A subject taught in many high schools and colleges, entrepreneurship is actually defined as "the state of being an entrepreneur." An entrepreneur is an individual who owns, organizes, and manages a business and, in so doing, assumes the risk of either making a profit or losing the investment. According to the Small Business Administration (1999), the total number of businesses in the United States in 1995 was somewhere between 16 million and 24 million, of which approximately 15,000 were large. In 1997, there were an estimated 8.5 million businesses owned by women.
For any business to be successful, an adequate level of funding must be furnished. The amount needed varies according to the scope and nature of the business. Another key factor in the success of an entrepreneurial organization is planning, including planning for the marketing, management, and financial aspects of the business.
From a personal perspective, becoming an entrepreneur is not a simple task. It certainly has its drawbacks. However, it can also be quite rewarding.
Benefits and Drawbacks of Entrepreneurship
Choosing to create a new business, or even to purchase an existing one, is a decision that has a far-reaching impact. Long hours, poor pay, and an unclear future are only three of the challenges a budding entrepreneur must face. And, of course, losing everything one invests in a business is a very real risk. In fact, while 885,416 "new employer firms" were created in 1997, as reported by the U.S. Department of Labor, 857,073 businesses were terminated during the same year, with 53,826 of these being bankruptcies and 83,384 being failures. Failures and bankruptcies are business closures that occur while the business owes debts.
However, the potential rewards are unlimited. Business owners can profit greatly. Many of the wealthiest people on earth are entrepreneurs, including William Henry Gates III, the world's richest person and co-founder, chairman, and CEO of Microsoft Corporation. Another reward entrepreneurs tend to appreciate is independence. However, entrepreneurs' time is not necessarily their own. The work of the business must be completed, and often the entrepreneur is the one who must perform the most complex tasks of the business. Although others may work for the owner and manager of the business, it is ultimately the responsibility of the entrepreneur to make sure that the work gets done. Other re wards cited by entrepreneurs include personal satisfaction gained while performing the duties of the business and the resulting prestige.
Business Plan
Planning is a key ingredient in the success of an entrepreneur. A business plan helps to guide the decision making needed to operate a business. The first decision is to choose what sort of business to own. The business may be:
- a retail business that markets a tangible product (such as clothing, houses, food)
- a wholesale business that acquires goods from a producer and distributes requested quantities to retailers
- a service business that offers an intangible product (such as insurance, haircuts, consultant services, construction, financial services)
- a manufacturing business that produces a product
Of course, a business may perform more than one of these functions. The scope of the business will also be dependent on the breadth and depth of the products or services offered as well as the geographic region served.
One option available to someone interested in purchasing a business is a franchise. A franchise is a license to organize a business that markets products manufactured or owned by a parent company, such as a Kwik Copy, Sleep Inn, McDonald's, Play It Again Sports, or other businesses.
Another early decision involves choosing the legal form of ownership. Three options are sole proprietorship, partnership, and corporation. In a sole proprietorship, a single person owns and operates the business. The owner assumes all risks and responsibilities for the business, including debts. Two or more individuals may form a partnership and serve as co-owners of the business. If the partnership is a general partnership, all partners assume unlimited liability. However, if the partnership is a limited partnership, one or more of the partners assumes unlimited liability while the remaining partner(s) do(es) not. Instead, they may lose up to the amount of their investment, while having limited involvement in the business.
The third form of ownership is the corporation. A corporation is a group of individuals who obtain a charter giving the organization formed by the group legal rights and privileges. This organization can perform such functions as buying and selling, as well as owning property, as if the group were an individual person. The corporation is actually owned by individuals who purchase stock. A major advantage of this form of ownership is that the stockholders themselves have limited liability, thus minimizing financial risks.
The Small Business Administration (1999) reports that in 1996, according to the Internal Revenue Service, 16,471,000 sole proprietorships, 1,679,000 partnerships, and 5,005,000 corporations filed nonfarm business tax returns.
A business plan often contains three major sections: the marketing plan, the management plan, and the financial plan.
Marketing Plan Marketing is a process in which the decisions of the business are based upon the goals of the organization. One of these goals is usually that of satisfying the needs and wants of potential customers or a target market. Potential customers can be divided into specific market segments that represent groups based on specified characteristics. For example, a business may strive to serve those in their late teens and early twenties who live primarily in large cities. Narrowing the segment even further, the business may offer goods or services for those interested specifically in sports—both as active players and as spectators or fans. Thus the business may sell athletic shoes and clothing, sports equipment, and "how-to" books. The owner(s) would locate this business in an area with a large number of people in that age group. Other factors to consider when defining a target market include such demographic factors as income level, sex, marital status, and ethnic group, and such geographic factors as climate and region of the country.
Part of the marketing plan is the marketing mix. A marketing mix has four basic components: product, place, price, and promotion.
Product: The product is the goods and/or services offered by the business. A travel agent may offer the service of arranging any type of trip to anywhere in the world or may specialize specifically in cruises. Choosing products is dependent on the market segment the business intends to serve. Other considerations include the amount of physical space available for storing the product, the amount of funds needed to purchase the product from the wholesaler or manufacturer, and the profitability potential of offering the product. Another important consideration is the product's life cycle. A life cycle has four sections: introduction, growth, maturity, and de cline. When a new product is introduced to the market, it is in the introduction phase. Over time, it may grow in popularity and sales, reaching a point of maturity. Maturity is then followed by decline. An entrepreneur must be careful to avoid offering products or services that are in decline. That is one of the reasons for continually monitoring the sales of products and adjusting the product mix to reflect such changes in the product life cycle.
Place: Another factor in the marketing mix is place. Marketers often say that the success of a business is dependent upon "location … location … location." Choosing the location of the business is an important decision that must take into consideration such factors as the chosen tar get market, traffic patterns, parking availability, population trends, competitive businesses, rental costs, and other expenses. The place function also includes business activities that involve physical distribution, such as transporting goods, handling the goods, storing the goods, and keeping track of the goods (inventory).
An increasing number of businesses are locating on the Internet. Entrepreneurs create World Wide Web pages on which they promote their offerings. Consumers may either telephone the business to order the product or service or use a credit card to purchase the item over the Internet. The actual location of the business is less important since the Web is available throughout the country and, indeed, the world. However, the location still must be considered relative to business expenses (e.g., rent, utility prices) and transportation prices (e.g., cost of transporting products purchased on the Internet from the business to the customer).
Businesses can also be located in the home; in fact, home-based businesses represent a large portion of businesses in the United States. Many entrepreneurs begin their businesses in the home and eventually outgrow the space available there, at which point the owner usually seeks an outside facility.
Price: Price is the third component of the marketing mix. A pricing structure must be developed that includes specific goals and reflects policies of the business. A goal may reflect an intended image of the business or a particular profit margin that is sought. Factors to consider when identifying goals and policies related to price are: the amount of sales that are sought, pricing policies of competitors, profits that are projected, supply of the product that is available and projected demand for that product, the location of the business, and the expenses of the business.
Promotion: The fourth component of the marketing mix is promotion—the activities of the business that are intended to inform potential customers about the product or service and persuade them to purchase it. Methods include personal selling, advertising, visual merchandising (the coordination of all physical elements in a business such as displays, counters, offices, windows, signs, fixtures, lighting, and such), and publicity. The effectiveness of promotional strategies must be monitored so that promotional dollars are spent on strategies that are contributing to the achievement of business goals.
Management Plan Another major section of a business plan is the management plan. The four basic functions of management are planning, organizing, directing, and controlling.
Planning involves the determination of goals and objectives for the business, including the actual results sought by the firm. A set of policies and procedures are determined that guide the identification of specific activities that will lead to these goals. Planning does not end with the creation of a business plan, however; it continues throughout the life of the business.
To implement the plan, the entrepreneur organizes the personnel and other resources of the business. An organizational chart is created that shows the hierarchy of the people working in the business. After the number of employees and their qualifications are determined, applicants are recruited and, once hired, are trained. Other types of resources that are organized by management are facilities, equipment, materials, and supplies.
The third management function is directing. Managers direct the work of the business by applying leadership and management skills. They model desired behavior while supervising, motivating, and evaluating their employees. Finally, comparing the plan with the actual results is called "controlling." By observing and studying financial statements, managers can understand the status of the business and adjust activities where necessary to contribute toward the achievement of the business goals. The controlling function also includes evaluation of employees.
Financial Plan The financial aspects of the business must also be planned. The financial plan includes several financial statements. One of these statements is the "statement of financial requirements," which identifies the projected expenses and the assets they will create for a specified time period. Among the expenses listed are those for rent, insurance, telephone, and inventory. The entrepreneur also needs money to meet personal expenses as the business grows. These expenses are also included in this statement. The expenses are used to create assets. Assets are items of value that are owned by the business. For example, if a business purchases land upon which to place a facility for the business, the money needed for the purchase is an expense that then creates the asset of land.
The financial plan also includes the source(s) of the funds needed to meet the financial requirements. Sometimes an entrepreneur will already have all the funds needed; more often these must be acquired from family members, private lending agencies, and/or governmental loan programs.
Another statement included in the financial plan is the income statement, which may be referred to as a profit-and-loss statement or operating statement. This statement is a projection of the sales expected in a given period of time, the cost of the merchandise that will be sold, and the operating expenses of the business. From this information, projected profits or losses are determined.
A financial plan also includes a beginning balance sheet. This form provides a list of the assets, liabilities, and net worth of a business on a given day. Assets are tangible items that are owned by the business, liabilities are the debts of a business, and net worth is the amount of investment that the owner(s) has in the business.
The financial plan also includes a cash-flow analysis and a break-even analysis. The cash-flow analysis identifies the cash generated after expenses and loan principal payments are deducted. This projection is calculated for several years into the future. The break-even analysis identifies the break-even point, which is the level of sales and expenses, including loan principal payments, at which a business has no profit and no loss.
Resources
Information that can help the budding entrepreneur is available from people, printed material, and the Internet. All entrepreneurs need people they can go to for advice. Accountants and attorneys are especially important. An accountant not only provides the financial data and statements for the business but also interprets the information for the entrepreneur. This is important because business decisions must be based on a variety of considerations, including financial ones. Attorneys provide legal advice throughout the process of purchasing or creating a business and owning and managing it.
Other sources of information include financial institutions, the Chamber of Commerce, educational institutions, insurance agents, and suppliers of products used in the business. Publications provide up-to-date information: Books from major publishers, magazines such as Entrepreneur and Inc., and newsletters and journals offered by associations are available. Many types of businesses are served by trade associations such as the American Hotel and Motel As sociation, which is comprised of owners and operators of lodging businesses throughout the country. Along with providing publications, these organizations hold conferences and workshops and provide networking opportunities. Various government agencies are also available for advice, such as the Small Business Administration and the Internal Revenue Service.
The Internet provides information from a variety of people and organizations. Although the Internet is a valuable resource, the information available on it is not screened for accuracy. Relevant Web sites can be located by use of search engines that pinpoint specification on categories and topics.
Although it is important that the entrepreneur seeks advice throughout the planning and operation of a business, the ultimate decision maker on matters related to the business is the entrepreneur.
Successful Entrepreneurs
Successful entrepreneurs can be found in just about every community in the country. From small businesses employing only a few persons to mega businesses employing thousands, successful entrepreneurs abound. The following successful entrepreneurs represent a few of those at the high end of success as measured by wealth:
William (Bill) H. Gates is the co-founder, chairman, and CEO of Microsoft Corporation, the world's leading provider of software for personal computers. Gates was a student at Harvard when he developed BASIC, a programming language for the first microcomputer. He founded Microsoft in 1975 with a childhood friend, Paul Allen. According to Microsoft Corporation, Gates's determination to develop Microsoft stemmed from his belief that the personal computer would be a valuable tool for every home and office; thus he began developing software for personal computers.
Mary Kay Ash launched Mary Kay Cosmetics on September 13, 1963. Mary Kay, Inc. reports that, with a life savings of $5000, Ash launched what is now the largest direct seller of skin care products and the best-selling brand of skin-care and color cosmetics in the United States. Mary Kay Cosmetics originated from an idea of writing a book to help women survive in the male-dominated business world. From there, Ash inadvertently created the marketing plan for Mary Kay Cosmetics.
Gozi Samuel Oburota founded the Gozi Samuel Oburota Certified Public Accountancy Corporation (GSO) in 1994. According to the GSO Corporation, before founding the company, Oburota had served as a senior accountant at IBM, trusted with worldwide accounting responsibility for the DASD 3390 mainframe computer project from product development through manufacturing and general availability. GSO is a full service certified public accounting firm with offices in San Jose, Los Angeles, and Washington, D.C. By 1999, GSO was one of the fastest-growing professional firms headquartered in Silicon Valley. GSO is 100 percent minority owned.
(See also: Factors of Production)
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[Article by: ROBERT G. BERNS; JEWEL E. HAIRSTON]
