MODULE 2

ENTREPRENEURSHIP

AS A CAREER

Entrepreneurs organize, manage, and assume responsibility for new enterprises. Their goal is to earn a profit by providing products and services everyone needs. If entrepreneurs are successful in carrying out this task, they can build rewarding careers for themselves.

Many opportunities exist to start new enterprises. But before you decide to become an entrepreneur, you should find out what is involved. This module examines entrepreneurship as a career. You will see if, and how, entrepreneurship fits into your future.

OBJECTIVES:

After studying this module, the student should be able to:

1.      Discuss the advantages and disadvantages of working for oneself.

2.      Describe eight types of entrepreneurs.

3.      Identify the characteristics common to successful entrepreneurs.

4.      Estimate your personal financial needs.

5.      Compare and contrast the three major ways to going into business for oneself.

WORKING FOR ONE’S SELF COMPARED 

TO WORKING FOR OTHERS

Thousands of Filipinos are interested in starting their own business. However, many think only of the rewards and give little thought to the risks. In this section, you will look at both the advantages and the disadvantages of being an entrepreneur.

Advantages of Working for Yourself

Those who choose entrepreneurship as a career usually do so for five appealing reasons: (1) personal satisfaction, (2) independence, (3) profit, (4) job security, and (5) status.

Personal Satisfaction. To some persons, the chief reward of working for yourself is personal satisfaction. Personal satisfaction means doing what you want with you life. As an entrepreneur, you will be able to spend each workday in a job you enjoy. For example, if you like photography, you may start your own studio. Each time a customer is pleased with a portrait, you will receive personal satisfaction.

You may have personal satisfaction from aiding the community in which you live. Entrepreneurs supply goods and services and create jobs for residents. They also buy goods and services from other local enterprises, borrow money from local banks, and pay taxes.

Independence. Another advantage of entrepreneurship is independence. Independence is freedom from the control of others. As an entrepreneur, you decide how you will use your knowledge, skills, and abilities. Compared to those who work for others, entrepreneurs have more freedom of action. They are in charge and can make decision without first getting the approval of someone else.

If you choose to become an entrepreneur, you can develop any creative ideas you have—assuming, of course, that the business is legal and that you have money to invest.

Profit. One of the major rewards expected when starting a new business is profit. Profit is the amount of sales income left after all expenses have been paid. Profits go to the owner of a business. Being self-employed, you would receive all the profits. Very often, increased time and effort put into the enterprise result in increased income. This is not often the case when you work for someone else.

Job Security. Many enterprises are created by prons who are seeking job security not available elsewhere. Job security is the assurance of continuing employment and income. Entrepreneurs cannot be laid off, fired, or transferred to another city, nor can they be forced ro retire at a certain age because of company policy.

Status. Self-employed people often enjoy persona benefits, such as status. Status is a person’s social rank or position. Entrepreneurs receive attention and recognition through customer contact and public exposure. As a result, they may enjoy status above that of many blue-collar and whit-collar workers.

Closely related to socials status is pride in ownership. Most people enjoy, at least for a while, seeing their names on buildings, on stationery and business cards, and in advertisements.

Disadvantages of Working For Yourself

In addition to knowing the advantages of working for yourself, you should also be familiar with the disadvantages: (1) possible loss of invested capital, (2) uncertain or low income, (3) long hours, and (4) routing chores.

Possible Loss of Invested Capital. A risk of entrepreneurship is the possibility of losing invested capital. Invested capital refers to the entrepreneur’s money used in starting the enterprise. As a general rule, the riskier the business, the greater the profit potential. If the enterprise succeeds, profits may be high; if not, invested capital may be lost. The entrepreneur risks losing personal and family savings. It may take years to repay banks, suppliers, or individuals who made loans to get the business started.

Uncertain or Low Income. Another disadvantage of owning your own business is the possibility of uncertain or low income. Unlike paychecks of salaried workers, profits usually vary from month to month. This is true even in well-established enterprises. When income is available, there may not be enough to meet personal and family needs. This is often the case during the first six to twelve months of operation. The level of sales and income tends to be low in these early months when the business is not known to many people.

Long Hours. Entrepreneurs are not 8-5 persons; they do not punch time cards. Many entrepreneurs work fourteen and fifteen hours a day, six or seven days a week. The owner is often the first to arrive in the morning and the last to leave at night. Business hours are set at the convenience of customers, not the desire of the owner. For example, many mall stores are open from 10 am to 9 pm. Likewise, many restaurants open before noon and do not close until after midnight. Not only are the hours long, but also the time between vacations. Some entrepreneurs feel than cannot leave their businesses for more than one or two days at a time.

Routine Chores. Running your own business may involve chores you d on not like. For example, new business owners expect to do some paperwork. However, many do not realize how much is required until the business is started. By that time, some feel they are buried under a mound of paper. One of the surprises is the extent of record keeping for items such as billing, payroll, and taxes. Maintenance and cleaning are other chores that must be performed each day. While it is possible to hire employees to perform these routine duties, a shortage of cash may prevent owners from doing so.

IDENTIFYING TYPES AND CHARACTERISTICS OF ENTREPRENEURS

An entrepreneur is a person who attempts to earn a profit by taking the risk of operating a business enterprise. While all entrepreneurs may have certain characteristics in common, no two entrepreneurs are exactly alike.

Types of Entrepreneurs

Entrepreneurial characteristics combined in different people result in different types of entrepreneurs. Entrepreneurs are classified into the following types: (1) solo self-employed individuals, (2) team builders, (3) independent innovators, (4) pattern multipliers, (5) economy-of-large-scale exploiters, (6) capital aggregators, (7) acquirers, and (8) buy-sell artists.

Solo Self-Employed Individuals. Entrepreneurs who work alone or with only a few employees are known as solo self-employed individuals. They generally perform the work themselves rather than assigning it to other people. Solo self-employed individuals are perhaps the most numerous of all entrepreneurs. Their ranks include small store and repair shop owners, independent sales representatives, attorneys, and physicians.

Team Builders. Entrepreneurs who expand small, usually one-person businesses into larger companies are team builders. An example is a self-employed electrician who gradually hires additional employees until a full-scale electrical contracting firm is established.

Independent Innovators. Individuals who create companies to manufacture and sell products they have invented are independent innovators.

Franchisers. Entrepreneurs who build several units of an effective business are known as franchisers. The entrepreneurs may have designed and built the original business, or they may have purchased a business started by someone else. Once this type of entrepreneur is successful with a business, the entrepreneur establishes for profit similar units elsewhere. Perhaps the best example of this type of entrepreneur is one who perfects a method of doing business and sells it to others.

Economy-of-Large-Scale Exploiters. When a firm has lower average costs due to its large sales volume, economies of large scale are involved. Entrepreneurs who can sell a large volume of goods at reduced prices are economy-of-large-scale exploiters. Discount store operators are one example of this type of entrepreneur. Because of the larger scale of their establishments, the may be able to afford advanced and specialized equipment such as the scanners built into the checkout counters at some larger supermarkets. This equipment enables one cashier to handle more customers in less time, thus lowering the store’s payroll expense because fewer cashiers are needed. Economy-of-large-scale exploiters often obtain merchandise at a price discount because they buy in such large quantities.

Capital Aggregators. Entrepreneurs who take the lead in establishing financial institutions that require a large amount of start-up capital are capital aggregators. Those who start banks and insurance companies are examples of this type of entrepreneur.

Acquirers. People who become entrepreneurs by buying an existing business are acquirers. Finding a business that someone is ready to sell is not usually difficult. Check the classified section of your local newspaper. You may be surprised at the number and variety of businesses for sale in your community.

Buy-Sell Artists. Rather than making their money from the day-to-day operations fo a business, buy-sell artists turn profit by buying a business and then selling it at a higher price. Buy-sell artists usually buy companies with problems that they solve before they sell the company. Typical actions include reducing costs and payrolls and eliminating unprofitable products. IN most cases, buy-sell artists do not wish to own a particular company for more than a few years.

Characteristics of Successful Entrepreneurs

Whatever type of entrepreneur, successful entrepreneurs are often described as being persons who (1) take moderate risks, (2) have self-confidence, (3) work hard, (4) set goals, (5) are responsible, (6) are innovative, (7) have technical knowledge, and (8) have business knowledge.

Moderate In Taking Risks. Persons who quit secure jobs and invest money in a new enterprise have much at stake. They are taking a risk. Their businesses may succeed and provide profits for years to come. On the other hand, the business may fail and cause financial ruin. Entrepreneurs are willing to take middle-of-the-road or moderate risks. Moderate risks means the chances of winning are neither too small nor too great. That is, results are not left purely to chance, nor are they sure to happen. Instead, they depend on a person’s abilities and actions.

Entrepreneurs like challenges suited to their skills. They want to make things happen rather than let them happen by chance.

Self-Confident. Successful entrepreneurs have self-confidence. Self-confidence means believing you can achieve what you set out to do. You are not afraid to take chances. You know you can get the job done. This strong inner feeling about oneself is important for the owner of a small business. It can often spell the difference between success and failure. Self-confidence sustains the owner during the difficult times in the growth of the new business.

Having self-confidence also means you are realistic and you know the limits of your abilities. You know what you can and cannot do. Entrepreneurs are not afraid to ask for help with difficult tasks.

Hardworking. Creating a new enterprise is hard work. Helping customers, keeping accounting records, and cleaning are just a few duties you may have to perform on a given day. You may also have to make deliveries, order supplies, and repair equipment. Much work must be done with few, if any, employees to help. Therefore, good health and physical stamina are important.

Only when their businesses are firmly established do entrepreneurs feel the freedom to put in fewer hours. Even then, however, they are ready to work when a job must be done.

Goal-Oriented. Do you know what you want to achieve in life? Successful entrepreneurs know where they are going by setting goals. A goal is an objective, something you plane to achieve. Your chances of becoming a business owner are slim unless you first decide you want to own your own business.

An example of a goal could be to get a summer job in a fast-food restaurant. Another example could be to have your own fast-food restaurant within five years.

You should learn to focus on one goal at a time. Direct all your energy toward this goal. When you have attained it, go to the next goal. If you try to pursue several goals at once, you can become confused and lose sight of your target.

Responsible. When you are responsible, you answer or account for what happens. You accept blame for failure, and you accept credit for success. An as entrepreneur, you will be responsible for the success or failure of your business. You will set goals and hold only yourself responsible if they are not met.

Entrepreneurs have many responsibilities. They must pay debts and wages. They must keep promises to employees or customers. They must also be willing to make personal sacrifices. For example, during busy seasons, the owner may not be able to take vacations with the family.

Innovative. Successful entrepreneurs are innovative because they introduce new ideas or methods. They try to improve existing products and services or create new products and services. Entrepreneurs invented fiberglass snow skis, video games, ballpoint pens, zippers, and automatic transmissions. They also introduced fast-food restaurants, quick oil change shops and computer shops.

Perhaps you have a new idea for a gift shop, a landscaping service, or a day-care center. Of course, not all ideas can be turned into profitable businesses. If you find one that can, you may build a satisfying career for yourself.

Knowledgeable About Technical Factors. You must have technical knowledge to succeed as an entrepreneur. Technical knowledge is what you know about a product or service. For example, a photographer must know how cameras operate. A pet shop owner must learn about the care of animals. A printer must have knowledge of different printing presses, inks, and papers.

One way to gain technical knowledge is by taking classes in school. You may also gain technical knowledge from a hobby or from a job in your area of interest. Make sure you have technical knowledge before you start a new enterprise.

Knowledgeable About Business Factors. You will also need business knowledge. Business knowledge is knowing how to operate the enterprise. Entrepreneurs must see that all tasks are performed appropriately. Examples are helping customers, setting prices for products and services, paying bills, planning advertising, and keeping accounting records.

ESTIMATING YOUR PERSONAL FINANCIAL NEEDS

It may be months or even years before the enterprise can provide you with enough money for living expenses. Every year, promising new enterprises are closed before they really get a chance to prove themselves. The owners simply run out of money and must obtain salaried jobs to support themselves and their families.

It is important, therefore, to estimate your personal financial needs. Do this for a period of three to six months. Then make sure your will have the money to cover that time period. If the money will not be available, you would be wise to delay the starting of the enterprise.

SELECTING A WAY OF GOING INTO BUSINESS

The aspiring entrepreneur who possesses the necessary personal characteristics, skills, and money can select one of three different ways of going into business: (1) buying an existing business, (2) starting a business from scratch, and (3) buying a franchise.

Buying An Existing Business

You may be interested in buying an existing business because the business is already set up. At first glance, buying an existing business may appear to be a way to avoid many of the beginner’s hazards. The risks, however, are never eliminated totally. Anyone with enough money to pay the purchase price cay buy a business; the question is whether that person will be able to operate the business successfully. Therefore, an individual must examine the advantages and disadvantages of buying an existing business before making a purchase decision.

Advantages of Buying an Existing Business

Buying an existing business may have these advantages: (1) a proven track record, (2) established clientele, (3) established location, (4) bank and supplier relationships, (5) trained employees, (6) established facilities, and (7) a low purchase price.

Proven Record. A business has a proven record when it has earned a profit for the current owner. Records are available to show what sales, expenses, and profits the new owner may expect.

Established Clientele. When buying an existing business, you normally get an established clientele. This is a group of regular customers who are in the habit of buying goods and services from the enterprise. A business with an established clientele has a group of customers who think favorably of the business, and the new owner will probably be able to count on their continuing support.

Established Location. Buying an existing business saves time and money in finding a location. A major problem in starting a new business is finding the right location. An existing business has already shown the value of it location if it is successful.

Bank and Supplier Relationships. A local banker may be familiar with the enterprise because of dealings with the former owner. This relationship could be helpful to a new owner who needs a business loan. Also, purchase arrangements with suppliers may be continued by the new owner. Seeking out dependable suppliers of equipment, materials, and services can be a time-consuming process.

Trained Employees. With the business, the buyer may acquire reliable employees. Getting employees who know the products, services, and customers is an advantage. Otherwise, the entrepreneur must hire and train employees. This takes time and attention away from other aspects of the business.

Established Facilities. When you buy an existing enterprise, you are ready to do business. Equipment and display fixtures are already installed. Signs are in place, and the parking lot is paved. If it is a gift shop, merchandise is displayed in windows and stocked on shelves. If it is a computer rental shop, computers equipment is anchored in place and ready to use.

Low Purchase Price. An owner who is eager to sell a business may give you a favorable price. Your purchase price may be less than the current cost of buildings, equipment, and inventory. OF course, you should make sure you are actually getting a bargain.

Disadvantages of Buying An Existing Business

You may not want to buy an existing business because of these disadvantages: (1) a poor record, (2) ill will, (3) wrong location, and (4) poor physical condition.

Poor Record. Why does the current owner want to sell? The current owner may have health problems, retirement plans, or the desire to pursue other business interests. The owner may want to get out of the enterprise because it has a record of losing, or because problems are expected in the future. For example, new competition may be coming into the area.

Ill Will. The previous owner may have treated customers and business persons poorly. Such treatment causes ill will, which is a felling of hostility, toward the business. A bad reputation is a major disadvantage. If you should buy the existing business, you would have to draw customers back to the business. You would also have to develop positive relationships with bankers and suppliers. In short, you would have to change a poor image into a favorable one. This is not an impossible task, but it may be just as easy to start a new business from scratch.

Wrong Location. What was once a good location may no longer be convenient to customers. The enterprise may be too far from other business or shopping facilities. Other problems may include lack of parking space or traffic congestion.

Poor Physical Condition. Be prepared to spend some money to improve the physical condition of the business. You may have to remodel buildings or repair or replace equipment. You may have a problem of energy usage. Delivery trucks that come with the business may not get good gas mileage. You should also check items in inventory.

STARTING A BUSINESS FROM SCRATCH

Starting a business from scratch means you will do all the work of establishing the enterprise. Before you choose this way of going into business, you should look at the advantages and disadvantages.

Advantages of Starting a Business From Scratch

The advantages of starting a business from scratch are (1) freedom to make decisions (2) opportunity to develop image, (3) choice of location, and (4) choice of physical facilities.

Freedom to Make Decisions. When you start an enterprise, you are free to make your own decisions. You choose when and how to get started. You are not limited to a certain location or to specific products or services. You hire your own employees and choose suppliers you want to use. In other words, you decide everything.

Opportunity to Develop Image. How customers feel about doing business with an enterprise is its image. Some enterprises enjoy a favorable image and others do not. In a new business, you can develop a favorable image from the start.

Choice of Location. Deciding where to locate is one of the most important decisions you will make. It can mean the difference between success and failure. Of course, you will be limited by the amount of money available to buy or rent facilities. But you will probably be able to select from several possible locations. Starting a new business is a way to obtain the best location.

Choice of Physical Facilities. Deciding on location is closely related to deciding on physical facilities. Physical facilities refer to buildings and its parts. When starting from scratch, you will be able to choose the physical facilities you need. You can either shop around until you find the right ones, or you can have them built. You will then be assured of having the right amount of space in the layout you desire.

Disadvantages of Starting a Business From Scratch

Some of the disadvantages of starting a business from scratch are (1) no record, (2) no established clientele, (3) time-consuming tasks, (4) difficulty in obtaining a loan.

No Record. Whereas an existing business has a proven record, the new business has no record. The best you can do is estimate what sales, expenses, and profits will be.

No Established Clientele. Brand-new businesses do not have an established clientele. As an entrepreneur, you would have to spend a lot of time attracting customers. You hope the customers you do get will develop a habit of buying from you. Even so, sales volumes build slowly. Weeks or months may pass before you are able to draw even a small salary.

Time-consuming Tasks. It takes time to launch an enterprise. You will have to search for the right location. Then you will have to install machines, display cases, or other needed items. You have to order goods. When they are received, you must store or display them. Another time-consuming task is hiring and training new employees.

Difficulty in Obtaining a Loan. Many new entrepreneurs under-estimate the amount of money they will need. They spend all their money in getting the enterprise started. Then they have trouble getting a loan to keep the business going. Banks usually prefer to lend to established businesses.

Buying a Franchise

Thousands of Filipinos have become entrepreneurs by buying franchises. A franchise is a legal agreement or contract between a company and an entrepreneur. The company, called the franchisor, is a manufacturer, wholesaler, or service company. The entrepreneur, called the franchisee, is permitted to sell the franchisor’s goods or services in a certain area. The franchisee pays fees to the franchisor. In return, the franchisor grants use of the company name and gives help to start the business. Many different kinds of franchised businesses exist in the Philippines.

Advantages of Buying a Franchise

The advantages of franchising are (1) initial training, (2) financial assistance, (3) established brand name or image, (4) proven method of doing business, and (5) continuing assistance.

Initial Training. Management training provided by the franchisor helps to make up for the entrepreneur’s lack of experience. The training covers a broad range of topics useful in getting the enterprise started. Examples are accounting, advertising, purchasing, and supervision of employees.

Financial Assistance. Financial assistance offered to franchisees can take several forms. Some franchisors lend money for the purchase of supplies and equipment. Others provide guidance on obtaining loans through banks. With the help of a successful franchisor, the entrepreneur is often able to obtain more favorable credit terms.

Established Brand Name or Image. Ina well-known franchise system, the franchisee does not have to work to establish a reputation. Customers are already familiar with the goods or services offered. Advertising by the franchisor may keep the product or service name in front of the public.

Proven Method of Doing Business. Franchisees have the benefit of proven methods of doing business. The methods and practices used in the business have been developed and tested through a process of trial and error. Operating manuals are developed. Thus, entrepreneurs learn from the franchisor’s experience and avoid many mistakes.

Continuing Assistance. Even after the business is established, franchisors may continue to provide assistance. They may help in controlling expenses and inventory or give advice on expanding the building or adding new products.

Disadvantages of Buying a Franchise

Entrepreneurs should also consider these disadvantages of franchising (1) limited control, (2) franchise fee, (3) image problems.

Limited Control. As a franchisee, you may have only limited control. A franchisee cannot make some decisions without prior approval of eth franchisor. You will use the franchisor’s name for the business, and you will only be able to sell certain products or services. Many franchises must remain open during specified hours and days. After investing your own money, you may still feel as though you are working for someone else.

Franchise Fees. A franchisee must pay two types of fees to the franchisor. One is the franchise fee, which gives the franchisee permission to use the name of the franchisor. The other is the royalty, which the franchisee pays continually for the life of the franchise. Some franchisees are also required to spend a certain percentage of sales on advertising.

Image Problems. If other franchisees mistreat customers and harm the image of the franchise, you could be hurt. Your sales and profits may suffer because of the action of others.

Evaluation of A Franchise

Before buying a franchise, be sure to study it closely for your own protection. This study should include an evaluation of the (1) franchisor, (2) the product or service, (3) the franchise contract, (4) the potential customers, and (5) you—the franchisee.

The Franchisor. When trying to decide if a franchise is right for you, one of the key questions you should seek to answer is: What can the franchise do for me that I cannot do for myself? Learn as much as possible about the franchisor. For example, find out how long the company has been in business and what kind of reputation it has. Visit franchises that are already in operation and discuss the franchise and relation with the franchisor. You may not get a clear picture of the business.

The Product of Service. What is the future for the product or service the franchise offers? Will consumers be buying more, the same amount as today, or less five years from now? Keep in mind that consumer’s needs and wants change often. What appears to be a favorable franchise today may not be one in a few years.

The Franchise Contract. The relationship between the franchisor and the franchisee is described in the franchise agreement or contract. This is usually a complex and lengthy document. Before signing the contract, make sure you understand all the terms. For example, does the contract specify the amount of the initial fee and the way royalty fees are determined? Does the contract cover all aspects of the franchise?

The Potential Customer. A franchise will not succeed unless there are enough customers in the market area where it is located. Therefore, you should determine the population in your area. Will it increase, remain the same, or decrease in the next five years? You should consider your competition. Will there be other entrepreneurs selling the same products and services in the immediate area?

You—the Franchisee. As the final step in evaluating a franchise, you should look at yourself as a franchisee. This should include an evaluation of your ability and your attitude toward all aspects of the franchise. Do you know where you will get the money for the initial fee? How does the cost compare to that of buying an existing business or starting from scratch? Perhaps the most important question is: Are you willing to trade your independence for the advantages the franchise offers?