1.5 ENTREPRENEURS AND LEADERS

CREATING AND SETTING UP A BUSINESS

• What is an Entrepreneur?

• A person who spots an opportunity and shows initiative and a willingness to take risks in order to benefit from the potential rewards

• Entrepreneurs make use of the resources available to them to set up or develop a business

• Creating and setting up a business starts with an idea, these can be the result of:

• Brainstorming

• Personal experience

• Business experience

• Market research

CREATING AND SETTING UP A BUSINESS

• Creating and setting up a business will involve a number of steps including:

• Generating an idea

• Asking if the idea can add value

• Conducting market research

• Drawing up a business plan

• Deciding on legal structure

• Raising finance

CREATING AND SETTING UP A BUSINESS

• A business plan is an important part of setting up a business

• A business plan will be used both internally by the entrepreneur and externally by banks, external investors or those willing to provide grants

• The contents of a business plan include:

• The executive summary - a synopsis of the entire plan looking at the most important points
• The business and products or services
• The market e.g. size, share, competitors
• The marketing strategy
• The skills of the entrepreneur and other key employees
• Operations
• Financial forecasts

CREATING AND SETTING UP A BUSINESS

What is the purpose of a business plan?

• To secure external funding 
  • banks, potential partners, venture capitalists, business angels

• To ensure that the firm develops a healthy financial structure

• To help identify problem areas that the business might face

• As a focus to set targets and check on the firms development

• To provide realistic expectations of what can be achieved
  • specific, measurable, achievable, realistic and time-based (SMART)

RUNNING AND EXPANDING / DEVELOPING A BUSINESS

• Once a business has been set up and becomes established then it requires managing on a day to day basis

• The entrepreneur is often also the hands on person making daily decisions, at least in the early years

• This involves:

RUNNING AND EXPANDING / DEVELOPING A BUSINESS

• As the business grows the entrepreneur may need to change roles:

• And make other key decisions:

INNOVATION WITHIN BUSINESS

• The characteristics of an entrepreneur include:

• Why are these also characteristics a business would look for in an employee?

• Intrapreneurship is when employees in a larger organisation act in the same way as entrepreneurs

BARRIERS TO ENTREPRENEURSHIP

Why is everyone not an entrepreneur?

• Not everyone wants to be an entrepreneur – comfortable working for others

• Lack of access to finance

• Knowledge and know how

• Risk-averse

• Lack confidence

• Limited skills

RISK AND UNCERTAINTY

• Both risk and uncertainty deal with unknowns
• Risks - It is possible to add a probability to quantify the degree of risk i.e. it is measurable
• Uncertainties - It is not possible to add a quantifiable probability as the outcome is too unpredictable i.e. it is not measurable
• Entrepreneurs have to anticipate both risks and uncertainties in the business environment

• Risks
  • Can be anticipated by entrepreneurs:
  • Market research
  • Understanding of the industry
  • Assessing own personal potential losses
  • Business plans
• Uncertainties
  • Are harder to anticipate as outside of the entrepreneur's control:
  • Keep up to date with current business climate e.g. economic and political changes
  • Make plans for unexpected events (contingency plans)
  • Spread risk e.g. a number of products or suppliers

RISK AND UNCERTAINTY

• What are the risks of being an entrepreneur?
• What are the rewards of being an entrepreneur?
• Do the risks outweigh the rewards or vice versa?
• Is risk a good or a bad thing?
• Are you a risk taker or risk-averse?

Rewards

•Financial Money Invested Salary foregone

•Esteem Fear of failure Proving self

•Commitment Time and effort Loss of personal/social time

•Profit motive Return on Investment Future security

•Being own boss Taking decisions Not taking orders!

•Self actualisation Self satisfaction Achievement

CHARACTERISTICS OF AN ENTREPRENEUR

What are the characteristics of an entrepreneur?

• Opportunity spotter
• Creative

• Show initiative
• Risk taker

• Positive thinker
• Hard working

• Self motivated
• Decision maker

• Visionary
• Enthusiastic
• Determined and persistent

SKILLS OF AN ENTREPRENEUR

Skills required to be an entrepreneur include:

• Communication
• Literacy

• Numeracy
• Information technology

• Organisation
• Problem solving
• Team working

REASONS WHY PEOPLE SET UP BUSINESSES

• Motives are reasons for doing something

REASONS WHY PEOPLE SET UP BUSINESSES

• Fulfilling a dream
• Making money

• In charge of own destiny
• Be own boss

• Work-life balance
• To prove you can

• Developing innovation
• Providing a service

• Supporting a community
• Social responsibility
• Necessity

REASONS WHY PEOPLE SET UP BUSINESSES

Financial motives:

Profit maximisation

To make as much profit as possible

Profit = sales revenue – total costs

Profit satisficing

To make enough profit to be satisfied but not be purely motivated by profit May profit satisfy to maintain a work life balance

REASONS WHY PEOPLE SET UP BUSINESSES

• Non-financial motives
  • Ethical stance
    • To behave in a manner deemed to be morally correct
    • Provide a  good or service that meets ethical beliefs e.g. cosmetics not tested on animals or clothes made from fair trade cotton

• Social entrepreneurship
  • Motivated by supporting a cause rather than making a profit
  • Any surplus revenue earned is used to further support the cause e.g. support the community or fund research

• Independence
  • Be your own boss and make own decisions

• Homeworking
  • Match family commitments to work commitments
  • Work life balance

BUSINESS OBJECTIVES

Business objectives include:

• Survival
• To continue to exist as a business
• • This may be the most important objective in the short term
  • This may be the primary objective of a start-up business or one experiencing difficult trading conditions
  • To achieve this a business may set a cash flow objective to ensure sufficient cash is available to meet day to day expenses
    • Cash flow is the flow of cash into and out of a business over a period of time

• Profit maximisation

BUSINESS OBJECTIVES

Other business objectives include:

• Sales maximisation

• To achieve the highest achievable amount of sales either by volume or by value

• Sales volume is the amount of sales expressed as a number of units sold e.g. 20 tonnes of wool

• Sales value is the amount of sales expressed as the total sum of money spent by consumers e.g. £3 million expenditure on clothing

• Market share

• Market share is the proportion of total market sales that a firm has this can be calculated as:

• Business A sales / market sales x 100

BUSINESS FORMS

Different forms of business include:

• Sole traders

• Partnership

• Private limited companies

• Public limited companies

SOLE TRADERS

• An individual who owns and runs their own business

• Registered as self-employed with Her Majesty’s Revenue and Customs (HMRC)

• Legally required to keep a record of all income and expenses and at the end of the tax year to fill in a self assessment tax return for HMRC

• Profits made by the sole trader are classed as income and are therefore taxable through income tax

• A sole trader has unlimited liability

SOLE TRADERS

• Benefits
  • Cheap and easy to set up
  • All profits go to the sole trader
  • Autonomy in decision making
  • Financial records remain private
  • Motivation is high as the success of the individual and the business are one and the same

• Disadvantages
  • Unlimited liability
  • Limited capital for investment
  • Little specialist skills as the owner is a ‘jack of all trades’ or will have to buy in specialists
  • Difficult to find cover when ill – although sole traders often do employ people

PARTNERSHIPS

• A partnership is where two or more people share the costs, risks and responsibilities of being in business together

• As with a sole trader, each partner has to register as self employed with HMRC and will have unlimited liability

• Each partner:

• ‘Sleeping’ partners invest in, but do not manage, the business

• Traditionally partnerships have had unlimited liability

PARTNERSHIPS

• Benefits

• Disadvantages

LIMITED COMPANIES

• Limited companies exist in their own right

• Shareholders are the owners of limited companies

PRIVATE LIMITED COMPANIES

• Have Ltd. after the name

• Owned by shareholders who are known to the company, often family and friends

• Can only sell shares on to other shareholders i.e. they can not sell them openly on a stock exchange

PRIVATE LIMITED COMPANIES

• Advantages

• Disadvantages

FRANCHISING

What is a franchise?

• A franchise is the replication of a successful business formula

• Franchising occurs when the owner of a business, the franchisor, licenses the use of trademarks and proven business ideas to another party, the franchisee

• Each business outlet is owned and operated by the franchisee

• However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.

• There are a number of familiar franchises in the UK – many are ideas from abroad such as McDonald’s and Subway but franchising covers all areas of UK business such as engineering, home care, parcel services and travel

FRANCHISING

• A franchise is when one business, the franchisor, gives another business, the franchisee, permission to trade using the franchisors name and selling the franchisors goods or services
  • Can be seen as a less risky option for business start-ups but can mean additional costs and a loss of independence

• A franchisee is a business that is given permission from another business to trade using its name or goods/services in return for a fee and share of the profits
  • The franchisee will also be given support by the franchisor but will have less autonomy in decision making

• A franchisor is a business that sells a licence giving permission to another business to trade using its name or goods/services
  • This allows the franchisor to grow more rapidly but may damage its reputation if standards are not maintained

FRANCHISING

• Franchising is a two way relationship

FRANCHISING (FRANCHISOR)

• Benefits
  • Rapid expansion
    • Optimum size
    • Maximum profitability
  • Cheap Investment
  • Motivation – franchisee has own capital tied up in business
  • Economies of scale
    • Buying power
    • Mass advertising
• Pitfalls
  • Loss of control
  • Managing growth
    • Enough staff?
    • Enough resources?
  • Litigation
    • A failed franchisee is a court case waiting to happen

FRANCHISING (FRANCHISEE)

• Benefits
  • Lower risk
  • Established product
  • Experienced firm
  • Brand awareness
  • Assistance
    • At start-up
    • Management
    • Financial
    • Marketing
    • Training
• Pitfalls
  • Lack of control
    • You have to follow the rules
    • You must buy supplies from the franchisor
  • Higher than expected costs e.g. start-up, royalties, supplies and franchise renewals can be expensive

TYPES OF BUSINESS

• Life style businesses

• Online businesses

GROWTH TO PLC AND STOCK MARKET FLOATATION

• A Plc is a public limited company

• As a business grows it may wish to change business form from an Ltd to a Plc

• Shares can be sold to the public via a stock exchange

• Open to more public scrutiny

• Risk of hostile takeovers i.e. if anyone can obtain 51% of shares in the company

• The process of becoming a Plc is called floatation

PUBLIC LIMITED COMPANIES

• Must have a minimum of two shareholders and have issued at least £50 000 of shares to the public before they can trade

• Have access to far greater amounts of capital that can be used for rapid expansion

• There is normally a divorce between ownership and control

• The shareholders own the company but the management (Chairperson and Board of Directors) run the company

PUBLIC LIMITED COMPANY

• Advantages

• Limited Liability
• Separate legal identity

• More flexible than a plc

• Financial records remain relatively private
• More capital can be raised through the sale of shares

• Disadvantages

• Lack of privacy as financial performance is available for all to view
• More complex to set up due to increased legal requirements and ongoing administrative costs

• Some loss of control as shareholders have voting rights
• Risk of hostile takeovers

OPPORTUNITY COSTS

• Opportunity cost can be defined as the benefit lost of the next best alternative when making a choice

• As all resources are scarce businesses must make choices in order to allocate these resources

• There are always competing alternatives when making choices e.g. should I buy a Pepsi or a Fanta?

• If I buy a Fanta I have lost the benefit of the closest alternative, a Pepsi

• There is an opportunity cost for all decisions made by businesses

TRADE-OFFS

• Opportunity cost is the cost of the next best alternative

• However there may be a range of alternatives all of which have been given up

• All of these alternatives are referred to as ‘trade-offs’

ENTREPRENEURS AND LEADERS

• An entrepreneur is a person who spots an opportunity and shows initiative and a willingness to take risks in order to benefit from the potential rewards
• A leader is a person that can inspire others and motivate them to meet objectives

DIFFICULTIES IN DEVELOPING FROM AND ENTREPRENEUR TO A LEADER

• Many entrepreneurs find it difficult to move from being an entrepreneur to a leader, reasons include:
  • Reluctance to hand over control making it difficult to delegate
    • The business is their baby that they have nurtured and seen become established and grow
    • Relinquishing control is not easy as many entrepreneurs are emotionally (and financially) attached to the success of the business