Course Description
ENTREPRENEURSHIP A specialized course in Business Administration.
Course Objectives
To analyse and select business ideas.
To develop business ideas into business plans and
implement business plans.
To apply acquired knowledge to outline, operate and
develop an effective business structure in line with the
environment.
To analyse information and explore new ideas.
To evaluate, select, implement and develop business
plans.
To govern and maintain entrepreneurship in the
organisation.
To provide learners with a foundation of knowledge
and skills to form entrepreneurial ideas and realize
ideas aligned with the contexts.
To guide learners on how to create entrepreneurial
ideas, make business plans and implement
entrepreneurial activities.
When finishing the course, learners should be able to:
(1) identify and assess business ideas; (2) analyse the
market and customers' needs; (3) build a business
plan; (4) implement the business plan; (5) aspire to
become an entrepreneur.
Textbook and Reference materials
Bruce R. Barringer & R. Duane Ireland (2016).
Entrepreneurship: Successfully launching new
Ventures (5ed). Pearson Education
Eric Ries (2011) The Lean Startup: How Todays
Entrepreneurs Use Continuous Innovation to Create
Radically Successful Businesses. Pearson Education
Bill Aulet (2013) Disciplined Entrepreneurship: 24
Steps to a Successful Startup
Assessment details Course Outline

Chapter 1: Introduction to entrepreneurship in the digital age

Assessment task Method Weighting
Class participation 10% Chapter 2: Recognizing Opportunities and Generating Ideas

Chapter 3: Developing an effective business plan

Formative assessment Assignment (group) 20%
Presentation (group) 20% Chapter 4: Marketing for a new venture

Chapter 5: Managing an entrepreneurial firm

Summative assessment Business plan 50%
Chapter 6: Sources of capital and financial preparation for

Total 100% entrepreneurial ventures

Chapter Objectives
INTRODUCTION TO Describe entrepreneurship, corporate entrepreneurship, and the
characteristics of entrepreneurial firms.
ENTREPRENEURSHIP Discuss the main reasons people decide to become
entrepreneurs.
Identify the main characteristics of successful entrepreneurs.
Explain common myths regarding entrepreneurship.
Describe the types of entrepreneurial firms.
Chapter 1 Discuss the positive effects of entrepreneurship and
entrepreneurial firms on economies and societies.
Explain the entrepreneurial process.
Learn how understanding entrepreneurship and the
entrepreneurial process can facilitate career success.
Introduce entrepreneurship in the digital age.
Entrepreneurs Breakthrough Innovators
Entrepreneurs
Recognize opportunities where
others see chaos or confusion
Are aggressive catalysts for
change within the marketplace
Challenge the unknown and
continuously create the future
The Evolution of Entrepreneurship
Entrepreneur is derived from the French
entreprendre
The entrepreneur is one who undertakes to organize,
manage, and assume the risks of a business.
Although no single definition of entrepreneur exists
entrepreneurs, research is providing an increasingly
sharper focus on the subject.
Entrepreneurship: A Mind-Set
Entrepreneurship is more than
the mere creation of business:
Seeking opportunities
Taking risks beyond security
Having the tenacity to push
an idea through to reality
Entrepreneurship is an integrated
business in an innovative manner.
An Integrated Definition
Entrepreneurship
A dynamic process of vision, change, and creation.
Requires an application of energy and passion towards the
creation and implementation of new ideas and creative
solutions.
Essential ingredients include:
The willingness to take calculated risks in terms of time,
equity, or career.
The ability to formulate an effective venture team; the creative
skill to marshal needed resources.
The fundamental skills of building a solid business plan.
The vision to recognize opportunity where others see chaos,
contradiction, and confusion.
Avoiding Folklore:
The Myths of Entrepreneurship
Myth 1: Entrepreneurs Are Doers, Not Thinkers
Myth 2: Entrepreneurs Are Born, Not Made
Myth 3: Entrepreneurs Are Always Inventors
Myth 4: Entrepreneurs Are Academic and Social Misfits
Myth 5: Entrepreneurs Must Fit the Profile
Myth 6: All Entrepreneurs Need Is Money
Myth 7: All Entrepreneurs Need Is Luck
Myth 8: Entrepreneurship Is Unstructured and Chaotic
Myth 9: Most Entrepreneurial Initiatives Fail
Myth 10: Entrepreneurs Are Extreme Risk Takers
Entrepreneurial School-of-Thought Approach
Types of people involved with contemporary
small businesses:
The entrepreneur who invents a business that works
without him or her.
The manager who produces results through
employees by developing and implementing effective
systems and, by interacting with employees,
enhances their self-esteem and ability to produce
good results.
The technician who performs specific tasks according
to systems and standards management developed.
Macro View: External Locus of Control
The Environmental School of Thought
Considers the external factors that affect a
The Financial/Capital School of Thought
Based on the capital-seeking process the search
for seed and growth capital.
The Displacement School of Thought
Alienation drives entrepreneurial pursuits
Political displacement (laws, policies, and regulations)
Cultural displacement (preclusion of social groups)
Economic displacement (economic variations)
Micro View: Internal Locus of Control
The Entrepreneurial Trait School of Thought
Focuses on identifying traits common to successful
entrepreneurs.
Achievement, creativity, determination, and technical
knowledge
The Venture Opportunity School of Thought
Focuses on the opportunity aspect of venture
development the search for idea sources, the
development of concepts, and the implementation of
venture opportunities.
Corridor principle: New pathways or opportunities will arise
that lead entrepreneurs in different directions.
Micro View: Internal Locus of Control
The Strategic Formulation School of Thought
Emphasizes the planning process in successful
venture development.
Strategic formulation is a leveraging of unique
elements:
Unique Markets mountain gap strategies
Unique People great chef strategies
Unique Products better widget strategies
Unique Resources water well strategies

An Integrative Model of Entrepreneurial Inputs

Process Approaches to Entrepreneurship
and Outcomes
An Integrative Approach
Built around the concepts of inputs to the
entrepreneurial process and outcomes from
the entrepreneurial process.
Focuses on the entrepreneurial process itself
and identifies five key elements that contribute
to the process.
Provides a comprehensive picture regarding
the nature of entrepreneurship that can be
applied at different levels.

Source: - SAM Advanced Management Journal 59, no.1 (Winter 1994): 21

31.
Process Approaches to Entrepreneurship The Entrepreneurial Revolution:
A Global Phenomenon
Dynamic States Approach
Stresses dependency of venture on environment and Entrepreneurship is the symbol of business
the interaction of:
tenacity and achievement.
The dominant logic of the firm
The business model
Value creation business successes.
Two perspectives on entrepreneurship:
Statistical: numbers that emphasize the importance
of entrepreneurs to the economy.
Academic: trends in entrepreneurial research and
education.

Effects of Entrepreneurship Phases of Economic Development

The Global Entrepreneurship Monitor (GEM)
Provides an annual assessment of the
entrepreneurial environment of 59 countries.
Latest GEM study: the U.S. outranks the rest of
the world in important entrepreneurial support. The The The
Entrepreneurs lead to growth by: factor-driven efficiency- innovation-
Entering and expanding existing markets. phase driven phase driven phase
Creating entirely new markets by offering
innovative products.
Increasing diversity and fostering minority
participation in the economy.
Lessons from the GEM Study
Entrepreneurial firms make two indispensable
Entrepreneurship
contributions to an economy:
1
Impacts economic measures for growth, innovation, and 1. They are an integral part of the renewal process that
internationalization. pervades and defines market economies.
Needs both dynamism and stability for the creation of new
2
businesses and the exit of nonviable ones 2. They are the essential mechanism by which millions
Requires a variety of business phases and types and different
enter the economic and social mainstream of society.
3
types of entrepreneurs including women and age groups
Innovation
Works best when there is a strong set of basic economic
4
requirements in place to reinforce efficiency enhancers
Job Creation
Flourishes when there is broad societal acceptance of the
5
entrepreneurial mind-set

Types of firms
 The entrepreneurial process Some concepts of Entrepreneur

Step 1: Decision to become an entrepreneur

Step 2: Generating venture ideas and turning venture

ideas into venture opportunities

Step 3: Setting up a new venture

Step 4: Managing and growing an entrepreneurial firm

The Entrepreneurial Mind-Set

Entrepreneurial Mind-Set
Describes the most common characteristics
associated with successful entrepreneurs as well as

entrepreneurship.
Who Are Entrepreneurs?
Independent individuals, intensely committed and
determined to persevere, who work very hard.
They are confident optimists who strive for integrity.
They burn with the competitive desire to excel and use
failure as a learning tool.
Characteristics of the Entrepreneurial Mind-Set
Determination and
perseverance
Drive to achieve
Opportunity orientation
Initiative and responsibility
Persistent problem solving
Seeking feedback
Internal locus of control
Tolerance for ambiguity
Characteristics Often Attributed to Entrepreneurs
Calculated risk taking 1. Confidence 15. Intelligence 29. Pleasant personality
2. Perseverance, determination 16. Orientation to clear goals 30. Egotism
High energy level 3. Energy, diligence 17. Positive response to 31. Courage
challenges
Creativity and
4.
5.
Resourcefulness
Ability to take calculated risks
18. Independence
32. Imagination
33. Perceptiveness
innovativeness 6. Dynamism, leadership
19. Responsiveness to
suggestions and criticism
34. Toleration of ambiguity
7. Optimism 35. Aggressiveness
20. Time competence, efficiency
Vision 8. Need to achieve
21. Ability to make decisions
36. Capacity for enjoyment
9. Versatility; knowledge of quickly 37. Efficacy
Passion product, market, machinery,
22. Responsibility 38. Commitment
technology
Independence 10. Creativity
23. Foresight 39. Ability to trust workers
24. Accuracy, thoroughness 40. Sensitivity to others
11. Ability to influence others
Team building 12. Ability to get along well with
25. Cooperativeness 41. Honesty, integrity
people 26. Profit orientation 42. Maturity, balance
13. Initiative 27. Ability to learn from mistakes
14. Flexibility 28. Sense of power
Source: Encyclopedia of Entrepreneurship, ed. Calvin Kent, Donald Sexton, and Karl Vesper, © 1982, 26 27. Adapted by permission
of Prentice-Hall, Englewood Cliffs, NJ.
Entrepreneurship Theory
Entrepreneurs cause entrepreneurship.
Entrepreneurship is a function of the entrepreneur:
Entrepreneurship is characterized as the interaction
of skills related to inner control, planning and goal
setting, risk taking, innovation, reality perception,
use of feedback, decision making, human relations,
and independence.
The Entrepreneurial Experience
Entrepreneurs
Create ventures much as an artist creates a painting.
Are formed by the lived experience of venture
creation.
Experiential Nature of Creating
a Sustainable Enterprise
Emergence of the opportunity
Emergence of the venture
End emergence of the entrepreneur
The four industrial revolutions
Age of steam (circa 1760s onwards)
Age of steel (circa 1850s onwards)
Entrepreneurial Motivation
Entrepreneurial Motivation
The quest for new-venture creation as well as
the willingness to sustain that venture
Personal characteristics, personal environment, business
environment, personal goal set (expectations), and the
existence of a viable business idea
Entrepreneurial Persistence
entrepreneurial opportunity regardless of
counterinfluences or other enticing alternatives
The four industrial revolutions
Digital and information (circa 1960s onwards)
The four industrial revolutions The four industrial revolutions
The four industrial revolutions and business The key differences between analogue and digital mindsets

The Digital Age The Digital Economy

Source: The Digital Economy Report, 2019, UNCTAD adapted from Bukht and Heeks, 2017
 Digital environment Digital revolution has brought many impacts
A typical day in the life of the internet

Source: WDR 2016 team; http://www.internetlivestats.com/one-second/ (As compiled on May 29, 2015)

Digital technologies hold benefits as well as risks 21st Century Trends in Entrepreneurship

BENEFITS: PROSPERITY Venture

with Financing
complements
INNOVATION EFFICIENCY INCLUSION Corporate Social
Entrepreneurship Entrepreneurship

DIGITAL
TECHNOLOGIES Women
Entrepreneurial Trends in and Minority
RISKS: DISPARITY Cognition Entrepreneurship Entrepreneurs

LARGE Vs. SMALL SKILLED Vs

STATE Vs. CTIZENS
FIRMS UNSKILLED (CONTROL)
without (CONCENTRATION) (INEQUALITY) Global
Entrepreneurial
Entrepreneurial
complements Movement
Education
Family
Businesses

1 48
THE END
 Chapter Objectives
RECOGNIZING
Explain the difference between opportunities and ideas.
OPPORTUNITIES AND Describe the three general approaches entrepreneurs use to
identify opportunities.
Discuss the personal characteristics of entrepreneurs that
GENERATING IDEAS contribute
to their ability to recognize business opportunities.
Identify and describe techniques entrepreneurs use to generate
ideas.
Chapter 2
Describe a product/service, an industry/market, an
organizational and a financial feasibility analysis and discuss the
issues to consider when completing these analyses.
Describe a feasibility analysis template and explain why it is
important for entrepreneurs to use this template.

Opportunity versus Ideas Opportunity Identification

Opportunity Identification The Opportunity Recognition Process

Opportunity Identification: Entrepreneurial Imagination and Creativity

The Search for New Ideas
How entrepreneurs do what they do:
Opportunity identification is central
Creative thinking + systematic analysis = success
to entrepreneurship and involves:
The creative pursuit of ideas Seek out unique opportunities to fill needs and wants
The innovation process Turn problems into opportunities
The first step for any entrepreneur is Recognize that problems are to solutions what
demand is to supply
The search for good ideas is never easy.
Opportunity recognition can lead to both
personal and societal wealth.
 Sources of Innovative Ideas Trends
Source Examples
Unexpected occurrences Unexpected success: Apple Computer (microcomputers)
Unexpected tragedy: 9/11 terrorist attack Societal Technology Economic Government
Trends Trends Trends Trends
Incongruities Overnight package delivery

Process needs Sugar-free products Higher

Mobile (cell
Aging disposable
Caffeine-free coffee phone) Increased
demographics, incomes, dual
Microwave ovens technology, e- regulations,
health and wage-earner
commerce, petroleum
fitness growth, families,
Internet prices, terrorism
Industry and market changes Health care industry: changing to home health care senior living performance
advances
pressures
Demographic changes Rest communities for older people

Perceptual changes Exercise (aerobics) and the growing concern for fitness

Knowledge-based concepts Mobile (cell phone) technology; pharmaceutical industry;

robotics

Trends Creating Business Opportunities Two Approaches to Creative Problem Solving

Emerging Opportunities
Green Products Health Care Niche Consumables Home Automation and
Adaptor Innovator
Organic foods Healthy food Wine Media Storage
Organic fibers/textiles School and govt.- Chocolate Lighting control Employs a disciplined, precise, Approaches tasks from unusual angles
Alternative Energy sponsored programs Burgers Security systems
Solar Exercise Coffee houses Energy management
methodical approach
Biofuel Yoga Exotic salads Comfort management
Fuel cells Niche gyms Entertainment systems Is concerned with solving, rather Discovers problems and avenues of
Energy conservation Children Networked kitchen
Nonmedical appliances
than finding, problems solutions
Pre-assisted living
Assisted living transition Attempts to refine current practices Questions basic assumptions related
services
to current practices
Emerging Internet Opportunities Emerging Technology Opportunities
Mobile Advertising Virtual Economies Nanotechnology
Tends to be means oriented Has little regard for means; is more
Cell phones Online auctions Wireless Technology interested in ends
PDAs Educational Tutoring
Concierge Services Human Resources Services
Niche Social Networks Matchmaking
Is capable of extended detail work Has little tolerance for routine work
Seniors Virtual HR
Music fans Online Staffing Is sensitive to group cohesion and Has little or no need for consensus;
Groups of local users
Pet owners
cooperation often is insensitive to others
Dating groups
Source: Journal of Applied Psychology (October 1976): 623. Copyright © 1976 by The
Source: Steve Cooper, Amanda C. Kooser Entrepreneur (December 2006): 80 93.
American Psychological Association.
The Critical Thinking Process
Key Areas for Assessing the Feasibility of a
New Venture
Techniques for generating ideas
Brainstorming
Focus group
Library and Internet research
Other (customer advisory boards,
day-in-the-life research)
Role of Feasibility Analysis in Developing
Successful Business Ideas
 Feasibility Analysis Product/Service feasibility analysis
1. Product/Service desirability
Does it make sense? Is it reasonable? Is it something
real customers will buy?
Does it take advantage of an environmental trend,
solve a problem, or fill a gap in the marketplace?
Is this a good time to introduce the product or
service to the market?

basic design or concept?

Product/Service feasibility analysis Technical Feasibility

2. Product/Service demand
Talking face-to-face with potential customers,
Utilizing online tools to assess demand
Library, internet, and gumshoe research
Technical Requirements for Products and Services:
Functional design and attractiveness in appearance
Flexibility, permitting ready modification of the external features
of the product to meet customer demands or technological and
competitive changes
Durability of the materials from which the product is made
Reliability, ensuring performance as expected under normal
operating conditions
Product safety, posing no potential dangers under normal
operating conditions
Reasonable utility, an acceptable rate of obsolescence
Ease and low cost of maintenance
 APPLYING A FIVE FORCES INDUSTRY ANALYSIS TO
Industry/Target Market feasibility analysis AN OPPORTUNITY ASSESSMENT
1. Industry Attractiveness
Are young rather than old
Are early rather than late in their life cycle
Are fragmented rather than concentrated
Are growing rather than shrinking
Are selling products or services that customers

Are not crowded

Have high rather than low operating margins
Are not highly dependent on the historically low
price of a key raw material, like gasoline or flour, to
remain profitable
2. Target Market Attractiveness

APPLYING A FIVE FORCES INDUSTRY ANALYSIS TO

AN OPPORTUNITY ASSESSMENT
Market Feasibility (Marketability)
Range of prices for the same,
complementary, and substitute
products; base prices; and
discount structures
Pricing
Customers, customer demand data
patterns in seasonal variations
in demand, and governmental
regulations affecting demand

Market
data

General
economic
Various economic indicators trends
such as new orders, housing
starts, inventories, and
consumer spending
 Organizational Feasibility Analysis
1. Organizational prowess: evaluate the ability, of its
initial management team, whether it is a sole
entrepreneur or a larger group
2. Resource sufficiency: determine whether
the proposed venture has or is capable of obtaining
sufficient resources to move forward
Financial Feasibility Analysis
2. Financial performance of similar businesses:
estimate a proposed start-
performance by comparing it to similar, already
established businesses.
Financial Feasibility Analysis
1. Total cash needed
Affordable office space
Lab space, manufacturing space, or space to launch
a service business
Contract manufacturers or service providers
Key management employees
Key support personnel (now and in the future)
Key equipment needed to operate the business
Ability to obtain intellectual property protection on
key aspects of the business
Support of local governments and state government
if applicable for business launch
Ability to form favorable business partnerships
Financial Feasibility Analysis
3. Overall Financial attractiveness of the proposed
venture:
The amount of capital invested
The risks assumed in launching the business
The existing alternatives for the money being invested
and efforts.
 Financial Feasibility Analysis
3. Overall Financial attractiveness of the proposed
venture:

THE END
Steady and rapid growth in sales during the first five to
seven years in a clearly defined market niche
High percentage of recurring revenue meaning that
once a firm wins a client, the client will provide
recurring sources of revenue
Ability to forecast income and expenses with a
reasonable degree of certainty
Internally generated funds to finance and sustain
growth
Availability of an exit opportunity for investors to
convert equity into cash

Chapter Objectives
DEVELOPING AN
Describe business models and discuss their importance.
EFFECTIVE BUSINESS Identify and describe the general types of business models.
Explain the components of the Business Model Template that
PLAN entrepreneurs can use to develop a business model.
Identify and discuss the strategy process for entrepreneurial
firms.
Chapter 3
Discuss different types of strategies for entrepreneurial firms.
Explain the purpose of a business plan.
Discuss the guidelines to follow to write an effective business
plan.
Identify and describe a suggested outline of a business plan.
What Is a Business Model?

it creates, delivers, and captures value for its

stakeholders.

to succeed, both in the short and long term,

especially when it is the first one to introduce a new
product or service to customers.

General categories of business models

Standard business models: depict existing plans or recipes

firms can use to determine how they will create, deliver, and
capture value for their stakeholders

Disruptive business models: are rare, are models that do

not fit the profile of a standard business model, and are
impactful enough that they disrupt or change the way
business is conducted in an industry or an important niche
within an industry
 Barringer/Ireland Business Model Template

Core strategy: Financials

Business mission Revenue streams
Basis of differentiation Cost structure
Target market Financing or funding
Product/market scope
Resources Operations
Core competency Products and/or services
Key assets production
Channels
Key partners

Strategic Planning and Emerging Firms

is informal and unsystematic.

The need for formal, systematic planning arises
when:
The firm is expanding with constantly increasing
personnel size and market operations
A high degree of uncertainty exists
There is strong competition
There is a lack of adequate experience, either
technological or business
The Nature of Strategic Planning The Nature of Strategic Planning
Strategic Planning Basic Steps in Strategic Planning:
The formulation of long-range plans for the effective 1. Examine the internal and external environments of
management of environmental opportunities and the venture (SWOT: strengths, weaknesses,
opportunities, threats).
weaknesses.
2. -range and short-range
Includes: strategies (mission, objectives, strategies, policies).
3. Implement the strategic plan (programs, budgets,
Specifying achievable objectives procedures).
Developing strategies
4. Evaluate the performance of the strategy.
Setting policy guidelines
5. Take follow-up action through continuous feedback.

The Strategic Management Process

Source: Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson, Strategic Management: Competitiveness & Globalization, 10th ed. (Mason, OH: Cengage Learning, 2013), 5.
Reprinted with permission of Cengage/South-Western , Publishing.
Key Dimensions Influencing The Lack of Strategic Planning
Reasons for the Lack of Strategic Planning
1. Time scarcity
Decision-making speed 2. Lack of knowledge
Problems of internal politics 3. Lack of expertise/skills
4. Lack of trust and openness
Environmental uncertainty
5. Perception of high cost

Step 1: Commitment to an open planning process.

Step 2: Accountability to a corporate conscience.
Step 3: Establishment of a pattern of subordinate
participation in the development of the
strategic plan.

The Value of Strategic Planning Strategic Planning Levels

Findings of Strategic Planning Studies
Strategic planning is of value to a venture and that
Benefits of Long-Range Planning
Cost savings
More efficient resource allocation
Improved competitive position
More timely information
More accurate forecasts
Reduced feelings of uncertainty
Faster decision making
Fewer cash-flow problems
Strategic Planning Categories
Category I: No written plan
Category II: Moderately sophisticated planning
Category III: Sophisticated planning
Results: More than 88% of firms with Category II or III
planning performed at or above the industry average
compared with only 40% of firms with Category I planning.
All research indicates:
Firms that engage in strategic planning are more
effective than those that do not.
The planning process, rather than merely the plans,
is a key to successful performance.
Fatal Visions in Strategic Planning The Integration of Entrepreneurial and Strategic Actions

Fatal mistakes that entrepreneurs fall prey

to in their attempt to implement a strategy:
Fatal Vision #1: Misunderstanding industry
attractiveness
Fatal Vision #2: No real competitive advantage
Fatal Vision #3: Pursuing an unattainable competitive
position
Fatal Vision #4: Compromising strategy for growth
Fatal Vision #5: Failure to explicitly communicate the

Source: R. Duane Ireland, Michael A. Hitt Academy of

Management Executive 15(1) (February 2001): 51.

Strategic Positioning: Strategic Approaches: Position, Leverage, Opportunities

The Entrepreneurial Edge Position Leverage Opportunities

Strategic logic Establish position Leverage resources Pursue opportunities

Strategic Positions Strategic steps Identify an attractive market Establish a vision Build Jump into the confusion
Locate a defensible resources Leverage across Keep moving Seize
Are often not obvious, and finding them requires position Fortify and defend markets opportunities Finish strong

creativity and insight. Strategic question Where should we be? What should we be? How should we proceed?

Source of advantage Unique, valuable position Unique, valuable, inimitable Key processes and unique
Are unique positions that have been available but with tightly integrated
activity system
resources simple rules

simply overlooked by established competitors. Works best in Slowly changing, well- Moderately changing, well- Rapidly changing,
structured markets structured markets ambiguous markets
Can help entrepreneurial ventures prosper by Duration of advantage Sustained Sustained Unpredictable
occupying a position that a competitor once held but Risk It will be too difficult to alter Company will be too slow Managers will be too
has ceded through years of imitation and straddling. position as conditions
change
to build new resources as
conditions change
tentative in executing on
promising opportunities

Performance goal Profitability Long-term dominance Growth

Source: Reprinted by permission of Harvard Business Review Sull (January 2001): 109. Copyright © 2001
by the Harvard Business School Publishing Corporation; all rights reserved.
The Entrepreneurial Strategy Matrix: Independent Variables The Entrepreneurial Strategy Matrix: Appropriate Strategies

Source: Matthew C. Sonfield n from Business Source: Matthew C. Sonfield n from Business Horizons,
Horizons, May/June 1997, by the trustees at Indiana University, Kelley School of Business. May/June 1997, by the trustees at Indiana University, Kelley School of Business.

The Importance of Planning What Is a Business Plan?

Planning is essential to the success of any A written document that details the proposed
undertaking. Critical factors that must be venture:
addressed when planning are: Describes the current status, expected needs, and
Realistic goals. These must be specific, projected results of the new business.
measurable, and set within time parameters.
Covers the project, marketing, research and
Commitment. The venture must be supported development, manufacturing, management, critical
by all involved family, partners, employees, risks, financing, and milestones or a timetable.
team members.
Demonstrates a clear picture of what that venture is,
Milestones. Subgoals must be set for continual
and timely evaluation of progress. where it is projected to go, and how the entrepreneur
proposes it will get there a road map for a successful
Flexibility. Obstacles must be anticipated, and enterprise.
alternative strategies must be formulated.
Pitfalls to Avoid in Planning
Pitfall 1: No Realistic Goals
Pitfall 2: Failure to Anticipate Roadblocks
Pitfall 3: No Commitment or Dedication
Pitfall 4: Lack of Demonstrated Experience
(Business or Technical)
Pitfall 5: No Market Niche (Segment)
Benefits of a Business Plan
For the Entrepreneur:
The time, effort, research, and discipline required to
create a formal business plan forces the entrepreneur
to view operating strategies and expected results
critically and objectively.
For Outside Evaluators:
The business plan provides a tool for use in
communications with outside financial sources.

Benefits of the Business Plan Reasons for writing a business plan

Specifically for the Financial Sources:
Details the market potential and plans for securing
a share of that market.

or provide an adequate return on equity.

Identifies critical risks and crucial events with
a discussion of contingency plans.
Contains the necessary information for a thorough
business and financial evaluation.
Types of business plan Red Flag in business plan

Putting the Package Together Guidelines to Remember

Appearance Keep the plan respectably short
Length Organize and package the plan appropriately
The cover and title page Orient the plan toward the future
The executive summary Avoid exaggeration

The table of contents Highlight critical risks

Give evidence of an effective entrepreneurial team
Do not over-diversify
Identify the target market
Keep the plan written in the third person
Common Business Plan Phrases: Statement vs Reality Questions to Be Answered
Statement Reality
We conservatively project . . . We read a book that said we had to be a $50 million company in five years, and we Is your plan organized so key facts leap out at the reader?
reverse-engineered the numbers.
We took our best guess and divided by 2. We accidentally divided by 0.5. Is your product/service and business mission clear and simple?
We project a 10 percent margin. We did not modify any of the assumptions in the business plan template that we
downloaded from the Internet. Are you focused on the right things?
The project is 98 percent complete. To complete the remaining 2 percent will take as long as it took to create the initial 98
percent but will cost twice as much. Who is your customer?
Our business model is proven . . . . . . if you take the evidence from the past week for the best of our 50 locations and
extrapolate it for all the others.
Why will customers buy? How much better is your product/service?
We have a six-month lead. We tried not to find out how many other people have a six-month lead.

We need only a 10 percent market share. So do the other 50 entrants getting funded. Do you have a competitive advantage?
Customers are clamoring for our product. We have not yet asked them to pay for it. Also, all of our current customers are
relatives. Do you have a favorable cost structure?
We are the low-cost producer. We have not produced anything yet, but we are confident that we will be able to.

We have no competition.
Our management team has a great deal of experience . . .
A select group of investors is considering the plan.
We seek a value-added investor.
Only IBM, Microsoft, Netscape, and Sun have announced plans to enter the
Can the management team build a business?
business.
. . . consuming the product or service.
How much money do you need?
We mailed a copy of the plan to everyone in
How does your investor get a cash return?
We are looking for a passive, dumb-as-rocks investor.

If you invest on our terms, you will earn a 68 percent If everything that could ever conceivably go right does go right, you might get your
internal rate of return. money back.

Source: Reprinted by permission of Harvard Business Review. August 1997): 106. Copyright © 1997 by
the Harvard Business School Publishing Corporation; all rights reserved.

Elements of a Business Plan Elements of a Business Plan

Section I: Executive Summary
Section II: Business Description B. Marketing plan
A. General description of business 1. Market strategy sales and distribution

B. Industry background 2. Pricing

3. Advertising and promotions
C. Goals and potential of the business and milestones (if any)
D. Uniqueness of product or service Section IV: Operations
Section III: Marketing A. Identify location advantages
B. Specific operational procedures
A. Research and analysis
C. Personnel needs and uses
1. Target market (customers) identified
2. Market size and trends D. Proximity to suppliers
3. Competition
4. Estimated market share
Source: Donald F. Kuratko, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2013). Source: Donald F. Kuratko, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2013).
 Elements of a Business Plan Elements of a Business Plan
Section V: Management Section VII: Critical Risks
A. Management team key personnel A. Potential problems
B. Legal structure stock and employment agreements, B. Obstacles and risks
and ownership C. Alternative courses of action
C. Board of directors, advisors, and consultants Section VIII: Harvest Strategy
A. Liquidity event (IPO or sale)
Section VI: Financial
B. Continuity of business strategy
A. Financial forecast (pro forma financial statements) C. Identify successor
1. Profit and loss Section IX: Milestone Schedule
2. Cash flow A. Timing and objectives
3. Break-even analysis B. Deadlines and milestones
4. Cost controls C. Relationship of events
5. Budgeting plans Section X: Appendix or Bibliography
Source: Donald F. Kuratko, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2013). Source: Donald F. Kuratko, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2013).

Helpful Hints for Developing the Business Plan Helpful Hints for Developing the Business Plan
I. Executive Summary IV. Operations Segment
No more than three pages. This is the most crucial part of your plan because you must Describe the advantages of your location (zoning, tax laws, wage rates). List the production
needs in terms of facilities (plant, storage, office space) and equipment (machinery, furnishings,
What, how, why, where, and so on must be summarized. supplies).
Complete this part after you have a finished business plan. Describe the specific operations of the venture.
II. Business Description Segment Indicate proximity to your suppliers.
The name of your business. Mention the need and use of personnel in the operation.
A background of the industry with history of your company (if any) should be covered here. Provide estimates of operation costs but be careful: Entrepreneurs underestimate their costs.
The potential of the new venture should be described clearly. V. Management Segment
Any uniqueness or distinctive features of this venture should be described clearly. Supply résumés of all key people in the management of your venture.
III. Marketing Segment Carefully describe the legal structure of your venture (sole proprietorship, partnership, or
Convince investors that sales projections and competition can be met. corporation).
Use and disclose market studies. Cover the added assistance (if any) of advisors, consultants, and directors.
Identify target market, market position, and market share. Give information on how and how much everyone is to be compensated.
Evaluate all competition and specifically cover why and how you will be better than your VI. Financial Segment
competitors. Give actual estimated statements.
Identify all market sources and assistance used for this segment. Describe the needed sources for your funds and the uses you intend for the money.
Demonstrate pricing strategy. Your price must penetrate and maintain a market share to Develop and present a budget.
produce profits; thus, the lowest price is not necessarily the best price. Create stages of financing for purposes of allowing evaluation by investors at various points.
Identify your advertising plans with cost estimates to validate proposed strategy.
Source: Donald F. Kuratko, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2013). Source: Donald F. Kuratko, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2013).
 Helpful Hints for Developing the Business Plan Milestone Schedule Segment
VII. Critical-Risks Segment
Discuss potential risks before investors point them out for example: Timetable for the activities to be accomplished:
Price cutting by competitors Incorporation of the venture
Any potentially unfavorable industry-wide trends
Design or manufacturing costs in excess of estimates Completion of design and development
Sales projections not achieved Completion of prototypes
Product development schedule not met
Difficulties or long lead times encountered in the procurement of parts or raw materials Hiring of sales representatives
Greater than expected innovation and development costs to stay competitive Product display at trade shows
Provide some alternative courses of action.
VIII. Harvest Strategy Segment Signing up distributors and dealers
Outline a plan for a liquidity event IPO or sale.
Ordering production quantities of materials
Describe the plan for transition of leadership.
Mention the preparations (insurance, trusts, and so on) needed for continuity of the business. Receipt of first orders
IX. Milestone Schedule Segment
First sales and first deliveries (dates of maximum interest
Develop a timetable or chart to demonstrate when each phase of the venture is to be completed.
This shows the relationship of events and provides a deadline for accomplishment.
X. Appendix or Bibliography need for capital)
Payment of first accounts receivable (cash in)
Source: Donald F. Kuratko, The Entrepreneurial Planning Guide (Bloomington: Kelley School of Business, Indiana University, 2013).

Updating the Business Plan

Financial
Changes

Additional Changes in
Financing the Market
Reasons to
Update the
Launch of a New Plan New
Product or Management
Service Team

Reflect the New

Reality
THE END
 Chapter Objectives

Introduce the new marketing concept for entrepreneurs

MARKETING FOR Explain the three steps (segmenting the market, selecting a
target market, and establishing a unique market position)
A NEW VENTURE entrepreneurial firms use to identify their customers.
Identify and explain marketing activities used by entrepreneurial
Chapter 4 firms.
Define a brand and explain why it is important to an

The process of Selecting a Target Market and

Segmenting the Market
Positioning Strategy
Requirements for successful market segmentation:
Homogeneity of needs and wants appears within the segment.
Heterogeneity of needs and wants exists between the
segments.
Differences within the segment should be small compared to
differences across segments.
The segment should be distinct enough so that its members
can be easily identified.
It should be possible to determine the size of the segment.
The segment should be large enough for the firm to earn
profits.
 Selecting a Target Market Crafting a Unique Positioning Strategy
A firm (especially a start-
entire segment of a market.
Most firms target a niche market within the segment. services.
A niche market is a place within a market segment that
represents a narrow group of customers with similar
interests. to the marketplace, and the competitive landscape.
with its business model and the backgrounds and skills Product attribute map
of its founders and other employees.
A firm must also continually monitor the attractiveness
of its target market.

Crafting a Unique Positioning Strategy Marketing Mix

marketing mix is the set of controllable,
tactical marketing tools that it uses to produce the
response it wants in the target market.
4Ps:
Product
Price: cost-based pricing or value-based pricing
Promotion: Advertising, Public relations, Social media, and
Other promotion-related activities
Place (Distribution): Selling direct (disintermediation), Selling
through intermediaries
 The New Marketing Concept for Entrepreneurs The New Marketing Concept for Entrepreneurs
Shift from the 4Ps to the 4Cs:
The Era of Generation C (as in Content) Knowledge of
the market
Connected, creative, collaborative, and contextual.
The customer is central to all effective marketing
activity. Understanding of Development of
marketing research the marketing plan

Understanding and Proper approach to

application of social media a pricing strategy

10 142

Common Elements in the Marketing Skills of Great

Marketing Terms
Entrepreneurs
1. They possess unique environmental insight, which they use to spot opportunities that others
overlook or view as problems.
Market
2. They develop new marketing strategies that draw on their unique insights. They view the status A group of consumers (potential customers) who
quo and conventional wisdom as something to be challenged.
3. They take risks that others, lacking their vision, consider foolish.
have purchasing power and unsatisfied needs.
4. They live in fear of being preempted in the market. A new venture will survive only if a market exists
5. They are fiercely competitive.
for its product or service.
6. They think through the implications of any proposed strategy, screening it against their
knowledge of how the marketplace functions. They identify and solve problems that others do
not even recognize. Marketing Research
7. They are meticulous about details and are always in search of new competitive advantages in
quality and cost reduction, however small. The gathering of information about a particular
8. They lead from the front, executing their management strategies enthusiastically and market, followed by analysis of that information.
autocratically. They maintain close information control when they delegate.
9. They drive themselves and their subordinates.
10. They are prepared to adapt their strategies quickly and to keep adapting them until they work.
They persevere long after others have given up.
11. They have clear visions of what they want to achieve next. They can see further down the road
than the average manager can see.
 Defining the Research Purpose and Objectives Gathering Information
Where do potential customers go to purchase Secondary Data
the good or service in question? Information that has already been compiled.
Why do they choose to go there? Advantage: Less expensive and available
What is the size of the market? Disadvantages: outdated, lacks specificity,
How much of it can the business capture? questionable validity
How does the business compare with Sources: internal and/or external sources
competitors?
Primary Data
Information that is gathered specifically for the
have on customers? research at hand.
What types of products or services are Surveys
desired by potential customers?
Experimentation

Comparison of Major Survey Research Techniques Developing an Information-Gathering

Door-to-Door
Personal Interview
Mall Intercept
Personal Interview Telephone Interview Mail Survey Internet Survey
Instrument
Speed of data Moderate to fast Fast Very fast Slow; researcher has no Instantaneous; 24/7

Make sure each question pertains to a specific

collection control over return of
questionnaire
Geographic Limited to moderate Confined; possible High High High (worldwide)
flexibility
Respondent Excellent
urban bias
Moderate to low Good Moderate; poorly designed Varies depending on
objective in line with the purpose of the study.
cooperation questionnaire will have low website; high from

Versatility of Quite versatile Extremely versatile Moderate

response rate
Not versatile; requires highly
consumer panels
Extremely versatile
Place simple questions first and difficult-to-answer
questions later in the questionnaire.
questioning standardized format
Questionnaire Long Moderate to long Moderate Varies depending on incentive Moderate; length
length customized, based on
answers
Item non- Low Medium Medium High Software can
response rate assure none
Possibility for
respondent
Low Low Average High; no interviewer present
for clarification
High Reword questions avoid misunderstanding.
misunderstanding
Degree of interviewer
influence on answer
High High Moderate None; interviewer absent None
Avoid leading and biased questions.
Supervision of Moderate Moderate to high High; especially with central- Not applicable Not applicable
interviewers
Anonymity of Low Low
location interviewing
Moderate High Respondent can be either
Give concise but not complete directions in the
respondent
Ease of call back or Difficult Difficult Easy Easy, but takes time
anonymous or known
Difficult, unless email questionnaire.
follow-up address is known
Cost
Special features
Highest
Visual materials may
Moderate to high
Taste tests, viewing
Low to moderate
Fieldwork and supervision of
Lowest
Respondent may answer
Low
Streaming media software
Use scaled questions rather than simple yes/no
be shown or
demonstrated;
extended probing
of TV commercials
possible
data collection are simplified;
quite adaptable to computer
technology
questions at own convenience: allows use of graphics and
has time to reflect on answers animation questions.
possible

Source: William G. Zikmund and Barry J. Babin, Essentials of Marketing Research, 5th ed. (Mason, OH: Cengage/SouthWestern, 2013), p. 182.
Quantitative versus Qualitative
Marketing Research
Quantitative Research
Involves empirical
assessments that work from
numerical measurements and
analytical approaches to
compare the results.
The researcher is an
uninvolved observer so that
Requires larger samples to
be able to perform the
statistical analyses.
Interpreting and Reporting the Information
Data organized and interpreted is information.
Qualitative research
Tables, charts, graphs
Requires smaller sample
size as it involves the Descriptive statistics mean, mode, median
researcher into the process
and is able to delve deeper
Market research subject areas:
into the questions with the Sales
respondents.
Relies less on analytical
Distribution
testing, and the researcher Markets
is engaged in the process,
the results are considered Advertising
Products

Inhibitors to Market Research Traditional versus Entrepreneurial Marketing

Conventional Marketing Entrepreneurial Marketing
Mistaken beliefs that inhibit the use of marketing Basic premise Facilitation of transactions and market Sustainable competitive advantage through value-creating

research: Orientation
control
Marketing as objective, dispassionate
innovation
Central role of passion, zeal, persistence, and creativity in
science marketing
Cost: research is too expensive. Context Established, relatively stable markets Envisioned, emerging, and fragmented markets
with high levels of turbulence

Complexity: research techniques rely on overly role

Coordinator of marketing mix; builder of the
brand
Internal and external change agent; creator of the
category
complex sampling, surveying, and statistical analysis. Market Reactive and adaptive approach to current Proactive approach, leading the customer with
approach market situation with incremental innovation dynamic innovation

Strategic Decisions: only major strategic decisions Customer

needs
Articulated, assumed, expressed by
customers through survey research
Unarticulated, discovered, identified through lead users

need to be supported through marketing research. Risk Risk minimization in marketing actions Marketing as vehicle for calculated risk-taking; emphasis
perspective on finding ways to mitigate, stage, or share risks

Irrelevancy: research data will contain either Resource

management
Efficient use of existing resources, scarcity
mentality
Leveraging, creative use of the resources of others; doing
more with less; actions are not constrained by resources
information that merely supports what is already currently controlled
New product/ Marketing supports new product/service Marketing is the home of innovation; customer is
known or irrelevant information. service development activities of R&D and other coactive producer
development technical departments
External source of intelligence and feedback
role defining product, price, distribution, and communications
approaches.
Source: Minet Schindehutte, Michael H. Morris, and Leyland F. Pitt, Rethinking Marketing (Upper Saddle River, NJ. 2009), p. 30.
Developing the Marketing Concept Developing the Marketing Concept
Marketing Philosophies Market Segmentation
Production-driven philosophy The process of identifying a specific set
of characteristics that differentiate one
Sales-driven philosophy group of consumers from the rest.
Consumer-driven philosophy Demographic variables
Age, marital status, sex, occupation, income,
Factors in Choosing a Marketing Philosophy and location

Competitive pressure Benefit variables

Convenience, cost, style, trends (depending
on the nature of the particular new venture)

Short-term focus

Consumer Behavior Developing a Marketing Plan

Consumer Behavior Marketing Plan
The types and patterns of consumer characteristics: The process of determining a clear, comprehensive
Personal characteristics approach to the creation of customers.
Psychological characteristics Elements of the Marketing Plan
Major Consumer Goods Classifications: Current marketing research
1. Convenience goods Current sales analysis
2. Shopping goods Marketing information system
Sales forecasting
3. Specialty goods
Evaluation
4. Unsought goods
5. New products
Developing a Marketing Plan Marketing Information System
Current Marketing Research Marketing Information System
The purpose of marketing research is to identify Compiles and organizes data relating to cost,
customers target markets and to fulfill their desires. revenue, and profit from the customer base for
Areas of Market Research monitoring the strategies, decisions, and programs
concerned with marketing.

Market profile
Factors affecting the value of a system:
Current and best customers 1. Data reliability
Potential customers 2. Data usefulness or understandability
Competition 3. Reporting system timeliness
Outside factors 4. Data relevancy
Legal changes 5. System cost

Market Planning The Market Plan: A Structured Approach

Sales Forecasting 1. Appraise marketing strengths and weaknesses,
The process of projecting future sales
through historical sales figures and the
application of statistical techniques.
2. Develop marketing objectives, along with
short- and intermediate-range sales goals.
Evaluation
Evaluating marketing plan performance 3. Develop product/service strategies.
is important so that flexibility and 4. Develop marketing strategies to achieve
adjustment can be incorporated into
marketing planning.
intermediate- and long-range sales goals and
long-term marketing objectives.
5. Determine a pricing structure.
History of the evolution of marketing History of the evolution of marketing

Comparison of marketing 1.0, 2.0, 3.0 and 4.0 Comparison of marketing 1.0, 2.0, 3.0 and 4.0
The changes of the marketing organization
Social Media Marketing
Social Media Marketing
The use of social networks, online communities,
blogs, wikis, and other online collaborative media
tools for marketing purposes.
Effective Social Media Marketing
Create value with an event, a video, a tweet, or a blog
entry, that attracts attention and becomes viral.
Enable customers to promote a message themselves
with multiple online social media venues.
Encourage user participation and dialogue that fully
engages customers with online conversations.
Marketing metrics in the digital era
Key Distinctions of Social Media Marketing
Control Versus Contributions
Social medial marketing emphasizes audience
contribution and relinquishes organizational control
over large parts of the content.
Trust Building
Firms cannot fully control the content users create,
development of trusting relationships is required.
Two-Way Communication
Social media creates an ongoing interactive
conversation between the firm and the customer.
 Developing a Social Media Marketing Plan Mobile Marketing

Listen
Integrate
Monitor Identify

Convert Categorize
Mobile Social
Initiate Media Strategy: Involve

Contribute Appraise

Collaborate Implement Individualize

Branding Branding

A brand is the set of attributes positive or negative Brand management

that people associate with a company. Brand equity

Brand loyalty
These attributes can be positive, such as trustworthy,
Name recognition
innovative, dependable, or easy to deal with.

Or they can be negative, such as cheap, unreliable, Brand associations in addition to quality (e.g., good
arrogant, or difficult to deal with. service)
Other proprietary assets, such as patents,
trademarks, and high-quality partnerships.
 MANAGING AN

THE END ENTREPRENEURIAL FIRM

Chapter 5

Chapter Objectives Legal Structures for Entrepreneurial Ventures

Explain the concept called liability of newness.
Identify and describe the different forms of organization
available to new firms.
Describe actions taken in new firms to effectively deal with legal
issues.
Provide an overview of the business licenses and permits that a
start-up must obtain before it begins operating.
Describe a new-venture team and discuss the primary elements
that form such a team.
Discuss the actions founders can take to establish a culture in
their entrepreneurial ventures.
A legal structure that will best suits the demands
of the venture addresses:
How easily the form of business organization
can be implemented
The amount of capital required to implement
the form of business organization
Legal considerations that might limit the options
available to the entrepreneur
The tax effects of the form of organization selected
The potential liability to the owner of the form of
organization selected
Factors in Selecting a Form of Business Organization Primary Legal Forms of Organization

LLC
Corporations

Partnerships

Sole proprietorships

Sole Proprietorships Sole Proprietorships

Sole Proprietorship Advantages
A business that is owned and operated by one Ease of formation
person. The enterprise has no existence apart
Sole ownership of profits
from its owner.
To establish a sole proprietorship, a person merely Decision making and
needs to obtain whatever local and state licenses are control vested in one
necessary to begin operations. owner
Flexibility
Relative freedom from
governmental control
Freedom from corporate
business taxes
Disadvantages
Unlimited liability
Lack of continuity
Less available capital
Relative difficulty
obtaining long-term
financing
Relatively limited
viewpoint and
experience
Partnerships Articles of Partnership Items
Partnership Name, purpose, domicile
Duration of agreement
An association of two or more persons acting Character of partners (general or
as co-owners of a business for profit. limited, active or silent)
The Revised Uniform Partnership Act (RUPA) acts the Contributions by partners (at
inception, at later date)
guide for legal requirements in forming partnerships.
Division of profits and losses
Articles of Partnership Draws or salaries
Clearly outline the financial and managerial Rights of continuing partner(s)
contributions of the partners and carefully delineate Death of a partner (dissolution and
windup)
the roles in the partnership relationship.
Release of debts
Business expenses (method of
handling)
Separate debts
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

Partnerships Partnerships
Advantages Disadvantages
Limited Partnerships
Ease of formation Unlimited liability of
Have two or more partners without responsibility for
Direct rewards at least one partner management and without liability for losses beyond their
Lack of continuity investment with the right to share in the profits.
Growth and
performance facilitated Relative difficulty Formed under The Uniform Limited Partnership Act (ULPA).

Flexibility obtaining large sums Limited Liability Partnership (LLP)

Relative freedom from
governmental control
and regulation
Possible tax advantage
of capital Allows professionals the tax benefits of a partnership while
Bound by the acts of avoiding personal liability for the malpractice of other partners.
general partner Limited Liability Limited Partnership (LLLP)
Difficulty of disposing Has elected limited liability status for all of its partners,
of partnership interest including general partners.
Principal Characteristics of Limited Partnerships and LLLPs Corporations
1. A limited partnership or LLLP may be created only in accordance with a statute.
2. A limited partnership or LLLP has two types of partners: general partners and limited partners. Corporation
It must have one or more of each type.
3. All partners, limited and general, share the profits of the business.
4. Each limited partner has liability limited to his capital contribution to the business. Each
general partner of a limited partnership has unlimited liability for the obligations of the
business. A general partner in an LLLP, however, has liability limited to his capital Supreme Court Justice John Marshall
contribution.
5. Each general partner has a right to manage the business, and she is an agent of the limited
As such, a corporation is a separate legal entity
partnership or LLLP. A limited partner has no right to manage the business or to act as its apart from the individuals who own it.
agent, but he does have the right to vote on fundamental matters. A limited partner they
manage the business, yet retain limited liability for partnership obligations.
Forming a Corporation
6. General partners, as agents, are fiduciaries of the business. Limited partners are not
fiduciaries. Subscriptions for capital stock must be taken
7.
general or limited partnership interest in not a partner, but is entitled only to the transferring and a tentative organization created.
8. The death or other withdrawal of a partner does not dissolve a limited partnership or LLLP,
Approval (a charter) must be obtained from the
unless there is no surviving general partner. secretary of state in the state in which the
9. Usually, a limited partnership or LLLP is taxed like a partnership. corporation is to be formed.
Source: Adapted from Jane P. Mallor, A. James Barnes, Thomas Bowers, and Arlen W. Langvardt, Business Law: The Ethical, Global, and E-Commerce Environment, 15 ed. (New York:
McGraw Hill Irwin, 2013), 955 1024. Reprinted with permission from The McGraw-Hill Companies.

Corporations S Corporation
Advantages Disadvantages
Limited liability Activity restrictions S Corporation
Takes its name from Subchapter S of the Internal
Transfer of ownership Lack of representation
Revenue Code.
Unlimited life Regulation
Relative ease of Organizing expenses it is taxed similarly to a partnership.
securing capital in Double taxation Avoids the imposition of income taxes at the
large amounts corporate level yet retain the benefits of a
Increased ability and corporate form (especially the limited liability).
expertise
Guidelines for S Corporations
The corporation must be a domestic corporation.
The corporation must not be a member of an affiliated
group of corporations.
The shareholders of the corporation must be individuals,
estates, or certain trusts. Corporations, partnerships, and
nonqualifying trusts cannot be shareholders.
The corporation must have 100 or fewer shareholders.
The corporation must have only one class of stock,
although not all shareholders may have the same voting
rights.
No shareholder may be a nonresident alien.
B Corporations
Certified B Corporations
Are a new way for businesses to solve critical social
and environmental problems by addressing two critical
problems:
Corporate laws that make it difficult for businesses to
consider employee, community, and environmental interests
in their decision making.
The lack of transparent standards that can make it difficult to
tell the difference between a socially proactive company and
just good marketing.

Limited Liability Company (LLC) General Characteristics of Forms of Business

Limited Liability
Sole Limited Liability Limited Limited Limited Liability
Proprietorship Partnership Partnership Partnership Partnership Corporation S Corporation Company

Limited Liability Company (LLC)

Formation When one By agreement of By agreement of By agreement of By agreement of By agreement of By agreement of By agreement of
person owns a owners or by owners; must owners; must owners; must owners; must owners; must owners; must
business default when two comply with comply with comply with comply with comply with comply with
without or more owners limited liability limited limited liability corporation corporation state; limited liability
forming a conduct business partnership partnership limited statute must elect S company statute
A hybrid form of business enterprise that offers the corporation or
LLC
together without
forming a limited
statute statute partnership
statute
Corporation
status under
partnership, an Subchapter S of
limited liability of a corporation but the tax advantages LLC or a
corporation
Internal Revenue
Code

of a partnership. Duration Terminates on

death or
withdrawal of
Usually
unaffected by
death or
Unaffected by
death or
withdrawal of
Unaffected by
death or
withdrawal of
Unaffected by
death or
withdrawal of
Unaffected by
death or
withdrawal of
Unaffected by
death or
withdrawal of
Usually
unaffected by
death or

Disadvantage is that LLC statutes differ from state to

sole proprietor withdrawal of partner partner, unless partner, unless shareholder shareholder withdrawal of
partner sole general sole general member
partner partner

state, and thus any firm engaged in multi-state

dissociates dissociates

Management By sole By partners By partners By general By general By board of By board of By managers or

proprietor partners partners directors directors members

operations may face difficulties. Owner Liability Unlimited Unlimited Mostly limited to
capital
Unlimited for
general partners;
Limited to capital
contribution
Limited to capital
contribution
Limited to capital
contribution
Limited to capital
contribution
contribution limited to capital
contribution for
limited partners

Transferability None None None None, unless None, unless Freely Freely None, unless
agreed otherwise agreed otherwise transferable, transferable, agreed otherwise
Interest although although
shareholders may shareholders
agree otherwise usually agree
otherwise

Federal Only sole Only partners Usually only Usually only Usually only Corporation Only shareholders Usually only
Income proprietor taxed partners taxed; partners taxed; partners taxed; taxed; taxed members taxed;
Taxation taxed may elect to be may elect to be may elect to be shareholders may elect to be
taxed like a taxed like a taxed like a taxed on taxed like a
corporation corporation corporation dividends (double corporation
tax)

Source: Jane P. Mallor, A. James Barnes, Thomas Bowers, and Arlen W. Langvardt, Business Law: The Ethical, Global, and E-Commerce Environment, 15 ed. (McGraw Hill Irwin, 2013), 959.
Reprinted with permission from The McGraw-Hill Companies.
 General Characteristics of Forms of Business
Liability of newness
The liability of newness refers to the fact that
companies often falter because the people who start
outside buyers and suppliers.
Firms can take to overcome these limitations by:
Assembling a talented and experienced new-venture team.
Persuading high-quality individuals to join them as directors
or advisers
Attending entrepreneurship-focused workshops and events
Joining one of the growing numbers of start-up accelerators.
Minimizing Legal Expenses
Establish the fee structure with an attorney beforehand.
Establish clear written agreements on all critical matters that
affect business operations.
Always attempt to settle any dispute rather than litigate.
Have your attorney share forms in electronic format.
Use a less expensive attorney for small collections.
Suggest cost-savings to your attorney for business matters.
Always check with your attorney during normal business hours.
Consult with your lawyer on several matters at one time.
Keep abreast of legal developments in your field.
Handle some matters yourself.
Involve attorneys early when it is feasible
New-venture team
A new-venture team is the group of founders, key
employees, and advisers that move a new venture
from an idea to a fully functioning firm.
it is built as the new firm can afford to hire additional
personnel.
Many firms have a board of directors, a board of
advisors, investors, and other professionals.
 Elements of a new-venture team Creating a new-venture team
Founders of a venture
Size of the founding team
Qualities of the founders
Management team and Key employees
Board of directors
Inside director
Outside director
Board of advisors
Lenders and Investors
Other professionals

The Entrepreneurial Culture versus the Administrative Culture Balancing the Focus:
Entrepreneurial versus Managerial
Entrepreneurial Focus Administrative Focus
Characteristics Pressures Characteristics Pressures
Strategic Driven by perception Diminishing opportunities Planning systems Social contracts The Administrative
Orientation of opportunity Rapidly changing technology, consumer and cycles Performance measurement
economics, social values, and political rules criteria Point of View Point of View
Commitment Revolutionary, with Action orientation Evolutionary, with Acknowledgement of multiple
to Seize
Opportunities
short duration Narrow decision windows
Acceptance of reasonable risks
long duration constituencies
Negotiation about strategic Where is the opportunity? What resources do I control?
Few decision constituencies course
Risk reduction
Coordination with existing How do I capitalize on it? What structure determines our
resource base
Commitment Many stages, with Lack of predictable resource needs A single stage, with Need to reduce risk What resources do I need?
of Resources minimal exposure at Lack of control over the environment complete Incentive compensation its market?
each stage Social demands for appropriate use of commitment out of Turnover in managers
resources decision Capital budgeting systems How do I gain control over them?
Foreign competition Formal planning systems How can I minimize the impact
Demands for more efficient use
Control of Episodic use or rent Increased resource specialization Ownership or Power, status, and financial
What structure is best? of others on my ability to
Resources of required resources Long resource life compared with need
Risk of obsolescence
employment of
required resources
rewards
Coordination of activity
perform?
Risk inherent in the identified opportunity Efficiency measures
Inflexibility of permanent commitment to
resources
Inertia and cost of change
Industry structures
What opportunity is
Management Flat, with multiple Coordination of key noncontrolled resources Hierarchy Need for clearly defined appropriate?
Structure informal networks Challenge to hierarchy authority and responsibility
Organizational culture
Reward systems
Management theory

Source: Reprinted by permission of the Harvard Business Review Gumpert, March/April 1985, 89. Copyright © 1985 by
the President and Fellows of Harvard College; all rights reserved.
The Entrepreneurial Mind-Set The Managerial versus the Entrepreneurial Mind-Set
Managerial Mind-Set Entrepreneurial Mind-Set
Decision-making The past is the best predictor of the future. A new idea or an insight from a
assumptions Most business decisions can be quantified. unique experience is likely to provide
the best estimate of emerging trends.

Values The best decisions are those based on New insights and real-world
quantitative analyses. experiences are more highly valued
Rigorous analyses are highly valued for than results based on historical data.
making critical decisions.

Beliefs Law of large numbers: Chaos and Law of small numbers: A single
uncertainty can be resolved by incident or several isolated incidents
systematically analyzing the right data. quickly become pivotal for making
decisions regarding future trends.

Approach to Problems represent an unfortunate turn of Problems represent an opportunity to

problems events that threaten financial projections. detect emerging changes and
Problems must be resolved with possibly new business opportunities.
substantiated analyses.

Source: Mike Wright, Robert E. Hoskisson, and Lowell W. Busenitz Academy of Management
Executive 15, no.1(2001): 114.

Entrepreneurial Leadership Establish a strong ethical culture for a firm

Four key metrics on the ethics environment of an
Entrepreneurial Leadership
organization:
Arises when an entrepreneur attempts to manage
the fast-paced, growth oriented company. Pressure to compromise organizational standards: an
important warning sign of future workplace misconduct.
Components of Entrepreneurial Leadership
Observed misconduct: the extent that employees follow the
rules and live out the core values of the organization.
Exploiting and maintaining the core competencies. Report observed misconduct: whether employees report
Developing human capital. misconduct when they observe it, rather than remaining
Sustaining an effective organizational culture. silent.
Emphasizing ethical practices. Experience retaliation for reporting misconduct: whether
Establishing balanced organizational controls. employees who report misconduct are retaliated against.
 Three steps to build a strong ethical culture

Leading

Code of conduct (or code of ethics)

Ethics training programs THE END

Chapter Objectives
SOURCES OF CAPITAL AND
Learn about the importance of understanding the financial
management of an entrepreneurial firm.
FINANCIAL PREPARATION FOR Identify the main financial objectives of entrepreneurial
ventures.

ENTREPRENEURIAL VENTURES Describe the process of financial management as used in

entrepreneurial firms.
Explain the difference between historical and pro forma financial
Chapter 6 statements.
Identify and describe the sources of financing for
entrepreneurial firms.
Identify challenges in entrepreneurship
Primary Financial Objectives Of Entrepreneurial Firms The Process of Financial Management

Three Reasons Start-Ups Need Funding Sources of Personal Financing

 Who Is Funding Entrepreneurial Start-Up Companies? Debt Versus Equity
Debt Financing
Secured financing of a new venture that involves a
payback of the funds plus a fee (interest for the use of
the money).
Equity Financing
Involves the sale (exchange) of some of the
ownership interest in the venture in return for an
unsecured investment in the firm.

Source:

Preparation for Debt or Equity Financing Debt Financing

Commercial Banks
Make 1-5 year intermediate-term loans secured by
collateral (receivables, inventories, or other assets).
Questions in securing a loan:
1. What do you plan to do with the money?
2. How much do you need?
3. When do you need it?
4. How long will you need it?
5. How will you repay the loan?
 Debt Financing Social Lending, or Crowdfunding
Advantages Disadvantages Sources of Social Lending
No relinquishment of Regular (monthly) Are often Internet-based sites that pool money from
ownership is required. interest payments are investors willing to lend capital at agreed-upon rates.
More borrowing allows required. Match borrowers and lenders based on loan size, risk
for potentially greater Continual cash-flow tolerance, and social familiarity (e.g., co-workers,
return on equity. problems can be fellow alumni, hometown residents, etc.).
low interest rates intensified because of Possible Dangers
reduce the opportunity payback responsibility. Low funding success rate
cost of borrowing Heavy use of debt can Business plan disclosure
inhibit growth and
No ongoing counseling relationship
development.
Potential tax liability
Uncertain regulatory environment

Common Debt Sources Other Debt Financing Sources

Business Type Financed Financing Term Trade Credit
Debt Start-Up Existing Short Intermediate Long
Source Firm Firm Term Term Term Credit given by suppliers who sell goods on account.
Accounts Receivable Financing
Trade credit Yes Yes Yes No No
Commercial Sometimes, but Yes Frequently Sometimes Seldom
banks only if strong
capital or Short-term financing that involves either the pledge of
collateral exists
Finance Seldom Yes Most frequent Yes Seldom receivables as collateral for a loan or the sale of
companies
receivables at a discounted value (factoring).
Factors Seldom Yes Most frequent Seldom No
Leasing
companies
Seldom Yes No Most frequent Occasionally Factoring
Mutual savings
banks and
Seldom Real estate
ventures only
No No Real estate
ventures only
The sale of accounts receivable at discounted values
savings-and-loan
associations Finance Companies
Insurance Rarely Yes No No Yes
companies Asset-based lenders that lend money against assets
such as receivables, inventory, and equipment.
Source: PricewaterhouseCoopers/National Venture Capital Association, MoneyTree Report, 2007.
Other Debt Financing Sources Equity Financing
Equity Financing Equity Financing
Gives investors a share of the ownership. Money invested in the venture with no legal obligation
Loan with warrants provide the investor with the right to buy
for entrepreneurs to repay the principal amount or pay
stock at a fixed price at some future date. interest on it.
Convertible debentures are unsecured loans that can be Funding sources: public offering and private
converted into stock. placement
Preferred stock is equity that gives investors a preferred Public Offering
place among the creditors in the event the venture is
dissolved.
through the sale of its securities on the stock markets.
Common stock is the most basic form of ownership and is
often are sold through public or private offerings. Initial Public Offerings (IPOs): new issues of common
stock

Public Offerings Investors

Advantages
Size of capital amount Wealthy individuals who invest regularly in new and
Liquidity early- and late-stage ventures and are knowledgeable
Value about the technical and commercial opportunities and
risks of the business in which they invest.
Image
Disadvantages
Costs
Disclosure
Requirements
Shareholder pressure
The Venture Capital Market Recent Developments in Venture Capital
Venture Capitalists
More-Experienced
Are valuable and powerful sources of equity funding Venture Investors
for new ventures who provide:
Capital for start-ups and expansion
Market research and strategy More-Specialized Emergence of
Management-consulting, audits and evaluation Venture Funds Feeder Funds
Contacts customers, suppliers, and businesspeople
Assistance in negotiating technical agreements
Help in establishing management and accounting controls
Decrease in Small
Help in employee recruitment and employee agreements Start-up
More Sophisticated
Help in risk management and with insurance programs Legal Environment
Investments
Counseling and guidance in complying with government
regulations

Recent Developments in Venture Capital Investment Agreement Provisions

More Choice of securities
experienced
investors Preferred stock, common stock, convertible debt, and
Stronger legal
Globalization
so forth
governance
environment
of VCs
Control issues
Who maintains voting power
Venture
More direct Capital Trends Evaluation issues and financial covenants
More VC
involvement of
VCs
specialization Ability to proceed with mergers and acquisitions
Remedies for breach of contract
Reduced seed
Syndication of
Rescission of the contract or monetary damages
and start-up
VC deals
financing
Dispelling Venture Capital Myths Factors in Successful Funding of Ventures
Myth 1: Venture capital firms want to own control of your
company and tell you how to run the business. Characteristics of
the Entrepreneurs
Myth 2: Venture capitalists are satisfied with a
reasonable return on investment.
Myth 3: Venture capitalists are quick to invest.
Characteristics Success in Seeking
Myth 4: Venture capitalists are interested in backing new Sources of
of the Funding Advice
ideas or high-technology inventions Request (Demand Side)
management is a secondary consideration.
Myth 5: Venture capitalists need only basic summary
information before they make an investment.
Characteristics of
the Enterprise

Venture Capitalists and Business Plans

Proposal Attribute Level Definition

Size Timing of entry Pioneer Enters a new industry first
Late
follower
Key success High Requirements necessary for success will not change radically during
Financial Investment factor stability industry development
Projections Recovery Low Requirements necessary for success will change radically during
industry development
Educational High Considerable resources and skills available to overcome market
capability ignorance through education
Low Few resources or skills available to overcome market ignorance
through education
Competitive Company
Lead time Long An extended period of monopoly for the first entrant prior to competitors
Advantage Management entering the industry
Short A minimal period of monopoly for the first entrant prior to competitors
entering this industry

Source: Journal of Small Business Management

(April 1999): 76 Management Science (May 1999): 621 632. Reprinted by permission. Copyright
1999, the Institute for Operation Research and the Management Sciences (INFORMS), 7240 Parkway Drive, Suite 310, Hanover MD 21076 USA.
 Criteria for Evaluating New-Venture Proposals
Attribute Level Definition
Competitive rivalry High Intense competition among industry members during industry
development
Major Categories of Venture Capitalist Screening
Low Little competition among industry members during industry
development Criteria:
Entry wedge High Considerable imitation of the mechanisms used by other firms to
mimicry enter this, or any other, industry for example, a franchisee
Low Minimal imitation of the mechanisms used by other firms to enter
this, or any other, industry for example, introducing a new product
Scope Broad A firm that spreads its resources across a wide spectrum of the
market for example, many segments of the market Product or service characteristics
Narrow A firm that concentrates on intensively exploiting a small segment of
the market for example, targeting a niche Market characteristics
Industry-related High Venturer has considerable experience and knowledge with the
competence industry being entered or a related industry Financial considerations
Low Venturer has minimal experience and knowledge with the industry
being entered or related industry Nature of the venture team
Source: Journal of Small Business Management
(April 1999): 76 Management Science (May 1999): 621 632. Reprinted by permission. Copyright
1999, the Institute for Operation Research and the Management Sciences (INFORMS), 7240 Parkway Drive, Suite 310, Hanover MD 21076 USA.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 233 8 234

Venture Capitalist Evaluation Process

Venture Capital Firm Requirements Financial Information on the Proposed Business
Must fit within lending guidelines of venture firm for Financial projections should be realistic Stage 1: Initial Screening
stage and size of investment Proposal Characteristics
Proposed business must be within geographic area Must have full information
This is a quick review of the basic venture to see if it meets the
of interest
Should be a reasonable length, be easy to scan,
Prefer proposals recommended by someone known have an executive summary, and be professionally
to venture capitalist
Proposed industry must be kind of industry invested
presented Stage 2: Evaluation of the Business Plan
Proposal must contain a balanced presentation
in by venture firm
Use graphics and large print to emphasize key This is where a detailed reading of the plan is done in order to
Nature of the Proposed Business points
Projected growth should be relatively large within Entrepreneur/Team Characteristics
evaluate the factors mentioned earlier.
five years of investment
Economic Environment of Proposed Industry
Must have relevant experience
Stage 3: Oral Presentation
Should have a balanced management team in place
Industry must be capable of long-term growth and
profitability Management must be willing to work with venture The entrepreneur verbally presents the plan to the venture
partners
Economic environment should be favorable to a
Entrepreneur who has successfully started previous
capitalist.
new entrant
business given special consideration
Proposed Business Strategy Stage 4: Final Evaluation
Selection of distribution channel(s) must be feasible
Product must demonstrate defendable competitive After analyzing the plan and visiting with suppliers, customers,
position
consultants, and others, the venture capitalist makes a final
decision.
Source:
Journal of Business Venturing (January 1993): 37.
© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 235
 Informal Risk Capital
Business Angel Financing
Wealthy individuals who are looking for investment Typical deal size $500,000 $850,000
opportunities. Typical recipient Start-up firms

risk capitalists. Cash-out time frame 5 to 7 years

Types of Angel Investors Expected return 35% to 50% a year
Corporate angels Ownership stake Less than 50%
Entrepreneurial angels
Enthusiast angles
Micromanagement angels
Professional angels
Source

Pros and Cons of Dealing with Angel Investors The Importance of Financial Information
for Entrepreneurs
Pros Cons
1. Angels engage in smaller 1. Angels offer no additional Significant Information
financial deals. investment money. for Financial Management
2. Angels prefer seed stage or 2. Angels cannot offer any national The importance of ratio analysis in planning
start-up stage. image.
Techniques and uses of projected financial
3. Angels invest in various industry 3. Angels lack important contacts statements
sectors. for future leverage.
Techniques and approaches for designing
4. Angels are located in local 4. Angels may want some decision
a cash-flow schedule
geographic areas. making with the entrepreneur.
Techniques and approaches for evaluating
5. Angels are genuinely interested 5. Angels are getting more
in the entrepreneur. sophisticated in their investment the capital budget
decisions.
 Kendon Corporation Balance Sheet for the Year Ended
Understanding the Key Financial Statements December 31, 2020
Balance Sheet

at a certain date.
It details the items the firm owns (assets) and
the amount the firm owes (liabilities).
It also shows the net worth of the firm and its liquidity.
Assets = Liabilities +
An asset is something of value the firm owns.
Current and fixed, tangible and intangible assets
Liabilities are the claims creditors have against the firm.
Short- (or current-) and long-term liabilities (or debts)

Allowance for Uncollectible Accounts Understanding Financial Statements

Number of Days Amount of Income Statement

Outstanding Receivables Commonly referred to as the P&L (profit and loss)
1 11 $325,000 statement from activities of the firm.
11 20 25,000
21 30 20,000 Income Statement Categories
31 60 5,000 Revenues: gross sales for the period
61 90 7,500 Expenses: Costs of producing goods or services
91+ 17,500 Net Income: The excess (deficit) of revenues over
expenses (profit or loss)
Kendon Corporation Income Statement for the Year Ended
December 31, 2020 Understanding Financial Statements
The Cash-Flow Statement
An analysis of the cash availability and cash needs

investing, and financing activities on its cash balance.

How much cash did the firm generate from operations?
How did the firm finance fixed capital expenditures?
How much new debt did the firm add?
Was cash from operations sufficient to finance fixed asset
purchases?
The use of a cash budget may be the best approach
for an entrepreneur starting up a venture.

Format of Statement of Cash Flows Preparing Financial Budgets

Budget
One of the most powerful tools the entrepreneur
can use in planning financial operations.
Operating Budget
A statement of estimated income and expenses
over a specified period of time.
Cash Budget
A statement of estimated cash receipts and
expenditures over a specified period of time.
Capital Budget
The plan for expenditures on assets with returns
expected to last beyond one year.
The Operating Budget Regression Analysis
Sales Forecasting
Creating an operating budget through
preparation of the sales forecast.
Forecasting
Linear regression: a statistical forecasting technique.
Y = a + bx
Y is a dependent variable its value is dependent
on the values of a, b, and x.
x is an independent variable that is not dependent
on any of the other variables
a is a constant.
b is the slope of the line of correlation
(the change in Y divided by the change in x).

North Central Scientific: Purchase Requirements

North Central Scientific: Sales Forecast for 2025
Budget for 2015
 Dynamic Manufacturing: Production Budget
Worksheet for 2015
The Cash-Flow Budget
Cash-Flow Budget
Provides an overview of the cash inflows and outflows
during the period. By pinpointing cash problems in
advance, management can make the necessary
financing arrangements.
Preparation of the cash-flow budget
Identification and timing of three cash inflows:
Cash sales
Cash payments received on account
Loan proceeds
Minimum cash balance

North Central Scientific: Expense and Operating Budgets North Central Scientific: Expense and Operating Budgets
In order to identify the behavior of the different expense accounts, John Wheatman North Central Scientific: Expense Budget for 2025

his analysis:

Rent is a constant expense and is expected to remain the same during the next
year.
Payroll expense changes in proportion to sales, because the more sales the store
has, the more people it must hire to meet increased consumer demands.
Utilities are expected to remain relatively constant during the budget period.
Taxes are based primarily on sales and payroll and are therefore considered a
variable expense.
Supplies will vary in proportion to sales. This is because most of the supplies will be
used to support sales.
Repairs are relatively stable and are a fixed expense. John has maintenance
contracts on the equipment in the store, and the cost is not scheduled to rise during
the budget period.
North Central Scientific: Cash-Flow Budget Pro Forma Statements
North Central Scientific: Cash Receipts Worksheet for 2025
Pro Forma Statements

future period (pro forma income statement) or on a

future date (pro forma balance sheet).
North Central Scientific: Cash Disbursements Worksheet for 2025
Using beginning balance sheet balances, they depict
projected changes on the operating and cash-flow
budgets which are added to create projected balance
sheet totals.

North Central Scientific: Cash-Flow Worksheet for 2025

North Central Scientific: Pro Forma Statements North Central Scientific: Pro Forma Statements
North Central Scientific: Comparative Pro Forma Income Statements North Central Scientific: Comparative Pro Forma Balance Sheet
Capital Budgeting North Central Scientific: Expected Return Worksheet

The Capital Budgeting Process

Identification of cash inflows or returns and their timing
The inflows are equal to net operating income before
deduction of payments to financing sources but after
deduction of applicable taxes and with depreciation
added back, as represented by the following formula:
Expected Returns = X(1 T) + Depreciation
X is equal to the net operating income
T is defined as the appropriate tax rate
Capital Budgeting Objectives
Which mutually exclusive projects to select?
How many projects, in total, to select?

Capital Budgeting Capital Budgeting

Payback Method
(recapture) the original investment.
Any project that requires a longer period than the maximum
time frame will be rejected, and projects that fall within the
time frame will be accepted.
One of the problems with the payback method is that it
ignores cash flows beyond the payback period.
Why it is used?
Very simple to use compared to other methods.
Projects with a faster payback period normally have more
favorable short-term effects on earnings.
If a firm is short on cash, it may prefer to use the payback
method because it provides a faster return of funds.
Net Present Value (NPV) Method
The premise that a dollar today is worth more than a
dollar in the future.
The cost of capital is the rate used to adjust future cash flows
to determine their value in present period terms.
This procedure is referred to as discounting the future cash
flows cash value is determined by the present value of the
cash flow.
Internal Rate of Return (IRR method)
Similar to the net present value method, but future
cash flows are discounted a rate that makes the net
present value of the project equal to zero.
Break-Even Analysis Break-Even Analysis
Contribution Margin Approach Graphic Approach
Uses the difference between the selling price and the Graphing total revenue and total costs.
variable cost per unit the amount per unit that is The intersection of these two lines (where total revenues
contributed to covering all other costs. -even point.
Fixed cost assumption: Two additional costs variable costs and fixed
0 = (SP VC )S FC QC costs also may be plotted.
Break-even point: Handling Questionable Costs
0 = [SP VC (QC/U )]S FC
Certain costs can behave as either fixed or variable
where:
costs at different levels of output:
SP = Unit selling price VC = Variable cost per unit
0 = (SP VC)S FC QC or
S = Sales in units FC = Total fixed costs
0 = [SP VC (QC/U)]S FC

Dynamic Manufacturing: Fixed-Cost Assumption Dynamic Manufacturing: Fixed-Cost Assumption

Ratio Analysis Financial Ratios
Ratios are useful for:
Anticipating conditions and as
a starting point for planning actions.
Showing relationships among
financial statement accounts.
Vertical Analysis
The application of ratio analysis to identify
financial strengths and weaknesses.
Horizontal Analysis
Looks at financial statements and ratios
over time for positive and negative trends.

Financial Ratios Financial Ratios

11 271
 Financial Ratios Financial Ratios

The Dark Side of Entrepreneurship Why New Ventures Fail

Product/Market Problems
Financial risk versus profit (return) motive varies in Financial Difficulties
Managerial Problems
Career risk loss of employment security
Family and social risk competing commitments of
work and family
Psychic risk psychological impact of failure on the
well-being of entrepreneurs

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 275
Causes for Failure
Product/Market Problems
Poor timing
Product design problems
Inappropriate distribution
strategy
Unclear business definition
Overreliance on one
customer
Financial Difficulties
Initial undercapitalization
Assuming debt too early
Venture capital relationship
problems
New Venture Failure Prediction Model
1. Role of profitability and cash flows
2. Role of debt
3. Combination of both
4. Role of initial size
5. Role of velocity of capital
6. Role of control
Types and Classes of First-Year Problems
1. Obtaining external financing 6. General management
Managerial Problems Obtaining financing for growth Lack of management experience
Other or general financing problems Only one person/no time
Concept of a team 2. Internal financial management Managing/controlling growth
approach Inadequate working capital Administrative problems
Cash-flow problems Other or general management problems
Human resource problems Other or general financial management problems 7. Human resource management
3. Sales/marketing Recruitment/selection
Low sales Turnover/retention
Dependence on one or few clients/customers Satisfaction/morale
Marketing or distribution channels Employee development
Promotion/public relations/advertising Other or general human resource
management problems
Other or general marketing problems
4. Product development 8. Economic environment
Developing products/services Poor economy/recession
Other or general product development problems Other or general economic environment
5. Production/operations management problems
Establishing or maintaining quality control 9. Regulatory environment
Raw materials/resources/supplies Insurance
Other or general production/operations
management problems
Source: - Entrepreneurship Theory and Practice (spring 1993): 19.
The Failure Process of a Newly Founded Firm
1. Extremely high indebtedness (poor static solidity) and small size
2. Too slow velocity of capital, too fast growth, too poor profitability
(as compared to the budget), or some combination of these
3. Unexpected lack of revenue financing (poor dynamic liquidity)
4. Poor static liquidity and debt service ability (dynamic solidity)
Source: Journal of Business Venturing (July 1992): 326 328. Reprinted with permission.
Pitfalls in Selecting New Ventures
Lack of objective evaluation

THE END
No real insight into the market
Inadequate understanding of technical
requirements
Poor financial understanding
Lack of venture uniqueness
Ignorance of legal issues