Entrepreneureship

Pankaj Sharma MBA- IV BIMT

Concept
Entrepreneur: Individual who takes risks and starts something new. Entrepreneurship : Process of creating something new and assuming the risks and rewards,

Function of entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological method of producing a new commodity or producing an old one in a new way, opening a new source of supply of materials or a new outlet for products, by organizing a new industry.

KNOWLEDGE AND SKILLS REQUIREMENT

1. 2. 3. 4. 5. Knowledge of Academic Technical Knowledge of Financial Management Knowledge of Operation Management Knowledge of Law Knowledge of Finance

CHARACTERISTICS OF SUCCESSFUL ENTREPRENEURS

1. 2. 3. 4. 5. 6. 7. A Need to Control and Direct Self-confidence Sense of Urgency Comprehensive Awareness Realistic Outlook Conceptual Ability Low Need for Status

8. Objective Approach 9. Emotional Stability 10. Attraction to Challenge 11. Describing with Numbers

ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

Product- Evolution Process- Process for developing and commercializing an innovation. Iterative Synthesis: The intersection of knowledge and social need that starts the product development process Ordinary Innovations: New products with little technological change Technological Innovations: New product with significant technological advantage.

Breakthrough Innovation: New products with some technological change Government as an innovator: A government active in commercializing technology Technology Transfer: Commercializing the technology in the laboratories into new products

THE ENTREPRENEURIAL PROCESS

It can be defined as a process through which a new venture is created by an entrepreneur. This more than just problem solving in a typical management position. This has four phase: 1. Identify and evaluate the opportunity 2. Development of the business plan 3. Determination of the required resources Management of the resulting enterprise

1. Identify and evaluate the opportunity The process by which an entrepreneur comes up with the opportunity for a new venture 2. Develop a business plan The description of the future direction of the business 3. Determine the resources required This process starts with an appraisal of the entrepreneurs present resources 4. Manage the enterprise After resources are required, the entrepreneur must use them to implement the business plan.

FACTORS IMPACTING EMERGENCE OF ENTREPRENEURSHIP

There are several factors which cause individual to grow as entrepreneur. 1. Childhood family environment 2. Education 3. Personal Values 4. Age 5. Work History 6. Motivation 7. Moral Support network 8. Professional support network

Managerial Versus Entrepreneurial Decision Making

The difference between the entrepreneurial and the managerial styles can be viewed from five key business dimensions strategic orientation, commitment to opportunity, commitment of resources, control of resources, and management structure.

1. Strategic orientation: The entrepreneurs strategic orientation depends on his or her perception of the opportunity. 2. Commitment to opportunity: It vary greatly with respect of the length of this commitment. 3. Commitment of resources: An entrepreneur is used to having resources committed at periodic intervals, that are often based on certain tasks or objectives being reached.

4. Control of resources: Control of the resources follows a similar pattern. Since the administrator is rewarded by effective resources administration. 5. Management structure: The final business dimension, management structure, also differs significantly between the two domain.

GENERATING BUSINESS IDEA SOURCES OF NEW IDEAS

Sources of new ideas: 1. Consumer 2. Existing products and services 3. Distribution Channels 4. Federal Government 5. Research and Development

Methods of Generating Ideas

1. Focus Groups 2. Brain storming 3. Problem Inventory analysis

Creative Problem Solving

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Brain Storming Reverse Brain Storming Brain Writing Godrdon Method Checklist Method Free Association Forced Relationships Collective Notebook Method Attribute Listing Big-Dream Approach Parameter Analysis

OPPORTUNITY RECOGNITION
The key to recognizing an opportunity lies in the knowledge and experience of the individual entrepreneur and where appropriate the entrepreneurial business. This prior knowledge is a result of a combination of education and experience and the relevant experience could be work related or could result from a variety of personal experiences or events.

Product Planning and Development Process

1.Idea Stage 1.1 Idea 1.2 Evaluate 2. Concept Stage 2.1 Laboratory Development 2.2 Evaluate 3. Product Development Stage 3.1 Pilot production run 3.2 Evaluate 4. Test Marketing 4.1 Semi commercial plan trails 4.2 Evaluate 5. Commercialization stage product life cycle 5.1 Introduction 5.2 Growth 5.3 Maturity 5.4 Decline

SOURCES OF FINANCE
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists. In an accounting context, Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock. At the start of a business, owners put some funding into the business to finance operations. This creates a liability on the business in the shape of capital as the business is a separate entity from its owners. Businesses can be considered, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for the positive remainder is deemed the owner's interest in the business.

COMMERCIAL BANKS Borrowings from banks are an important source of finance to companies. Bank lending is still mainly short term, although medium-term lending is quite common these days. Short term lending may be in the form of: a) an overdraft, which a company should keep within a limit set by the bank. Interest is charged (at a variable rate) on the amount by which the company is overdrawn from day to day;b) a short-term loan, for up to three years. Medium-term loans are loans for a period of from three to ten years. The rate of interest charged on medium-term bank lending to large companies will be a set margin, with the size of the margin depending on the credit standing and riskiness of the borrower. A loan may have a fixed rate of interest or a variable interest rate, so that the rate of interest charged will be adjusted every three, six, nine or twelve months in line with recent movements in the Base Lending Rate.

Lending to smaller companies will be at a margin above the bank's base rate and at either a variable or fixed rate of interest. Lending on overdraft is always at a variable rate. A loan at a variable rate of interest is sometimes referred to as a floating rate loan. Longerterm bank loans will sometimes be available, usually for the purchase of property, where the loan takes the form of a mortgage. When a banker is asked by a business customer for a loan or overdraft facility, he will consider several factors, known commonly by the mnemonic PARTS. - Purpose - Amount - Repayment - Term - Security P-The purpose of the loan A loan request will be refused if the purpose of the loan is not acceptable to the bank. A-The amount of the loan. The customer must state exactly how much he wants to borrow. The banker must verify, as far as he is able to do so, that the amount required to make the proposed investment has been estimated correctly. R-How will the loan be repaid? Will the customer be able to obtain sufficient income to make the necessary repayments? T-What would be the duration of the loan? Traditionally, banks have offered short-term loans and overdrafts, although medium-term loans are now quite common. S-Does the loan require security? If so, is the proposed security adequate?

Venture capital Venture capital is money put into an enterprise which may all be lost if the enterprise fails. A businessman starting up a new business will invest venture capital of his own, but he will probably need extra funding from a source other than his own pocket. However, the term 'venture capital' is more specifically associated with putting money, usually in return for an equity stake, into a new business, a management buy-out or a major expansion scheme. The institution that puts in the money recognises the gamble inherent in the funding. There is a serious risk of losing the entire investment, and it might take a long time before any profits and returns materialise. But there is also the prospect of very high profits and a substantial return on the investment. A venture capitalist will require a high expected rate of return on investments, to compensate for the high risk. A venture capital organisation will not want to retain its investment in a business indefinitely, and when it considers putting money into a business venture, it will also consider its "exit", that is, how it will be able to pull out of the business eventually (after five to seven years, say) and realise its profits. Examples of venture capital organisations are: Merchant Bank of Central Africa Ltd and Anglo American Corporation Services Ltd. When a company's directors look for help from a venture capital institution, they must recognise that: the institution will want an equity stake in the company it will need convincing that the company can be successful it may want to have a representative appointed to the company's board, to look after its interests.

 The directors of the company must then contact venture capital organisations, to try and find one or more which would be willing to offer finance. A venture capital organisation will only give funds to a company that it believes can succeed, and before it will make any definite offer, it will want from the company management: a) a business planb) details of how much finance is needed and how it will be used c) the most recent trading figures of the company, a balance sheet, a cash flow forecast and a profit forecast d) details of the management team, with evidence of a wide range of management skills e) details of major shareholders f) details of the company's current banking arrangements and any other sources of finance g) any sales literature or publicity material that the company has issued. A high percentage of requests for venture capital are rejected on an initial screening, and only a small percentage of all requests survive both this screening and further investigation and result in actual investments.

FINANCIAL INSTITUTIONS A large number of financial institutions have been established in India for providing long-term financial assistance to industrial enterprises. There are many all-India institutions like Industrial Finance Corporation of India (IFCI); Industrial Credit and Investment Corporation of India (ICICI); Industrial Development Bank of India(IDBI), etc. At the State level, there are State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs). These national and state level institutions are known as 'Development Banks'. Besides the development banks, there are several other institutions called as 'Investment Companies' or 'Investment Trusts' which subscribe to the shares and debentures offered to the public by companies. These include the Life Insurance Corporation of India (LIC); General Insurance Corporation of India (GIC); Unit Trust of India (UTI), etc.

LEGAL ISSUES
Intellectual property rights Intellectual property (IP) is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized, and the corresponding fields of law. Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works; discoveries and inventions; and words, phrases, symbols, and designs. Common types of intellectual property rights include copyrights, trademarks, patents, industrial design rights and trade secrets in some jurisdictions. The term intellectual property is used to describe many very different, unrelated legal concepts.

Objectives1. Financial incentive 2. Economic growth 3. Morality

A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention. The procedure for granting patents, the requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however, a patent application must include one or more claims defining the invention which must meet the relevant patentability requirements such as novelty and non-obviousness. The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission.

Effects - A patent is not a right to practice or use the invention. Rather, a patent provides the right to exclude others from making, using, selling, offering for sale, or importing the patented invention for the term of the patent, which is usually 20 years from the filing date subject to the payment of maintenance fees. A patent is, in effect, a limited property right that the government offers to inventors in exchange for their agreement to share the details of their inventions with the public. Enforcement Patents can generally only be enforced through civil lawsuits Typically, the patent owner will seek monetary compensation for past infringement, and will seek an injunction prohibiting the defendant from engaging in future acts of infringement. To prove infringement, the patent owner must establish that the accused infringer practices all the requirements of at least one of the claims of the patent. Ownership In most countries, both natural persons and corporate entities may apply for a patent. In the United States, however, only the inventor(s) may apply for a patent although it may be assigned to a corporate entity subsequently and inventors may be required to assign inventions to their employers under a contract of employment. In most European countries, ownership of an invention may pass from the inventor to their employer by rule of law if the invention was made in the course of the inventor's normal or specifically assigned employment duties, where an invention might reasonably be expected to result from carrying out those duties, or if the inventor had a special obligation to further the interests of the employer's company.

 A trademark, trade mark, or trade-mark is a distinctive sign or indicator, used by an individual, business organization, or other legal entity, to identify that the products or services with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities. A trademark may be designated by the following symbols: (for an unregistered trade mark, that is, a mark used to promote or brand goods) (for an unregistered service mark, that is, a mark used to promote or brand services) (for a registered trademark)

Maintaining rights -Trademarks rights must be maintained through actual lawful use of the trademark. These rights will cease if a mark is not actively used for a period of time, normally 5 years in most jurisdictions. In the case of a trademark registration, failure to actively use the mark in the lawful course of trade, or to enforce the registration in the event of infringement, may also expose the registration itself to become liable for an application for the removal from the register after a certain period of time on the grounds of "non-use". Enforcing rightsIf a trademark has not been registered, some jurisdictions (especially Common Law countries) offer protection for the business reputation or goodwill which attaches to unregistered trademarks through the tort of passing off. Passing off may provide a remedy in a scenario where a business has been trading under an unregistered trademark for many years, and a rival business starts using the same or a similar mark. If a trademark has been registered, then it is much easier for the trademark owner to demonstrate its trademark rights and to enforce these rights through an infringement action. Unauthorized use of a registered trademark need not be intentional in order for infringement to occur, although damages in an infringement lawsuit will generally be greater if there was an intention to deceive.

Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time. Generally, it is "the right to copy", but also gives the copyright holder the right to be credited for the work, to determine who may adapt the work to other forms, who may perform the work, who may financially benefit from it, and other, related rights. It is an intellectual property form (like the patent, the trademark, and the trade secret) applicable to any expressible form of an idea or information that is substantive and discrete. Obtaining and enforcing copyright - Copyright law recognises the right of an author based on whether the work actually is an original creation, rather than based on whether it is unique; two authors may own copyright on two substantially identical works, if it is determined that the duplication was coincidental, and neither was copied from the other.

Exclusive rights Several exclusive rights typically attach to the holder of a copyright: to produce copies or reproductions of the work and to sell those copies (including, typically, electronic copies) to import or export the work to create derivative works (works that adapt the original work) to perform or display the work publicly to sell or assign these rights to others to transmit or display by radio or video

A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information" or "classified information". Protection- A company can protect its confidential information through non-compete and non-disclosure contracts with its employees (within the constraints of employment law, including only restraint that is reasonable in geographic and time scope). The law of protection of confidential information effectively allows a perpetual monopoly in secret information - it does not expire as would a patent.

License refers to that permission as well as to the document recording that permission. A license may be granted by a party ("licensor") to another party ("licensee") as an element of an agreement between those parties. A shorthand definition of a license is "an authorization (by the licensor) to use the licensed material (by the licensee)." A licensor may grant a license under intellectual property laws to authorize a use (such as copying software or using a (patented) invention) to a licensee, sparing the licensee from a claim of infringement brought by the licensor.[1] A license under intellectual property commonly has several component parts beyond the grant itself, including a term, territory, renewal provisions, and other limitations deemed vital to the licensor. it is similar to assignment. Term: many licenses are valid for a particular length of time. This protects the licensor should the value of the license increase, or market conditions change. It also preserves enforceability by ensuring that no license extends beyond the term of the agreement. Territory: a license may stipulate what territory the rights pertain to. For example, a license with a territory limited to "North America" (United States/Canada) would not permit a licensee any protection from actions for use in Japan.

Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-French derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid the need for investments and liability for a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

 The franchising of goods and services foreign to India is in its infancy. The first International Exhibition was only held in 2009. India is, however, one of the biggest franchising markets because of its large middle-class of 300 million who are not reticent about spending and because the population is entrepreneurial in character. In a highly diversified society, McDonald's is a success story despite its fare's differing from that of the rest of the world. So far, franchise agreements are covered under two standard commercial laws: the Contract Act 1872 and the Specific Relief Act 1963, which provide for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract.

Businesses for which franchising work best have one or several of the following characteristics: A good track record of profitability Ease of duplication Detailed systems, processes and procedures A unique or unusual concept Broad geographic appeal Relative ease of operation Relatively inexpensive operation.

FINANCIAL PLAN
What is a cash budget? A forecasting tool that tracks all cash receipts and cash disbursements. Done on a shorter time frame than other statements (i.e., month-by-month or even week-by week). Why is a cash budget important? Allows companies to predict possible cash shortages and take corrective action before a crisis occurs. Allows companies to see if large sums of excess cash are lying idlecould be put to better use. Disregard the principles of accrual accounting when developing a cash budget: Instead of matching EXPENSES with REVENUES in the period in which they are incurred, now we are concerned with matching CASH INFLOWS and CASH OUTFLOWS in the periods in which they are incurred. All cash items, regardless of their classification (expense, asset, fixed cost, variable cost, etc.), are accounted for in a cash budget. Non-cash items (such as amortization) never appear. REMEMBER: A business that is UNPROFITABLE can SURVIVE but INSOLVENCY (i.e., insufficient cash to pay debts) could mean BUSINESS FAILURE.

Methodology of the Cash Budget 1. Identify the nature and timing of all cash inflows. These include: Inflows from financing (e.g., bank loans, capital infusions, proceeds from sale of fixed assets). Usually on a one-time basis. Investment income collections. Sporadic. Collections from sales (recurring over time). This may involve sales forecasts, collections schedules. Useful tools when forecasting sales: Management estimates Historical sales patterns Industry trends Competitor's sales 2. Identify the nature and timing of all cash outflows. These include: Cash operating expenditures Capital expenditures Financial commitments Equity reductions 3. Subtract outflows from inflows to get net cash flow for the period (either a surplus or deficit). 4. Add (subtract) cash flow for the period to the ending balance in cash from the previous period to get new ending balance. Schedule timing of cash flows to: Make efficient use of cash Analyze solvency Forecast financial requirements Prioritize and plan payments of outstanding accounts Perform SENSITIVITY to plan contingency action Categorize type of financing requirements Note: Cash budgeting involves a FUTURE Orientation Implications: KEY VARIABLES highlighted Constant fine tuning Not perfect

WORKING CAPITAL
Working capital typically means the firms holding of current or short-term assets such as cash, receivables, inventory and marketable securities. These items are also referred to as circulating capital Corporate executives devote a considerable amount of attention to the management of working capital. Definition of Working Capital Working Capital refers to that part of the firms capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.

There are two possible interpretations of working capital concept:

1. Balance sheet concept 2. Operating cycle concept Balance sheet concept

There are two interpretations of working capital under the balance sheet concept. a. Excess of current assets over current liabilities b. gross or total current assets. Excess of current assets over current liabilities are called the net working capital or net current assets. Working capital is really what a part of long term finance is locked in and used for supporting current activities. The balance sheet definition of working capital is meaningful only as an indication of the firms current solvency in repaying its creditors. When firms speak of shortage of working capital they in fact possibly imply scarcity of cash resources. In fund flow analysis an increase in working capital, as conventionally defined, represents employment or application of funds.

 Operating cycle concept A companys operating cycle typically consists of three primary activities:

The firm has to maintain cash balance to pay the bills as they come due. In addition, the company must invest in inventories to fill customer orders promptly. And finally, the company invests in accounts receivable to extend credit to customers. Operating cycle is equal to the length of inventory and receivable conversion periods.

Purchasing resources, Producing the product and Distributing (selling) the product. These activities create funds flows that are both unsynchronized and uncertain. Unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example collection of receivables). They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy.

TYPES OF WORKING CAPITAL

WORKING CAPITAL

BASIS OF CONCEPT Gross Working Capital Net Working Capital

BASIS OF TIME Permanent / Fixed WC Temporary / Variable WC Special WC

Seasonal WC Regular WC Reserve WC

Inventory conversion period Avg. inventory = _________________ Cost of sales/365 Receivable conversion period Accounts receivable = ___________________ Annual credit sales/365

Payables deferral period

Accounts payable + Salaries, etc = ___________________________ (Cost of sales + selling, general and admn. Expenses)/365

Cash conversion cycle = operating cycle payables deferral period. Importance of working capital Risk and uncertainty involved in managing the cash flows Uncertainty in demand and supply of goods, escalation in cost both operating and financing costs. Strategies to overcome the problem Manage working capital investment or financing such as
Holding additional cash balances beyond expected needs Holding a reserve of short term marketable securities Arrange for availability of additional short-term borrowing capacity One of the ways to address the problem of fixed set-up cost may be to hold inventory. One or combination of the above strategies will target the problem Working capital cycle is the life-blood of the firm

FACTORS DETERMINING WORKING CAPITAL

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. Nature of the Industry Demand of Industry Cash requirements Nature of the Business Manufacturing time Volume of Sales Terms of Purchase and Sales Inventory Turnover Business Turnover Business Cycle Current Assets requirements Production Cycle Credit control Inflation or Price level changes Profit planning and control Repayment ability Cash reserves Operation efficiency Change in Technology Firms finance and dividend policy Attitude towards Risk

Disadvantages of Redundant or Excess Working Capital Idle funds, non-profitable for business, poor ROI Unnecessary purchasing & accumulation of inventories over required level Excessive debtors and defective credit policy, higher incidence of B/D. Overall inefficiency in the organization. When there is excessive working capital, Credit worthiness suffers Due to low rate of return on investments, the market value of shares may fall Disadvantages or Dangers of Inadequate or Short Working Capital
Cant pay off its short-term liabilities in time. Economies of scale are not possible. Difficult for the firm to exploit favorable market situations Day-to-day liquidity worsens Improper utilization the fixed assets and ROA/ROI falls sharply

PROFORMA INCOME STATEMENT

Revenues less Expenses = Net Income Earnings Per Share is reported on face of IS Also called the Statement of Earnings Comparative financial statements enable users to analyze performance over multiple periods and identify significant trends. Consolidated financial statements combine the financial results of a parent company with its subsidiaries. Income reported on income statement is based on Accrual Accounting, all revenues earned in the year & all expenses incurred in that year (NOT on the cash generated or cash paid during accounting period) Income Statement may be presented in the multi-step or single step form.

 Income reported on income statement is based on Accrual Accounting, all revenues earned in the year & all expenses incurred in that year (NOT on the cash generated or cash paid during accounting period) Income Statement may be presented in the multi-step or single step form.
Single-step
All operating revenues and gains are reported first, followed by all operating expenses and other losses. No separate section is prepared for COGS and gross profit.

Multiple-step
Divided into separate sections, various subtotals are reported. Involves separate sections for gross profit, operating income, other income/losses, income before income taxes, and net income.

Net Sales Less: Cost of Goods Sold (COGS)

Cost to seller of products sold to customers.
If purchased, then price plus freight-in. If manufactured, then DM, DL, Manf. Ovhd. The relationship between COGS and sales is an important one.

= Gross Profit
Key analytical tool in analyzing performance. Gross profit percentage equals Gross profit/Sales firms operating

Gross Profit Less: Operating Expenses Selling Expenses: Advertising expenses Salesmen salaries General and Administrative Expenses: Office and officer salaries Payroll taxes Depreciation expense Repairs & maint. Insurance expense Rent expense Lease expense Bad debt expense Research and Development Supplies = Operating Income (or Operating Profit or Income from Operations) Measures overall performance of companys operations Operating Income Percentage=Operating Income/Sales

Operating Income +/- Other Income/Expense

Interest income Gain from sale of equipment Gain from sale of investments Interest expense Loss from sale of equipment Loss from sale of investments Loss from write-down of inventory

Earnings before income taxes Less: Income taxes Net Earnings or Net Income (or Income from Continuing Operations)

Income from Continuing Operations +/- Income from Discontinued Operations (net of tax) +/- Extraordinary Gains and Losses (net of tax) +/- Cumulative Effect of a Change in Accounting Principle (net of tax) Net Earnings or Net Income Net Earnings Percentage Earnings/Sales =Net