CHAPTER 4

ENTREPRENEURSHIP

What is Entrepreneurship?

Think of some of your favorite things….clothes, shoes, stores, food, etc?

Who started the business?Small businesses, usually those with fewer

than 500 employees, represent 99% of American businesses.

They employ more than 50% of the nonmilitary workforce.

A person who organizes and then runs a business is called an entrepreneur.

What is Entrepreneurship?

An entrepreneur’s life is challengingPlanning is a big part of getting the business

up and runningMust make good decisionsFind inventive solutions to problemsRisks are high but the rewards can be greatDoes this challenge appeal to you?Are you willing to take the risks?

Advantages of Entrepreneurship

You are in charge Decide when and how hard to work How the business will operate

Great job satisfactionCan lead to good income

Disadvantages of Entrepreneurship

Financial risk Lose initial start up money and more

Work long hoursCompetition can be difficult to overcomeNo guarantees of success

Almost half of new businesses fail within their first four years.

Traits of Entrepreneurs

Self-motivation They know what they want and believe in their ability

to achieve it They stay motivated by setting short and long-term

goals. They make a plan how to achieve those goals

Perceptive They see opportunities where others do not They look at problems and see opportunities Follow trends Do your research by talking to customers to see how

to meet their needs

Traits of Entrepreneurs

Decisive Make decisions every day Must be good decisions Look at the whole picture How can the decision help How can the decision hurt

Being a Business Owner

Four main ways to go into business1. Start a new business2. Buy an existing business3. Buy a franchise4. Join a family business

Starting a New Business

Chance to work hard and put your business ideas to the test

Rewards Do not inherit a pervious owner’s mistakes or

poor reputation Develop your own reputation Build the business your way Use your experiences and information you have

gained from studying other businesses Personal satisfaction from knowing you built the

business

Starting a New Business

Challenges Requires more time and effort Start-up costs are often high (rent / buy space,

equipment, office supplies and insurance) You will have to convince lenders that your business

idea is sound It is risky = no guarantees that your business will

succeed

Buying an Existing Business

A successful may be for sale because the owners are retiring or starting a new business

An unsuccessful business might be for sale for many reasons Losing money Before buying, see if the problems can be fixed and at what

expenseAdvantages

Can put you several steps ahead Save on start-up costs (jump in on leases, purchase existing

equipment) Can build on the successes

Goodwill or loyalty of existing customers Positive reputation Trained staff

Buying an Existing Business

Disadvantages Location may be poor Competition may be taking business away Market outlook (potential for future sales) may be

poor Building or equipment may need expensive

repairs or replacement May have a poor reputation

Buying a Franchise

Franchise – legal right to sell a company’s goods and services in a particular area Example: restaurants, hair salons, real estate offices,

etc.Buy the right to sell another company’s

productsIn addition to paying for the franchise you

agree to pay a percentage of your profits to the parent company

Buying a Franchise

Advantages A recognized product name Established procedures and management systems A business reputation and customer goodwill Training and support services Advertising Financing

Disadvantages Pay a portion of the profits to the parent company May be less profitable Must follow the parent company’s guidelines May be less satisfaction because you did not build it

Joining a Family Business

Advantages Relatives might help you finance the business Family = Loyal + Trust Family members working as a team can achieve more

than individuals Relatives can teach you the business Customers are likely to give the same trust and

goodwill to a new owner who is part of the previous owner’s family

Potential Disadvantages Some families work well together / others do not Difficulties at work can affect family relationships

Owning a Business

One of the first questions – how to organize your business?

Most businesses begin as a sole proprietorship – owned by one person. The owner owns all the assets and debts.

A partnership is a legal arrangement in which two or more people share ownership. Control and profits are divided among the partners according a an agreement. All partners are liable for the debts.

A corporation is a business chartered by a state that legally operates apart form the owner(s). The owners buy shares of the company. Shareholders have only limited responsibility for the debts.

Forms of Legal Ownership

Forms of Business

Ownership

Advantages Disadvantages

Sole Proprietorship •Owner makes all decisions•Easiest form of business to set up

•Least regulated form

•Limited by the skills, abilities, and financial resources of one person

•Difficult to raise funds to finance business

•Owner has sole financial responsibility for company; personal assets may be at risk

Partnership •Can draw on the skills, abilities, and financial resources of more than one person

•Easier to raise funds than in sole proprietorship

•More complicated than sole proprietorship

•Tensions may develop among partners•Owners liable for all business losses; personal property may be at risk

Corporation •Easier to finance than other forms of business

•Financial liability of shareholders limited

•Expensive to set up•Record keeping can be time consuming and costly

•Can pay more taxes than other forms

Financing

Business Plan – gives specific information about your business Describes your product and states where your business will

be located How many employees you will hire and what their salaries are Describes your competitors and points out their strengths and

weaknesses Describes your marketing plan and timetable

Financial Plan – spell out your start-up costs, operating expenses and other costs for the first few months Operating expenses are the cost of doing business (ex.

manufacturing and selling the product)

Ongoing Operations

Must keep accurate financial records Tax purposes Seeking additional financing Tells you how your business is doing

Income statement Summary of a business’s income and expenses during

a specific period Revenue – income from sales Gross profit – difference between the cost of goods

and their selling price Net profit – amount left after operating expenses are

subtracted from the gross profit

Ongoing Operations

Balance Sheet – summarizes a business’s assets, liabilities and owner equity Assets – anything of monetary value that you own

(current assets - money in the bank , inventory, etc. / fixed assets – land, equipment, furniture and fixtures)

Liabilities = debts a business owes Current liabilities must be paid during the current year Long-term liabilities are not due in the next 12 months

Net Worth – difference between assets and liabilities The savings you invest in your business are your

equity, or ownership interest, in the business.

Ongoing Operations

Cash flow statement – a monthly plan that shows when you anticipate cash coming into the business and when you expect to pay out cash This helps you see if you will have enough money to

pay your bills

Succeeding in Business

Location – Are you near your potential customers? Can you work at home to reduce expenses? Online business – location not as important Factors to consider1. Type of businesses in the area2. Condition of streets and buildings3. Cost of property 4. Location of competition5. Location of your customers

Succeeding in Business

Competition Know your competitor’s product or service Produce your product better and have better service!

Management Successful businesses are usually managed well Poor management is one of the main reasons for

business failure Entrepreneurships need skills: reading, writing,

listening, speaking, and MATH (setting prices to calculating payroll)