Entrepreneurship: Dr. Cherop's Notes PDF

# ENTREPRENEURSHIP ## Meaning of Entrepreneurship: - The word entrepreneurship originates from the French word *entrependre*, which means "to undertake.” - Entrepreneurship is the key to innovation, productivity, and effective competition. - When a person realizes his ability or capacity and makes...

# ENTREPRENEURSHIP ## Meaning of Entrepreneurship: - The word entrepreneurship originates from the French word *entrependre*, which means "to undertake.” - Entrepreneurship is the key to innovation, productivity, and effective competition. - When a person realizes his ability or capacity and makes its practical use and establishes new business unit this activity is known as entrepreneurship. ## Concept of Entrepreneurship: Entrepreneurship is an innovative function. It is a leadership rather than ownership. The process of innovation may be in the form of: - Introduction of a new product - Use of a new method of production - Opening of a new market - The conquest of a new source of supplying raw materials Joseph A. Schumpeter. ## Concept of Entrepreneurship: - Ability and aptitude to bear various types of business-related risks and facing of uncertainties. - The ability to establish a new enterprise, and carrying out various new improvements in the enterprise. ## Risk Bearing Capacity - Risk refers to the variability of outcomes (or returns). - Entrepreneurs are “risk-taker,” – people who don’t fear anything in business. - Entrepreneurship involves taking of risks and making the necessary investments under conditions of uncertainty. ## Organization Building Ability - Entrepreneurship is the ability to connect and coordinate the productive resources to organize a venture and enterprise. - It is bringing together the factors of production and to organize them. - Entrepreneur makes decisions about resource allocations. ## Managerial and Leadership Skills - Entrepreneurship is the process of bringing together creative and innovative ideas and actions with the management & leadership skills to mobilize the appropriate people, money, and operating resources to create wealth in the process. - Entrepreneurs can translate their ideas into action with management and leadership skills. ## Innovative Function - Innovation is the specific function of entrepreneurship. - It is the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth. - Joseph Schumpeter revived the concept of entrepreneurship as an innovative function. ## High Level Need for Achievement - The person who are motivated with the need for high achievement have a high level of entrepreneurial activities. - They have a desire to be successful in competitive situations ## Search for Profitable Opportunities - Entrepreneurship is actively searching for opportunities to do new things or to do existing things in new ways for a profitable business. - Potential entrepreneurs are always looking for unique opportunities to fill needs and wants. ## Wealth Creation - Entrepreneurs are economic agents who transform demand into supply and they transform resources into useful goods & services, that lead to the creation of wealth and industrial growth. ## Change Agent - This is a modern concept of entrepreneurship. - The entrepreneur becomes the change agent who transforms the resources into useful goods and services, often creating the circumstances that lead to industrial growth. ## Process of Creating New Values - This is also a modern concept. - Through entrepreneurship, new products, services, transactions, approaches, resources, technologies and markets are created that contribute some value to a community or marketplace . - Value can be created when resources are transformed into output such as products & services. ## Subject or Discipline - Entrepreneurship education is a fast-growing area in colleges & universities. - Most universities in the countries did research on entrepreneurship, followed by training courses. - Due to a fully developed subject, many entrepreneurial schools have been opened. ## Definition of Entrepreneurship The definition of entrepreneurship may be classified in: - Establishment of new enterprises based - Function based - Combination based - Decision-making based - Innovation based ## Establishment of New Enterprises Based - According to Prof. Musselman & Jackson, “Entrepreneurship is the inventing and risking of time, money, and effort to start a business.” - According to Prof. Udai Pareek And Manohar Nadkarni, "Entrepreneurship refers to the general trend of setting up new enterprises in a society.” - These definitions do not specify which functions and activities are to be performed for establishing new enterprises for starting new businesses and making them successful. ## Function Based - According to Joseph A. Schumpeter, “Entrepreneurship is an innovative function; it is a leadership rather than an ownership.” - It reveals various opportunities and abilities like forecasting of economic opportunities and the ability to organize various sources and techniques of production ## Combination Based - Many scholars elaborate entrepreneurship as the combination of functions and activities, and organization. - According to H. W. Johnson, “Entrepreneurship is a composite of three basic elements – inventions, innovation, and adaptations.” ## Decision Making Based - According to Lamb, " Entrepreneurship is that form of social decision-making performed by economic innovations." - This definition focuses on social responsibilities and the role of business. - This definition does not lay emphasis on doing innovations directly in the society. ## Innovation Based - According to Prof. Rao and Mehta, “Entrepreneurship can be described as creative and innovative response to the environment." - Entrepreneurship is an activity of linking the business with society and the environment. ## Components or Elements of Entrepreneurship: - Entrepreneur - Pursuit of Opportunities - Innovation - Organization Creation - Creating Values - Profit or Non for Profit - Growth - Uniqueness - Process ## Characteristics of Entrepreneurship: - Innovation - Risk-Bearing Capacity - Creative Decision - Creating & Managing Resources - Managerial Skills & Leadership - Gap Filling Function - Business Oriented Tendency - Economic Activity - Producing Results - Life Style ## Concept of an Entrepreneur: - It refers to a person. - It refers to a creator. - It refers to an organizer. - It refers to a decision maker. - It refers to an initiator. - It refers to a leader. - It refers to a motivator. - It refers to a risk taker. ## Wage Employment vs. Entrepreneurship | Wage Employment | Entrepreneurship | |-----------------------------|-----------------------------| | Work for Others | Own Boss | | Follow Instructions | Make own plans | | Routine Job | Creative activity | | Earning is fixed, never negative | Can be negative sometimes | | Does not create wealth | Generally surplus | | | Creates Wealth | | | Contributes to GDP | | Can choose from: | Can choose from: | | Government service | Industry | | Public Sector | Trade or Service Enterprise | | Private Sector | | ## Who is an Entrepreneur? - An entrepreneur is an individual who starts a business venture and is responsible for its development - An individual who bears the risk of operating a business in the face of uncertainty - One who organizes, manages, and assumes the risk of a business or enterprise ## Characteristics of an Entrepreneur - **Mental Ability** - Entrepreneurs must have creative thinking and must be able to analyze problems and situations. They should be able to anticipate changes. - **Business Secrecy ** - They should guard their business secrets from their competitors - **Clear Objectives** - They must have clear objectives as to the exact nature of the business or the nature of the goods to be produced. - **Human Relations** - They must maintain good relations with their customers, employees, etc. To maintain good relationships, they should have emotional stability, personal relations, tactfulness, and consideration - **Communication Ability** - They should have good communication skills, meaning both the sender and the receiver should understand each other's messages - **Technical Knowledge** - They should have sufficient technical knowledge ## Importance of Entrepreneurship: - Reduces poverty level - Increases employment - Fulfills the demands of people - Helps to develop the economic conditions of a country ## Causes of Failure of Entrepreneurship: - Lack of visible concept - Lack of market knowledge - Lack of technical skill - Lack of seed capital - Lack of business knowledge - Lack of motivation - Time pressure & distractions - Legal constraints & regulations - Monopoly & protectionism # SOME OF THE REAL ENTREPRENEURS - **Dhirubhai Ambani:** Founder of Reliance Company. Built India’s largest private sector company - **Rahul Bajaj:** Chairman of Bajaj Group. One of the most distinguished business leaders - **Steve Jobs:** Founder of Apple Computer. Founder of Pixar, Next also ## ENTREPRENEUR VS. ENTREPRENEURSHIP | ENTREPRENEUR | ENTREPRENEURSHIP | |-----------------------|----------------------------| | PERSON | PROCESS | | VISUALIZER | VISION | | CREATOR | CREATION | | ORGANIZER | ORGANISATION | | INNOVATOR | INNOVATION | | PLANNER | PLANNING | | LEADER | LEADERSHIP | ## TYPES of ENTREPRENEURSHIP ### On the basis of Nature - Innovating, imitative - Fabian, Drone ### On the basis of Activity - Sole, workpower builder, product innovating, format, unused resource user, take over, capital accumulating ### On the basis of Ownership - Private, government, joint sector, co-operative ### On the basis of size - Small scale - Large scale ### On social basis - Exploitative - Ideal ### On the basis of number - Sole, group - Copreneurs, institutional ### Other: - Social - Women - Agriprenuership - Technoprenuership - Netprenuership - Portfolioprenuership - Intrapreneurship ## Role & Importance of Entrepreneurship - Pivot of Economic Development - Basis of Business - Organizer of Society’s Productive Resources - Contribution in Production of New Products - Development of New Production Techniques - Helpful in Capital Formation - Development of New Market - Establishment of New Industrial Enterprises - Contribution in Development & Expansion of Existing Enterprises - Help in bringing changes in Social Framework - Contribution in the formation of Industrial Climate - Contribution to generate Employment Opportunities - Contribution to raise the Standard of Living - Help in removing Regional Disparities - Encouragement to Investigation & Research ## BUSINESS LIFE CYCLE ### INTRODUCTION - A life cycle is a course of events that brings a new product into existence and follows its growth into a mature product and eventual critical mass and decline. - The most common steps in the life cycle of a product include product development, market introduction, growth, maturity, and decline/stability. ### Business Life Cycle - Start-up - Growth - Maturity - Decline ### 1 - INTRODUCTION STAGE - After testing, a product enters the Introduction stage and the product will be available in the market. - Slow sales - Low profits or losses - High cost due to high promotional expenses - Generally high price - Less competition - Build selective distribution - Create product awareness and trial ### 2 - GROWTH - More customers will start buying the product. This is because customers of the introduction stage are buying again or have recommended the product to their circles. - Rapidly rising sales - Expansion in the scale of production - Rising profits - Lower unit cost - Competition - Stable or slightly reduced price ### 3 - MATURITY - In this stage, the demand for the product reaches a saturation point and competition becomes severe. - High sales - Build more extensive distribution - Average cost per consumer decreases - Maximum profit - Low competition - Diversify brand differences and benefits ### SATURATION - In this stage, there is no growth of sales. Competition becomes tough. The firm uses different strategies - Prices tend to fall - Profits start declining - Stiff competition - Product supply may exceed demand - Product modification and improvement ### 4 - DECLINE - In this stage, sales begin to fall, and there may be little or no profit. Production cost and inventory cost become larger. This stage will lead to the gradual phasing out of the product. - Rapid fall in sales - Fall in prices - No promotional expense - Reducing distribution network to the minimum - Product technology becomes obsolete ### BUSINESS WHICH DOSEN’T FOLLOW BLC: - Not all the products follow this life cycle. - Fads - Styles - Fashions # BUSINESS FINANCE ## OBJECTIVES: - Define business finance - Be familiar with the role of business finance - Know the importance of consideration of risks in financial decision making - Know the relationship of business finance in other disciplines particularly accounting ## BUSINESS FINANCE - The study of financing and investment decisions made from theory to practice. - Making of decisions about which investment the business should make. - Management of money and other valuable assets. - You should be familiar with accounting methods, investing strategies, and debt management. ## ROLE OF BUSINESS FINANCE - **FINANCING**: The act of bringing money into the organization - Bus. Fin will help us in financing and investment decision. - **Methods of financing are:** - Taking on debt - Credit arrangements - Investments on real assets and financial assets. - The success and failure of a business rely on this discipline. ## BUS FIN AND ACCTNG - **ACCOUNTANT**: Is concerned with financial record keeping, production, or periodic reports, statements, and analysis. - **FINANCIAL MANAGER**: Only makes decisions involving finance and does not provide financial information. - In a small business, an accountant and financial manager can be one person. ## FINANCIAL MANAGEMENT - It starts with a plan. - Having cash and resources is not enough. - Financial management in business is a must. - **FINANCIAL MANAGEMENT**: - Deals with decisions that are supposed to maximize the value of shareholders' wealth (shares of stocks). - Planning, controlling, and directing the financial activities such as procurement and utilization of funds. - **Stocks:** Forms of ownership in a corporation. ## SCOPE OF FINANCIAL MANAGEMENT - **INVESTMENT DECISION**: Investment on fixed assets (capital budgeting decision) and current assets (working capital decision) - **FINANCIAL DECISION**: Raising of finance from various resources - **DIVIDEND DECISION**: Decision on net profits distribution, which are - Dividend for shareholders - Retained profits ## OBJECTIVES OF FINANCIAL MANAGEMENT - Ensures regular and adequate supply of funds. - Ensures adequate returns of shareholders. - Ensures optimum fund utilization. - Ensures safety of investments - to achieve an adequate rate of returns. - Plan a sound capital structure - so that balance between debt to equity capital will be maintained ## FUNCTION OF FINANCIAL MANAGEMENT - **Estimation of capital requirements** - such as expected costs and profits, future programs and policies to ensure an increase in earning capacity. - **Determination of capital composition** - after estimation, a capital structure should be decided. It involves short-term and long-term debt equity (D/E) analysis. ## Debt / Equity Analysis - Under the solvency financial ratio, it measures the amount of debt a company uses to fund its business (also called leveraging/risk/gearing). - **Ex.** Total shares value = P180,000 and Total Liabilities = P620,000 - D/E ratio = 344.44% (high risk) - **What if:** Total shares value = P620,000 and Total Liabilities = P180,000 - D/E ratio = 29.03% (low risk) - The higher the ratio is, the more debt a business uses compared to equity. - A ratio that is too high can potentially cause problems in your small business. - The risk of defaulting or being unable to repay your debt increases as your debt-to-equity ratio rises. - If you fail to make interest payments, creditors might take your company’s assets or force you into bankruptcy. ## FUNC’N. OF FIN. MGMT. (continuing) - **Choice on the sources of funds:** - Issue of shares and debentures (type of bond or debt instrument like T-bills that is not secured by physical assets or collateral but backed up by credit worthiness and reputation of the issuer, free risk) - Loans from banks and financial institutions - Public deposits from bonds - **Investment of funds**: Allocating funds to profitable ventures for safety investments and regular returns ## 5. Disposal of Surplus - Or net profit disposal done through: - Dividend declaration - Retained profits - for expansion, innovation and diversification plan. ## 6. Management of Cash - For administrative and distributive cost. ## 7. Financial Control - Not only procuring, planning, and utilizing funds, but also controls finances through ratio analysis, financial forecasting, cost profit control, etc. ## "BEWARE OF LITTLE EXPENSES, A SMALL LEAK WILL SINK A GREAT SHIP" - **Activity:** Write everything you’ve learned through a mind map # Business Valuation ## Contents - Introduction - Key Drivers of Valuation - Concepts of Value - Golden Rules of Valuation - Valuation Methods - Valuation of Shares - Goodwill / Brand Valuation ## Introduction - Liberalization of the economy, an emphasis on core competence, and relaxation of tax laws led to a spurt of mergers, takeovers, acquisitions, de-mergers, etc. - Aligning business activities in line with the prime objective of creating & maximizing shareholders' wealth has propelled large organizations into such strategic decisions. - In all of these strategic decisions, one common thing that assumes a very critical proposition is “Business Valuations”. - 'Value’ means economic value, an amount expressed in monetary terms, to be paid in exchange for an asset or the right to receive future benefits from the use of the asset. ## Introduction - Value is not a static or homogenous concept. ### Valuation Dynamics: - Total economic environment - Potential use of the asset - Timing of the value estimate - Location of the asset - Relative scarcity - Availability of substitutes - Extent of ownership involved - Liquidity of the asset - Physical condition of the asset ### Value is Different from Price or Cost: - **Price:** The amount spent to acquire an asset - **Value:** What lies in the eyes of the payer ## Key Drivers of Valuation ### Purpose of Valuation: - Buyer vs. Seller - Acquisition vs. Investment - Legal vs. Commercial ### Industry and Sector: - Economy – Boom vs. Gloom - Emerging vs. Dying Sector - Manufacturing vs. Service - Structured vs. Tradition ### Macro Factors: - Economic scenario - Investment patterns in the sector - Government role - Fin. Inst, Banks role ### Micro Factors: - Nature of product/service - Business life cycles - Seasonal nature - Growing vs. Maturity ### Regulations: - SEBI Takeover Regulations - Banking mergers - RBI role - Stock Exchange guidelines - Companies Act ## Concepts of Value - **Fair Market Value:** The amount (arms' length price) at which an asset would exchange between a willing seller and a willing buyer (having reasonable knowledge). - **Investment Value:** The value of future benefits of ownership of an asset to a particular buyer. Similar to Opportunity Cost. - **Book Value:** It means the value of a business as reflected in the audited financial statements of an enterprise. - **Intrinsic Value:** It is the total value of a business after considering all hidden and latent facts. It is also defined as the present value of future earnings stream discounted at the current market rate of return. - **Going Concern Value:** The value under the assumption that the business will never die. Value is based on future maintainable income as a going concern, capitalized by a suitable rate of return. - **Replacement Value:** The cost of acquiring a new asset of equal utility. - **Goodwill / Brand Value:** The value of intangible assets. The difference between the price paid for acquiring a business and the fair market value of all acquired assets, net of liabilities. - **Liquidation Value:** The net amount that can be realized if a business is terminated, its assets are sold, and the liabilities are satisfied. - **Benchmark Value:** Based on comparative company valuation, used for justifying the valuation of companies via several adjustments. - **Salvage Value:** The amount realizable upon sale or other disposition of an asset after it is no longer useful to the current owner and is to be taken out of service. Different from scrap value, where the asset is not useful for anyone for any purpose. ## Golden Rules of Valuation - Valuation is an art, more than science. - Valuation is more subjective in nature than objective. - Valuation depends on the perceptions and skills of the valuer. - Valuation has a reference to time; even a single person can have different values at different times. - Price is paid for the deal; value is in the eyes of the payer. - Valuation is a critical tool for strategic decision-making - Valuation is an application of theory and practice. ## Business Valuation Methods - **Historical Cost:** Also known as the Book Value Method. All assets are taken at their respective historical costs. The value of the goodwill is ascertained and added to such historical costs of assets. - **Current Cost:** The current costs of the assets are taken for valuation purposes instead of historical costs. - **Tangible assets:** The current replacement price is taken. - **Investment:** Valued at current market prices. Unquoted investments are taken at cost unless MP is determined - **Inventory:** Current market prices - **Debtors:** Net collection/ realizable amount - **Intangibles:** Current acquisition prices (Patents, TM, CP) - **Economic Valuation (Income Based):** The fundamental logic behind the concept is that the values of businesses are determined by its profitability (present and future) and cash generation ability. There are three techniques: - **Capitalization Method:** Past profits (3-4 years) are capitalized at a proper rate of return, as that is applicable to the company in the industry. Adjustments are made for extraordinary items, abnormal losses, taxation, appropriate weights to profits, etc. - **Profit Earning Capacity Value:** Similar to the capitalization method, except that future maintainable profits are considered for capitalization. - **Discounted Cash Flow:** The value of the business is the present value of all future cash flows. A better method because it considers the time value of money. WACC is used as the discount factor. Future cash flow calculations are based on taxes, depreciation, etc. - **Market Valuation:** Applicable for listed companies, where share price is determined by market forces. An average price is selected for valuation purposes. - **Asset Based Valuation:** This method is used in combination with profitability and market value methods. - While valuing assets under this approach, total assets are divided into operating and non-operating assets. - Non-operating assets are valued at realizable value, while operating assets are valued at their book values. - **Comparative Companies:** Certain parameters of comparative companies are used for valuation. This method is more used for negotiation rather than valuation. ## Valuation of Shares - Computation of the share value of a firm, using various techniques. It involves arriving at the proper share value, i.e. the value which “ought to be.” - Considerations governing share valuation are intricate, varied and numerous. They are quantifiable as well as non-quantifiable, objective as well as subjective. - The valuer's approach is influenced by the purpose of the valuation. E.g. a valuer may use liberal ways in compensation cases, while a strict view for taxation (basic principles being the same) - Valuation requires judicious assessment of the interests, advantages, expectations, and hazards of parties involved. ## Valuation of Shares - Purpose - Purchase of a block of shares, which may or may not give a holder a controlling stake in the company. - Formulation of a scheme of amalgamation, absorption, merger and acquisition, etc. - Acquisition of interest of dissenting shareholders under a scheme of reconstruction. - Compensating shareholders by the government under a scheme of nationalization. - Advancing a loan on the security of shares - Assessment under the Wealth Tax Act. - Conversion purposes (Deb., Pref. into equity shares) ## Valuation of Shares - **In case of shares quoted on recognized stock exchanges, these prices are normally taken as the basis for valuation.** - **However, stock exchange quotations are not acceptable** - Stock exchange prices are driven by demand-supply cycles - Prices are more sentiment-based rather than fact-based, e.g. Tata Motors price fell on the acquisition of Jaguar, Rover. - Many factors other than company performance affect the prices, such as inflation, crude oil rates, political turmoil, etc. - Reign of speculation, intelligence, guesswork, fear, etc. - Two factors stand out to be basically important for share valuation, viz. assets employed and earning capacity. For a going concern, earning power plays a major role, while assets are considered only to indicate safety margin ## Share Valuation Methods - **Net Assets Basis:** - Net assets available to equity shareholders = Number of equity shares - Tangible fixed assets (plant, bldg., etc.) and intangibles (patents, copyrights, etc.) should be taken at their current market costs. Separate valuation for goodwill is necessary. - Investment at market prices/ book value (availability basis). - Stock of FG @ market price, but RM, WIP, stores may be taken at cost (using a conservative approach). - Receivables be taken based on quality with provisions - Fictitious assets, P&L debit balance, preliminary expenses should be excluded. - All short-term and long-term liabilities should be deducted from total assets (incl. accrued interest and expenses) - Preference capital, including dividend arrears be deducted. - If ex-dividend equity share value is required, proposed equity dividend should also be deducted. - Adequate provisions for taxation and liabilities not provided in the books of accounts. - **Yield Basis:** - Yield-based valuation is earnings and rate of return-centric. - If a block of shares (controlling interest) is to be taken, the rate of earnings should be the basis. - For a small block of shares, the rate of dividend is the basis. - Steps in valuation include the determination of the future maintainable profits and establishing a desired rate of return. Suitable adjustments be made in the calculation of profits, such as abnormal items, taxation, depreciation, government policy, etc. - Capitalize the earnings by the rate of return to arrive at the total value. Divide that total value by the number of shares to get the value per share. ## Valuation of Goodwill / Brand - Goodwill is an intangible asset and contributes to the profit-earning capacity of a business. - Goodwill is the difference between the value of a business as a whole and the aggregate of the fair values of its separable net assets (UK A/c Std.). - **Peculiarities of Goodwill**: - No direct/predictable relation with any cost incurred - Distinct factors adding brand value cannot be valued - The value of goodwill fluctuates widely, over short periods. - Assessment of brand/goodwill is highly subjective. - Types of goodwill – “Dog”, “cat”, and “Rat” ## Goodwill/Brand Creation - Steady, growing profitability - Minimal risk exposure - Superior management - High-quality products - Exceptional sales section - Secret/patent processes - Effective advertising - Outstanding credit ratings - Cost savings - Technology advantage - Strong capital base - Better liquidity position - Good public image - Strategic location - Favourable government policies - Good Labour Relations - Social commitments - Weak competitors - Market dominance - Economies of scale ## Goodwill/Brand Valuation - **Simple Profit Method:** In this method. Goodwill is valued on the basis of a certain number of years’ purchase of the average profits of the past few years. - Average profits = Capital employed * normal rate of return - Goodwill = Average profits * no. of years purchase - **Super Profit Method:** Excess of future maintainable profit over normally-expected profit is known as super profits. Under this method, goodwill is taken as the number of years purchase of super profits expected to be maintained. - Super Profit = future profits - (capital employ * normal rate) - Goodwill = Super profits * no. of years maintained ## Goodwill / Brand Valuation – Capitalization Method - Future maintainable profits are capitalized using a normal rate of return to arrive at that normal capital employed. Goodwill is the excess of normal capital employed over actual capital employed. - Normal Capital Employed = Future maintainable profit / Normal rate of return - Goodwill = Normal capital employ (-) Actual capital employ # ENTREPRENEURSHIP FAILURE - The most recent global survey showed 80% of new startups disappear before the first 18 months, and of the remaining 20%, 95% cease to exist after three years. - Failure is what we say "experiment going wrong". - It is an attitude of sitting back, feeling dejected, and pitying yourself. ## Reasons for Failure - Survival Driven - Low Business IQ - Lack of focus - Fear of failure - Shortsightedness - Poor Money Management - Insecurity ## Issues Regarding Failure - Psychological issues - Political issues - Personological orientation - Motivational approach - Cognitive judgment ## Steps to Solve Problems - Learn and move on - Listen to the market - Research - Outsource and effective technology - Find a niche among competitors ## Thank You!!!