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Entrepreneurship

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Entrepreneurship ­ MGT602
VU
Lesson 41
PREPARING FOR THE NEW
VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued....)
LONG-TERM VS. SHORT-TERM DEBT
The entrepreneur may need to borrow funds to finance assets and meet cash needs. Fixed assets are usually
financed by long-term debt borrowed from a bank. Alternatives include borrowing from family members,
having partners contribute more funds or selling corporate stock. Many of these options require the
entrepreneur to give up some equity.
MANAGING COSTS AND PROFITS
An interim income statement helps to compare the actual with the budgeted amount for that period.
The most effective use of the interim income statement is to establish cost standards and compare the
actual with the budgeted amount for that time period. Costs are budgeted based on percentages of net
sales. These percentages can be compared with actual percentages to see where tighter cost controls may be
necessary. This lets the entrepreneur manage and control costs before it is too late. In later years, it is also
helpful to look back on the first year of operation and make comparisons month-to-month. When
expenses or costs are much higher than budgeted, the entrepreneur may need to determine the exact cause.
Comparison of actual and budgeted expenses can be misleading for ventures with multiple products or
services. For financial reporting purposes, the income statement summarizes expenses across all products
and services. This does not indicate the marketing cost for each product nor should the most profitable
product. Allocating expenses over product lines be done as effectively as possible to avoid arbitrary
allocation of costs.
TAXES
The entrepreneur will be required to withhold federal and state taxes for employees and make deposits to
the appropriate agency. Federal taxes, state taxes, social security, and Medicare are withheld from
employees' salaries and are deposited later. The entrepreneur should be careful not to use these funds. The
new venture may also be required to pay state and federal unemployment taxes. Federal and state
governments will require the entrepreneur to file end-of-the-year returns of the business.
RATIO ANALYSIS
Calculations of financial ratios can also be valuable as an analytical and control mechanism. These ratios
serve as a measure of the financial strengths and weaknesses of the venture, but should be used with
caution. There are industry rules of thumb that the entrepreneur can use to interpret the financial data.
Liquidity Ratios
Current ratio is commonly used to measure the short-term solvency of the venture or its ability to meet its
short-term debts. The current liabilities must be covered from cash or its equivalent.
The formula is:
Current ratio =
current assets
current liabilities
While a ratio of 2:1 is generally considered favorable the entrepreneur should also compare this ratio with
industry standards.
Acid test ratio is a more rigorous test of the short-term liquidity of the venture.
It eliminates inventory, which is the least liquid current asset.
The formula is:
Acid test =
current assets - inventory
ratio
current liabilities
Usually a 1:1 ratio would be considered favorable.
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Entrepreneurship ­ MGT602
VU
Activity Ratios
Average collection period indicates the average number of days it takes to convert accounts receivable into cash.
This ratio helps gauge the liquidity of accounts receivable or the ability of the venture to collect from its
customers.
The formula:
Average collection =  accounts receivable
period
average daily sales
This result needs to be compared to industry standards.
Inventory turnover measures the efficiency of the venture in managing and selling its inventory. A high
turnover is a favorable sign indicating the venture is able to sell its inventory quickly.
The formula:
Inventory =
cost of goods sold
turnover
inventory
Leverage Ratios
Debt ratio helps the entrepreneur assess the firm's ability to meet all its obligations. It is also a measure of
risk because debt also consists of a fixed commitment.
The calculation:
Debt ratio =
total liabilities
total assets
Debt to equity ratio assesses the firm's capital structure. It provides a measure of risk by considering the
funds invested by creditors and investors. The higher the percentage of debt, the greater the degree of risk
to any of the creditors.
The calculation:
Debt to
=
total liabilities
equity ratio
stockholder's equity
Profitability Ratios
Net profit margin represents the venture's ability to translate sales into profits. You can also use gross profit
as another measure of profitability. It is important to know what is reasonable in the particular industry as
well as to measure these ratios over time.
The calculation:
Net profit =
net profit
margin
net sales
Return on investment measures the ability of the venture to manage its total investment in assets. By
substituting stockholders' equity for assets, you can also calculate a return on equity.
The calculation:
Return on =
net profit
investment
total assets
The result of this calculation will also need to be compared to industry data. As the firm grows it will be
important to use these ratios in conjunction with all other financial statements to provide an understanding
of how the firm is performing.
RAPID GROWTH AND MANAGEMENT CONTROLS
Rapid growth may result in management problems. Before rapid growth occurs, the new venture is usually
operating with a small staff and limited budget. Rapid growth may also dilute the leadership abilities of the
entrepreneur. The entrepreneur's unwillingness to delegate responsibility can lead to delays in decision-
making.
The entrepreneur can avoid these problems through preparation and sensitivity. It may be necessary to
limit the venture's growth if the future financial well being of the venture means a more controlled growth
rate. The limits to the growth of any venture will depend on the availability of a market, capital, and
management talent. Too rapid growth can stretch these limits and lead to serious financial problems.
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Entrepreneurship ­ MGT602
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CREATING AWARENESS OF THE NEW VENTURE
In the early stages, the entrepreneur should focus on developing awareness of the products offered
through:
Publicity
Internet Advertising
Trade Shows
Selecting an Advertising Agency
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Table of Contents:
  1. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:DEFINITION OF ENTREPRENEUR
  2. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:Possibility of New Venture Formation
  3. ENTREPRENEURIAL PROCESS/START UPS:GOVERNMENT AS AN INNOVATOR
  4. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND:ENTREPRENEURIAL PROCESS
  5. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…)
  6. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):CLIMATE FOR ENTREPRENEURSHIP
  7. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):PROBLEMS AND SUCCESSFUL EFFORTS
  8. THE INDIVIDUAL ENTREPRENEUR:ENTREPRENEURIAL BACKGROUND AND CHARACTERISTICS
  9. THE INDIVIDUAL ENTREPRENEUR (continued…):Personal Values, Work History, MOTIVATION
  10. THE INDIVIDUAL ENTREPRENEUR (continued…):ROLE MODELS AND SUPPORT SYSTEMS
  11. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES:INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES, Minority interests
  12. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):DIRECT FOREIGN INVESTMENT
  13. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):BARRIERS TO INTERNATIONAL TRADE
  14. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):ENTREPRENEURIAL PARTNERING
  15. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):SOURCES OF NEW IDEAS
  16. CREATIVITY AND THE BUSINESS IDEA:METHODS OF GENERATING NEW IDEAS, CREATIVE PROBLEM SOLVING
  17. CREATIVITY AND THE BUSINESS IDEA:PRODUCT PLANNING AND DEVELOPMENT PROCESS
  18. LEGAL ISSUES FOR THE ENTREPRENEUR:NEED FOR A LAWYER, PATENTS
  19. LEGAL ISSUES FOR THE ENTREPRENEUR:TRADEMARKS, LICENSING
  20. LEGAL ISSUES FOR THE ENTREPRENEURS:PRODUCT SAFETY AND LIABILITY, INSURANCE
  21. CREATING AND STARTING THE VENTURE:WHAT IS THE BUSINESS PLAN, PRESENTING THE PLAN
  22. CREATING AND STARTING THE VENTURE (Continued….):WRITING THE BUSINESS PLAN
  23. CREATING AND STARTING THE VENTURE (Continued….):
  24. CREATING AND STARTING THE VENTURE (Continued….):WHY SOME BUSINESS PLANS FAIL, MARKETING PLAN
  25. THE MARKETING PLAN:MARKET RESEARCH FOR THE NEW VENTURE
  26. THE MARKETING MIX:STEPS IN PREPARING THE MARKETING PLAN
  27. THE ORGANIZATIONAL PLAN:DEVELOPING THE MANAGEMENT TEAM, LEGAL FORMS OF BUSINESS
  28. THE ORGANIZATIONAL PLAN (Continued….)
  29. THE ORGANIZATIONAL PLAN (Continued….):THE LIMITED LIABILITY COMPANY
  30. THE FINANCIAL PLAN:OPERATING AND CAPITAL BUDGETS
  31. THE FINANCIAL PLAN (Continued….):PRO FORMA INCOME STATEMENTS, PRO FORMA CASH FLOW
  32. PRO FORMA SOURCES AND USES OF FUNDS:PERSONAL FUNDS, FAMILY AND FRIENDS
  33. PRO FORMA SOURCES AND USES OF FUNDS:COMMERCIAL BANKS
  34. BANK LENDING DECISIONS:SMALL BUSINESS ADMINISTRATION LOANS
  35. SOURCES OF CAPITAL:GOVERNMENT GRANTS
  36. SOURCES OF CAPITAL:PRIVATE PLACEMENT, BOOTSTRAP FINANCING
  37. CAPITAL SOURCES IN PAKISTAN:PROVINCIAL LEVEL INSTITUTIONS, FINANCIAL INSTITUTIONS
  38. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  39. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  40. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  41. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  42. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  43. NEW VENTURE EXPANSION STRATEGIES AND ISSUES:JOINT VENTURES, ACQUISITIONS
  44. NEW VENTURE EXPANSION STRATEGIES AND ISSUES (Continued….):DETERMINING THE PRICE FOR AN ACQUISITION
  45. ENTREPRENEURSHIP & PAKISTAN:GENDER DEVELOPMENT STATUS WOMAN AS AN ENTREPRENEUR IN PAKISTAN