Entrepreneurship revision

Section 1
Who is entrepreneur
A person who combines resources , labor , materials and other assets to make their value greater
than before and introduces changes , innovations and new order.
Or
An individual whom takes initiatives to bundle resources in innovative ways and is willing to take
the risk and to act.
What is entrepreneurship
The process of creating something new with value by applying the necessary time and effort ,
assuming the accompanying financial , psychic and social risks and receiving the resulting rewards
of monetary and personal satisfaction.
Basic aspects of entrepreneurs
1) Creation of new venture
2) Investing necessary time and effort
3) Accepting associated risks
4) Enjoying resulting rewards

Distinct phases of entrepreneurial process

1) Identification and evaluation of the opportunity
2) Development of the business plan
3) Determination of the required resources
4) Management of the resulting enterprise

1)Identification and evaluation of the opportunity

a)opportunity assessment
b)creation and length of opportunity
c)real and perceived value
d)risks and returns of opportunity
e) opportunity vs personal skills and goals, competitive environment

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-assessing the opportunity
1) what market need does it fill?
2)what personal observations have you made?
3)what are the underlying social conditions?
4)examine the market research data
5)assess competition
6) any patents?

2)Development of the business plan

a) executive summary
b) description of venture
c) description of industry
d) technology plan
e) marketing plan
f) financial plan
g) production plan
h) organization plan
i) exhibits

3) Determination of the required resources

a) determining existing resources
b) identify resource, gaps and available suppliers
c) develop access to needed resources

5) Management of the resulting enterprise

a) develop the management style
b) understand variables for success
c) identify problems and potential problems

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d) implement control system
e) develop growth strategy

section 2
-entrepreneurial intentions
Are motivational factors that influence individuals to pursue entrepreneurial outcomes
Management of the resulting enterprise
“ intention is stronger when an action is perceived to be feasible and desirable”

-entrepreneurial self-efficacy
Is the belief that one can successfully execute the entrepreneurial process

-perceived desirability
The degree to which an individual has a favorable or unfavorable evaluation of the potential
outcomes

Entrepreneur background and skills

1) education
2) age
3) work history

1) Education
a) Provides a background about starting a business
b) Helps in the development of communication , problem solving skills
c) Provides individuals with larger opportunity set

2) Age
Most entrepreneurs begin their entrepreneurial careers between 22 – 45

3) Work history
a) The decision to launch a new venture can be influence by:-
Dissatisfaction with one’s job
Previous technical and industry experience

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 b) Managerial skills and entrepreneurial experiences are also important once the ventures
start growing
c) Previous start-up experience is a relatively good predictor of starting subsequent
businesses

Role models
Individuals influencing an entrepreneurs career , choice and style
a) Can be parents , family members ,or other entrepreneurs
b) Can serve in a supportive capacity as mentors by providing information , advice and
guidance
Support systems
1) moral – support network
2) professional – support network
1) moral support network
a) it is important for entrepreneurs to have encouraging individuals who provide
psychological support
b) friends can provide honest advice , encouragement , understanding and assistant
c) relatives can be strong sources of moral support , particularly if they are also
entrepreneurs

2) professional support network

a) entrepreneurs need advice and counsel through out the establishment of the new
venture from :-
mentors , business associate , suppliers , trade associations , personal relationships
b) entrepreneurial activity is established in networks of interpersonal relationships

personality traits of entrepreneurial careers

1) achievement striving
2) industriousness – seriousness
3) passion
4) taking control
5) creativity

1) achievement striving
refers to an individuals actual motivation and efficiency of work completion
2) industriousness – seriousness

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 an indicator of levels of persistence and hardiness , the ability to overcome difficulties
and to remain functional in stressful situations , it can also carry willingness to work
hard and to offer additional efforts when required
3) passion
refers to ones enthusiasm , personal commitment to achieving goals and extent to
which they will go in order to get ahead. Being passionate about business proposal or
career can provide greater determination to accomplish objectives, as well as
increasing the enjoyment gained from it
4) taking control
linked to how far the individual believes themselves to have control over a situation
and its outcomes and affecting their perception of positive and negative events

5) creativity
it indicates how effectively one might generate new ideas which is vital to an
entrepreneur wishing to establish themselves within a niche market, the ability to
continually revolutionize and build upon pre-existing concepts may help to produce a
vast number of successful business models

skills required in entrepreneurship

1) technical skills
2) business management skills
3) personal entrepreneurial skills

1) technical skills
a) writing
b) oral communication
c) monitoring environment
d) technical business management
e) technology
f) interpersonal
g) listening
h) ability to organize
i) network building
j) management style
k) coaching
l) being a team player

2) business management skills

a) planning and goal setting
b) decision making

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 c) human relations
d) marketing
e) finance
f) accounting
g) management
h) control
i) negotiation
j) venture launch
k) managing growth

3) personal entrepreneurial skills

a) inner control
b) risk taker
c) innovative
d) change oriented
e) persistent
f) visionary leader
g) ability to manage change

how entrepreneurs think

they think differently based on the situation
given the nature of their decision making environment entrepreneurs need to
1) effectuate
2) be cognitively adaptable
3) learn from failure

1) effectuation process
a) starts with what one has
b) selects among possible outcomes
c) entrepreneurial mind – set involves the ability to rapidly sense, act and manage , even
under uncertain conditions

2) cognitive adaptability
describes the extent to which entrepreneurs are
dynamic , flexible , self-regulating and engaged in the process of generating multiple
decision frameworks focused on sensing and processing changes in their environments
and then acting on them
to achieve it:-
a) comprehension questions “environment”

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 b) connection tasks “current situation”
c) strategic tasks “strategies”
d) reflection tasks “feelings”

entrepreneurs who can increase cognitive adaptability have an improved ability to

1) adapt to new situations
2) be creative
3) communicate one’s reasoning behind a particular response

3) learn from failure

- uncertainty, changing conditions and insufficient experience can lead to failure among
entrepreneurial firms
- an entrepreneur’s motivation is from
a) loyalty to a product
b) loyalty to a market and customers
c) personal growth
d) the need to prove oneself
- loss of a business can result in a negative emotional response from the entrepreneur
- it can interfere with: -
1) entrepreneur’s ability to learn from the failure
2) motivation to try again
recovery and learning process: -
 emotional recovery from failure happens when thoughts about the events surrounding,
and leading up to the loss of the business , no longer generate a negative emotional
response
 primary descriptions of the process of recovering are
a) loss-orientation
b) restoration-orientation

a) loss orientation
involves working through and processing some aspects of the loss experience and
as a result breaking emotional bonds to the object lost , this gradually provides the
loss with meaning and eventually produces a changed viewpoint , involves
confrontation which is physically and mental exhausting , characterized by
feelings of relief and pain that shine and decline over time .

b) restoration-orientation
based on both avoidance and a proactiveness toward secondary sources of stress
arising from a major loss, involves suppression which requires mental effort and
presents potentially adverse consequences for health , provides an opportunity to
address secondary causes of stress , may reduce emotional significance of the loss

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role of entrepreneurship in economic development
it’s a significant factor for economic growth, innovation and job creation of countries, innovation
is shown as a key to economic development
types of innovation
1) ordinary (new products with little technological change)
2) technological (new products with significant technological advancement)
3) breakthrough (new products with dramatic technological change)
*entrapreneurship
entrepreneurship within an existing organization it bridges the gap between science and the
marketplace
Problems face entrepreneurship
1) bureaucratic structure
2) emphasis on short term profits
3) highly structured org inhibit creativity
in the present era of hyper competition organizations need to develop the intrapreneurial
spirit

 top management must create an environment that encourages employees to think and act
entrepreneurially , employees will realize that entrepreneurial action within the firm is
both personally desirable and feasible.
 Entrepreneurial management is distinct from traditional management in terms of
1) Strategic orientation
2) Commitment to opportunity
3) Commitment of resources
4) Control of resources
5) Management structure
6) Reward philosophy
7) Growth orientation
8) Entrepreneurial culture

Section 3
A good business idea
Could be an invention , a new product or service , or an idea or solution to an everyday problems

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Ways to build upon an already existing material and would still provide profit
1) Develop ideas as an extension of an existing product
2) Create an improved service
3) Market a product at a lower price
4) Add value to an existing product or service
5) Change their quality or quantity
6) Introducing automation , simplification ,convenience
7) Personal interests or hobbies
8) Work experiences , skills , abilities related to the work you do
9) A familiar or unfamiliar product or service
10)Spot the latest trends
11) changing the delivery method , packaging , unit size or shape
12) increasing mobility , access , portability or disposability
13) simplifying repair , maintenance , replacement or cleaning
14) changing their colour , material or shape

*most new start-up companies are involved in industries where they had significant work
experience.
*anybody who intends to start a business in a new industry should first become a learner
for a period of time , so you could avoid costly mistakes and be able to assess whether
you enjoy the work before making financial commitment

Sources of new ideas

1) Consumers
2) Existing companies
3) Distribution channels
4) Government
5) Research

Methods of generating new ideas( techniques)

1) Brainstorming
2) Focus groups
3) Observation
4) Surveys
5) Emerging trends
6) Research and development
7) Tradeshows and association meetings
8) Other technique

1) Brainstorming

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 A process in which a small group of people interact with very little structure ,to produce a
large quantity of imaginative ideas , to create an open atmosphere that allows the
members of the group to feel free to give their ideas , each idea stimulate the thinking of
others and the producing of ideas becomes designed

2) Focus groups
Group of individuals provide information using a structured format , a moderator will
lead a group of people through an open discussion , the members will form comments in
depth discussion

3) Observation
A method to describe peoples behavior
a) What do people buy
b) What do they want and cannot buy
c) What do they buy and don’t like
d) Where do they buy , when and how
e) What else might they need but cannot get

4) Surveys
Involves gathering data based on communication with a representative sample of
individuals , this technique requires asking people for information either verbally or by
using written questions

5) Emerging trends
Based on the population within your area may be getting older and creating demand for
new products and services

6) Research and development

Planned activity aimed at discovering new knowledge to develop new or improved
products and services , it enable entrepreneurs to enhance their performance and ability to
deliver better products and services

7) Tradeshows and association meetings

An excellent way to examine the products of many potential competitors , uncover
product trends and identify potential products.

Techniques for creative problem solving

1) Brainstorming
The most well known and widely used for both creative problem solving and idea
generation
2) Reverse brainstorming

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 Criticism is allowed and encouraged as a way to bring out possible problems with the
ideas
3) Synectics
A creative process that forces individuals to solve problems through one of four
analogy mechanisms
a) Personal
b) Direct
c) Symbolic
d) Fantasy

4) Gordon method
Method of developing new ideas when the individuals are unaware of the problem ,
entrepreneur starts by mentioning a general concept associated with the problem the
group responds with expressing a number of ideas
5) Checklist method
Developing a new idea through a list of related issues is checklist method of problem
solving

Product planning and development process

*criteria should evaluate the idea in terms of
1) market opportunity
2) competition
3) marketing system
4) financial factors
5) production factors

Section 4

Business model
Describes how an idea will create value , it’s the theory of how to make money, business model
can be visualized using a business model canvas
Components of the business model
1) Value proposition(what value does the company bring to the customers)
2) Customer segments( what market segments has been targeted by the company)
3) Channels ( how do they reach to the company)
4) Customer relationships ( how does the business develop and retain the CR)
5) Key activities (what activities need to occur to make the company successful)
6) Key resources (how does the company get its resources)
7) Key partners (who are the key partners)
8) Revenue streams (how does the company generate its revenues)

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 9) Cost structure (what costs does the business incur)

*a good business plan must be developed in order to exploit the opportunity defined , its
important in developing the opportunity and in determining the resources required ,
obtaining those resources and successfully managing the venture.

Business plan
Is a written document prepared by the entrepreneur describing all relevant internal and
external elements and strategies for starting a new venture
Scope and value of the business plan
Three perspectives need to be considered
1) The entrepreneur understands the new venture better than anyone
2) The marketing perspective considers the venture through the eyes of the customer
3) The investor looks for sound financial projections
The depth of the business plan depends on the size and scope of the proposed venture

*the business plan is valuable to the entrepreneur and investors because

1) it helps determine the viability of the venture in a designated market
2) it gives guidance in organizing planning activities
3) it serves as an important tool in obtaining financing

Information needs
1) Market information
2) Operations information needs
3) Financial information needs

Outline of a business plan

1) Introductory page
2) Executive summary
3) Industry analysis
4) Description of venture
5) Production plan
6) Operations plan
7) Marketing plan
8) Organizational plan
9) Risk management plan
10)Financial plan

1) Introductory page
a) Name and address of business
b) Name and address of principal

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 c) Nature of business
d) Statement of financing needed
e) Statement of confidentiality of report

2) Executive summary
2-3 pages summarizing the complete business plan

3) Industry analysis
a) Future outlook and trends
b) Analysis of competitors
c) Market segmentation
d) Industry market and forecast

4) Description venture
a) Product
b) Service
c) Size of business
d) Office equipment and personnel
e) Background of entrepreneur

5) Production plan
a) Manufacturing process
b) Physical plant
c) Machinery and equipment
d) Names of suppliers of raw materials

6) Operations plan
a) Description of company’s operation
b) Flow of orders for goods or services
c) Technology utilization

7) Marketing plan
a) Pricing
b) Distribution
c) Promotion
d) Product forecasts
e) Controls

8) Organizational plan
a) Form of ownership
b) Identification of partners or principal shareholders
c) Authority of principals
d) Management team background

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 e) Roles and responsibilities of members of organization

9) Risk management plan

a) Evaluate weaknesses of business
b) New technologies
c) Contingency plan

10)financial plan
a) assumptions
b) pro forma income statement
c) cash flow projections
d) pro forma balance sheet
e) break-even analysis
f) sources and applications of funds

sheet 5
Business Plan

- Writing a Business Plan

A business plan should be comprehensive enough to give any potential investor a complete
picture and understanding of the new venture. It should help the entrepreneur clarify his or her
thinking about the business.

1. Introductory Page
a- Name and address of the company.
b- Name of the entrepreneur(s), telephone number, fax number, e-mail address, and Web
site address.
c- Description of the company and nature of the business.
d- Statement of financing needed.
e- Statement of confidentiality of report.

2. Executive Summary
About two to three pages in length summarizing the complete business plan.
Generally the executive summary should address a number of issues For example:
a- What is the business concept or model?
b- How is this business concept or model unique?

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 c- Who are the individuals starting this business?
d- How will they make money and how much?

3. Environmental and Industry Analysis

a-The environmental analysis “assesses external uncontrollable variables that may impact the
business plan”. Examples: Economy, culture, technology, legal concerns, etc.
b-The industry analysis “involves reviewing industry trends and competitive strategies”.
Examples: Industry demand, competition, etc.
industry analysis
Reviews industry trends and competitive strategies. For example
1-Industry demand
a. Knowledge of whether the market is growing or declining,
b. the number of new competitors, and
c. possible changes in consumer needs ,are all important issues in trying to ascertain the
potential business that might be achieved by the new venture.
The projected demand for the entrepreneur’s product or service will require some additional
marketing research (Marketing Plan)
2-Competition
Most entrepreneurs generally face potential threats from larger corporations. The entrepreneur
must be prepared for these threats and should be aware of who the competitors are and what their
strengths and weaknesses are so that an effective marketing plan can be implemented.
Most competitors can be easily identified from (experience, trade journal articles,
advertisements, Web sites, or even the yellow pages).
3-The specific market
Who the customer is and what the business environment is like in the specific market and
geographic area where the venture will compete.
This information is particularly significant to the preparation of the marketing plan.

4. Description of venture
Provides complete overview of the product(s), service(s), and operations of a new venture.
This section should begin with the mission of the new venture.

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Other Key elements are the product(s) or service(s), the location and size of the business, the
personnel and office equipment that will be needed, the background of the entrepreneur(s), and
the history of the venture.
If the product is very technical, it will be important to make sure that it’s description is clear and
easy to understand.
The location of any business may be vital to its success .An enlarged local map may help give
the location some perspective with regard to roads, highways, access, and so forth.
Some of the important questions regarding location might be asked by an entrepreneur are as
follows:
a) How much space is needed?
b) Should I buy or lease the building?
c) What is the cost per square foot?
d) Is the site zoned for commercial use?
e) What town restrictions exist for signs, parking, and so forth? Is renovation of the building
necessary?
f) Is the facility accessible to traffic?
g) Is there adequate parking?
h) Will the existing facility have room for expansion?
i) What is the economic and demographic profile of the area?
j) Is there an adequate labor pool available?
k) What are local taxes?
l) Are sewage, electricity, and plumbing adequate?

5. Production plan
Details how the product(s) will be manufactured. If some or all of the manufacturing Process is
to be subcontracted, the plan should describe the subcontractor(s), including location, reasons for
selection, costs, and any contracts that have been completed.
If the manufacturing is to be carried out in whole or in part by the entrepreneur, he will need to
describe the physical plant layout; the machinery and equipment needed to perform the
manufacturing operations; raw materials and suppliers’ names, addresses, and terms; costs of
manufacturing; and any future capital equipment needs.
These items will be important to any potential investor in assessing financial needs.

If a Retail Operation or Service:

1. From whom will merchandise be purchased?
2. How will the inventory control system operate?
3. What are the storage needs of the venture and how will they be promoted?

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4. How will the goods flow to the customer?
5. Chronologically, what are the steps involved in a business transaction?
6. What are the technology utilization requirements to service customers effectively?

6. Operation plan
All businesses (manufacturing or non-manufacturing) should include an operations plan as part
of the business plan.
-It goes beyond the manufacturing process.
-Describes the flow of goods and services from production to the customer.
-The major distinction between services and manufactured goods is services involve intangible
performances.

7. Marketing plan
It describes market conditions and strategy related to how the product/service will be distributed,
priced, and promoted.
Marketing research evidence to support any of the marketing decision strategies as well as for
forecasting sales should be described in this section.
Potential investors regard the marketing plan as critical to the success of the new venture.

8. Organizational plan
It describes the form of ownership and lines of authority and responsibility of members of new
venture.
In case of a partnership, the terms of the partnership should be included.
In case of a corporation, the following should be included:
a- Shares of stock authorized and share options.
b- Names, addresses, and resumes of directors and officers.
Organization chart.

9. Assessment of risk
Identifies potential hazards and alternative strategies to meet goals and objectives.
The entrepreneur should indicate:
1-Potential risks to the new venture.
2-Impact of the risks.
3-Strategy to prevent, minimize, or respond to the risk.

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Major risks could result from:
1-Competitor’s reaction.
2-Weaknesses in marketing/ production/ management team.
3-New advances in technology.

10. Financial plan

It contains projections of key financial data that determine economic feasibility and necessary
financial investment commitment.
It should contain:
a- Summarized forecasted sales and appropriate expenses for at least the first three
years.
b- Cash flow figures for three years.
c- Projected balance sheet.

11. Appendix
It contains any backup material that is not necessary in the text of the document.
It may include:
a- Letters from customers, distributors, or subcontractors.
b- Secondary data or primary research data used to support plan decisions.
c- Leases, contracts, or other types of agreements.
d- Price lists from suppliers and competitors.

- Using and Implementing the Business Plan:

The business plan is designed to guide the entrepreneur through the first years of operations.
The strategy should contain control points to ascertain progress and to initiate contingency plans
if necessary.
Without good planning employees will not understand the company’s goals.
Businesses fail due to entrepreneur’s inability to plan effectively.

- Measuring Plan Progress:

Business plan projections are made on a 12-month schedule but the entrepreneur should
frequently check on:
a- Profit and loss statement.
b- Cash flow projections.
c- Inventory control.
d- Production control.
e- Quality control.
f- Sales control.

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 g- Disbursements.
h- Web site control.

- Updating the Plan:

-Entrepreneurs must be sensitive to changes in the company, industry, and market.
-Determine what revisions are needed if changes are likely to affect the business plan.
This helps entrepreneurs to:
a- Maintain reasonable targets and goals.
b- Keep the new venture on a course to high probability of success.

- Why Some Business Plans Fail:

1- Goals are unreasonable.
2- Objectives are not measurable.
3- Entrepreneur has not made a total commitment to the business .
4- Lack of experience in the planned business.
5- No sense of potential threats or weaknesses to the business.
6- No customer need was established for the proposed product or service.

Sheet 6
Marketing plan

Developing an effective marketing plan is one of the most important areas of decision making
that an entrepreneur faces.
Even with a unique product or service, consumers usually have choices they can make, so the
entrepreneur must position his or her business with unique marketing strategies.

- Industry analysis
 Prior to the preparation of the marketing plan, the entrepreneur will need to complete the
industry analysis section of the business plan.
 The primary focus of the industry analysis is to provide sufficient knowledge of the
environment (national and local market) that can affect marketing strategy decision
making.
 Information can be gathered through secondary sources and market research.
 The entrepreneur can begin to understand competitors’ strengths and weaknesses;
provides insight into how to position products or services

- Competitor analysis
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Is to Document current strategies of primary competitors.
Information can be utilized to formulate the market positioning strategy.
This analysis provides a solid basis for marketing decision making.
- Marketing Research for the New Venture
Information for developing the marketing plan may necessitate conducting some marketing
research. Marketing research involves the gathering of data to determine such information as
who will buy the product or service, what is the size of the potential market , what price should
be charged, what is the most appropriate distribution channel, and what is the most effective
promotion strategy to inform and reach potential customers.
Marketing research may be conducted by the entrepreneur or by an external supplier or
consultant.
Four Steps In Market Research:
Step One: Defining the Purpose or Objectives
Step Two: Gathering Data from Secondary Sources
Step Three: Gathering Information from Primary Sources
Step Four: Analyzing and Interpreting the Results

Step One: Defining the Purpose or Objectives

Make a list of the information that will be needed to prepare the marketing plan.
1. How much would potential customers be willing to pay for the product or service?
2. Where would potential customers prefer to purchase the product or service?
3. Where would the customer expect to hear about or learn about such a product or service?

Step Two: Gathering Data from Secondary Sources.

 Secondary sources can include trade magazines, newspaper articles, libraries, government
agencies, the Internet, and commercial data.
 The most important purpose of reviewing secondary sources is to obtain information that
will assist the entrepreneur in making the best decisions regarding the marketing of a
product or service.

Step Three: Gathering Information from Primary Sources

“Information that is new is primary data”.

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  Data collection procedures such as Observation, networking, interviewing, focus groups,
and experimentation.
 Observation is the simplest approach .
 Interviewing or surveying is the most common approach used to gather market
information
 Interviewing is more expensive than observation but is more likely to generate more
meaningful information. Interviews may be conducted in
person, by telephone, through the mail, or online.
 The Internet is becoming an important resource for new ventures to gather information
both formally and informally.
 The informal sources typically involve the use of Facebook, Twitter, or LinkedIn.
 Data collection instrument by Questionnaire. The questionnaire, or data collection
instrument, used by the entrepreneur should Include questions specifically designed to
fulfill one or more of the objectives the entrepreneur listed earlier.
 Focus groups are a more informal method for gathering in-depth information
Step Four: Analyzing and Interpreting the Results
 Results can be tabulated by hand or on a computer.
 Evaluation and interpretation should be based on research objectives.
 Cross tabulated data can provide more focused results.
 Example: Entrepreneur compare results by different Age, Occupation, Location- fine
tuning can provide valuable insights particularly regarding the segmentation of the
market

- Difference between a business plan and a marketing plan

 The marketing plan focuses on all marketing activities of a venture for one year or more.
 The marketing plan will vary significantly for a firm depending on the industry, target
market, and the size and scope of the organization. It is an integral part of a business plan

- The Marketing Mix

A combination of product, price, promotion, and distribution and other marketing activities
needed to meet marketing objectives.
Product
Quality of components or materials, style, features, options, brand name, packaging, sizes,
service availability, and warranties.
Price

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Quality image, list price, quantity, discounts, allowances for quick payment, credit terms, and
payment period.
Channels of distribution
Use of wholesalers and/or retailers, type of wholesalers or retailers, how many, length of
channel, geographic coverage, inventory, and transportation.
Promotion
Media alternatives, message, media budget, role of personal selling, sales promotion (displays,
coupons, etc.), and media interest in publicity
- Understanding the Marketing Plan
Marketing plan is A written statement of marketing objectives, strategies, and activities to be
followed in business plan.
It is designed to provide answers to three basic questions:
1. Where have we been?
2. Where do we want to go (in the short term)?
3. How do we get there?

- Characteristics of a Marketing Plan

A marketing plan should:
1. Provide a strategy.
2. Be based on facts/assumptions.
3. Describe an organization for implementation.
4. Provide for short-term and long-term continuity.
5. Be simple and short.
6. Be flexible.
7. Specify criteria for control

- Outline for a Marketing Plan

1. Situation analysis
2. Background of venture
3. Strengths and weaknesses of venture
4. Market opportunities and threats
5. Competitor analysis
6. Marketing objectives and goals
7. Marketing strategy and action programs
8. Budgets and Controls

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 - Steps in Preparing the Marketing Plan
1-Defining the Business Situation
Situation analysis - Describes past and present business achievements of new venture.
In case of a new venture, information should relate to how and why the product or service was
developed.
After a new venture has started up information should relate to:
a. Present market conditions.
b. Performance of the company’s goods and services.
c. Future opportunities or prospects.
2-Defining the Target Market/ Opportunities and Threats
The target market is specific group of potential customers toward which the venture aims its
marketing plan.
 Market segmentation - Dividing a market into definable and measurable groups for
purposes of targeting marketing strategy
3-Process of segmenting and targeting customers
-Decide on general market or industry to pursue.
-Divide market into smaller groups based on:
a. Characteristics of the customer – Geographic, demographic, and psychographic.
b. Buying situation – Desired benefits, usage, buying conditions, and awareness of buying
intention.
-Select segment or segments to target.
-Develop a marketing plan integrating product, price, distribution, and promotion.
-Consider the strengths and weaknesses in the target market
4-Establishing Goals and Objectives
-These are statements of level of performance desired by new venture.
-Realistic and specific marketing goals and objectives respond to the question: “Where do we
want to go?”.
-Not all goals are quantifiable.
-Limit the number of goals or objectives to between six and eight.
-Goals should represent key areas to ensure marketing success
5-Defining Marketing Strategy and Action Programs

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 a. Product or service
May consider more than the physical characteristics.
Involves packaging, brand name, price, warranty, image, service, delivery time, features, style,
and even the Web site.
b. Pricing
Costs - Material costs, labor costs, cost of goods from suppliers, labor and overhead expenses,
etc.
Margins or markups - Expected to cover overhead costs and some profit.
c. Promotion
To inform potential consumers about the product’s availability or to educate the consumer.
Methods include print, radio, or television advertising, Internet, direct mail, trade magazines, or
newspapers.
The entrepreneur should consider both costs and effectiveness of the medium in meeting the
market objectives.
d. Distribution
-Provides utility to the consumer.
-Must also be consistent with other marketing mix variables.
- Budgeting and Control
Budgeting Costs should be reasonably clear. Assumptions, if necessary, should be
clearly stated.
Entrepreneur should ensure coordination and implementation of the plan.
- The marketing strategy
The marketing strategy section or action plan describes how to achieve the goals and objectives
already defined.
There may be alternative marketing approaches that could be used to achieve these defined
goals.
One such approach is the use of social media as an integrated part of any promotional strategy.
It is especially important to consider alternative marketing approaches when entering
international markets.
During the year, the marketing plan will be monitored to discern the success of the action
programs.

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Any “weak” signals will provide the entrepreneur with the opportunity to modify the plan and/or
develop a contingency plan
- Monitoring the Progress of Marketing Actions
-Involves tracking results of the marketing effort.
-Entrepreneur should prepare for contingencies.
-Minor adjustments in the plan are normal; significant changes indicate a poorly prepared plan.
-Weaknesses in market planning may be due to:
a. Poor analysis of the market and competitive strategy.
b. Unrealistic goals and objectives.
c. Poor implementation of the outlined plan actions.
d. Unforeseen hazards like weather or war
- The social media plan
social media should be planned and considered part of any promotional efforts.
Step 1
It is necessary to identify the target market.
Step 2
- Identifying the social networks that will be utilized.
-Not all social media are the same. Facebook and Twitter are the most popular for small
businesses.
Step 3
All efforts to develop an effective social media plan start with the company Web site. The Web
site should include links to your Facebook and Twitter pages.
In addition, the entrepreneur should include a blog or a newsletter on the Web site that provides
important information to the target market
Step 4
The entrepreneur needs to post information on a regular basis and it is recommended that he or
she set aside time each day to review posts and update or add any new information.
Step 5
The last step is to assess and analyze the effectiveness of your social media plan.

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The more often you post, the more likely that you will be able to ascertain what content, timing,
and frequency is most effective in increasing company sales.

Sheet7
Organizational and financial plan

- Legal Forms of Business

One of the most important decisions the entrepreneur(s) must make in the business plan is the
legal form of business. The three basic legal forms of business are: Proprietorship, Partnership
and Corporation
a. Proprietorship - Single owner, unlimited liability, controls all decisions, and receives all
profits.
b. Partnership - Two or more individuals having unlimited liability who have pooled
resources to own a business.
c. Corporation- Most common form of corporation; regulated by law; treated as a separate
legal entity for liability and tax purposes.

- Designing the Organization

Entrepreneur’s roles in Designing the Organization can be grouped into:
a. Organization structure.
b. Planning, measurement, and evaluation schemes ,Selection criteria, Training and
Rewards.
-It is important to begin the new venture with a strong management team that is committed to the
goals of the new venture.
The management team must be able to work together effectively toward these ends.
- Important factors in establishing an effective team:
a. Desired culture must match business strategy outlined in the business plan.
b. Employees must be motivated and rewarded for good work.
c. Entrepreneur should be flexible to try different things.
d. Spend extra time in the hiring process.
e. Core values and appropriate tools must be provided for employees to effectively
complete their jobs
-History indicates that many entrepreneurs try to perform too many tasks in the new venture,
often spreading themselves too thin and thus negatively affecting all their tasks.
-Assigning and delegating tasks is part of being a good leader and in the long run will enhance
the confidence and motivation of all employees and contribute to a strong management team.
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-The design of the organization requires the entrepreneur to specify the types of skills needed
and the roles that must be filled.
-In addition to the formal organization, the entrepreneur must consider the informal organization
or culture that is desired to match the strategy stipulated in the business plan.
Organization culture “represents the attitudes, behaviors, dress, and communication styles that
can differentiate one company from another”.
-Both of formal and informal organizations are important in establishing an effective and
profitable organization.
- The Organization and Use of Advisors
Outside advisors are usually used on an as-needed basis. They can become a part of the
organization and need to be managed.
The relationship between the entrepreneur and outside advisors can be enhanced by involving
them thoroughly and at an early stage.
Even after hiring advisors, the entrepreneur should question their advice
- Financial Plan Objectives
1. To understand the role of budgets in preparing pro forma statements.
2. To learn how to prepare monthly pro forma cash flow, income, balance sheet, and
sources and applications of funds statements for the first year of operation.
3. To explain the application and calculation of the break-even point for the new venture
- The Financial Plan
“It provides the entrepreneur with a complete picture of:
a. The amount funds and when they are coming into the organization.
b. Where funds are going and how much cash is available.
c. The projected financial position of the firm.
-The plan explains how the entrepreneur intends to meet financial obligations and maintain the
venture’s liquidity
- Operating and Capital Budgets
Sales budget – An estimate of the expected volume of sales by month.
Cost of sales can be determined from the sales forecasts.
In manufacturing ventures, costs of internal production and subcontracting are compared.
Includes estimated ending inventory required as a buffer.
a. Operating costs:
Includes fixed expenses incurred regardless of sales volume.

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Variable expenses must be linked to strategy in the business plan.
b. Capital budgets
provide a basis for evaluating expenditures that will impact the business for more than one year
1. Pro Forma Income Statements
Pro forma income is the Projected net profit calculated from projected revenue minus projected
costs and expenses.
-Sales by month is calculated first.
-Projections of all operating expenses for each of the months during the first year should be
made.
-Increasing selling expenses as sales increase should be taken into account.
-Changes in expenses during the first year can necessitate month-by-month illustration.
-Increase in individual expenses need to be reflected in the first year’s pro forma income
statement.
-Projections should be made for years 2 and 3 as well; consider expenses that are likely to remain
stable over time
2. Pro Forma Cash Flow
Projected cash available calculated from projected cash accumulations minus projected cash
disbursements payouts. It is not the same as profit. Sales may not be regarded as cash.
-Use of profit as a measure of success may be unreliable if there is significant negative cash
flow.
-Cash flow can be projected using the indirect or direct method
-Entrepreneurs must make monthly projections of cash If disbursements are greater than receipts
- entrepreneur must either borrow in a bank.
-Large positive cash flows need to be invested or deposited in a bank for periods when
disbursements are greater than receipts.
-Determining the exact monthly receipts and disbursements is difficult.
-Pro forma cash flow is based on best estimates.
3. Pro Forma Balance Sheet
Summarizes the projected assets, liabilities, and net worth of the new venture. It is a picture of
the business at a certain moment in time and does not cover a period of time. Consists of: Assets
, Liabilities and Owner’s equity

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 a- Assets - Items that are owned or available to be used in the venture operations; can be
current or fixed.
b- Liabilities - Money that is owed to creditors; can be current or long-term debt.
c- Owner’s equity - Amount owners have invested and/or retained from the venture
operations.

- Break-Even Analysis
Breakeven is the Volume of sales where the venture neither makes a profit nor a loss.
The break-even formula:
B/E(Q) = __________TFC______________
SP-VC/unit (marginal contribution)
Major weakness in the breakeven lies in determining if a cost is a fixed or variable
4. Pro Forma Sources and Applications of Funds
a- Sources:
-Operations.- New investments. -Long-term borrowing. -Sale of assets.
b- Uses/ Applications:
-Increase assets. -Retire long-term liabilities. -Reduce owner or stockholders’ equity. -Pay
dividends
- Software Packages
A spreadsheet program (Microsoft Excel or others ) is most suitable for completing pro forma
statements.
-Helps present different scenarios and assess their impact on the pro forma statements.
-A simple and easy to use software is useful in the start-up stage.
-Software packages vary in price and complexity.

Sheet 8
Sources of capital

a) Debt or Equity Financing

1. Debt financing - Obtaining borrowed funds for the company.
a- Asset-based financing; requires some asset to be used as a collateral.
b- Borrowed funds plus interest need to be paid back.

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 2. Equity financing - Obtaining funds for the company in exchange for ownership.
-Does not require collateral.
-Offers investor some form of ownership position
- Factors affecting type of financing:
1- Availability of funds.
2- Assets of the venture.
3- Prevailing interest rates.
4- All financing requires some level of equity; amount will vary by nature and size of venture
b) Internal Funds
Internally generated funds are most frequently employed; sources include:
1- Profits.
2- Sale of assets and little used -asset.
3- Reduction in working capital: inventory, cash and other working capital items.(reducing
short term assets)
4- Extended payment terms for supplier.
5- Accounts receivable

c) External Funds
Criteria for evaluating external sources of funds:
1- Length of time the funds are available.
2- Costs involved.
3- Amount of company control lost

d) Personal Funds
1- Least expensive funds in terms of cost and control.
2- Essential in attracting outside funding.
Typical sources of personal funds:
a. Savings.
b. Life insurance.
c. Mortgage on a house or car.
The entrepreneur’s level of commitment is reflected in the percentage of total assets that the
entrepreneur has committed.
e) Family and Friends
- Likely to invest due to relationship with entrepreneur.
Advantages - Easy to obtain money; more patient than other investors.

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Disadvantage - Direct input into operations of venture.
- A formal agreement must include:
1- Amount of money involved.
2- Terms of the money.
3- Rights and responsibilities of the investor.
4- Steps to be taken incase business fails

f) Commercial Banks (Types of Bank Loans)

1- (Asset based)
a. Accounts receivable loans.
b. Inventory loans.
c. Equipment loans.
d. Real-estate loans.

2- Cash flow financing (Conventional bank loans)

a. Installment loans.
b. Straight commercial loans.
c. Long-term loans.
d. Character loans

Commercial banks
- Bank Lending Decisions
1- Based on quantifiable information and subjective judgments.
2- Decisions are made according to the five Cs of lending Character, Capacity, Capital,
Collateral, and Conditions.
3- Review of past financial statements and future projections.
4- Questions are asked regarding ability to repay the loan

- “Bank Shopping” procedure:

1- Complete an application, which is a “mini” business plan.
2- Evaluate alternative banks.
3- Select one with a positive loan experience in the business area.
4- Set an appointment.
5- Carefully present the case for the loan.
6- Borrow the maximum amount possible

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 - Role of the SBA in Small-Business Financing
The Small Business Administration (SBA) is primarily a guarantor of loans made by private and
other institutions.
The 7(a) Loan Guaranty is the SBA’s primary business loan program.
Proceeds can be used for:
1- Working capital.
2- Machinery and equipment.
3- Furniture and fixtures.
4- Land and building.
5- Leasehold improvements.
6- Debt refinancing (under some conditions).
Eligibility criteria:
1- Repayment ability.
2- Five “C’s”.
3- Size.
4- Type of business.
5- Use of proceeds.
6- Availability of funds from other sources.
7- Owners of 20 percent or more are required to personally guarantee SBA loans

- Research and Development Limited Partnerships

Money given to a firm for developing a technology that involves a tax shelter.
Major elements:
1- Contract - Liability for loss incurred is borne by the limited partners; tax advantages to
both parties.
2- Limited partnership - A party that usually supplies money and has a few responsibilities.
3- Sponsoring company- Acts as the general partner; has the base technology but needs
funds to develop it
Procedure:
a. Funding stage - Establishment of contract; investment of money; documentation of
terms and conditions, and scope of research.
b. Development stage - Sponsoring company performs actual research.
c. Exit stage - Commences when technology is successfully developed; sponsoring
company and the limited partners commercially reap the benefits through either
equity partnerships, royalty partnerships, or joint ventures.
Benefits:
a. Provides funds with minimum amount of equity dilution.

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 b. Reduces the risks involved.
c. Strengthens sponsoring company’s financial statements.
Costs:
a. Expending of time and money.
b. Restrictions placed on technology can be substantial.
c. Exit from the partnership may be too complex.

g) Government Grants
The Small Business Innovation Research (SBIR) program was created as part of the Small
Business Innovation Development Act.
All federal agencies with R&D budgets in excess of $100 million must award a portion of their
R&D funds to small businesses through the SBIR grants program.
Offers a uniform method by which each participating agency solicits, evaluates, and selects the
research proposals for funding
Procedure:
1- Solicitations describing areas for funding are published by government agencies.
2- Proposal is submitted by a company or individual.
3- Screening of received proposals.
4- Evaluation of proposal on a technological basis.
5- Granting of awards based on potential for commercialization.
6- Research findings are owned by the company or individual, not by the government.

h) Private Placement
Types of Investors
1- Investor can influence nature and direction of the business.
2- May be involved in the business operation.
3- Entrepreneur needs to consider degree of involvement.
Private Offerings
1- A formalized method for obtaining funds from private investors.
2- Faster and less costly

i) Bootstrap Financing
Important at start-up and in the early years of the venture when capital from debt financing or
from equity financing more expensive
Cost of outside capital:

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 a. Usually takes between three and six months to raise.
b. Often decreases a firm’s drive for sales and profits.
c. Increases the impulse to spend.
d. Decreases the company’s flexibility.
e. May cause disruption and problems in the venture
Bootstrap financing involves using any possible method for conserving cash such as:
a. Use of discounts for volume.
b. Frequent customer discounts.
c. Promotional discounts.
d. “Obsolescence money”.
e. Savings through bulk packaging.
f. Consignment financing

Sheet 9
Informal Risk Capital, Venture Capital, and Going Public

- Financing the Business

Criteria for evaluating appropriateness of financing alternatives:
1- Amount and timing of funds required.
2- Projected company sales and growth.
Three types of funding:
1. Early stage financing.
2. Development financing.
3. Acquisition financing

Risk capital markets provide debt and equity to nonsecure financing situations.
- Types of risk capital markets:
1. Informal risk capital market.
2. Venture-capital market.
3. Public-equity market.
All three can be a source of funds for stage-one financing.
However, public-equity market is available only for high potential ventures.

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 - Informal Risk Capital
Area of risk- capital markets consisting mainly of a virtually invisible group of wealthy
investors (business angels).
Provides funding, especially in start-up (first-stage) financing

- Venture Capital
Nature of Venture Capital
Along-term investment discipline, usually occurring over a five-year period.
The equity pool is formed from the resources of wealthy limited partners
Venture-Capital Process
Objective of a venture-capital firm - Generation of long-term capital appreciation through debt
and equity investments.
Criteria for committing to venture:
1. Strong management team.
2. A unique product and/or market opportunity.
3. Business opportunity must show significant capital appreciation.
- Valuing Your Company
Factors in Valuation:
1. Nature and history of business.
2. Economic outlook- general and industry.
3. Comparative data.
4. Book (net) value.
5. Future earning capacity.
6. Dividend-paying capacity.
7. Assessment of goodwill/intangibles.
8. Previous sale of stock.
9. Market value of similar companies ‘stock
Ratio Analysis
Serves as a measure of financial strengths and weaknesses of the venture but should be used with
caution.
-It is typically used on actual financial results.
- Provides a sense of where problems exist in the pro forma statements.

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 a- Liquidity ratios:
- Current ratio = current assets/current liabilities
- Acid test ratio = (current asset – inventory) / current liabilities

b- Activity ratios:
- Average collection period = accounts receivables / average daily sales
- Inventory turnover = cost of goods sold / inventory

c- Leverage ratios:
- Debt ratio = total liabilities / total assets
- Debt to equity = total liabilities / stockholders’ equity

d- Profitability ratios:
- Net profit margin = net profit / net sales
- Return on investment = net profit / total assets

General valuation method:

Venture capitalist ownership (%) =
(VC investment * VC investment multiple desired) / (company’s projected profits in year
5 * price earnings multiple of comparable company)

- Deal Structure
Terms of the transaction between the entrepreneur and the funding source.
Needs of the funding sources:
1. Rate of return required.
2. Timing and form of return.
3. Amount of control desired.
4. Perception of risks.
Entrepreneur’s needs:
1. Degree and mechanisms of control.
2. Amount of financing needed.
3. Goals for the particular firm.

- Going Public
Selling some part of the company by registering with the Securities and Exchange Commission
(SEC).
Resulting capital infusion provides the company with:
1. Financial resources.
2. A relatively liquid investment vehicle.

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Company consequently gains:
1. Greater access to capital markets in the future.
2. A more objective picture of the public’s perception of the value of the business
- Timing of Going Public and Underwriter Selection
1) Timing
a- Is the company large enough?
b- What is the amount of the company’s earnings, and how strong is its financial
performance?
c- Are the market conditions favorable for an initial public offering?
d- How urgently is the money needed?
e- What are the needs and desires of the present owners?
2) Underwriter Selection
 Managing underwriter - Lead financial firm in selling stock to the public.
 Underwriting syndicate - A group of firms involved in selling stock to the public.
 Factors to consider in selection:
1. Reputation.
2. Distribution capability.
3. Advisory services.
4. Experience.
5. Cost

- Registration Statement and Timetable

SEC attempts to ensure that the document makes a full and fair disclosure of the material
reported.
Registration statement consists of:
1. Prospectus.
a. Cover page
b. Prospectus summary
c. Description of the company
d. Risk factors
e. Use of proceeds
f. Dividend policy
g. Capitalization
h. Dilution
i. Selected financial data
j. Business, management, and owners
k. Type of stock
l. Underwriter information
m. Actual financial statements
2. Registration statement

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 - After Going Public
- Aftermarket Support, Actions of underwriters to help support the price of stock following the
public offering.
- Relationship with the Financial Community, Has a significant effect on the market interest and
the price of the company’s stock.
- Reporting Requirements
The company must file:
1. Annual reports on Form 10-K.
2. Quarterly reports on Form 10-Q.
3. Specific transaction or event reports on Form 8-K

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