enterprenuership for for Engineers (1).ppt

8/16/2019 enterprenuership for for Engineers (1).ppt

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Debre-Markos UniversityDebre-Markos UniversityCollege of Technology

Mechanical Engineering DepartmentMechanical Engineering Department

lecture note on Entrepreneurship for Engineers


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ContentsPart 1Part 2Part 3

Part 4Part 5Part 6

Introduction toEntrepreneurshipChoosing The Legal Form O an

O!nership"etting a #usiness enterprise$ar%eting in #usiness enterprisesFinancing and accounting in

&usiness'is% and insurance o #usinessenterprises


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Chapter oneEntrepreneurship

Entrepreneur Entrepreneurship


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)hat is Entrepreneur*Entrepreneurs are action-oriented, highlymotivated individuals who take risks to

achieve goalsEntrepreneurs are people who have theability

to see and evaluate business opportunities,to gather the necessary resources to takeadvantage of them! andto initiate appropriate action to ensure success

$eaning o the terms Entrepreneur+Entrepreneurship+ O!ner,$anager


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Economists may view entrepreneurs as those

who bring resources together in unusualcombinations to generate pro"tsPs-chologists tend to view entrepreneurs inbehavioral terms as those achievement-

oriented individuals driven to seek challengesand new accomplishmentsPeter .ruc%er states, as #Entrepreneur issomeone who always searches for changeresponds to it, and e$ploits it as an opportunity %E$ample& 't is the entrepreneur who only knows

(pening of new university near the society(pening of )otels near tourists* attraction-center


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)hat is Entrepreneurship*

# Entrepreneurship is the dynamic process of creatingincremental wealth This wealth is created by individualswho assume the ma+or risks in terms of e uity, time and

or career commitments of providing value for someproduct or service The product or service itself may ormay not be new or uni ue but value must somehow beinfused by the entrepreneur by securing and allocatingthe necessary skills and resources% Robert Ronstadt

Entrepreneurship is very rarely a get rich- uick

proposition! rather, it is one of building long-term value

and durable cash .ow streams


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What Is An Entrepreneur& Entrepreneurship ?

ENTREPRENEUR

A vision-driven individual who assumessignificant personal and financial risk to

start or expand a business

ENTREPRENEUR!"#P

The pursuit of opportunit$ throughinnovation% creativit$ and hard work

without regard for

the resources currentl$ controlled


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The Entrepreneurial /rocess•

't is opportunity/market opportunity/market driven• 't is driven by a lead entrepreneur lead en trepreneur

and an entrepreneurial teamen trepreneurial team• 't is resource parsimonious parsimonious and creativecreative• 't depends on the ft ft and balancebalance among

these• 't is integratedinte grated and holisticholistic


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The entrepreneur /ersus the o!nermanager 0similarities and di erences

Entrepreneura. Entrepreneurial function is the organization of production &

Entrepreneurship is an economic concept Economicsdescribes four factors of production, namely, land, labor,capital and entrepreneurial ability 0 organizationalskill).

b. Decision-making and calculated risk bearing:c. An entrepreneur has an all-round personality:

d. High le els of achie ement moti atione Inno/ati/e+ creati/e+ imaginati/e soulf. !he entrepreneur is the o"ner of the business

"ho en#oys the position of an employer.


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O!ner $anager They may or may not be entrepreneurs They own and manage a small enterprise, in a way,which "ts with their personal motivations

They are more intent on survival than seekinginnovative change and growth1 2imited scope for innovativeness, creativity andimagination3 Managerial +obs are transferable

-4s a manager in the business organi5ation,his +ob is transferable from o6ce to o6ce, from oneunit and location to another location7 Managers do not bear-risk -8isk bearing capacity is an entrepreneurial

uality


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Characteristics o Entrepreneurs1 eed or chie/ement , /ision2 )illingness to ta%e ris%s ,7nancial+ careers+ amil- +3 "el ,Con7dence , internal and e8ternal locus o

control9 Inno/ation , The entrepreneurial manger is constantly looking

for innovations, not by waiting for a .ash of inspirations, butthrough an organi5ed and continuous search for new ideas

5 Total Commitment

6 ll,rounders

9 need to see% re uge , escape rom en/ironmentalactor

a The :Foreign 'e ugee; & Corporate 'e ugee

c Other 'e ugees


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(ther types of # refugees% mentioned are the following&

$.!he parental %paternal) refugee:ho leaves a family business to show the parent that #' can do it

alone%

&.!he feminist refugee:ho e$periences discrimination and elects to start a "rm in

which she can operate independently male chauvinist

'.!he house"ife refugee:ho starts her own business after her family is grown or atsome other point when she can free herself from householdresponsibilities

(.!he educational refugee:ho tires of an academic program and decide to go intobusiness


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$oti/ation or starting a&usiness*


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$oti/ation or starting a &usiness

The reason for small "rm formation can be divided between

#pull % and # push % in.uencesI :Pull; In


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:Push; Independence

Many people are pushed into founding a newenterprise by variety of factors including&

$% edundancy


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(utcomes of EntrepreneurshipEconomic growth

@ew industry formation Aob creation

"uccess actors or entrepreneurs Most new ventures succeed because their founders are capable individuals

1 The entrepreneurial team 3 'ncremental growth of product or services 7 Marketing and timing& Market potential is critically

in.uenced bytiming of new products or

services


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Weakness o entrepreneurship

a imited resource &- entrepreneurship mostlystarts from small investment or contribution ofowners are more than one individual

b ack of e*perience &- most of entrepreneurs haveno e$perience and this may lead to in e6ciency

c .isag reement bet"een member & if the owner ofentrepreneur is more than one person,disagreement between them can be created Thisdisagreement can limit the operation of the

business d +ncertainty of income &- opening and running a

business provide no guarantee that anentrepreneur will earn enough money to survive


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e Risk &- starting or buying a new business involves riskand the higher rewards the greater the riskentrepreneurs usually face This is why entrepreneurstend to have evaluate risk very carefully

f Lo!er =ualit- o li e until the &usiness getsesta&lished &- the long hour and hard work needed tolaunch a business can take their tall in the rest of theentrepreneurs life

g Complete responsibility&- it is great to be the boss butmany entrepreneurs "nd they must make decision onissues about which they are not knowledgeable :henthere is no one to ask the pressure can build uickly thereali5ation that, the decisions they make are the causeof success or failure


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Elements in/ol/ed inEntrepreneur

1 8';B &- ;imply stated risk is # acondition in "hich there is a

possibility o an adverse deviationrom a desired outcome that is

e pected or hoped rom applied to a

business risk translates in to thepossibility of losses associated withthe assets and the earning potentialof the "rm *


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>usiness risks can be classi"ed in to twobroad category market risk and pure risk

Entrepreneurs face a number of di erenttypes of risk These can be grouped in tobasic areas

a Political ris% &-& #usiness ris% ,c Economic ris% &-d propert- ris% e Personal ris%


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2 In ormation

'nformation gives the following importance to thebusinessmen*s To know the position of their competitors that istheir strength and weaknesses, business strategy

they use and their long term plan To know threats and opportunity in doing business)elps to design long term ob+ectives and goalsindicate capital re uirement 0labor, capital and

machinery?)elps to know market position locally andinternationally


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,ources of information'nformation are obtained from two mainmethods of data collection That is primary datacollection and secondary data collection

1 Collection of primary data&(bservation method'nterview method

Through uestioner(ther methods which includes warranty

cards, consumer panels, etc


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3 Collection of secondary data&-;econdary

data are available inarious publication of the central state and

local governmentarious publications of foreign government

or international bodies and their subsidiaryorgani5ation

Technical and trade +ournals>ooks, maga5ines and newspapers8eports/ublic records and statistics, historicaldocuments


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>y way of caution, the entrepreneur before usingsecondary data must see that the processfollowing characteristics

1 8eliability of data a :ho collected the dataF b :hat were the sources of dataF

c :ere they collected by using proper methodsF d 4t what time they collected Etc

3 ;uitability of data&- the data that are suitable forone en uiry may not be suitable for anotheren uiry, then the researcher has to check thesuitability of the data properly

7 4de uacy of data


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>inds o Entrepreneurship

1 :omen Entrepreneurs

3 Gounders and other Entrepreneursa Gounding Entrepreneurs Goundersb Heneral mangers andc Granchisees

7 )igh-Hrowth and low-Hrowth Girms a Marginal Girms b 4ttractive ;mall Companies and c )igh potential ventures

ssignment One :hat is franchise I franchiseein businessF Jma$ 1pageK


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;tarting Technology basednew venture

Introduction The innovative capacity of an entrepreneur and moreaccurately, of companies operating in that "eld, is akey determinant of its capability to enhance the

economic development and to upgrade the standardof living of a country 't is widely accepted that oneof the indicators of this innovative capacity is therate of creation of @ew Technology->ased "rms

0@T>G? The nurturing of small "rm formation and growth hasbecome increasingly important to the health ofdeveloped economies in general, and to the creationof new innovative industrial sectors in particular


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Cont*d Technology incubators , which play a role inaccelerating the commerciali5ation of 8IDoutputs and the transfer of technology , havecontributed to startups of high technology-basedenterprises in the newly industriali5ingeconomies of developing and developedeconomies of the world;trengthening and promoting technology basedventures through incubation programmes for newtechnology based enterprises is necessary forthem to survive in a competitive society


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?o! to orm and de/elop Technolog- &ased

/entures*

Hovernment policies&Credit programmes with ;tate-subsidi5ed rates;hare programmes by Hovernment venture-capital companies Hrants by the Hovernment, especially for creating +obs and for research;ecurity programmes by the Hovernment for taking over part of the risk ofthe credit institutions for enterprises4dvisory services

(ther support activities for enterprises with both public and

private sector involvement, include& @ #usiness consulting ser/ices Assistance "ith

business development+ developing business plans+ ta advice+and so orth,


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Cont*dTechnical consulting ser/ices More speciali5edservices are provided such as networking assistancebetween enterprises and science and technology

organi5ations, technology transfer, the e$change ofsimilar e$periences and the identi"cation of potential forcooperationFinancing support acti/ities ( er optimal conditionsto enterprises, especially ;MEs, in terms of rent andcosts of spaces, infrastructure and services ( er alsoassistance with accessing and using "nancial sourcessuch as corporate "nancing, business angels, venturecapital, and so forth!Intellectual propert- assistance 4ssistance withdeveloping and patenting new and improved technology,including bringing it to the market for pro"t!International assistance 4ssistance with the globalnetworking of incubation and innovation centres forinformation e$change and technology transfer


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Factors contri&uting to the "uccess o ?ighTechnolog- &ased Enterprises

The main catalytic factors for the success of hightechnology-based enterprises are &national policies,research and development institutions technological entrepreneur development

innovative "nance support systems Iprotecting intellectual propertyscience and technology parks promoting and developing strategic businessalliances and networking standardi5ation, uality control and marketing


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Technolog- trans er or &usinessde/elopmentTechnolog- trans er is t he process by which

e$isting knowledge, facilities or capabilities are utili5edand marketed to ful"ll public and private needs 't is the process by which basic science research andfundamental discoveries are developed into practicaland commercially relevant applications and products

Technology transfer processes constitutes technologytrans er+ technology promotion+ technologydeployment+ technology innovation+ technologydevelopment+ technology research+ technologyassessment+ technology in ormation andcommunication+ technology investment+ technologycollaboration and technology commerciali-ation


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.ri/e or ac=uiring ne!technolog-

Cost Technology can cut costs in many ways& reducing material,labor or distribution costs E$ample& material costs can bereduced by replacing lower cost material or by reducing thematerial re uired to make a product"peed o deli/er- The key competitive priority may be thespeed of delivery, as measured by lead time re uired to deliver aproduct E$ample, 4utomated guidance vehicle04H ?, Electronic

Data 'nterchange0ED'?Aualit- Technologies help to improve the uality and reduce theproduction costs

Fle8i&ilit- and customiBation The global market place of 1LL sis characteri5ed by short product lifecycles, increased product veriety, and

e$tensive customi5ation To retain and increase market share in suchcompetitive environment, "rms have to be more .e$ible in their operations

N 'ncreased production volume N)igher living standards


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The Entrepreneurship /rocess


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Entrepreneurship and TechnologicalChange


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@ew 'ndustry Gormation Itechnology@ew industries are born when technological change

produces a new opportunity that an enterprisingentrepreneur sei5esDisruptive or metamorphic technologies that destroyprevious technologies and create new industries displaya di erent pattern of behavior

The pattern of growth, shakeout, stabili5ation, anddecline of industry can be interrupted at any time by theentry of another disruptive technology

8eading assignment@"teps in Technolog- Trans er@ Promotion and CommercialiBation o technolog-,&ased inno/ation'e erence Entrepreneurship for Engineers, )andout


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'n The >eginningOO The :orld was roundOO


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4nd @owOOO F

• Companies w orldwide are nding they m ust either convincingly justify theirprices o r differentiate themselves w ith some kind of perceived recognizable

value.


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!echnology is al"ays e ol ing andcompanies not #ust search companies

can/t be afraid to take ad antage ofchange.0-Eric ,chimdt


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!he use of technology as an integraland key element in the transformationof goods or ser ices.0 1 Randall ,tross


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De"nitionTechnopreneurship is the 8esult of uniting#Technology% with #Entrepreneurship%

This is not +ust the e ect of technology onbusinesses but rather the process whereprogression in the lives of the people happens't is the process of using the developmentsbrought about by speciali5ed knowledge to comeup with innovations in all the aspects of humanlife with the aid of a creative and skillful mind

>irth of this "eld provides every entrepreneur achallenge of e$ploring an untraveled pathtowards greater success


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Technopreneurship can bede"ned as

2ntegration of !echnology 2nno ation andEntrepreneurship

Act of turning something0 into a resourceof high alue by con erting good ideas intobusiness entures that relies hea ily on theapplication of human kno"ledge for

practical purposes.Entrepreneurship in the 4eld of technology.

5irms in "hich technology plays a criticalrole in their operations.6rocess of engineering the future of anindi idual an organization or a nation.


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De"nition ContinuesO Application of the ne"est in entionsand ad ancements in coming out "ithne" and inno ati e products throughthe process of dissemination.

7anufacturing of hi-tech products ormaking use of hi technology to deli er

product to consumers.E*hausti e use of and E*ploitation oftechnology in making pro4t.


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:ho )as >eenF;teve Aobs >ill Hates


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:ho has >eenO FMark Puckerberg ;ergey >rin and

2arry /age


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Bey 'deas


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Discovering Haps


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;eeking and Creating(pportunities

:hat do you ;eeF/roblem or aChallengeF

4lways Distinguish>etween 8isk andUncertainty

Uncertainty is anopportunity for'nnovation

(pportunities 4bound,;ee or Create them


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Bnowing and 2everaging your;trengths

4reas of E$perti5e:hat comes to you@aturally4reas you can2everage in a;ynergy;kills, Bnowledge,/roven 4bilities


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De"ning and 4ssembling Qour4udience

De"ne your Market;egment your4udience

4ssemble the4udience and Target the ;hare ofMind

Create Top ofMind 4wareness


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Developing a iable >usinessModel


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Moneti5ing your Creation

8evenueModels

;ubscription4dvertising(utright ;ales;ales and

;ervice


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arious /ossible GundingModels


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Ginal Thoughts


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2f you really "ant it you/ll 4nd a "ay 2fyou don/t you/ll 4nd an e*cuse8

- 9im Rohn

2f 2 had asked people "hat they"anted they "ould ha e said faster

horses.0-Henry 5ord


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Part t!o Choosing The LegalForm O an O!nership

3 1 Gorms of (wnership and legalre uirement

3 3 4dvantage and disadvantage foreach types of ownership

F ! hi d l l


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Forms o o!nership and legalre=uirements

Those forms have been modi"ed over thecourse of time to keep pace with businessneeds and the custom of society

(wnership of business is represented by theright of individual or a group of individuals toac uire legal title to property 0assets? for thepurpose of controlling them and to en.oy thegains o profts from such possession and use


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The most common forms currently in wideuse by small business are&

,ole proprietorship6artnership

orporations and

ooperati esEach form of ownership has a characteristicinternal structure, legal status, si5e and"eld to which it is best suited


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1? ;ole proprietorship't is an individual or single ownership

The sole proprietorship is a form of business organi5ationin which

o 4 n individual introduces his capital,o Use of his own skill and intelligence in the management

of its a airs ando 't is solely responsible for the results of its operation

This form is known also as indi idual or single proprietorship , sole o"nership or indi idualenterprise

E$ample& /hoto studio, bookshop, bakeries, small townrestaurants, retail stores, radio and watch repair shops,and other elementary forms of business where personalservice is important


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d/antages o "oleproprietorshipsa Ease and lo! cost o ormation and dissolution ,

there are no restrictions on either starting orterminating small business operations& .irect moti/ation and personal carec Freedom and promptness o action The sole proprietor can take his own decision and there is

none to uestion his authority the sole proprietor cantake prompt uick decisions especially when anemergency arises

d #usiness con7dentialit-

e "ingle Ta8 , The proprietorship does not pay ta$ as abusiness! the pro"ts from the business are thepersonal income of the owner and are declare on hisindividual income ta$ return

isad/antages o sole


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.isad/antages o soleproprietorship

a. imited resources and size:- the capacity and skill arevery limited 2ending institutions and suppliers may not bewilling to cooperate because it is neither safe nor dependablewhich results in making the business to remain limited in si5e

b imited 7anagerial ,kill:- in comple$ and di6cult conditionwhich re uires di erent e$pertise knowledge

c +nlimited liability:- The sole proprietor will be legally liablefor all debts of the business , a source of courage and realdevotion, limit his activities only in speci"ed areas

d +ncertain future;Death of the o"ner terminates thebusiness;

e Di


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2 Partnership@@

The association of t"o or more persons tocarry as co-o"ners of a business where therelationship is based on agreement iscalled partnership

This form of a business re uires the e$istenceof two or more persons entering into acontractual relationship

This contract, which is an agreement betweenthe parties, is known as a memorandum ofassociation or article of partners/ deed

>inds o Partners


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inds o Partners1 4 general partner

4ssumes unlimited liability and is usually active in managing the business

Most partners are general partners3 4 limited or special partner

4ssumes limited liability, risking only his her investment in thebusiness 2imited partners may not be active in management , andtheir names are not used in the name of the business

7 4 secret partner Takes an active role in managing a partnership but whose identities areunknown to the public i e the general public does not know of this person*spartnership status

9 4 silent partner 4s opposed to a secret partner, a silent partner, his identities andinvolvement, is known to the general public, but is inactive in managing thepartnership business


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R enior partners4ssume ma+or roles in management because of the

long tenure 0possession?, amount of investment in thepartnership, or age They normally receive large sharesof the partnership*s pro"ts

S 0unior partners

4re generally younger partners in tenure, have onlysmall investment in the "rm, and are not e$pected tomake ma+or decision They assume limited role in thepartnership*s management and receive a smaller shareof the partnership*s pro"ts

;ee othersO


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d/antages o partnership1 Ease of starting2 2ncreased source of capital 12/artnership can o er creditors less

risk than a sole proprietorship! it is often an attractive investment3 ombined managerial skill 4 De4nite legal status

Today*s partner can be assured that a competent lawyer can answervirtually any uestions he she might have about this form of

ownership i e lawyers can provide a sound legal advice aboutpartnership issues

S 3otivation o important employeeseduced risk


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.isad/antages o partnership1 %'nlimited liability

3 % isk o implied authority The fault and miss +udgment made by a singlepartner binds the "rm and the remaining partners

Thus, they are liable for the debts made by thepartner

7 5ack o harmony6 agrmnt or synchroni-atn9 5ack o continuity/instability/

'f any one of the general partners dies, withdrawsbecause of mentally or physically incapable 0in+ured?,the partnership ends

R Investment "ithdra"als di7culty ro-en2investment

3 C ti @@@


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3 Corporation@@@

4 corporation is an arti"cial person authori5ed and recogni5ed

by law, with distinctive name, a common seal, comprising oftransferable shares of "$ed values, carrying limited liability andhaving a perpetual or continued or uninterrupted succession

life

Characteristics o Corporation


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p1 ,eparate legal entity

't can sue or be sued't has the right to manage its own a airs;hareholders cannot be liable for the acts of the corporation

&. imited liability;ince the corporation has separate legal entity its debts are itsown The assets and liabilities, rights and obligations incidental tothe company*s activities are assets and liabilities, rights andobligations respectively of the company and not of its members

'.!ransferiablity of shares't is easy to transfer ownership in a corporation 4 stockholder maysell stock to another person and transfer the membership andmembership interest freely without consulting other stockholders

(.6erpitual e*istence


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( pDeath, insanity, retirement and withdrawal of shareholders will nota ect the company

=. ommon seal

4 corporation has a common seal with the name of the companyengraved on it, which is used as a substitute for its signature throughit acts through its agents

>.,eparation of o"nership from management ?.,uper ision

@. ritten onstitution(n the creation of a company, the promoters must "le certaindocuments with the 8egistrar of Companies These include the Articleof Association and the 7emorandum of AssociationB

d/antages o a


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d/antages o acorporation$% #inancial strength

8% 5imited liability 9% cope o e pansion

Corporations have greater potential than soleproprietorship or partnerships

:% 3anagerial e7ciency

Corporations en+oy the advantage of e6cientmanagement by hiring specialist*s skilled persons tobecome members of the board of directors to mange thecorporation

;% Ease in trans erring o"nership


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.isad/antages o a corporation$% Di7culty o ormation

't is time consuming and cumbersome notmanagable to establish corporations unlike theother forms of businesses

8% 5ack o o"ner=s/manager=s personal interest

These forms of organi5ations are managed bydirectors, hired o6cials, and employees who maynot be e$pected to have such an interest in thesuccess of the business as the individual owner orpartner would have in his own business

9% Delay in decision2making6 it needs o


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4 Corporati/es0@'t is an organi5ation owned by members customers

who pay an annual membership fee and share inany pro"ts 0if it is pro"t making organi5ation?'t has to adopt the following principles&

3embers have an e>ual vote in decisions

3embership is open to every one "ho ulfllsspecifed conditions 0e g @umber of hour worked ? Assets controlled and usually o"ned .ointly bymembers

roft shared e>ually bet"een members "ith limitedinterest payment on loans made by members !3embers beneft rom participation+ not investment

5 Other orms o &usiness


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5 Other orms o &usiness5ranchises

4 franchise is a business in which the owner of thename or method of doing business 0called thefranchisor? allows a local operator 0called thefranchisee? to set up a business under that name

7anagement buy-outs and buy-ins'n recent years the traditional separation ofshareholders and management has been eroded by thegrowing popularity of management buy-outs/ This iswhere a group of members pool their resources to buythe business they have been running, usually from aslarger, parent company 4 management buy-in iswhere a group of managers buys into an e$isting "rm,usually replacing those who have been running it


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Part Three "etting a #usiness

enterprise7 1 ;mall >usiness as >asiccomponents of Economy7 3 :hat is basic business idea7 7 ;teps in business setting7 9 Developing a >usiness /lan

h i ll b i F


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:hat is small businessF

There are two approaches to de"ne small>usiness They are&

1 >y some measure of si5e 3 using an economic control de"nitions

…what r msr of si5eF Owt r economic criteriaF


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1 "iBe CriteriaE$amples of criteria used to measure si5e are&

1 @umber of employees 3 ;alesvolume

7 4sset si5e 9 'nsuranceenforce

R olume of deposits

4lthough the "rst criteria located above,

employee, is the most widely used yardstick!the best criteria in any given case dependsupon the user*s purpose


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To provide a clear image of the small "rms, thefollowing general criteria for de"ning a small

business are suggested&

4? Ginancing of the business is supplied by oneindividual or a small group

b? E$cept for its marketing function, the "rm*soperations are geographically locali5ed

c? Compared to the biggest "rms in the industry issmalld? The number of employees in the business isusually fewer than 1

Economic Control Criteria


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Economic Control Criteria The economic control de"nition cover&

a $ar%et shar e&- The characteristics of a small "rm*sshare of the market is that it is not large enough toenable it to in.uence the prices of national uantities ofgoods sold to any signi"cant e$tent

& Independence - Means that the owner has control of thebusiness himself

c PersonaliBed management - 's the most characteristicsfactor of all 't implies that the owner activity participates

in all aspects of the managements of the business, and inall ma+or decisions-making processes There is nodelegation of authority

4ll three of these characteristics must be satis"ed if the

business is to rank as a small business


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)h- are small &usiness important


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to econom-*

They make e$ceptional contributions as theyprovide

a @ew +obs as populations and economy grow, smallbusiness provide new +ob opportunity

b 'ntroducing innovations-many scienti"cbreakthrough originated with small organi5ation/hotocopies, etc

c ;timulating Economic competitions


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8easons for the more rapid growth of small "rms in

most developed countries

1 @ew technologies, such as numerically controlledmachine tools, may permit e6cient production

on a smaller scale3 Hreater .e$ibility is re uired as a result of

increased global competitions7 Consumers may be coming to prefer personali5ed

products over mass produced goods

Causes or small &usiness ailure


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Incompetence - The owners simply do not know how to run the

enterpriseDn&alanced e8perience, do not have rounded e$perience inthe ma+or activities of business productionLac% o managerial e8perience Do not know how tomanage productionLac% o e8perience in the line, the owner has entered abusiness "eld in which he or she has very little knowledge

eglect, the owner does not pay su6cient attention to theenterprise

Fraud, involves intentional misrepresentations or deception0purchasing materials or goods for him her self with thecompany*s money?.isaster - refers to some unforeseen happening or act of Hod*0eg 8obberies and e$tended strikes ?


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"trength and !ea%ness o small


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trength and !ea%ness o small&usiness

"trength

1 IndependenceMost small business owners en+oy being their ownboss, they like the freedom to do things than way

3 Financial opportunitiesMany small business owners make more moneyrunning their own company than they would beworking for someone else

3 Communit- ser/icesif the person has reason to believe the public willpay for such output, he she will start a company toprovide it


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)ea%nesses


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)ea%nesses

1 "ales


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)hat is &asic &usiness idea't is logical to think of a goal for the unit in long

run rather than to look for the immediatetomorrow This long-term thinking is called basicbusiness idea

i b i h ld hi k f


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>usinessmen businesswomen should think oflong-term goal and the pro"t when they start abusiness

The basic business idea , which is at the top of thehierarchy, is to meet the broadest needs of thecustomers, and has the long life perhaps from R-

R years The basic business idea facilitates choice ofproduct under an overall plan

Thus, entrepreneur may think of being in theentertainment "lm, in automobiles, in medicines,in services, in industries, etc


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'n a dynamic business scheme, one has tocarefully watch is one of the basic idea

degenerating as regardsIts ability to generate >uick returns%Its ability to permit >uick changes in the

products%

)hat pro ect an entrepreneur


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) p pshould ha/e*

4 pro#ect is a comple$ of economic activities in which the

key players commit scarce limited resources in thee$pectation that the bene"ts gained will e$ceed theseresources

4lso, a pro+ect, broadly de"ned, in a way of using

resources& a decision between undertaking and notundertaking a pro+ect is a choice between attentive waysof using resources

The pro+ect should have to consider the ")OT andshould be designed accordingly

The ")OT approach compels individuals to think orreason out systematically and analytically the importantfactors strengths, weakness, opportunities, and threats


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To be a successful entrepreneur, one ma+ordeterminant factor is the choice o a goodbusiness idea To select the best business idea,the following steps needs to be pursued

a%Identi y your problemb%Defne your ob.ectivesc%Identi y+ develop and analy-e the possible

alternative

d% elect the best alternative in light o the specifccriteria set to the better ulfllment o theob.ective%

" i & i i


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"teps in &usiness setting1 The "rst key to success in any

manufacturing activity is to select the rightproduct These must be e$amined with aview to assess&

a%!he marketing aspects

b%!echnical aspectsc% #inancial aspects

3 ) i l t d d t d t il d


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3 )aving selected a product, a detailedpro+ect report to be prepared This will

cover the following aspectsa% A detailed estimate o demand is to be made%b%!echnical specifcations o the process should

be care ully studied%

c%!he e>uipment re>uired and their sources areto be specifed

d% e>uirement o space %e%!he total cost o the pro.ect to be "orked out+

the means or fnancing it identifed%!he economics o the entire scheme at pro.ected operating level is to be assessed%

7 'mplementation of the detailed pro+ect report 'ncludes&


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a%Deciding on orm o o"nership and registrationb%@btaining fnance +@btaining license

c%Establishing necessary in rastructures

9 (nce all the re uired authori5ations and sanctions havebeen obtained, simultaneous action is to be taken for thefollowing /re-commissioning re uirement

a%@rdering machinery rom suppliersb%@btaining utilities like po"er and "ater connections

a ter constructions o shed+ i necessary%c% ecruitment o sta +

d% Arranging supplies o materialse% Arranging or distribution o the products

( h l h l d f


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R (nce these are complete, the plant is ready forcommissioning trial run may be made

Commissioning of plant , 'ncludes&a%!rial run o machineriesb% romotional activity or the product c%Introduce the product to the market and obtain

eedback

S The unit is then ready for commercial productiona Commercial production

!his is all about the easibility study Bpre&a terimplementation


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.EGELOPI H #D"I E"" PL)? T I" #D"I E"" PL *

4 business plan is a comprehensive set ofguidelines for a new venture

4 business plan is also called a feasibility plan thatencompasses the full range of business planningactivities , but it seldom re uires the depth ofresearch or detail e$pected for an establishment

enterprise4 business plan would present your basic businessidea and all related operating, marketing, "nancialand managerial considerations


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:hat ever the name, it should lay out your

idea , describe where you are , point out whereyou want to go , and how you propose to gothere

The business plan may present a proposal forlaunching an entirely new business Morecommonly, perhaps! it may present a plan for ama+or e$planation of a "rm that has already

started operation

T?E PD'PO"E OF #D"I E""


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PL$%It can help the o"ner/manager crystalli-e and ocus

his/her idea

8% Although planning is a mental process+ it must gobeyond the realm o thought% !hinking about a

proposed business becomes more rigorous as roughideas must be crystalli-ed and >uantifed on paper%

9%It can help the o"ner/manager set ob.ectives andgive him a yardstick against "hich to monitor

per ormance:%It can also use as a vehicle to attract any e ternal

fnance needed by the business Eg To get fundO


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;%It can convince investors that theo"ner/manager has identifed high gro"thopportunities


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)?O P'O.DCE. T?E #D"I E"" PL *


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o $anagers &,O!ners &,Lenders

HC !HE +,2 E,, 6 A , ARE6RFD+ EDG

Assessing the easibility and viability o the business/pro.ect &it is in every ones interests to make mistakes on paper,hypothetically testing for feasibility, before trying the realthing

etting ob.ectives and budgets & having a clear "nancial visionwith believable budgets is a basic re uirement of everyone

involved in a plan

alculating ho" much money is needed & a detailed cash .owwith assumptions is vital ingredient to precisely uantifyearlier the likely funds re uired


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C(M/(@E@T; (G >U;'@E;; /24@ 0(UT 2'@E (G 4>U;'@E;; /24@?1 Identi7cation o the &usiness

a Introduction - relevant history and background

- /roposed date for commencement of trading beginning of a plan& ames-name of the business and trading name

- name of the managers ownersc Legal identit- -company partnership sole-trade cooperative

- details of share or capital structured Location

-address-registered and operational

- brief details of premisese Pro essional ad/isers+ -4ccountants, solicitors, bank

I nal-sis o the current situation 0"hereare "e no"G


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3 The nature o the &usiness a Product0s or ser/ice0s , Description andapplications

-Bey suppliers -/lanned developments of product or service & $ar%et and customers WDe"nition of target market, classi"cation of

customers - Trend in market place c Competition - description of competitors! strength

and weakness of the ma+or competitors

II FDTD'E .I'ECTIO 0!here do !e intendgoing*


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III I$PLE$E T TIO OF I$ 0ho! do !e getthere*

1 $anagement o resourcesa Operation , premises, materials, e uipment,

insurance, management information system& People )uman resource - employment practices,

recruitment, team management, training etc

2 $ar%eting plana Competiti/e edge - uni ue selling point of business

0Critical products or service characteristics oruni ueness in relation to competitors?

& $ar%eting o& ecti/es - speci"c aims for product orservice in the market place

c $ar%eting methods - product, pricing, promotion,distributions


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Part our $ar%eting in #usinessenterprises

9 1 The Marketing /erspective

9 3 Marketing Mi$-product, price, place,and promotion,

9 7 Marketing segmentation and marketresearch,

9 9 Gactors a ecting the >usinessEnvironment

T?E $ '>ETI HPE'"PECTIGE


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PE PECTIGE

.e7nition o $ar%et &Market is a group of potential customershaving needs to satisfy, ability to buy Iwillingness to pay in order to satisfy these

needs(8

4 social managerial process by whichindividuals I groups obtain what they need Iwant through creating I e$changing products Ivalue with others


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T?E $ '>ETI H $I


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4 marketing organi5ation has to concentrate on

four important aspects known as the 4PJs ofmarketing

The marketing manager has to combine these9 /*s 0 P'O.DCT , P'ICE , P'O$OTIO andPL CE ? in such a way that the combinationprovides satisfaction to the customer and pro"tto the manufacturer

:hen these elements 09 /*s? are combinedtogether they are called as # The $ar%eting$i8 %

1 The product mi8 Includes &roduct planning and development

3 Place mi80Ph-sicaldistri&ution mi8


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roduct planning and development Franding ackaging 5abeling

2 The price mi8 Includesrice polices

kimming pricing ( ricing abovethe market)

enetration pricing ( ricing belo"the market)remium pricing ( ricing "ith the

market)Discounts

Guantity discount easonaldiscount !rade discount ash discount

redits

distri&ution mi8X hannels o

distributionX !ransportationX Warehousing

4 Promotion mi8Includes

X AdvertisingX ersonal sellingX ales promotion

X ublicity

I T?E P'O.DCT $I


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6roduct & 's any commodity that satis"es the needs I wants ofcustomer

't is a bundle of tangible I intangible attributes, which satisfy theneeds, I wants of customers

'n today market, a product can beo 4 person 0soccer players?, (rgani5ation 0privati5ed

"rms?,o /laces 0leased land?, (b+ects 0items?,o 'dea 0business plans or pro+ect proposal?,o ;ervices 0medication or barber?, or mi$es of these elements

;o, a product can be de"ned as anything, which comprises ofbene"ts in forms of physical, service, and symbolic attributes toma$imi5e buyers* want satisfaction

$.6roduct planning and de elopment


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$ p g p

/roduct planning includes three ma+or types ofdecisions&

Development and introduction o ne" products

3odifcations o e isting products in keeping"ith the changing tastes and pre erences othe target customers andElimination o unproftable or obsolete

products

&. randing# d & th t f b d hi h i t f d


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• #rand name & the part of a brand, which consists of word,letters and or numbers, which can be vocali5ed Eg (M(,Coke

#rand mar% the part of a brand that can be recogni5ed butis not utter able 't can appear in the form of symbol, design,distinctive coloring or lettering

Trademar% a brand or part of a brand that has been givenlegal protection so that the owner has e$clusive rights to itsuse 4fter companies identify their trademark, they entail aterm #Y% or #Z%

!rade ame: Trade name is the name of the businessorgani5ation 4 trade name may also be used as a brandname 'n such a case it performs a dual function 't givesidenti"cation to the product as well as the manufacturer

2mportance of a brand

!he brand makes it easier or the seller to process orders and trackd bl


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do"n problems%

!he seller=s brand name and trademark provide legal protection o

uni>ue product eatures%

Franding gives the seller the opportunity to attract a loyal proftable seto customers and helps to increase the control and share o the market%

Franding helps the seller to segment markets and e pand the productmi %

Hood brand help to build the corporate image because it advertises the>uality and si-e o the company%

Frands make it easy or customers to identi y products or services%

ReIuirements of a good brand


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Fe easy to pronounce+ recogni-e and remember

Fe distinctive%

uggest something about the product=s benefts orcharacteristics

uggest about the product >ualities such as action oruse%

Fe large enough to be applicable to ne" productsthat may be added to the product line%

ave a possibility o registration and legal protection%

'.6ackagingk k d h


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/ackaging is a marketing process concerned withthe design and production of the container orwrapper for a product

The container or wrapper or covering is called thepackage

2mportance of packaging$% ackaging serves several sa ety and utilitarian

purposes8% ackaging may implement a company=s

marketing program9%Well2packaged products may increase proft

possibilities in that it stimulates customers to paymore .ust to get the special package

(. abeling


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1 #rand la&el simply the brand alone applied tothe product or to the package2 Hrade la&el a label, which identi"es the

uality with, a letter, number or word

3 .escripti/e la&el it gives ob+ectiveinformation about the use, construction, care,performance or other features of the product;ometimes it is called informati e label

Eg medicines

22. !HE 6R2 E 72J


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)? T I" P'ICE*

's the amount of money consumers have to payto obtain the product

/rice has operated as the ma+or determinant of

user choice traditionally

4lthough non-price factors have become moreimportant in recent decades price still remains

one of the most important element determiningmarket share and pro"tability

Di erent companies set the price hapha5ardlyas based on cost

7E!HFD, F5 6R2 2 K


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1 Cost plus pricing $ar% Dp pricing

2 "%imming pricing The following conditions should be satis"ed$% A su7cient number o buyers have a high

current demand%8%!he high initial prices do not attract more

competition to the market%9%!he high price communicates the image o a

superior product%3 Penetration pricing &elo! mar%et price9 Premium pricing !ith mar%et


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The ma+or ob+ectives of pricing are&

4chievement of target returnMa$imi5ation of pro"t'ncrease of sales volumeMaintenance or increase of market share

;tabili5ation of prices IMeeting competition


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Direct channel

1 .oor,to,door selling


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, , g2 $anu acturersJ sales &ranches3 .irect mail

2ndirect channel

1 $erchant $iddlemen ,• :hole seller&- Eg /etram /2C and East 4frica Trading are

wholesalers of consumer products• 8etailer&- Eg )adiya supermarket, and several Biosks are

found closer to sell the items to residential houses2 gent $iddlemen

Commission agent, >rokers, ;elling agents,Eg -;ony Hlorious, is an agent to ;ony Electronics products,

-E uatorial business is agent to ;amsung


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2L. 6RF7F!2F 72J

k k


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's sometimes known as marketingcommunication

Means activities that communicate themerits of the product I persuade targetcustomers to buy it

/romotional ob+ectives&In orming the product Increasing sales

tabili-ing sales / proft ositioning the product

The promotional mi$ consists of four ma+or


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The promotional mi$ consists of four ma+ortools

Advertising1 such as informative 4d, /ersuasive4d and 8eminder 4d

ersonal selling W (ral presentation inconversation with one more consumers for thepurpose of making sale

ales promotion W 'ncludes& gifts, games,sampling, coupons, and window displays

ublicity W 4ny information about theorgani5ation, its personnel or its products thatappears in any medium on a non - paid basis

$ '>ET "EH$E T TIO

Market segment is a group of individuals or organi5ations withina market that share one or more common characteristics


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a market that share one or more common characteristics

The process of dividing a market in to segments is called marketsegmentation

#ases or mar%et segmentation$.Keographic segmentation:- egion 'rban+ uburban+ ural+

3arket density+ limate+ !errain (land+ topography)+ ity si-e+ ountry

si-e+ tate si-e2 Demographic segmentation:- Age+ Hender+ ace+ Ethnicity+

Income+ Education+ @ccupation+ #amily si-e+ #amily li e cycle+eligion+ ocial class

'.6sycho graphic segmentation:- ersonality+ Attributes+ 3otives+5i estyles

(. eha ioral segmentation:- Jolume usage+ End use+ Feneft+E pectations+ Frand loyalty+ rice sensitivity


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Part 7/e Financing andaccounting in &usiness

R 1 Ginancial re uirementR 3 ;ources of "nance,R 7 control of "nancial resourceR 9 "nancial analysis and accounting

(reading ass%%)

.EGELOPI H FI CI L PL


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/ro+ect implementation re uires bringingtogether the inputs of land, labor,machinery, sta etc

Ginance is re uired to assemble theseinputs

/roper "nancing of business is essential for

success in both small and large enterprises

Financial planning is the process of formulatingpolicies and strategies relating to the procurement,investment and administration of funds for an enterprise


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investment and administration of funds for an enterprise

:hile formulating a "nancial plan, the entrepreneur hasto answer the following uestions&

)ow much money is neededF:here the money comes fromF:hen should the money be availableF

These three uestions are concerned respectively withthe estimation of "nancial needs , sources of "nance , andthe time of raising funds

…Discuss about source o fnance and ho" get romthem?


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Internal sources 0 EIuity capital


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(wners capital or owners e uity represent thepersonal investment of the owner or owners ina business, and it is sometimes called riskcapital because these investors assume theprimary risk of losing their funds if the business

fails't re uires no repayment in the form of debtand much safer for new ventures than debt"nancing

't also re uires sharing the ownership andpro"ts with the funding sources

"ource o e=uit- capital


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1 Personal sa/ings

• The "rst place entrepreneurs should take for startup money is in their own pockets or on theirpool of personal savings

• 't is the least e$pensive source of funds available

• 4s a general rules, entrepreneurs should e$pect toprovide at least half of the start up funds in theform of e uity capital

• 'f the entrepreneur is not willing to risk his ownmoney potential investors re not likely to risk theirmoney in the business either

2 F i d d l ti/ &


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2 Friends and relati/es &

• >ecause of their relationships with the founder,these people are most likely to invest >ut havingthem invest can lead to controversy if theirparticipation is not clear to everyone

• To avoid such problems, and entrepreneur musthonestly present the investment opportunity andthe nature of risks involved to avoid alienating

friends and family members if the business fails


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4 Partners &

• :henever an entrepreneur gives up e uity inhis her business 0through what evermechanisms?, he she runs the risk of losing

control over it

• 4s the founder*s ownership is a companybecomes increasingly diluted, the probability of

losing control of its future directional and theentire decision making process increases

5 Genture capital companies


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• venture capital companies are private, for pro"t organi5ationsthat purchases e uity positions in young businesses theybelieve have high growth and high pro"t potential

• They provide start up 0seed money? capital to new ventures,

• Development funds to businesses in their early growth stage,and

• E$pansion funds to rapidly growing ventures that have thepotential to go public or that need capital for ac uisitions

• Two factors make a deal attractive to venture capitalists&high returns and a convenient 0and pro"table? e$it strategy


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6 Pu&lic stoc% sale 0going pu&lic

• This is an e ective method of raising largeamounts of capital, but it can be an

e$pensive and time-consuming process "lled with regulatory nightmares

# E8ternal source 0 Debt capital


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• >orrowed capital or debt capital is the e$ternal

"nancing that a small business owner has borrowedand must repay with interest • ;mall enterprises have few choices than large "rm

for obtaining debt "nancing

• 4lthough borrowed capital allows entrepreneurs tomaintain complete ownership of their business, itmust be carried as a liability on the balance sheet aswell as be repaid with interest at some point in thefuture or with in the time stipulated in the contract


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unsecured and secured loans


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4n unsecured loan is a loan in which collateralis not re uested

That is the loan is granted against personalguarantee or corporate customers of the bank

Unsecured loans will have high interestcharges but this may not be necessarilyapplicable by all banks

To secure a bank loan, an entrepreneur typicallywill have to answer a number of uestion,


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,together with descriptive commentaries

)hat do -ou plan to do !ith the mone-0credit acilit- *?o! much do -ou need*)hen do the- need it*?o! long !ill -ou need it*?o! !ill -ou repa- the loan*


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3 Trade credit


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• 't is credit given by suppliers who sell goods onaccount

• This credit is re.ected on the entrepreneur*sbalance sheet as account payable and in mostcases it must be paid in 7 to L or more daysinterest free because of its ready availability

• Hetting suppliers to e$tend credit in the form ofdelayed payments usually is much easier for asmall business than obtaining bank "nancing

7 E=uipment suppliers


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• Most e uipment vendors encourage businessowners to purchase their e uipment byo ering to "nance the purchase

• 'n some cases, the vendors will repurchasee uipment for salvage value at he end of itsuseful life and o er the business owneranother credit agreement on new e uipment


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R ccounts recei/a&le 7nancing

• ;hort term "nancing that involves eitherthe pledge of receivables as collateral for a

loan or the sale of receivables 0factoring?

• 4ccount receivable bank loans are made ona discounted value of the receivables

pledged


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S Credit Dnions & Insurance Companies &

[ #onds L Treasur- &ill

)ow to prepare "nancial statement naccounting O readI time c sm pts abt accounting6%


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Part si8 , 'is% and insurance o #usiness

enterprises S 1 De"nition of 8isk,

S 3 The process of 8iskmanagement,

S 7 Classifying risks by Type of4sset,

S 9 'nsurance of the ;mall>usiness

.EFI ITIO OF 'I">

'is% e8ists !hene/er the uture is


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is% e8ists !hene/er the uture isun%no!n >ecause the adverse e ects of riskhave plagued mankind since the beginning oftime, individuals, groups and societies havedeveloped various methods for managing risk"ince no one %no!s the uture e8actl-+

e/er-one is a ris% manager or himsel ' e ,not by choice but by sheer necessity

o E$ample& 'n buying a tire, we may have achoice There is no sheer necessity

The term risk used in di erent ways Thef ll i d " iti i b di t h l


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following de"nitions given by di erent scholars

and practitioners in the "eld&isk is the channel o lossisk is the possibility o lossisk is uncertainlyisk is the dispersion o actual rom e pected

resultisk is the probability o any outcome di erentrom the one e pected

Henerally, it has bad/negative connotation

#usiness ris%s can &e classi7ed into t!o &road

categories &


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categories &

1 $ar%et ris% is the uncertainty associated with aninvestment decision 4n entrepreneur who invests ina new business hopes for a gain but reali5es that theeventual outcome may be a loss

2 Pure ris% is used to describe a situation where only

loss or no loss can occur-there is no potential gain4 pure risk e$ists when there is a chance of loss but

no chance of gain pro"t E$ample& (wner of anautomobile faces the risk of a collusion loss 'fcollusion occurs, he will su er a "nancial loss 'f thereis no collusion, the owner will not gain

'I"> $ HE$E T

$


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The comple$ity of the business environment calls for

or demand for a special attention to a risk& The special task to'dentify4naly5eCombat and the operating risks are referred to as ris%management …below

;ome of the factors, which increase the comple$ity ofenvironment, are&

'n.ationHrowth of internal operationMore comple$ technology'ncreasing government regulation

)hat is ris% management* 8isk


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)hat is ris% management 8iskmanagement is a systematic way of protectingbusiness resources and income against lossesso that the organi5ation*s aims are reachedwithout interruption, creating stability andcontributing to pro"t


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&.!o estimate the freIuency and size ofloss i e , to estimate the probability of lossf i ' i l ll d i k


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from various sources 't is also called as risk

measurement 8isk measurement means

i Determination of the chance of an occurrenceor relative fre uency

ii Determination of the impact of losses upon"nancial a airs

iii The ability to predict the losses that willactually occur during the budget year

'.!o decide the best and most economicalh d f h dli h i k if l


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method of handling the risk if loss.

i%e% election o the proper tool orhandling risk

(. 2mplementing the decision=.Re aluating the decision

Tools o 'is% $anagement

1 /oidance


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(ne way to handle a particular pure risk is to avoidthe property, person or activity with which the risk isassociated

Two approaches of risk avoidance&

i. Refusing e g Gor instance, a "rm can avoid a .ood loss by not

building a plant in a place where .ood is fre uentlya ecting 'n case of refusing, we are discontinuingthe activity

ii Abandonment e g 4 "rm that produces a highly to$ic product may

stop manufacturing that product

2 'etention>earing all the risk by that person organi5ation


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Types of retention

i Planned conscious acti/e ris% retention't is characteri5ed by the recognition that the riske$ists, and tacit agreement to assume the lossesinvolved The decision to retain a risk actively is madebecause there are no alternatives more attractive;elf-insurance is a special case of active retention;elf-insurance is not insurance, because there is no

transfer of the risk to an outsidero E g 4 "rm may keep some money to retain the

risk

ii Dnplanned Dnconscious Passi/e' t ti


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'etention

/assive risk retention takes place when theindividual e$posed to the risk does notrecogni5e its e$istence

'n this case, the person so e$posed retains the"nancial conse uence of the possible losswithout reali5ing that he does so


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4 "eparation .i/ersi7cation

;eparation of the "rm*s e$posures to loss instead ofi h l i h h


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concentrating them at one location where they

might all be involved in the same loss;eparation


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t is also called as shi ting method

:hen a business organi5ation cannot a ord tocover the loss by itself, it may look for transferinstitutions'nsurance is a means of shifting or transferringrisk

CL ""IFKI H 'I"> #K TKPE OF ""ET

1 Propert- ris%s/ i d i k i l ibl d hi hl


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/roperty-oriented risks involve tangible and highly

visible assets Many property-oriented risks areinsurable! they include&

#ire + Katural disasters+ Furglary+ Fusinesss"indles (or fraudulent transactions ) and+

hopli ting%2 Personnel ris%s

/ersonnel-oriented losses occur through the actionsof employees The three primary types of /ersonnel-

oriented risks are&Employee dishonesty+ ompetition rom ormeremployees+ 5oss o key e ecutives

3 Customer ris%s Customers are the source of pro"t for small business, butthey are also the source of an ever-increasing amount ofb i i k h f h i k & @ 2 i i i


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business risk Much of these risks are& @n2premises in.uries

and roduct liability @n2premises in.uries &

Customers may initiate legal claims as a result of on-premises in+uries:hen a customer breaks an arm by slipping on icy stepswhile entering or leaving a store!'nade uate security, which may result in robbery, assault, orother violent crimes! Customers who are victims often look tothe business to recover their losses

roduct liability14 product liability suit may be "led when a customerbecomes ill or sustains physical or property damage fromusing a product made or sold by a "rm

I "D' CE FO' T?E "$ LL #D"I E""

1 #asic principles or a sound insurance program>asic principles in evaluating an insurance program include&


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p p g p gIdenti ying insurable business risks5imiting coverage to ma.or potential losses and

elating premium costs to probability o loss

2 'e=uierments or o&taining insurance

$% !here must be a su7ciently large number o homogenouse posure units to make the losses reasonably predictable%

o 'nsurance is based on the operation of the law of largenumbers

o There must be a large number of e$posures and thosee$posures must be homogenous

o Unless we are able to calculate the probability of loss, wecannot have a "nancially sound program

8% !he loss produced by the risk must be defnite andmeasurable

The loss must have "nancial measurement or "nanciali li ti


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implication

The risk must be calculatedE8ample Gor instance a person may purchase disabilityinsurance )ow do we know that the person is unable todoF Thus, the risk must be de"nite and measurable

9% !he loss must be ortuitous or accidental%i e the loss must be the result of a contingency, i e , itmust be something that may or may not happen 't mustnot be something that is certain to happen

:ear and tear or depreciation, which is a certainty,should not be insured @o protection is given byinsurance:e should not be certain as to the occurrence of a loss

:% !he loss must not be catastrophic

4ll or most of the ob+ects in the group should notl h i b h i


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su er loss at the same time because the insurance

principle is based on a notion of sharing lossesE8ample Damage which results from war, .ood,windstorm and so on would be catastrophic innature and hence do not have insurance

;% !he loss must be large loss%

The risk to be insured against must be capable ofproducing a large loss, which the insured could not paywithout economic distress

'ncase the loss occurs, it must be severe that must betransferred to the insurer Those recurring and minortypes of losses are not transferred to the insurancecompany


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because the cost of transfer tends to be e$cessive

To be insurable, the chance of loss must be small The more probable the loss, the more certain it is tooccur

The more certain it is, the greater the premium willbe >ut to make insurance attractive, the premiumhas to be for less than the face of the policy Gorinstance, a life insurance company to issue a birr1 policy on a man aged LL The net premiumwould be about birr L[


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The end

8isk management is the identi"cation, measurementand treatment of liability, property and personal pureris%s that the business organi5ation is facing


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't is the science that deals with the techni ues offorecasting future losses so as to plan, organi5e, directand control the adverse e ect of risk

i e , 8isk management is de"ned on the base ofmanagerial functions

't is the reduction and prevention of the unfavorablee ects of risk at minimum cost through its identi"cation,measurement and control

't is a discipline a profession that systematicallyidenti"es and analy5es the various loss e$posures facedby a "rm or an organi5ation and employees and thebest method of treating the loss e$posures consistencewith the goals an ob+ective of the organi5ation

5 Com&ination

8isks are pooled when the number ofindependent e$posure units under observation is


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independent e$posure units under observation is

increasedUnlike separation, which spreads a speci"ednumber of e$posure units, combination increasesthe number of e$posure units under the control of

the "rm'n the case of "rms, combination results in thepooling of resources of two or more "rms Thenew "rm has more building, more automobiles,

and more employees than either of the originalcompanies This leads to "nancial strength,thereby minimi5ing the adverse e ect of thepotential loss


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#D"I E"" T' " CTIO . CCOD TIH EAD TIO


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4 business transaction is the occurrence of anevent or of a condition that must be recorded

The payment of a monthly telephone bill, The purchase of merchandise on credit and The ac uisition of land and a building aree$amples of business transactions

4 particular business transaction may lead to an eventor a condition that result in another transaction

Gor e$ample, the purchase of merchandise oncredit will be followed by payment to thecreditor, which is another transaction


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E$pansion of the e uation to give recognition to thetwo basic types of e uities yields the following, which


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is known as the accounting e=uation &

o ssets e=uitieso ssets creditorJs e=uities M o!nerJs e=uit-o ssets lia&ilities Mcapital

't is customary to place #liabilities# before #owner*se uity% in the accounting e uation because creditorshave preferential rights to the assets

ssets & any physical thing 0tangible? or right 0intangible?that has a monetary value is an asset 4ssets are

ssets


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ycustomarily divided into two&

urrent assets & are cash and other assets that mayreasonably be e$pected to be reali5ed incase or sold orused up usually within one year or less, through thenormal operations of the business

E$ample& cash, accounts receivable, notes receivable, supplies, prepaid e$penses, stock 0inventory?, etc

6lant assets & are tangible assets used in the businesses

that are of a permanent or relatively "$ed nature 't isalso known as 4*ed assets

E$ample& e uipment, machinery, building, vehicles and land

Lia&ilities &

Lia&ilities & are debts owned to outsiders 0creditors?


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2iabilities are fre uently described on the balance sheetby titles that include the word # 6ayable %

1 urrent liabilities & are liabilities that will be due within ashort time 0usually one year or less? and that are to bepaid out of current assets

E$ample& notes payable, accounts payable, salariespayable, interest payable, ta$es payable

3 ong-term liabilities & are liabilities that will be due for acomparatively long time 0usually more than one year? it is

also known as 4*ed liabilities 4s they come within the one-year range and are to be

paid, such liabilities become currentE$ample& Mortgage payable


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.i/idends represents the distribution ofearnings to stockholders


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'e/enue is the amount charged to customersfor goods or services sold to them 't is an increasein capital that resulted from the normal operationof the business E$ample& /rofessional fees,commissions revenue, fares earned, interestincome, etc

E8pense & costs that have been consumed in theprocess of producing revenue are e$pired costs or

e$penses 't resulted in a decrease in capitalE$ample& :ages e$pense, rent e$pense, suppliese$pense, utilities e$pense, etc

Preparation o 7nancialstatements

Financial statements & 4fter the e ect of the individualtransactions has been determined the essential information is


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statementstransactions has been determined, the essential information iscommunicated to users The account statements thatcommunicate this information are called "nancial statements

The principal "nancial statements are the income statementsthe statement of owner*s e uity, the balance sheet and thestatement of cash .ow

The "nancial statements prepared for sole proprietorship,partnership and corporation are almost the same

The ma+or di erence is in the capital section of the balancesheet

The capital section of these enterprises indicates the name ofthe owner, the name of the partners and the capital stock0common stock? and or the preferred stock in their respectiveorder

Income statement & a summary of the revenue andthe e$penses of a business entity for a speci"c periodof time, such as a month or a year

#C trading


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#C trading

Income statementFor month ended .ecem&er 31+ 2NN4

"ales 1 ,Operating e8penses &

:ages e$pense 7, 8ent e$pense 3, ;uppliers e$pense 3, Utilities e$pense R

Miscellaneous e$pense 3RTotal operating e8pense 0[, ?et income 3,


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#alance sheet & is a list of the assets, liabilities and owner*se uity of a business entity as of a speci"c date, usually atthe close of the last day of a month or year

#C trading


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#alance sheet.ecem&er 31+ 2NN4

ssets Cash

1 ,

;upplies 1, 2and [,

Total asset1L,

Lia&ilities 4ccounts payable 3,R O!nerJs e=uit- Mr \, capital 1S, Total lia&ilities and capital 1L,

"tatement o cash


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payments of a business entity for a speci cperiod of time, such as a month or a year

't is customary to report cash .ows 0cashreceipts and cash payments? in three sections&

1 Fperating acti ities 3 2n esting acti ities , and

7 5inancing acti ities

#C trading"tatement o cash


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2ess cash payments for e$pense and payments to creditors 0 ,7 ? @et cash .ow from operating activities 3,

Cash


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3 Cash receipts /roduct manufacturing will not be completed

until Gebruary, so there will be no sales )owever, serviceincome of ]9, is pro+ected7 'nterest on the ]3 , will amount to about ]1 at current

rate9 There are no long-term assets to sell Enter a 5ero

R 4dding 1, 3, 7, and 9 the Total Cash 4vailable will be ]39,1S Cash payments /roduct will be available from manufacturer in

Gebruary and payment will not be due until pickup )owever,there will be prototype costs of ]R, ariable 0selling? e$penses Estimated at ]1,19

[ Gi$ed 0administrative? e$penses Estimated at ]1,31RL 'nterest e$pense @o outstanding debts or loans Enter 5ero1 Ta$es @o pro"t previous uarter @o estimated ta$es would

be due

11 /ayments on long-term assets 4>C plans to purchase o6cee uipment to be paid in full at the time of purchase ]1,17L


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13 2oan repayments @o loans have been received Enter 5ero17 (wner draws (wner will need ]3, for living e$penses19 Total cash paid out 4dd S through 17 Total ]1 ,9L91R Cash balance ;ubtract Cash /aid (ut from Total Cash

4vailable 0]17,S S?

1S 2oans to be received >eing aware of the ]7 , to be paidto the manufacturer in Gebruary, a loan of ]9 , isanticipated to increase Cash 4vailable 0This re uires advanceplanning ?

1 E uity deposit (wner plans to add ]R, from personal CD

1[ Ending cash balance 4dding 1R, 1S, and 1 , the result is]R[,S S

Fe&ruar- Pro ections

1 Gebruary >eginning Cash >alance AanuaryEnding Cash >alance 0]R[ S S?


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Ending Cash >alance 0]R[,S S?3 Cash receipts ;till no sales, but service income

is ]3,7 'nterest income /ro+ected at about ]139 ;ale of long-term assets @one Enter 5eroR Total cash available 4dd 1, 3, 7, and 9 The

result is ]S , 3SS Cash payments ]7 , due to manufacturer,

]9 due on packaging design Continue as in Aanuary Don*t forget to include

payments on your loan


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Comm

enterprenuership for for Engineers (1).ppt

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