Entrepreneurship development and Industrial Consultancy

Module.2 Concept and working of entrepreneur

Lesson 7
MANAGING AN ENTERPRISE

7.1 Introduction

Entrepreneurs start an enterprise and manage it effectively so as to make it a successful enterprise. In general managing an enterprise consists of following different stages/ phases.

7.2 Identify an Opportunity

This is a crucial step both for a new enterprise as well as for existing organization. Identification of opportunity at appropriate time provides competitive advantage over competitors. It helps to increase profit margins. Identification of opportunity and evaluation is a difficult task. Majority of good business opportunities do not immediately emerge just by chance. They are found out due to alertness of entrepreneur or by adopting procedures specifically to generate ideas viz research and development, analyzing competitors, from supply chain members or using idea generating techniques. The assessment of opportunity can be evaluated by finding answers to following questions.

1) Which market need will be satisfied by the offering?

2) Which social conditions underlie this market need?

3) Which market research data can be associated with this market need?

4) Whether any patents might be available to fulfill this need?

5) What is the national and international structure of competition for the concerned need?

7.3 Evaluating and Establishing Vision

After identifying the opportunities, an entrepreneur lays down a vision to convert these opportunities into a realizable product. Each opportunity is carefully screened and evaluated so as to assess whether the specific product or service when conceptualized from a particular idea has profitable returns in comparison to resources required. The evaluation criteria looks at length of opportunity, its real and perceived value, its risk and return, its match with personal skills and goals of entrepreneur, its uniqueness or differential advantage in its competitive environment.

7.4 Persuade Others

No individual can work in isolation. Thus, entrepreneurs also need help and advice from many other people. Success of a business depends upon getting the right people involved.

7.5 Gather Resources

After successfully communicating the vision and persuading others, the stage of starting the project is reached. Here first of all resources of different kind are gathered. In general resources required for an enterprise can be classified in to four categories.

7.5.1 Financial

One of the most important considerations for any new enterprise is its financial structure. It can be a sole enterprise, partnership, private company, public company, co-operative firms. After selecting any suitable structure the next questions of finding some sources of finance which include own capital, informal investors (family and friends), public flotation, and government. etc.

7.5.2 Operating resources

This consists of physical items like office building, land and machinery, various raw materials etc.

7.5.3 Human resources

This covers labours, skilled operators and professional managers.

7.5.4 Creating new venture/ developing business plan

The next step is organizing all these resources effectively and creating / establishing a new venture.

7.6 Business Plan

A business plan is prepared by entrepreneur. It is a written document which describes all the necessary internal and external elements involved in starting a new enterprise. It is integration of major functional plans of the enterprise i.e. marketing, finance, production, human resources etc. It addresses short term and long term decision making for initial years of operation. Business plan is required by potential investors, suppliers, and even consumers.

The business plan is used by different persons such as investors, suppliers, customers etc. Each of them will read and interpret the plan from their own perspective. Thus while preparing the business plan; the entrepreneur must address all the issues affecting all different stakeholders.

7.6.1 Reasons for failure of business plan

1. Unreasonable goal setting by entrepreneur

2. Non measurable goals

3. Lack of full commitment from the entrepreneur

4. lack of experience on the part of entrepreneur in planned business

5. Entrepreneur lacks sense of potential threats or weaknesses

6. Lack of establishment of customer needs for the proposed product or service

7.6.2 Manage the enterprise

It is necessary to examine and solve operational problems of the growing enterprise. This calls for implementing management style and structure as well as determining key variables of success. A control system needs to be established so as to identify the problems and resolve it quickly.

7.6.3 Change / Adapt with time

As business environment change, entrepreneur needs to adopt new policies/ strategies so as to succeed and remain competitive.

Both the central and state governments frame rules and regulations for the operation of a business. The rules framed by other local bodies like municipal corporations are also binding on business. A large number of laws have been enacted for ensuring fair trade practices and fair competition, protecting the interests of consumers, employees, protecting improvement and collect tax from the business enterprises. The rules are not common for all the enterprises. They are enterprise specific. Thus it is the responsibility of the management of concerned enterprise that they enforce all the legal rules framed by the government for their enterprise. Thus entrepreneurs are required to remain watchful and keep themselves informed of latest standing orders that serve to control, regulate and guide their business activity. In this regard the aspects of form & ownership, industrial license, registration of project scheme, protection of environment, construction of factory shed, trade license, employee welfare, consumer rights etc are some of the important aspects to be considered by entrepreneur.

7.7 Type of Ownership

This is one of the basic procedural needs. There are different types of ownership models ranging from sole proprietorship, different kinds of partnership, joint stock company, co-operatives etc.

7.7.1 Sole proprietorship

In a sole proprietorship, individual is the sole owner of a business and there is no other form of business organization, such as a corporation, used as a vehicle to carry on the business. All benefits from the operation of the business accrue to the sole proprietor. At the same time, all obligations associated with the business are also the personal responsibility of the sole proprietor. Thus, all income or losses of the business are attributable to, and taxed at the rate applicable to, and all assets of the business are owned by, the sole proprietor.

Some of the advantages of operating as a sole proprietorship are: relatively low start-up costs, the ability to offset losses from the business against other sources of income, less formalities and filing requirements, and control over the direction of the business. The principal disadvantage of operating a business as a sole proprietorship is the unlimited personal liability of the proprietor (which can generally only be limited by contract or insurance). This means that all of the personal assets of the proprietor are at risk, whether or not they are used in, or related to, the operation of the business. Other disadvantages of operating a business as a sole proprietorship include: lack of status and credibility in the eyes of potential business partners; difficulty in attracting investment; limited ability to use a share of ownership in the business as a retention and incentive tool for employees; ineligibility for many government loan and grant programs (which are available only to corporations); and ineligibility for employment insurance benefits in the event of a failure of the business.

7.7.2 Patrnership

The term "partnership" has changed over the years, as business people have come to add new features to the old business form. These new partnership types are intended to help mitigate the liability issues with partnerships. The three most used partnership types are: General partnership, limited partnership, limited liability partnership.

7.7.2.1 General partnership

A general partnership is a partnership with only general partners. Each general partner takes part in the management of the business, and also takes responsibility for the liabilities of the business. If one partner is sued, all partners are held liable. General partnerships are the least desirable for this reason.

7.7.2.2 Limited partnership

A limited partnership includes both general partners and limited partners. A limited Partner does not participate in the day-to-day management of the partnership and his/her liability is limited. In many cases, the limited partners are merely investors who do not wish to participate in the partnership other than to provide an investment and to receive a share of the profits.

7.7.2.3 Limited Liability partnerships

A limited liability partnership (LLP) is different from a limited partnership or a general partnership, but is closer to a Limited Liability company (LLC). In the LLP, all partners have limited liability. An LLP combines characteristics of partnerships and corporations. As in a corporation, all partners in an LLP have limited liability, from errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees. Of course, any partners involved in wrongful or negligent acts are still personally liable, but other partners are protected from liability for those acts.

7.7.3 Joint stock company

A company form of business organisation is known as a Joint Stock Company which is a voluntary association of persons who usually contribute capital to carry on a particular type of business. The business is thus established by law and can be dissolved only by law. Those who contribute capital become members of the company. Joint Stock Company has a legal existence separate from its members. This implies that even if its members die, the company remains in existence. Joint stock company generally requires huge capital investment, which is contributed by its members. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him. Hence, members are also called shareholders. A joint stock company form of business organisation is found to be suitable where the volume of business is large and huge financial resources are needed and for businesses which involve heavy risks . Members of a joint stock company have limited liability, thus it is possible to raise capital from the public with ease. Again, for business activities which require public support and confidence, joint stock form is preferred as it has a separate legal status. Certain types of businesses, like production of pharmaceuticals, machine manufacturing, information technology, iron and steel, aluminum, fertilisers, cement, etc., are generally organised in the form of joint stock company.

7.7.4 Cooperatives

Cooperative models serve a useful role of awakening consciousness and showing that there is an alternative way to organize economic activity. However, successful models are few and far between in an environment hostile to cooperatives. For cooperatives to develop on any scale, changes are needed in society's values, political support, and the economic system.

7.7.4.1 Principles of cooperative enterprise

Cooperatives are firms that are controlled and owned by their members, who are the workers. cooperatives find affinity with the following principles:

1. Membership is open and voluntary.

2. There is democratic control at all levels of the enterprise, on the basis of one member, one vote.

3. Interest paid on share capital is limited.

4. Some part of cooperatives' surpluses is devoted to member’s education.

5. Cooperatives cooperate among themselves.

7.8 Factors to be Considered While Choosing a Particular Type of Ownership

Nature of business, minimum output to achieve economies of production, minimum turnover to make business commercially viable, requirement of specialized and skilled personnel, requirement of capital, return on investment, extent of financial support in the form of loan available from external sources, liability of equity, Ease of formation – registration and associated financial burden, tax benefits and concessions, grants and subsidies from government, and control over management.