CHAPTER ONE

NATURE AND CONCEPTS OF ENTREPRENEURSHIP

1.1 Concept of Entrepreneurship

Different scholars define the term entrepreneurship differently. Here are some common
definitions of entrepreneurship. Entrepreneurship is the process of creating something new with
value by devoting the necessary time and effort, assuming the accompanying financial, psychic
and social risks and receiving the resulting rewards of monitory and personal satisfaction and
independence.

Entrepreneurship is also defined as the dynamic process of creating incremental wealth. The
wealth is created by individuals who assume the major risks in terms of equity, time, and/ or
career commitment or provide value for some products or services.

It is the ability to create and build a vision from practically nothing. It fundamentally concerns
with a human creative act, the application of energy to initiate and build an enterprise or
organization rather than just watching or analyzing. Though this requires being visionary, it
depends on a willingness to take calculated risks both possible and reduce of failure. Moreover,
the entrepreneurship includes the ability to build an entrepreneurial or venture team to
complement skills and talents. Entrepreneurship therefore, is more than the mere creation of
business. It is a symbol of business tenacity and achievement.

In almost all the definitions of entrepreneurship, there is agreement that we are talking about a
kind of behavior that includes;

1. Initiative taking
2. The organizing and reorganizing of social and economic mechanisms to turn resources
and situations to practical account.
3. The acceptance of risks of failure.

Entrepreneurs deal with business activities. Literally, the word “business” means the state of being
busy. Generally, the term business includes all human activities concerned with earning money.

Business can be defined in several ways. However all business definitions emphasize the profit
motive.

1
Areas in which entrepreneurs conduct their activities include the following components: Industry
and Commerce

INDUSTRY

Industry is connected with the production and preparation of goods and services. It is a place
where raw material is converted into finished or semi ‐ finished goods, which have the ability to
satisfy human needs or can be used in another industry as a base material.

In other words, industry means that part of business activity, which is concerned with the
extraction, production and fabrication of products.

(a) Extractive Industry

Extractive industries are those industries, which extract, raise or produce raw material from
below or above or above the surface of the earth. For example, fishery, extraction of oil, gas
and coal etc.

(b) Genetic Industry

Genetic industries are those, which are engaged in reproducing and multiplying certain species
of animals and plants. For example, poultry farm, fishing farm, dairy farm, plant nurseries etc.

(c) Construction Industry

All kinds of constructions are included in this industry. For example, buildings, canals,roads,
bridges etc.

(d) Manufacturing Industry

In this industry, material is converted into some finished goods or semi‐finished goods. For
example, textile mills, sugar mills etc.

(e) Services Industry

These industries include those industries, which are engaged in providing services
of professionals such as lawyers, doctors, teacher etc.

2
COMMERCE

Commerce is the second component of business. The term “commerce” includes all activities,
functions and institutions, which are involved in transferring goods, produced in various
industries, from their place of production to ultimate consumers.

“Commercial occupations deal with the buying and selling of goods, the exchange of
commodities and distribution of the finished goods.”

In simple words, “trade and aids to trade” is called commerce.

1. TRADE

Trade is the whole procedure of transferring or distributing the goods produced by different
persons or industries to their ultimate consumers. In other words, the system or channel, which
helps the exchange of goods, is called trade.

(a) Home Trade

The purchase and sale of goods inside the country is called home trade. It is also known as
‘domestic’, ‘local’ or ‘internal trade’. Home trade has two types:

(i) Wholesale Trade

It involves selling of goods in large quantities to shopkeepers, in order to resale them to the
consumers. A wholesaler is like a bridge between the producers and retailers.

(ii) Retail Trade

Retailing means selling the goods in small quantities to the ultimate consumers. Retailer is a
middleman, who purchase goods from manufacturers or wholesalers and provide these goods to
the consumers near their houses.

(b) Foreign Trade

Trade or exchange of goods and services between two or more independent countries for their
mutual advantages is called foreign trade. It is also called international trade.

3
(i) Import Trade

When goods or services are purchased from other country it is called import trade.

(ii) Export Trade

When goods or services are sold to any other country it is called export trade.

2. AIDS TO TRADE

Aids to trade mean all those things which are helpful in business and trade activities.

(a) Banking

In daily business routine, commercial banks and other financial institutions help the seller and the
buyer in receiving and making payments.

(b) Transportation

The goods which are manufactured in mills and factories, reach the consumers by different
means of transportation like air, roads, rails, seas etc.

(c) Insurance

The transfer of goods from one place to another is not free from risk of loss. There is a risk of
loss due to accident, fire, theft etc. The insurance companies help out the traders with this problem
through insurance policy.

(d) Warehousing

The manufacturers today, produce goods in large quantity. Therefore, a need for warehouses arises
in order to store the manufactured goods.

(e) Agents

They are the persons who act as the agents of either buyer or seller. They perform these activities
for commission.

(f) Finance A large amount is needed to set up an industry. Financial institutions provide long
term finance to the producers.

4
(G) Communication

The producers, wholesalers, retailers, transporters, banks, warehouse ‐ keepers, advertisers and
consumers live at different place. This post office, telephone and other similar media is very useful
for promotion of trade and industry.

(H) Advertising

The producer must sell goods in order to remain in business. Advertisement is an easy way to
inform customers about the availability of goods.

1.2 Functions of Entrepreneur

An entrepreneur frequently has to wear many hats. He/she has to perceive opportunity, plan,
organize resources, and oversee production, marketing, and liaison with officials. Most
importantly he/she has to innovate and bear risk. The main functions of an entrepreneur are as
follows.

Innovation: innovation is one of the most important functions of an entrepreneur according to

Schumpeter. An entrepreneur uses information, knowledge and intuition to come up with new
products, new methods of reducing costs of a product, improvement in design or function of a
product, discovering new markets or new ways of organization of industry.

Risk and uncertainty bearing: according to Hozelist an entrepreneur performs the function of
risk and uncertainty bearing. Every decision pertaining to development of new products,
adapting new technologies, opening up new markets involves risk. Decision – making in an
environment of uncertainty requires anticipation of risk.

Organization building: An entrepreneur has to organize human, material and other resources.
He/she has to perform the functions of planning, co-ordination and control. He/she has to use
his/her leadership qualities to build a team, generate resources and solve problems. With his/her
organizational skills an entrepreneur builds an enterprise from scratch, nurtures it and makes it
grow. His/her vision sows the seeds for a sound and vibrant organization and synergies are built
in the enterprise.

1.3 Characteristics of Entrepreneurs

5
It is pointed out that, successful entrepreneurs are characterized by unusual creativeness,
propensity of risk taking, aggressiveness and a strong need for achievement (Vansant Desai
1999). On the other hand, literatures have indicated that there are certain traits shared among
entrepreneurs, effective leaders and managers.

The following are the most frequently cited entrepreneurial competencies.

1. Clear Vision

Entrepreneurs have special quality in clearly identifying (determining) where they want to go.
They have a vision and what they can be specifying their vision clearly is an integral part of their
life in terms of learning and communicating. Successful entrepreneurs have predetermined
visions for their firms. In many cases, this vision develops overtime as the individual begins to
realize what the firm is and what it can be.

2. Clear objective

Entrepreneurs have the personal competency to set clear objectives as to the exact nature of the
business, the nature of the goods to be produced and subsidiary activities to be undertaken. They
usually establish SMART objectives; that are specific, measureable, attainable, and realistic and
time bound.

3. Drive to Achieve

Since they can specify their visions clearly, entrepreneurs are self-starters who appear to others
to be internally driven by a strong desire to compete, to excel against self-imposed standards and
to pursue and attain challenging goals. Entrepreneurs are competent enough in establishing
challenging but attainable goals. They are high achieves and accept responsibility for taking
decisions and for achieving solutions to problems. They set standards carefully so that they can
be achieved and satisfactions can be gained from finding solution to a problem rather than with
monetary reward.

4. Commitment

Entrepreneurs are dedicated to success and overcome obstacles. In order to realize their future
vision, entrepreneurs are committed even to mortgage their houses 9 for the business), to take a
cut in pay, scarify their family time and reduce their standard of living.

5. Capacity to Assume Calculated Risk

6
Risk taking implies assuming the responsibility for loss that may occur due to unforeseen
contingencies of the future. Entrepreneurs assume all possible risks of running business, which
emerges due to the possibility of changes in the tastes of consumers, techniques of production
and new invention. Usually, such risks are not insurable. If they materialize, the entrepreneur has
to bear the loss himself/herself since he/she is running his/ her own business; he/she is both an
investor and manager.

1.4 What is an Enterprise?

Entrepreneur is a person who starts an enterprise. The process of creation is called

entrepreneurship. The entrepreneur is the actor and entrepreneurship is the act. The outcome of
the actor and the act is called the enterprise. An enterprise is the business organization that is
formed and which provides goods and services, creates jobs, contributes to national income, and
exports an overall economic development.

7
 CHAPTER TWO

DEVELOPING BUSINESS PLAN

2.1 Concept of Business Plan

A business plan is the written document that details the proposed venture. It is a written
document prepared by entrepreneur that describes all the relevant external and internal elements
and strategies involved in starting a new venture. It is description of the future direction of the
business, which developed so as to exploit the defined opportunity of a given business.

Every aspect of a venture needs to be described the project, marketing, research and
development, manufacturing, management, critical risks, financing and milestones or a time
table to demonstrate a clear picture of what that venture is, where it is projected to go and how
the entrepreneur proposes it will get thee. Thus, business plan is the entrepreneurs’ road map for
a successful enterprise.

It may also be described as a venture plan, a loan proposal, or an investment prospected in some
professional areas. Whatever the name, the business plan is the minimum document required by
any financial source. It allows the entrepreneur entrance into investment process. Required by
any financial source, it allows the entrepreneur entrance into investment process.

2.2 Benefits of Business plan

The following benefits of business plan are identified both for entrepreneur and the financial
sources that read it and evaluate the venture.

For the entrepreneur

The time, effort, research and discipline needed to put together a formal business force the
entrepreneur to view the venture critically and objectively.

The competitive, economic and financial analyses included in the business plan subject the
entrepreneur to close scrutiny of assumptions about the venture’s success.

The business plan quantifies objectives; provide measurable benchmarks for comparing forecasts
with actual results. The completed business plan provides the entrepreneur with a

8
communication tool for outside financial resources as well as an operational tool for guiding the
venture toward success.

For financial resources

 Business plan provides the details of the market potential and plans for securing a share
of that market.
 The business plan illustrates the venture’s ability to service debt or provide an adequate
return on equity.
 It gives clear, concise document with the necessary information for a thorough business
and financial evaluation.
 The plan identifies critical risks and crucial events with the discussion of contingency
plans that provide opportunity for the venture’s success.
 The business plan provides a useful guide for assessing the individual entrepreneur’s
planning and managerial ability

2.3 Scope and Value of Business Plan

The depth and detail of the business plan depends on the size and scope of the proposed new
venture. An entrepreneur planning to market a new portable computer will need a comprehensive
plan, largely because of the nature of the product and market where as an entrepreneur that plans
to open a retail video store will not need the comprehensive coverage required by a new
computer manufacturer. A new e-commerce business, however, may require a very different
focus, particularly on how to market the website that will offer the goods and services. Thus, the
differences in the scope of the business plan may depend on whether the new venture is a
service, involves manufacturing, or is a customer good or industrial product.

The size of the market, competition, and potential growth may also affect the scope of the
business plan. The business plan is valuable to the entrepreneur, potential investors, or even new
person as, who are trying to familiarize themselves with the venture, its goals, and objectives.
The business plan is important to these people because:

It helps in determining the validity of the venture in a designated market.

It provides guidance to the entrepreneur in organizing his/her planning activities.

9
It also serves as an important tool obtaining financing. Potential investors are very particular
about what should be included in the business plan thinking process required to complete the
plan is a valuable experience for the entrepreneur since it forces him or her to assess such things
as cash flow and cash requirements. In addition thinking process takes the entrepreneur into the
future, leading him or her to consider the important issues that could impede the road to success.

The process also provides a self-assessment by the entrepreneur. Usually, he/she feels that the
new venture is assured of success. However, the planning process forces the entrepreneur to
bring objectivity to the idea to reflect on questions as “Does the idea make sense? Will it work?
Who is my customer? Does it satisfy customer needs? What kind of production can I get against
imitation by competitors? Can I manage such a business? Whom will I compete with?”

2.4. Elements of Business Plan

Preparation of detailed business plan is essential whatever the size, scope, structure and style of
the business is. Thus, a detailed business plan usually has then basic sections which show
complete business plan outline. The basic ten sections are listed below for detail information.

1. Summary section

Many people who read business plan (bankers, venture capitalists, investors) like to see a
summary of the plan that features its most important parts. The summary gives a brief overview
of what is to follow: helps put all of the information into perspective. It should be no longer than
three pages and should be written only after the entire business plan has been identified. Since
the summary is the first, and sometimes the only, part of plan to read, it must present the quality
of the entire report. It should be a clever snapshoot of the complete plan.

The statements selected for a summary segment should briefly touch on the venture itself, the
market opportunities, the financial needs and projections, and any special research or technology
associated with the venture. If information is not presented in a concise, competent manner, the
reader may put aside the plan or simply conclude the project does not warrant funding.

2. Business description

“What aspects should be described in business plan?”Is the basic question to be raised in this
section. It includes the following:

1st The name of the venture should be identified, with any special significance related (such as
family name, technical name, etc …)

10
2nd The industry background should be presented in terms of current status and future trends. It
is important to note any special industry developments that may affect the plan.

3rd The new venture should be thoroughly described along with its proposed potential. All key
terms should be defined and made comprehensible functional specifications or descriptions
should be provided including drawings and photographs.

4th the potential advantages the new venture possesses over the completion should discussed at
length. The discussion may include patents, copyrights and trademarks, as well as special
technological or market advantages.

3. Marketing segment

This is the third section (element 0 of business plan in which the entrepreneur must convince
investors that a market exists, that the completion can be beaten.

Since almost all subsequent sections of the plan depend on the sales estimates developed here
marketing segment is one of the most critical parts.

The projected sales levels, based on the market research and analysis, directly influence the size
of the manufacturing operation, the marketing plan and the amount of debt and equity capital
required. Thus, market research and analysis and marketing plan are the two broad aspects of
marketing segment to be addressed during development of a comprehensive exposition of the
market.

4. Research, design and development segment.

The extent of any research, design and development in regard to cost, time and special testing
should be covered in this segment. Investors need to know the status of the project in terms of
prototypes, lab tests, and scheduling delays. Blue prints, clutched drawings and models are often
important for an entrepreneur to have a comprehensive section.

It is equally important to identify the design or development of work that still needs to be done
and to discuss possible difficulties or risks that may delay or alter the project. In this regard, a
developmental budget that shows the costs associated with labor, materials consulting research,
design, and the like should be constructed and presented.

11
This segment always should begin by describing the location of the new venture. This is to show
the appropriateness of the chosen site in terms of labor availability, wage rate, proximity to
suppliers and customers, and community support. Additionally local taxes and zoning
requirements should be sorted out and the support of area banks for new ventures should be
touched on. Furthermore, production needs in terms of the facilities required to handle the new
venture (plant, warehouse storage, and offices ) and the equipment needs to be acquired (special
tooling, machinery, computers and vehicles ) should be discussed.

5. Manufacturing segment

This segment always should begin by describing the location of the new venture. The chosen site
should be appropriate in terms of labor availability, wage rate, proximity to suppliers and
customers and community support. Production needs should be discussed in terms of the
facilities required to handle the new venture and the equipment that needs to be acquired.

6. Management segment

This segment identifies the key personnel, their positions and responsibilities and the career
experiences that qualify them for particular roles.

This is a section where the role of entrepreneur is clearly outlined, and advisors, consultants or
members of the board should be identified and discussed. In addition, the structure of payment
and ownership (stock agreements, consulting fees, etc) need to be described clearly in this
section. Thus, investors can understand about each of the following critical factors that have been
presented

i. Organizational structure
ii. Management team and critical personnel
iii. Experience and technical capabilities of the personnel
iv. Ownership structure and compensation agreements
v. Board of directors and outside consultants and advisors.
7. Critical risks segment

This is concerned with the identification of potential risks such as effect of unfavorable trends in
the industry, design or manufacturing costs that have gone over estimates difficulties of long lead

12
times encountered when purchasing parts or materials and unplanned for new completion In
addition to these risks, covering ‘ What ifs” is its concern.

Finally, it should include suggestions for alterative courses of action certainly, delays, inaccurate
projections, and industry slumps all can happen, and people reading recognizes these risks and
has prepared for such critical events.

8. Financial segment

Financial segment of a business plan must demonstrate the potential viability of undertaking. The
three basic financial statements need to be presented.

These are:

i. The pro forma balance sheet

ii. The income statement
iii. The cash flow statement
 The pro forma balance sheet projects what the financial condition of the venture will be
at a particular point in time. It should be prepared at start-up, semi-annually for the first
years and at the end of each of the first there years. The balance sheet details the assets
required to support the projected level of operations and shows how their assets are to be
financed.
 The income statement illustrates the projected operating results based on profit and loss.
It requires the sales forecast developed in the marketing segment.
 The cash-flow statement highlights the need for and timing of additional financing and
will indicate peak requirements for working capital. It may direct the entrepreneur’s
attention to operating problems before serious cash crises arise if it is understood
properly.
9. Milestone schedule segment
 Provides investors with a time table for the various activities to be accomplished. It is a
step-by –step approach to illustrating accomplishments in a piecemeal fashion. These
milestones can be established according to any appropriate time frame, such as quarterly
monthly or weekly.
10. Appendix and / or bibliography segment

13
 CHAPTER THREE

STARTING A SMALL BUSINESS

3.1 Sources of New Ideas

Some of the more frequently used sources of ideas for new entrepreneurs include consumers,
existing companies, distribution channels, the federal government, and research and
development.
Consumers: Potential entrepreneurs should pay close attention to the final focal point of the
idea for a new product or service-the potential consumer.
Existing Companies: Potential entrepreneurs and entrepreneur should also establish a formal
method for monitoring and evaluating competitive products and services on the market.
Distribution Channels: Members of the distribution channels are also excellent sources for
new ideas because of their familiarity with the needs of the market. Not only do channel
members frequently have suggestions for completely new products, but they can also help in
marketing the entrepreneur's newly developed products. One entrepreneur found out from the
salesclerks that the reason his hosiery was not selling was due to its color. By heeding the
suggestion and making the appropriate color changes, his company became the leading supplier
of non brand hosiery in that region.
Federal Government: The federal government can be a source of new product ideas in two
ways. First, the files of the Patent Office contain numerous new product possibilities. Although
the patents themselves may not be feasible new product introductions, they can frequently
suggest other more marketable product ideas. Several government agencies and publications
are helpful in monitoring patent applications. Second, new product ideas can come in response
to government regulations. For example, the Occupational Safety and Health Act (OSHA),
aimed at eliminating unsafe working conditions in industry, mandated that first-aid kits be
made available in business establishments employing more than three people. Research and
Development: The largest source of new ideas is the entrepreneur's own "research and
development," efforts that may be a formal endeavor connected with one's current employment
or an informal lab in the basement or garage.

14
3.2. Process of Screening Business Ideas

Since it is clear that all business ideas may not have equal value due to one or other reasons,
it should be evaluated and the most feasible ideas should be considered for new product
development. To do so, the following procedural activities can be done in the process of
evaluating and screening the most feasible business idea.

1. Listing down all the business ideas you identified.

In the process of screening business ideas, first, with listing down at least ten business ideas on
your observation on what people would like to buy. At this stage, do not worry if these ideas are
vague to some extent since this is just a brain storming stage.

2. Down screening the ideas in to three/ micro screening

Secondly, you have to make a first selection of three business ideas from your list of possible
business ideas. Usually it is not possible for an organization/ entrepreneur to pursue all of its
opportunities, so it must try to match the opportunities to its resources and objective based on
screening criteria, the second stage adds quality to the first stage by adjoining different
parameters/ criteria related economic judgment. Ideas or opportunities should pass the screening
process and be able to convert into implementation. Some of the common criteria for screening
ideas are:

i. Marketability/ demand

The greatest mistake people make when starting a new business is that they try to sell products
they like. For example, people who like reading want to start bookstores. People who like to dine
out to cook want to start restaurants. This may be human nature, but it is a backward approach to
starting a business.

The first law of marketing is “you need to offer what people want to buy not what you want to
sell.” Customers may not buy what you like rather they may buy what you like rather they may
buy what they want. So your business idea should be evaluated from the point of customers’
interest or its marketability. The first step in starting a new venture begins with listening to the
marketplace. You needs to generate a list if areas where people’s needs are not being met enough
or at all.

Is there a market for the idea? Are there any customers –people with money are able to buy the
product/ Can you provide what they need or want? Market analysis is a key to the success of new

15
businesses or projects. Market analysis of the product is all about estimation of demand of the
product. Thus, ideas generated from different sources should be evaluated and screened based on
marketability of the ideas. The marketability screening typically involves analysis of demand and
level of supply in the total market (competition).

Basically when you think about a business idea, you are thinking of the possibility of marketing
the idea or converting it into real business. In doing so, you should anticipate the future demand
of the product or the service or the idea.

ii. Profitability of the idea if implemented

Actually when we think of the marketability of the idea, we are calculating the profitability of
the idea if implemented in a certain time span. Potential benefits associated with each idea
should be considered while evaluating the ideas generated before.

iii. Availability of raw material and resources

The raw material needed to successfully meet the opportunity must be assessed. This process
starts with and appraisal of the entrepreneur’s present resources. In addition, possible sources of
the raw materials at reasonable cost and effort shall be considered. While considering the source
of resources, the entrepreneur should also take into account whether such resources can be
imported or locally available. If the raw material is to be imported, other factors like currency
exchange rate, custom duty and transportation should further be considered. Availability of
resources in a timely manner is also a factor that should be considered while screening the large
number of generated ideas. More over the available national labor supply also affects the ideas.

iv. Personal goals and competence of the entrepreneur

Do you really want to venture into a business/ Do you have what it takes/ Are you motivated
enough/ Who else will be involved with you in the business? Do you have the experience, know-
how? Contacts, or other desirables attributes required? In evaluating the idea generated you have
to give concise answers to such questions.

v. Ease of implementation

The generated ideas can be evaluated based on whether the idea is converted in to real business
easily. To check whether the idea is converted in to real business easily or not the entrepreneur
should consider the following points:

16
  Procedures for registration; whether the business can be started within a short registration
period or reasonable preparatory period or not;
 Need of providing different documents to different bodies.
 Legal requirements. And
 Need of employing qualified persons for the purpose of acquiring recognition or official
approval.

For example, when you compare the idea of establishing kindergarten with that of private
college, the former idea can be implemented easily since it requires relatively less educated
persons, keeping constant all other factors.

vi. Financial Requirements

Actually, the profitability of each idea should be evaluated based on the finance required to
implement and manage the business successfully. Hence, ideas, which are expected to generate
better profit, may not be selected best, rather financial requirements and the financial capacity of
the entrepreneur should be considered. For instance ideas that require sophisticated technology
for implementation may be invalid for entrepreneur who has limited finance and mechanism of
finding out external sources is questionable.

vii. Risk exposure criteria.

 Whether the product can readily be copied or imitated if found very profitable by others.
 Competitors who have more resources and expertise may retaliate if threatened by the
new business.
 Competitors who have more resources and expertise may retaliate if threatened by the
new business.
 The envisaged business may suffer from unforeseen factors such as unavailability of raw
materials.
viii. Government priority and support

Business ideas can also be evaluated from the point of view having government support. In the
process of checking the business idea from the government priority side you have to consider the
following points.

 Is the envisaged business under the government’s list of priorities for promotion of
investment and employment generation?

17
 Is a possibility of getting government support such as tax exception or reduction loan on
reduced rate of interest or other support such as market assess, technical or advisory
services?
3. Finer cross checking

In the third stage of idea screening, after the above mentioned parameters are evaluated, new
business start-up can go into a finer crosschecking of the key variables ( Critical success
Factors) affecting the success or the failure of the business. For example, not only consider just
raw materials but also seasonal availability of raw materials, lack of standard of raw materials,
unpredictability of raw materials supply and the like.

In summary, ideas can be generated from different sources using different methods since all
these ideas are not-equally worth having. Thus, these ideas must be evaluated based on different
criteria.

4. Selecting the Best Business Idea

The final step in the process of business idea screening is selecting the best business idea. Since
the future success and failure of the business depends on the value of the business idea, due
consideration should be given to the idea selected.

3.3 Developing New Product

After the best business idea is selected, new product development process follows. Accordingly,
the following procedural activities are usually considered in the new process of product
development.

Business Analysis: after ideas are screened and the best business idea is selected, the business
analysis will be made to specify the features of product; marketing strategy; and necessary
financial projections.

Product development: product development stage follows business analysis in the new product
development process. In this stage activities like: turning the idea on paper into a prototype;
designing the product, manufacturing and testing (laboratory and consumer tests) will be done.

Market Testing: in this stage of new product development process, the preliminarily developed
product will be tasted in the market to ensure:

 Exposing actual products to prospective consumers under realistic purchase situations.

18
  Test the product (and its packaging) in typical usage situations
 Conduct focus group customer interviews or introduce at trade show
 Make adjustments where necessary
 Produce an initial run of the product and sell it in a test market area to determine
customer acceptance
Commercialization: finally once the product become accepted and passed the stage of market
tasting; commercialization stage follows. It involves:

 (Often considered post-NPD): positioning and launching a new product in full scale
production and sales. This step includes;
 Launch the product
 Produce and place advertisements and other promotions
 Fill the distribution pipeline with product
 Critical path analysis is most useful at this stage
N.B. New product development is: a proactive; ongoing process (continuous development),
usually performed by cross-functional teams; and better performed using a flexible approach

3.4 Product Protection

Once new products are developed and ready for mass production and distribution, the
entrepreneur should give concern for some legal considerations. All entrepreneurs are concerned
with protecting their ideas. Protecting new product becomes paramount when the ideas are
related to new products, new processes, unusual processes etc. Thus, the various ways of product
protection are:

1. Patent

A patent is a grant of a property right by the government to an inventor. All patents have the
distinction of being assets with commercial value because they provide exclusive rights of
ownership to patent holders, their heirs and assigns. Patents are exclusive property rights that can
be sold, transferred, willed, licensed, or used as collateral; much like other valuable assets. Most
independent investors do not commercialize their inventions or create new products from their
ideas. Instead, they sell or license their patents to others who have the resources to develop
products and commercial markets.

19
2. Trade Marks

A trade mark includes any word, name, symbol, or distinguishing device, or any combination
thereof adopted and used by a manufacturer or merchant to identify his goods and distinguish
them from those manufactured or sold by others. A trade mark is granted through the U.S Patent
and Trade Mark office for a period of 20 years.

Examples: Coke (name) for Coca-Cola Corporation; (Symbol) Apple with a bite in the side-
apple Computer Corporation; wild Mustang horse-Ford Automobile; the intricate shield and
eagle design-beer cans by Anheuser-Busch, Inc.

3. Copyright

A copyright is that the intellectual property is protected for the life of the originator plus 50
years. This protection affords an extraordinary property right and a substantial estate. A
copyright extends protection to authors, composers, and artists, and it relates to a form of
expression rather than the subject matter. This distinction is important because most intellectual
property has proprietary information in terms of subject matter, and if that property cannot be
patented, the copyright only prevents duplicating or using the original material.

CHAPTER FOUR
BUSINESS FINANCING
All businesses need money to finance a host of different requirements. In looking at the types
and adequacy of funds available, it is important to match the use of the funds with appropriate
funding methods
4.1 The Importance of Getting Financing or Funding

1) Permanent Capital
The permanent capital base of a small firm usually comes from equity investment in shares in a
limited company or share company, or personal loans to form partners or to invest in sole
proprietorship.
2) Working Capital
It is short-term finance. Most small firms need working capital to bridge the gap between when
they get paid, and when they have to pay their suppliers and their overhead costs.
3) Asset Finance
It is medium to long term finance. The purchase of tangible assets is usually financed on a
longer-term basis, from 3 to 10 years, or more depending on the useful life of the asset

20
4.2 Sources of Financing
Financial resources are essential for business, but particular requirements change as an enterprise
grows. Obtaining those resources in the amount needed and at the time needed can be difficult
for entrepreneurial ventures because they are generally considered more risky than established
enterprises
4.2.1 Internal Sources (Equity capital)
Owner’s capital or owner’s equity represents the personal investment of the owner(s) 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. However, if the venture succeeds, they also share in the
benefit.

1. Personal saving: The first place entrepreneurs should take for startup money is in their own
pockets. As a general rule, entrepreneurs should provide at least half of the start- up funds in the
form of equity capital.
2. Friends and relatives: After emptying their own pockets, entrepreneurs should turn to friends
and relatives who might be willing to invest in the business. The entrepreneur is expected to
describe the opportunities and threats of the business.
3. Partners: An entrepreneur can choose to take on a partner to expand the capital formation of
the proposed business.
4. Public stock sale (going public): In some case, entrepreneurs can go public by selling share of
stock in their corporation to outsiders. This is an effective method of raising large amounts of
capital.
8.2.2 External Sources (Debt capital)
Borrowed capital or debt capital is the external financing that small business owner has borrowed
and must repay with interest. There are different sources as discussed here below:

I) Commercial banks: Commercial banks are by far the most frequently used source for short
term debt by the entrepreneur. In most cases, commercial banks give short term loans (repayable
within one year or less) and medium term loan (maturing in above one year but less than five
years), long term loans (maturing in more than five years).
To secure a bank loan, an entrepreneur typically will have to answer a number of questions,
together with descriptive commentaries.

21
Bank Lending Decision:-The small business owner needs to be aware of the criteria bankers use
in evaluating the credit worthiness of loan applications. Most bankers refer to the five C’s of
credit in making lending decision. The five C’s are capital, capacity, collateral, character, and
conditions.
1. Capital: A small business must have a stable capital base before a bank will grant a loan.
2. Capacity: The bank must be convinced of the firm’s ability to meet its regular financial
obligations and to repay the bank loan.
3. Collateral: The collateral includes any assets the owner pledges to the bank as security for
repayment of the loan.
4. Character: Before approving a loan to a small business, the banker must be satisfied with the
owner’s character. The evaluation of character frequently is based on intangible factors such as
honesty, competence, willingness to negotiate with the bank.
5. Conditions: The conditions surrounding a loan request also affect the owner’s chance of
receiving funds. Banks consider the factors relating to the business operation such as
II) Micro Finances: provide financial services mainly to the poor, micro and small enterprises
(detail to be discussed later in part 6.7)
III) 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.
IV) Equipment Suppliers: Most equipment vendors encourage business owners to purchase
their equipment by offering to finance the purchase.
V) Account receivable financing: It is a short term financing that involves either the pledge of
receivables as collateral for a loan.
VI) Credit unions: Credit unions are non-profit cooperatives that promote savings and provide
credit to their members. But credit unions do not make loans to just any one; to qualify for a loan
an entrepreneur must be a member.
VII) Bonds: A bond is a long term contract in which the issuer, who is the borrower, agrees to
make principal and interest payments on specific date to the holder of the bond. Bonds have
always been a popular source of debt financing for large companies in the western world.
VIII) Traditional Sources of Finance: “Idir”, “equip”
4.3 Creative Sources of Financing and Funding

Because financing and funding are difficult to obtain, particularly for start-ups, entrepreneurs
often use creative ways to obtain financial resources. Here are the common creative sources of
financing and funding for entrepreneurial firms:
22
 Crowd funding

Crowd funding is the practice of funding a project or new venture by raising monetary
contributions from a large number of people, typically via the Internet. There are two types of
crowd funding sites:

Rewards-based crowd funding allows entrepreneurs to raise money in exchange for some type of
amenity or reward. Once a novelty, rewards-based crowd funding has become a major source of
start-up funds.

Equity-based crowd funding helps businesses raise money by tapping individuals who provide
funding in exchange for equity in the business.

An accredited investor is a person who is permitted to invest in higher-risk investments such as

business start-ups.

 Leasing

A lease is a written agreement in which the owner of a piece of property allows an individual or
business to use the property for a specified period of time in exchange for payments. The major
advantage of leasing is that it enables a company to acquire the use of assets with very little or no
down payment.

 Other Grant Programs

There is limited number of other grant programs available to entrepreneurs. Obtaining a grant
takes a little detective work. Granting agencies are, by nature, low-key, so they normally need to
be sought out. Finding a grant that fits your business is the key. One thing to be careful of is
grant-related scams. Business owners often receive unsolicited letters or e-mail messages from
individuals or organizations that assure them that for a fee they can help the business gain access
to hundreds of business-related grants. The reality is that there aren't hundreds of business-
related grants that fit any one business. Most of these types’ offers are a scam.

 Strategic Partners

Strategic partners are another source of capital for new ventures. Indeed, strategic partners often
play a critical role in helping young firms fund their operations and round out their business
models. Many strategic partnerships are also formed to gain access to a particular resource or to
facilitate speed to market. In exchange for access to plant and equipment and established

23
distribution channels, new ventures bring an entrepreneurial spirit and new ideas to these
partnerships.

24