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MPU2223 - 3223 Entreprenuership PDF
MPU2223 - 3223 Entreprenuership PDF
MPU2223/3223/OUMM2103
Entrepreneurship
Dr Oh Teik Hai
Abd Kadir Othman
Loo Sze Wei
Open University Malaysia
Answers 178
References 196
INTRODUCTION
MPU2223/3223/OUMM2103 Entrepreneurship is one of the courses offered by
OUM Business School at Open University Malaysia (OUM). This course is worth
three credit hours and should be covered over 8 to 15 weeks.
COURSE AUDIENCE
This is a compulsory course for all students of OUM.
As an open and distance learner, you should be able to learn independently and
optimise the learning modes and environment available to you. Before you begin
this course, please ensure that you have the right course materials, understand
the course requirements, as well as know how the course is conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.
Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussion 3
Study the module 60
Attend three to five tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS 120
COURSE OUTCOMES
By the end of this course, you should be able to:
1. Explain the historical background, concepts and theories of
entrepreneurship;
2. Develop a vision to become an entrepreneur and appreciate the
entrepreneurial value and culture in your profession;
3. Acquire creativity and innovative development skills in entrepreneurship;
and
4. Identify entrepreneurial opportunity and transform it into a basic business
plan.
COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic is presented
below:
Topic 5 outlines the techniques of preparing a business plan which will help
students to evaluate a business plan objectively, critically and practically.
Students will be taught how to produce a blueprint for a realistic business plan.
They will also be exposed to several methods and techniques of presenting an
effective business plan.
Topic 9 discusses the need for personal financial planning and looking at the
steps and benefits of financial planning as well. It will also explain the power of
money in terms of building financial success and the basic budgeting and
spending plan for an entrepreneur. The topic will also discuss the early signs of
financial trouble that could be faced by an entrepreneur and explain the
approaches on how an entrepreneur could get out of the financial trouble.
Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
PRIOR KNOWLEDGE
No pre-requisite is required for this course.
ASSESSMENT METHOD
Please refer to myINSPIRE.
REFERENCES
Abd. Aziz Yusof. (2000). Usahawan dan keusahawanan: Satu penilaian. Prentice
Hall Sprint Print.
Mohd Salleh Hj Din, Hoe C. H., Norashidah H., Rosli M., Habshah B., Ooi Y. K.,
Armanurah M., Shuhymee A., Norita D., & Lily Julienty A. B. (2004). Asas
keusahawanan. Kuala Lumpur: Thomson.
INTRODUCTION
Welcome to the world of entrepreneurship!
18th Century In the 18th century, the entrepreneur was differentiated from the
capital provider. This happened because of the industrialisation that
occurred throughout the world. Many of the inventions developed
during this time were reactions to the changing world. For example,
the case with the inventions of Eli Whitney and Thomas Edison. Both
Eli Whitney and Thomas Edison were developing new technologies
and were unable to finance their inventions. Eli Whitney and Thomas
Edison were capital users (entrepreneurs), not providers (venture
capitalists).
19th and 20th In the late 19th and 20th centuries, entrepreneurs were not
Centuries frequently distinguished from managers. In the middle of the
20th century, the notion of an entrepreneur as an innovator
was established. The function of the entrepreneur is to reform or
revolutionise the pattern of production by exploiting an invention or,
more generally, an untried technological possibility for producing a
new commodity or producing an old one in a new way.
21st Century Entrepreneurs in the twenty-first century are considered the heroes
of free enterprise. Many of them have used innovation and creativity
to build multimillion-dollar enterprises from fledgling businesses.
Entrepreneurs have created new products and services and have
assumed the risks associated with these ventures. Today, many
people regard entrepreneurship as „pioneership‰ on the frontiers of
business (Kuratko & Hodgetts, 2004).
ACTIVITY 1.1
According to Peter Drucker, entrepreneurship is a discipline which can
be learned. What do you think of this statement? Discuss with your
coursemates.
1.2.1 Entrepreneurship
According to Histrich and Peter (1998), entrepreneurship is the dynamic process
of creating incremental wealth. The wealth is created by individuals who assume
major risks in terms of equity, time, and career commitment or provide value for
some product or service. It is the process of creating something new with value
by devoting the necessary time and effort, assuming the accompanying financial,
psychological and social risks and receiving the resulting rewards of monetary,
personal satisfaction and independence. This definition focuses on four basic
aspects, as shown in Figure 1.1.
Copyright © Open University Malaysia (OUM)
4 TOPIC 1 INTRODUCTION TO ENTREPRENEURSHIP
SELF-CHECK 1.1
1. What is entrepreneurship?
Entrepreneurs are catalysts for economic change who use purposeful searching,
careful planning and sound judgement when carrying out the entrepreneurial
process.
ACTIVITY 1.2
You are an entrepreneur who is about to open a franchise restaurant.
What should you do before you start your business? Present your
ideas in class.
ACTIVITY 1.3
Myths Facts
Myth 1 Although entrepreneurs tend to be action oriented, they are also
Entrepreneurs thinkers. They are actually often very methodical people who plan
are doers, not their moves carefully. They also have other alternatives set if
thinkers their plan fails. This shows that entrepreneurs are both thinkers
and doers.
Myth 2 Some entrepreneurs and non-entrepreneurs say that the
Entrepreneurs characteristics of entrepreneurs cannot be taught or learned.
are born, not Entrepreneurial characteristics are innate traits and one must
made be born with it to become entrepreneurs. However, research
has proven that entrepreneurship can be taught and studied.
Entrepreneurship has models, processes and case studies that
allow it to be learned.
Myth 3 Although many inventors are also entrepreneurs, numerous
Entrepreneurs successful entrepreneurs are not inventors. For example, Ray
are always Kroc did not invent the fast-food franchise but his innovative
inventors ideas made McDonaldÊs the largest fast-food enterprise in the
world. Successful entrepreneurs use creative and innovative
ideas in their ventures and these characteristics can be learned.
Myth 4 This belief arises because some business owners started their
Entrepreneurs successful enterprise only after dropping out of school or
are academic and quitting a job. Historically, educational and social organisations
social misfits did not recognise entrepreneurs. Today, the entrepreneur is
no longer considered a misfit. They are now viewed as
professionals.
Myth 5 Many books and articles have presented checklists of
Entrepreneurs characteristics of the successful entrepreneur. These lists were
must fit the neither validated nor complete; they were based on case studies
„Profile‰ and on research findings among achievement-oriented people.
Today, we realise that a standard entrepreneurial profile is hard
to compile. Many successful entrepreneurs today did not have
all the profile of the successful entrepreneur when they started
their venture.
Myth 6 It is true that venture needs capital to survive; it is also true that
All entrepreneurs a large number of business failures occur because of a lack of
need is money adequate financing. To entrepreneurs, money is a resource but
not an end in itself.
Myth 7 To be at „the right place at the right time‰ is always an
All entrepreneurs advantage. However, „luck happens when preparation meets
opportunity‰. What are important and needed for the
need is luck
entrepreneur to seize an opportunity are planning, preparation,
determination, desire, knowledge and innovativeness.
Myth 8 „Too much planning and evaluation lead to constant problems‰.
Ignorance is bliss This statement is not true in todayÊs competitive markets. The
for entrepreneurs key factors to be successful entrepreneurs are detailed planning
and preparation. Entrepreneurs identify a ventureÊs strength and
weaknesses, set up clear timetables with contingencies for
handling problems, and minimise these problems through
careful strategy formulation.
Myth 9 It is true that many entrepreneurs suffer a number of failures
Entrepreneurs before they are successful. In fact, failures can teach many
seek success but lessons to entrepreneurs and often lead to future successes.
experience high Entrepreneurs always learn from their failures and also the
failure rates failures of others, which act as a form of guidance and direction
for their future
Myth 10 The concept of risk is a major element in the entrepreneurial
Entrepreneurs are process. However, the publicÊs perception is that most
extreme risk- entrepreneurs are high risk-takers. In fact, entrepreneurs always
takers (gamblers) search for information and do planning before taking any action.
This means that entrepreneurs are usually working on moderate
and calculated risks.
ACTIVITY 1.4
Name some policies enacted by the Malaysian government to
promote local entrepreneurship.
ACTIVITY 1.5
EXERCISE 1.1
The study of entrepreneurship has relevance today, not only because it helps
entrepreneurs to better fulfil their personal needs but also because of the
contribution it gives to the individual, society, country and to the world.
This topic examines the evolution and concepts of entrepreneurship and
discusses the importance of entrepreneurship.
In addition, the ten major myths of entrepreneurship are presented to
provide a better understanding of the assumptions surrounding this newly
developing field of study.
It also provides a framework and foundation for researching contemporary
theories and processes of entrepreneurship.
The discussion on the entrepreneurship development in Malaysia is
presented to give a brief history and scenarios of entrepreneurship in
Malaysia. The government should continuously promote the growth of this
area in the future.
Furthermore, to foster entrepreneurship development, entrepreneurship
education is a vital element to further educate society in the area of
entrepreneurship.
INTRODUCTION
This topic describes the most common characteristics associated with successful
entrepreneurs, entrepreneur self-assessment and the differences between the
entrepreneur, the small businessman and the managers.
(o) Independent
Entrepreneurs are independent people. They like to accomplish tasks in
their own way. This does not mean entrepreneurs must make all the
decisions. They want to have authority to make important decisions.
(p) Flexibility
Entrepreneurs are not rigid in their ventures. They are flexible and have the
ability to adapt to the changing demands of their customers and businesses.
In this rapidly changing world economy, rigidity often leads to failure.
EXERCISE 2.1
ACTIVITY 2.1
What is the purpose of the entrepreneur self-assessment test? You
can try one of the online tests by accessing http://bizmove.com/
other/quiz.htm. Compare your score with your friends.
Source: Zimmerer, T. W., & Searborough, N. M., (1998). Essential of entrepreneurship and
small business management (2nd ed.). Prentice Hall.
SELF-CHECK 2.1
The topic also presents the entrepreneur self-assessment test to see the
entrepreneurial inclination potential in individuals.
Creative Innovative
Entrepreneurs self-assessment Optimistic
INTRODUCTION
TodayÊs competitive business environment requires an entrepreneur to think of
ways to produce new products, services or processes for new purposes to the
customers. This, in turn, could enable the organisation to survive and attract the
attention of customers to the organisationÊs new inventions as well as generate
revenues. Hence, creativity and innovation are vital elements for all levels of
businesses in order for them to grow and expand. Besides, it is also essential both
for survival and for building competitive advantage (Kirby, 2003).
As a result, the ability to create or invent something new is the answer for
business to remain in the market.
The first section discusses what creativity is, the process of creativity, barriers to
creativity, how to generate creativity and characteristics of creative entrepreneurs.
„The ability to produce work that is novel (i.e. original and unexpected), high
in quality and appropriate (i.e. useful, meets task constraints).‰
(Sternberg, Kaufman and Pretz, 2002)
SELF-CHECK 3.1
Give the definition for creativity based on your understanding.
According to Kuratko and Hodgetts (2004), there are four main phases or steps in
the creative process, as shown in Figure 3.1.
EXERCISE 3.1
Briefly explain what creativity is and the main phases involved in the
process of creative thinking.
(a) Brainstorming
Brainstorming is the most common and powerful technique used to hatch
ideas. During a brainstorming session, all members of the group suggest
ideas that are then discussed. The ideal number of group members
involved in a brainstorming session is four to seven. There are four rules of
brainstorming (Williams, 2000), namely:
(ii) All ideas are acceptable, no matter how wild or crazy they might be;
(ii) Use other group membersÊ ideas to come up with even more ideas;
and
(c) DO IT
Thirdly, we need to examine and analyse in detail before choosing the best
ideas to solve a problem, and all the solutions should come from the second
stage.
Finally, once the best solution is identified, it is time to implement it. This
stage involves the development of a reliable product from the ideal,
marketing and business strategies and it normally incurs time, cost, and
energy.
Mind mapping can also be used to generate new products, solve a problem,
plan strategy, or develop a process. The key to its effective use to generate
ideas and solve problems is to not necessarily think logically. If one idea
triggers another, do not try to analyse it; just mark it down on the mind
map. Similar to brainstorming, the crazier the association, the better. That is
how truly innovative solutions come about.
EXERCISE 3.2
List and briefly explain the techniques for generating creative ideas.
ACTIVITY 3.1
What do you understand by the term innovation? In your opinion,
how does this term apply to entrepreneurs and why is it important?
Discuss in your class.
SELF-CHECK 3.2
Figure 3.7: Four strategies to encourage creativity and innovation in the organisation
ACTIVITY 3.2
1. What are the strategies that you can use to encourage creativity and
innovation in an organisation?
2. To take some creativity tests, please browse the following websites:
http://www.creax.com/csa/frame.asp?session=zero
http://enchantedmind.com/html/creativity/iq_tests/
creativity_test.html
The definition of the concept of creativity is „the ability to produce work that
is novel (original and unexpected), high in quality and appropriate (useful,
meets task constraints)‰.
INTRODUCTION
Business venture environments are usually discussed in relation to marketing
and economics management, to name a few. In this topic, we will discuss the
importance of environment in providing opportunities and threats to new
ventures creation. There are many ways to assess an environment of new
business ventures.
First, we will analyse the component of environment where the ventures operate.
Then, we will discuss the steps in identifying a business opportunity and how to
evaluate and grab this opportunity to start up new business ventures.
ACTIVITY 4.1
EXERCISE 4.1
ACTIVITY 4.2
Figure 4.3 shows the political and legislative segment of macro environment.
There are many political and legislative differences between one country and
another. The global issues entrepreneurs should be aware of are trade barriers,
tariffs and political risks, as well as bilateral and multilateral relationships. All
these issues are interrelated.
(d) Taxation
This is the major political factor that entrepreneurs face at the national level.
The impact of taxation on business operations are as follows:
(i) Reduces the cash available for business ventures to invest.
(ii) Some taxes are favourable to only certain businesses and
disadvantageous to others.
(e) Regulation
An example of regulation is the regulation on the use of drugs. However,
sometimes the effect of regulations on businesses is negative. They
sometimes add to the cost on businesses in terms of paperwork, testing,
monitoring and compliancy.
ACTIVITY 4.3
4.2.2 Economy
The economic environment plays a vital role in the success or failure of any new
venture. A macro economic environment encompasses the total of all goods and
services produced, distributed, sold and consumed. Entrepreneurs need to
analyse this environment at the global, national and local levels where their
business operates. Each business is related to one another at these three levels of
the macro economics environment. However, one should know which level has a
greater impact on entrepreneurs. Entrepreneurs should scan, monitor, forecast
and assess the macroeconomic conditions that affect the new venture. They
should be able to see the changes that happen in the economy and be able to
determine the variables that are relevant for analysis.
4.2.3 Socio-cultural
The socio-cultural environment consists of two highly related aspects:
(a) Demographics; and
(b) Cultural trends.
There are business opportunities that exist in a societyÊs popular culture, for
example, business opportunities for consumer and durable goods, retailing and
services, leisure and entertainment and housing and construction.
SELF-CHECK 4.1
4.2.4 Technology
The branch of knowledge that deals with industrial arts, applied science,
engineering, process, invention or method can be defined as technology.
Technological analysis requires scanning and monitoring from the time of basic
research through product development and commercialisation. Technological
change takes two forms:
Pure invention; and
Process innovation.
(a) Customers
Customers are the main target group in business. They consume goods and
services produced by the industry. Customers can be housewives, workers,
students or groups of people. The consumer is „king‰ in the market system.
Some products are consumed by industrial buyers such as dealers, agents,
wholesalers and retailers. This group of people influences the decision of
entrepreneurs.
(b) Competitors
Entrepreneurs in new venture businesses must really analyse their
competitors in the industry. The competitors are the businesses that fulfil
the same customer needs or have the potential to serve those customers.
They can be identified by asking the customers (of existing business) or
potential customers (of new business) where they can buy the product or
services. Entrepreneurs can identify them through business directories.
Financial resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Physical resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Human resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Technical resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Reputation resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Organisational resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Total scores
Grand Mean
+/ From mean
(c) Suppliers
Suppliers are the second group of people who have great influence on
entrepreneurial activities. They can increase the prices they charge for the
products and services they sell. They can also decrease the quality of those
products and services that are in the market.
EXERCISE 4.2
(a) Resources
Among the internal resources in an organisation are the entrepreneur
himself, finances, human resources, tangible and intangible assets,
technology and reputation. Entrepreneurial personality characteristics,
skills, energy, ideas, knowledge and experiences are part of entrepreneur
resources. All these resources are processed together in the business
venture to produce goods and services.
(b) Structure
Organisational structure must be suitable for a new venture to adapt to
changes in the environment.
(c) Culture
Positive culture and values should be inculcated into the business
organisation for the benefit of all human resources.
They are also defined as positive external trends or changes that provide unique
and distinct possibilities for innovating and creating value. Opportunity is also
defined as the potential to create something new that involves changes in
knowledge, technology, economy, political, social and demographic conditions.
ACTIVITY 4.4
Sources of
No. Situations
opportunity
1. The unexpected Opportunities can be found when situations and events are
unanticipated. An event might be an unexpected success/
good news or unexpected failure/bad news that can be an
opportunity for entrepreneurs to pursue.
ACTIVITY 4.5
Table 4.3 shows the evaluation process which involves looking at the creation
and length of the opportunity, its real and perceived value, its risks and returns,
its suitability with the personal goals of the entrepreneur and its differential
advantage in its competitive environment.
Opportunity must fit the personal skills and goals of the entrepreneur.
Opportunity assessment plans should be short, focused on the opportunity, not
the entire venture, and provide a basis to make the decision of whether to act on
the opportunity. A good business plan must be developed in order to exploit the
opportunity. The resources for the opportunity must also be determined. Finally,
the entrepreneur must employ the resources through implementation of the
business plan.
Identify and
Develop the Business Resources Manage the
Evaluate the
Plan Required Enterprise
Opportunities
Creation and Title page Existing Management
length of the Table of contents resources of style
opportunities entrepreneur Key variable for
Executive summary
Real and Resource success
1. Description of
perceived value gaps and Identification of
business
of the available problems and
opportunities 2. Description of supplies potential
industry
Risk and return Access to problems
of opportunity 3. Marketing plan needed Implementation
Opportunity 4. Financial plan resources of control
versus personal 5. Production plan systems
skills and goals 6. Organisation
Competitive plan
situation 7. Operational plan
8. Summary
Appendices
(Exhibits)
ACTIVITY 4.6
EXERCISE 4.3
(b) The size of the opportunities that will attract the investors.
(d) Business necessary to attract key team members to make the business
successful.
(b) Good opportunities can force an organisation to develop a skill that can be
leveraged for the pursuit of many new ideas.
Example of a
Forms of Technological business idea in
No. Reasoning
opportunities change response to the
opportunity
1. New product Internal Automobile The internal
or service combustion combustion engine is
engine used to power
automobiles.
2. New way of Internet Online book The internet allows
organising sales people to sell products
without retail outlets.
3. New market Refrigerator Refrigerated The refrigerated ship
ship allows ranchers in one
country to sell their
meat in another
country.
4. New method Computer Computer-aided The computer allows
of production design designers to make
products without
building physical
prototypes.
5. New raw Oil Producing Oil is refined into
material gasoline gasoline to power
vehicles.
1. Learning Curve New companies have not yet moved up the learning curve
and are still bad at manufacturing and marketing products.
However, as companies produce more of something, they
get better at doing it.
2. Reputation Research has shown that people are much more likely to
buy products from suppliers that they know and trust.
Table 4.6 summarises the types of opportunities for new and established ventures.
SELF-CHECK 4.2
INTRODUCTION
Business environments today are dynamic, complex and subject to continual
change. In order to gain and retain sustainable competitive advantage, achieve
stated objectives and a range of efficiencies, an entrepreneur must have a good
business plan. Business planning is one of the management tools used to achieve
business objectives.
Figure 5.1: Three main things that an entrepreneur should include in a business plan
(f) It enables them to identify constraints that they may face when running the
business.
EXERCISE 5.1
(d) Customers
Customers will also be interested in the business plan for information
regarding the company which will influence their decision to use its
products or services. Issues of interest include the quality and safety of the
companyÊs product. To gain customersÊ confidence, the business plan
should also include the price of the product, durability, features and
additional support or after sales services. Customers will have more
confidence if the product uses new technologies, is authorised by parties
such as SIRIM and JAKIM, and is in line with their culture.
(e) Suppliers
Suppliers need a business plan when considering approval for business
procurement on credit terms. Suppliers want to see the ability of a business
to pay back the credit on time. Thus, a good business plan is able to give a
clear picture on the capability of the business.
(g) Financials
Financials should be developed after analysing the market and setting clear
objectives. In this section, the entrepreneur shows clearly the financial
projections such as cash flow pro forma, profit and loss pro forma, balance
sheets projections, etc.
(h) Appendix
The appendix section should be provided to readers on an as-needed basis.
In other words, it should not be included with the main body of business
plan. The business plan is a communication tool. As such, it will be seen by
many people. The appendix includes a credit history, resume of key
managers, product pictures, letters of reference, details of market studies,
relevant magazine articles, licenses, permits, legal documents, copies of
leases, building permits, contracts and list of business consultants,
including attorneys and accountants.
ACTIVITY 5.1
EXERCISE 5.2
Entrepreneurs should avoid the pitfalls discussed in order to better the chances
of their business plan to succeed. These critical areas must be handled carefully
before developing their business plan. This will help the entrepreneur to
establish a solid foundation on which to develop an effective business plan.
EXERCISE 5.3
The business planning process provides management with basic tools and
information that describe the management and resource environment, and
contribute to establishing the accountability framework needed to manage in
a dynamic environment. So, the execution of business planning is very
important to ensure the survival and expansion of the business.
INTRODUCTION
Do you know who an entrepreneur is? According to Dictionary.com an
entrepreneur is a person who organises any enterprise especially a business,
usually with considerable initiative and risk. So are you interested in becoming
an entrepreneur? Do you know how to set up a new business?
In this topic, we will examine types of businesses classified into three forms
which are start-up, buying an existing business and franchising. Besides that, we
will look into legal structures for new businesses and sources of capital for
business activities.
We will discuss the three forms of starting a new business further in the next sub-
topic.
6.2 START-UP
In starting up a business, it is important that you know about:
(b) Usually, entrepreneurs will use funds from their savings or by borrowing
from others.
(c) An entrepreneur who wants to start up his business usually needs to have
lots of experience, knowledge, skills and interest in the field involved.
Advantages Disadvantages
(a) The freedom of making oneÊs own (a) It requires a lot of time, money and
decisions like answering all questions additional effort to search for a
such as when, how and what type of strategic location, obtain license,
products or services. purchase machines, find new
suppliers, hire and train new worker
(b) The opportunity of using oneÊs
to perform advertising activities.
ideas and developing own image
by identifying with the customerÊs (b) In the initial stage of the business,
emotion. an entrepreneur will obtain minimal
profits or losses because of the
(c) The freedom to select the ideal
large expenditure on numerous items
location, plant, equipment, products
related to start-up.
or services, employees, suppliers
and bankers. These opportunities can (c) There is no history of business
determine the success of a business. records in which an entrepreneur can
forecast sales, expenditures and
(d) The ability to avoid any undesirable
profits.
precedents, policies, procedures and
legal commitments of existing firms. (d) There are no ready customers. An
entrepreneur needs a lot of effort to
(e) Will not affect the reputation of the
attract new customers and sales
business because it is a new business.
expand very slowly and it will take a
(f) Ability to make changes to business. long time before the business brings
in profits.
(e) The difficulty of obtaining loans
from financial institutions because
these institutions have less confidence
in the new businesses compared with
established businesses.
ACTIVITY 6.1
You are planning to sell seafood-based crisps. Can you think of a way
to start your venture? List and compare your answer with those of your
coursemates.
EXERCISE 6.1
1. Define a start-up.
2. List the three phases in a start-up.
3. What are the critical factors that are important for new-venture
assessment?
If you are thinking about running your own business, buying a company that is
already established may be a lot less hassle than starting from scratch. According
to some business experts, buying an existing business is the safest and most
effective way for entrepreneurs to go into business. However, you will need to
put time and effort into finding the business that is right for you. By buying an
existing company, it allows the company to expand and provide the opportunity
to enter new markets.
(ii) Your commitment Are you prepared to put in the hard work and
investment in the business to succeed?
(iii) Your strengths What kind of business opportunities will give you
the chance to put your background, experience and skills to good use?
(iv) The type of business Sole proprietorship, partnership, etc. that you
are interested in buying.
(v) The business sector you are interested in Learn as much as you
can about your chosen industry so that you can compare different
businesses.
(iii) How much to pay and how to allocate the purchase price
(iv) What matters need to be covered in the purchase agreement for your
protection
The parties
You will receive the purchase assets or shares free and clear of all
encumbrances, except those to which you have agreed.
All other documents that form part of the transaction have been
signed and received.
ACTIVITY 6.2
EXERCISE 6.2
6.4 FRANCHISING
When we talk about franchising, it is important to know:
gross sales. A franchisee will have to pay a continual royalty based on sales,
usually between 5 to 12 percent. Most franchisors require buyers to have
25 to 50 percent of the initial costs in cash. The rest can be borrowed
from the organisation itself. The cost of franchising involves the following
expenditure:
(ii) Insurance
ACTIVITY 6.3
Is operating a franchise business more expensive compared to other
types of ventures? What is your opinion on this? Discuss during your
next tutorial session.
To become a sole proprietor, a person merely needs to obtain whatever local and
state licenses necessary to begin the operations. If the proprietor should choose a
fictitious or an assumed name, he or she also must file a „certificate of assumed
business name‰ with the state. Due to its ease of formation, the sole
proprietorship is the most widely used legal form of organisation. Table 6.2
indicates the advantages and disadvantages of sole proprietorship.
Advantages Disadvantages
EXERCISE 6.3
1. Define briefly the three legal forms of organisation.
6.5.2 Partnership
A partnership is an association of two or more persons acting as co-owners of a
business for profit. Here, each partner contributes money, labour or skills and
each share in the profits as well as losses of the business. Though not specifically
required in the uniform Partnership Act, written articles of partnership are
usually executed and are always recommended. This is because unless otherwise
agreed to in writing, the court assumes equal partnership; that is, equal sharing
of profits, losses, assets management and other aspects of the business. A
partnership agreement clearly outlines the financial and managerial
contributions of the partners and carefully delineates the roles in the partnership
relationship.
The following are examples of the type of information customarily written into
agreement:
Name, purpose, domicile
Duration of agreement
Character of partners (general or limited, active or silent)
Contribution by partners (at inception, at later date)
Division of profits and losses
Draws or salaries
Right of continuity partner(s)
Death of a partner (dissolution and wind-up)
Release of debts
Business expenses (method of handling)
Separate debts
Authority (entrepreneur partnerÊs authority on business conduct)
Books, records and method of accounting
Sale of partnership interest
Arbitration
Settlement of disputes
Additions, alterations or modifications of partnership
Required and prohibited acts
Absence and disability
Employee management
Advantages Disadvantages
EXERCISE 6.4
6.5.3 Corporation
From this definition, it is clear that a corporation is a separate legal entity apart
from the entrepreneurs that own it.
(iii) Liabilities
The liabilities of members of a corporation are only limited to the
amount of shares they subscribed. Therefore, members are not liable
even if the corporation were to incur bankruptcy. Corporations differ
from sole proprietorship and partnership in which there is no
(iv) Members
A corporation must have at least two members that are permanent
residents of Malaysia. The two members involved must act as
directors and the cornerstone of the corporation. In a corporation, its
members will elect the board of directors, which will be responsible
for operating the corporation as well as following specified rules and
regulations as stipulated by the 1965 Corporation Act.
Advantages Disadvantages
(a) Limited Liability (a) Activities Restriction
The stockholderÊs liability is limited Corporate activities are limited by the
to the entrepreneurÊs investment. charter and by various laws.
This is the most amount of money the
person can lose. (b) Lack of Representation
The majority stockholders in the
(b) Transfer of Ownership corporation outvote the minority
Ownership can be transferred stockholders.
through the sale of stock to interested
buyers. (c) Regulation
Extensive governmental regulations
(c) Unlimited Life and reports required by the state and
The Company has a life separate and federal agencies often result in a great
distinct from that of its owners and deal of paperwork and red tape.
can continue for an indefinite period.
(d) Organising Expenses
(d) Relative Ease of Securing Capital in A large amount of expenses is
Large Amounts involved in forming a corporation.
Capital can be acquired through the
issuance of bonds and shares of stock (e) Double Taxation
and through short-term loans made Income taxes are levied both on
against the assets of the business or corporate profits and on entrepreneur
personal guarantees of the major salaries and dividends.
stockholders.
(e) Increased Ability and Expertise
The corporation is able to draw on the
expertise and skills of a number of
entrepreneurs, ranging from major
stockholders to the professional
managers who are brought on board.
EXERCISE 6.5
Types of Financial
Institutions Description
Financing
(a) Long Term This type of finance will be borrowed from external sources
over a long period, usually between five and 25 years. A
commercial mortgage or long-term loan agreement from one of
the main banks is an example of long-term financing. The
money can be used for acquiring fixed assets such as plant and
equipment.
(b) Medium Term Any borrowing over 2 to 7 years period can be described as
medium-term financing. The finance is commonly based on an
agreement between yourself and the organisation that will be
providing it. It will cover hire purchase, leasing and loan
agreements.
(c) Short Term The most typical and frequently used type of short-term finance
is bank overdraft facilities. Although the arrangement fees can
be high, you have the advantage of only paying interest on the
amount actually overdrawn. With a bank loan, on the other
hand, you have the use of a set amount of money and you will
have to pay interest whether you use the full amount or not.
EXERCISE 6.6
There are three forms of starting a new business i.e. a start-up, buying an
existing business and franchising
Three primary legal forms for new business are sole proprietorship,
partnership and corporation.
This topic also discussed six sources of capital for entrepreneurial activities:
Personal funds
Family and friends
Retirement account
Bank/financial institution
Government loan
Stock market
Corporation Partnership
Due diligence Sole proprietorship
Franchisee Start-up company
Franchising
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe three advantages of having good networking;
2. Explain two types of networking;
3. Discuss six important reasons for networking;
4. Explain seven techniques in establishing and building confidence in
networking; and
5. Identify five barriers in network building.
INTRODUCTION
Networking is a business tool that plays a very significant role for the
entrepreneurÊs success. If entrepreneurs have very good networking with both
external and internal customers, it will be easier for them to take advantage of
business opportunities and settle some of the problems related to their business.
Good networking relationships will enable them to gain support and cooperation
from networking circles. Therefore, every entrepreneur should develop
networking skills, as it will act as a catalyst to achieve business goals and
objectives.
(a) Accessibility
Networking is very important for the entrepreneur to gain either tangible
or intangible resources directly or indirectly. Among the tangible resources
are financial support, transfer of technology and accessibility in gaining
information to produce the right product at the right cost and the right time
as demanded by the market. Intangible resources are the moral support,
guidance and confidence provided by various groups to entrepreneurs in
operating their business.
(b) Reputation
Reputation refers to the ability of entrepreneurs to exercise leadership or to
influence the decision making of other network members, based on the
expertise that they have. A good reputation enables the entrepreneur to
attract members in networking circles to give priority to the products or
services they produce.
(c) Expectations
These can both facilitate and restrict the freedom of the companyÊs actions.
For example, network members could have the expectation that a particular
company will effectively set prices for a number of other companies. On the
other hand, a company may be expected not to take advantage of product
shortages by raising prices or to conform to conventional competition or to
set higher ethical standards than others.
EXERCISE 7.1
EXERCISE 7.2
When we are ready to listen to other people, we will get some ideas that could
help us change. We need to compromise with others and show our confidence.
Every entrepreneur who wishes to engage good networking strategies must
possess these qualities. Any failure to build good networking will:
(a) Increase cost;
(b) Waste time;
(c) Waste the resources of the company;
(d) Damage the entrepreneurÊs reputation;
(e) Damage the companyÊs reputation; and
(f) Create dilemmas.
ACTIVITY 7.1
You have planned a Thanksgiving party in your house. You have
invited your friends and relatives to the party. Explain how you will
develop good networking with them in the party.
ACTIVITY 7.2
You have just been appointed as the team leader in your organisation.
How would you react if your team members do not agree with your
opinions?
SELF-CHECK 7.1
Describe some strategies that you could use to bolster your confidence.
(a) Emotional
Barriers may arise from emotional flaws apparent in the characteristics,
personality and ego of an entrepreneur. These barriers will create a social
space which will separate the entrepreneur from others. A social space
could cause entrepreneurs to fail to adapt to changes. Emotional barriers
are caused by the following elements or flaws in the personality of an
entrepreneur:
(i) Overly aggressive;
(ii) Fearful;
(iii) Speech which reveals a negative tendency to assume the authority
of a principal leader;
(iv) Carelessness in actions;
(v) Thinking and acting in ways that suggest one is better than others;
(vi) Arrogance;
(vii) Hypocrisy;
(viii) Being a perfectionist but taking perfection to extremes;
(ix) Indecorous assumption of leadership;
(x) Never punctual;
(xi) Unwilling to admit oneÊs mistakes; and
(xii) Unwilling to recognise other peopleÊs talents and abilities.
(b) Physical
Physical barriers might arise from an entrepreneurÊs personal lack of
confidence in himself or from his inattention to other important matters
with respect to manners and attire. An entrepreneur who has little regard
for his own personal deportment could easily fail to inspire confidence
among his fellow colleagues. People often feel that an individual whose
manners, appearance or attire are wanting will likewise be incapable of
running an organisation well. They will thus have a greater tendency to
resist any changes that such an entrepreneur may seek to introduce. The
following are pitfalls in physical deportment which will raise unnecessary
barriers to strategic networking:
(i) Improper attire;
(ii) Physical appearance suggesting poor health or exhaustion;
(iii) Poor or total lack of self-management;
(iv) Nervous behaviour;
(v) Manners or speech that betray a lack of confidence;
(vi) Habitually avoiding eye contact when speaking to others;
(vii) An unfriendly countenance;
(viii) Overly expressive body language when attempting to communicate
with others; and
(ix) Speaking in an unnecessarily high tone or pitch.
(c) Psychological
Factors and characteristics affecting the psychological make-up of an
entrepreneur will influence his ability to build strategic networks.
Psychological barriers affect an entrepreneurÊs interactions with other
people. If, for instance, he is one who is prone to feelings of loneliness or
inferiority, he will face difficulties building an effective network. An
entrepreneur who is psychologically well-balanced has a better chance of
inspiring support and confidence. He will also be in a position of strength
(d) Behavioural
The way we behave will determine whether we are closed or distant from
others. Good behaviour will help us generate good changes. Bad behaviour
characteristics include:
(i) Slandering other people;
(ii) Carelessness in making decisions;
(iii) Always wanting to be first;
(iv) Always wanting to be the leader;
(v) Teasing other people;
(vi) Making other people appear foolish;
(vii) Pretending to know everything;
(viii) Thinking and acting as if other people were incapable of making
mistakes;
(ix) Reluctance to accept other peopleÊs opinion; and
(x) Not appreciative of other peopleÊs contributions.
An entrepreneur must therefore do his best to avoid the five barriers to building
a strategic network. By confidently applying the knowledge that he possesses,
the entrepreneur should be able to set up an effective network for successful
business. Such a network would be mutually advantageous to both the
entrepreneur and others within the network. The entrepreneur who is keen on
achieving his full potential through a good network will understand that he
cannot strive to dominate others. Instead, it is important to seek cooperation from
all concerned. Also, in any situation where changes need to be implemented, the
opinions of other members must be considered. Treating fellow workers or
associates with consideration and respect yields better results than attempting to
control, intimidate or offend them into submission.
SELF-CHECK 7.2
There are two types of networking (a) Formal networking and (b) Informal
networking. Formal networking is the existing relationship between various
people who have a symbiotic relationship with the entrepreneur. Informal
networking is established through relationships with childhood friends,
members of oneÊs family and people sharing common interests or hobbies.
To establish and build confidence in networking, you can apply the following
seven techniques:
communicate effectively and with full confidence;
prove your abilities to others;
show concern for other people;
always be fair;
always be ready to admit your own mistakes;
show team spirit; and
be confident of others.
INTRODUCTION
The number of new ventures have been increasing in the past few years. There
are several reasons for entrepreneurs starting up new ventures. As ideas develop
into new ventures, the real challenge is for these companies to survive and grow.
What will make you a successful entrepreneur? Have you ever thought of the
necessary aspects that you should be familiar with? In order to face the real
challenges in the world of entrepreneurship, you need to have a very deep
knowledge and understanding of the common pitfalls in selecting a new venture.
This topic will help you to identify critical factors for new venture development
and underlying factors of venture success. We will also discuss an effective
evaluation process for new ventures.
(ii) They fail to take into account the life cycle of a new product/service.
(iii) Entrepreneurs must realise that timing is crucial. Projecting the life
cycle of new products is important as well as introducing the products
at the right moment.
(i) Costs are often ignored by entrepreneurs. They might also not
conduct proper planning.
ACTIVITY 8.1
Name two world-renowned firms that have failed in their „new‰
business ventures. What could have been their problems? Share this
information with your tutor and friends during a tutorial session.
EXERCISE 8.1
Table 8.1 shows a checklist of new venture ideas that an entrepreneur should
consider in the assessment of a new venture.
ACTIVITY 8.2
What are the critical factors that need to be considered for the
development of a new venture?
Figure 8.3: Three major factors that contribute to the failure of new ventures
Figure 8.4 illustrates the evaluation process provided by Kuratko and Hodgetts
(2004).
(ii) Has a prototype been tested by independent testers who try to blow
the system or rip the product to shreds? What are the weak points?
Will it stand up?
(iii) Has it been taken to a trade show? If so, what reactions did it receive?
Were there any sales made?
(v) What is the overall market? What are the market segments? Can
the product penetrate these segments? Can any special niche be
exploited?
(vi) Has market research been conducted? Who are the competitors?
(viii) How will the product be made? How much will it cost?
(i) Is it proprietary?
(iv) Does the product have potential for very high margins?
(v) Is the time required to get to market and to reach the break-even
point realistic?
(x) Can the product and the need for it be understood by the financial
community?
EXERCISE 8.2
New venture selection may foresee a few pitfalls such as insufficient objective
evaluation of the venture, lack of market potential knowledge, little
understanding of the technical requirements, insufficient financial
understanding, lack of unique ideas and being unaware of legal issues.
Major factors that may cause the failure of new ventures are insufficient
market knowledge, faulty product, ineffective sales and marketing strategy,
lack of awareness of competitive pressure, timing problems and insufficient
capital.
By asking the right questions, making a profile analysis and carrying out a
feasibility criteria study, the feasibility of an entrepreneurÊs product or
service can be assessed.
INTRODUCTION
A well-thought out plan is half the success. The same principle applies to an
entrepreneurÊs personal financial planning. It is either you do it or you just
ignore it. If you apply principles of financial planning in a proper manner, you
will definitely be better off financially. This topic will introduce some basic
knowledge about personal financial planning and serve as the foundation for
learning the other important aspects related to personal financial planning. Let us
do it together.
You need to do proper financial planning to achieve your life dreams and goals.
It involves how you do your budgeting, saving and spending money from time
to time.
We will discuss more about these steps in the following topic of this module.
SELF-CHECK 9.1
1. What do you understand about personal financial planning?
2. What do you think about the relationship between personal
financial goals and life stages of an individual?
3. Why must you assess your current financial situatio before
setting your financial goals?
You may want help getting started. If you set up good financial planning habits,
you can always ensure you have enough for more fun in the future!
If you have the time and knowledge, and your financial situation is not too
complicated you may be able to do a lot of it on your own. With your very own
financial plan, you will:
(a) Have more control of your financial affairs and be able to avoid excessive
spending, unmanageable debts, bankruptcy or dependence on others;
(b) Have better personal relationships with people around you, such as your
family, friends and colleagues, because you are happy with your life and
you are not going around borrowing money to make ends meet or
expecting handouts from others;
(c) Have a sense of freedom from financial worries because you have planned
for the future, anticipated your expenses and achieved your personal goals
in life; and
In other words, when you have a good personal financial plan, you will be more
informed about your future needs and the resources that you have. You will also
have peace of mind knowing that you are in control.
When you are in your 20s, you will be looking at money and spending it
differently from when you get into your 50s. For example, when you are single,
you probably want to have enough money to make a downpayment for your car
or go on a holiday with your friends. After you get married, you may want to
buy a house. Later, when you have children, you would want to plan for their
education and maybe even start a retirement fund.
As your needs change, your financial priorities will adjust to meet your varied
needs at different points of your life. Therefore, what you do with your money as
you go through your adult life depends on your financial goals. In the following
topic, we will be going into detail on how you can achieve your financial goals.
Nonetheless, it is worthwhile to point out here that to achieve your financial
goals, you need to save your money!
SELF-CHECK 9.2
1. Define the term financial planning.
Money is power, freedom, a cushion, the root of all evil, the sum of blessings.
– Carl Sandburg
When setting your financial goals, you need to sort out what your priorities are.
Without knowing your priorities, it will be difficult to set satisfying financial
goals. You will find it easier to set financial goals that you can achieve when you
understand your priorities.
How do you set your goals? Just having these goals in your thoughts are not
enough, however. You are very likely to forget the goals that you have set or you
may even have unconsciously changed them in your mind. It is best to write
down your financial goals. Writing down financial goals will increase your
chances of achieving them.
When writing down your financial goals, be as specific as possible. What is the
point of writing: „My goal is to have lots of money in the bank‰. What do you
mean by „lots of money‰? Is it RM50,000 or RM500,000 or RM5,000,000? Be
specific and write your goals in terms that can be measured. Break down your
goals into those that are short term, medium term and long term.
For instance:
You may adopt Table 9.1 to help you in writing down your financial goals:
My Financial Goals
Short term Medium term Long term
In life, there are many uncertainties that you might face. From a minor
breakdown of your car to the more serious death of the sole breadwinner in your
family. Unexpected events are well, unexpected.
When you list your financial goals, include saving for an emergency fund. As a
rule of thumb, have an equivalent of at least six monthsÊ worth of your basic
living expenses in your emergency fund. Ideally, you should put aside about
12 monthsÊ worth.
Example: If you need about RM1,500 a month to pay for your living expenses,
including fixed payments such as housing loan or rent and insurance premium,
as well as electricity and water bills, you should have at least RM9,000 in your
emergency fund (i.e. RM1,500 6 months). If possible, keep aside RM18,000 in
the fund (RM1,500 12 months).
It might be hard at first when you start working to have that kind of money kept
aside but make sure you build it over time; every little amount will help build
your emergency fund. Remember to make a conscious effort to save.
When doing this, two types of personal financial statements come in handy:
(b) Your cash flow statement (discussed in the section on „The Basics of
Budgeting ‰ of this topic).
(a) Provide information about your current financial position and a summary
of your income and expenditure;
(b) Measure your progress in meeting your short-term, medium-term and long-
term financial goals;
(d) Provide data you can use when preparing tax forms or applying for a bank
loan.
Do you know what is a personal balance sheet? Let us look at the definition:
A personal balance sheet is your financial scorecard, which you can use to
regularly assess your financial standing. It can be a reference point in making
money-related decisions.
Your personal balance sheet reports on what you own and what you owe:
(a) What you own (assets) Include items such as cash, savings, real estate,
unit trusts or shares in companies.
(b) What you owe (liabilities) Include all types of loans, whether to your
bank, family or friends, as well as credit card debt and payments that are
due, such as house rental and utility bills.
An example of a personal balance sheet is provided in Table 9.2, which you can
use as the basis to prepare one for yourself. This personal balance sheet has a
positive net worth because the value of the total assets is more than the total
liabilities.
Asset Liability
Item
RM RM
Bank Accounts
Savings accounts 5,237
Current accounts 3,532
Fixed deposit accounts 25,835
Cash on hand 1,235
Properties
Apartment 250,000
House
Land
Jewellery 7,695
Car 60,000
Investments
Employee Provident Fund 55,267
Unit trust 15,982
Shares
Bank Loans
Credit cards
Study loan
Borrowing from friends & family
Hire purchase of furniture & electrical goods
However, having a high net worth does not guarantee that you will never face
financial difficulties. You can have a high net worth and still be in for a rough
time. So how is it possible for someone with a positive net worth to get into
financial problems? Financial difficulties can occur when your assets are not
liquid! When assets are not liquid (easily converted into cash) there could be
potential problems looming ahead. Let us see how this is possible.
Say you have a house as your asset (where you live in), but you do not have cash
in your wallet or bank account and you have already defaulted on your credit
card payments. The most pressing thing now is, you need money for your daily
expenses. Out of a job with no possible way of making one ringgit, you decide to
sell your house for money to support your expenses. Here is the problem. You
cannot sell your house immediately to get money because the house, being a
non-liquid asset, is not easily sold and finding a buyer may take several months.
It is also where you and maybe your family live. You really cannot sell your
home unless you have somewhere else to go.
When you owe more than you own, you have a negative net worth. In this
situation, you are unable to pay off your debts when they are due because you
do not have enough money or assets that can be easily converted into cash. You
are actually in financial trouble and may be made a bankrupt.
Your net worth gives an idea of your financial position on a given date. Do not
consider your non cash items as cash as it may not be easily disposed.
There are several ways you can increase your net worth. These include
increasing your savings, reducing your spending and debts and selling some of
your non-income generating assets/belongings.
ACTIVITY 9.2
How do you calculate your own individual net worth? List the steps.
EXERCISE 9.1
(e) Develop good financial management habits, with regular check-ups of your
cash flow and net worth.
Prepare your budget at the beginning of the month or on the day when you
receive your monthly salary.
(a) Refer to your financial goals. Compare your budget to your financial goals
to see whether or not you are achieving them. For example, if you have
targeted on putting a downpayment to buy a car in one year, make sure
you do monthly checks to ensure you are keeping money away towards
your goal.
(b) Estimate your income for the budget period. This covers your salary,
commissions, allowances and other sources of money.
(c) Put aside at least 10% of your income for your savings (20% to 30% of your
income as savings will be better because you are creating a bigger pool of
money for your future retirement).
(e) Estimate fixed expenses for the budget period. These are expenses that
must be paid or spent, and include house rental, loan installment payments,
credit card payments and insurance premiums.
(f) Also estimate variable expenses for the period. These cover items such as
petrol, groceries, electricity and water bills.
(g) Aside from that, estimate your discretionary expenses, i.e. for items that
you can choose whether to spend or not spend. They include gifts, hobbies,
entertain- ment and holidays.
(a) Be patient and disciplined. A good budget takes time and effort to prepare.
Do not give up because you feel that there is too much to do!
(b) Be realistic. If you have a moderate income, do not expect to save a lot of
money in a short period of time.
(c) Be flexible. There will be unexpected expenses and changes in the prices of
groceries and other items. Revise your budget when needed.
(d) Set aside an amount of money to enjoy yourself. You are young and will
want to have a night out with friends or to watch a movie.
Your most important inflow is probably your income from employment. You
may, however, have other sources of income, such as a business income and
interest earned on savings and investments. Outflows would be living expenses,
loans and other financial commitments.
If you have a cash surplus, that is fantastic! Put the money away in your savings.
However, if you have a cash deficit, take another look at your spending. Try
postponing any purchases or payments for the time being. Try not to use your
emergency fund unless it is absolutely necessary. If you have to use your credit
card, use it as your last resort as using your credit card will only add towards
expenses for the coming months.
In preparing next monthÊs budget, base it on the balance brought forward from
the previous month.
Make sure you review and revise both your budget and spending plan regularly.
If you need to decrease your spending, look at expenses you can do without or
cut down. A good idea is to take a look at expenses involving food and
entertainment. You may even have to revise your financial goals, if some of these
are not realistic in relation to your monthly income.
Your budget tells you how much is your planned income, saving and
spending to achieve your financial goals.
Your cash flow statement tells you what you received and spent in terms
of cash over a period of time.
Table 9.3 is an example of a statement that combines a personal budget and cash
flow statement. In this example, the person has spent more than his budget due
to unforeseen circumstances, i.e. a car breakdown and extra travelling using the
car, resulting in additional spending on petrol, toll and parking expenses as well
as food.
(If the amount is negative, you have spent more than your monthly income)
ACTIVITY 9.1
1. What are your personal financial goals and how are you going to
achieve them? Prepare a budget for the same purpose.
2. Prepare and analyse your own cash flow statement.
EXERCISE 9.2
In this section, you will find out whether you are living within your means by
looking into a few tips such as knowing your needs and wants, spending wisely
and delaying gratification.
What is a „need‰? A need is something you must have, that you cannot do
without. An example of a need is food. You need to eat to live. Otherwise, you
would not survive for long.
Now what is a „want‰? A want is something you would like to have, which is
not absolutely necessary. Jewellery is a want because you do not really have to
wear it for survival.
In todayÊs world, for example, a mobile phone with basic features is a „must
have‰ for communicating with other people. However, one that has Bluetooth, a
music player, camera and video, and GPS is a „nice to have‰ mobile phone.
Knowing the difference between a need and a want, will make a significant
impact on your spending behaviour and ultimately, your financial future. The
decisions that you make regarding what you need or want will affect your
budget and your monthly spending.
Making sensible purchasing choices and spending wisely will prevent you from
creating financial difficulties for yourself and others. Handle your personal
finances in a responsible manner. It is easy if you just learn to say „no‰ to
purchases you cannot afford.
Throughout your adult life, there will always be someone who will try to
influence you into spending your money. If it is not your friend asking you to go
out to dinner, it will be the sales promoter at the hyper-market asking you to buy
their product.
Take the time to think whether it is necessary to spend the money and if it is
something you can afford within your budget. Remember when you say „no‰ to
spending money now (by delaying gratification), you are one step closer towards
achieving your financial dreams.
In life, there are always alternatives to choose from. Look into different
substitutes for your needs and wants. Change your perceptions, if necessary.
Instead of buying a car, using the public transport might be a good alternative to
moving around the city. You will save money and furthermore contribute
positively to the environment.
Table 9.4 shows us some tell-tale signs to indicate that you are in financial trouble
and you must be aware of them.
Sign Explanation
(a) Credit Cards (i) Paying only the minimum balance each month.
(ii) Increasing the outstanding balance every month.
(iii) Going over your credit limit.
(iv) Taking frequent cash advances.
(v) Missing payments, paying late, or paying some bills this
month and others next month.
(vi) Having your credit card revoked by the bank.
(b) Loans (i) Using the overdraft or automatic loan features on your
current account frequently.
(ii) Receiving second or third payment notices from banks
or creditors for non-payment of debts.
(iii) Being denied credit because of a negative credit bureau
report.
(iv) Borrowing money from family or friends to pay your
debts.
(c) Savings (i) Using up your savings at an alarming rate.
(ii) Having little or no savings to handle unexpected
expenses or emergencies.
(d) Expenses (i) Depending on part-time jobs, overtime, commissions or
bonuses to pay for your living expenses.
(ii) Living from paycheck to paycheck.
(e) Ignorance (i) Not talking to your spouse or family members about
money problems or arguing when you talk about
money to them.
(ii) Not knowing how much money you owe until the bills
arrive.
If you start experiencing any of the above, get advice immediately. Do not wait
until the problem gets bigger. The earlier you seek assistance, the easier it is to
get out of the situation.
If you do not act immediately when you see the signs of being in financial
trouble, it will only get worse...
It is just not worth it in the long run to give in to your whims and fancies,
spending as and when you like, without thinking about the future. If you do not
plan your finances, it is very possible for you to spend more than you earn,
putting you eventually into serious debt, which leads to financial trouble.
Being financially distressed will affect your reputation, but that is not all you
will also be emotionally troubled, looking for money to pay off your debts and
eventually strain your relationships with family and friends. All these will affect
your physical health, mental and emotional stability. You will end up in a never-
ending spiral of problems - all because you failed to plan.
If you are in serious debt, you will be seen as a bad credit risk to any banker you
may approach for a loan. Financial institutions have various criteria to assess the
credit-worthiness of potential borrowers. These include the borrowersÊ character,
attitude towards their loan obligations as well as their capacity to pay their loans.
When you have a poor credit record, it will be difficult for you to obtain loans
from licensed financial institutions.
For unsecured loans, the financial institution has a number of options to execute
the judgement it has obtained to recover its debts. These include writ of seizure
and sale, garnishee proceedings, judgement debtor summons and filing a
bankruptcy order if the debt amount is RM30,000 and above.
If you are made a bankrupt, there are many things you are legally barred from
doing:
(a) Hold any public office without the approval of the Director-General (DG).
(d) Be a company director or carry out your own business or be involved in the
management of a company without the courtÊs or the DGÊs approval.
ACTIVITY 9.2
Provided that money can earn interest, money you have at the present time is
worth more than the same amount in the future.
Write down your financial goals in specific terms, then categorise them into
short-term, medium-term and long-term goals.
Your personal balance sheet shows your assets and liabilities and net worth
at a given point in time.
Preparing a budget and tracking your cash flow is part of an ongoing process
that requires patience, discipline and flexibility.
INTRODUCTION
Have you ever heard of this saying „what matters is how much you save, not
how much you earn‰. In other words, higher earning does not guarantee you are
financially better off than others who are earning lower than you, if you spend
more than what you have earned. It is always better to spend below your means
and make a habit to save. However, besides saving, one must learn and practise
investing saving may not make you rich, but investment does. Investment from
the personal financial perspective will never be complete if it is done without the
knowledge of sustaining it and a proper protection i.e. insurance. Finally, you
need to know when you are falling into financial difficulty. This serves as the
financial self-check that should not be overlooked in order to achieve true
personal financial success.
You should make your savings automatic. A savings plan is an essential part of
your financial plan. Without a savings plan, you will not be able to achieve your
financial goals. We suggest that you save at least 10% of your salary every
month. It is even better if you can save 20% to 30% because this will translate into
more money for your future. Remember that the more you save now, the easier it
would be to achieve your financial goals.
There are several ways that this percentage of your monthly salary can be put
into your savings account in the bank. You can:
(a) Write out a cheque every month and deposit it into your savings account;
(c) Transfer money from your current account to your savings account via
Internet banking every month.
It is good if you are doing any of the above. However, after a few months, you may
forget to do so or find some reason to use the money for something else instead of
putting it into your savings account. You would have broken the pattern and, once
broken, it is possible that you will not get back to your savings plan.
So how do you make sure that you keep to your savings plan? Simple by
making it automatic!
Give an instruction to your bank to transfer at least 10% of your monthly salary
from your current account to your savings account every month. Have the
transfer done as soon as your salary is credited into your current account. What
you do not see or have, you would not miss. In the meantime, the amount of
money in your savings account will just grow and grow, bringing you closer to
your financial goals.
As and when you can afford it, such as after you have received a raise or
promotion, instruct your bank to increase the amount to be transferred to your
savings account.
When you have saved the total amount of money that you had planned, transfer
the whole sum into a fixed deposit or some other account that can earn more
returns.
However, continue to instruct your bank to make the monthly deduction. Never
stop it, as this would only break your habit. The money that you are
„automatically‰ saving can go towards another financial goal.
ACTIVITY 10.1
In this topic, we will focus on increasing your assets through savings and
investments. We will look at your investment goals, investment risk and return
and diversify your investment.
However, how do you come up with investment goals that fit your needs?
Well, there are some crucial questions you should think about when
coming up with your investment goals. Let us take a look at some
questions below:
(i) What are your financial goals? Why do you need to save and invest
your money?
(ii) How much money do you need to save and how much to invest to
achieve your goals?
(iii) How long do you have to save or invest your money to achieve your
goals?
(v) How much return do you expect from your savings or investments?
(vi) What sort of sacrifices are you prepared to make to achieve these
goals, e.g. changing your lifestyle and spending habits?
Be realistic when you consider your answers to the above questions. Look
at your sources of income and see how much you can consistently save and
invest. Your financial and investment goals should be reasonable and
achievable.
For example, if you invest your money in the stock market, you face a
greater risk of losing your money than if you were to keep it in a savings
account. Share prices move up and down, depending on many factors. You
may have bought the shares of a company at RM5 per share, but this price
can go up to RM7 or it can go down to RM2.
When you invest your money, you expect to earn a return on that money. A
return on an investment is usually stated as an annual percentage. If you
buy shares at RM10 a share and the price goes up to RM10.80 after one
year, then your rate of return is 8%.
Remember: When choosing your investment, the higher the return, the
greater the risk.
How you invest is partly determined by your investor profile, i.e. whether,
as an investor, you are aggressive, moderate or conservative. Many people
actually fall in-between these types.
If you are a moderate investor, you might invest a high portion of your
money in different asset class such as unit trust funds and the balance in
fixed income investments such as fixed deposits. The amount that you
assign to an asset class could be further divided among different segments
such as a bond or equity fund.
On the other hand, if you are a more conservative investor, you might
consider putting your money in less aggressive investments such as bonds
and fixed deposits.
No two investors are exactly alike! You are the only one who can decide
which options to choose and how much to spread your savings amongst
the types of investment products available.
SELF-CHECK 10.1
1. What are your investment goals? Give examples to elaborate.
2. Discuss the relationship between risk and return, using examples.
However, while they do offer security, they usually provide very little
income and no capital growth. In actuality they can be quite risky in the
long run because inflation erodes the value of your investment. For most
investors, cash and fixed interest products are suitable for:
(ii) Keeping cash on hand for short-term expenses and emergencies; and
(iii) Short-term savings where they cannot afford any risk to their capital.
(b) Shares
Shares (also known as equities or stocks) represent ownership in a
company. When you buy a share, you become a part-owner of the
company and become entitled to share in its future value and profits.
(i) As the overall value of the company increases, the value of the shares
also increases.
(ii) You can earn dividends when the company chooses to pay part of its
profits to shareholders as income payment.
Each investor then receives „units‰ in the fund, with each unit representing
a mix of all the underlying assets such as shares, bonds and fixed deposits.
Unit trust funds are an ideal option for people who:
(iii) Have a small initial amount to invest (with the option to make
regular additional contributions); and
(d) Property
Property is one asset class that most Malaysians are familiar with. Property
investment offers value to investors in two ways:
(i) Properties increase in capital value over time as house and land
prices rise.
(i) Bonds
When you buy a government or corporate bond, you are „lending‰
your money for a certain period of time at a predetermined interest
rate. In return, you receive a steady income stream through regular
interest payments.
ACTIVITY 10.2
EXERCISE 10.1
State the main types of investment.
Well, in this section, we will discuss several tips on how to deal with
uncertainties, for instance the need to get insured, the types of insurance we
should take and what takaful is.
There is a financial instrument that you can purchase to protect you from
such an eventuality insurance. It is a means of giving you a financial
buffer or protection in case something happens to you, your family or your
belongings.
(i) Pay for damages to your personal belongings or to replace items that
had been stolen (provided such items are insurable);
(ii) Pay for medical bills when you or your family members are
hospitalised;
(iii) Take care of your monthly living expenses, debts and financial
commitments when you are not able to work due to a serious illness
or an accident;
(iv) Provide some financial support to your family in the event of your
disability, serious illness or death, particularly if you are the
breadwinner of the family.
ACTIVITY 10.3
1. Why would you pay high premiums to get your family members
and yourself insured?
2. How much insurance coverage is considered adequate? Is it the
same for all individuals?
You can insure almost anything under the sun but certain things absolutely need
to be properly insured. This typically includes your life, your health and your
property. Figure 10.2 shows us two types of insurance.
Now, we will go into detail for each main life insurance product.
(iii) Endowment
This combines protection and savings. This policy provides cash
benefits at the end of a specific period or upon death or total and
permanent disability during the same period. The coverage period is
determined by the buyer.
(iv) Investment-linked
This combines investment and protection. Under this policy, you get
to choose the type of investment fund you wish to place your
investment and the amount of life insurance coverage you wish to
have. The amount of premium is flexible.
Product Explanation
It covers your motor vehicle against theft, accident or fire. If you
buy third party cover, you are insured against claims made against
you by a third party for injuries or death of other person (third
party) as well as loss or damage to the property of the third party
that is caused by your vehicle. If you buy comprehensive cover, you
are getting the widest coverage, i.e. third party injury and death,
third party property loss or damage, and loss or damage to your
own vehicle due to an accident, fire or theft.
A basic fire policy covers the building only against fire, lightning or
explosion. A house ownerÊs policy extends coverage of the building
to loss or damage due to flood, burst pipes and other calamities as
well. With a house holderÊs policy, the contents of the house, such as
furniture, are covered against theft, flood and fire. This policy does
not cover damage to the house itself.
Before deciding on an insurance policy, make sure you check the perils and risks
that are covered by various policies offered by different insurance companies.
10.2.3 Takaful
As in banking where you can choose between conventional and Islamic banking
products and services, the insurance industry in Malaysia also offers conventional
insurance as well as takaful.
Both insurance and takaful have similar basic principles. For example, in both
insurance and takaful, you suffer a financial loss when the insured event occurs.
While takaful offers products similar to conventional insurance, it has some
unique features:
(a) The surplus of the fund is shared between you and the takaful company
based on a pre-agreed ratio. The amount in the surplus fund is calculated
after deducting expenses such as claims, technical reserves, management
expenses and re-takaful.
(b) You are entitled to this surplus, if you had not made a claim during the
period of the takaful.
For more information on takaful, you may want to surf this website:
http://www.insuranceinfo.com.my.
SELF-CHECK 10.2
Describe each type of insurance and takaful. Which do you prefer and
why?
EXERCISE 10.2
Before borrowing money, make sure you can manage debts. Remember that you
want to own more than you owe. You want to build wealth. If you borrow
money, you should use it to make more money. Try not to pay for things that
will not create value for you. Also, never use short-term loans, such as credit
cards or overdrafts, to fund long-term assets for example house or building.
(b) If it is important and you need to have it, can you afford to pay the
instalments?
(c) If it is a substantial purchase, such as a car or house, can you afford to put
down a larger down payment?
(d) If it is something you desire, can you control the feeling and delay your
decision to buy it since it is not that important?
(e) If you decide to take a loan or use your credit card to buy something, have
you worked out your cash flow to see if you are able to repay the money
you borrowed?
(f) Do you know the costs of borrowing and using your credit card? There are
interest rate costs as well as finance charges such as late payment fees.
Unless you are able to increase your income, you need to give up something to
make your monthly loan payment. Are you prepared to make this trade-off? For
example, are you willing to give up spending on your weekly entertainment to
make payments for your loan and credit card debt?
No matter how careful you have worked out your monthly cash flow to pay your
loan payment or credit card debt, something unexpected or an emergency can
happen and you will need extra cash. Are you able to still meet your
commitments if such a thing happens?
Never, ever borrow money from a loan shark because you will:
(a) Get a loan on very strict terms and conditions.
(b) Have to pay a very high rate of interest with daily compounding effect.
(c) Open yourself and your family to harassment if you get behind on your
payments.
(d) Be pressured into borrowing more from the loan shark to repay one debt
after another.
As stated earlier in this topic, ask yourself some important questions before
you apply for such a loan. Be clear about the purpose of the application and
whether you can afford to make the repayments.
As with any loan you take, ask yourself the important questions before
deciding to borrow. Also work out your cash flow to see how much
monthly instalments you can afford to pay. When you apply for a car loan,
you can do so directly with the financial institution or through the car
dealer, who will then submit your application to the financial institution.
(ii) Check and ensure that the purchase price and HP terms in the
agreement are as agreed;
(v) Keep all documents, such as the agreement and receipts, in a safe
place; and
However, before taking up a car loan, check on the effective interest rate as
it will work out to be much higher than the flat rate offered. Look at the
following example of a RM50,000 loan at 5% interest per annum with a five-
year tenure. The effective interest rate works out to be 9.15%.
Do know the basics of hire purchase? Table 10.4 provides you some
details on hire purchase basics.
Terms Explanation
(a) Minimum Deposit This is about 10% of the cash value of the car but financial
institutions can request for a higher deposit.
(b) Interest Rate This is a fixed rate and the maximum allowed is 10%.
(c) Effective Interest This is the actual interest that you pay after taking into
Rate account annual compound interest on the loan over its
tenure.
(d) Late Payment You will be charged a penalty if you are late in paying
Charges your instalments. This interest is charged on a daily basis.
(e) Guarantor Financial institutions may require a guarantor who will be
responsible for the unpaid portion of a loan including
interest, if you default on your loan.
(f) Insurance You must purchase insurance coverage for your car.
Financial institutions require a car owner to undertake a
comprehensive insurance policy.
(g) Repossession If you default on your payments, financial institutions can
repossess your car as they are the legal owners.
When you do not make your car loan payments on schedule, the financial
institutions can repossess your car by engaging a registered reposessor.
Having your car taken away from you can be a traumatic and embarrassing
experience. Before taking any action, the repossessor must show you his
identity and authority cards along with a repossession order issued by the
financial institution. He must then make a police report and bring the
repossessed car to a place indicated by the financial institution.
You will receive advance notice in writing, known as the Fourth Schedule,
before your car is repossessed. This notice expires in 21 days after which
you will receive a second notice 14 days after the Fourth Schedule is issued
this is a reminder to pay up or your car will be repossessed.
To avoid repossession, pay the outstanding arrears before the notice period
expires or return the car to the financial institution before the expiry date.
You will still need to pay any outstanding amount less the value of the car.
If your car has been repossessed, there is still a way to get it back. The
financial institution will issue you and your guarantors, if any, a Fifth
Schedule notice within 21 days of the repossession. You can have the car
returned to you if you pay all outstanding arrears or the due amount in full
and other expenses incurred by the financial institution. Alternatively, you
can introduce a buyer, e.g. a family member or friend, to buy the car at the
price given in the Fifth Schedule.
Within 21 days of the Fifth Schedule issue, if you or your guarantors do not
settle the outstanding amount, the financial institution will sell your car by
public auction or give you the option to buy the car at a price lower than
the estimated price stated in the Fifth Schedule.
Do your research, get as much information as you can and compare items
such as interest rates before deciding on the loan suitable for you. As with
other loan products, you can choose between a conventional or Islamic
housing loan.
A housing loan is a large financial commitment, one that will stretch over
many years. Think very carefully about the various aspects of such a loan
before making your decision, some of which are as follows:
(i) Is the loan meant for buying a completed house or one under
construction? Are you buying land to build a house?
(ii) What is the value of the house or land you want to buy? How much
can you afford to pay in monthly instalments, depending on your
monthly cash flow?
(iii) Do you have enough money to make the downpayments and the cash
flow to pay the loan instalments?
(iv) What are the incidental fees or costs that you have to pay? The more
common ones are legal fees, stamp duties, processing fees and
disbursement fees.
(v) Is the interest rate fixed or variable with the Base Lending Rate (BLR)?
(vi) How flexible can your loan payments be? There are several payment
schemes available.
(vii) Is there an early termination penalty if you repay your loan in full
before the tenure expires? Financial institutions may impose such a
penalty because of the attractive rates they may have packaged for the
loan.
There are also variable interest rate loans with fixed monthly payments where
any changes to the interest rate will either increase or decrease the loan tenure.
There is more than one method of paying housing loan (Table 10.5). The
principal sum of a loan is reduced each time an instalment is paid.
(i) Read and understand all the terms and conditions of the loan;
(v) Check that you have accurate information on your loan account on a
regular basis.
As with any loan, if you fail to pay your instalments, the financial
institution will take legal action against you to recover the loan.
(i) You read and understand the nature of the guarantee and the
implications on you;
(iii) You do not become a guarantor to someone whose integrity you are
doubtful of; and
(iv) You are aware of your liabilities if variations are made to the terms
and conditions of the loan.
You can use the statement to track your spending for budgeting
purposes;
You can also earn loyalty points for usage of credit cards, a reward
that is unavailable when cash payments are made.
Normally, the credit card limit given is two or three times your
monthly salary. If you use your card up to this limit, you are
effectively spending at least two or three months of your salary in
advance.
the card gets low, you can reload up to the maximum amount as
determined by the card issuer. Debit and prepaid cards are better
options for people who are not financially disciplined.
It is important to realise that the longer you take to settle your credit card
debts by making minimum payments, the more money you will owe. With
high interest rates, you will end up paying more money to the financial
institution as compared to the original amount you paid for the product or
service. Remember to always pay in full this will ensure you keep out of
financial trouble.
(i) Pay the amount due in full when you get your monthly statement to
avoid paying interest;
(ii) Do not use a credit card if you cannot make the monthly payments;
(iv) Do not use your credit card to get cash advances from an ATM.
Each time you use your credit card to withdraw money, you are
increasing your loan commitments in addition to paying upfront
withdrawal charges and daily interest;
(v) Pay before the due date to avoid late payment charges and penalty
rates;
(vii) If you have a cash flow problem, pay the minimum amount for the
present but pay the full amount as soon as possible; and
(viii) Always check your credit card monthly statement to ensure proper
transactions and charges are recorded. The statement includes your
transactions, any fees and charges, the due date of payment and the
minimum payment. Call your bank if there is anything wrong with
your statements, or you have not received it.
Each time you make a new application for a loan, the financial institution
will check your payment history with the Credit Bureau. They will use the
information to decide whether to give you a loan or not. Other than the
Credit Bureau, there are also privately-owned companies that provide their
clients, including financial institutions, with information on a borrowerÊs
repayment record and status of legal actions, if any.
Keep a copy of your CCRIS report to track your loans with financial
institutions and monitor your loan and credit card repayment pattern. You
can check whether you have a healthy repayment schedule and defaults or
late payments appearing in your report. If your CCRIS report indicates late
repayment or default, a financial institution has the option of denying any
new loan applications because it indicates that you are not managing your
loans well or you have financial difficulties.
If you wish to find more information on Credit Bureau, surf this website:
http://creditbureau.bnm.gov.my.
You will suffer emotionally due to stress. You will be getting constant calls
and letters from lawyers and lenders to demand that you settle your debts.
In such situations, you can become unproductive and your work or health
may be affected.
(i) You are not in control of your money i.e. your expenses are more than
your income;
(ii) You have more debts than you can manage to pay;
(iii) You are only able to pay the minimum 5% every month on your credit
card bills;
(iv) You do not have any savings to meet personal or family emergencies;
If you are facing any of the above problems, seek help and advice on your
finances from a professional financial counselor as soon as possible.
EXERCISE 10.3
SELF-CHECK 10.3
1. What are the risks of becoming a guarantor? How can you minimise
the risks of becoming a guarantor?
In order to build wealth, start saving and invest now. You need to increase
your assets in order to increase your net worth. Diversify your investments in
order to spread your risks. The higher the return you get from an investment,
the greater the risk.
The amount of life insurance to buy depends on how much money you need
to support your lifestyle and pay your expenses when you are critically ill or
disabled due to an illness or accident.
When making a claim, ensure that you have all the documents needed by the
insurance company to speed up the process.
When applying for a loan, ask yourself the purpose of the loan and whether
you can afford to make the instalments. Never ever resort to borrowing from
unlicensed money lenders. Be aware of the terms and conditions of the loans
you take.
Always ask for the effective interest rate on all your hire purchase and fixed
rate term loans. Your total monthly payments on all your loans and credit
card debt should not exceed one-third of your gross monthly salary.
Do not fall into the trap of using credit and charge cards as if it is „free‰
money.
Paying only the minimum monthly payment on your credit card statement
can result in a huge debt due to the compounding effect.
Aim to be a good paymaster so that you will have a positive credit report.
Bonds Loan
Borrowing Property
Cash Real Estate Investment Trust (REIT)
Credit Risk and return
Financial Scams Saving
Fixed interest investment Shares
Insurance Takaful
Insurance coverage Unit trust funds
Insurance premium Wealth
Investment
Answers
TOPIC 1: INTRODUCTION TO ENTREPRENEURSHIP
Exercise 1.1
1. The ten myths of entrepreneurship are:
(a) Entrepreneurs Are Doers, Not Thinkers
(b) Entrepreneurs Are Born, Not Made
(c) Entrepreneurs Are Always Inventors
(d) Entrepreneurs Are Academic and Social Misfits
(e) Entrepreneurs Must Fit the „Profile‰
(f) All Entrepreneurs Need Is Money
(g) All Entrepreneurs Need Is Luck
(h) Ignorance Is Bliss for Entrepreneurs
(i) Entrepreneurs Seek Success but Experience High Failure Rates
(j) Entrepreneurs Are Extreme Risk Takers (Gamblers)
(i) More ventures are created and new jobs are produced, thus reducing
the unemployment rate.
(j) It creates and promotes wealth distribution.
Exercise 2.1
The common characteristics of successful entrepreneurs are:
(a) Initiative and responsibility
(b) High degree of commitment
(c) Opportunity orientation
(d) Moderate risk taker
Exercise 3.1
Creativity involves the development of unique and novel responses to problems
and opportunities. There are four main phases or steps in the creative process:
Exercise 3.2
The following are the techniques for generating creative ideas:
(c) Brainstorming
Brainstorming is the most common and powerful technique used to
hatch ideas. During a brainstorming session, all the members of a group
suggest ideas that are then discussed. The ideal number of group members
involved in brainstorming is between four and seven.
Exercise 4.1
Business environments can be divided into two parts, which are known as:
(a) The macro view of the external environment; and
(b) The micro view of the external environment and the internal environment.
Each of these consist of many components that need to be assessed.
Exercise 4.2
Entrepreneurs need to analyse each component of macro and micro
environments because of the following reasons:
(b) The micro environment of a business venture is also part of the ventureÊs
external environment but can directly influence entrepreneursÊ decisions
and activities. It is also known as industrial environment.
(c) The internal environment can also influence the decision making of
entrepreneurs directly. But they control these elements.
Exercise 4.3
The seven potential sources of opportunity are:
(e) Demographics
Changes in demographics will influence industries and markets upon
their target market and market segmentation. These can be entrepreneurial
opportunities in anticipating and meeting needs of the population.
Exercise 5.1
Business plans are important for entrepreneurs because of the following reasons:
(a) Increase opportunities for success.
(b) Develop mission and vision.
(c) Identify the main competitor(s).
(d) Identify the right way of managing the business.
(e) Increase the stakeholdersÊ confidence.
(f) Identify barriers to business.
(g) As a performance tool.
Exercise 5.2
The important elements in a good business plan are:
(a) Executive summary
(b) Market analysis
(c) Marketing and sales strategies
(d) Services or product line
(e) Organisation and management
(f) Funding request
(g) Financials
(h) Appendix
Exercise 5.3
The factors which contribute to the failure of business plans are:
(a) No realistic goals.
(b) Failure to anticipate obstacles.
(c) No commitment or dedication.
(d) Lack of business or technical experience.
(e) No market niche.
Exercise 6.1
1. A start-up company is a recently formed company. It is a process where an
entrepreneur creates a completely new business starting from scratch.
3. The critical factors that are important for new-venture assessment are as
follows:
(a) The uniqueness of the venture.
(b) The investment size at start-up.
(c) The expected increase in sales and profits as the venture cruises
through the start-up phase.
(d) The availability of products during the two phases.
(e) The availability of customers during the two phases.
Exercise 6.2
1. (a) The five advantages of a start-up are as follows:
(i) The freedom of making oneÊs own decisions.
(ii) The opportunity of using oneÊs ideas.
(iii) The freedom to select the ideal location, plant, equipment,
products or services, employees, suppliers and bankers.
(iv) Undesirable precedents, policies, procedures and legal
commitments of existing firms are not a problem for a start-up
venture.
(v) It will not affect the reputation of the business because it is a
new venture.
Exercise 6.3
1. The three legal forms of organisations are as follows:
(a) Sole proprietorship
(b) Partnership
(c) Corporation
Exercise 6.4
(a) The five advantages of partnerships are as follows:
(i) Ease of formation
(ii) Direct rewards
(iii) Growth and performance facilitated
(iv) Flexibility
(v) Relative freedom from governmental control and regulation
Exercise 6.5
(a) The five advantages of a corporation are as follows:
(i) Limited liability
(ii) Transfer of ownership
(iii) Unlimited life
(iv) Relative ease of securing capital in large amounts
(v) Increased ability and expertise
Exercise 6.6
Five sources of capital that an entrepreneur can use in starting up or buying an
existing business are as follows:
(a) Personal funds
(b) Family and friends
(c) Retirement account
(d) Banks and other financial institutions
(e) Government loans
(f) Stock markets
(Any five answers)
Exercise 7.1
The advantages that an entrepreneur would gain from good networking are:
(a) Accessibility
Networking is very important for the entrepreneur to gain either tangible
or intangible resources directly or indirectly. Among the tangible resources
are financial support, transfer of technology and accessibility in gaining
information to produce the right product at the right cost and the right time
as demanded by the market. Intangible resources are the moral support,
guidance and confidence provided by various groups to entrepreneurs in
operating their business.
(b) Reputation
Reputation refers to the ability of entrepreneurs to exercise leadership or to
influence the decision making of other network members, based on the
expertise that they have. A good reputation enables entrepreneurs to attract
members in networking circles to give priority to the product or services
they produce.
(c) Expectations
These can both facilitate and restrict the freedom of the companyÊs actions.
For example, network members could have the expectation that a particular
company will effectively set prices for a number of other companies. On the
other hand, a company may be expected not to take advantage of product
shortages by raising prices or to conform to conventional competition or to
set higher ethical standards than others.
Exercise 7.2
The three ways to establish strategic networking for entrepreneurs are:
Exercise 8.1
The six pitfalls in selecting new ventures:
Exercise 8.2
The main reasons why new ventures fail:
Exercise 9.1
The five steps in deriving your net worth:
Exercise 9.2
The considerations to prepare a successful budget:
(b) Be Realistic
If you have a moderate income, do not expect to save a lot of money in a
short period of time.
(c) Be Flexible
There will be unexpected expenses and changes in the prices of groceries
and other items. Revise your budget when needed.
Copyright © Open University Malaysia (OUM)
ANSWERS 193
Exercise 10.1
The main types of investment:
(b) Shares
Shares (also known as equities or stocks) represent ownership in a
company. When you buy a share, you become a part-owner in the company
and become entitled to share in its future value and profits.
(d) Property
Property is one asset class that most Malaysians are familiar with. Property
investment offers value to investors in two ways:
(i) Properties increase in capital value over time as house and land prices
rise.
(ii) You can earn rental income from tenants.
(e) Bonds
When you buy a government or corporate bond, you are ÂlendingÊ your
money for a certain period of time at a predetermined interest rate. In
return, you receive a steady income stream through regular interest
payments.
Exercise 10.2
The basic types of family takaful include:
(c) Investment-linked
Combining investment and protection, part of your contribution is used to
buy investment units while the balance goes towards providing coverage in
the event of death or permanent disability.
Exercise 10.3
The main types of loan:
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