Manual For General Entrepreneuship Studies12 - 2

MANUAL FOR GENERAL
ENTREPRENEUSHIP STUDIES
CHAPTER 1: INTRODUCTION TO ENTREPRENEURSHIP AND PROBLEM
SOLVING B
EHAVIOUR

The World of the Entrepreneur
Welcome to the world of the entrepreneur! Across the globe, growing numbers of people
are realizing their dreams of owning and operating their own businesses.
Interest in entrepreneurship has never been higher than it has been at the beginning of the
twentyfirst century
Capitalist societies depend on entrepreneurs to provide the drive and risk taking
necessary for the system to supply people with the goods and services they need.
Entrepreneurship plays a significant role in the business world by:
i. Introducing innovative products
ii. Pushing back technological frontiers
iii. Creating new jobs
iv. Opening foreign markets
What is an Entrepreneur
An entrepreneur is one who
creates a business in the face of risk and uncertainty
for the purpose of achieving profit and growth
by identifying significant opportunities
and assembling the necessary resources to capitalize on them.
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Characteristics of Entrepreneur (Entrepreneurial profile)
i. Desire for responsibility
ii. Preference for moderate risk (Minimize risk by building a solid business plan)
iii. Confidence in their ability to succeed
iv. Desire for immediate feedback
v. High level of energy
vi. Future orientation (A focus on future opportunities, rather than focus on past events)
vii. Skill at organizing
viii. Value of achievement over money
ix. High degree of commitment
x. Tolerance for ambiguity (willingness to take risks)
xi. Flexibility (adapt their businesses to meet changing tastes and trends)
xii. Tenacity (Try, try and try again)
The Benefits of Entrepreneurship
i. Opportunity to create your own destiny
ii. Opportunity to make a difference (combining concern for social issues and a desire to
earn a good living).
iii. Opportunity to reach your full potential
iv. Opportunity to reap impressive profits
v. Opportunity to contribute to society and be recognized for your efforts
vi. Opportunity to do what you enjoy and have fun at it
The Potential Drawbacks of entrepreneurship
i) Uncertainty of income
ii) Risk of losing your entire investment
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iii) Long hours and hard work
iv) Lower quality of life until the business gets established
v) Complete responsibility (have to make all decisions)
vi) Discouragement (Face many obstacles along the way).
The Cultural Diversity of Entrepreneurship
Anyone has the potential to become an entrepreneur.
Indeed, diversity is a hallmark of entrepreneurship, and the following represent the
diverse mix of people who make up the rich fabric of entrepreneurship:
a) Young Entrepreneurs
b) Women Entrepreneurs
c) Minority Enterprises
d) Immigrant Entrepreneurs
e) PartTime Entrepreneurs
f) HomeBased Business
g) Familyowned business
h) Copreneurs (entrepreneurial couples who work together as coowners of their
business)
i) Corporate Castoffs (People who lose their company jobs and start their own
businesses)
j) Corporate dropouts
The Power of “Small” Business
A small business is one that employs fewer than 100 people.
“Gazelles” refer to very successful small businesses that are growing at 20% or more per
year with at least $100,000 in annual sales; they create 70% of net new jobs in the
economy.
The small business sector’s contributions are many:
a. They make up 99% of all businesses
b. They employ 51% of the private sector workforce
c. They create twothirds to threefourths of the net new jobs in the economy
d. They produce 51% of the country’s private gross domestic product (GDP)
e. They account for 47% of all business sales.
The 10 Deadly Mistakes of Entrepreneurship
1. Management Mistakes (primary cause of business failure)
2. Lack of Experience
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3. Poor Financial Control
4. Weak Marketing Efforts
5. Failure to Develop a Strategic Plan (Failure to plan is planning to fail)
6. Uncontrolled Growth (As the business increases in size and complexity, problems
increase in magnitude, and the entrepreneur must learn to deal with them)
7. Poor Location
8. Improper Inventory Control
9. Incorrect Pricing (Small businesses usually underprice their products and services. The
first step in establishing accurate prices is too know what a product or service costs to
make or provide)
10. Inability to Make the “Entrepreneurial Transition” (Once a business is started and starts
to grow, it usually requires a radically different style of management, one that
entrepreneurs are not necessary good at)
Putting Failure into Perspective
Because they are building businesses in an environment filled with uncertainty and
shaped by rapid change, entrepreneurs recognize that failure is likely to be part of their
lives, but they are not paralyzed by that fear.
Failure is a natural part of the creative process. The only people who never fail are those
who never do anything or never attempt anything new.
One hallmark of successful entrepreneurs is the ability to fail intelligently, learning why
they failed so that they can avoid making the same mistake again.
Entrepreneurial success requires both persistence and resilience, the ability to bounce
back from failure.
How to Avoid the Pitfalls
1. Know Your Business in Depth
2. Develop a Solid Business Plan
3. Manage Financial Resources
4. Understand Financial Statements (To truly understand what is going on in the business,
an owner must have at least a basic understanding of accounting and finance)
5. Learn to Manage People Effectively (No matter what kind of business you launch, you
must learn to mange people. Every business depends on a foundation of welltrained,
motivated employees. No business owner can do everything alone.)
6. Keep in Tune with Yourself (Monitor your health, manage your time, and have passion
for what you do).
CHAPTER 2: INSIDE THE ENTREPRENEURIAL MIND: FROM IDEAS TO REALITY
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Creativity, Innovation, and Entrepreneurship
What is the entrepreneurial “secret” for creating value in the marketplace? In reality, the
“secret” is no secret at all: It is applying creativity and innovation to solve problems and
to exploit opportunities to enhance or to enrich people’s lives.
Creativity is the ability to develop new ideas and to discover new ways of looking at
problems and opportunities.
Innovation is the ability to apply creative solutions to problems and opportunities to
enhance or to enrich people’s lives.
Successful entrepreneurs come up with ideas and then find ways to make them work to
solve a problem or to fill a need.
Entrepreneurship is thus the result of a disciplined, systematic process of applying

creativity and innovation to needs and opportunities in the marketplace.
Creativity – A Necessity for Survival
In this fiercely competitive, fastfaced, global economy, creativity is not only and
important source for building a competitive advantage, but it also is a necessity for
survival.
A paradigm is a preconceived idea of what the world is, what it should be like, and how it
should operate.
Entrepreneurs must always be on guard against existing paradigms because they are
obstacles to creativity. Successful entrepreneurs often go beyond conventional wisdom as
they ask “why not…?”
Success – even survival – in this fiercely competitive, global environment requires

entrepreneurs to tap their creativity and that of their employees constantly.
Barriers to Creativity
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The number of potential barriers to creativity is limitless, but entrepreneurs commonly
face 10 “mental locks” on creativity:
i. Searching for the one “right” answer
Deeply ingrained in most educational systems is the assumption that there is one “right”
answer to a problem.
In reality, however, depending on the question one asks, there may be (and usually are)
several “right” answers.
ii. Focusing on “being logical”
Focusing too much on being logical discourages the use of one of the mind’s most
powerful creations: intuition.
Intuition is a crucial part of the creative process because using it often requires one to
think about things in new and different ways.
iii. Blindly following the rules
Sometimes creativity depends on our ability to break the existing rules so that we can see
new ways of doing things.
iv. Constantly being practical
Suspending practicality for a while frees the mind to consider creative solutions that

otherwise might never arise. (Consider the invention of the airplane).
v. Viewing play as frivolous (not important)
A playful attitude is fundamental to creative thinking
Children learn when they play, and so can entrepreneurs
Watch children playing and you will see them invent new games, create new ways of
looking at old things, and learn what works and what doesn’t in their games.
vi. Becoming overly specialized
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Creative thinkers do not limit their search for ideas in areas in which they have expertise.
They search for ideas outside their areas of specialty.
vii. Avoiding ambiguity (uncertainty)
Avoiding uncertain situations often stifles creativity
Ambiguity can be a powerful creative stimulus; it encourages us to “think something
different”.
viii. Fearing looking foolish
People tend toward the status quo because they don’t want to look foolish.
Entrepreneurs perform a vital function – “creative destruction” – in which they look at
old ways of doing things and ask, “Is there a better way?” By destroying the old, they
create the new.
ix. Fearing mistakes and failure
Creative people realize that trying something new often leads to failure; however they do
not see failure as an end. It represents a learning experience on the way to success.
x. Believing that “ I’m not creative”
Some people limit themselves because they believe creativity belongs only to a select
few.
Everyone has within themselves the potential to be creative.
How to enhance creativity
Entrepreneurs can stimulate creativity in their companies by:
i. Embracing diversity (Hire a diverse workforce)
ii. Expecting creativity
iii. Expecting and tolerating failure
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iv. Encouraging creativity
v. Viewing problems as challenges
vi. Providing creativity training
vii. Providing support (Employees should be given the tools and the resources they need
to be creative).
viii. Rewarding creativity
ix. Modeling creativity (Entrepreneurs must set an example to employees by being

creative themselves.
Entrepreneurs can enhance their own creativity by:
i. Allowing themselves to be creative
ii. Giving their minds fresh input everyday
iii. Keeping a journal handy to record their thoughts and ideas
iv. Reading books on stimulating creativity
v. Taking some time off to relax
The Creative Process
Although creative ideas may appear to strike as suddenly as a bolt of lightning, they are
actually the result of the creative process, which involves seven steps
i. Preparation:
involves getting the mind ready for creative thinking
Preparation might include a formal education, onthejob training, work experience, and
taking advantage of other learning opportunities
ii. Investigation:
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Requires the individual to develop a solid understanding of the problem or decision
iii. Transformation:
Involves viewing the similarities (convergent thinking) and the differences in the
information collected
iv. Incubation:
Allows the subconscious to reflect on the information collected
v. Illumination:
Occurs at some point during the incubation period when a spontaneous breakthrough
causes “the light bulb to go on”
vi. Verification:
Involves validating the idea as accurate and useful
For entrepreneurs, this may include conducting experiments, running simulations, test
marketing a product or service, etc, to verify that the new idea will work and is practical
to implement.
vii. Implementation:
Involves transforming the idea into a business reality
Techniques for Improving the Creative Process
Three techniques are especially useful for improving the creative process:
i. Brainstorming
A process in which a small group of people interact with very little structure with the goal
of producing a large quantity of novel and imaginative ideas
As group members interact, each idea sparks the thinking of others, and the spawning of
ideas becomes contagious.
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ii. Mindmapping
A graphical technique that encourages thinking on both sides of the brain, visually
displays the various relationships among ideas, and improves the ability to view a
problem from many sides
iii. Rapid Prototyping
Based on the premise that transforming an idea into an actual model will point out flaws
in the original idea and will lead to improvements in its designs
Developing a model of an idea enables the entrepreneur to determine what works and
what does not.
Protecting Your Ideas
Once entrepreneurs come up with an innovative idea for a product or service that ahas
market potential, their immediate concern should be to protect it from unauthorized use.
This is where patents, trademarks and copyrights become very useful.
Patents: A patent is a grant from the federal government that gives an inventor exclusive
rights to an invention for 20 years.
Trademark: A trademark is any distinctive word, symbol, or trade dress that a company
uses to identify its product and to distinguish it from other goods. It serves as the
company’s “signature” in the market place.
Copyright: A copyright protects original works of authorship. It covers only the form in
which an idea is expressed, not the idea itself, and lasts for 70 years beyond the creator’s
death.
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CHAPTER 3: STRATEGIC MANAGEMENT AND THE ENTREPRENEUR
Introduction
Too often, entrepreneurs brimming with optimism and enthusiasm launch businesses
destined for failure because their founders never stop to define a workable strategy that
sets them apart from their competitors.
Perhaps the biggest change business owners’ face is the shift in the world’s economy
from a base of financial to intellectual capital.
Intellectual capital is a key source of a company’s competitive advantage that is

comprised of:
1. Human Capital (talents, skills and abilities of a company’s workforce)
2. Structural Capital (accumulated knowledge and experience that a company possesses)
3. Customer Capital (the established customer base, positive reputation and goodwill a
company builds over time with its customers)
Increasingly, entrepreneurs are recognizing that the capital stored in these three areas
forms the foundation of their ability to compete effectively and that they must manage
this capital base carefully.
The process of strategic management provides entrepreneurs a powerful weapon to

successfully manage their intellectual capital and be successful.
Strategic management is the process of developing a gameplan to guide a company as it
strives to accomplish its vision, mission, goals, and objectives and to keep it from
straying off course.
Building a Competitive Advantage
Te goal of developing a strategic plan is to create for the small company a competitive
advantage.
Competitive advantage is the aggregation of factors that sets a small business apart from
its competitors and gives it a unique position in the market superior to its competition.
Building a competitive advantage alone is not enough; the key to success is building a
sustainable competitive advantage.
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In the long run, a company gains a sustainable competitive advantage through its ability
to develop a set of core competencies that enables it to serve its target customer better
than its rivals.
Core competences are a unique set of lasting capabilities that a company develops in key
operational areas, such as quality, service, innovation, team building, flexibility,
responsiveness and others, which allow it to vault past competitors.
They are what the company does best, and the focal point of the strategy. This step must
identify target market segments and determine how to position the company in those
markets.
The bottom line is that entrepreneurs must identify some way to differentiate their
companies from competitors.
The Strategic Management Process
Strategic planning is a continuous process that consists of nine steps:
Step 1: Develop a clear vision and translate it into a meaningful mission statement
A vision is the result of an entrepreneur’s dream of something that does not exist yet and
the ability to paint a compelling picture of that dream for everyone to see.
A clearly defined vision helps a company in three ways:
i. Vision provides direction
ii. Vision determines decisions
iii. Vision motivates people
The best way to put a vision into action is to create a written mission statement that
communicates those values to everyone the company touches.
A mission statement is an enduring declaration of a company’s purpose that addresses the
first question of any business venture: What business are we in?
The mission statement sets the tone for the entire company and focuses its attention on
the right direction
Some the key issues that a company’s mission statement should address (elements of a
mission statement) include:
i. What are the basic beliefs and values of the organization? What do we stand for?
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ii. Who are the company’s target customers?
iii. What are our basic products and services? What customer needs and wants do they
satisfy?
iv. Why should customers do business with us rather than the competitor?
v. What constitutes value to our customers? How can we offer them better value?
vi. What is our competitive advantage? What is its source?
vii. In which markets will we choose to compete?
viii. Who are the key stakeholders in our company and what effect do they have on it?
Step 2: Assess the Company’s Strengths and Weaknesses
Building a successful competitive strategy requires a business to magnify its strengths
and overcome or compensate for its weaknesses.
Strengths are positive internal factors that a company can use to accomplish its mission,
goals, and objectives (e.g. special skills or knowledge, positive public image and
experienced sales force).
Weaknesses are negative internal factors that inhibit a company’s ability to accomplish it
mission, goals and objectives. (e.g. lack of capital, shortage of skilled workers, and an
inferior location)
Step 3: Scan the Environment for Significant Opportunities and Threats facing the business
Opportunities are positive external options that a firm can exploit to accomplish its
mission, goals and objectives.
Opportunities almost always arise as a result of factors that are beyond entrepreneurs’
control. Constantly scanning for those opportunities that best match their companies’ core
competencies and strengths and then pouncing on them ahead of competitors is the key to
success.
Threats are negative external factors that inhibit a company’s ability to achieve its
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Threats to the business can take a variety of forms, such as competitors entering the local
market, a government mandate regulating a business activity, an economic recession,
rising interest rates, technological advances making the company’s product obsolete, etc.
Step 4: Identify the Key Factors for Success in the Business
Key success factors are the factors that determine a company’s ability to compete
successfully in an industry
Many of these sources of competitive advantage are based on cost factors such as
manufacturing cost per unit and distribution cost per unit. Some are less tangible but just
as important, such as superior product quality, solid relationships with dependable
suppliers, number of services offered, prime store location, etc.
Entrepreneurs must identify these key success factors and determine how well their
businesses meet these criteria for successfully competing in the market.
Step 5: Analyze the Competition
Business owners should know their competitors almost as well as they know their own
business.
Direct competitors are those that offer the same products and services
Strategic competitors offer some of the same products and services.
Indirect competitors offer the same or similar products or services, but their target
customers seldom overlook yours.
A competition profile matrix is a helpful tool for analyzing competitors’ strengths and
weaknesses.
It allows business owners to evaluate their company against major competitors on the key
success factors for that market.
Step 6: Create Company Goals and Objectives
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Before entrepreneurs can build a comprehensive set of strategies, they must first establish
business goals and objectives, which give them targets to aim for and provide a basis for
evaluating their companies’ performance.
Goals are the broad, longrange attributes that a business seeks to accomplish; they tend
to be general and even abstract.
Objectives are more specific targets of performance, commonly addressing areas such as
profitability, productivity, growth and other key aspects of a business.
Wellwritten objectives have the following characteristics: i) specific, ii) measurable, iii)
assignable, iv) realistic, yet challenging, v) timely and vi) written down.
The strategic planning process works best when managers and employees are actively
and jointly involved in setting objectives.
Step 7: Formulate Strategic Options and Select the Appropriate Strategies
A strategy is a road map of the actions an entrepreneur draws up to fulfill a company’s
In other words, the mission goals and objectives spell out what the entrepreneur hopes to
achieve, while the strategy defines the means for reaching them.
A successful strategy is comprehensive and wellintegrated, focusing on establishing the
key success factors that the entrepreneur identified in Step 4.
Three basic strategic options can be utilized:
i. Cost leadership strategy: a strategy in which a company strives to be the lowcost
producer relative to its competitor in the industry.
ii. Differentiation strategy: a strategy in which a company seeks to build customer

loyalty by positioning its goods or services in a unique or different fashion.
iii. Focus strategy: a strategy in which a company selects one or more market segments,
identifies customers’ special needs, wants and interests, and approaches them with a
good or service designed to excel in meeting those needs, wants, and interests (Focus
on a narrow market segment and be the best in that area, either through being the
lowestcost provider or by differentiating the product or service in a unique fashion).
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Step 8: Translate Strategic Plans into Action Plans
No strategic plan is plan is complete until it is put into action.
To make the plan workable, the business owner should divide the plan into projects,
carefully defining each one by the following:
i. Purpose: What is the project designed to accomplish?
ii. Scope: Which areas of the company will be involved in the project?
iii. Contribution: How does the project relate to other projects and to the overall strategic
plan?
iv. Resource requirements: What human and financial resources are needed to complete
the project successfully?
v. Timing: Which schedules and deadlines will ensure project completion?
Step 9: Establish Accurate Controls
A company’s actual performance rarely ever matches stated objectives. Entrepreneurs
quickly realize the need to control actual results that deviate from plans.
To judge the effectiveness of their strategies, many companies are developing balanced
scorecards, a set of measurements unique to a company that includes both financial and
operational measures and gives managers a quick yet comprehensive picture of the
company’s overall performance.
A balanced scorecard looks at a business from four important perspectives:
i. Customer perspective: How do customers see us?
ii. Internal business perspective: At what must we excel?
iii. Innovation and Leaning Perspective: Can we continue to improve and create value?
iv. Financial Perspective: How do we look to shareholders?
The strategic planning process does not end with the nine steps outlined here; it is an ongoing
procedure that entrepreneurs must repeat.
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CHAPTER 4: FORMS OF BUSINESS OWNERSHIP AND FRANCHISING
a) Three major forms of business ownership (advantages and disadvantages)
I) The Sole Proprietorship
a business owned and managed by one individual
Advantages of a proprietorship
i. Simple to create
ii. Least costly form of ownership to begin
iii. Profit incentive (owner keeps all profits)
iv. Total decisionmaking authority
v. No special legal restriction (has very few rules for establishing and running, unlike
corporation)
vi. Easy to discontinue.
Disadvantages of a proprietorship
i. Unlimited personal liability (owner responsible for all debts of the business)
ii. Limited skills and capabilities (owner may not possess all the skills necessary for
successfully running the business).
iii. Feelings of isolation (no one to turn for help in solving problems or getting feedback
on a new idea).
iv. Limited access to capital (difficulty in raising additional money to grow and expand
business).
v. Lack of continuity for the business (if the proprietor dies, retires or becomes
incapacitated, the business usually automatically terminates).
II) The Partnership
An association of two or more people who coown a business for the purpose of making a
profit.
A good partnership requires a partnership agreement, which is a document that states in
writing all of the terms of operating the partnership and protects the interest of each
partern
Advantages of the Partnership
i. Easy to establish
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ii. Complementary skills (In successful partnerships, the parties’ skills and abilities
usually complement one another, strengthening the company’s managerial
foundations).
iii. Division of profits (no restrictions on how profits should be shared as long as all
partners agree).
iv. Larger pool of capital
v. Ability to attract limited partners
General partners: partners who share in owning, operating and managing a business and
who have unlimited personal liability for the partnership’s debts
Limited partners: partners who do not take an active role in managing a business and
whose liability for the partnership’s debts is limited to the amount they have invested.
A limited partnership can attract investors by offering them limited liability and the
potential to realize a substantial return on their investments if the business is successful.
vi. Little government regulation
vii. Flexibility
viii. Taxation (not subject to federal taxation; like the proprietorship, avoids the “double
taxation” disadvantage associated with the corporate form of ownership)
Disadvantages of the Partnership
i. Unlimited liability of at least one partner (at least one member of every partnership
must be a general partner, and every general partner has unlimited personal liability).
ii. Capital accumulation ( not as effective as corporate form of ownership which can raise
capital by selling shares).
iii. Difficulty in disposing of partnership interest without dissolving the partnership (when
a partner withdraws from the partnership, it ceases to exist unless there are specific
provisions in the partnership agreement)
iv. Lack of continuity (if a partner dies, partnership interest is often nontransferable
through inheritance because the remaining partners may not want to be in a
partnership with the person who inherits the deceased partner’s interest).
v. Potential for personality and authority conflicts (No matter how compatible partners
are, friction among them is inevitable. The demise of many partnerships can often be
traced to interpersonal conflicts and the lack of a procedure to resolve those conflicts).
Other forms of partner ships

i. Limited partnership – a partnership composed of at least one general partner and at
least one limited partner.
ii. Limited liability partnership (LLP) – a special type of limited partnership in which all
partners, who in many states must be professionals (e.g. attorneys, physicians, dentists
and accountants), are limited partners.
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iii. Master limited partnership (MLP) – a partnership whose shares are traded on stock
exchanges, just like a corporation’s; behave much like a corporation, and in 1987 U.S.
legislation provided that any MLPs not involved in natural resources or real estate be
taxed as corporations).
III) Corporations
Most complex of the three major forms of business ownership
A Corporation is a separate legal entity apart from its own owners that receives the right to
exist from the state in which it is incorporated.
A domestic corporation is one doing business in the state in which it is incorporated.
A foreign corporation is one doing business in a state other than the one in which it is
incorporated
An alien corporation is one formed in one country and doing business in another country.
How to Incorporate
Every state requires a certificate of incorporation or charter to be filed with the secretary
of state,
The following information is generally required to be included in the certificate of
incorporation:
i) The corporation’s name
ii) The corporation’s statement of purpose
iii) The corporation’s time horizon (mostly formed with no specific termination date)
iv) Names and addresses of the incorporators
v) Place of business
vi) Capital stock authorization (The articles of incorporation must include the amount and
type of capital stock the corporation wants to be authorized to issue; a corporation can
issue any number of issues up to the amount authorized).
vii) Capital required at the time of incorporation (some states require a newly formed
corporation to deposit in a bank a specific percentage of the stock’s par value prior to
incorporating)
viii) Restrictions on transferring shares
Many closelyheld corporations (those owned by a few shareholders, often family
members) require shareholders interested in selling their stock to offer it first to the
corporations.
Treasury stock: the shares of its own stock that a corporation owns
Right to first refusal: a provision requiring shareholders who want to sell their stock to
offer it first to the corporation.
ix) Names and addresses of the officers and directors of the corporation
x) Rules under which the corporation will operate (Bylaws)
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The Advantages of the Corporation
i. Limited liability of stockholders( because it is a separate legal entity, a corporation
allows investors to limit their liability to the total amount of their investment in the
business
ii. Ability to attract capital
iii. Ability to continue indefinitely
iv. Transferable ownership
The Disadvantages of Corporations
i. Cost and time involved in the incorporation process
ii. Double taxation (corporation’s profits are taxed twice: at the corporate rate and at the
individual rate [on the portion of profits distributed as dividends]).
iii. Potential for diminished managerial incentives
Professional managers the entrepreneur brings in to help run the business as it grows do
not always have the same degree of interest in or loyalty to the company. As a result, the
business may suffer without the founder’s energy, care, and devotion.
One way to minimize this potential problem is to link managers’ compensation to the
company’s financial performance through a profitsharing or bonus plan.
iv. Legal requirements and regulatory red tape
v. Potential loss of control by the founder
When entrepreneurs sell shares of ownership in their companies, they relinquish some
control.
When large amount of capital is needed, entrepreneurs may have to give up significant
amounts of control, so much, in fact, that the founders become minority shareholders.
Other forms of ownership
i. The S Corporation
A corporation that retains the legal characteristics of a regular(C) corporation but has the
advantage of being taxed as a partnership if it meets certain criteria.
It must meet the following criteria:
a) It must be a domestic corporation
b) It cannot have a nonresident alien as a shareholder
c) It can issue only one class of common stock, which means that all shares must carry
the same rights.
d) It must limit its shareholders to individuals, estates and certain trusts
e) It cannot have more than 75 shareholders
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f) Less than 25% of the corporation’s gross revenues during three successive tax years
must be from passive sources.
ii. The Limited Liability Company (LLC)
a relatively new form of ownership that, like an S corporation, is a cross between a
partnership and a corporation; it is not subject to many of the restrictions imposed on S
corporations.
For example, S corporations cannot have more than 75 shareholders, none of whom can
be foreigners or corporations. S corporations are also limited to only one class of stock.
LLCs eliminate those restrictions.
Creating an LLC is much like creating a corporation. Two documents are filed with the
secretary of state: the articles of organizations and the operating agreement.
Articles of organization are similar to a regular corporation’s article of incorporation,
while operating agreements are similar to corporations’ bylaws.
iii. The Professional Corporation
Designed to offer professionals – lawyers, doctors, dentists, accountants, and others the
advantages of the corporate form of ownership.
They are ideally suited for professionals who must always be concerned about
malpractice law suits because they offer limited liability.
For example, if three doctors formed a professional corporation, none of them would be
liable for the others’ malpractice.
iv. The Joint venture
A joint venture is very much like a partnership, except that it is formed for a specific,
limited purpose.
For instance, suppose you own a piece of land normally used for agriculture. You have a
friend who wants to host a twoweek program for FUT students. You and your friend
form a joint venture for the specific purpose of hosting the program. Your contribution is
the exclusive use of your land for two weeks. When the program is over, you and your
friend split the profits 2080, and the joint venture terminates.
Franchising
Franchising is a system of distribution in which semindependent business owners
(franchisees) pay fees and royalties to a parent company (franchiser) in return for the
right to become identified with its trademark, to sell its products or services, and often to
use its business format and system.
Franchisees do not establish their own autonomous businesses; instead they buy a
“success package” from the franchiser, who shows them how to use it.
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Franchisees, unlike independent business owners, don’t have the freedom to change the
way they run their businesses, but they do have a formula for success that the franchiser
has worked out.
Types of Franchising
i. Tradename franchising: a system of franchising in which a faranchisee purchases the
right to use the franchiser’s trademark without distributing particular products under
the franchiser’s name.
ii. Product distribution franchising:
A system of franchising in which a franchiser licenses a franchisee to sell its products
under the franchiser’s brand name and trademark through a selective, limited distribution
network.
This system is commonly used to market automobiles (Toyota, Peugeot), gasoline
products ( Mobil, Texaco), soft drinks, etc.
iii. Pure franchising:
A system of franchising in which a franchiser sells a franchisee a complete business
format and system,
Franchiser provides the franchisee with a complete business format, including a license
for a trade name, the products or services to be sold, the physical plant, the methods of
operation, a marketing strategy plan, a quality control process, a twoway
communications system, and the necessary business services.
Most common among fastfood restaurants, hotels, and many others.
Benefits of Buying a Franchise
i. Management training and support (Franchisers often offer managerial training
programs to franchisees prior to opening a new outlet).
ii. Brandname Appeal (Franchisees have the advantage of identifying their businesses
with a widely recognized trademark, which usually provides a great deal of drawing
power.
iii. Standardized Quality of Goods and Services (In order to maintain reputation,
franchisers demands franchisees to comply with uniform standards of quality and
services throughout the entire chain.
iv. National Advertising Programs (Franchisers usually require franchisees to contribute
a percentage of their gross revenues for a national advertising campaign. These funds
are pooled together and used for a cooperative advertising program, which has more
impact than if the franchisees spent the same amount of money separately.)
v. Proven Products and Business Formats (What a franchisee essentially purchases is a
franchiser’s experience, expertise and products. A franchise owner does not have to
build the business from scratch.
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vi. Centralized Buying Power (A significant advantage a franchisee has over an
independent small business owner is participation in the franchiser’s centralized and
largevolume buying power)
vii. Site Selection and Territorial Protection
A proper location is critical to the success of any small business. Many franchisers will
make an extensive location analysis for each new outlet.
Some franchisers offer franchisees territorial protection, which gives existing franchisees
the right to exclusive distribution of brand name goods or services within a particular
geographic area.
viii. Greater Chance for Success (Available statistics suggest that franchising is less risky
than building a business from the ground up.)
The Drawbacks of Buying a Franchise
i. Franchise fees and profit sharing
ii. Strict adherence to standardized operations
iii. Restrictions on purchasing (in the interest of maintaining quality standards,
franchisees may be required to purchase products, special equipment or other times
from the franchiser of from an “approved” supplier).
iv. Limited product line
v. Less freedom
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CHAPTER 5: BUYING AN EXISTING BUSINESS
Buying an Existing Business
Advantages
1. A successful existing business may continue to be successful: purchasing a thriving

business at an acceptable price increases the likelihood of success.
2. An existing business may already have the best location: When the location of the
business is critical to its success, it may be wise to purchase a business that is already in
the right place.
3. Employees and suppliers are established: An existing business already has experienced
employees, so there are fewer problems associated with the transition phase.
4. Equipment is installed and productive capacity is known: Avoid the tremendous cost of
buying new equipment as is the case when starting business from scratch.
5. Inventory is in place and trade credit is established.
6. The new business owner hits the ground running
7. The new owner can use the experience of the previous owner
8. Easier financing
9. It’s a Bargain: In some cases, the current owners may need to sell on short notice, which
may lead them to selling the business at a low price.
Disadvantages
1. It’s a Loser: A business may be for sale because it has never been profitable.
2. The previous owner may have created ill will: Customers, suppliers, creditors or
employees may have extremely negative feelings about the behavior of the previous
owner.
3. Employees inherited with the business may not be suitable
4. The Business location may have become unsatisfactory
5. Equipment and facilities may be obsolete or inefficient
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6. Change and innovation are difficult to implement: Methods previously used in a business
may have established precedents that are hard to modify.
7. Inventory may be outdated or obsolete
8. The business may be overpriced
The Steps in Acquiring a Business
Buying a business can be a treacherous experience unless the buyer is well prepared.
The right way to buy a business is to:
1. Analyze your skills, abilities and interests to determine what kinds of businesses you
should consider.
2. Prepare a list of potential candidates
Do not limit yourself to only those companies that are advertised as being “for sale”.
Consider the “hidden market”: low profile companies that might be for sale but not
advertised as such.
One can tap into such a hidden market through sources like business brokers, bankers,
accountants, and even by knocking on doors of businesses you would like to buy (even if
they are not advertised as being for sale)
3. Investigate those candidates and evaluate the best one(s)
4. Explore financing options (how to raise the money to buy the business)
5. Ensure a smooth transition
Concentrate on communicating with employees
Be honest with employees
Listen to employees
Consider asking the seller to serve as a consultant until the transition is complete.
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Evaluating an Existing Business – The Due Diligence Process
Rushing into a deal can be the biggest mistake a business buyer can make
Before closing a deal, every business buyer should investigate 5 critical areas:
1. Why does the owner wish to sell? Look for the real reason.
2. Determine the physical condition of the business. Consider both the building and its

location.
3. Conduct a thorough analysis of the market for your products or services. Who are the
present and potential customers? Conduct and equally thorough analysis of competitors,
both indirect and direct. How do they operate and why do customers prefer them?
4. Consider all of the legal aspects that might constrain the expansion and growth of the
business.
5. Analyze the financial condition of the business, looking at financial statements, income
tax returns, and especially cash flow.
Methods for determining the Value of a Business
Placing a value on a business is partly an art and partly a science.
There is no single best method for determining the value of a business.
The following techniques are useful:
1. Basic Balance Sheet Methods: Net Worth = Assets – Liabilitis
a. Balance Sheet Technique:
a method of valuing a business based on the value of the company’s net worth (net worth
= total assets – total liabilities)
b. Adjusted Balance Sheet Technique
A more realistic method for determining a company’s value is to adjust the book value of
net worth to reflect actual market value.
The adjusted balance sheet technique is thus a method of valuing a business based on the
market value of the company’s net worth
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2. Earnings Approach
A method of valuing a business that recognizes that a buyer is purchasing the future
income (earnings) potential of a business
Example is the capitalized earnings approach
Under this approach, Value = Net earnings (after deducting owners salary)/ Rate of return
3. Market Approach
A method of valuing a business that uses the price/earnings ratio of similar publicly held
companies to determine value.
Value = Average P/E ratio * Estimated Net Earnings.
Negotiating the Deal
The first rule of negotiating is never to confuse price with value
In a business sale, the party who is the better negotiator usually comes out on top.
Before beginning negotiations, a buyer should identify the factors that are affecting the
negotiations and then develop a negotiating strategy.
The best deals are the result of a cooperative relationship between the parties based on
trust.
The 5 Ps of Negotiating
1. Preparation: Examine the needs of both parties and all of the relevant external factors
affecting the negotiation before you sit down to talk
2. Poise: Remain calm during the negotiation.
3. Patience: Don’t be in such a hurry to close the deal you end up giving up much of what
you hoped to get.
4. Persuasiveness: Know what your most important positions are, articulate them, and offer
support for your position.
5. Persistence: Don’t give in at the first sign of resistance to your position, especially in
issues you consider very important.
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CHAPTER 6: DEVELOPING MARKETING STRATEGIES
Building a Guerrilla Marketing Plan
Marketing is the process of creating and delivering desired goods and services to
customers, and involves all of the activities associated with winning and retaining loyal
customers.
The secret to successful marketing is to understand what your target customers’ needs,
demands, and wants are before your competitors can; offer them the products and
services that will satisfy those needs, demands and wants; and provide customers service,
convenience and value.
Guerrilla marketing strategies are unconventional, lowcost, creative marketing strategies
designed to give small companies an edge over their larger, richer, more powerful rivals.
A guerilla marketing plan should accomplish four objectives:
1. It should pinpoint the specific target markets the small company will serve.
2. It should determine customer needs and wants through market research.
3. It should analyze the firm’s competitive advantages and build a guerrilla marketing
strategy around them.
4. It should help create a marketing mix that meets customer needs and wants.
Pinpointing the Target Market
Target market is the specific group of customers at whom a company aims its goods or
services.
To be customer driven, an effective marketing program must be based on a clear, concise
definition of a company’s target customers.
A sound market research helps the owner pinpoint his target market.
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The most successful businesses have well defined portraits of the customers they are
seeking to attract.
Determining Customer Needs and Wants Through Market Research
Market research is the vehichle for gathering the information that serves as the
foundation for the marketing plan.
It involves systematically collecting, analyzing, and interpreting data pertaining to a
company’s market, customers and competitors.
The objective of market research is to learn how to improve the level of satisfaction for
existing customers and to find ways to attract new customers.
Market research does not have to be time consuming, complex or expensive to be useful.
By applying the same type of creativity that they display when creating their businesses,
entrepreneurs can perform effective market research at reasonable costs.
The steps in conducting market research include:
1. Defining the objective
The first and most crucial step.
It answers the question, “What do we want to know?”
2. Collect the data
The marketing approach that dominates today is individualized (onetoone) marketing, a
system based on gathering data on individual customers and developing a marketing
program designed to appeal specifically to their needs and wants.
How can entrepreneurs collect such valuable market and customer information? Two
basic methods are available: conducting primary research (data you collect and analyze
yourself) and gathering secondary research (data that have already been compiled and are
available, often at a very reasonable cost.
3. Analyze and Interpret the Data
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Entrepreneurs must use judgment and common sense to determine what the results of
their research mean.
4. Draw Conclusions and Act
The market research process is not complete until the business owner acts on the
information collected.
Plotting a Guerilla Marketing Strategy: How to Build a Competitive Edge
When plotting a marketing strategy, owners must strive to achieve a competitive edge
some way to make their companies different from, and better than the competition.
Successful entrepreneurs rely on the following effective guerilla marketing strategies to
develop a competitive edge:
1. Find a Niche and Fill it
A niche strategy allows a small company to maximize the advantages of its size and to
compete effectively even in industries dominated by giants.
Focusing on niches that are too small to be attractive to large companies is a common
recipe for success among thriving small companies.
2. Don’t Just Sell – Entertain
Winning customers today requires more than low prices and wide merchandise selection;
increasingly, businesses are adopting strategies based on entertailing.
Entertailing is a marketing concept designed to draw customers into a store by creating a
kaleidoscope of sights, sounds, smells and activities, all designed to entertain and of
course sell.
3. Strive to be Unique
Entrepreneurs can achieve a unique place in the market in a variety of ways, including
through the products and services they offer, the marketing and promotional campaigns
they use, the store layouts they design, and the business strategies they employ.
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4. Create an Identity for your business
Some of the most powerful marketers are those companies that have a clear sense of who
they are, what they stand for, and why they exist.
5. Connect with Customers on an Emotional Level
Companies that establish a deeper relationship with their customers than one based
merely on making a sale have the capacity to be exceptional guerrilla marketers.
They connect with their customers emotionally by supporting causes that are important to
their customer base, taking exceptional care of their customers, surpassing customers’
expectations in quality and service, or making it fun and enjoyable to do business with
them.
6. Focus on the Customer
Businesses must realize that everything in the business – even the business itself –
depends on creating a satisfied customer.
7. Devotion to Quality
Worldclass companies treat quality as a strategic objective – an integral part of a
company’s strategy and culture.
This philosophy is called total quality management (TQM) – quality not just in the
product or service itself but in every aspect of the business and its relationship with the
customer and continuous improvement in the quality delivered to customers.
8. Attention to Convenience
Successful companies go out of their way to make sure that it is easy for customers to do
business with them.
9. Concentration on Innovation
Innovation is the key to success.
Markets change too quickly and competitors move too fast for a small company to stand
still and remain competitive.
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Because y cannot outspend their larger rivals, small companies often turn to superior
innovation as the way to gain a competitive edge.
10. Dedication to Service and Customer Satisfaction
Success businesses recognize that superior customer service is only an intermediate step
towards the goal of customer satisfaction.
These companies seek to go beyond customer satisfaction, striving for customer
astonishement.
Certainly the least expensive – and the most effective way to achieve customer
satisfaction is through friendly, personal service.
11. Emphasis on Speed
Worldclass companies recognize that reducing the time it takes to develop, design,
manufacture, and deliver a product reduces costs, increases quality, improves customer
satisfaction, and boosts market share.
Marketing on the World Wide Web
The Web offers small business owners tremendous marketing potential on a par with
their larger rivals.
Establishing a presence on the Web is important for companies targeting educated,
wealthy, young customers.
Successful Web sites are attractive, inviting, easy to navigate, interactive, and offer users
something of value.
The Marketing Mix
The major elements of a marketing strategy are the four Ps of marketing – product, place,
price and promotion.
1. Product
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A product is any item or service that satisfies the need of a customer.
Products can have form and shape, or they can be services with no physical form.
The product life cycle describes the stages of development, growth, and decline in a
product’s life.
Stage 1: introductory stage – the stage in which a product or service must break into the
market and overcome customer inertia.
Stage 2: growth and acceptance stage – the stage in which sales and profits materialize
Stage 3: maturity and competition stage – the stage in which sales rise, but profits peak
and then fall as competitors enter the market.
Stage 4: market saturation stage – stage in which sales peak, indicating the time to
introduce the next generation product.
Stage 5: product decline stage – the stage in which sales continue to fall and profit
margins decline drastically.
2. Place
Refers to method of distribution of products
The focus here is on choosing the appropriate channel of distribution and using it most
efficiently.
3. Price
Almost everyone agrees that the price of the product or service is a key factor in the
decision to buy.
Price affects both sales volume and profits, and without the right price, both sales and
profits will suffer.
The right price for a product or service depends on three factors: (1) a small company’s
cost structure, (2) an assessment of what the market will bear, and (3) the desired image
the company wants to create in the customer’s mind.
4. Promotion
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Involves both advertising and personal selling
The goal is to inform and persuade customers
Advertising communicates to potential customers through some mass medium the
benefits of a good or service.
Personal selling involves the art of persuasive sales on a onetoone basis.
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CHAPTER 6: BUILDING A POWERFUL MARKET PLAN
customers.
services.
36
seeking to attract.

6. Collect the data

37
course sell.
38
them.

business with them.
39

astonishement.

something of value.
The Marketing Mix
5. Product
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product’s life.
6. Place
efficiently.
7. Price
decision to buy.
8. Promotion
41

42
CHAPTER 7: INTEGRATED MARKETING COMMUNICATIONS AND PRICING
STRATEGIES
The Basics of a Marketing Communications Plan
Every small business needs a plan to assure that the money invested in its marketing
communications is not wasted.
The first step is to define the purpose of the company’s marketing communications
program. In other words, the owner must decide, “What do I want to accomplish with my
messages?”
The next step in developing a communications plan is to analyze the firm and its target
audience.
Once business owners have defined their target audience, they can design marketing
messages and choose the media for transmitting the. At this stage, the owners decide
what to say and how to say it.
Entrepreneurs should build their advertisements around a unique selling proposition

(USP).
USP is a key customer benefit of a product or service that sets it apart from its
competition; it answers the customer’s question: “What’s in it for me?”
The best way to identify a meaningful USP is to describe the primary benefit your
product or service offer customers, and then to list other secondary benefits it provides.
The Operational Elements of a Marketing Communications Plan
The marketing communications plan is made operational by ensuring that all elements of
the plan (advertising, publicity, and personal selling) achieve a consistent message that is
based on the firm’s USP.
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1. Advertising
Advertising is any sales presentation that is nonpersonal in nature and is paid for by an
identified sponsor.
There are five fundamentals of a successful advertisement:
i. It should communicate the company’s USP
ii. It should prove the USP and benefits to the customer with facts, statistics, or
testimonials.
iii. It should emphasize a key benefit of the product or service to the customer.
iv. It should attract attention
v. It should motivate customers to take action immediately.
2. Publicity
Any commercial news covered by the media that boosts sales but for which a small

company does not pay
The following tactics can help any small business owner stimulate publicity for his or her
firm:
i. Sponsor a community project or support a nonprofit organization or charity
ii. Promote a good cause
iii. Offer or sponsor a seminar
3. Personal Selling
The personal contact between salespeople and potential customers resulting from sales
efforts.
Not everyone can be effective at personal selling. It requires training about the product or
service, and certain qualities such as patience, motivation to succeed and empathy for
customers.
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Selecting Advertising Media
One of the most important decisions an entrepreneur must make is which media to use in
disseminating the advertising message.
The medium used to transmit the message influences the consumer’s perception and
reception of it. By choosing the proper advertising media, a business owner can reach his
target audience effectively at minimum cost.
Traditional Media options are as follows:
1. WordofMouth Advertising and Endorsements
Advertising in which satisfied customers recommend a business to friends, family

members, and acquaintances.
The ultimate in wordofmouth advertising is what experts call “buzz”. Buzz occurs when
a product is hot and everyone is talking about it.
2. Newspapers
3. Radio
4. Television
5. Magazines
6. Direct Mail
7. Internet
Preparing an Advertising Budget
Establishing an advertising budget presents a real challenge to the small business owner.
There are four basic methods:
1. Whatisaffordable method
Management spends what it can afford on advertising.
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This method fails to relate the advertising budget to the advertising objective.
2. Matching competitor method
This method assumes that a firm’s advertising needs and strategies are the same as those
of the competitor, so the firm spends the same amount as its competitors do.
Relying on this technique can lead to blind imitation instead of a budget suited to the
small firm’s circumstances.
3. Percentageofsales approach
Most commonly used method of establishing an advertising budget.
This method relates advertising expenditures to actual sales results.
Relying on this method can be dangerous as it may not be representative of a small

company’s advertising needs.
4. Objectiveandtask method
Most difficult and least used technique
It is also the method most often recommended by advertising experts
With this method, an owner links advertising expenditures to specific objectives.
Advertise Big on a Small Budget
Despite their limited advertising budgets, small businesses do not have to take a second
class approach to advertising.
Three techniques that can stretch a small company’s advertising dollars are:
1. Cooperative Advertising
An arrangement in which a manufacturing company shares the cost of advertising with a
small retailer if the retailer features its products in those ads.
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Both the manufacturer and the retailer get more advertising per dollar by sharing
expenses
2. Shared Advertising
An arrangement in which a group of similar businesses forms a syndicate to produce
generic ads that allow the individual businesses to dub in local information.
Technique is especially useful for firms that sell relatively standardized products or
services such as legal assistance, autos, and furniture.
3. Publicity
Pricing Strategies and Tactics
A. Introducing a new product
Pricing a new product is often difficult for the small business manager, but it should
accomplish three objectives:
i. Getting the product accepted: No matter how unusual a product is, its price must be
acceptable to the firm’s potential customers.
ii. Maintaining market share as competition grows: If a new product is successful,

competitors will enter the market, and the small company must work to expand or at
least maintain its market share. Continuously reappraising the product’s price in
conjunction with special advertising and promotion techniques helps to retain a
satisfactory market share.
iii. Earning a profit: Obviously, a small firm must establish a price for the new product
higher than its cost. Entrepreneurs should not introduce a new product at a price
below cost because it is much easier to lower a price than to increase it once the
product in on the market.
Small business strategies have three basic strategies to choose from when establishing a
new product’s price:
1. Market penetration
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If a small business introduces a product into a highly competitive market in which a large
number of similar products are competing for acceptance, the product must penetrate the
market to be successful.
To gain quick acceptance and extensive distribution in the mass market, the firm should
introduce the product with a low price (just above the total unit cost).
2. Skimming
A skimming pricing strategy often is used when a company introduces a new product into
a market with little or no competition.
Here a firm uses a higherthannormal price in an effort to quickly recover the initial
developmental and promotional costs of the market.
Successful skimming strategies require a company to differentiate its products or services
from those of the competition, justifying the aboveaverage price.
3. Sliding down the demand curve
It is a variation of the skimming pricing strategy.
Using this tactic, a small firm introduces a product at a high price. Then technological
advancements enable the firm to lower its costs quickly and to reduce the product’s price
before the competition can.
By beating other businesses in a price decline, the small company discourages

competitors and gradually, over time, becomes a high volume producer.
Computers are a prime example of a product introduced at a high price that quickly
cascaded downward as companies made important technological advances.
Pricing Established Goods and Services
1. Odd pricing
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A pricing technique where managers prefer to establish prices that end in odd numbers
(5, 7, and 9) because they believe for example that merchandise selling at N1295 appears
to be much cheaper than the same item priced at N1300.
Effectiveness of this approach remains to be proven.
2. Price Lining
A technique that greatly simplifies the pricing function.
Managers set the same price for products that have similar features and appear within the
same line.
For example, most movie stores use price lines for their DVDs and CDs.
3. Leader Pricing
A technique that involves marking down the normal price of a popular item in an attempt
to attract more customers who make incidental purchases of other items at regular prices
4. Geographical pricing
a. Zone pricing: a technique that involves setting different prices for customers located in
different territories because of different transportation costs. (e.g parcel post charges at
post office, UPS or DHL)
b. Delivered pricing: a technique in which a company charges all customers the same price
regardless of their locations.
c. FOBFactory: a pricing method in which a company sells merchandise to customers on
the condition that they pay all shipping costs.
5. Opportunistic pricing
A pricing method that involves charging customers unreasonably high prices when goods
or services are in short supply.
Opportunistic pricing may backfire, however, because customers know that a company is
exploiting them.
6. Discounts (markdowns)
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Discounts are reductions from normal prices.
Many small business managers use discounts to move stale, outdated, damaged or slow
moving merchandise.
Multiple unit pricing is a promotional technique that offers customers discounts if they
purchase in quantity.
7. Suggested Retail Prices
Many manufacturers print suggested retail prices on their products or include them on
invoices or in wholesale catalogues.
Many small businesses follow these suggested retail prices because it eliminates the need
to make a pricing decision.
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CHAPTER 8: MANAGING CASH FLOW
Cash Management
A survey by the National Federation of Independent Businesses found that 67% of small
business owners say they have at least occasional problems managing cash flow; 19%
report cash flow as a continuing problem.
The only way to avoid this potentially businesscrushing predicament is by using the
principles of cash management.
Cash management is the process of forecasting, collecting, disbursing, investing and

planning for the cash a company needs to operate smoothly.
Cash management is a vital task because cash is the most important yet least productive
asset that a small business owns.
A business must have enough cash to meet its obligations or it will be declared bankrupt.
The first step in managing cash flow more effectively is to understand the company’s
cash flow cycle.
Cash flow cycle is the time lag between paying suppliers for merchandise or materials
and receiving payment from customers; the longer this cash flow cycle, the more likely
the business owner is to encounter a cash crisis
The next step in effective cash management is to analyze the cash flow cycle, looking for
ways to reduce its length.
5 Cash Management Roles of the Entrepreneur
1. Cash Finder:
This is the entrepreneur’s first and foremost responsibility.
You must make sure there is enough capital to pay all present and future bills.
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This is not a onetime task, it is an ongoing job.
2. Cash Planner:
As cash planner, an entrepreneur makes sure the company’s cash is used properly and
efficiently.
You must keep track of its cash, make sure it is available to pay bills, and plan for its
future use.
3. Cash Distributor:
This role requires you to control the cash needed to pay the company’s bills and the
priority and the timing of those payments.
Forecasting cash disbursements accurately and making sure the cash is available when
payments come due are essential to keeping the business solvent.
4. Cash Collector:
As cash collector, your job is to make sure your customers pay their bills on time.
Too often, entrepreneurs focus on pumping up sales, while neglecting to collect the cash
from those sales.
Having someone n your company responsible for collective accounts receivable is
essential.
Uncollected accounts drain a small company’s pool of cash very quickly.
5. Cash Conserver
This role requires you to make sure your company gets maximum value for the dollars it
spends.
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Whether you are buying inventory to resell or computers to keep track of what you sell, it
is important to get the most for your money.
Avoiding unnecessary expenditures is an important part of this task.
The goal is to spend cash so it will produce a return for the company.
Cash and Profits are not the same
When analyzing cash flow, entrepreneurs must understand that cash and profits are not
the same.
Profit (or net income) is the difference between a company’s total revenue and its total
expenses. It measures how efficiently a business is operating.
Cash is the money that is free and readily available to use in a business.
Cash follow measures a company’s liquidity and its ability to pay its bills and other

financial obligations on time by tracking the flow of cash into and out of the businesses
over a period of time.
Profitability does not guarantee liquidity, as profits can be tied up in many forms such as
accounts receivable, inventory, computers or machinery.
Decreases in cash occur when the business purchases on credit or for cash, goods for
inventory or materials for use in production.
When a company takes in cash or collects payments on accounts receivable, its cash
balance increases.
The Cash Budget
The need for a cash budget arises because in every business the cash flowing in is rarely
“in sync” with the cash flowing out of the business.
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This uneven flow of cash creates periodic cash surpluses and shortages, making it
necessary for entrepreneurs to track the flow of cash through their businesses so they can
project realistically the cash available throughout the year.
The cash budget is a “cash map” showing the amount and the timing of cash receipts and
cash disbursements on a daily, weekly or monthly basis.
Preparing a Cash Budget
There are five basic steps in completing a cash budget:
1. Determining an adequate minimum cash balance
The most reliable method of deciding cash balance is based on past experience.
Past operating records should indicate the proper cash cushion needed to cover any
unexpected expenses after all normal cash outlines are deducted from the month’s cash
receipts.
2. Forecasting sales
The heart of the cash budget is the sales forecast.
It is the central factor in creating an accurate picture of the firm’s cash position because
sales ultimately are transformed into cash receipts and cash disbursements.
For an established business, a sales forecast is based on past sales, but owners must be
careful not to be excessively optimistic in projecting sales.
The task of forecasting sales for the new firm is more difficult but not impossible. For
example, the new owner might conduct research on similar firms and their sales patterns
in the first year of operation to come up with a forecast.
No matter what techniques entrepreneurs use, they must recognize that even the best sales
estimates will be wrong.
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Many financial analysts suggest that the owner create three sales estimates – an
optimistic, a pessimistic, and a most likely sales estimate – and then make a separate cash
budget for each forecast.
3. Forecasting Cash Receipts
When a firm sells goods and services on credit, the cash budget must account for the
delay between the sale and the actual collection of the proceeds.
Collecting accounts receivable promptly poses problems for many small companies, and
is often cited by small business owners as the primary cause of cash flow problems.
4. Forecasting Cash Disbursements
The key factor in forecasting disbursements for a cash budget is to record them in the
month in which they will be paid, not when the obligation is incurred.
Usually an owner’s tendency is to underestimate cash disbursements, which can result in
a cash crisis. To prevent this, wise entrepreneurs cushion their cash disbursement
accounts, assuming they will be higher than expected.
5. Estimating the EndofMonth Cash Balance
Begin by determining the cash balance at the beginning of the month ( cash in hand, and
cash in savings or checking account)
Add forecasted cash receipts and decrease forecasted cash disbursements to estimate end
ofmonth cash balance.
The “Big Three” of Cash Management
The big three of cash management are accounts receivable, accounts payable and
inventory.
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A good cash management “recipe” involves collecting your company’s cash as quickly as
possible, economizing to keep costs low, and paying out your company’s cash as slowly
as possible.
Business owners must also monitor inventory carefully to avoid tying up valuable cash in
an excessive stock of inventory.
1. Accounts Receivable:
Controlling accounts receivable requires business owners to establish clear, firm credit
and collection policies and to screen customers before granting them credit.
Sending invoices promptly and acting on pastdue accounts quickly also improve cash
flow.
The goal is to collect cash from receivables as quickly as possible.
2. Accounts Payable:
When managing accounts payable, a manager’s goal is to stretch out payables as long as
possible without damaging the company’s credit rating.
Other techniques include verifying invoices before paying them, taking advantage of cash
discounts, and negotiating the best possible credit terms.
3. Inventory:
Inventory frequently causes cash headaches for small business managers.
Excess inventory earns a zero return of return and ties up a company’s cash
unnecessarily.
Owners must watch for stale merchandise.
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Avoiding the Cash Crunch
By utilizing the following techniques, entrepreneurs can get maximum benefit from their
companies’ pool of available cash:
1. Barter
Bartering is the exchange of goods and services for other goods and services rather than
for cash
2. Trim Overhead costs
Simple costcutting measures can save big money.
Examples include: i) periodically evaluating expenses, ii). Leasing instead of buying

when practical, iii) Avoiding nonessential outlays and iv) hiring parttime and freelance
specialists whenever possible.
3. Be on the lookout for employee theft
4. Keep your business plan current
5. Invest surplus cash
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CHAPTER 9: CREATING A SUCCESSFUL FINANCIAL PLAN
Fashioning a welldesigned, logical financial plan as part of a comprehensive business
plan is one of the most important steps to launching a new business venture.
Entrepreneurs who fail to develop workable strategies for earning a profit within a
reasonable time eventually will suffer the ultimate business penalty: failure.
Financial management is a process that provides entrepreneurs with relevant financial
information in an easytoread format on a timely basis; it allows entrepreneurs to know
not only how their businesses are doing financially but also why they are performing that
way.
Basic Financial Statements
Entrepreneurs rely on three basic financial statements to understand the financial conditions of
their companies:
1. The balance sheet:
Built on the accounting equation, Assets = Liabilities + Owner’s equity (Capital)
It provides an estimate of the company’s value on a particular date.
The first section of the balance sheet lists the firm’s assets and show the total value of
everything the business owns; Current assets consist of cash and items to be converted to
cash with one year or within the company’s normal operating cycle. Fixed assets are
assets acquired for longterm use in a business.
The second section shows the business’s liabilities (the creditors’ claims against the
company’s assets). Current liabilities are those debts that must be made within one year
or within the normal operating cycle of a company. Longterm liabilities are those that
come due after one year.
This section also shows the owner’s equity, the value of the owner’s investment in the
business. It is the balancing factor on the balance sheet.
2. Income Statement
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This statement compares the firm’s revenues against its expenses to determine its net
profit (or loss).
It provides information about the company’s bottom line.
To calculate the net profit or loss, an entrepreneur records sales revenues for the year,
which include all income that flows into the business from sales of goods and services.
Income from other sources also must be included in the revenue section.
To determine net sales, owners subtract the value of returned items and refunds from
gross revenue.
Cost of goods sold represent the total cost, including shipping, of the merchandise sold
during the accounting period
Net sales minus costs of goods sold results in a company’s gross profit. Dividing fross
profit by net sales revenue produces the gross profit margin.
Operating expenses include those costs that contribute directly to the manufacture and
distribution of goods. General expenses are indirect costs incurred in operating the
business.
Total revenue minus total expenses gives the net income (or loss) for the accounting
period.
3. Statement of cash flows:
This statement shows the change in the company’s working capital over the accounting
period by listing the sources and the uses of funds.
Creating Projected(pro forma) Financial Statements
Projected financial statements are a basic component of a sound financial plan.
They help the manager plot the company’s financial future by setting operating objectives
and by analyzing the reasons for variations from targeted results.
Also, the small business in search of startup funds will need these pro forma statements
to present to prospective lenders and investors.
They also assist in determining the amount of cash, inventory, fixtures and other assets
the business will need to begin operations.
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Ratio Analysis
Once an entrepreneur has the business “up and running” with the help of a solid financial
plan, the next step is to keep the company moving in the right direction with the help of
proper financial controls.
Establishing these controls and using them consistently is one of the keys to keeping a
business vibrant and healthy.
Ratio analysis is a method of expressing the relationship between any two accounting
elements that allow business owners to analyze their companies’ financial performances.
There are 12 key ratios which are divided into four major categories: liquidity ratios,
leverage ratios, operating ratios, and profitability ratios.
A. Liquidity Ratios
They tell whether a small business will be able to meet its shortterm obligations as they
come due.
1. Current ratio
Measures a small firm’s solvency by indicating its ability to pay current liabilities out of
current assets.
Current ratio = Current assets/Current liabilities
Also called working capital ratio
Typically, financial analysts suggest that a small business maintain a current tatio of at
least 2:1 (2 dollars of current assets for every 1 dollar of current liabilities) to maintain a
comfortable cushion of working capital.
Generally, the higher a company’s current ratio, the stronger its financial position.
2. Quick ratio
A conservative measure of a firm’s liquidity, measuring the extent to which its most
liquid assets cover its current liabilities.
Quick assets include all current assets except inventory
Quick ratio = Quick assets/Current liabilities
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Also called acid test ratio
It is a more rigorous test of a firm’s liquidity.
Generally a quick ratio of 1:1 is considered satisfactory.
B. Leverage Ratios
Measure the financing supplied by a firm’s owners against that supplied by its creditors;
they are a gauge of the depth of a company’s debt.
1. Debt Ratio
Measures the percentage of total assets financed by a company’s creditors compared to
its owners
Debt Ratio = Total debt (or liabilities)/Total assets
A high debt ratio means that most of the firm’s financing comes from creditors, and thus
they bear most of the financial risk.
2. Debt to Net Worth Ratio
Expresses the relationship between the capital contribution from creditors and those from
owners and measures how highly leveraged a company is.
This ratio shows a company’s capital structure by comparing what the business “owes” to
“what it is worth”.
Debt to Net Worth Ratio = Total debt (or liabilities)/ Tangible net worth
Tangible net worth represents the owners’ investment in the business.
The higher this ratio, the more leverage the firm is using, and the lower the degree of
protection afforded creditors if the business should fail.
A higher debt to net worth ratio means that the firm has less capacity to borrow, as
creditors view it as risky.
3. Times Interest Earned Ratio
Measures a small firm’s ability to make the interest payments on its debt.
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It tells how many times a company’s earnings cover the interest payments on the debt it is
carrying
Times Interest Earned = Earnings before interest and taxes (EBIT)/Total Interest Expense
A high ratio suggests that the company would have little difficulty meeting the interest
payments on its loans, and creditors see this a s a sign of safety for future loans.
C. Operating Ratios
Help an entrepreneur evaluate a small company’s overall performance and indicate how
effectively the business employs its resources.
1. Average Inventory Turnover
Measures the number of times its average inventory is sold out, or turned over, during an
accounting period.
This ratio tells the owner whether or not he or she is managing inventory properly.
It tells the owner whether inventory is understocked, overstocked or obsolete.
Average Inventory Turnover = Cost of goods sold/Average Inventory
Average Inventory = Beginning Inventory + Ending Inventory/2
Financial analysts suggest that a favorable turnover ratio depends on the type of business,
its size, profitability, its method of inventory valuation, and other relevant factors.
2. Average Collection Period Ratio
Measures the number of days it takes to collect accounts receivable
To compute the average collection period, you must first calculate the firm’s receivable
turnover ratio = Credit sales/Accounts receivable.
The receivable turnover ratio measures the number of times the firm’s accounts
receivable turn over during the accounting period.
Average collection period = Days in accounting period / Receivable turnover ratio
The lower a company’s average collection period, the fast it is collecting its receivables.
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One of the most useful applications of the collection period ratio is to compare it to the
industry average.
3. Average Payable Period Ratio
Measures the number of days it takes a company to pay its accounts payable
To compute, first calculate the payables turnover = purchases/accounts payable.
Average payable period = Days in accounting period/ payables turnover ratio
One of the most meaningful comparisons for this ratio is against the credit terms
suppliers offer.
If the average payable ratio slips beyond the supplier’s credit terms, it is an indication
that the company is suffering from a sloppy accounts payable procedure or from cash
shortages, and its credit rating is in danger.
4. Net Sales to Total Assets Ratio
Measures a company’s ability to generate sales in relation to its asset base.
It describes how productively the firm employs its assets to produce sales revenue
Also called Total Asset Turnover
Total Asset Turnover = Net Sales/ Net Total Assets
Net Total Assets = Total Assets – Depreciation
Ratio is only meaningful when compared with that of similar firms in the same industry
category.
A total assets turnover ratio below the industry indicates that a small firm is not
generating an adequate sales volume for its asset size.
5. Net Sales to Working Capital Ratio
Measures how many dollars in sales a business generates for every dollar of working
capital.
Working capital = Current Assets – Current liabilities
Net sales to working capital ratio = Net Sales/ (Current assets – Current liabilities)
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D. Profitability Ratios
Indicate how efficiently a small company is being managed
They describe how successfully a firm is using its available resources to generate a profit.
1. Net Profit on Sales Ratio
Measures a company’s profit per dollar of sales
Net profit on sales ratio = Net profit/Net sales
To evaluate this ratio properly, the owner must consider a firm’s asset value, its inventory
and receivables turnover ratios, and its total capitalization.
If the firm’s profit margin on sales is below the industry average, it may be a sign that its
prices are too low, that its costs are excessively high , or both.
2. Net Profit to Equity Ratio
Measures the owners’ rate of return on investment.
Because it reports the percentage of the owners’ investment in the business that is being
returned through profits annually, it is one of the most important indicators of a firm’s
profitability or management’s efficiency
Net Profit to Equity Ratio = Net Profit/Owners’ equity (or net worth)
Interpreting Business Ratios
To benefit from ratio analysis, the small company should compare its ratios to those of
other companies in the same line of business and look for trends over time.
When business owners detect deviations in their companies’ ratios from industry
standards, they should determine the cause of the deviations.
In some cases, such deviations are the result of sound business decisions; in other
instances, they might be indicators of what could become serious problems for the
company.
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CHAPTER 10: BUSINESS PLANNING
customers.
services.
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seeking to attract.
10. Collect the data
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course sell.
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them.
business with them.
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astonishement.
something of value.
The Marketing Mix
9. Product
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product’s life.
10. Place
efficiently.
11. Price
decision to buy.
12. Promotion
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CHAPTER 10b: CRATFTING A WINNING BUSINESS PLAN
Why Develop a Business Plan
A business plan is a written summary of an entrepreneur’s proposed business venture, its
operational and financial details, its marketing opportunities and strategy, and its
managers’ skills and abilities.
A well assembled business plan serves three essential functions:
1. Most importantly, it guides the company’s operations by charting its future course and
devising a strategy for success.
2. It attracts lenders and investors
3. It forces potential entrepreneurs to look at their business ideas in the harsh light of reality
by making them assess their ventures’ chances of success more objectively.
To get external financing, an entrepreneur’s plan must pass three tests with potential

lenders and investors:
i. Reality Test
The external component of the reality test revolves around proving that a market for the
product or service really does exist. It focuses on industry attractiveness, market niches,
potential customers, market size, degree of competition, and similar factors.
The internal component of the reality test focuses on the product or service itself. Can the
company really build or provide it for the cost estimates of the business plan. Does it
offer customers something of value?
ii. Competitive Test
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The external part of the competitive test evaluates the company’s relative position to its
key competitors. Ho w do the company’s strength and weaknesses match up with those of
the competition?
The internal competitive test focuses on management’s ability to create a company that
will gain an edge over existing rivals. To pass this part of the test, a plan must prove the
quality, skill and experience of the venture’s management team.
iii. Value Test
To convince lenders and investors to put their money into the venture, a business plan
must prove to them that it offers a high probability of repayment or an attractive rate of
return.
The Elements of a Business Plan
Although a business plan should be unique and tailormade to suit the particular needs of a small
company, it should cover these basic elements:
1. The Executive Summary
A concise ( maximum of 2 pages) summary of all the relevant points of the business
venture.
It should explain the basic business model and briefly describe the owners and key
employees, target market, and financial highlights.
Although it is the first part of the business plan, it should be the last section written.
2. Mission Statement
The broadest expression of a company’s purpose and defines the direction in which it will
move.
3. Company History
Brief history of the operation, highlighting the significant financial and operational events
in the company’s life.
4. Business and Industry Profile
To acquaint lenders with the industry in which a company competes, an entrepreneur
should describe it in the business plan.
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This section should begin with a statement of the company’s general business goals and a
narrower definition of its immediate objectives.
5. Business Strategy
This segment of the business plan outlines the methods the company can use to meets its
goals and objectives.
6. Description of Firm’s Product/Service
An entrepreneur should describe the company’s overall product line, giving an overview
of how customers use its goods or services.
The emphasis of this section should be on defining the benefits customers get by
purchasing the company’s product or services rather than just a description of the features
of those products and services.
Manufacturers should describe their production process, strategic raw materials required,
sources of supply they will use, and their costs.
7. Marketing Strategy
Defining the target market and its potential is one of the most important and most
challenging parts of building a business plan.
Prospective lenders and investors want to know whether or not there is a real market for
the proposed good or service.
Questions this part of the business plan should address include: Who are the most
promising customers or prospects? What are their characteristics? Where do they live?
What do they buy? Why do they buy? When do they buy? What expectations do they
have about the product or service? Will the business focus on a niche? How does the
company seek to position itself in its market.
This portion of the plan also should describe the channels of distribution that the business
will use.
8. Competitor Analysis
This section of the plan should include an analysis of each significant competitor.
Entrepreneurs who believe that they have no competition are only fooling themselves.
This section of the plan should also focus on demonstrating that the entrepreneur’s
company has an advantage over its competitors.
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9. Description of the Management Team
The most important factor in the success of a business venture is the quality of its
management, and most financial officers and investors weigh heavily the ability and
experience of the firm’s managers in their financing decisions.
A plan should thus describe the qualifications of business officers, key directors and any
person with at least 20 percent ownership in the company.
Resumes in a plan should summarize an individual’s education, work history and relevant
business experience.
10. Plan of Operation
To complete the description of the business, the owner should construct an organizational
chart identifying the business’s key positions and the personnel occupying them.
Also, a description of the form of ownership and of any leases, contracts, and other

relevant agreements pertaining to the business is helpful.
11. Forecasted or Pro Forma Financial Statements
One of the most important sections of the business plan is an outline of the proposed
company’s financial statements.
Whether assembling a plan for an existing business or for a startup, an entrepreneur
should carefully prepare monthly projected financial statements for the operation for the
next year using past operating data, published statistics, and judgments to derive three
sets of forecasts of the income statement, balance sheet, cash budge and schedule of
planned capital expenditures.
12. The Loan or Investment Proposal
The loan or investment proposal section of the business plan should state the purpose of
the financing, the amount requested, and the plans for repayment or, in the case of
investors, an attractive exit strategy.
Making the Business Plan Presentation
Lenders and investors are favorably impressed by entrepreneurs who are informed and
prepared when requesting a loan or investment.
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Some helpful tips for making a business plan presentation to potential lenders and
investors include:
1. Demonstrate enthusiasm about the venture, but don’t be overly emotional.
2. Know your audience thoroughly and work to establish rapport with them.
3. “Hook” investors quickly with an upfront explanation of the new venture, its
opportunities, and the anticipated benefits to them.
4. Use visual aids.
5. Hit the highlights of your venture
6. Don’t get caught up in too much detail in early meetings with lenders and investors.
7. Avoid the use of technological terms that will likely be above most of the audience.
8. Rehearse your presentation before giving it.
9. Close by reinforcing the nature of the opportunity.
10. Be prepared for questions.
11. Follow up with every investor to whom you make a presentation. Don’t sit back and wait;
be proactive. They have what you need – investment capital.
What Lenders and Investors look for in a Business Plan
Small business owners need to be aware of the criteria bankers use in evaluating the
creditworthiness of loan applications. These criteria are referred to as the “five Cs of
credit”.
1. Capital
Banks expect a small company to have an equity base of investment by the owner(s) that
will help support the venture during times of financial strain, which are common during
the startup and growth phases of a business.
Lenders and Investors see capital as a risksharing strategy with entrepreneurs.
2. Capacity
Another name for capacity is cash flow.
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The bank must be convinced of the firm’s ability to meet its regular financial obligations
and to repay the bank loan, and that takes cash.
Lenders expect small businesses to pass the test of liquidity, especially for shortterm
loans.
3. Collateral
Collateral includes any assets the owner pledges to the bank as security for repayment of
the loan.
Bankers view the entrepreneurs’ willingness to pledge collateral as an indication of their
dedication to making the venture a success.
4. Character
Before extending a loan to or making an investment in a small business, lenders and
investors must be satisfied with an entrepreneur’s character.
The evaluation of character is frequently based on intangible factors such as honesty,
integrity and competence, and it plays a critical role in the decision to put money into a
business or not.
5. Conditions
Lenders and investors consider factors relating to a business’s operation such as potential
growth in the market, competition, location, strengths, weaknesses, opportunities and
threats. The best way to provide this relevant information is in a business plan.
Another important condition influencing the banker’s decision is the shape of the overall
economy, including interest rate levels, inflation rate, and demand for money. Although
these factors are beyond an entrepreneur’s control, they still are an important component
in a banker’s decision.
CHAPTER 11: SOURCES OF FINANCING: DEBT AND EQUITY
Introduction
Raising the money to launch a new business has always been a challenge for
entrepreneurs.
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Rather than rely primarily on a single source of funds as they have in the past,
entrepreneurs must piece together capital from multiple sources, a method known as
layered financing.
This chapter will guide you through the many financing options available to
entrepreneurs, focusing on both sources of equity (ownership) and debt ( borrowed)
financing.
Planning For Capital Needs
Becoming a successful entrepreneur requires one to become a skilled fundraiser, a job
that requires more time and energy than most business founders think.
Capital is any form of wealth employed to produce more health.
Entrepreneurs need three different types of capital:
1. Fixed Capital:
Capital needed to purchase a company’s permanent or fixed assets such as buildings,
land, computers and equipment.
Money invested in these fixed assets are usually large, and frozen because they cannot be
used for any other purpose.
2. Working Capital:
Capital needed to support a business’s shortterm operations.
It represents a company’s temporary funds
Working capital is normally used to buy inventory, pay bills, finance credit sales, pay
wages and salaries, and take care of any unexpected emergencies.
3. Growth Capital:
Capital needed to finance a company’s growth or its expansion in a new direction.
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Equity Capital Versus Debt Capital
Equity Capital
Equity Capital represents the personal investment of the owner (or owners) in a business,
and is sometimes called risk capital because these investors assume the primary risk of
losing funds if the business fails.
If a venture succeeds, however, founders and investors share in the benefits, which can be
quite substantial.
The primary advantage of equity capital it that it does not have to be repaid like a loan
does.
The primary disadvantage is that the entrepreneur must give up some – perhaps most – of
the ownership in the business to outsiders.
Debt Capital
The financing that a small business owner has borrowed and must repay with interest
The primary advantage is that it does not require entrepreneurs to give up ownership of
the business.
The primary disadvantage is that it must be carried as a liability on the balance sheet as
well as be repaid with interest at some point in the future.
Source of Equity Financing
1. Personal Savings: The first place entrepreneurs should look for startup money is their
own pockets.
2. Friends and Family Members
3. Angels: wealthy individuals, often entrepreneurs themselves, who invest in business start
ups in exchange for equity stakes in the companies.
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4. Partners
5. Corporate Venture Capital: When large corporations finance small companies.
6. Venture Capital Companies: private, forprofit organizations that purchase equity

positions in young businesses they believe have highgrowth and highprofit potential.
7. Public Stock Sale (“Going Public”): In some cases, entrepreneurs can raise capital by
selling shares of its stock to the general public for the first time. This is known as an
initial public offering (IPO).
Sources of Debt Financing
1. Commercial Banks:
Offer the greatest variety of loans, although they are conservative lenders.
Typical shortterm loans include commercial loans, lines of credit, discounting accounts
receivable, inventory financing, and floor planning (a form of financing used by big
ticket item retailers like cars, boats).
2. Trade Credit:
Used extensively by small businesses as a source of financing.
Vendors and suppliers commonly finance sales to businesses for 30, 60, or even 90 days.
3. Equipment suppliers: offer small businesses financing similar to trade credit but with
slightly different terms.
4. Commercial Finance Companies:
Offer many of same time of loans that banks do, but are more risk oriented in their

lending practices.
They emphasize accounts receivable financing and inventory loans.
5. Savings and Loan Associations: specialize in loans to purchase real property –

commercial and industrial mortgages for up to 30 years.
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6. Brokerage houses: offer loans to prospective entrepreneurs at lower interest rates than
banks because they have high quality, liquid collateral – stocks and bonds in the
borrower’s portfolio.
7. Insurance Companies:
Provide financing through policy loans and mortgage loans.
Policy loans are loans extended on the basis of the amount of money a customer has paid
into a policy in the form of premiums.
Mortgage loans are made for large amounts and are based on the value of the land being
purchased
8. Credit Unions: a nonprofit financial cooperative that promotes savings and provides loans
to its members.
9. Federally Sponsored Programs
A. NEEDS
The National Economic Empowerment and Development Strategy (NEEDS) is the

response to the development challenges of Nigeria established in 2003 by the Obasanjo
administration.
NEEDS focuses on four key strategies:
i. Poverty eradication
ii. Wealth creation
iii. Employment generation
iv. Value orientation.
The major target of NEEDS is poverty eradication, which perceives entrepreneurship as a
major vehicle for economic growth.
B. SMEDAN
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Small and Medium Development Agency of Nigeria (SMEDAN) was established in
2003.
Its aim was not to provide direct finance to small and medium enterprises, but to facilitate
their access to finance and other resources.
It has four major roles: i) provision of information and awareness creation through
business sensitization activities, ii) Business Development Service (BDS) with its
tripartite role of training, counseling and mentoring, iii) Promotion of enterprise
networking or cluster formation to stimulate international competitiveness, and iv)
advocacy and improvement in operating environment usually in partnership with others.
Internal Methods of Financing
Small business owners may also look inside their firms for capital.
This type of financing is called bootstrap financing, and includes:
1. Factoring Accounts Receivable:
Instead of carrying credit sales on its own books, a small business can sell outright its
accounts receivable to a factor.
A factor is a financial institution that buys a business’s accounts receivable at a discount.
2. Leasing:
By leasing expensive assets, the small business owner is able to use them without locking
in valuable capital for an extended period of time.
3. Credit cards:
Unable to find financing elsewhere, many entrepreneurs launch their companies using the
fastest and most convenient source of debt capital available: credit cards.
Putting business startup costs on credit cards is expensive and risky, but some
entrepreneurs have no choice.
CHAPTER 12: CHOOSING THE RIGHT LOCATION AND LAYOUT
Location: A Source of Competitive Advantage
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Much like choosing a form of ownership and selecting particular sources of financing, the
location decision has farreaching and often longlasting effects on a small company’s
future.
The location decision process resembles a pyramid. The first level of the decision is the
broadest, requiring an entrepreneur to select a particular region of the country. From
there, an entrepreneur must choose the right state, then the right city, and finally, the right
site within the city.
The “secret” to selecting the ideal location lies in knowing which factors are most
important to a company’s success and then finding a location that satisfies as many of
them as possible, particularly those that are most critical
1. Choosing the Region
Which region of the country has the characteristics necessary for a new business to
succeed?
Above all, the entrepreneur must always place the customer first in his or her mind when
deciding on a location.
One of the first stops entrepreneurs should make when conducting a regional evaluation
is the Census Bureau which is an excellent source for basic demographic and population
data.
2. Choosing the State
Some of the key issues to explore include the laws, regulations and taxes that govern
businesses and any incentives or investment credits the state may offer to businesses
locating there.
Other factors include proximity to markets, proximity to raw materials, wage rates,
quantity and quality of the labor supply, general business climate, tax rates, and internet
access.
3. Choosing the City
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A company’s location should match the market for its products or services, and
assembling a demographic profile will tell an entrepreneur how well a particular city suits
the company.
Studying the size of the market for a product or service and the number of existing

competitors will help an entrepreneur determine whether he or she can capture a
sufficiently large market share to earn a profit. Again census data can be valuable.
Some cities have characteristics that attract certain industries, and as a result, companies
tend to cluster there.
Business owners must investigate the quality of local transportation systems
Does the community in which you plan to locate offer adequate police and fire
protection?
A final consideration when selecting a cit is the quality of life it offers. Cities that offer
comfortable weather, cultural events, museums, outdoor activities, concerts, etc are very
attractive to entrepreneurs.
4. Choosing the Site
Each type of business has different evaluation criteria for what makes an ideal location.
The site location decision draws on the most precise information available on the makeup
of the area.
Location Criteria For Retail and Service Businesses
For retailers, the location decision is especially crucial.
Retailers must consider:
1. The size of the trade area (trading area is the region from which a business can expect to
draw customers over a reasonable time span).
2. The volume of customer traffic
3. Number of parking spots
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4. Availability of room for expansion
5. Visibility of a site
Location Options for Retail and Service Businesses
There are six basic areas where retail and service business owners can locate:
1. Central Business District (CBD): CBD is the traditional center of town.
2. Neighborhood Locations: Locations near residential areas.
3. Shopping Centers and Malls
4. Near Competitors: Locating near competitors might be a key factor for success in those
businesses selling goods that customers shop for and compare on the basis of price,
quality, color, and other factors.
5. Outlying Areas: Generally, it is not advisable for a small business to locate in a remote
area because accessibility and traffic flow are vital to retail and service success.
6. HomeBased Business
The Location Decision for Manufacturers
A manufacturer’s location decision is strongly influenced by local zoning ordinances.
Some offer industrial parks designed specifically to attract manufacturers (e.g. Agbara
Industrial Estate in Ogun State).
Two crucial factors for most manufacturers are:
1. The reliability and the cost of transporting raw materials
2. The quality and quantity of available labor.
Layout and Design Considerations
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Once the entrepreneur chooses the best location for his or her business, the next question
deals with designing the proper layout for the building to maximize sales or productivity.
Layout is the logical arrangement of the physical facilities in a business that contributes
to efficient operations, increased productivity, and higher sales.
The following factors have a significant impact on a building’s layout and design:
1. Size: Is it large enough to accommodate the business with some room for growth?
2. Construction and External Appearance: Is the building structurally sound and does it

create the right impression for the business?
3. Entrances: Are they inviting?
4. Legal Issues: Does the building comply with the zoning and planning laws? If not, how
much will it cost to bring it up to standard?
5. Signs: Are they legible, well located, and easy to see?
6. Interior: Does the interior design contribute to our ability to make sales, and is it
ergonomically designed? [Ergonomics is the science of adapting work and the work
environment to complement employees’ strengths and to suit customers’ needs)
7. Lights and Fixtures: Is the lightning adequate for the tasks workers will be performing,
and what is the estimated cost of lightning?
Layout: Maximizing Revenues, Increasing Efficiency and Reducing Cost
The ideal layout for a building depends on the type of business it houses and on the
entrepreneur’s strategy for gaining a competitive advantage.
Retailers design their layouts with the goal of maximizing sales revenue.
Manufacturers see layout as an opportunity to increase efficiency and productivity and to
lower costs.
A. Layout for Retailers
85
Retailers have three basic layout patterns to choose from:
1. The Grid Layout:
A formal arrangement of displays arranged in a rectangular fashion so that aisles are
parallel.
Supermarkets and discounts stores use the grid layout because it is well suited to self
service stores.
This layout uses the available space most efficiently, creates a neat, organized
environment, and facilitates shopping by standardizing the location of items.
2. Freeform Layout:
An informal arrangement of displays of various shapes and sizes.
Its primary advantage is a relaxed, friendly shopping atmosphere it creates, which

encourages customers to shop for longer, and increases the number of impulse purchases
they make.
It is not as efficient as the grid layout, and can cause security problems if not properly
planned.
3. Boutique Layout:
An arrangement that divides a store into a series of individual shopping areas, each with
its own theme.
B. Layout for Manufacturers
Three basic options exist:
1. Product (line) layout:
An arrangement of workers and equipment according to the sequence of operations

performed on a product.
86
Automobile assembly plants, paper mills, and oil refineries are examples of product
layouts.
2. Process Layout:
An arrangement of workers and equipment according to the general function they

perform, without regard to any particular product or customer.
3. FixedPosition Layout:
An arrangement in which materials do not move down a production line but rather,
because of their weight, size or bulk are assembled in one spot.
Aircraft assembly parts and shipyards typify this kind of layout.
Build, Buy or Lease
Once an entrepreneur has a good idea of the specific criteria to be met for a building to
serve the needs of the business, the issue turns to what she can afford to spend.
The ability to obtain the best possible facilities in relation to available cash may depend
largely on whether an entrepreneur decides to build, buy, or lease a building.
Building a new building gives an entrepreneur the opportunity to design exactly what he
wants in a brandnew facility; however, not very small business owner can afford to tie
up significant amounts of cash in fixed assets.
Buying an existing building gives a business owner the freedom to renovate as needed,
but this can be an expensive alternative.
Leasing a location is a common choice because it is economical, but the business owner
faces the uncertainty of lease renewals, rising rents, and renovation problems.
CHAPTER 13: GLOBAL ASPECTS OF ENTREPRENEURSHIP
Why Go Global?
87
Failure to cultivate global markets can be a lethal mistakes for modern businesses,
whatever their size.
Increasingly, small businesses will be under pressure to expand into international markets
and to consider themselves businesses without borders.
Going global can put tremendous strain on a small company, but entrepreneurs who take
the plunge into global business can reap the following benefits:
1. Offset sales declines in the domestic markets:
Markets in foreign countries may be booming when those in Nigeria are sagging.
In this way, global business acts as a countercyclical balance.
2. Increase sales and profits:
3. Extend their products’ life cycle
Some companies have been able to take products that had reached the maturity stage in
their home country and sell them successfully in foreign markets.
4. Lower manufacturing costs:
In industries characterized by high level of fixed costs, businesses that expand into global
markets can lower their manufacturing costs by spreading those fixed costs over a larger
number of units.
5. Improve competitive position and enhance reputation
6. Raise quality levels:
88
Businesses that compete in global markets learn very quickly how to boost their quality
levels to worldclass standards.
7. Become more customer oriented:
Delving into global markets teaches business owners about the unique tastes, customs,
preferences, and habits of customers in many different cultures.
Responding to these differences imbues businesses with a degree of sensitivity toward
their customers, both domestic and foreign.
Strategies For Going Global
Entrepreneurs have eight strategic options to choose from when going global:
1. Creating a World Wide Web
Perhaps the simplest and least expensive way for a small business to begin conducting
business globally is to establish a site on the World Wide Web.
Companies wanting to sell goods on the Web should establish a secure ordering and
payment system for online customers.
2. Trade Intermediaries
Trade intermediaries are domestic agencies that serve as distributors in foreign countries
for domestic companies of all sizes.
These trade intermediaries such as export management companies and export trading
companies serve as a small company’s “export department”.
3. Joint Ventures
89
In a domestic joint venture, 2 or more small Nigerian companies form an alliance for the
purpose of exporting their goods and services abroad.
In a foreign joint venture, a domestic business small business forms an alliance with a
company in the target area.
4. Foreign Licensing
Rather than sell their products or services directly to customers overseas, some small
companies enter foreign markets by licensing businesses in other nations to use their
patents, trademarks, copyrights, technology, processes, or products.
In return for licensing these assets, the small company collects royalties from the sales of
its foreign licenses.
5. International Franchising
6. Countertrading and Bartering
Some countries lack a hard currency that is convertible into other currencies, so
companies doing business there must rely on countertrading or bartering.
Countertrade is a transaction in which a business selling goods in a foreign country
agrees to promote investment and trade in that country.
Bartering involves trading goods and services for other goods and services.
7. Exporting
8. Establishing international locations
90
Exporting
Building a successful export program takes patience and research. Steps include:
1. Realizing that even the tiniest companies and least experienced entrepreneurs have the
potential to export.
2. Analyze your product or service
3. Analyze your commitment
4. Research markets and pick your target.
5. Develop a distribution strategy
6. Find your customer
7. Find financing
8. Ship your goods
9. Collect your money
Barriers to International Trade
A. Domestic Barriers
1. The attitude that “we are too small to export”.
2. Lack of information on how to get started in global trade.
3. A lack of available financing
91
B. International Barriers
1. Tariff Barriers: A tariff is a tax, or duty, that a government imposes on goods and
services imported into that country.
2. Non Tariff Barriers:
i. Quotas: a limit on the amount of product imported into a country.
ii. Embargoes: a total ban on imports of certain products.
iii. Dumping: the practice of selling large quantities of products in foreign countries
below cost in an attempt to gain market share.
C. Political Barriers
Companies doing business in politically risky lands face the very real dangers of:
i. Government takeovers of private property
ii. Attempts at coups to overthrow ruling parties
iii. Kidnapping, bombings, and other violent acts against businesses and their
employees, etc.
D. Business Barriers
Companies doing business internationally quickly learn that business practices and
regulations in foreign lands can be quite different from those in Nigeria.
E. Cultural Barriers
92
The culture of a nation includes the beliefs, values, view, and mores that its inhabitants
share
Differences in cultures among nations create another barrier to international trade.
The diversity of languages, business philosophies, practices, and traditions make
international trade more complex than selling to the business down the street.
International Trade Agreements
1. General Agreement on Tariffs and Trade (GATT)
The first global tariff agreement created in 1947.
It was designed to reduce tariffs among member nations and to facilitate trade across the
globe.
2. World Trade Organization (WTO)
Established in 1995 to implement the GATT tariff agreements
The WTO has over 140 members and represents over 97% of all global trade.
The WTO is the governing body that resolves trade disputes among members.
3. The North American Free Trade Agreement (NAFTA)
It created a free trade area among Canada, Mexico, and the United States.
93
The agreement created an association that knocked down trade barriers; both tariff and
nontariff, among these partner nations.
CHAPTER 14: LEADING THE GROWING COMPANY
Leadership in the New Economy
To be successful, an entrepreneur must assume a wide range of roles, tasks, an
responsibilities, but none is more important than the role of leader.
Leadership is the process of influencing and inspiring others to work to achieve a
common goal and then giving them the power and freedom to achieve it
Management and leadership are not the same; yet both are essential to a company’s
success.
Leadership without management is unbridled; management without leadership is
uninspired.
In other words, leasers are the architects of small businesses; management are the
builders.
Tips for Becoming a Successful Leader in the New Economy
1. Leaders are both confident and modest
Being a leader is not about making yourself more powerful; it’s about making the people
around you more powerful.
2. Leaders are authentic
No one believes in a leader who fails to “walk the talk”.
94
Leadership requires integrity and sincerity. These characteristics are the building blocks
of trust.
3. Leaders are good listeners
Successful leaders know that some of the best ideas come from the people who actually
do a job every day, and these leaders are willing to listen to employees.
4. Leaders are good at giving encouragement, and they are never satisified
Leaders constantly test their own stamina and courage and those of the people in their
organizations by raising the standards of performance.
They praise those who succeed and are supportive when people fail
5. Leaders make unexpected connections
Leaders arrange for interaction among people who otherwise might not get together.
Then they listen for innovative ideas that result from those interactions and act on them.
6. Leaders provide direction
Modern leaders know how to ask probing, revealing questions of others that provide
insight into the best course of action. They realize that they do not have all the answers.
7. Leaders protect their people from danger and expose them to reality
The surest way leaders can protect their organizations from danger is to keep everyone
focused on the vision.
Exposing people to reality means forcing the organization to face up to the need for
change.
8. Leaders create change and stand for values that don’t change
95
Although change is essential to an organization’s survival, a leader must protect those
values and principles that are central to the company’s core.
9. Leaders lead by example
Leaders recognize that they are always under the microscope and that workers are always
interpreting leaders’ actions.
That is why leaders must live by the principles that they espouse.
10. Leaders don’t blame; they learn
Leaders know that creativity and innovation carry with them the risk of failure.
Their attitude is: Try, fail, learn, and try again.
11. Leaders look for and network with other leaders
Successful leaders are not Lone Rangers
They look for allies and the opportunity to network with others so they can learn to
become more effective leaders.
12. The job of the leader is to make more leaders
In the past, the assumption was that an organization needed just one strong leader.
Today, the organization with the most leaders usually wins! Your ultimate challenge is
not just to become an effective leader but also to create more leaders in your company.
Hiring the Right Employees
96
The decision to hire a new employee is an important one for every business, but its
impact is magnified many times in a small company.
Every “new hire” a business owner makes determines the heights to which the company
can climb – or the depths to which it will plunge.
To avoid making hiring mistakes, entrepreneurs should:
1. Develop meaningful job descriptions and job specifications
2. Plan and conduct an effective interview
3. Check references before hiring any employee.
Building the Right Organizational Culture and Structure
Company culture is the distinctive, unwritten code of conduct that governs the behavior,
attitudes, relationships, and style of an organization.
Culture arises from an entrepreneur’s consistent and relentless pursuit of a set of core
values that everyone in the company can believe in.
Small companies’ flexible structures can be a major competitive weapon.
Entrepreneurs rely on six different management styles to guide their companies as they
grow.
The first three involve running a company without any management assistance and are
best suited for small companies in the early stages of growth; the last three rely on a team
approach to run the company as its growth rate heats up.
1. The Craftsman
97
These entrepreneurs run a oneman show.
They do everything themselves because their primary concern is the quality of the
products or services they produce.
Woodworkers, cabinetmakers, glassblower, and other craftsmen rely on this style of
management.
2. The Classic
The classic entrepreneur brings in other people but does not delegate any significant
authority to them, choosing instead to watch over everything himself.
An inherent danger with this style is the entrepreneur’s tendency to “micromanage” every
aspect of the business rather than spend her time focusing on those tasks that are most
important and most productive for the company.
3. The Coordinator
The coordinator style of management gives an entrepreneur the ability to create a fairly
large company with very few employees.
In this type of business, the entrepreneur farms out a large portion of the work to other
companies and then coordinates all of the activities.
Although this style sounds like an easy way to build a business, it can be very
challenging to implement as the business’s success is highly dependent on its suppliers.
4. The EntrepreneurplusEmployee Team
This style gives an entrepreneur the power to grow the business beyond the scope of the
manageronly styles.
98
The entrepreneur delegates authority to key employees, but retains the final decision
making authority in the company.
Sometimes employees given authority might make mistakes, but delegation allows a
manager to get the maximum benefit from each employee while freeing himself or
herself up to focus on the most important tasks in the business
5. The Small Partnership
In this style, entrepreneurs choose to share managerial responsibilities with one or more
partners.
The biggest advantage of this style is the ability to share responsibility for the company
with those who have a real stake in the company and are willing to work hard to make it a
success.
The downside is the necessity of giving up total control over the business, and the
potential for personality conflicts and disputes over the company’s direction.
6. The BigTeam Venture
This is the broadest management style which typically emerges over time as a company
grows.
Once a company reaches a certain point in its growth, managers must expand the breadth
of the management team’s experience to handle the increasing level of responsibility that
results from the sheer size of the company.
The Challenge of Motivating Workers
99
Motivation is the degree of effort an employee exerts to accomplish a task; it shows up as
excitement about work.
Four important tools of motivation include:
1. Empowerment:
Empowerment is the process of giving workers at every level of the organization the
power, the freedom, and the responsibility to control their own work, to make decisions,
and to take action to meet the company’s objectives.
Empowerment challenges workers to make the most of their creativity, imagination,
knowledge, and skills.
This method of management encourages them to take the initiative to identify and solve
problems on their own and as part of a team.
2. Job design:
Over the years, managers have learned that the job itself, and the way it is designed can
be a source of motivation or demotivation for workers.
Job design techniques for enhancing employee motivation include:
i. Job enlargement: It adds more tasks to a job to broaden its scope. The idea is to make
the job more varied and to allow employees to perform a more complete unit of work.
ii. Job rotation: it involves crosstraining employees so they can move from one job in
the company to others, giving them a greater number and variety of tasks to perform.
100
iii. Job enrichment: It involves building motivators into a job by increasing the planning,
decisionmaking, organizing, and controlling functions workers perform. The idea is
to make every employee a manager – at least a manager of his own job.
iv. Flex time: an arrangement under which employees work a number of hours but have
flexibility about when they start and stop work. For instance, one worker might
choose to come in at 7am and leave at 3pm to attend her son’s football game, whereas
another may work from 11am to 7pm.
v. Job sharing: a work arrangement in which two or more people share a single fulltime
job. For instance two university students might share the same 40houraweek job,
one working mornings and the other working afternoons.
vi. Flexplace: a work arrangement in which employees work at a place other than the
traditional office, such as a satellite branch closer to their homes or at home.
Flexplace is an easy job design strategy because of telecommuting, which is an
arrangement under which employees working from their homes use modern
communications equipment to hook up electronically to their workplaces.
3. Reward and Compensation
Money is an important motivator for many workers, but it is not the only one.
The key to using rewards such as recognition and praise to motivate workers involves
tailoring them to the needs and characteristics of the workers.
4. Feedback
Giving employees timely, relevant feedback about their job performances through a
performance appraisal system can be a powerful motivator.
101
CHAPTER 9: RISK MANAGEMENT AND ACCEPTANCE OF ENTREPRENEURIAL
RESPONSIBILITY
Introduction
Entrepreneurship is a configuration of risks. No matter the dynamism of a business
environment, risk taking is a part of business, as decisions must be made without
complete information and contingencies of life.
A risk situation involves potential loss or failure or potential gain or success. A risk
situation entails two types of cost – 1) cost of potential loss that turns into actual loss and
2) cost of reducing or eliminating the risk and potential loss.
Risks can be categorized into two: Speculative risk and pure risk.
Speculative risk is where there is a probability of loss or gain. Example is stock exchange
market, shares and stocks.
Pure risks are circumstances where losses and injuries occur from certain eventualities
like fire, burglary, motor or industrial accident, natural disasters, etc.
Risk Management
Risk management is concerned with the conservation of a firm’s assets and earning
power against risk of accidental loss.
Risk management techniques can be categorized into three:
1. Risk avoidance, which implies keeping off those activities that have very high potential
loss.
102
2. Risk reduction, which involves the reduction of the risk in developing a new product
through careful planning, strategizing and market testing. Taking of appropriate
precautionary measures and procedures like fire and smoke alarms, burglar alarms and
security guards, etc.
3. Risk shifting, which is the shifting or transferring of risks that cannot be avoided or
reduced to insurance companies who then assume the risk. The burdens of loss resulting
from pure risk are passed to insurance companies in exchange for a premium.
An entrepreneur must not be generally averse to taking risk, as investment will be low in
spite of promising returns. Risk should be taken in a systematic way.
Insurance and Insurance Management
Insurance is a fund to which all who face pure risk make periodic financial contributions
called premiums to a common fund out of which compensation is made in the event of a
loss.
Insurance is a contract between two parties – the insurance company (insurer) and the
person(s) contributing (insured).
Insurance contract is a legal relationship; therefore certain conditions must be met to
make it binding and enforceable by the parties. The conditions are stated below:
i. There must be an insurable risk, i.e. something to insure.
ii. Potential accidental loss, e.g. traffic accident
iii. Predeterminable and measurable loss or injury
iv. Not catastrophic in nature, e.g. loss through war
103
v. Availability of large number of similar risk to be insured in order to pool risk.
vi. Proven monetary losses to b suffered if the risk materializes
vii. The property must possess value
viii. A premium must be paid.
Insurance management is a part of the risk management functions that concerns itself on
a technically trained and professional level. It is the liaison function between buyers of
insurance for business needs and the seller which is the insurance industry.
The entrepreneur must understand and negotiate an almost limitless number of forms of
insurance that are beneficial to the venture. Some examples are:
1. Fire Insurance
2. Motor Vehicle Insurance
3. Advertisers Liability Insurance: protects a firm against liability arising from libel,
slander, assassination of character, infringement of copyright through advertising.
4. Comprehensive General Liability Insurance: a very broad covering for all liabilities
including contractual liability, product liability, premises and operations, but excludes
automobiles.
5. Accident Insurance
6. Credit Insurance: protection against the insolvency of customers. Does not extend to
retailers.
7. Employers liability Insurance: provides protection for the firm against liability arising
from injury to employees.
104
8. Workmen Compensation Insurance: Legislation compelling employers to compensate
employees for accident occurring in places of work.
GOVERNMENTAL INTERVENTION IN BUSINESS OWNERSHIP
Indigenization
Indigenization simply means policy initiatives designed to accelerate the greater
participation of Nigerians in the ownership and management of business enterprises in
Nigeria.
It was discovered that most expatriates are not really committed to the economic
development of Nigeria, but concerned with making as much profit as possible, and then
taking these profits back to their countries.
In view of these, it was felt that the authoritative heights in the private sector should
cease being controlled by foreigners and that indigenes should be afforded the
opportunity of developing their economy.
Reasons for Indigenization
1. Indigenization brings about a greater sense of patriotism on the part of the indigenes in
the pursuance of their private economic objectives.
2. The need to encourage entrepreneurial spirit on the part of indigenes, improved attitude
towards risk, uncertainties and investment which will definitely stimulate
entrepreneurship development.
3. For the purpose of preservation of national identity and economic independence, a
country would have to indigenize its economy.
105
4. The need to encourage and stimulate the use of local materials and further exploitation of
local resources while the expatriates are much more interested in their home economy as
they bring virtually all resources from their economy, even labor.
5. Indigenization is supposed to lead to development of the capital market, as company
shares continue to change hands and the capital market will record remarkable pressure
of transactions which will provide good experience for the future growth.
Types of Indigenization
1. Indigenization of ownership: This aims at giving the indigenes of a country ownership
stake in the economic establishment of the country.
2. Indigenization of control: This enables the indigenes of a country to exercise control
through the board of Directors on the policies of the enterprises.
3. Indigenization of manpower: This is otherwise known as Africanization. It was the first
form of indigenization policy applied in the civil services.
4. Indigenization of Technology: Involves two phases
a. Acquisition of technology from highly industrialized countries so as to enable developing
countries to skip many stages of development.
b. Adaptive technology: This is the process of selection and adaptation in order to match
imported techniques to African conditions.
The Degree of Indigenization
The first attempt to ensure that Nigerians control and run the business enterprises of their
country was made with the promulgation of the Nigerian Enterprises Promotion Decree
106
1972. The economic activities were structured into two schedules based on the varying
degrees of complexities of the enterprises.
The 1972 decree was confronted with a lot of difficulties, especially by foreigners who
attempted to circumvent the promulgation. This led to another decree in 1977.
The Nigerian Enterprises Promotion Decree of 1977 increased the number of businesses
that were 100% owned by Nigerians adding departmental stores and supermarkets with
an annual turnover of less than N2 million.
In 1997, as a way of having foreign investment and to pursue a policy of economic
liberalization, the Nigerian Enterprises Promotion Decree was abolished.
There is a feeling, however, that Nigerians have already come of age in entrepreneurship
and can now compete effectively with expatriates in any sector of the Nigerian economy.
Privatization and Commercialization of Public Enterprises
Public enterprises refer to those owned by the government, whether federal, state or local.
Commercialization of public enterprises is a method whereby government retains the
ownership and control, but subvention will cease and the institution will be required and
motivated to profit orientation
Privatization means the adoption of an economic methodology which enhances the role
of the private sector in the economy to include public sector enterprises, the nature of
which requires that they be managed on commercial basis.
Privatization means a radical shift in ownership of manufacturing enterprises in the
country by the public sector to the private sector.
The objectives of privatization are:
107
1. Integrate our economy into the mainstream of the world economic order.
2. Send a clear message to the local and international community that a new transparent
Nigeria is now open for business.
3. Change the orientation of all public enterprises engaged in economic activities towards a
new horizon of performance, improvement, viability and overall efficiency.
4. Raise funds for financing sociallyoriented programs such as poverty eradication, health,
education and infrastructure.
5. Improve economic efficiency and foster economic equity.
6. Reduce government interference in the economy
7. Expose public enterprise to market discipline
8. Generate new investment
9. Provide opportunity for competition
10. Improve technical and operational efficiency of public enterprises.
In order to concretize the privatization program and realize the set objectives,
Government set up a National Council on Privatization (NCP). The NCP exercises the
function of privatization through the Bureau for Public Enterprise (BPE).
PublicPrivate Participation (PPP)
Following the introduction of the Structural Adjustment Program in 1986, government
has been downplaying its leading role as a major investor in the manufacturing sector.
108
The objective of rapidly transforming the country into a major industrialized economy
now hinges on the private sector playing the leading role in investment management and
development.
Government is now keen to provide an enabling environment for the private sector to
play a pivotal role by adopting the following strategies:
1. Deregulation: Government intends to achieve increased private sector participation by
repealing all enactments that created public sector monopoly in certain sectors of the
economy.
2. Privatization/Commercialization
3. Public/Private Interface: a situation whereby the government is in constant and
continuous contact and consultations with the private sector on issues of concern to
industry through quarterly dialogue.
4. Identification of Strategic Industrial Sub sectors: Government produced the Industrial
Master plan (IMP). Under the IMP, certain strategic subsectors were identified as the
main focus that could enhance the industrial development of Nigeria if vigorously
pursued. These subsectors are as follows: Engineering, Chemical/Petrochemical, Agro
Allied, Construction and Information and Communications Technologies.
109

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MANUAL FOR GENERAL

­ Entrepreneurship is thus the result of a disciplined, systematic process of applying

­ Success – even survival – in this fiercely competitive, global environment requires

­ Suspending practicality for a while frees the mind to consider creative solutions that

ix. Modeling creativity (Entrepreneurs must set an example to employees by being

­ Intellectual capital is a key source of a company’s competitive advantage that is

­ The process of strategic management provides entrepreneurs a powerful weapon to

ii. Differentiation strategy: a strategy in which a company seeks to build customer

1. A successful existing business may continue to be successful: purchasing a thriving

2. Determine the physical condition of the business. Consider both the building and its

­ It involves systematically collecting, analyzing, and interpreting data pertaining to a

­ How can entrepreneurs collect such valuable market and customer information? Two

­ World­class companies treat quality as a strategic objective – an integral part of a

­ These companies seek to go beyond customer satisfaction, striving for customer

­ Establishing a presence on the Web is important for companies targeting educated,

­ The product life cycle describes the stages of development, growth, and decline in a

­ Advertising communicates to potential customers through some mass medium the

­ Entrepreneurs should build their advertisements around a unique selling proposition

­ Any commercial news covered by the media that boosts sales but for which a small

­ Advertising in which satisfied customers recommend a business to friends, family

­ Relying on this method can be dangerous as it may not be representative of a small

ii. Maintaining market share as competition grows: If a new product is successful,

­ By beating other businesses in a price decline, the small company discourages

­ Cash management is the process of forecasting, collecting, disbursing, investing and

­ Cash follow measures a company’s liquidity and its ability to pay its bills and other

­ Examples include: i) periodically evaluating expenses, ii). Leasing instead of buying

­ To get external financing, an entrepreneur’s plan must pass three tests with potential

­ Also, a description of the form of ownership and of any leases, contracts, and other

6. Venture Capital Companies: private, for­profit organizations that purchase equity

­ Offer many of same time of loans that banks do, but are more risk oriented in their

5. Savings and Loan Associations: specialize in loans to purchase real property –

­ The National Economic Empowerment and Development Strategy (NEEDS) is the

­ Studying the size of the market for a product or service and the number of existing

2. Construction and External Appearance: Is the building structurally sound and does it

­ Its primary advantage is a relaxed, friendly shopping atmosphere it creates, which

­ An arrangement of workers and equipment according to the sequence of operations

­ An arrangement of workers and equipment according to the general function they

­ These trade intermediaries such as export management companies and export trading

companies enter foreign markets by licensing businesses in other nations to use their

­ Countertrade is a transaction in which a business selling goods in a foreign country

­ The diversity of languages, business philosophies, practices, and traditions make

­ To be successful, an entrepreneur must assume a wide range of roles, tasks, an

­ Leadership is the process of influencing and inspiring others to work to achieve a

­ Leadership without management is unbridled; management without leadership is

­ Modern leaders know how to ask probing, revealing questions of others that provide

­ Exposing people to reality means forcing the organization to face up to the need for

­ They look for allies and the opportunity to network with others so they can learn to

­ The classic entrepreneur brings in other people but does not delegate any significant

­ Empowerment challenges workers to make the most of their creativity, imagination,

traditional office, such as a satellite branch closer to their homes or at home.

Flexplace is an easy job design strategy because of telecommuting, which is an

­ Entrepreneurship is a configuration of risks. No matter the dynamism of a business

environment, risk taking is a part of business, as decisions must be made without

­ A risk situation involves potential loss or failure or potential gain or success. A risk

through careful planning, strategizing and market testing. Taking of appropriate

6. Credit Insurance: protection against the insolvency of customers. Does not extend to

­ Indigenization simply means policy initiatives designed to accelerate the greater

towards risk, uncertainties and investment which will definitely stimulate

3. For the purpose of preservation of national identity and economic independence, a

2. Indigenization of control: This enables the indigenes of a country to exercise control

­ Commercialization of public enterprises is a method whereby government retains the

­ Privatization means a radical shift in ownership of manufacturing enterprises in the

Entrepreneurship is thus the result of a disciplined, systematic process of applying

Success – even survival – in this fiercely competitive, global environment requires

Suspending practicality for a while frees the mind to consider creative solutions that

Intellectual capital is a key source of a company’s competitive advantage that is

The process of strategic management provides entrepreneurs a powerful weapon to

It involves systematically collecting, analyzing, and interpreting data pertaining to a

How can entrepreneurs collect such valuable market and customer information? Two

Worldclass companies treat quality as a strategic objective – an integral part of a

These companies seek to go beyond customer satisfaction, striving for customer

Establishing a presence on the Web is important for companies targeting educated,

The product life cycle describes the stages of development, growth, and decline in a

Advertising communicates to potential customers through some mass medium the

Entrepreneurs should build their advertisements around a unique selling proposition

Any commercial news covered by the media that boosts sales but for which a small

Advertising in which satisfied customers recommend a business to friends, family

Relying on this method can be dangerous as it may not be representative of a small

By beating other businesses in a price decline, the small company discourages

Cash management is the process of forecasting, collecting, disbursing, investing and

Cash follow measures a company’s liquidity and its ability to pay its bills and other

Examples include: i) periodically evaluating expenses, ii). Leasing instead of buying

To get external financing, an entrepreneur’s plan must pass three tests with potential

Also, a description of the form of ownership and of any leases, contracts, and other

6. Venture Capital Companies: private, forprofit organizations that purchase equity

Offer many of same time of loans that banks do, but are more risk oriented in their

The National Economic Empowerment and Development Strategy (NEEDS) is the

Studying the size of the market for a product or service and the number of existing

Its primary advantage is a relaxed, friendly shopping atmosphere it creates, which

An arrangement of workers and equipment according to the sequence of operations

An arrangement of workers and equipment according to the general function they

These trade intermediaries such as export management companies and export trading

Countertrade is a transaction in which a business selling goods in a foreign country

The diversity of languages, business philosophies, practices, and traditions make

To be successful, an entrepreneur must assume a wide range of roles, tasks, an

Leadership is the process of influencing and inspiring others to work to achieve a

Leadership without management is unbridled; management without leadership is

Modern leaders know how to ask probing, revealing questions of others that provide

Exposing people to reality means forcing the organization to face up to the need for

They look for allies and the opportunity to network with others so they can learn to

The classic entrepreneur brings in other people but does not delegate any significant

Empowerment challenges workers to make the most of their creativity, imagination,

Entrepreneurship is a configuration of risks. No matter the dynamism of a business

A risk situation involves potential loss or failure or potential gain or success. A risk

Indigenization simply means policy initiatives designed to accelerate the greater

Commercialization of public enterprises is a method whereby government retains the

Privatization means a radical shift in ownership of manufacturing enterprises in the