
This system is commonly used to market automobiles
(Toyota, Peugeot), gasoline products ( Mobil, Texaco), soft drinks, etc.
iii. Pure franchising:
-
A system of franchising in which a franchiser sells a
franchisee a complete business format and system,
-
Franchiser provides the franchisee with a complete
business format, including a license for a trade name, the products or services
to be sold, the physical plant, the methods of operation, a marketing strategy
plan, a quality control process, a two-way communications system, and the
necessary business services.
-
Most common among fast-food restaurants, hotels, and
many others.
Benefits of Buying a Franchise
i.
Management training and support (Franchisers often
offer managerial training programs to franchisees prior to opening a new
outlet).
ii. Brand-name Appeal (Franchisees have the advantage of identifying their
businesses with a widely recognized trademark, which usually provides a great
deal of drawing power.
iii. Standardized Quality of Goods and Services (In order to maintain
reputation, franchisers demands franchisees to comply with uniform standards of
quality and services throughout the entire chain.
iv. National Advertising Programs (Franchisers usually require franchisees
to contribute a percentage of their gross revenues for a national advertising
campaign. These funds are pooled together and used for a cooperative
advertising program, which has more impact than if the franchisees spent the
same amount of money separately.)
v. Proven Products and Business Formats (What a franchisee essentially
purchases is a franchiser�s experience, expertise and products. A franchise
owner does not have to build the business from scratch.
vi. Centralized Buying Power (A significant advantage a franchisee has over
an independent small business owner is participation in the franchiser�s
centralized and large-volume buying power)
vii. Site Selection and Territorial Protection
-
A proper location is critical to the success of any
small business. Many franchisers will make an extensive location analysis for
each new outlet.
-
Some franchisers offer franchisees territorial
protection, which gives existing franchisees the right to exclusive
distribution of brand name goods or services within a particular geographic
area.
viii. Greater Chance for Success (Available statistics suggest that
franchising is less risky than building a business from the ground up.)
The
Drawbacks of Buying a Franchise
i.
Franchise fees and profit sharing
ii. Strict adherence to standardized operations
iii. Restrictions on purchasing (in the interest of maintaining quality
standards, franchisees may be required to purchase products, special equipment
or other times from the franchiser of from an �approved� supplier).
iv. Limited product line
v. Less freedom
CHAPTER 4: DEVELOPING
MARKETING STRATEGIES
Building a Guerrilla Marketing Plan
-
Marketing is the process of creating and
delivering desired goods and services to customers, and involves all of the
activities associated with winning and retaining loyal customers.
-
The secret to successful marketing is to
understand what your target customers� needs, demands, and wants are before
your competitors can; offer them the products and services that will satisfy
those needs, demands and wants; and provide customers service, convenience and
value.
-
Guerrilla marketing strategies are
unconventional, low-cost, creative marketing strategies designed to give small
companies an edge over their larger, richer, more powerful rivals.
-
A guerilla marketing plan should
accomplish four objectives:
Pinpointing the Target Market
-
Target market is the specific group of
customers at whom a company aims its goods or services.
-
To be customer driven, an effective
marketing program must be based on a clear, concise definition of a company�s
target customers.
-
A sound market research helps the owner
pinpoint his target market.
-
The most successful businesses have well
defined portraits of the customers they are seeking to attract.
Determining Customer Needs and Wants
Through Market Research
-
Market research is the vehicle for
gathering the information that serves as the foundation for the marketing plan.
-
It involves systematically collecting,
analyzing, and interpreting data pertaining to a company�s market, customers
and competitors.
-
The objective of market research is to
learn how to improve the level of satisfaction for existing customers and to
find ways to attract new customers.
-
Market research does not have to be time
consuming, complex or expensive to be useful. By applying the same type of
creativity that they display when creating their businesses, entrepreneurs can
perform effective market research at reasonable costs.
-
The steps in conducting market research
include:
-
The first and most crucial step.
-
It answers the question, �What do we
want to know?�
-
The marketing approach that dominates
today is individualized (one-to-one) marketing, a system based on gathering
data on individual customers and developing a marketing program designed to
appeal specifically to their needs and wants.
-
How can entrepreneurs collect such
valuable market and customer information? Two basic methods are available:
conducting primary research (data you collect and analyze yourself) and
gathering secondary research (data that have already been compiled and are
available, often at a very reasonable cost.
-
Entrepreneurs must use judgment and
common sense to determine what the results of their research mean.
-
The market research process is not
complete until the business owner acts on the information collected.
Plotting a Guerilla Marketing Strategy:
How to Build a Competitive Edge
-
When plotting a marketing strategy,
owners must strive to achieve a competitive edge- some way to make their
companies different from, and better than the competition.
-
Successful entrepreneurs rely on the
following effective guerilla marketing strategies to develop a competitive
edge:
-
A niche strategy allows a small company
to maximize the advantages of its size and to compete effectively even in
industries dominated by giants.
-
Focusing on niches that are too small to
be attractive to large companies is a common recipe for success among thriving
small companies.
-
Winning customers today requires more
than low prices and wide merchandise selection; increasingly, businesses are
adopting strategies based on entertailing.
-
Entertaining �is a marketing concept designed to draw customers
into a store by creating a kaleidoscope of sights, sounds, smells and
activities, all designed to entertain- and of course sell.
-
Entrepreneurs can achieve a unique place
in the market in a variety of ways, including through the products and services
they offer, the marketing and promotional campaigns they use, the store layouts
they design, and the business strategies they employ.
-
Some of the most powerful marketers are
those companies that have a clear sense of who they are, what they stand for,
and why they exist.
-
Companies that establish a deeper
relationship with their customers than one based merely on making a sale have
the capacity to be exceptional guerrilla marketers.
-
They connect with their customers
emotionally by supporting causes that are important to their customer base,
taking exceptional care of their customers, surpassing customers� expectations
in quality and service, or making it fun and enjoyable to do business with
them.
-
Businesses must realize that everything
in the business � even the business itself � depends on creating a satisfied
customer.
-
World-class companies treat quality as a
strategic objective � an integral part of a company�s strategy and culture.
-
This philosophy is called total quality
management (TQM) � quality not just in the product or service itself but in
every aspect of the business and its relationship with the customer and
continuous improvement in the quality delivered to customers.
-
Successful companies go out of their way
to make sure that it is easy for customers to do business with them.
-
Innovation is the key to success.
-
Markets change too quickly and
competitors move too fast for a small company to stand still and remain
competitive.
-
Because y cannot outspend their larger
rivals, small companies often turn to superior innovation as the way to gain a
competitive edge.
-
Success businesses recognize that
superior customer service is only an intermediate step towards the goal of
customer satisfaction.
-
These companies seek to go beyond
customer satisfaction, striving for customer astonishment.
-
Certainly the least expensive � and the
most effective - way to achieve customer satisfaction is through friendly,
personal service.
-
World-class companies recognize that
reducing the time it takes to develop, design, manufacture, and deliver a
product reduces costs, increases quality, improves customer satisfaction, and
boosts market share.
Marketing on the World Wide Web
-
The Web offers small business owners
tremendous marketing potential on a par with their larger rivals.
-
Establishing a presence on the Web is
important for companies targeting educated, wealthy, young customers.
-
Successful Web sites are attractive,
inviting, easy to navigate, interactive, and offer users something of value.
The Marketing Mix
-
The major elements of a marketing
strategy are the four Ps of marketing � product, place, price and promotion.
-
A product is any item or service that
satisfies the need of a customer.
-
Products can have form and shape, or
they can be services with no physical form.
-
The product life cycle describes the
stages of development, growth, and decline in a product�s life.
-
Stage 1: introductory stage � the stage
in which a product or service must break into the market and overcome customer
inertia.
-
Stage 2: growth and acceptance stage �
the stage in which sales and profits materialize
-
Stage 3: maturity and competition stage
� the stage in which sales rise, but profits peak and then fall as competitors
enter the market.
-
Stage 4: market saturation stage � stage
in which sales peak, indicating the time to introduce the next generation
product.
-
Stage 5: product decline stage � the
stage in which sales continue to fall and profit margins decline drastically.
-
Refers to method of distribution of
products
-
The focus here is on choosing the
appropriate channel of distribution and using it most efficiently.
-
Almost everyone agrees that the price of
the product or service is a key factor in the decision to buy.
-
Price affects both sales volume and
profits, and without the right price, both sales and profits will suffer.
-
The right price for a product or service
depends on three factors: (1) a small company�s cost structure, (2) an
assessment of what the market will bear, and (3) the desired image the company
wants to create in the customer�s mind.
-
Involves both advertising and personal
selling
-
The goal is to inform and persuade
customers
-
Advertising communicates to potential
customers through some mass medium the benefits of a good or service.
-
Personal selling involves the art of
persuasive sales on a one-to-one basis.
CHAPTER 5: MANAGING CASH FLOW
Cash Management
-
A survey by the
National Federation of Independent Businesses found that 67% of small business
owners say they have at least occasional problems managing cash flow; 19%
report cash flow as a continuing problem.
-
The only way to avoid
this potentially business-crushing predicament is by using the principles of
cash management.
-
Cash management is the
process of forecasting, collecting, disbursing, investing and planning for the
cash a company needs to operate smoothly.
-
Cash management is a
vital task because cash is the most important yet least productive asset that a
small business owns.
-
A business must have
enough cash to meet its obligations or it will be declared bankrupt.
-
The first step in
managing cash flow more effectively is to understand the company�s cash flow
cycle.
-
Cash flow cycle is the
time lag between paying suppliers for merchandise or materials and receiving
payment from customers; the longer this cash flow cycle, the more likely the
business owner is to encounter a cash crisis
-
The next step in
effective cash management is to analyze the cash flow cycle, looking for ways
to reduce its length.
5
Cash Management Roles
of the Entrepreneur
1. Cash
Finder:
-
This is the
entrepreneur�s first and foremost responsibility.
-
You must make sure
there is enough capital to pay all present and future bills.
-
�This is not a one-time task, it is an ongoing
job.
2. Cash
Planner:
-
As cash planner, an
entrepreneur makes sure the company�s cash is used properly and efficiently.
-
You must keep track of
its cash, make sure it is available to pay bills, and plan for its future use.
3. Cash
Distributor:
-
This role requires you
to control the cash needed to pay the company�s bills and the priority and the
timing of those payments.
-
Forecasting cash
disbursements accurately and making sure the cash is available when payments
come due are essential to keeping the business solvent.
4. Cash
Collector:
-
As cash collector, your
job is to make sure your customers pay their bills on time.
-
Too often,
entrepreneurs focus on pumping up sales, while neglecting to collect the cash
from those sales.
-
Having someone n your
company responsible for collective accounts receivable is essential.
-
Uncollected accounts
drain a small company�s pool of cash very quickly.
5. Cash
Conserver
-
This role requires you
to make sure your company gets maximum value for the dollars it spends.
-
Whether you are buying
inventory to resell or computers to keep track of what you sell, it is
important to get the most for your money.
-
Avoiding unnecessary
expenditures is an important part of this task.
-
The goal is to spend
cash so it will produce a return for the company.
Cash and Profits are not the same
-
When analyzing cash
flow, entrepreneurs must understand that cash and profits are not the same.
-
Profit (or net income)
is the difference between a company�s total revenue and its total expenses. It
measures how efficiently a business is operating.
-
Cash is the money that
is free and readily available to use in a business.
-
Cash follow measures a
company�s liquidity and its ability to pay its bills and other financial
obligations on time by tracking the flow of cash into and out of the businesses
over a period of time.
-
Profitability does not
guarantee liquidity, as profits can be tied up in many forms such as accounts
receivable, inventory, computers or machinery.
-
Decreases in cash occur
when the business purchases on credit or for cash, goods for inventory or
materials for use in production.
-
When a company takes in
cash or collects payments on accounts receivable, its cash balance increases.
The Cash Budget
-
The need for a cash
budget arises because in every business the cash flowing in is rarely �in sync�
with the cash flowing out of the business.
-
This uneven flow of
cash creates periodic cash surpluses and shortages, making it necessary for
entrepreneurs to track the flow of cash through their businesses so they can
project realistically the cash available throughout the year.
-
The cash budget is a
�cash map� showing the amount and the timing of cash receipts and cash
disbursements on a daily, weekly or monthly basis.
Preparing a Cash Budget
There are five basic steps in completing
a cash budget:
1. Determining
an adequate minimum cash balance
-
The most reliable
method of deciding cash balance is based on past experience.
-
Past operating records
should indicate the proper cash cushion needed to cover any unexpected expenses
after all normal cash outlines are deducted from the month�s cash receipts.
2. Forecasting
sales
-
The heart of the cash
budget is the sales forecast.
-
It is the central
factor in creating an accurate picture of the firm�s cas-span lang=EN-MY
style='font-size:12.0pt;line-height:115%;font-family:"Times New Roman","serif";
mso-fareast-font-family:"Times New Roman"'/o:ph position because
sales ultimately are transformed into cash receipts and cash disbursements.
-
For an established
business, a sales forecast is based on past sales, but owners must be careful
not to be excessively optimistic in projecting sales.
-
The task of forecasting
sales for the new firm is more difficult but not impossible. For example, the
new owner might conduct research on similar firms and their sales patterns in
the first year of operation to come up with a forecast.
-
No matter what
techniques entrepreneurs use, they must recognize that even the best sales
estimates will be wrong.
-
Many financial analysts
suggest that the owner create three sales estimates � an optimistic, a
pessimistic, and a most likely sales estimate � and then make a separate cash
budget for each forecast.
3. Forecasting
Cash Receipts
-
When a firm sells goods
and services on credit, the cash budget must account for the delay between the
sale and the actual collection of the proceeds.
-
Collecting accounts
receivable promptly poses problems for many small companies, and is often cited
by small business owners as the primary cause of cash flow problems.
4. Forecasting
Cash Disbursements
-
The key factor in
forecasting disbursements for a cash budget is to record them in the month in
which they will be paid, not when the obligation is incurred.
-
Usually an owner�s
tendency is to underestimate cash disbursements, which can result in a cash
crisis. To prevent this, wise entrepreneurs cushion their cash disbursement
accounts, assuming they will be higher than expected.
5. Estimating
the End-of-Month Cash Balance
-
Begin by determining
the cash balance at the beginning of the month ( cash in hand, and cash in
savings or checking account)
-
Add forecasted cash
receipts and decrease forecasted cash disbursements to estimate end-of-month
cash balance.
The �Big Three� of Cash Management
-
The big three of cash
management are accounts receivable, accounts payable and inventory.
-
A good cash management
�recipe� involves collecting your company�s cash as quickly as possible,
economizing to keep costs low, and paying out your company�s cash as slowly as
possible.
-
Business owners must
also monitor inventory carefully to avoid tying up valuable cash in an
excessive stock of inventory.
1. Accounts
Receivable:
-
Controlling accounts
receivable requires business owners to establish clear, firm credit and
collection policies and to screen customers before granting them credit.
-
Sending invoices
promptly and acting on past-due accounts quickly also improve cash flow.
-
The goal is to collect
cash from receivables as quickly as possible.
2. Accounts
Payable:
-
When managing accounts
payable, a manager�s goal is to stretch out payables as long as possible
without damaging the company�s credit rating.
-
Other techniques
include verifying invoices before paying them, taking advantage of cash
discounts, and negotiating the best possible credit terms.
3. Inventory:
-
Inventory frequently
causes cash headaches for small business managers.
-
Excess inventory earns
a zero return of return and ties up a company�s cash unnecessarily.
-
Owners must watch for
stale merchandise.
Avoiding the Cash Crunch
By utilizing the following techniques,
entrepreneurs can get maximum benefit from their companies� pool of available
cash:
1. Barter
-
Bartering is the
exchange of goods and services for other goods and services rather than for
cash
2. Trim
Overhead costs
-
Simple cost-cutting
measures can save big money.
-
Examples include: i)
periodically evaluating expenses, ii). Leasing instead of buying when
practical, iii) Avoiding nonessential outlays and iv) hiring part-time and
freelance specialists whenever possible.
3. Be
on the lookout for employee theft
4. Keep
your business plan current
5. Invest
surplus cash
Sources of financing: debt and equity
-
Raising the money to launch a new
business has always been a challenge for entrepreneurs.
-
Rather than rely primarily on a single source
of funds as they have in the past, entrepreneurs must piece together capital
from multiple sources, a method known as layered financing.
-
This chapter will guide you through the
many financing options available to entrepreneurs, focusing on both sources of
equity (ownership) and debt ( borrowed) financing.
Planning For Capital
Needs
-
Becoming a successful entrepreneur
requires one to become a skilled fund-raiser, a job that requires more time and
energy than most business founders think.
-
Capital is any form of wealth employed
to produce more health.
-
Entrepreneurs need three different types
of capital:
-
Capital needed to purchase a company�s
permanent or fixed assets such as buildings, land, computers and equipment.
-
Money invested in these fixed assets are
usually large, and frozen because they cannot be used for any other purpose.
-
Capital needed to support a business�s
short-term operations.
-
It represents a company�s temporary
funds
-
Working capital is normally used to buy
inventory, pay bills, finance credit sales, pay wages and salaries, and take
care of any unexpected emergencies.
-
Capital needed to finance a company�s
growth or its expansion in a new direction.
Equity Capital Versus
Debt Capital
Equity Capital
-
Equity Capital represents the personal
investment of the owner (or owners) in a business, and is sometimes called risk
capital because these investors assume the primary risk of losing funds if the
business fails.
-
If a venture succeeds, however, founders
and investors share in the benefits, which can be quite substantial.
-
The primary advantage of equity capital
it that it does not have to be repaid like a loan does.
-
The primary disadvantage is that the
entrepreneur must give up some � perhaps most � of the ownership in the
business to outsiders.
Debt Capital
-
The financing that a small business
owner has borrowed and must repay with interest
-
The primary advantage is that it does
not require entrepreneurs to give up ownership of the business.
-
The primary disadvantage is that it must
be carried as a liability on the balance sheet as well as be repaid with
interest at some point in the future.
Source of Equity
Financing
Sources of Debt
Financing
-
Offer the greatest variety of loans,
although they are conservative lenders.
-
Typical short-term loans include
commercial loans, lines of credit, discounting accounts receivable, inventory
financing, and floor planning (a form of financing used by big-ticket item
retailers like cars, boats).
-
Used extensively by small businesses as
a source of financing.
-
Vendors and suppliers commonly finance
sales to businesses for 30, 60, or even 90 days.
-
Offer many of same time of loans that
banks do, but are more risk oriented in their lending practices.
-
They emphasize accounts receivable
financing and inventory loans.
-
Provide financing through policy loans
and mortgage loans.
-
Policy loans are loans extended on the
basis of the amount of money a customer has paid into a policy in the form of
premiums.
-
Mortgage loans are made for large
amounts and are based on the value of the land being purchased
-
The National Economic Empowerment and
Development Strategy (NEEDS) is the response to the development challenges of
Nigeria established in 2003 by the Obasanjo administration.
-
NEEDS focuses on four key strategies:
i.
Poverty eradication
ii.
Wealth creation
iii.
Employment generation
iv.
Value orientation.
-
The major target of NEEDS is poverty
eradication, which perceives entrepreneurship as a major vehicle for economic
growth.
-
Small and Medium Development Agency of
Nigeria (SMEDAN) was established in 2003.
-
Its aim was not to provide direct
finance to small and medium enterprises, but to facilitate their access to
finance and other resources.
-
It has four major roles: i) provision of
information and awareness creation through business sensitization activities,
ii) Business Development Service (BDS) with its tripartite role of training,
counseling and mentoring, iii) Promotion of enterprise networking or cluster
formation to stimulate international competitiveness, and iv) advocacy and
improvement in operating environment usually in partnership with others.
Internal Methods of
Financing
-
Small business owners may also look
inside their firms for capital.
-
This type of financing is called
bootstrap financing, and includes:
-
Instead of carrying credit sales on its
own books, a small business can sell outright its accounts receivable to a
factor.
-
A factor is a financial institution that
buys a business�s accounts receivable at a discount.
-
By leasing expensive assets, the small
business owner is able to use them without locking in valuable capital for an
extended period of time.
-
Unable to find financing elsewhere, many
entrepreneurs launch their companies using the fastest and most convenient
source of debt capital available: credit cards.
-
Putting business start-up costs on
credit cards is expensive and risky, but some entrepreneurs have no choice.
CHAPTER
6: CRATFTING A WINNING BUSINESS PLAN
Why Develop a
Business Plan
-
A
business plan is a written summary of an entrepreneur�s proposed business
venture, its operational and financial details, its marketing opportunities and
strategy, and its managers� skills and abilities.
-
A
well assembled business plan serves three essential functions:
-
To
get external financing, an entrepreneur�s plan must pass three tests with
potential lenders and investors:
i.
Reality
Test
-
The
external component of the reality test revolves around proving that a market
for the product or service really does exist. It focuses on industry
attractiveness, market niches, potential customers, market size, degree of
competition, and similar factors.
-
The
internal component of the reality test focuses on the product or service
itself. Can the company really build or provide it for the cost estimates of
the business plan. Does it offer customers something of value?
ii.
Competitive
Test
-
The
external part of the competitive test evaluates the company�s relative position
to its key competitors. Ho w do the company�s strength and weaknesses match up
with those of the competition?
-
The
internal competitive test focuses on management�s ability to create a company
that will gain an edge over existing rivals. To pass this part of the test, a
plan must prove the quality, skill and experience of the venture�s management
team.
iii.
Value
Test
-
To
convince lenders and investors to put their money into the venture, a business
plan must prove to them that it offers a high probability of repayment or an
attractive rate of return.
The Elements of
a Business Plan
Although a
business plan should be unique and tailor-made to suit the particular needs of
a small company, it should cover these basic elements:
-
A
concise ( maximum of 2 pages) summary of all the relevant points of the
business venture.
-
It
should explain the basic business model and briefly describe the owners and key
employees, target market, and financial highlights.
-
Although
it is the first part of the business plan, it should be the last section
written.
-
The
broadest expression of a company�s purpose and defines the direction in which
it will move.
-
Brief
history of the operation, highlighting the significant financial and
operational events in the company�s life.
-
To
acquaint lenders with the industry in which a company competes, an entrepreneur
should describe it in the business plan.
-
This
section should begin with a statement of the company�s general business goals
and a narrower definition of its immediate objectives.
-
This
segment of the business plan outlines the methods the company can use to meets
its goals and objectives.
-
An
entrepreneur should describe the company�s overall product line, giving an
overview of how customers use its goods or services.
-
The
emphasis of this section should be on defining the benefits customers get by
purchasing the company�s product or services rather than just a description of
the features of those products and services.
-
Manufacturers
should describe their production process, strategic raw materials required,
sources of supply they will use, and their costs.
-
Defining
the target market and its potential is one of the most important and most
challenging parts of building a business plan.
-
Prospective
lenders and investors want to know whether or not there is a real market for
the proposed good or service.
-
Questions
this part of the business plan should address include: Who are the most
promising customers or prospects? What are their characteristics? Where do they
live? What do they buy? Why do they buy? When do they buy? What expectations do
they have about the product or service? Will the business focus on a niche? How
does the company seek to position itself in its market.
-
This
portion of the plan also should describe the channels of distribution that the
business will use.
-
This
section of the plan should include an analysis of each significant competitor.
-
Entrepreneurs
who believe that they have no competition are only fooling themselves.
-
This
section of the plan should also focus on demonstrating that the entrepreneur�s
company has an advantage over its competitors.
-
The
most important factor in the success of a business venture is the quality of
its management, and most financial officers and investors weigh heavily the
ability and experience of the firm�s managers in their financing decisions.
-
A
plan should thus describe the qualifications of business officers, key
directors and any person with at least 20 percent ownership in the company.
-
Resumes
in a plan should summarize an individual�s education, work history and relevant
business experience.
-
To
complete the description of the business, the owner should construct an organizational
chart identifying the business�s key positions and the personnel occupying
them.
-
Also,
a description of the form of ownership and of any leases, contracts, and other
relevant agreements pertaining to the business is helpful.
-
One
of the most important sections of the business plan is an outline of the
proposed company�s financial statements.
-
Whether
assembling a plan for an existing business or for a start-up, an entrepreneur
should carefully prepare monthly projected financial statements for the
operation for the next year using past operating data, published statistics,
and judgments to derive three sets of forecasts of the income statement,
balance sheet, cash budge and schedule of planned capital expenditures.
-
The
loan or investment proposal section of the business plan should state the
purpose of the financing, the amount requested, and the plans for repayment or,
in the case of investors, an attractive exit strategy.
Making the
Business Plan Presentation
-
Lenders
and investors are favorably impressed by entrepreneurs who are informed and
prepared when requesting a loan or investment.
-
Some
helpful tips for making a business plan presentation to potential lenders and
investors include:
What Lenders and
Investors look for in a Business Plan
-
Small
business owners need to be aware of the criteria bankers use in evaluating the
creditworthiness of loan applications. These criteria are referred to as the
�five Cs of credit�.
-
Banks
expect a small company to have an equity base of investment by the owner(s)
that will help support the venture during times of financial strain, which are
common during the start-up and growth phases of a business.
-
Lenders
and Investors see capital as a risk-sharing strategy with entrepreneurs.
-
Another
name for capacity is cash flow.
-
The
bank must be convinced of the firm�s ability to meet its regular financial
obligations and to repay the bank loan, and that takes cash.
-
Lenders
expect small businesses to pass the test of liquidity, especially for
short-term loans.
-
Collateral
includes any assets the owner pledges to the bank as security for repayment of
the loan.
-
Bankers
view the entrepreneurs� willingness to pledge collateral as an indication of
their dedication to making the venture a success.
-
Before
extending a loan to or making an investment in a small business, lenders and
investors must be satisfied with an entrepreneur�s character.
-
The
evaluation of character is frequently based on intangible factors such as
honesty, integrity and competence, and it plays a critical role in the decision
to put money into a business or not.
-
Lenders
and investors consider factors relating to a business�s operation such as
potential growth in the market, competition, location, strengths, weaknesses,
opportunities and threats. The best way to provide this relevant information is
in a business plan.
-
Another
important condition influencing the banker�s decision is the shape of the
overall economy, including interest rate levels, inflation rate, and demand for
money. Although these factors are beyond an entrepreneur�s control, they still
are an important component in a banker�s decision.