Entrepreneurship Course

1. Entrepreneurshi
p
6th
Semester Session 2017-2021

2. Course Objectives
The objectives of this course are to enable students
to:
1. Familiarize students with concepts of
Entrepreneurship
2. Develop skills necessary to visualize a startup
3. Make a Business Plan for an Enterprise

3. Course Learning
Outcomes
Upon successful completion of the course, the
student should be able to:
1. Comprehend the terminology and concepts of
Entrepreneurship
2. Innovate the ideas necessary for a startup
3. Devise a Business Strategy and businesses plan

4. Syllabi
• Evolution of the concept of entrepreneur, Characteristics of an
entrepreneur, Distinction between an entrepreneur and a
Manager, in Economic Development, Factors affecting
entrepreneurial growth (economics, Non-Economic and
Government factors)
• Critical factors for stalling a new enterprise, Ingredients for a
successful new business, Self-assessment and feedback,
Personal entrepreneurial competencies, Goal setting. Creativity
and sources of new business ideas, the difference the difference
between ideas and opportunity and creativity. Assessing
business opportunities in Pakistan. Screening and evaluating
opportunities Product planning and development process.
Creating parallel competition by developing a similar product or
service, Product life cycle, Finding sponsorship. Acquiring a going
concern, E-Commerce and business start-up and growth.

5. Syllabi
• Marketing as a philosophy, marketing management: Creating a
marketing plan, Analyzing the environmental situation and the
marker opportunity, Setting marketing objective, Formulating a
marketing strategy.
• The business plan as selling document, reasons for writing a
business plan your company: What’s your identity, Field work
started, Marketing issues: who are your buyers?., Product
issues: What are you selling?, Production exercise, Sales and
Promotion: Financial issues: Targeting and writing the plan:
Business Plan compilation exercise.
• Franchising, becoming a franchisees versus starting a stand-
alone business, the franchisee contract, Non-contractual
considerations of buying a franchise, Limitations of franchising.

6. Books
Recommended Books:
• Rober D. Hisrich and Michael P. Peter, entrepreneurs/lip, 5th Edition,
McGraw- Hill
• S.S. Khanka, entrepreneurial Development
• Kenji Uchino “Entrepreneurship for Engineers” 2010.
• Irving Burstiner, the small Businesses Handbook
• Bruce A. Kirchhoff, Entrepreneurship and Dynamic Capitalism
• Modern Business Management, A System & Environment Approach by
McGraw-Hill
• William D. Bygrave, The Portable MBA in entrepreneurs/lip
entrepreneurship CEFE, Germany, Development Manual
• Further Recommended Books
• Paul Burns and Jim Dew Hurst: Small Business and entrepreneurship
• P. N. Singh: entrepreneurship for Economic Gwoth

7. What is Entrepreneur?
• Entrepreneurs are action-oriented, highly
motivated individuals who take risks to
achieve goals.
• Entrepreneurs are people who have the
ability
to see and evaluate business opportunities,
to gather the necessary resources to take
advantage of them; and
to initiate appropriate action to ensure
Meaning of the terms Entrepreneur,
Entrepreneurship, Owner-Manager

8. • Economists may view entrepreneurs as
those who bring resources together in
unusual combinations to generate profits.
• Psychologists tend to view entrepreneurs in
behavioral terms as those achievement-
oriented individuals driven to seek
challenges and new accomplishments.
• Peter Drucker states, as “Entrepreneur is
someone who always searches for change
responds to it, and exploits it as an
opportunity.”
• Example: It is the entrepreneur who only
knows
• Opening of new university near the society

10. What is Entrepreneurship?
“ Entrepreneurship is the dynamic process of creating
incremental wealth. This wealth is created by individuals
who assume the major risks in terms of equity, time
and /or career commitments of providing value for some
product or service. The product or service itself may or
may not be new or unique but value must somehow be
infused by the entrepreneur by securing and allocating
the necessary skills and resources” Robert
Ronstadt
Entrepreneurship is very rarely a get rich-quick
proposition; rather, it is one of building long-term value
and durable cash flow streams.

11. What Is An
Entrepreneur
& Entrepreneurship ?
ENTREPRENEUR
A vision-driven individual who assumes significant
personal and financial risk to start or expand a business.
ENTREPRENEURSHIP
The pursuit of opportunity through
innovation, creativity and hard work
without regard for
the resources currently controlled.

12. The Entrepreneurial
Process
• It is opportunity/market driven
• It is driven by a lead entrepreneur and an
entrepreneurial team
• It is resource parsimonious and creative
• It depends on the fit and balance among these
• It is integrated and holistic

13. The entrepreneur versus the owner
manager (similarities and differences)
Entrepreneur
a.Entrepreneurial function is the organization
of production:
 Entrepreneurship is an economic concept. Economics
describes four factors of production, namely, land,
labor, capital and entrepreneurial ability
(organizational skill).
b. Decision-making and calculated risk
bearing:
c. An entrepreneur has an all-round
personality:
d. High levels of achievement motivation
e. Innovative, creative, imaginative soul
f. The entrepreneur is the owner of the

14. Owner Manager
They may or may not be entrepreneurs.
They own and manage a small enterprise, in a
way, which fits with their personal motivations.
They are more intent on survival than seeking
innovative change and growth.
1. Limited scope for innovativeness, creativity and imagination
2. Managerial jobs are transferable
-As a manager in the business organization,
his job is transferable from office to office,
from one unit and location to another location
3. Managers do not bear-risk
-Risk bearing capacity is an entrepreneurial
quality

15. Characteristics of Entrepreneurs
1. Need for Achievement:- vision
2. Willingness to take risks:-financial, careers, family ,
3. Self-Confidence:- internal and external locus of control
4. Innovation:-. The entrepreneurial manger is constantly looking
for innovations, not by waiting for a flash of inspirations, but
through an organized and continuous search for new ideas
5. Total Commitment
6. All-rounders
7. A need to seek refuge:- escape from environmental factor
a. The “Foreign Refugee”
b. Corporate Refugee.
c. Other Refugees

16. Other types of “ refugees” mentioned are the following:
1.The parental (paternal) refugee
Who leaves a family business to show the parent that “I
can do it alone”.
2.The feminist refugee
Who experiences discrimination and elects to start a
firm in which she can operate independently.
3.The housewife refugee
• Who starts her own business after her family is grown
or at some other point when she can free herself from
household responsibilities.
4.The educational refugee
• Who tires of an academic program and decide to go
into business.

17. Entrepreneurship
SME IDE
Local market Global Market
Less Risk, Less Cash
Flow
More Risk, More
Cash Flow
Entrepreneurship Types

18. Motivation for starting a business
The reason for small firm formation can be divided between
“pull” and “push” influences.
I.“Pull” Influence
• Some individuals are attracted towards small
business ownership by positive motive such as a
specific idea which they are convinced will work.
”Pull” motives include:
a. Desire for independence
b. Desire to exploit an opportunity
c. Turning a hobby or previous work experience in to a
business
d. Financial Incentive
• The promise of long-term financial
independence can clearly be a motive in
starting new firm.

19. “Push” Independence
• Many people are pushed into founding a new
enterprise by variety of factors including:
1.Redundancy==>Being without a job (idleness)
2.Unemployment (or threat of)
3.Disagreement with previous
employer==>Uncomfortable relation at work has
also pushed new entrants into small business.
• The dividing line between those “pulled”
and those “pushed” is often blurred.

20. Outcomes of Entrepreneurship
• Economic growth
• New industry formation
• Job creation

21. Success factors for
entrepreneurs
Most new ventures succeed because their
founders are capable individuals.
1.The entrepreneurial team
2.Incremental growth of product or services
3.Marketing and timing:
Market potential is critically influenced by
timing of new products or services.

22. Weakness of entrepreneurship
a. Limited resource:- entrepreneurship mostly
starts from small investment or contribution of
owners are more than one individual
b. Lack of experience:- most of entrepreneurs
have no experience and this may lead to in
efficiency
c. Disagreement between member: if the owner
of entrepreneur is more than one person,
disagreement between them can be created. This
disagreement can limit the operation of the
business.
d. Uncertainty of income:- opening and running a
business provide no guarantee that an
entrepreneur will earn enough money to survive

23. e. Risk:- starting or buying a new business involves
risk and the higher rewards the greater the risk
entrepreneurs usually face. This is why entrepreneurs
have to evaluate risk very carefully
f. Lower quality of life until the business gets
established:- the long hour and hard work needed to
launch a business can take their tall in the rest of the
entrepreneurs life
g. Complete responsibility:- it is great to be the boss
but many entrepreneurs find they must make decision
on issues about which they are not knowledgeable.
When there is no one to ask the pressure can build
quickly the realization that, the decisions they make
are the cause of success or failure.

24. Elements involved in
Entrepreneur
1.RISK:- Simply stated risk is “a
condition in which there is a
possibility of an adverse deviation
from a desired outcome that is
expected or hoped from applied to
a business risk translates in to the
possibility of losses associated with
the assets and the earning potential
of the firm. ”

25. Business risks can be classified in to two
broad categories market risk and pure
risk.
Entrepreneurs face a number of different
types of risk. These can be grouped in to
basic areas.
a. Political risk:-
b. Business risk:-
c. Economic risk:-
d. property risk
e. Personal risk

26. 2.Information
Information gives the following importance to the
businessmen’s
To know the position of their competitors that is
their strength and weaknesses, business strategy
they use and their long term plan.
To know threats and opportunity in doing
business
Helps to design long term objectives and goals
indicate capital requirement (labor, capital and
machinery)
Helps to know market position locally and
internationally.

27. Sources of information
• Information are obtained from two main methods of
data collection. That is primary data collection and
secondary data collection
1. Collection of primary data:
• Observation method
• Interview method
• Through questioner
• Other methods which includes warranty cards,
consumer panels, etc

28. 2. Collection of secondary data:-Secondary
data are available in
• Various publication of the federal government and
local government
• Various publications of foreign government or
international bodies and their subsidiary
organization.
• Technical and trade journals
• Books, magazines and newspapers
• Reports
• Public records and statistics, historical documents.

29. By way of caution, the entrepreneur before
using secondary data must see that the
process following characteristics
1.Reliability of data
a. Who collected the data?
b. What were the sources of data?
c. Were they collected by using proper methods?
d. At what time they collected. Etc.
2.Suitability of data:- the data that are
suitable for one enquiry may not be suitable
for another enquiry, then the researcher has
to check the suitability of the data properly.
3.Adequacy of data

30. Kinds of Entrepreneurship
1.Women Entrepreneurs.
2.Founders and other Entrepreneurs.
a. Founding Entrepreneurs /Founders/
b.General mangers and
c.Franchisees
3.High-Growth and low-Growth Firms
a.Marginal Firms
b.Attractive Small Companies and
c.High potential ventures.
Assignment One: What is franchise & franchisee in
business? [max 1page]

31. Entrepreneurshi
p
6th
Semester Session 2017-2021

32. Starting Technology
based new venture
Introduction
• The innovative capacity of an entrepreneur and more
accurately, of companies operating in that field, is a
key determinant of its capability to enhance the
economic development and to upgrade the standard of
living of a country. It is widely accepted that one of the
indicators of this innovative capacity is the rate of
creation of New Technology-Based firms (NTBF).
• The nurturing of small firm formation and growth has
become increasingly important to the health of
developed economies in general, and to the creation of
new innovative industrial sectors in particular.

33. Cont’d
• Technology incubators, which play a role in
accelerating the commercialization of R&D outputs
and the transfer of technology, have contributed to
startups of high technology-based enterprises in the
newly industrializing economies of developing and
developed economies of the world.
• Strengthening and promoting technology based
ventures through incubation programmes for new
technology based enterprises is necessary for them to
survive in a competitive society.

34. How to form and develop Technology based
ventures?
• Government policies:
• Credit programmes with State-subsidized rates
• Shared programmes by Government venture-capital
companies
• Grants by the Government, especially for creating jobs and for
research
• Security programmes by the Government for taking over part
of the risk of the credit institutions for enterprises
• Advisory services.
• Other support activities for enterprises with both public
and private sector involvement, include:
* Business consulting services: Assistance
with business development, developing business

35. Cont’d
• Technical consulting services: More specialized
services are provided such as networking assistance
between enterprises and science and technology
organizations, technology transfer, the exchange of
similar experiences and the identification of potential
for cooperation
• Financing support activities: Offer optimal
conditions to enterprises, especially SMEs, in terms of
rent and costs of spaces, infrastructure and services.
Offer also assistance with accessing and using
financial sources such as corporate financing,
business angels, venture capital, and so forth;
• Intellectual property assistance: Assistance with
developing and patenting new and improved
technology, including bringing it to the market for
profit;
• International assistance: Assistance with the
global networking of incubation and innovation
centres for information exchange and technology
transfer

36. Factors contributing to the Success of High
Technology based Enterprises
The main catalytic factors for the success of high
technology-based enterprises are :
• national policies,
• research and development institutions
• technological entrepreneur development
• innovative finance support systems & protecting
intellectual property
• science and technology parks
• promoting and developing strategic business alliances
and networking
• standardization, quality control and marketing.

37. Technology transfer for business
development
• Technology transfer is the process by which existing
knowledge, facilities or capabilities are utilized and
marketed to fulfill public and private needs.
• It is the process by which basic science research and
fundamental discoveries are developed into practical
and commercially relevant applications and products.
• Technology transfer processes constitutes technology
transfer, technology promotion, technology
deployment, technology innovation, technology
development, technology research, technology
assessment, technology information and
communication, technology investment, technology
collaboration and technology commercialization

38. Drive for acquiring new
technology
• Cost: Technology can cut costs in many ways: reducing
material, labor or distribution costs. Example: material costs
can be reduced by replacing lower cost material or by
reducing the material required to make a product.
• Speed of delivery: The key competitive priority may be the
speed of delivery, as measured by lead time required to
deliver a product. Example, Automated guided vehicle(AGV),
Electronic Data Interchange(EDI)
• Quality: Technologies help to improve the quality and reduce the
production costs.
• Flexibility and customization: The global market place of 1990s is
characterized by short product lifecycles, increased product veriety, and
extensive customization. To retain and increase market share in such
competitive environment, firms have to be more flexible in their
operations.
* Increased production volume
*Higher living standards

39. The Entrepreneurship
Process

40. Entrepreneurship and Technological
Change

41. New Industry Formation &
technology
• New industries are born when technological change
produces a new opportunity that an enterprising
entrepreneur seizes.
• Disruptive or metamorphic technologies that destroy
previous technologies and create new industries
display a different pattern of behavior.
• The pattern of growth, shakeout, stabilization, and
decline of industry can be interrupted at any time by
the entry of another disruptive technology.

42. TechnoPreneurship

43. “Technology is always evolving, and
companies, not just search companies, can’t
be afraid to take advantage of change.”-Eric
Schimdt

44. “The use of technology as an integral and key
element in the transformation of goods or
services.” – Randall Stross

45. Definition
• Technopreneurship is the Result of uniting
“Technology” with “Entrepreneurship”
• This is not just the effect of technology on businesses but
rather the process where progression in the lives of the
people happens.
• It is the process of using the developments brought about
by specialized knowledge to come up with innovations in
all the aspects of human life with the aid of a creative
and skillful mind.
• Birth of this field provides every entrepreneur a challenge
of exploring an untraveled path towards greater success.

46. Technopreneurship can be defined as..
• Integration of Technology,
Innovation and Entrepreneurship
• Act of turning “something” into a
resource of high value by converting
good ideas into business ventures
that relies heavily on the application
of human knowledge for practical
purposes.
• Entrepreneurship in the field of
technology.
• Firms in which technology plays a
critical role in their operations.

47. Definition Continues….
• Application of the newest inventions and
advancements in coming out with new and
innovative products through the process of
dissemination.
• Manufacturing of hi-tech products or making
use of hi technology to deliver product to
consumers.
• Exhaustive use of and Exploitation of
technology in making profit.

48. Some Thoughts from Definition- The Meruvian
Roadmap

49. Who Has Been?
• Steve Jobs • Bill Gates

50. Who has Been…..?
• Mark Zuckerberg • Sergey Brin and
Larry Page

51. Key Ideas
Discovering
Gaps and
Areas of
Need in the
Environmen
t
Having
Eyes for
and
Creating
Opportuniti
es
•Distinguishing
Between Risk
and
Uncertainty
Understand
ing your
Strengths
and
Leveraging
Them
Defining
and
Assembling
your
Audience
Developing
a Viable
Business
Model
Monetizing
your
Audience

52. Discovering Gaps
Environmental Awareness
Mental Alertness
Research and Knowledge Seeking
Behaviours
Eye for Details

53. Seeking and Creating
Opportunities
• What do you See?
• Problem or a Challenge?
• Always Distinguish
Between Risk and
Uncertainty
• Uncertainty is an
opportunity for
Innovation
• Opportunities Abound,
See or Create them

54. Knowing and Leveraging your
Strengths
• Areas of
Expertize
• What comes to
you Naturally
• Areas you can
Leverage in a
Synergy
• Skills, Knowledge,
Proven Abilities

55. Defining and Assembling Your
Audience
• Define your
Market
• Segment your
Audience
• Assemble the
Audience and
Target the Share
of Mind
• Create Top of
Mind Awareness
•

56. Developing a Viable Business Model
• Customer Segmentation
• Value Proposition
• Customer Relations
• Revenue Streams
Determining How
Money will be
Made
• Channels
• Mode of Delivery
Service Deliver
• Fixed Cost Structures
• Variable Costs
• Shared
Understanding the
Cost Structure
Finding and
Engaging Key
Partners
• Financial Resources
• Human Capital
Engaging and
Managing Key
Resources

59. Monetizing your Creation
•Revenue Models
• Subscription
• Advertising
• Outright Sales
• Sales and
Service

60. Various Possible Funding
Models
Concept of
the 3 Fs
• Friends
• Family
• Foes
Assessing
the
ANGELS
• Private Equity
• Venture Capital
• Angel Investors
• Public Offers
Collaborati
on
• Synergy and Partnering
• Participatory Investment
• You Cannot Go it Alone Always

61. Forms of ownership and legal
requirements
• Forms of business have been modified over the
course of time to keep pace with business needs
and the custom of society.
• Ownership of business is represented by the right of
individual or a group of individuals to acquire legal
title to property (assets) for the purpose of
controlling them and to enjoy the gains of profits
from such possession and use.

62. • The most common forms currently in
wide use by small business are:
• Sole proprietorship
• Partnership
• Corporations and
• Cooperatives
• Each form of ownership has a
characteristic internal structure, legal
status, size and field to which it is best
suited.

63. 1) Sole proprietorship
• It is an individual or single ownership
• The sole proprietorship is a form of business
organization in which
• An individual introduces his capital,
• Use of his own skill and intelligence in the
management of its affairs and
• It is solely responsible for the results of its
operation.
• This form is known also as individual or single
proprietorship, sole ownership or individual
enterprise.
• Example: Photo studio, bookshop, bakeries, small town
restaurants, retail stores, radio and watch repair shops,
and other elementary forms of business where
personal service is important.

64. Advantages of Sole proprietorships
a. Ease and low cost of formation and
dissolution:-there are no restrictions on either
starting or terminating small business operations.
b. Direct motivation and personal care
c. Freedom and promptness of action
The sole proprietor can take his own decision and
there is none to question his authority. the sole
proprietor can take prompt/quick decisions
especially when an emergency arises.
d. Business confidentiality
e. Single Tax:-The proprietorship does not pay tax as
a business; the profits from the business are the
personal income of the owner and are declare on his
individual income tax return.

65. Disadvantages of sole
proprietorship
a. Limited resources and size:-the capacity and skill are very
limited. Lending institutions and suppliers may not be
willing to cooperate because it is neither safe nor
dependable which results in making the business to remain
limited in size.
b. Limited Managerial Skill:- in complex and difficult
condition which requires different expertise knowledge
c. Unlimited liability:-The sole proprietor will be legally
liable for all debts of the business , a source of courage and
real devotion, limit his activities only in specified areas
d. Uncertain future/Death of the owner terminates the
business/
e. Difficulty in hiring and keeping high achievement
employees

66. 2. Partnership**
• The association of two or more persons to carry
as co-owners of a business where the
relationship is based on agreement is called
partnership.
• This form of a business requires the existence of two
or more persons entering into a contractual
relationship.
• This contract, which is an agreement between the
parties, is known as a memorandum of
association or article of partners’ deed.

67. Kinds of Partners
1.A general partner
• Assumes unlimited liability and is usually active in managing
the business. Most partners are general partners.
2.A limited or special partner
• Assumes limited liability, risking only his /her
investment in the business. Limited partners may not
be active in management, and their names are not
used in the name of the business.
3.A secret partner
• Takes an active role in managing a partnership but whose
identities are unknown to the public. i.e the general public
does not know of this person’s partnership status.
4.A silent partner
• As opposed to a secret partner, a silent partner, his
identities and involvement, is known to the general public,
but is inactive in managing the partnership business

68. 5.Senior partners
• Assume major roles in management because of the
long tenure (possession), amount of investment in
the partnership, or age. They normally receive
large shares of the partnership’s profits.
6.Junior partners
• Are generally younger partners in tenure, have
only small investment in the firm, and are not
expected to make major decision. They assume
limited role in the partnership’s management and
receive a smaller share of the partnership’s profits.
See others…

69. Advantages of partnership
1. Ease of starting
2. Increased source of capital:-Partnership can offer creditors less
risk than a sole proprietorship; it is often an attractive investment.
3. Combined managerial skill
4. Definite legal status
• Today’s partner can be assured that a competent lawyer can answer
virtually any questions he/she might have about this form of
ownership. i.e lawyers can provide a sound legal advice about
partnership issues.
6. Motivation of important employees
7. Reduced risk

70. Disadvantages of partnership
1.Unlimited liability
2. Risk of implied authority
• The fault and miss judgment made by a single
partner binds the firm and the remaining partners.
Thus, they are liable for the debts made by the
partner.
3. Lack of harmony…agrmnt or synchronizatn
4. Lack of continuity/instability/
• If any one of the general partners dies, withdraws
because of mentally or physically incapable (injured),
the partnership ends.
5. Investment withdrawals difficulty /frozen-
investment/

71. 3. Corporation***
• A corporation is an artificial person authorized and
recognized by law, with distinctive name, a common
seal, comprising of transferable shares of fixed
values, carrying limited liability and having a
perpetual or continued or uninterrupted succession

72. Characteristics of Corporation
1. Separate legal entity
• It can sue or be sued.
• It has the right to manage its own affairs.
• Shareholders cannot be liable for the acts of the corporation
2. Limited liability
• Since the corporation has separate legal entity its debts are its
own. The assets and liabilities, rights and obligations incidental to
the company’s activities are assets and liabilities, rights and
obligations respectively of the company and not of its members.
3.Transferiablity of shares
• It is easy to transfer ownership in a corporation. A stockholder
may sell stock to another person and transfer the membership
and membership interest freely without consulting other
stockholders.

73. 4.Perpitual existence
• Death, insanity, retirement and withdrawal of shareholders will not
affect the company.
5.Common seal
• A corporation has a common seal with the name of the company
engraved on it, which is used as a substitute for its signature
through it acts through its agents.
6.Separation of ownership from management
7.Supervision
8.Written Constitution
• On the creation of a company, the promoters must file certain
documents with the Registrar of Companies. These include the
Article of Association and the Memorandum of Association*.

74. Advantages of a
corporation
1. Financial strength
2. Limited liability
3.Scope of expansion
 Corporations have greater potential than sole
proprietorship or partnerships
4. Managerial efficiency
• Corporations enjoy the advantage of efficient
management by hiring specialist’s skilled persons to
become members of the board of directors to mange
the corporation
5. Ease in transferring ownership
6. Legal entity status
A corporation can purchase property, make
contracts, sue and be sued in the corporate name.

75. Disadvantages of a corporation
1. Difficulty of formation
• It is time consuming and cumbersome/not
managable to establish corporations unlike the other
forms of businesses.
2. Lack of owner’s/manager’s personal interest
• These forms of organizations are managed by
directors, hired officials, and employees who may not
be expected to have such an interest in the success
of the business as the individual owner or partner
would have in his own business.
3. Delay in decision-making…it needs official meeting of
managers or board
4.Lack of secrecy….openness…lack of privacy
5.Double taxation

76. 4.Corporatives(*)
• It is an organization owned by members/customers
who pay an annual membership fee and share in any
profits (if it is profit making organization).
It has to adopt the following principles:
• Members have an equal vote in decisions
• Membership is open to every one who fulfills
specified conditions (e.g. Number of hour worked)
• Assets controlled and usually owned jointly by
members
• Profit shared equally between members with
limited interest payment on loans made by
members;
• Members benefit from participation, not
investment

77. 5.Other forms of business
Franchises
• A franchise is a business in which the owner of the
name or method of doing business (called the
franchisor) allows a local operator (called the
franchisee) to set up a business under that name.
Management buy-outs and buy-ins
• In recent years the traditional separation of
shareholders and management has been eroded by
the growing popularity of management buy-outs’.
This is where a group of members pool their
resources to buy the business they have been
running, usually from as larger, parent company. A
management buy-in is where a group of managers
buys into an existing firm, usually replacing those
who have been running it.

78. Setting a Business enterprise
• Small Business as Basic
components of Economy
• What is basic business idea
• Steps in business setting
• Developing a Business Plan

79. What is small business?
There are two approaches to define small Business.
They are:
1. By some measure of size
2. using an economic /control definitions.

80. 1. Size Criteria
Examples of criteria used to measure size are:
1. Number of employees 2. Sales volume
3. Asset size 4. Insurance enforce
5. Volume of deposits
• Although the first criteria located above, employee,
is the most widely used yardstick; the best criteria
in any given case depends upon the user’s purpose.

81. To provide a clear image of the small firms, the
following general criteria for defining a small business
are suggested:
A). Financing of the business is supplied by one
individual or a small group.
b) Except for its marketing function, the firm’s
operations are geographically localized.
c) Compared to the biggest firms in the industry is
small
d) The number of employees in the business is usually
fewer than 100

82. Economic /Control Criteria
The economic /control definition cover:
a)Market share:- The characteristics of a small firm’s share
of the market is that it is not large enough to enable it to
influence the prices of national quantities of goods sold to
any significant extent.
b)Independence:- Means that the owner has control of the
business himself.
c)Personalized management:- Is the most characteristics
factor of all. It implies that the owner activity participates
in all aspects of the managements of the business, and in
all major decisions-making processes. There is no
delegation of authority.
All three of these characteristics must be satisfied if the
business is to rank as a small business.

83. Types of small business
1. Family Enterprises
• Family owned business varies widely and can include
retail stores, contracting businesses, small
manufacturing firms, and restaurants among others.
In the absence of a successor, the life of a venture is
limited to the working life of its founder. Succession is
a serious problem.
2. Personal service Firms(PSF)
3. Franchise:-The franchisee may receiver Francis help,
training, a protected market, and technical
assistance with matters such as site selections,
purchasing, accounting, and operations
management.

84. Why are small business important to
economy?
They make exceptional contributions as they provide
a.New jobs as populations and economy grow, small
business provide new job opportunity.
b.Introducing innovations-many scientific breakthrough
originated with small organization. Photocopies, etc
c. Stimulating Economic competitions.

85. Reasons for the more rapid growth of small firms in
most developed countries.
1.New technologies, such as numerically controlled
machine tools, may permit efficient production on a
smaller scale
2.Greater flexibility is required as a result of increased
global competitions
3.Consumers may be coming to prefer personalized
products over mass produced goods.

86. Causes for small business failure
• Incompetence- The owners simply do not know how to
run the enterprise.
• Unbalanced experience- do not have rounded
experience in the major activities of business production.
• Lack of managerial experience. Do not know how to
manage production.
• Lack of experience in the line- the owner has entered a
business field in which he or she has very little knowledge.
• Neglect- the owner does not pay sufficient attention to the
enterprise.
• Fraud- involves intentional misrepresentations or
deception (purchasing materials or goods for him/her self
with the company’s money)
• Disaster- refers to some unforeseen happening or ‘act of
God’ (eg. Robberies and extended strikes.)

87. The following are specific managerial causes of small
business failure
• Inadequate records- unable to establish an adequate
record keeping system.
• Expansion beyond resources
• Lack of information about customer
• Failure to diversify market
• Lack of marketing research.
• Legal problems
• Nepotism- favoritism toward family members
• One person management
• Lack of technical competence
• Absentee management the owner stayed away for
long period

88. Strength and weakness of small
business
Strength
1. Independence
•Most small business owners enjoy being their own
boss, they like the freedom to do things than way.
2. Financial opportunities
•Many small business owners make more money
running their own company than they would be
working for someone else.
3. Community services
•if the person has reason to believe the public will
pay for such output, he/she will start a company to
provide it.

89. 4. Job security
•when one owns a business, job security is
ensured.
5. Family employment (benefits)
•create the employment in the family
•higher moral and trust occur in family-run
business
•is times of server economic downturn
6. Challenge.
•They want to win or lose on their own abilities the
challenge gives them psychological satisfaction

90. Weaknesses
1. Sales fluctuations
in some months sales are very high, while in other
they drop off dramatically. The individual must
balance cash inflows with cash outflows.
2. Competition- Owning a business is the risk of
competition (eg. Restaurants)
3. Increased responsibilities- owner is often a
bookkeeper, accountant sales person, personnel
manager.
4. Financial loses- when the owner makes all major
decisions
6. Risk of failure- the ultimate risk the small business
owner manger faces is failure.

91. What is basic business idea?
• It is logical to think of a goal for the unit in long run
rather than to look for the immediate tomorrow. This
long-term thinking is called basic business idea

92. • Businessmen/businesswomen should think of long-
term goal and the profit when they start a business.
• The basic business idea, which is at the top of the
hierarchy, is to meet the broadest needs of the
customers, and has the long life perhaps from 5-50
years.
• The basic business idea facilitates choice of product
under an overall plan.
• Thus, entrepreneur may think of being in the
entertainment film, in automobiles, in medicines, in
services, in industries, etc.

93. • The product line is relatively narrow and has a
shorter life. The product line consists of different
families of product.
• A unit with a basic business idea for example
packaging can manufacture any of the following
groups of the products:
• Glass bottles,
• Plastic packages,
• Metal packages,
• Aluminum packages,
• Paper or wood packages.

94. • The product range includes different size of the
product with in the product line, in the examples
given above different size of glass bottles can be
manufactured for varied applications.
• The product is one item of the product range
having different specifications like
• size,
• material used and
• weight, etc.

95. In a dynamic business scheme, one has to carefully
watch is one of the basic idea degenerating as regards
• Its ability to generate quick returns.
• Its ability to permit quick changes in the
products.

96. What project an entrepreneur
should have?
• A project is a complex of economic activities in which
the key players commit scarce/limited resources in
the expectation that the benefits gained will exceed
these resources.
• Also, a project, broadly defined, in a way of using
resources: a decision between undertaking and not
undertaking a project is a choice between attentive
ways of using resources.
• The project should have to consider the SWOT and
should be designed accordingly.
• The SWOT approach compels individuals to think or
reason out systematically and analytically the
important factors strengths, weakness, opportunities,
and threats.

97. • Strength: is an inherent capacity, which an
organization can use to gain strategic advantage
over its competitors.
• Weakness: is an inherent limitation or constraint,
which creates a strategic disadvantage
• Opportunity: refers to any factor that offer promise
or potential for moving closer or more quickly
towards the firms goal
• Threat: is any factor that may limit or impede the
business in the pursuit of its goals

98. To be a successful entrepreneur, one major
determinant factor is the choice of a good business
idea. To select the best business idea, the following
steps needs to be pursued.
a.Identify your problem
b.Define your objectives
c.Identify, develop and analyze the possible
alternative
d.Select the best alternative in light of the specific
criteria set to the better fulfillment of the
objective.

99. Steps in business setting
1. The first key to success in any
manufacturing activity is to select the
right product. These must be examined
with a view to assess:
a.The marketing aspects
b.Technical aspects
c. Financial aspects

100. 2. Having selected a product, a detailed
project report to be prepared. This will
cover the following aspects.
a.A detailed estimate of demand is to be made.
b.Technical specifications of the process should be
carefully studied.
c. The equipment required and their sources are to be
specified
d.Requirement of space.
e.The total cost of the project to be worked out, the
means for financing it identified
f. The economics of the entire scheme at projected
operating level is to be assessed.

101. 3. Implementation of the detailed project report.
Includes:
a.Deciding on form of ownership and
registration
b.Obtaining finance ,Obtaining license
c.Establishing necessary infrastructures
4. Once all the required authorizations and
sanctions have been obtained, simultaneous
action is to be taken for the following. Pre-
commissioning requirement
a.Ordering machinery from suppliers
b.Obtaining utilities like power and water connections
after constructions of shed, if necessary.
c. Recruitment of staff,
d.Arranging supplies of materials
e. Arranging for distribution of the products

102. 5. Once these are complete, the plant is ready for
commissioning trial run may be made.
Commissioning of plant, Includes:
a.Trial run of machineries
b.Promotional activity for the product
c.Introduce the product to the market and obtain
feedback
6. The unit is then ready for commercial production.
a. Commercial production
This is all about the feasibility study
+pre&after implementation

103. DEVELOPING A BUSINESS PLAN
WHAT IS A BUSINESS PLAN?
• A business plan is a comprehensive set of guidelines
for a new venture.
• A business plan is also called a feasibility plan that
encompasses the full range of business planning
activities, but it seldom requires the depth of research
or detail expected for an establishment enterprise.
• A business plan would present your basic business
idea and all related operating, marketing, financial and
managerial considerations.

104. • What ever the name, it should lay out your idea,
describe where you are, point out where you want to
go, and how you propose to go there.
• The business plan may present a proposal for launching
an entirely new business. More commonly, perhaps; it
may present a plan for a major explanation of a firm
that has already started operation

105. THE PURPOSE OF BUSINESS PLAN
1.It can help the owner/manager crystallize and focus
his/her idea.
2.Although planning is a mental process, it must go
beyond the realm of thought. Thinking about a
proposed business becomes more rigorous as rough
ideas must be crystallized and quantified on paper.
3.It can help the owner/manager set objectives and
give him a yardstick against which to monitor
performance.
4.It can also use as a vehicle to attract any external
finance needed by the business. Eg. To get fund…

106. 5.It can convince investors that the
owner/manager has identified high
growth opportunities.
6. It entails taking a long-term view of
the business and its environment.
7. It emphasizes the strengths and
recognizes the weaknesses of the
proposed venture.
8. The plan can uncover weakness or
alert the entrepreneur to sources of
possible danger

107. WHEN THE BUSINESS PLANS ARE
PRODUCED?
• At the start up of a new business:
• Business purchase:
• On going:
• Major decisions:

108. WHO PRODUCED THE BUSINESS PLAN?
• Managers:, Owners:, Lenders:
WHY THE BUSINESS PLANS ARE PRODUCED?
• Assessing the feasibility and viability of the
business/project: it is in every ones interests to make
mistakes on paper, hypothetically testing for feasibility,
before trying the real thing.
• Setting objectives and budgets: having a clear financial
vision with believable budgets is a basic requirement of
everyone involved in a plan.
• Calculating how much money is needed: a detailed cash
flow with assumptions is vital ingredient to precisely
quantify earlier the likely funds required.

109. THE FORMAT OF A BUSINESS PLAN
1. Where are we now?
• An analysis of the current situations of the market
place, the competitions, the business concept and the
people involved. It will include any historical background
relevant to the positions to date.
2. Where do we intend going?
• Qualitative expression of the objectives, quantifiable
targets will clarify and measure progress towards the
intended goals.
3. How do we get there?
• Implementing of accepted aims is what all the parties to
a plan are interested in as a final result.

110. COMPONENTS OF BUSINESS PLAN (OUT LINE OF A BUSINESS
PLAN)
1. Identification of the business
a. Introduction
- relevant history and background
- Proposed date for commencement of trading /beginning of a plan
b. Names
-name of the business and trading name
- name of the managers/owners
c. Legal identity
-company/partnership/sole-trade/cooperative
- details of share or capital structure
d. Location
-address-registered and operational
- brief details of premises.
e. Professional advisers, -Accountants, solicitors, bank
I. Analysis of the current situation (where are we now?)

111. 2. The key people
a. Existing management- Outline of background
experience
, skills and knowledge.
-Names of the management team
b. Future requirement -gaps in skills and experience
and how they will be filled ,- future recruitment
intentions

112. 3.The nature of the business
a. Product(s)or service(s)-Description and
applications
-Key suppliers
-Planned developments of
product or service
b. Market and customers
–Definition of target market, classification of
customers
- Trend in market place
c. Competition- description of competitors;
strength and weakness of the major competitors.

113. II. FUTURE DIRECTION (where do we intend
going?)
i. Strategic Influence -SWOT Analysis
1. Opportunities and threats in the business
environment
• Socio-economic trends, Technological
trends
• Legislation and politics, Competition
2. Strengths and weaknesses
• In its industry, In the general
environment:
ii. Strategic direction:
1. Objectives- general and specific
2. Policies- guidelines and rules
3.Activities- action plans and timetable of key

114. III. IMPLEMENTATION OF AIM (how do we get
there?)
1. Management of resources
a) Operation:-premises, materials, equipment, insurance,
management information system.
b) People/Human resource/- employment practices,
recruitment, team management, training etc
2. Marketing plan
a)Competitive edge- unique selling point of business (Critical
products or service characteristics or uniqueness in relation to
competitors)
b) Marketing objectives - specific aims for product or service
in the market place
c) Marketing methods- product, pricing, promotion,
distributions=4ps

115. 3. Money: financial analysis
a. Funding requirement- start up capital, working
capital, asset capital, timing of funds required,
security offered.
b. Profit and loss:-- 3 years forecast, sales variable
costs, profit, overheads, net profit
c. Cash flow:-- 3 years forecast, receipts, payments,
monthly and cumulative cash flow
d. Balance sheet - use of funds, source funds

116. Entrepreneurshi
p
6th
Semester Session 2017-2021

117. Marketing in Business
enterprises
• The Marketing Perspective
• Marketing Mix-product, price, place, and promotion,
• Marketing segmentation and market research,
• Factors affecting the Business Environment

118. THE MARKETING
PERSPECTIVE
Definition of Market:
• Market is a group of potential customers having
needs to satisfy, ability to buy & willingness to pay in
order to satisfy these needs.
OR
• A social & managerial process by which
individuals & groups obtain what they need & want
through creating & exchanging products & value with
others.

119. The main concepts of marketing
• Marketing activities are integrated
• Organizations are market oriented
• Marketing focuses on selected markets
• Customer satisfaction is the core of marketing
• Marketing starts early before production &
continues after selling…T/F…discuss?

120. THE MARKETING MIX
 A marketing organization has to concentrate on four
important aspects known as the 4P’s of marketing.
 The marketing manager has to combine these 4 P’s
(PRODUCT, PRICE, PROMOTION and PLACE.) in
such a way that the combination provides
satisfaction to the customer and profit to the
manufacturer.
 When these elements (4 P’s) are combined together
they are called as “The Marketing Mix”.

121. 1.The product mix: Includes:
• Product planning and
development
• Branding Packaging
Labeling
2.The price mix: Includes
• Price polices
• Skimming pricing (Pricing above
the market)
• Penetration pricing (Pricing below
the market)
• Premium pricing (Pricing with the
market)
• Discounts
• Quantity discount Seasonal
discount
•
3. Place mix
(Physical
distribution mix):
• Channels of
distribution
• Transportation
• Warehousing
4. Promotion mix:
Includes
•Advertising
•Personal selling
•Sales promotion
•Publicity

122. I. THE PRODUCT MIX
• Product: Is any commodity that satisfies the needs & wants of
customer.
• It is a bundle of tangible & intangible attributes, which satisfy
the needs, & wants of customers.
• In today market, a product can be
• A person (soccer players), Organization
(privatized firms),
• Places (leased land), Objects (items),
• Idea (business plans or project proposal),
• Services (medication or barber), or mixes of these
elements.
• So, a product can be defined as anything, which comprises of
benefits in forms of physical, service, and symbolic attributes to
maximize buyers’ want satisfaction.

123. 1.Product planning and development
Product planning includes three major types of
decisions:
• Development and introduction of new
products
• Modifications of existing products in
keeping with the changing tastes and
preferences of the target customers and
• Elimination of unprofitable or obsolete
products

124. 2. Branding
• Brand name: the part of a brand, which consists of
word, letters and/or numbers, which can be vocalized.
Eg. OMO, Coke
• Brand mark: the part of a brand that can be
recognized but is not utter able. It can appear in the
form of symbol, design, distinctive coloring or
lettering.
• Trademark: a brand or part of a brand that has been
given legal protection so that the owner has exclusive
rights to its use. After companies identify their
trademark, they entail a term “™” or “®”
• Trade Name: Trade name is the name of the business
organization. A trade name may also be used as a brand
name. In such a case it performs a dual function. It gives
identification to the product as well as the manufacturer

125. Importance of a brand
• The brand makes it easier for the seller to process orders and track
down problems.
• The seller’s brand name and trademark provide legal protection of
unique product features.
• Branding gives the seller the opportunity to attract a loyal profitable
set of customers and helps to increase the control and share of the
market.
• Branding helps the seller to segment markets and expand the product
mix.
• Good brand help to build the corporate image because it advertises
the quality and size of the company.
• Brands make it easy for customers to identify products or services.

126. Requirements of a good brand
• Be easy to pronounce, recognize and remember
• Be distinctive.
• Suggest something about the product’s benefits or
characteristics
• Suggest about the product qualities such as action or
use.
• Be large enough to be applicable to new products that
may be added to the product line.
• Have a possibility of registration and legal protection.

127. 3.Packaging
 Packaging is a marketing process concerned with the
design and production of the container or wrapper for
a product.
 The container or wrapper or covering is called the
package.
Importance of packaging
1. Packaging serves several safety and utilitarian
purposes
2. Packaging may implement a company’s marketing
program.
3. Well-packaged products may increase profit
possibilities in that it stimulates customers to pay
more just to get the special package.

128. 4.Labeling
1. Brand label: simply the brand alone applied to the
product or to the package.
2. Grade label: a label, which identifies the quality
with, a letter, number or word.
3. Descriptive label: it gives objective information
about the use, construction, care, performance or
other features of the product. Sometimes it is called
informative label.
Eg. medicines

129. II. THE PRICE MIX
WHAT IS PRICE?
• Is the amount of money consumers have to pay to
obtain the product.
• Price has operated as the major determinant of user
choice traditionally.
• Although non-price factors have become more
important in recent decades price still remains one of
the most important element determining market share
and profitability.
• Different companies set the price haphazardly as
based on cost.

130. METHODS OF PRICING
1.Cost plus pricing/ Mark Up pricing/
2. Skimming pricing
The following conditions should be satisfied
1.A sufficient number of buyers have a high current
demand.
2.The high initial prices do not attract more
competition to the market.
3.The high price communicates the image of a
superior product.
3.Penetration pricing: below market price
4. Premium pricing: with market

131. The major objectives of pricing are:
• Achievement of target return
• Maximization of profit
• Increase of sales volume
• Maintenance or increase of market share
• Stabilization of prices &
• Meeting competition

132. III. PLACE MIX
• Place: Includes company activities that make the
product available to target consumers.
• Physical distribution includes:
• Channels of distribution
• Transportation
• Warehousing/ storing goods/
DEFINITION OF MARKETING CHANNELS
The marketing (or distribution) channels refer to
the activities, parties and channel structure
required to transfer a product from its point of
production to its point of consumption by the
end customer

133. Direct channel
1.Door-to-door selling
2.Manufacturers’ sales branches
3.Direct mail
Indirect channel
1.Merchant Middlemen:-
• Whole seller:- Eg. Dalda, Shan, DG Cement etc.
• Retailer:- Eg. Shops, supermarkets.
2. Agent Middlemen
• Commission agent, Brokers, Selling agents,
• Eg. -Sony Glorious, is an agent to Sony
Electronics products,
-Equatorial business is agent to Samsung.

134. Channel levels
Manufact
urer
Consum
er
Zero-level
Manufact
urer
Retaile
r
Consum
er
One-level
Manufact
urer
Retaile
r
Wholesa
ler
Consume
r
Two-level
Manufact
urer
Agent
Wholesa
ler
Retaile
r
Consum
er
Three-
level

135. IV. PROMOTION MIX
• Is sometimes known as marketing
communication.
• Means activities that communicate the
merits of the product & persuade target
customers to buy it.
• Promotional objectives:
• Informing the product
• Increasing sales
• Stabilizing sales / profit
• Positioning the product

136. The promotional mix consists of four major
tools
• Advertising: such as informative Ad, Persuasive Ad
and Reminder Ad
• Personal selling – Oral presentation in conversation
with one / more consumers for the purpose of
making sale
• Sales promotion – Includes: gifts, games, sampling,
coupons, and window displays.
• Publicity – Any information about the organization,
its personnel or its products that appears in any
medium on a non - paid basis.

137. MARKET SEGMENTATION
• Market segment is a group of individuals or organizations within a
market that share one or more common characteristics.
• The process of dividing a market in to segments is called market
segmentation.
Bases for market segmentation
1.Geographic segmentation:- Region Urban, Suburban,
Rural, Market density, Climate, Terrain (land, topography),
City size, Country size, State size
2.Demographic segmentation:- Age, Gender, Race,
Ethnicity, Income, Education, Occupation, Family size,
Family life cycle, Religion, Social class
3.Psycho graphic segmentation:- Personality, Attributes,
Motives, Lifestyles
4.Behavioral segmentation:- Volume usage, End use,
Benefit, Expectations, Brand loyalty, Price
sensitivity

138. MARKET RESEARCH
1.Marketing research is the systematic
recording and analysis of data about problems
relating to marketing.
American Marketing Association
2.Marketing research is the application of
scientific method to the solution of marketing
problems.
Luck, Wales, Taylor
It is important for any business to conduct it before
established ,ongoing business and futurity….

139. Part five: Financing and
accounting in business
Financial requirement
Sources of finance,
control of financial resource
financial analysis and accounting

140. DEVELOPING FINANCIAL PLAN
• Project implementation requires bringing together
the inputs of land, labor, machinery, staff etc.
• Finance is required to assemble these inputs.
• Proper financing of business is essential for success
in both small and large enterprises.

141. • Financial planning is the process of formulating
policies and strategies relating to the procurement,
investment and administration of funds for an
enterprise.
• While formulating a financial plan, the entrepreneur
has to answer the following questions:
• How much money is needed?
• Where the money comes from?
• When should the money be available?
• These three questions are concerned respectively
with the estimation of financial needs, sources of
finance, and the time of raising funds.

142. SOURCE OF FINANCE

143. A. Internal sources (Equity capital)
• Owners capital or owners equity represent the
personal investment of the owner or owners in a
business, and it is sometimes called risk capital
because these investors assume the primary risk of
losing their funds if the business fails.
• It requires no repayment in the form of debt and
much safer for new ventures than debt financing.
• It also requires sharing the ownership and profits
with the funding sources.

144. Source of equity capital:
1. Personal savings
• The first place entrepreneurs should take for start up
money is in their own pockets or on their
pool of personal savings.
• It is the least expensive source of funds available.
• As a general rules, entrepreneurs should expect to
provide at least half of the start up funds in the form of
equity capital.
• If the entrepreneur is not willing to risk his own money
potential investors re not likely to risk their money in
the business either.

145. 2. Friends and relatives:
• Because of their relationships with the founder, these
people are most likely to invest. But having them
invest can lead to controversy if their participation is
not clear to everyone.
• To avoid such problems, and entrepreneur must
honestly present the investment opportunity and the
nature of risks involved to avoid alienating friends and
family members if the business fails.

146. 3. Angels
• These private investors (or angels) are wealthy
individuals, often entrepreneurs themselves, who
invest in business start ups in exchange for equity
stakes in the companies.
• Due to the inherent risks in start up companies, may
venture capitalists have shifted their investment
portfolios away form startups toward more
established firms.
• Angles will often finance the deals that no venture
capitalists will consider most angles have substantial
business and financial experience and prefer to
invest in companies at the start up or infant growth
stage

147. 4.Partners:
• Whenever an entrepreneur gives up equity in
his/her business (through what ever mechanisms),
he/she runs the risk of losing control over it.
• As the founder’s ownership is a company becomes
increasingly diluted, the probability of losing
control of its future directional and the entire
decision making process increases.

148. 5. Venture capital companies
• venture capital companies are private, for profit organizations
that purchases equity positions in young businesses they
believe have high growth and high profit potential.
• They provide start up (seed money) capital to new ventures,
• Development funds to businesses in their early growth stage,
and
• Expansion funds to rapidly growing ventures that have the
potential to go public or that need capital for acquisitions.
• Two factors make a deal attractive to venture capitalists:
high returns and a convenient (and profitable) exit strategy.

149. 6. Public stock sale (going public)
• This is an effective method of raising large
amounts of capital, but it can be an expensive
and time-
consuming process filled with regulatory nightmar
es

150. B. External source (Debt capital)
• Borrowed capital or debt capital is the external
financing that a small business owner has borrowed
and must repay with interest.
• Small enterprises have few choices than large firm for
obtaining debt financing.
• Although borrowed capital allows entrepreneurs to
maintain complete ownership of their business, it
must be carried as a liability on the balance sheet as
well as be repaid with interest at some point in the
future or with in the time stipulated in the contract

151. 1.Commercial banks
In most cases commercial banks give
• Short-term loan (repayable with in one year or less) and
• Medium term loan (maturing in above one year but less
than five years) as a working capital.
• Long term loans (maturing in more than five years) for
the purchase of property or equipment or as a project
loan, with the purchased asset or the project itself
serving as collaterals.

152. unsecured and secured loans
• An unsecured loan is a loan in which collateral is not
requested.
• That is the loan is granted against personal guarantee
or corporate customers of the bank.
• Unsecured loans will have high interest charges but
this may not be necessarily applicable by all banks

153. • To secure a bank loan, an entrepreneur typically will
have to answer a number of question, together with
descriptive commentaries
• What do you plan to do with the money
(credit facility)?
• How much do you need?
• When do they need it?.
• How long will you need it?
• How will you repay the loan?

154. Bank lending decision
• Most bankers refer to the five Cs of credit in making
lending decision. The five Cs are
• Capital
• Capacity
• Collateral
• Character and
• Conditions

155. 2.Trade credit
• It is credit given by suppliers who sell goods on
account.
• This credit is reflected on the entrepreneur’s
balance sheet as account payable and in most
cases it must be paid in 30 to 90 or more days
interest free because of its ready availability
• Getting suppliers to extend credit in the form of
delayed payments usually is much easier for a
small business than obtaining bank financing.

156. 3.Equipment suppliers
• Most equipment vendors encourage business owners
to purchase their equipment by offering to finance
the purchase
• In some cases, the vendors will repurchase
equipment for salvage value at he end of its useful
life and offer the business owner another credit
agreement on new equipment.

157. 5. Accounts receivable financing
• Short term financing that involves either the
pledge of receivables as collateral for a loan or
the sale of receivables (factoring).
• Account receivable bank loans are made on a
discounted value of the receivables pledged.

158. 6. Credit Unions:
7. Insurance Companies:
8. Bonds
9. Treasury bill
• How to prepare financial statement n accounting
….read
• If time c sm pts abt accounting….

159. Risk and insurance of Business enterprises
Definition of Risk,
The process of Risk management,
Classifying risks by Type of Asset,
Insurance of the Small Business

160. DEFINITION OF RISK
• Risk exists whenever the future is
unknown. Because the adverse effects of
risk have plagued mankind since the
beginning of time, individuals, groups and
societies have developed various methods
for managing risk. Since no one knows
the future exactly, everyone is a risk
manager for himself. I.e., not by choice,
but by sheer necessity.
• Example: In buying a tire, we may have
a choice. There is no sheer necessity

161. • The term risk used in different ways. The following
definitions given by different scholars and
practitioners in the field:
• Risk is the channel of loss
• Risk is the possibility of loss
• Risk is uncertainly
• Risk is the dispersion of actual from
expected result
• Risk is the probability of any outcome
different from the one expected
• Generally, it has bad/negative connotation

162. Business risks can be classified into two
broad categories:
1.Market risk is the uncertainty associated with
an investment decision. An entrepreneur who
invests in a new business hopes for a gain but
realizes that the eventual outcome may be a
loss.
2.Pure risk is used to describe a situation where
only loss or no loss can occur-there is no
potential gain.
• A pure risk exists when there is a chance of loss
but no chance of gain/profit. Example: Owner of
an automobile faces the risk of a collusion loss. If

163. RISK MANAGEMENT
• The complexity of the business environment calls for or
demand for a special attention to a risk:
• The special task to
Identify
Analyze
Combat and the operating risks are referred to as risk
management.
• Some of the factors, which increase the complexity of
environment, are:
Inflation
Growth of internal operation
More complex technology
Increasing government regulation

164. • What is risk management? Risk management is a
systematic way of protecting business resources and
income against losses so that the organization’s aims
are reached without interruption, creating stability
and contributing to profit.

165. • Risk management is broader than insurance
management in that it deals with both insurable
and uninsurable risks. Insurance management for
most part it is restricted to the area of those risks
that are considered to be insurable.
• The emphasis in the risk management concept is
on reducing the cost of safeguarding against risk by
whatever means.

166. The process of risk management
1. To recognize exposure to loss
Is also called as risk identification
Is the 1st
step of risk managers’
function.
Is the most vital task
• What types of possible losses are
there?
• Failure to identify exposure to loss
==> the risk manager will not have
any chance of handling the loss that
identify the risk.

167. 2.To estimate the frequency and size of
loss, i.e., to estimate the probability of loss
from various sources. It is also called as risk
measurement.
Risk measurement means
i. Determination of the chance of an occurrence or relative
frequency.
ii. Determination of the impact of losses upon financial
affairs.
iii.The ability to predict the losses that will actually occur
during the budget year.

168. 3.To decide the best and most economical method
of handling the risk if loss.
i.e. Selection of the proper tool for handling
risk
4. Implementing the decision
5.Revaluating the decision

169. Tools of Risk Management
1. Avoidance
One way to handle a particular pure risk is to
avoid the property, person or activity with which
the risk is associated.
• Two approaches of risk avoidance:
i. Refusing
e.g. For instance, a firm can avoid a flood loss by
not building a plant in a place where flood is
frequently affecting. In case of refusing, we are
discontinuing the activity
ii. Abandonment
e.g. A firm that produces a highly toxic product
may stop manufacturing that product.

170. 2. Retention
• Bearing all the risk by that person/organization.
Types of retention
i. Planned/conscious/ active risk retention
• It is characterized by the recognition that the
risk exists, and tacit agreement to assume
the losses involved.
• The decision to retain a risk actively is made
because there are no alternatives more
attractive.
• Self-insurance is a special case of active
retention. Self-insurance is not insurance,
because there is no transfer of the risk to an
outsider.
• E.g. A firm may keep some money to retain

171. ii. Unplanned/Unconscious/ Passive
Retention
• Passive risk retention takes place when the individual
exposed to the risk does not recognize its existence.
• In this case, the person so exposed retains the
financial consequence of the possible loss without
realizing that he does so.

172. 3. Loss Prevention and Reduction Measures
• Prevention is defined as a measure taken before
the misfortune occurs.
• Generally speaking, loss prevention programs
intend to reduce the chance of occurrence.
•
Example:
• Constricting a building with a fire resistance
material / fireproofing.
• Constructing a building in a place where there is
little danger.
• Regularly inspecting the machine / area
• The existence of automatic loss detection
programs.
• Fire alarms
• Warning posters /NO SMOKING!! , DANGER ZONE!!/

173. • Loss reduction measures try to minimize the severity
of the loss once the peril happened/ after the event
occurs.
For Example:
• Automatic sprinkler
• An immediate first aid
• Medical care and rehabilitation service
• Guards
• Cover
• Fire extinguisher
• Fire alarms

174. 4. Separation /Diversification
• Separation of the firm’s exposures to loss instead of
concentrating them at one location where they
might all be involved in the same loss.
• Separation==>Dispersion/Scattering the exposure in
different places.
• “Don’t put all your eggs in one basket”
• Example: Instead of placing its entire inventory in
one warehouse, the firm may elect to separate this
exposure by placing equal parts of the inventory in
ten widely separated warehouses.

175. •
5. Transfer
• It is also called as shifting method.
• When a business organization cannot afford to cover the
loss by itself, it may look for/transfer institutions.
• Insurance is a means of shifting or transferring risk.

176. CLASSIFYING RISK BY TYPE OF ASSET
1.Property risks
• Property-oriented risks involve tangible and
highly visible assets. Many property-oriented
risks are insurable; they include:
• Fire , Natural disasters, Burglary, Business
swindles (or fraudulent transactions) and,
Shoplifting.
2.Personnel risks
• Personnel-oriented losses occur through the
actions of employees. The three primary types of
Personnel-oriented risks are:
• Employee dishonesty, Competition from
former employees, Loss of key executives

177. 3.Customer risks
• Customers are the source of profit for small business, but
they are also the source of an ever-increasing amount of
business risk. Much of these risks are: On-premises injuries
and Product liability
• On-premises injuries:
• Customers may initiate legal claims as a result of on-
premises injuries.
• When a customer breaks an arm by slipping on icy steps
while entering or leaving a store;
• Inadequate security, which may result in robbery, assault, or
other violent crimes; Customers who are victims often look to
the business to recover their losses.
• Product liability:
• A product liability suit may be filed when a customer
becomes ill or sustains physical or property damage from
using a product made or sold by a firm.

178. INSURANCE FOR THE SMALL BUSINESS
1. Basic principles for a sound insurance program
Basic principles in evaluating an insurance program include:
• Identifying insurable business risks
• Limiting coverage to major potential losses and
• Relating premium costs to probability of loss
2.Requierments for obtaining insurance
1. There must be a sufficiently large number of homogenous
exposure units to make the losses reasonably
predictable.
• Insurance is based on the operation of the law of
large numbers.
• There must be a large number of exposures and
those exposures must be homogenous.
• Unless we are able to calculate the probability of
loss, we cannot have a financially sound program.

179. 2. The loss produced by the risk must be definite and
measurable.
• The loss must have financial measurement or financial
implication.
• The risk must be calculated
• Example: For instance a person may purchase disability
insurance. How do we know that the person is unable to
do? Thus, the risk must be definite and measurable.
3. The loss must be fortuitous or accidental.
• i.e. the loss must be the result of a contingency, i.e., it
must be something that may or may not happen. It must
not be something that is certain to happen.
• Wear and tear or depreciation, which is a certainty,
should not be insured. No protection is given by
insurance.
• We should not be certain as to the occurrence of a loss

180. 4. The loss must not be catastrophic
• All or most of the objects in the group should not suffer
loss at the same time because the insurance principle
is based on a notion of sharing losses.
• Example: Damage which results from war, flood,
windstorm and so on would be catastrophic in nature
and hence do not have insurance.
5. The loss must be large loss.
• The risk to be insured against must be capable of
producing a large loss, which the insured could not
pay without economic distress.
• Incase the loss occurs, it must be severe that must
be transferred to the insurer. Those recurring and
minor types of losses are not transferred to the
insurance company.

181. 6. Reasonable cost of transfer
• i.e: the probability of loss must not be too high because
the cost of transfer tends to be excessive.
• To be insurable, the chance of loss must be small. The
more probable the loss, the more certain it is to occur.
• The more certain it is, the greater the premium will be.
But to make insurance attractive, the premium has to be
for less than the face of the policy. For instance, a life
insurance company to issue a birr 1000 policy on a man
aged 99. The net premium would be about birr 980.

182. The end

183. • Risk management is the identification,
measurement and treatment of liability, property
and personal pure risks that the business
organization is facing.
• It is the science that deals with the techniques of
forecasting future losses so as to plan, organize,
direct and control the adverse effect of risk.
• i.e., Risk management is defined on the base of managerial
functions.
• It is the reduction and prevention of the
unfavorable effects of risk at minimum cost
through its identification, measurement and
control.
• It is a discipline / a profession that systematically
identifies and analyzes the various loss exposures
faced by a firm or an organization and employees

184. 5. Combination
• Risks are pooled when the number of
independent exposure units under
observation is increased.
• Unlike separation, which spreads a specified
number of exposure units, combination
increases the number of exposure units under
the control of the firm.
• In the case of firms, combination results in
the pooling of resources of two or more firms.
The new firm has more building, more
automobiles, and more employees than either
of the original companies. This leads to

185. 6. Neutralization
• Neutralization, which is very closely related to transfer.
• It is the process of balancing a chance of loss against a
chance of gain.
• Eg. An excellent example is the process of making
commitments on both sides of transaction in such a way
the risks compensate each other.
• The following matrix can determine which risk
management be used.

186. ACCOUNTING FOR SMALL BUSINESS
• Proper financial and accounting records make it possible
for the owner to exercise effective control of funds and
overall performance of his/her business.
• Such records also make it possible to know whether the
firm is earning profits or loss.
• Accounts also help to know the financial position of the
business at any time and at the end of the fiscal year.

187. BUSINESS TRANSACTION AND ACCOUNTIN
G EQUATION
• A business transaction is the occurrence of an event
or of a condition that must be recorded.
• The payment of a monthly telephone bill,
• The purchase of merchandise on credit and
• The acquisition of land and a building are
examples of business transactions
• A particular business transaction may lead to an
event or a condition that result in another
transaction.
• For example, the purchase of merchandise
on credit will be followed by payment to
the creditor, which is another transaction

188. The accounting equation
• Assets are the properties owned by a business
enterprise or any thing of value owned by a business
enterprise.
• The rights or claims to the properties are referred to as
equities.
• The sum of assets is equal to that of the sum of
equities.
• Equities may be subdivided into two principal types:
• the rights of creditors and
• the rights of owners.
• Rights of creditors represent debts of the business and
are called creditor’s equities or liabilities.
• The rights of owner or owners are called owner’s

189. • Expansion of the equation to give recognition to the two
basic types of equities yields the following, which is
known as the accounting equation:
• Assets = equities
• Assets = creditor’s equities + owner’s
equity
• Assets = liabilities +capital
• It is customary to place “liabilities“ before “owner’s
equity” in the accounting equation because creditors
have preferential rights to the assets.

190. • Assets: any physical thing (tangible) or right
(intangible) that has a monetary value is an asset.
Assets are customarily divided into two:
• Current assets: are cash and other assets that may
reasonably be expected to be realized incase or sold or
used up usually within one year or less, through the
normal operations of the business.
• Example: cash, accounts receivable, notes receiv
able, supplies, prepaid expenses, stock
(inventory), etc
• Plant assets: are tangible assets used in the
businesses that are of a permanent or relatively fixed
nature. It is also known as fixed assets.
• Example: equipment, machinery, building,
Assets

191. Liabilities:
• Liabilities: are debts owned to outsiders (creditors) .
Liabilities are frequently described on the balance sheet
by titles that include the word “Payable”.
1.Current liabilities: are liabilities that will be due within
a short time (usually one year or less) and that are to be
paid out of current assets.
• Example: notes payable, accounts payable, salaries
payable, interest payable, taxes payable.
2.Long-term liabilities: are liabilities that will be due for a
comparatively long time (usually more than one year) it is
also known as fixed liabilities.
As they come within the one-year range and are to be
paid, such liabilities become current.
Example: Mortgage payable

192. Owner equity
• Owner equity: is the residual claim against the assets
of the business after the total liabilities are deducted.
For a corporation, owner’s equity is frequently called
stockholders equity, shareholder’s equity or
stockholder’s investment.
• Capital: is the owner’s equity in a sole proprietorship
(and partnership)
• Capital stock: represents the investment of the
stockholders.
• Retained earnings: represents the net income retained in
the business.
• Drawings: represents the amount of withdrawals made by
the owner of a sole proprietorship (and partnership)

193. • Dividends: represents the distribution of earnings to
stockholders.
• Revenue: is the amount charged to customers for
goods or services sold to them It is an increase in
capital that resulted from the normal operation of the
business. Example: Professional fees, commissions
revenue, fares earned, interest income, etc
• Expense: costs that have been consumed in the
process of producing revenue are expired costs or
expenses. It resulted in a decrease in capital. Example:
Wages expense, rent expense, supplies expense,
utilities expense, etc

194. Preparation of financial
statements
• Financial statements: After the effect of the individual
transactions has been determined, the essential information is
communicated to users. The account statements that
communicate this information are called financial statements.
• The principal financial statements are the income
statements the statement of owner’s equity, the balance
sheet and the statement of cash flow.
• The financial statements prepared for sole proprietorship,
partnership and corporation are almost the same.
• The major difference is in the capital section of the balance
sheet.
• The capital section of these enterprises indicates the name of
the owner, the name of the partners and the capital stock
(common stock) and/or the preferred stock in their respective
order.

195. • Income statement: a summary of the revenue and the
expenses of a business entity for a specific period of time,
such as a month or a year.
ABC trading
Income statement
For month ended December 31, 2004
Sales 10,000
Operating expenses:
Wages expense 3,000
Rent expense 2,000
Suppliers expense 2,000
Utilities expense 750
Miscellaneous expense 250
Total operating expense (8,000)
Net income 2,000

196. • Statement of owner’s equity is a summary of the
changes in the owner’s equity of a business entity that
have occurred during a specific period of time such as a
month or a year.
ABC trading
Statement of owner’s equity
For month ended December 31, 2004
Investment during the month
15,000
Net income for the month 2,000
Less withdrawals 500
Increase in owner equity
1,500
Mr. X, Capital, December 31,2004
16,500

197. • Balance sheet: is a list of the assets, liabilities and
owner’s equity of a business entity as of a specific
date, usually at the close of the last day of a month
or year.
ABC trading
Balance sheet
December 31, 2004
Assets
Cash
10,000
Supplies
1,000
Land
8,000
Total asset
19,000
Liabilities

198. Statement of cash flows
• It is a summary of the cash receipts and cash payments
of a business entity for a specific period of time, such as
a month or a year.
• It is customary to report cash flows (cash receipts and
cash payments) in three sections:
1. Operating activities
2. Investing activities, and
3. Financing activities

199. ABC trading
Statement of cash flows
For month ended December 31,2004
Cash flows from operating activities:
Cash received from customers 10,000
Less cash payments for expense and payments to creditors (7,300)
Net cash flow from operating activities 2,700
Cash flows from investing activities:
Cash payments for acquisition of land (8,000)
Cash flows from financing activities:
Cash received as owner’s investment 15,000
Less cash withdrawal by owner (500)
Net cash flow from financing activities 14,500
Net cash flow and December 31,2004 cash balance 9,200

200. January Projections
1. ABC projects a beginning cash balance of $20,000.
2. Cash receipts. Product manufacturing will not be completed
until February, so there will be no sales. However, service
income of $4,000 is projected.
3. Interest on the $20,000 will amount to about $100 at current
rate.
4. There are no long-term assets to sell. Enter a zero.
5. Adding 1, 2, 3, and 4 the Total Cash Available will be $24,100.
6. Cash payments. Product will be available from manufacturer
in February and payment will not be due until pickup.
However, there will be prototype costs of $5,000.
7. Variable (selling) expenses. Estimated at $1,140.
8. Fixed (administrative) expenses. Estimated at $1,215.
9. Interest expense. No outstanding debts or loans. Enter zero.
10. Taxes. No profit previous quarter. No estimated taxes would
be due.

201. 11. Payments on long-term assets. ABC plans to
purchase office equipment to be paid in full at the
time of purchase $1,139.
12. Loan repayments. No loans have been received.
Enter zero.
13. Owner draws. Owner will need $2,000 for living
expenses.
14. Total cash paid out. Add 6 through 13. Total
$10,494.
15. Cash balance. Subtract Cash Paid Out from Total
Cash Available ($13,606).
16. Loans to be received. Being aware of the $30,000
to be paid to the manufacturer in February, a loan of
$40,000 is anticipated to increase Cash Available.
(This requires advance planning.)
17. Equity deposit. Owner plans to add $5,000 from

202. February Projections
1. February Beginning Cash Balance. January
Ending Cash Balance ($58,606).
2. Cash receipts. Still no sales, but service income
is $2,000.
3. Interest income. Projected at about $120.
4. Sale of long-term assets. None. Enter zero.
5. Total cash available. Add 1, 2, 3, and 4. The
result is $60,726.
6. Cash payments. $30,000 due to manufacturer,
$400 due on packaging design.
7. Continue as in January. Don’t forget to include
payments on your loan.

204. Common Accounting Transactions
Let’s suppose that Lykun and Gelila have opened a local feed
and pet supply store. During their first month of business
several accounting transactions take place. Owner
Investments – Lykun and Gelila file articles of incorporation and
receive their charter and business license and begin their
business as LGM, Inc. They have $75,000 of cash to invest in
their new business. The first balance sheet of LGM, Inc. would
show the asset Cash and the Equity of the owners
• As of right now, LGM has no liabilities and assets equal equity.
The labels Cash and Net Worth are called accounts. Accounts
are used to classify similar transactions.

205. • Purchase of Assets with Cash – LGM decides to purchase a
small land for $10,000 and building for $40,000. This
transaction doesn’t change LGM’s total assets, liabilities,
or equity, but it does change the composition of the
assets. A key point to remember is that the purchase of an
asset doesn’t affect owner’s equity. The transaction
decreases Cash and increases two new accounts called
Land and Buildings:

206. • Purchase of Assets by Incurring a Liability – Assets
may be purchased with credit instead of with cash.
However, by using credit the business agrees to
pay the liability at a later date. Let’s suppose that
LGM buys pet supplies for $1,000 on credit. The
transaction increases the assets (Pet Supplies) and
increases the liabilities of LGM, Inc. Assets
purchased on credit are still recorded for the full
amount at the time of purchase. It should be
pointed out that this type of transaction increases
both sides of the accounting equation to $76,000.
The liability creates a new account called Accounts
Payable:

207. • Payment of a Liability – Shortly after purchasing the pet
supplies, LGM decides to pay $500 of the $1,000 owed
for the supplies. As a result, both assets (Cash) and
liabilities (Accounts Payable) decrease, but Pet Supplies
is unaffected. Payment of a liability doesn’t affect
equity or the asset purchased with credit. Both sides of
the equation are still equal although they now have a
new value of $75,500:

208. • Revenue – Revenues equal the price charged for
the sale of goods or services. LGM, Inc. earns
money (Revenue) by selling feed and pet supplies.
Sometimes these supplies are paid to LGM
immediately in the form of cash and sometimes a
customer asks for a credit account and agrees to
pay within 30 days. In either case, the sale is
recorded when it is earned. Suppose LGM sells
horse feed to a customer for $2,000 and is paid in
cash. This transaction increases both assets (Cash)
and owner’s equity (Net Worth):

209. • Now suppose that LGM sells $1,000 of steer ration
to a 4-H member and agrees to wait for the
payment until after the local youth show and sale.
Because the money has been earned now, a bill or
invoice is sent to the youth and the transaction is
recorded now. Revenues are recorded when they
are earned, not necessarily when payment is
received. This revenue increases both assets and
owner’s equity as before but a new asset account
(Accounts Receivable) is also created:

210. • Collection of Accounts Receivable – Let’s say that
immediately after the youth show and sale the 4-H
member comes in and pays $500 of the $1,000 that he/
she owes. The asset Cash increases and the asset
Accounts Receivable decreases. The transaction
doesn’t affect owner’s equity because the revenue was
already recorded in transaction 6 above. It should be
noted that the balance for Accounts Receivable is $500
indicating that another $500 is still to be paid to LGM:

211. • Expenses – Expenses are recorded when they are
accrued just as revenue is recorded when earned.
Expenses may be paid in cash immediately or later
on. If an expense is going to be paid later on, a
liability (Accounts Payable or Wages Payable) is
created. In either case, owner’s equity decreases.
Suppose that LGM, Inc. pays $1000 to rent some
equipment for their office and $400 in wages to a
part-time worker. Each of these transactions reduce
assets (Cash) and equity (Net Worth):

212. • Let’s also assume that LGM has not paid a $400 bill for
utility expenses incurred the previous month. In this
transaction, the effect on owner’s equity is the same as
when the expense is paid in cash, but instead of a
decrease in assets there is an increase in liabilities
(Accounts Payable):

213. Break even analysis
• One of the most common tools used in evaluating the
economic feasibility of a new enterprise or product is
the break-even analysis.
• The break-even point is the point at which revenue is
exactly equal to costs. At this point, no profit is made
and no losses are incurred.
• The break-even point can be expressed in terms of unit
sales or dollar sales. That is, the break-even units
indicate the level of sales that are required to cover
costs.
• Sales above that number result in profit and sales
below that number result in a loss. The break-even
sales indicates the dollars of gross sales required to
break-even.

214. • Break-even analysis is based on two types of costs:
fixed costs and variable costs.
• Fixed costs are overhead-type expenses that are
constant and do not change as the level of output
changes.
• Variable cost are not constant and do change with the
level of output. Because of this, variable expenses are
often stated on a per unit basis.
• Once the break-even point is met, assuming no
change in selling price, fixed and variable cost, a profit
in the amount of the difference in the selling price and
the variable costs will be recognized.

215. • One important aspect of break-even analysis is
that it is normally not this simple. In many
instances, the selling price, fixed costs or variable
costs will not remain constant resulting in a
change in the break-even.
• And these changes will change the break-even.
So, a break-even cannot be calculated only once.
It should be calculated on a regular basis to
reflect changes in costs and prices and in order to
maintain profitability or make adjustments in the
product line.
• There are three basic pieces of information
needed to evaluate a break-even point:
• Average Per Unit Sales Price
• Average Per Unit Variable Cost
• Average Annual Fixed Costs

216. Profit = revenue-cost
Profit=(revenue)-(fixed cost (Cf) + variable cost)
Revenue =(selling price (P))* quantity sold (Q))
Variable cost = (quantity sold * variable cost per unit
(Cv))
In break even point the profit is assumed to be zero
0= (P*Q)-(Cf + (Q*Cv))
(P*Q)-(Q*Cv)=Cf
Q(P-Cv)=Cf
Q=Cf/P-Cv
The basic equation for determining the break-even units
is=
Average Annual Fixed Cost
(Average Per Unit Sales Price - Average Per Unit Variable
Cost)

218. Example: A local livestock producer utilizes compost
waste to develop an organic fertilizer product. The
fertilizer is prepared for retail sale in 50 pound bags. The
retail sales price is $5.00 per bag. The average variable
cost per bag is $2.80 and average annual fixed costs are
$60,000. These three pieces of information are:
•Average Per Unit Sales Price = $5.00 per bag
•Average Per Unit Variable Cost = $2.80 per bag
•Average Annual Fixed Costs = $60,000.00

219. • The above assumption can be utilized to calculate the
number of bags that must be sold in order to break-
even as well as the total dollar of sales needed to
break-even. Using the formulas explained earlier, the
following calculations can be made:
• Break-Even Units: $60,000.00 ÷ ($5.00 -
$2.80) = 27,273 bags
• Break-Even Sales: $60,000.00 ÷ 1 -
($2.80 ÷ $5.00) = $136,365
• Therefore, no profits are made from the sale of this
product until more than 27,273 bags are sold or more
than $136,365 in gross sales is generated.

220. ILLUSTRATION 4: Jack’s Grocery is manufacturing a
“store brand” item that has a variable cost of Rs. 0.75
per unit and a selling price of Rs. 1.25 per unit. Fixed
costs are Rs. 12,000. Current volume is 50,000 units.
The Grocery can substantially improve the product
quality by adding a new piece of equipment at an
additional fixed cost of Rs. 5,000. Variable cost would
increase to Rs. 1.00, but their volume should increase
to 70,000 units due to the higher quality product.
Should the company buy the new equipment? What are
the break-even points (Rs. and units) for the two
processes? Develop a break-even chart.
105

221. SOLUTION
• Profit = TR – TC
• Option A: Current Equipment
• BEP Sales in value (Rs.)
• BEP Sales in Quantity (Units)
• Option B: Adding New Equipment
• BEP Sales in value (Rs.)
• BEP Sales in Quantity (Units)
• Profit = 50000 * (1.25 – 0.75) –12000 = Rs.13000.
• Option B: Add equipment:
• Profit = 70000 * (1.25 – 1.00) – 17000 = Rs.500.
Therefore, the company should continue as is with the
present equipment as this returns a higher profit.
106

222. 107

223. 108

224. FACTORS AFFECTING THE BUSINESS ENVIRONMENT
1.The macro environment (far environment)
i. Economic forces
A. Rising income
B. Inflation
C. Recession:-A recession is a period of
economic activity when income, production,
and employment tend to fall-all of which
reduce demand. Thus businesses are expected
to design different strategies that enable them
overcome the problems of inflation and
recession.
ii. Legal and political factors
A. Federal and state laws
B. The development of regional markets
C. The creation and expansion of the global market

225. iii. Social forces
A. Demographic forces
i. Population growth
ii Age distribution
B. Cultural forces
C. The consumer movement:-Is a connection of
individuals, organizations and groups whose
objective is to protect the rights of consumers
iv. Technological forces

226. 2.The microenvironment (The near environment)
• The microenvironment refers the competitive situation
of an industry.
• The competitive environment refers to the number of
competitors a firm must face, the relative size of the
competitors, and the degree of interdependence within
the industry.
Competition in an industry arises from
i. The power of buyers
ii. The power of suppliers
iii. The threat of new entrants
iv. The threat of substitutes
v. The intensity of rivalry

227. • Porter claims that five forces determine competitiveness.
These are shown in figure below:

228. • Economies of scale (i.e. the average size of
business varies from industry to industry .For
example, the average size of chemical firms is
very large, where as the average size of retail
firms is relatively small. The most fundamental
reason for these differences in the extent of
economies of scale in an industry. i.e how the
total cost per unit produced changes as
more units are produced.)