MPU2222 Entrepreneurship I - Caug2017 (Bookmark) PDF

MPU2222
Entrepreneurship I
Copyright © Open University Malaysia (OUM)

MPU2222
ENTREPRENEURSHIP I
Norashidah Hashim
Assoc Prof Abd Aziz Yusof
Ooi Yeng Keat
Armanurah Mohamad
Abd Razak Amir
Dr Oh Teik Hai
Abd Kadir Othman
Loo Sze Wei
Prof Dr Mohd Ghazali Mohayidin
Dr Chiam Chooi Chea
Yanty Roslinda Harun

Project Director: Prof Dato’ Dr Mansor Fadzil
Open University Malaysia
Adapted by: Prof Dr Mohd Ghazali Mohayidin

Dr Chiam Chooi Chea
Yanty Roslinda Harun
Developed by: Centre for Instructional Design and Technology

First Edition, August 2017

Copyright © Open University Malaysia (OUM), August 2017, MPU2222
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).

Table of Contents
Course Guide ix–xiv
Topic 1 Introduction to Entrepreneurship 1

1.1 The Evolution of Entrepreneurship 2
1.2 Concepts of Entrepreneurship 3
1.2.1 Who are Entrepreneurs? 5
1.3 The Importance of Entrepreneurship 7
1.4 Development of Entrepreneurship in Malaysia 8
Summary 9
Key Terms 9
References 10
Topic 2 Identifying Entrepreneurial Characteristics 11

2.1 Characteristics of Successful Entrepreneurs 12
2.2 Self-assessment for Entrepreneurs 15
2.3 Differences between Businessmen, Managers 16
and Entrepreneurs
2.3.1 Differences between a Businessman and 16
an Entrepreneur
2.3.2 Differences between a Conventional Manager 17
and an Entrepreneur
Summary 18
Key Terms 18
References 19
Topic 3 Developing Entrepreneurial Creativity and Innovation 20

3.1 What is Creativity? 21
3.1.1 The Process of Creativity 21
3.1.2 Barriers to Creativity 24
3.1.3 How to Generate Creative Ideas 25
3.1.4 Characteristics of Creative Individuals 27
3.2 What is Innovation? 28
3.2.1 Types of Innovation 29
3.2.2 Sources of Innovation 30
3.2.3 Barriers to Innovation 32
Summary 34
Key Terms 34
References 35

iv  TABLE OF CONTENTS
Topic 4 Ventures Environment Assessment 36

4.1 Components of Ventures Environment 37
4.2 Macro Environment 39
4.2.1 Political and Legislation 40
4.2.2 Economy 42
4.2.3 Sociocultural 43
4.2.4 Technology 44
4.3 Micro Environment 45
4.4 An OrganisationÊs Internal Environment 48
4.5 Identification of Business Opportunity 48
4.5.1 Recognition of an Opportunity Phase of 49
a Process Perspective on Entrepreneurship
4.5.2 E-Commerce as a New Opportunity 51
Summary 52
Key Terms 53
References 53
Topic 5 Business Plan 54

5.1 What is a Business Plan? 55
5.2 Importance of Business Planning 56
5.3 Who Needs a Business Plan? 58
5.4 Essential Elements of a Good Business Plan 60
5.5 Guidelines on Preparing a Business Plan 62
5.5.1 Pitfalls to Avoid in Planning 64
Summary 65
Key Terms 65
References 65
Topic 6 Starting a New Entrepreneurial Venture 66

6.1 Start-Up 67
6.1.1 Phases in Start-Up 67
6.1.2 Advantages and Disadvantages of Start-Up 68
6.2 Buying an Existing Business 69
6.2.1 Steps and Processes in Buying an Existing Business 70
6.2.2 Advantages of Buying an Existing Business 74
6.2.3 Disadvantages of Buying an Existing Business 75
6.3 Franchising 76
6.3.1 Advantages of Franchising 77
6.3.2 Disadvantages of Franchising 78

TABLE OF CONTENTS  v
6.4 Legal Structures for New Business 80

6.4.1 Sole Proprietorship 80
6.4.2 Partnership 82
6.4.3 Corporation 85
6.5 Sources of Capital for Business Activities 87
Summary 89
Key Terms 90
References 90
Topic 7 Entrepreneurial Networking 91

7.1 What is Networking? 91
7.2 Advantages of Having Good Networking 92
7.3 What is Strategic Networking? 92
7.3.1 Types of Networking 93
7.3.2 The Importance of Networking 94
Summary 96
Key Terms 96
References 96
Topic 8 Evaluation of Entrepreneurial Opportunities 97

8.1 Pitfalls in Selecting New Ventures 98
8.2 Critical Factors for New Venture Development 100
8.3 Why New Ventures Fail 102
8.4 The Evaluation Process 103
Summary 107
Key Terms 107
References 107
Topic 9 Entrepreneur and Personal Financial Planning 109

9.1 Need for Personal Financial Planning 110
9.1.1 Steps in Financial Planning 110
9.1.2 Benefits of Financial Planning 111
9.1.3 Life Stages and Financial Goals 111
9.2 The Power of Money 113
9.2.1 How to Set Your Goals 113
9.2.2 An Important Goal – Saving for Emergencies 114
9.2.3 Assets and Liabilities: What You Own and Owe 115
9.2.4 Knowing Your Net Worth 117
9.2.5 Deriving Your Net Worth 119
9.3 The Basics of Budgeting 120
9.3.1 Budgeting and Spending Plan 120
9.3.2 Tracking Your Cash Flow 122

vi  TABLE OF CONTENTS
Summary 125
Key Terms 125
References 125
Topic 10 Achieving Entrepreneur's Personal Financial Dreams 126

10.1 Entrepreneur Wealth Building 127
10.1.1 The Saving Habit 127
10.1.2 Increasing Net Worth via Savings and Investments 128
10.1.3 Types of Investment 131
10.2 Planning for Uncertainties 134
10.2.1 The Need to Get Insured 134
10.2.2 Types of Insurance 136
10.3 Managing Debt: Borrowing Basics 140
10.3.1 Loans and Credit 140
10.3.2 Types of Loan 141
10.3.3 Types of Cards, Credit Trap and Tips on Using 147
Credit Cards
10.3.4 Repayment and Default 150
Summary 152
Key Terms 153
References 153

COURSE GUIDE  ix
COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through the
course material. It also suggests the amount of time you are likely to spend in order
to complete the course successfully. Please keep on referring to the Course Guide
as you go through the course material. It will help you to clarify important study
components or points that you might miss or overlook.
INTRODUCTION
MPU2222 Entrepreneurship I is one of the courses offered at Open University
Malaysia (OUM). This course is worth three credit hours and should be covered
over 15 weeks.
COURSE AUDIENCE
This is a compulsory course for all students of OUM.
As an open and distance learner, you should be acquainted with learning

independently and being able to optimise the learning modes and environment
available to you. Before you begin this course, please ensure that you have the right
course materials, and understand the course requirements, as well as know how
the course is conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend 120
study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.

x  COURSE GUIDE
Table 1: Estimation of Time Accumulation of Study Hours
Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussion 3
Study the module 60
Attend 3 to 5 tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 120
COURSE OUTCOMES
By the end of this course, you should be able to:
1. Explain the historical background, concepts and theories of

entrepreneurship;
2. Develop a vision to become an entrepreneur and appreciate entrepreneurial

value and culture in your profession;
3. Acquire creativity and innovative development skills in entrepreneurship;

and
4. Identify entrepreneurial opportunity and transform it into a basic business

plan.
COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic is as follows:
Topic 1 introduces and defines entrepreneurship and discusses the evolution of

entrepreneurship from the earliest period up till today. It describes the importance
of entrepreneurship to individuals, society and country.

COURSE GUIDE  xi
Topic 2 focuses on 16 of the most often cited entrepreneurial characteristics. The

entrepreneur self-assessment test is a means of getting insight into the individual
entrepreneurial potential. This topic describes not only the differences between a
small business owner and an entrepreneur but also the differences between a
conventional manager and an entrepreneur.
Topic 3 is devoted to creativity and innovation. Entrepreneurs need to know the

definition of creativity and innovation and their advantages and relationship in
entrepreneurship. This topic explains the barriers to creativity and innovation, as
well as the strategy to encourage creativity and innovations among entrepreneurs in
todayÊs businesses. Students will be exposed to opportunities and challenges in
producing creative and innovative ideas, products and services that meet the
challenges of todayÊs competitive business environment.
Topic 4 focuses on the environmental assessment in pursuing business

opportunities and identifying threats that exist in the environment. It also explains
elements in the internal and external environments of business ventures that
influence entrepreneurial decisions and activities.
Topic 5 outlines the techniques of preparing a business plan which will help
students to evaluate a business plan objectively, critically and practically. Students
will be taught how to produce a blueprint for a realistic business plan. They will
also be exposed to several methods and techniques of presenting an effective
business plan.
Topic 6 describes the various types of ventures that an entrepreneur can

undertake. Here, students will be introduced to three common types of ventures.
It will also explain the various steps to be taken when an entrepreneur wants to
buy an existing business venture. It will also discuss some of the advantages and
disadvantages of the different types of ventures, the legal structures for new
ventures and various sources of capital for an entrepreneur starting a new venture.
Topic 7 discusses the importance of networking for entrepreneurs. Networking is

one of the business approaches that contribute to entrepreneursÊ success. If
entrepreneurs have very good networking with both external and internal
customers, it will be easier for them to gain business opportunities and overcome
some of the problems related to their business. This is because good networking
relationships will enable them to gain support and cooperation from the
networking circle. Therefore, every entrepreneur should develop networking
skills to achieve their business goals and objectives.

xii  COURSE GUIDE
Topic 8 discusses the evaluation of entrepreneurial opportunities. It also explains

six common pitfalls in selecting new ventures. Students will be exposed to the
critical factors involved in new venture assessment and the underlying factors of
venture success. An effective evaluation process for new ventures will also be
looked at in this topic.
Topic 9 discusses the need for personal financial planning and looks at the steps
and benefits of financial planning as well. It will also explain the power of money
in terms of building financial success and basic budgeting and spending plans for
an entrepreneur.
Topic 10 explains entrepreneur wealth building by having a good savings habit as

this practice will ultimately increase the entrepreneurÊs net worth in the long term.
The topic will also discuss an entrepreneurÊs need to plan for future uncertainties
by taking into consideration the several types of insurance coverage. Students will
be exposed to the various types of loans and credit cards available. They will learn
how to manage their loans efficiently and avoid falling into a credit trap and
becoming a credit defaulter.
TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:
Learning Outcomes: This section refers to what you should achieve after you have
completely covered a topic. As you go through each topic, you should frequently
refer to these learning outcomes. By doing this, you can continuously gauge your
understanding of the topic.
Self-Check: This component of the module is inserted at strategic locations

throughout the module. It may be inserted after one sub-section or a few sub-
sections. It usually comes in the form of a question. When you come across this
component, try to reflect on what you have already learnt thus far. By attempting
to answer the question, you should be able to gauge how well you have
understood the sub-section(s). Most of the time, the answers to the questions can
be found directly from the module itself.

COURSE GUIDE  xiii
Activity: Like Self-Check, the Activity component is also placed at various locations
or junctures throughout the module. This component may require you to solve
questions, explore short case studies, or conduct an observation or research. It may
even require you to evaluate a given scenario. When you come across an Activity,
you should try to reflect on what you have gathered from the module and apply it
to real situations. You should, at the same time, engage yourself in higher order
thinking where you might be required to analyse, synthesise and evaluate instead
of only having to recall and define.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should be
able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful textbooks,
journals, articles, electronic contents or sources can be found. The list can appear
in a few locations such as in the Course Guide (at the References section), at the
end of every topic or at the back of the module. You are encouraged to read or
refer to the suggested sources to obtain the additional information needed and to
enhance your overall understanding of the course.
PRIOR KNOWLEDGE
No prior knowledge needed.
ASSESSMENT METHOD
Please refer to myINSPIRE.

xiv  COURSE GUIDE
REFERENCES
Abd. Aziz Yusof. (2000). Usahawan dan keusahawanan: Satu penilaian. Petaling
Jaya, Selangor: Pearson.
Dollinger, M. J. (2007). Entrepreneurship: Strategies and resources. Lombard, IL:

Marsh.
Histrich, R. D., & Peters, M. P. (1998). Entrepreneurship: Starting, developing and

managing a new enterprise (4th ed.). Boston, MA: McGraw Hill.
Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: Contemporary

approach (5th ed.).Fort Worth, TX: Harcourt College.
Mohd Salleh Hj Din, Hoe C. H., Norashidah H., Rosli M., Habshah B., Ooi Y. K.,
Armanurah M., Shuhymee A., Norita D., & Lily Julienty A. B. (2004). Asas
keusahawanan. Kuala Lumpur: Thomson.
Zimmerer, T. W., & Scarborough, N. M., (2007). Essentials of entrepreneurship and

small business management (5th ed.). Upper Saddle River, NJ:
Prentice Hall.
TAN SRI DR ABDULLAH SANUSI (TSDAS)

DIGITAL LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for the
use of its learners. This comprehensive digital library, which is accessible through
the OUM portal, provides access to more than 30 online databases comprising e-
journals, e-theses, e-books and more. Examples of databases available are
EBSCOhost, ProQuest, SpringerLink, Books24x7, InfoSci Books, Emerald
Management Plus and Ebrary Electronic Books. As an OUM learner, you are
encouraged to make full use of the resources available through this library.

Topic  Introduction to
Entrepreneurship
1
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the evolution and concepts of entrepreneurship;
2. Discuss the importance of entrepreneurship; and
3. Discuss entrepreneurship development in Malaysia.
 INTRODUCTION
Welcome to the world of entrepreneurship!
Most of what you hear about entrepreneurship, is all wrong. ItÊs not magic; itÊs
not mysterious; and it has nothing to do with genes. ItÊs a discipline, it can be
learned.
Peter F. Drucker
Innovation and Entrepreneurship
Source: Kuratko & Hodgetts (2001)
The concept of entrepreneurship was introduced in the 18th century by economists

as a topic for discussion and analysis. It continued to attract the interest of
economists in the following century. In the 20th century, the word
entrepreneurship became synonymous with free enterprise. It was generally
recognised that entrepreneurs act as agents of change, provide creative, innovative
ideas for business enterprises and help businesses grow and become profitable.
Entrepreneurship is the symbol of business tenacity and achievement.
Entrepreneurship is important to individuals, society and the country and is

2  TOPIC 1 INTRODUCTION TO ENTREPRENEURSHIP
recognised throughout the world as a catalyst for economic growth. This topic
discusses the evolution and concepts of entrepreneurship, the importance of
entrepreneurship as well as entrepreneurship development in Malaysia.
1.1 THE EVOLUTION OF ENTREPRENEURSHIP

The word entrepreneur is derived from the French word entreprendre, meaning
„to undertake‰. The evolution and development of the theory of entrepreneurship
can be summarised as shown in Table 1.1.
The concepts of the entrepreneur and entrepreneurship are elaborated further in

the following discussion.
Table 1.1: Evolution and Development of the Theory of Entrepreneurship

Period Theory and Concept
Earliest An early example of the definition of an entrepreneur as a go-between
Period is Marco Polo, who attempted to establish trade routes to the Far East.
As a go-between, Marco Polo would sign a contract with a financier
(capitalist) to sell his goods. The capitalist was a passive risk bearer.
The merchant-adventurer took the active role in trading, bearing all the
physical and emotional risks. Once the merchant adventurer had
successfully sold the goods, the profits would be divided between the
capitalist and the merchant-adventurer.
Middle Ages During this period, the term „entrepreneur‰ was used to describe both
an actor and a person who was in charge of and managed large
production projects. This person merely managed the projects using
the resources provided by the government, and did not assume any
risks. The entrepreneur in this period was the person who was in
charge of great architectural works, such as public buildings and
cathedrals.
17th Century In this century, there was a connection between risk and
entrepreneurship. The entrepreneur was a person who entered into a
contractual arrangement with the government to perform a service or
to supply stipulated products. The contract price was fixed. Therefore,
any profits or losses were borne by the entrepreneur. It was during this
century that Richard Cantillon, an economist, developed one of the
early theories of an entrepreneur. He is regarded as the founder of the
term ``entrepreneurÊÊ. He viewed an entrepreneur as a risk taker. The
entrepreneurs in the 17th century as observed by Cantillon were
merchants, farmers, craftsmen and other sole proprietors. They bought
at a certain price and sold at an uncertain price, therefore operating at
a risk.

TOPIC 1 INTRODUCTION TO ENTREPRENEURSHIP  3
18th Century In the 18th century, an entrepreneur was differentiated from a capital
provider. This was due to the industrialisation that occurred
throughout the world. Many of the inventions developed during this
time were reactions to the changing world. Two cases in point were
the inventions of Eli Whitney and Thomas Edison. Whitney and
Edison were developing new technologies but were unable to finance
their inventions. Whitney and Edison were capital users
(entrepreneurs), not providers (venture capitalists).
19th and 20th In the late 19th and 20th centuries, entrepreneurs were not often
Centuries distinguished from managers. In the middle of the 20th century, the
notion of an entrepreneur as an innovator was established. The
function of the entrepreneur is to reform or revolutionise the pattern
of production by exploiting an invention or, more generally, an
untried technological possibility for producing a new commodity or
producing an old one in a new way.
21st Century Entrepreneurs in the 21st century are considered the heroes of free
enterprise. Many of them have used innovation and creativity to build
multimillion-dollar enterprises from fledgling businesses.
Entrepreneurs have created new products and services and have
assumed the risks associated with these ventures. Today, many people
regard entrepreneurship as „pioneership‰ on the frontiers of business.
1.2 CONCEPTS OF ENTREPRENEURSHIP

According to Hisrich and Peters (1998), entrepreneurship is the dynamic process
of creating incremental wealth. The wealth is created by individuals who assume
major risks in terms of equity, time and career commitment or provide value to
some product or service. It is the process of creating something new with value by
devoting the necessary time and effort, assuming the accompanying financial,
psychological and social risks and receiving the resulting rewards of monetary,
personal satisfaction and independence. This definition focuses on four basic
aspects, as shown in Figure 1.1.

Figure 1.1: The four basic aspects of entrepreneurship

Source: Hisrich & Peters (1998)
Entrepreneurship as defined by Kuratko and Hodgetts (2004) is a process of

innovation and new venture creation through four major dimensions:
(a) Individuals;
(b) Organisational;
(c) Environmental; and
(d) Process.
These dimensions are aided by collaborative networks in government, education

and institutions.
ACTIVITY 1.1
According to Peter Drucker, entrepreneurship is a discipline which can

be learned. What do you think of this statement? Discuss with your
coursemates.

In recognising the importance of entrepreneurship in the 21st century, Kuratko

and Hodgetts (2004) developed an integrated definition of entrepreneurship as
follows:
„Entrepreneurship is a dynamic process of vision, change and creation. It

requires an application of energy and passion towards the creation and
implementation of new ideas and creative solutions. Essential ingredients
include the willingness to take calculated risks in terms of time, equity or to
marshal needed resources; the fundamental skill of building a solid business
plan; and finally, the vision to recognise opportunity where others see chaos,
contradiction, and cofussion‰
1.2.1 Who are Entrepreneurs?

Entrepreneurs are the pioneers of todayÊs business success. Their sense of
opportunity, their drive to innovate and their capacity for accomplishment have
become the standard by which free enterprise is now measured. The following are
some definitions of entrepreneurs by various scholars:
Scarborough and Zimmerer (1999) define an entrepreneur as a person who

creates a new business in the face of uncertainty for the purpose of achieving
profit and growth by identifying opportunities and assembling the necessary
resources to capitalise on them. Entrepreneurs usually start with nothing more
than an idea, often a simple one, and then assemble the resources necessary to
transform that idea into a sustainable business.
Kuratko and Hodgetts (2004) define an entrepreneur as one who undertakes

to organise, manage and assume the risks of a business. The entrepreneur is
also a catalyst for economic change who uses purposeful searching, careful
planning and sound judgement when carrying out the entrepreneurial
process. Uniquely optimistic and committed, the entrepreneur works
creatively to establish new resources or endow old ones with a new capacity,
all for the purpose of creating wealth.

Today, an entrepreneur is an innovator or developer who recognises and seizes

opportunities; converts those opportunities into workable or marketable ideas;
adds value through time, effort, money, or skills; assumes the risks of the
competitive marketplace to implement these ideas; and realises the rewards from
the efforts.
The meaning and definition of an entrepreneur varies with discipline. For

example, an economist sees entrepreneurs as those who bring resources, labour,
materials and other assets into unusual combinations that make their value greater
than before and also those who introduce changes, innovations and a new order
to generate profit. A psychologist defines entrepreneurs at the behavioural term
of achievement. To a psychologist, entrepreneurs are individuals who are driven
to seek challenges and accomplishments.
Although each of these definitions views entrepreneurs from a slightly different

perspective, they all contain similar notions such as:
(a) Newness;
(b) Wealth;
(c) Organising;
(d) Creating; and
(e) Risk-taking.
Entrepreneurs are catalysts for economic change who use purposeful searching,
careful planning and sound judgement when carrying out the entrepreneurial
process.
ACTIVITY 1.2
You are an entrepreneur who is about to open a franchise restaurant.
What should you do before you start your business? Present your
ideas.
SELF-CHECK 1.1
1. What is entrepreneurship?
2. What are the four basic aspects of entrepreneurship?

1.3 THE IMPORTANCE OF

ENTREPRENEURSHIP
Entrepreneurship is important in todayÊs world. It is a catalyst for economic
change and growth. The role of entrepreneurship in economic development
involves more than just increasing per capita output and income. It involves
initiating and constituting change in the structure of business and society. This
change is accompanied by growth and increased output. One theory of economic
growth depicts innovation as the key for economic growth in developing new
products or services for the market. Innovative activities also stimulate investment
interest in the new ventures being created. Thus, entrepreneurship through its
process of innovation creates new investment in new ventures, which result in
economic development. As more ventures are created, new jobs will be produced,
thus reducing the unemployment rate.
Entrepreneurship, through its creativity and innovation process produces new

products and services to fulfil human needs. It provides specific products or
services needed by customers. In producing goods and services, they will find
better ways to utilise resources, and reduce waste. For that, society will get better
goods and services at a cheaper price.
Entrepreneurship helps to improve the lives of millions of people through the new
products and services they bring to the market. Moreover, entrepreneurs are also
extremely generous in donating substantial portions of their wealth to eminently
worthy causes. Therefore, entrepreneurs are individuals who create wealth, as
well as promote wealth distribution.
ACTIVITY 1.3
What do you think is the importance of entrepreneurship to
individuals, society and the country? Discuss in class.

1.4 DEVELOPMENT OF ENTREPRENEURSHIP

IN MALAYSIA
Entrepreneurship has existed in Malaysia (Malaya) since the interaction of Malacca
with foreign traders. However, when the British colonised the Malay Peninsula,
they changed the structure of the society and practised the „divide and rule‰
system in which the Malays were engaged in administration and agriculture, the
Chinese in mining and business, and the Indians in rubber plantations. As a result
of this system, the Chinese society was far ahead in business compared with the
Malays and Indians.
After independence, the Malaysian Government realised the importance of

entrepreneurship to individuals, society as well as the country and how it
contributes to the nationÊs prosperity. Since then, the government has been
focusing on the field of entrepreneurship until today. The New Economic Policy
(1971 to 1990), the National Development Policy (1990 to 2000) and Vision 2020, all
encourage and support entrepreneurship development in Malaysia.
The government encourages entrepreneurship development and gives recognition

to entrepreneurs because they can contribute to the development of the country.
ACTIVITY 1.4
1. How far does the Malaysian government recognise and
restructure entrepreneurship development in the country? Do
research on this topic and share your findings. You may use the
Internet, newspapers and books as resources for your research.
2. Name some policies adopted by the Malaysian government to

promote local entrepreneurship.
SELF-CHECK 1.2
1. Discuss the importance of entrepreneurship.
2. Give some scenarios of entrepreneurship development in Malaysia.

 The study of entrepreneurship has relevance today, not only because it helps
entrepreneurs to better fulfil their personal needs but also because of the
contribution it gives to the individual, society, country and the world.
 Entrepreneurship can be defined as a process of innovation and new venture

creation through four major dimensions:
 Individual;
 Organisational;
 Environmental; and
 Process.
 The role of entrepreneurship involves initiating and constituting change in the

structure of business and society.
 Entrepreneurship creates new investments and ventures which will result in

economic development.
 The government of Malaysia encourages and recognises entrepreneurs

because they can contribute to the development of the country.
 It also provides a framework and foundation for researching contemporary

theories and processes of entrepreneurship.
 Furthermore, to foster entrepreneurship development, entrepreneurship

education is a vital element to further educate society in the area of
entrepreneurship.
Divide and rule New venture

Entrepreneur Risk
Entrepreneurship

Hisrich, R. D., & Peters, M. P. (1998). Entrepreneurship: Starting, developing and

managing a new enterprise (4th ed.). Boston, MA: McGraw Hill.
Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: A contemporary

approach (5th ed.). Fort Worth, TX: Harcourt College.
Kuratko, D. F., & Hodgetts, R. M. (2004). Entrepreneurship: Theory, process,

practice. Mason, OH: Thomson Learning.
Scarborough, N. M., & Zimmerer, T. W. (1999). Effective small business

management: An entrepreneurial approach (6th ed.). Upper Saddle River,
NJ: Prentice Hall.

Topic  Identifying
2 Entrepreneurial
Characteristics
LEARNING OUTCOMES
1. Identify 16 characteristics of successful entrepreneurs;
2. Evaluate your entrepreneurial inclination potential using the
entrepreneur self-assessment test; and
3. Describe at least three differences between businessmen, managers
and entrepreneurs.
 INTRODUCTION
Entrepreneurs are individuals who recognise opportunities where others see

chaos or confusion. They are aggressive catalysts for change within the
marketplace. They have been compared to Olympic athletes challenging
themselves to break new barriers, to long-distance runners dealing with the
agony of the miles, to symphony orchestra conductors who balance the
different skills and sounds into a cohesive whole, or to top-gun pilots who
continually push the envelope of speed and daring. Whatever the passion,
because they all fit in some way, entrepreneurs are the heroes of todayÊs
marketplace. They start companies and create jobs at a breathtaking pace.
They challenge the unknown and continuously create the future.
This topic describes the most common characteristics associated with successful
entrepreneurs, entrepreneur self-assessment, and the differences between the
entrepreneur, the small businessman and the managers.

12  TOPIC 2 IDENTIFYING ENTREPRENEURIAL CHARACTERISTICS
2.1 CHARACTERISTICS OF SUCCESSFUL

ENTREPRENEURS
This subtopic provides a brief summary of characteristics most commonly
associated with successful entrepreneurs. Even though new characteristics are
continually being added to the list, it does provide important insights into the
entrepreneurial perspective.
Figure 2.1: Characteristics of successful entrepreneurs
(a) Initiative and Responsibility

Most researchers agree that effective entrepreneurs actively seek and take the
initiative. They willingly put themselves in situations where they are
personally responsible for the success or failure of the operation.
Entrepreneurs feel a personal responsibility for the outcome of ventures with
which they are associated. They like to take the initiative in solving problems
where no leadership exists.

TOPIC 2 IDENTIFYING ENTREPRENEURIAL CHARACTERISTICS  13
(b) High Degree of Commitment

Launching a venture successfully requires total commitment from
entrepreneurs. This commitment helps entrepreneurs to overcome business-
threatening mistakes and obstacles. EntrepreneursÊ commitment to their ideas
and ventures determine how successful those ventures ultimately become.
(c) Opportunity Orientation

Entrepreneurs focus and start on opportunities rather than on resources,
structure or strategy. They begin with opportunities and let their
understanding of them guide other important issues. Entrepreneurs have a
well-defined sense of searching for opportunities. In searching for new
business opportunities, entrepreneurs observe the same events other people
do but they see something different. Entrepreneurs are not only capable of
searching for opportunities but are also capable of seizing the extraordinary
ones.
(d) Moderate Risk-taker

Entrepreneurs are not wild risk-takers; they take calculated risks. When
entrepreneurs participate in any venture, they do so in a very calculated,
carefully thought-out manner. They often avoid taking unnecessary risks.
(e) Confident and Optimistic

Entrepreneurs typically have an abundance of confidence in their ability to
succeed. They tend to be optimistic about their chances of success and
usually their optimism is based on reality. The high level of confidence and
optimism explains why some of the most successful entrepreneurs have
failed in business, often more than once, before finally succeeding.
(f) Creative and Innovative

Creativity and innovativeness are important for entrepreneurs to gain a
competitive advantage in their ventures. Through their creative and
innovative minds and imagination, entrepreneurs can produce unique goods
and services for customers. Creativity is not inherited, it can be learned.
(g) Seeking Feedback

Entrepreneurs like to know how they are doing and are constantly looking
for reinforcement. They actively seek and use feedback to improve
themselves and their venture performance. Through feedback,
entrepreneurs can learn from their mistakes.
(h) Drive to Achieve

Achievement seems to be the primary motivating force behind
entrepreneurs. Entrepreneurs are self-starters who have a strong desire to
compete, excel, pursue and attain challenging goals. One of the common

misconceptions about entrepreneurs is that they are driven wholly by the

desire to make money. To entrepreneurs, money is simply a symbol of
achievement, not the driving motive.
(i) Ability to Set Vision

Entrepreneurs know what they want to achieve. They have a vision or
concept of what their firm can be. Not all entrepreneurs have predetermined
visions for their firm. In many cases, this vision develops over time as the
entrepreneur begins to realise what the firm is and what it can become.
(j) Skilled at Organising

Building a venture from the very beginning is not easy. So, entrepreneurs
know how to put the right people together to accomplish a task.
Entrepreneurs are able to organise their resources in an effective way so as
to transform their visions into reality.
(k) Internal Locus of Control

Entrepreneurs believe that the success or failure of their venture depends on
themselves. Their accomplishments and setbacks are within their own
control and influence and they can affect the outcome of their actions.
(l) Tolerance of Failure

Entrepreneurs do not become disappointed, discouraged, or depressed by
failure. They use failure as a learning experience. In difficult times, they still
look for opportunities. Most entrepreneurs believe they learn more from
their early failures than from their early successes.
(m) High Level of Energy

Entrepreneurs are more energetic than the average person. Entrepreneurs
need to have a high level of energy so as to cope with the extraordinary
workload and the stressful demands they face. That energy may be a critical
factor, given the incredible effort required to start up a company.
(n) Team Building

Most successful entrepreneurs have highly qualified and well-motivated
teams that help handle the ventureÊs growth and development.
(o) Independent
Entrepreneurs are independent people. They like to accomplish tasks in their
own way. This does not mean entrepreneurs must make all the decisions.
They want to have authority to make important decisions.

(p) Flexibility
Entrepreneurs are not rigid in their ventures. They are flexible and have the
ability to adapt to the changing demands of their customers and businesses.
In this rapidly changing world economy, rigidity often leads to failure.
SELF-CHECK 2.1
What are the common characteristics of successful entrepreneurs?
2.2 SELF-ASSESSMENT FOR ENTREPRENEURS

There are many instruments that can be used to assess and measure the potential
inclination towards entrepreneurship in individuals. Among them are instruments
proposed by Robinson, Stimpson, Huefner and Hunt (1991). Today, there are
many online interactive tests and quizzes on entrepreneurial inclination potential
to test your level of entrepreneurial potential.
The purpose of the entrepreneur self-assessment test is to get insights into

entrepreneurial inclination potential in individuals. It is not to find out whether
individuals can become entrepreneurs or not. Anyone has the potential to become
an entrepreneur, regardless of age, race, gender, colour and national origin.
Entrepreneurship is not a genetic trait; it is a learned skill. Each individual has a
chance to be an entrepreneur. Hence, from this entrepreneur self-assessment test,
you can gauge your standing and do something to improve your level of
inclination towards entrepreneurship if you are interested in becoming a
successful entrepreneur.
ACTIVITY 2.1
What is the purpose of the entrepreneur self-assessment test? You can
try one of the online tests by accessing the following link. Compare your
score with your coursemates.
https://www.bizmove.com/other/quiz.htm

2.3 DIFFERENCES BETWEEN BUSINESSMEN,

MANAGERS AND ENTREPRENEURS
In this subtopic, we are going to look at the differences between businessmen,
managers and entrepreneurs. Before we do that, let us have a look at the definition
of a businessman and a manager.
According to the Oxford English Dictionary (Businessman, n.d.), a businessman

can be defined as:
A man who works in commerce, especially at executive level.
Whereas a manager is defined as (Manager, n.d.):
A person responsible for controlling or administering an organisation or

group of staff.
ACTIVITY 2.2
Are businessmen similar to entrepreneurs? Can you think of any

similarities between businessmen, managers and entrepreneurs? Discuss
with your coursemates.
2.3.1 Differences between a Businessman and

an Entrepreneur
Entrepreneurs are not synonymous with businessmen, especially the small
businessman. This is due to the fact that not all businessmen are entrepreneurs.
However, all entrepreneurs are businessmen. Businessmen do have the
characteristics of most entrepreneurs but those characteristics are at a lower level
compared with entrepreneurs. Several characteristics can be used to differentiate
the small businessman from the entrepreneur. Table 2.1 describes the differences
between a small businessman and an entrepreneur.

Table 2.1: Differences between a Businessman and an Entrepreneur
Small Businessman Entrepreneur

Ć Engages in business activities for Ć Starts the venture, assumes leadership
the purpose of profit to support his and expands the venture to fulfil
lifestyle and his family. personal goals and attain self-
accomplishment.
Ć Low risk-taker. Ć Moderate risk-taker.
Ć Follows others and invests only in Ć Takes calculated risks.

tested and proven markets.
2.3.2 Differences between a Conventional Manager

and an Entrepreneur
There are some differences between managers and entrepreneurs. Table 2.2 shows
the differences between managers, especially conventional managers, and
entrepreneurs.
Table 2.2: Differences between a Conventional Manager and an Entrepreneur
Conventional Manager Entrepreneur

Ć Very conscious of rules and taboos. Ć Views rules only as guidelines.
Ć Sensitive to the future and willing Ć Concept of the future based on

to postpone rewards. personal goals. Low threshold for
frustration.
Ć Has a powerful need for Ć Ambivalent towards control, success
acceptance. and responsibility. Can be
manipulative and exploitative of
others.
Ć Able to identify problems in any Ć Impatient with discussions and
course of action. theories. Prone to action and seems
Ć Makes detailed plans. impulsive.
Source: Zimmerer & Scarborough (1998)
SELF-CHECK 2.2
Summarise the differences between businessmen, managers and

entrepreneurs. Discuss your list with your coursemates.

 There are 16 characteristics of entrepreneurs worth identifying in this topic:

– Seeking feedback;
– Internal locus of control;
– Flexibility;
– High level of energy;
– Team building;
– Ability to set vision;
– Tolerance for failure;
– Drive to achieve;
– Skilled at organising;
– Creative and innovative;
– Independent;
– Confident and optimistic;
– Moderate risk-taker;
– Opportunity orientation;
– High degree of commitment; and
– Initiative and responsibility.
 This topic also presents the entrepreneur self-assessment test to gauge the
entrepreneurial inclination potential in individuals.
 It also discusses the differences between entrepreneurs, small businessmen

and conventional managers.
Creative Innovative
Entrepreneurs self-assessment Optimistic

Businessman. (n.d.). English Oxford Dictionary. Retrieved from

https://en.oxforddictionaries.com/definition/businessman
Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: A contemporary

Manager. (n.d.). English Oxford Dictionary. Retrieved from

https://en.oxforddictionaries.com/definition/manager
Robinson, P. B., Stimpson, D. V., Huefner, J. C., & Hunt, H. K. (1991). An attitude
approach to the prediction of entrepreneurship. Entrepreneurship: Theory
and Practice, 15(4), 13-33.

Topic  Developing
3 Entrepreneurial
Creativity and
Innovation
LEARNING OUTCOMES
1. Define the concepts of creativity and innovation;
2. Explain four main phases in the creative process;
3. Explain five creativity techniques;
4. Describe four basic types of innovation; and
5. Discuss the barriers to creativity and innovation.
 INTRODUCTION
TodayÊs competitive business environment requires an entrepreneur to think of
ways to produce new products, services or processes for new purposes for
customers. This in turn, could enable the organisation to survive and attract the
attention of customers to the organisationÊs new inventions as well as generate
revenue. Hence, creativity and innovation are vital elements for all levels of
businesses in order for them to grow and expand. They are also essential for
survival and for building competitive advantage (Kirby, 2003).

TOPIC 3 DEVELOPING ENTREPRENEURIAL CREATIVITY AND INNOVATION  21
Continuously seeking new paradigms of solving a business problem is the

precondition for successful entrepreneurs. As a creative person, the entrepreneur
must be able to think creatively to find solutions to existing problems. However,
one should remember that efficiency and effectiveness no longer guarantees the
survival of business nowadays. Creativity and innovation are constantly pushing
business forward. As a result, the ability to create or invent something new is the
answer for businesses to remain in the market. This topic will discuss what
creativity is, the process of creativity, barriers to creativity, how to generate
creativity and characteristics of creative entrepreneurs.
3.1 WHAT IS CREATIVITY?

There are a few definitions of creativity. According to Schermerhorn, Hunt and
Osborn (2003), creativity involves the development of unique and novel responses
to problems and opportunities. Creativity is imperative for responding to complex
challenges in a dynamic business environment which is often full of non-routine
problems. Thus, creativity is:
„The ability to produce work that is novel (i.e. original and unexpected), high
in quality and appropriate (i.e. useful, meets task constraints).‰
Sternberg, Kaufman & Pretz (2002)
SELF-CHECK 3.1
Give the definition of creativity based on your understanding.
3.1.1 The Process of Creativity

An entrepreneur needs to think of ideas to implement new strategies. Generally,
ideas evolve from the creative process in which an imaginative individual will
imagine, shape and develop an idea into a form that can be implemented and in
return, benefit both the entrepreneur and the organisation.

22  TOPIC 3 DEVELOPING ENTREPRENEURIAL CREATIVITY AND INNOVATION
According to Kuratko and Hodgetts (2004), there are four main phases or steps in
the creative process, as shown in Figure 3.1.
Figure 3.1: The creative thinking process


The elaboration of the phases is shown in Figure 3.2.
Figure 3.2: Four phases in the creative process

SELF-CHECK 3.2
Briefly explain what creativity is and the main phases involved in the
process of creative thinking.
3.1.2 Barriers to Creativity

We should bear in mind that not all novel ideas generated during the creative
thinking process are acceptable. Creativity does not ensure that there will be no
barriers, no frustrations and no failures. There are four barriers to creativity, as
shown in Figure 3.3.
Figure 3.3: Barriers to creativity

3.1.3 How to Generate Creative Ideas

Different people have different ways of thinking. There are several techniques to
improve creativity. Five techniques that can be used to foster creativity are as
shown in Figure 3.4.
Figure 3.4: Techniques to foster creativity
Let us now take a look at these different ways of thinking in further detail.
(a) Brainstorming
Brainstorming is the most common and a powerful technique used to hatch
ideas. During a brainstorming session, all members of the group suggest
ideas that are then discussed. The ideal number of group members involved
in a brainstorming session is between four and seven. There are four rules of
brainstorming (Williams, 2000), namely:
(i) The more ideas, the better;
(ii) All ideas are acceptable, no matter how wild or crazy they might be;
(iii) Use other group membersÊ ideas to come up with even more ideas; and
(iv) Criticism or evaluation of ideas is not allowed.

(b) Forced Analogy

This is a very useful and fun-filled technique of generating ideas. An idea is
compared to a problem and something else that has little or nothing in
common to get a new insight. There are several ways that you can ``forceÊÊ a
relationship between almost everything and gain new solutions, such as you
and a pen, music and computers, products and markets. Forcing
relationships can help to develop new insights as well as new alternatives.
To develop a relationship is to have a selection of objects or a card with
pictures or images that help to generate ideas. Choose an object or card
randomly and see what kind of relationship can be forced.
(Adapted from http://members.optusnet.com.au/charles57/Creative/Techniques/)
(c) DO IT
At the first stage of the DO IT technique, we must analyse the problem to

ensure that the correct question is being asked. Studying and understanding
the problem is crucial in order to identify the main cause of the problem. If
the problem appears to be very large, break it into smaller parts and
summarise the problem as concisely as possible.
Secondly, once we have successfully identified a problem, generate as many

ideas as possible to get possible solutions to overcome it. Every attempt to
generate an idea is essential, regardless of whether the ideas are good or bad.
Thirdly, we need to examine and analyse in detail before choosing the best
ideas to solve a problem, and all the solutions should come from the second
stage.
Finally, once the best solution is identified, it is time to implement it. This
stage involves the development of a reliable product from the ideal,
marketing and business strategies and it normally incurs time, cost, and
energy.

(d) Mind Mapping

This technique allows one to use pictures and/or word phrases to organise
and develop thoughts in a non-linear fashion. It helps people to „see‰ a
problem and its solution.
Many people use mind mapping during:

(i) Brainstorming;
(ii) Taking notes; and
(iii) Refreshing their memory.
Mind mapping can also be used to generate new products, solve a problem,
plan strategy, or develop a process. The key to its effective use to generate
ideas and solve problems is to not necessarily think logically. If one idea
triggers another, do not try to analyse it; just mark it down on the mind map.
Similar to brainstorming, the crazier the association, the better. That is how
truly innovative solutions come about.
(e) Nominal Group

The use of nominal groups is to generate ideas and evaluate solutions face-
to-face in non-threatening group circumstances; members do so by writing
down silently as many ideas as possible. After that, group members engage
in recording the ideas given and then discuss the ideas to obtain clarification
and evaluation. Finally, each member will vote privately on the priority of
ideas.
SELF-CHECK 3.3
List and briefly explain the techniques for generating creative ideas.
3.1.4 Characteristics of Creative Individuals

Entrepreneurs are somehow creative individuals. However, not all creative
individuals can be entrepreneurs. Figure 3.5 shows the eight characteristics of
creative individuals.

Figure 3.5: Characteristics of creative individuals
3.2 WHAT IS INNOVATION?

Once entrepreneurs have undergone a creative process and found the best
solution, the next step will be application and eventually innovation. Creativity is
a pre-condition for innovation. Today, innovation is widely believed to be the key
to sustainable success for many organisations. Companies that are able to compete
and win are those that develop new products or new systems of producing
products and continue doing so over time.
Why is innovation imperative? What is innovation? In this subtopic, we will

discuss what innovation is, its types, sources and barriers.

According to Kinicki and Williams (2003), innovation is „finding ways to deliver

new or better goods or services‰. It means that every organisation, whether profit
or non-profit, will not allow itself to become complacent, especially when rivals
are coming up with creative ideas. Innovation is also deemed as the creation of
something new in the marketplace that alters the supply-demand equation (Chell,
2001). An entrepreneur creates a new demand in the market by recombining the
factors of production to create something new. Therefore, innovation is the key to
survival for entrepreneurs in todayÊs intense business environment. ``Innovate or
dieÊÊ should be every entrepreneurÊs principle of daily life.
ACTIVITY 3.1
What do you understand by the term innovation? In your opinion, how

does this term apply to entrepreneurs and why is it important? Discuss
in your class.
3.2.1 Types of Innovation

Everyone in an enterprise must be innovative so as to enable the enterprise to
change fast enough to cater to customersÊ needs and demands. Essentially, there
are four basic types of innovation (Kuratko & Hodgetts, 2004) as shown in
Figure 3.6.

Figure 3.6: Types of innovation and examples
3.2.2 Sources of Innovation

An entrepreneur needs powerful ideas before he or she can inspire a new product,
service or process. The following are four sources of innovation for entrepreneurs
(Drucker, 1985; Kuratko & Hodgetts, 2004).
(a) Unexpected events

Entrepreneurs frequently notice that they get ideas from something that is
out of their expectations. Unexpected events offer immense opportunities for
entrepreneurs to apply their expertise to a new application or formula.
Besides that, unexpected success or failure is also a major source of
innovation when things go unnoticed or unplanned.

(b) New knowledge concepts

In todayÊs marketplace, we can find out about new products or services
easily. Indeed, most of these products or services are knowledge-based
innovations that need a long time to research and to be developed by experts.
New knowledge can be obtained through reading, attending seminars or
conferences or discussions among professionals.
(c) Demographic changes

Changes in demographic characteristics in age, educational levels, income
and types of employment have been a main source of innovation for
entrepreneurs. The transformation of demographic characteristics has
created huge opportunities for entrepreneurs to explore. For example, as the
standard of living and income increase, the demand for luxury goods and
health care products also accelerate.
(d) Process needs

Process needs exist within the process of business, an industry or a service.
It perfects a process which already exists, replaces a link that is weak,
redesigns an existing process and so on. All these provide opportunities for
entrepreneurs to produce products, services or processes that suit the
customersÊ demands and needs. For example, in the process of creating a
healthy society, people will want to do more exercise. Thus, entrepreneurs
could provide more health facilities or centres for those who desire them.
SELF-CHECK 3.4
1. What are the sources of innovation? Give examples based on your

observation of your surroundings.
2. Based on the types of innovation, give appropriate examples and

explain. Compare with your friendsÊ examples.

3.2.3 Barriers to Innovation

Even though entrepreneurs have a pool of ideas to innovate, there are some
glitches that can hinder them from becoming innovative. Barriers to innovation
always come from within an organisation, especially from the staff. The barriers to
innovation are as follows:
(a) Organisation does not encourage innovation

Some organisations are comfortable with the current status quo and refuse
to change. For them, any change means a threat that could affect the
organisational culture and procedures, and more importantly their current
position. Thus, to avoid such things from happening, the management will
try to avoid or refuse to recognise the need for innovation within the
organisation. Moreover, interdepartmental borders prevent communication
of innovative ideas among the staff.
(b) Insufficient resources

Some organisations are keen to change and innovate but are let down by
insufficient resources like human resources, funds and facilities that are vital
in implementing innovations.
(c) Traditional management behaviour

ManagementÊs desire to be in control prevents staff from being creative. This
happens especially when the management is controlled by senior staff
members who maintain traditional ways of thinking and resist changing.
Sometimes, a creative staff member is hindered by the managementÊs
excessive rules, constraints and bureaucracy.

In addition to all these, barriers to innovation could be derived from personal or

individual behaviour as shown in Figure 3.7.
Figure 3.7: Personal or individual behaviour
ACTIVITY 3.2
1. What are the strategies that you can use to encourage creativity and
innovation in an organisation?
2. Go online to the following websites and attempt the creativity test to

measure your creativity.
 http://www.testmycreativity.com/
 http://www.enchantedmind.com/html/creativity/iq_tests/creat
ivity_test.html

 Creativity is „the ability to produce work that is novel (original and

unexpected), high in quality and appropriate (useful, meets task constraints)‰.
 The four main phases in the creative phase are:
 Knowledge accumulation;
 Incubation;
 Ideas; and
 Evaluation and implementation.
 The five creativity techniques are brainstorming, forced analogy, DO IT, mind
mapping and nominal group.
 Innovation is defined as „finding ways to deliver new or better goods or

services‰.
 The four basic types of innovation are invention, extension, duplication and
synthesis.
 Barriers to innovation are:
 Organisations which do not encourage innovation;
 Insufficient resources; and
 Traditional management behaviour.
Brainstorming Forced analogy

Creativity Innovation
Creative process Mind mapping
DO IT Nominal group

Chell, E. (2001). Entrepreneurship: Globalisation, innovation and development.

London, England: Thomson Learning.
Drucker, P. F. (1985). Innovation and entrepreneurship: Practice and principles.

Oxford, England: Butterworth-Heinemann.
Kinicki, A., & Williams, B. K. (2003). Management: A practical introduction.

Boston, MA: McGraw-Hill.
Kirby, D. A. (2003). Entrepreneurship. London, England: McGraw-Hill.

Schermerhorn, J. R., Hunt, J. G., & Osborn, R. N. (2003). Organisational behaviour

(8th ed.). New York, NY: John Wiley & Sons.
Sternberg, R. J., Kaufman, J. C., & Pretz, J. E. (2002). The creativity conundrum: A
propulsion model of kinds of creative contributions. New York, NY:
Psychology Press.
Williams, C. (2000). Management. Cincinnati, OH: South-Western College.

Topic  Ventures
4 Environment
Assessment
LEARNING OUTCOMES
1. Identify two components of ventures environment;
2. Describe four elements of macro and micro environment and six
elements of micro environment;
3. Explain three elements of an organisationÊs internal environment;
and
4. Explain a business opportunity.
 INTRODUCTION
Business venture environments are usually discussed in relation to marketing and
economics management, to name a few. In this topic, we will discuss the
importance of environment in providing opportunities and threats to new
ventures creation. There are many ways to assess an environment of new business
ventures.
First, we will analyse the components of environment where the ventures operate.
Then, we will discuss the steps in identifying a business opportunity and how to
evaluate and grab this opportunity to start up new business ventures.

TOPIC 4 VENTURES ENVIRONMENT ASSESSMENT  37
4.1 COMPONENTS OF VENTURES

ENVIRONMENT
Entrepreneurs need to evaluate the environment not only prior to the start-up of
their business but also during the growth stage of ventures. An environment is the
situation where business ventures operate. Ventures environments can be divided
into two parts, which are:
(a) Macro view of the external environment; and
(b) Micro view of the external and internal environment.
Each of these consists of many components that need to be assessed. Figure 4.1
illustrates the components of ventures environment.
Figure 4.1: The components of ventures environment

38  TOPIC 4 VENTURES ENVIRONMENT ASSESSMENT
The following explains further external and internal environments found in

ventures environment.
(a) External Environment

The external environment consists of the following elements: macro
environment and micro environment. Macro environment can influence
business decision-making in the long term and comprises uncontrollable
elements. It consists of four elements:
(i) Politics and legislation;
(ii) Economy;
(iii) Sociocultural; and
(iv) Technology.
Meanwhile, according to Kuratko and Hodgetts (2004) the micro environment

of business venture is also part of venture external environment, but can
directly influence the entrepreneursÊ decisions and activities. It is also known
as the industrial environment or task environment. The micro environment
consists of six elements:
(i) Customers;
(ii) Competitors;
(iii) Suppliers;
(iv) Financial institutions;
(v) Non-government organisations; and
(vi) Government agencies.
The micro environment or the industrial environment is also known as

competitive environment in PorterÊs Five Forces Model which includes
threat of new entrant, substitute product and bargaining power of suppliers
and buyers. Financial institutions are considered as general environment,
while non-government organisations and government agencies are
categorised under politics and legislation.

(b) Internal Environment

The internal environment can also directly influence decision-making of
entrepreneurs. However, they can control these elements. The internal
organisation environment consists of the following elements:
(i) Organisation structure;
(ii) Culture; and
(iii) Resources.
ACTIVITY 4.1
What do you think will happen if entrepreneurs start up their

business without analysing the environment in which the venture
operates? Compare and discuss your answers with your coursemates
and tutor.
SELF-CHECK 4.1
List all segments and components of business environments.
4.2 MACRO ENVIRONMENT

Earlier, we mentioned that the macro environment consists of elements such as
political and legislative, economy, technology and sociocultural. In this subtopic,
we will describe these elements and their influence on entrepreneurs. Figure 4.2
shows the environmental variables.

Figure 4.2: Environmental variables

Source: Adapted from Kuratko & Hodgetts (2004)
4.2.1 Political and Legislation

The political and legislative segment of a macro environment is the arena in which
different interest groups compete for attention and resources. This is the
environment where entrepreneurs exercise their political power. To a large extent,
entrepreneurs have to take the given political and legislative elements of the new
ventures. They have to obey and adhere to the policy, legislation and regulations
where the business operates.
ACTIVITY 4.2
What do you think is the role of political and legislation segments in

a venture environment? Discuss with your coursemates.

Figure 4.3 shows the political and legislative segment of macro environment.
Figure 4.3: The political and legislative segment of macro environment
There are many political and legislative differences between one country and
another. Entrepreneurs should be aware of global issues pertaining to trade
barriers, tariffs and political risks, as well as bilateral and multilateral
relationships. All these issues are interrelated. The following looks at the different
segments of global and national issues shown in Figure 4.3 in further detail.
(a) Trade Barriers and Tariffs

Trade barriers and tariffs are imposed on goods and services that are traded
internationally. They hinder the free flow of resources from other countries
as a protection for the home countryÊs industries. Examples include trade
barriers that are imposed on the automobile industry in Malaysia.
(b) Political Risks

This refers to the potential for instability, corruption and violence in a
country or region where businesses take operate. In regions where political
risks are high, it is difficult and costly for entrepreneurs to buy, protect and
dispose of resources. Other risks include political and physical violence,
extortion and corruption which involve bribes and other forms of unethical
payments. These will add to the cost of new ventures.
(c) Trade Agreements

There is a trend of increasing trade agreements between countries, for
example, the ASEAN Free Trade Agreement (AFTA) that Malaysian
entrepreneurs should consider when making decisions regarding trading
internationally. The goal of this agreement is to increase economic
productivity within the geographical region covered.
National issues entrepreneurs must be aware of are taxation, regulations and

government spending. All these issues are interrelated.

(d) Taxation
This is the major political factor that entrepreneurs face at the national level.
The impact of taxation on business operations are as follows:
(i) Reduces the cash available for business ventures to invest; and
(ii) Some taxes are favourable to only certain businesses and
disadvantageous to others.
(e) Regulations
An example of regulations is the regulation on the use of drugs. However,
sometimes the effect of regulations on businesses is negative. They
sometimes add to the cost of businesses in terms of paperwork, testing,
monitoring and compliance.
Therefore, entrepreneurs should evaluate the political environment thoroughly in

order to identify whether threats or opportunities exist. Generally, political
stability of a country will allow business operations to provide opportunities for
entrepreneurs to start up new ventures or expand their business.
ACTIVITY 4.3
What is the role of AFTA? Discuss in myINPSIRE.
4.2.2 Economy
The economic environment plays a vital role in the success or failure of any new
venture. A macro economic environment encompasses the total of all goods and
services produced, distributed, sold and consumed. Entrepreneurs need to analyse
this environment at the global, national and local levels where their business
operates. Each business is related to one another at these three levels of the macro
economics environment. However, one should know which level has a greater
impact on entrepreneurs. Entrepreneurs should scan, monitor, forecast and assess
the macroeconomic conditions that affect their new venture. They should be able
to see the changes that take place in the economy and be able to determine the
variables that are relevant for analysis.
Figure 4.4 lists out some important questions to be answered by entrepreneurs

regarding the economic environment of new ventures in order to provide an
overall picture of the business climate:

Figure 4.4: Questions to consider regarding new ventures
4.2.3 Sociocultural
The sociocultural environment consists of two highly related aspects:
(a) Demographics; and
(b) Cultural trends.
There are business opportunities that exist in a societyÊs popular culture, for
example, business opportunities for consumer and durable goods, retailing and
services, leisure and entertainment, and housing and construction. Let us take a
look at the two aspects of the sociocultural environment.
(a) Demographic Changes

They occur due to changes in the population, ethnic groups as well as
population structure according to age, gender, geographical location and
population distribution of income. These elements are the contributing
factors to consumersÊ demand, purchasing power and industrial capacity.
Entrepreneurs should also closely examine these elements which contribute
to the creation of markets. However, the demographic trends and changes
are beyond an entrepreneurÊs control. Entrepreneurs need to assess
demographic changes in order to identify business opportunities. For
example, the increasing number of children in a society can create
opportunity for business related activities that service the needs and wants
of this particular group, such as childrenÊs education, food and clothes.

(b) Social Trends

They relate to the modes and manner in which people live their lives.
Lifestyle reflects the peopleÊs tastes and preferences. Entrepreneurs need to
scan and monitor lifestyle changes in order to identify business
opportunities. The variables that require attention are household formations,
work modes and labour force participation rates, education levels, patterns
of consumption and patterns of leisure. Entrepreneurs can use available
information from public and private sources of data to scan and monitor
these changes. Entrepreneurs also need to forecast and assess the meaning of
changes for a new venture by looking after their own self-interest. Thus, they
can predict how people behave.
SELF-CHECK 4.2
Why is the sociocultural environment vital to the entrepreneur?
4.2.4 Technology
The branch of knowledge that deals with industrial arts, applied science,
engineering, process, invention or method can be defined as technology.
Technological analysis requires scanning and monitoring from the time of basic
research through product development and commercialisation. Technological
change takes two forms, which are pure invention and process innovation. The
following explains these two forms.
(a) Pure Invention

Pure invention refers to the creation of something new that is different from
existing technology or products. For this reason, invention usually has
economic value and has no competitors at initial stages and is often a
monopoly by the individual who has the legal right on that invention.
However, there are disadvantages with inventions because there is no
market at the early stage. New inventions can create new markets and
opportunities for business, for example, the invention of semiconductors that
created business opportunities in computers.
(b) Process Innovation

Process innovation refers to small changes in design, product formulation
and manufacturing, materials and distribution. This will be discussed in
further detail in the subtopic on opportunity identification.

Scanning and monitoring changes in technology is not an easy task because

information is not easily available. Even the scientist who is involved in basic
research does not know when the commercialisation stage is reached.
However, it is a great advantage and opportunity if entrepreneurs have this
information.
4.3 MICRO ENVIRONMENT

As mentioned earlier, the microenvironment for a new venture also refers to the
industrial environment. This environment has influence on entrepreneurial
activities and it is difficult for entrepreneurs to influence the elements in the
industry. Entrepreneurs need to plan and implement certain strategies in order to
gain a competitive advantage in the industry. Major influences in the industry
include customers, competitors, suppliers, financial institutions, governmental
agencies as well as non-governmental organisations. Let us now take a detailed
look at these influences.
(a) Customers
Customers are the main target group in business. They consume goods and
services produced by the industry. Customers can be housewives, workers,
students or groups of people. The consumer is „king‰ in the market system.
Some products are consumed by industrial buyers such as dealers, agents,
wholesalers and retailers. This group of people influences the decisions of
entrepreneurs.
(b) Competitors
Entrepreneurs in new venture businesses must really analyse their
competitors in the industry. The competitors are the businesses that fulfil the
same customer needs or have the potential to serve those customers. They
can be identified by asking the customers (of existing business) or potential
customers (of new business) where they can buy the product or services.
Entrepreneurs can also identify them through business directories.
A resource-based competitive analysis grid can be used as a tool to analyse

and rank competitors in the industry. Entrepreneurs can also identify the
strengths and weaknesses of competitors using this tool and help them to
position new ventures. Table 4.1 exhibits the resources-based competitive
analysis.

Instructions: On a scale of 1 to 7, evaluate the competitorÊs resource base. A value of 1

indicates that the firm has absolutely no advantage in the resource area; a value of 4
indicates that the firm possesses about the same resource capabilities as the other
industry participants; a value of 7 indicates that the firm possesses an absolute
advantage in the resource category.
Table 4.1: Resources-based Competitive Analysis
Resource Type
Own Firm 1 2 3 4 5 6 7
and Attribute
Financial Resources
Rare
Valuable
Imperfectly imitable
Non-substitutable
Physical Resources
Rare
Valuable
Non-substitutable
Human Resources
Rare
Valuable
Non-substitutable
Technical Resources
Rare
Valuable
Non-substitutable
Reputation Resources
Rare
Valuable
Non-substitutable
Organisational Resources
Rare
Valuable
Non-substitutable
Total scores ___________________

Grand Mean ___________________
+/ă From mean ___________________

(c) Suppliers
Suppliers are the second group of people who have great influence on
entrepreneurial activities. They can increase the prices they charge for the
products and services they sell. They can also decrease the quality of those
products and services that are in the market.
(d) Financial Institutions

Financial institutions are one of the sources of external funding to initiate a
new business venture or for expanding an existing business. Loans from
financial institutions are not only hard to get for new venture entrepreneurs
because of their lack of track record, but also because of the cost in terms
of interest payment, which burdens the new business. Thus, financial
institutions have a direct influence on entrepreneurs.
(e) Government Agencies

Government influences the entrepreneurial activities through policy
implementation. Some examples include the New Economic Policy,
Privatisation Policy and the Malaysian Agriculture Policy which have been
implemented in our country. Some policies have a direct impact on
entrepreneurial activities. These government policies and regulations have
certain objectives and purposes. The Government also provides some
support for entrepreneurs. This has been discussed in earlier topics of this
module.
(f) Non-Government Organisations

Non-government organisations such as consumer societies, political
organisations, religious groups, business society, environmental groups and
others are among interest groups that can influence entrepreneurs. These
groups can influence entrepreneurs through campaigns against products or
services and by disseminating the information regarding certain products.
Later, these actions can influence customers and pressure the government to
take action on certain issues.
ACTIVITY 4.4
Why do entrepreneurs need to analyse each component of macro and
micro environments? Discuss with your coursemates.

4.4 AN ORGANISATION’S INTERNAL

ENVIRONMENT
An organisationÊs internal environment consists of resources, structure and
culture. These elements influence the entrepreneurÊs decisions and activities.
Entrepreneurs need to assess the strengths and weaknesses in their business before
making any decision or formulating any strategies.
(a) Resources
Among the internal resources in an organisation are the entrepreneur
himself, finances, human resources, tangible and intangible assets,
technology and reputation. Entrepreneurial personality characteristics,
skills, energy, ideas, knowledge and experiences are part of an
entrepreneurÊs resources. All these resources are processed together in the
business venture to produce goods and services.
(b) Structure
Organisational structure must be suitable for a new venture to adapt to
changes in the environment.
(c) Culture
Positive culture and values should be inculcated into the business
organisation for the benefit of all human resources.
4.5 IDENTIFICATION OF BUSINESS

OPPORTUNITY
Opportunities can exist on paper or as ideas. Opportunities can turn a bad
situation or loss into a good situation or profit. According to Myzuka (2000), ID:
please refer to comment in references section opportunity is defined as a business
concept that, if turned into a tangible product or service offered by a business
enterprise, will result in financial profit. Opportunities are usually related to
entrepreneursÊ work experience, hobbies and social environment.
They are also defined as positive external trends or changes that provide unique
and distinct possibilities for innovating and creating value. Opportunity is also
defined as the potential to create something new that involves changes in
knowledge, technology, economy, and in political, social and demographic
conditions.

Most good business opportunities do not suddenly appear but result from an
entrepreneur being alert in identifying potential opportunities. Most entrepreneurs
do not have formal mechanisms for identifying business opportunities. However,
consumers, business associates, members of the distribution system and technical
people are the best sources of ideas for a new venture.
ACTIVITY 4.5
In your opinion, what is a business opportunity? Discuss with your
coursemates.
4.5.1 Recognition of an Opportunity Phase of a

Process Perspective on Entrepreneurship
Recognition of an opportunity is one of the major phases in the process perspective
on entrepreneurship. The entrepreneurial process begins when one or more
persons recognise an opportunity. The opportunities themselves are generated by
economic, technological and social factors. The convergence of these factors offers
an opportunity for an interesting new venture (refer to Figure 4.5).
Figure 4.5: Opportunities emerge out of a confluence of factors

Source: Baron & Shane (2004)

According to Mukesh Chatter (as cited in Baron & Shane, 2004), changing
economic, technological and social conditions generate opportunities; however
nothing happens with respect to these opportunities until one or more energetic,
highly motivated persons recognise them.
Entrepreneurs should be able to identify, pursue and capture the value of business
opportunities. Successful entrepreneurs are those who can capture an opportunity.
Some entrepreneurs seize opportunities through exploration and others from
fortunate circumstances. Entrepreneurs who pursue an opportunity should have
added value to attract customers, distributors and retailers. Peter Drucker, a well-
known management author, has identified seven potential sources of opportunity
in the external context as shown in Table 4.2.
Table 4.2: Sources of Opportunity
Sources of
Situations
Opportunity
The unexpected Opportunities can be found when situations and events are
unanticipated. An event might be an unexpected success/ good
news or unexpected failure/bad news that can be an opportunity
for entrepreneurs to pursue.
The Incongruous situations happen when there are inconsistencies in

incongruous the way they appear. For example, there are opportunities to
capture when conventional wisdom about the way things should
be no longer holds true. In these types of situations, entrepreneurs
who are willing to think beyond the traditional approach may find
a potential possibility.
The process Entrepreneurial opportunities could also surface throughout the

need process of discovery such as the process of research and
development done by the researchers and technicians of a product
or service. Even before a breakthrough, there will be numerous
opportunities which could be seized by entrepreneurs during the
process.
Industry and Changes in technology, social values and customersÊ tastes

market can change the structure of an industry and market. These
structures situations, however, will give entrepreneurs opportunities to
innovate their product or services.
Demographics Changes in demographics will influence industries and markets
upon their target market and market segmentation. These can be
entrepreneurial opportunities in anticipating and meeting needs of
the population.

Change in Perception is oneÊs view of reality. Changes in perception get to the

perception heart of peopleÊs psychographic profiles of what their values are,
what they believe in, and what they care about. Changes in these
attitudes and values create potential market opportunities to alert
entrepreneurs.
New knowledge New knowledge can be a source of opportunities for entrepreneurs.

Examples of new knowledge are new technologies and new
discoveries that can be sources of information for entrepreneurial
innovation. Entrepreneurs who come out with new products and
processes that can compete with other products can manipulate this
kind of knowledge.
4.5.2 E-commerce as a New Opportunity

The evolution of electronic commerce has created many new opportunities and
new businesses. However, building and marketing a business via e-commerce can
be costly. E-commerce offers entrepreneurs opportunities by turning ideas into
exciting new markets. Entrepreneurs can use a website catalogue containing online
information about their company to promote and sell their products or services
online. Technologies that use electronic commerce offer information that assists
customers in making decisions.
Information in e-commerce is available 24 hours a day, with data updated every

half-hour (depending on the company). It enables the enterprise to take customers
through a web experience from the beginning of the customer activity cycle to the
end. It also personalises offerings to suit the unique needs of individuals and
enables interactivity between customers and the enterprise itself. Most
importantly, e-commerce can lower transaction costs.
ACTIVITY 4.6
What are the advantages and disadvantages of e-commerce to the

entrepreneur in creating a new opportunity? Discuss with your
coursemates.
SELF-CHECK

 The components of ventures environment can be divided into:
 The external environment; and
 The internal environment.
 The macro environment involves the following elements:
 Political and legislation;
 Economy;
 Sociocultural; and
 Technology.
 The micro environment is highly influenced by:
 Customers;
 Competitors;
 Suppliers;
 Financial institutions;
 Government agencies; and
 Non-government organisations.
 An organisationÊs internal environment consists of:
 Resources;
 Structure; and
 Culture.
 A business opportunity is a business concept that, if turned into a tangible

product or service offered by a business enterprise, will result in financial
profit.

Business opportunity Resources based

Competitive analysis Sociocultural
External environment Trade barriers and tariff
Industrial environment Ventures environment
Internal environment
Baron, R. A., & Shane, S. A. (2004). Entrepreneurship: A process perspective.

Mason, OH: Thomson South Western.

practice (6th ed.). Mason, OH: Thomson Learning.
Myzuka, D. F. (2000). Evaluating the opportunity: Spotting the market

opportunity. New York, NY: Prentice Hall.

Topic  Business Plan
5
LEARNING OUTCOMES
1. Explain what a business plan is;
2. Explain the importance of business plans;
3. Identify the parties who need business plans;
4. Explain eight essential elements of a good business plan;
5. Discuss six guidelines for preparing a business plan; and
6. Describe five factors that contribute to the failure of business plans.
 INTRODUCTION
Business environments today are dynamic, complex and subject to continual
change. In order to gain and retain sustainable competitive advantage, achieve
stated objectives and a range of efficiencies, an entrepreneur must have a good
business plan. Business planning is one of the management tools used to achieve
business objectives.
Therefore, a company should prepare a convincing business plan to attract

investors. Investors are more prepared to invest in a business when they believe
that the business planning is realistic and profitable based on their forecast of the
business viability. When a business plan is prepared based on correct information,
investors will have confidence in the market, product or service of the company.
The accuracy of a business plan will reflect the managementÊs ability, experience
and history in running the business.

TOPIC 5 BUSINESS PLAN  55
5.1 WHAT IS A BUSINESS PLAN?

A business plan is a written document which describes in detail the overall plans
of a business in which an entrepreneur aims to get involved. Even if the
entrepreneur has been in business for a number of years, committing plan to paper
allows the entrepreneur to re-examine his business as well as to consider new
business opportunities. Therefore, a business plan is the blueprint of a company,
presented in a standard business format that is logical and realistic. A business
plan must communicate ideas and goals clearly. To accomplish this, a plan should
include three things as shown in Figure 5.1:
Figure 5.1: Three main things that an entrepreneur should include in a business plan
According to Utton (2001), a business plan is a detailed programme or road map

outlining every conceivable aspect of an entrepreneurÊs proposed business
venture. It is a comprehensive, self-explanatory plan of what the entrepreneur
intends to do; how the entrepreneur intends to do it, when the entrepreneur
intends to do it; where the entrepreneur intends to do it and why he believes his
idea is viable and profitable. It is, in essence, a structured guideline to achieve the
entrepreneurÊs goals in operating the business.
Besides that, a business plan is an ideal tool to check facts and to comprehensively
examine the practicality of an idea before putting it into action. It gives the
entrepreneur opportunities for realistic expectations and action when taking the
business into operation. On the other hand, it also helps the entrepreneur to
identify areas of strength and weakness, the opportunity to be gained and the
threat to be faced. All these aspects will determine how they can best achieve their
business goals.

56  TOPIC 5 BUSINESS PLAN
Generally, an entrepreneur needs to prepare a workable business plan for the

following purposes:
(a) It forces entrepreneurs to arrange their thoughts in a logical and

structured order.
(b) It helps them to create business frameworks by defining the activities,

responsibilities and objectives to be achieved.
(c) It encourages entrepreneurs to stimulate reality and anticipate pitfalls before

they actually occur.
(d) It helps entrepreneurs to develop strategies to meet those objectives.
(e) It serves as a working action plan or guideline in operating their business.
(f) It enables them to identify constraints that they may face when running the
business.
5.2 IMPORTANCE OF BUSINESS PLANNING

A business plan is very important to an entrepreneur for various reasons
(refer to Figure 5.2).
Figure 5.2: The importance of a business plan
The following is a more detailed explanation of the importance of a business plan

as illustrated in Figure 5.2.
(a) Increase Opportunities for Success

Comprehensive business planning can identify the level of performance that
is supposed to be achieved in business. A business plan will determine the
changes that need to be taken to ensure its success. Changes that need to be

considered are organisational structure, introduction of new technology,

new manufacturing techniques and new programmes for subordinates to
increase their commitment and productivity. Entrepreneurs need to update
their knowledge and skills to increase their opportunity for success.
(b) Develop Mission and Vision

A business plan can set a clear mission and vision for a business. It enables
the entrepreneur to make the right decisions and take appropriate actions.
The mission and vision will act as a lighthouse to enable entrepreneurs to
know the direction they are moving. The entrepreneurs should communicate
the mission and vision to all the stakeholders to gain their confidence.
(c) Identify the Main Competitor(s)

Business planning will enable entrepreneurs to determine who their main
competitors are, their strengths and weaknesses, and determine the right
strategy to face them. All these can be done by competitive analysis to
identify the competitorsÊ product line or service as well as their market
segment. The entrepreneur should identify all key competitors for each of
their products or services and estimate how long it will take before new
competitors enter the marketplace.
(d) Identify the Right Way of Managing the Business

A business plan gives room for entrepreneurs and their employees to
develop an effective strategy to run the business. They can define who, when
and how to tender their knowledge, skills and abilities in implementing the
business. The entrepreneurs should also ensure that their products and
services are in line with the customersÊ tastes, government policies and other
changes in the business environment.
(e) Increase StakeholdersÊ Confidence

Every stakeholder who has an interest in a business will want to know the
companyÊs strengths like finances, resources and company viability. This
information is necessary for the stakeholder to determine the return on his
investment. For example, before a financial institution agrees to provide the
loan needed by the entrepreneur either to start or to expand his business,
they would want to know the prospects of the business, and the ability to
repay the loan. On the other hand, suppliers also want to know the strength
of the entrepreneursÊ financial position before they give credit for their
materials. In addition, government agencies would want to know the
background and nature of the business before they allow the company to
operate.

(f) Identify Barriers to Business

When implementing a business, an entrepreneur is bound to face many
barriers. These barriers will cause failure or slow down the entrepreneurÊs
progress if not properly managed. Therefore, the entrepreneur should
identify the barriers he may face before implementing the business and take
necessary action to face them. The entrepreneur knows how far those barriers
will affect him and his business.
(g) As a Performance Tool

A business plan is an operating tool which, if properly prepared, will help
the entrepreneur to work effectively towards success. The business plan will
allow the entrepreneur to set a realistic target to be achieved as a
performance yardstick. Therefore, the business plan will provide the basics
for evaluating and controlling the companyÊs performance in the future, in
terms of profit, cost and quality. It is also used to achieve performance
targets, to analyse customersÊ behaviour trends, competitorsÊ strengths, and
internal and external economic performances.
ACTIVITY 5.1
Why are business plans important for entrepreneurs? Discuss with
your coursemates
5.3 WHO NEEDS A BUSINESS PLAN?

A business plan is very important to various parties. Among those who need
business plans are:
(a) The Management Team

A business plan will enable the management team to consider the time, effort
and support needed to achieve the companyÊs goal. It will provide them with
opportunities to analyse critical situations that will hinder business progress.
It will also enable them to forecast changes that might occur in the future.
The management team must also analyse the reasons for the success and
failure of the company as well as threats and opportunities that would be
faced in the future. Therefore, the team must build and examine the strategies
and priorities that should be clearly described and communicated to ensure
company growth. The management team is responsible for setting a
reasonable benchmark as a comparison for the companyÊs success. Besides
that, a business plan will enable the management team to identify difficulties
and constraints faced by the employees in achieving the target.
(b) The Shareholders

Business planning is also important to shareholders. They must know how
the business is to be conducted since their approval is necessary if changes
in target and strategy are to be made. So, they need to know about any new
decisions before they are executed. A business plan is an essential document
for shareholders because it plays a vital role in critically reviewing the draft
plan. The entrepreneur should inform them about the future market of the
products or services, business operations, financial projections and future
plans, such as expanding the business to international markets. The business
plan is also important for new ventures or new businesses in order to secure
potential new shareholders.
(c) Bankers or Creditors

Before approving a loan application, bankers will need to study the
entrepreneurÊs business plan. This plan will give them an indication of the
returns they may expect from their loan and also enable them to gauge the
viability of the venture and its profitability within a reasonable time frame.
The business plan will also give bankers an idea of the companyÊs strategies
and priorities. These must be clearly described in the plan and consistent
with the overall departmental strategy policy, functional objectives and
reporting requirement. From the business plan, bankers will also be able to
ascertain government grants and tax incentives available to the entrepreneur.
(d) Customers
Customers will also be interested in the business plan for information
regarding the company which will influence their decision to use its products
or services. Issues of interest include the quality and safety of the companyÊs
product. To gain customersÊ confidence, the business plan should also
include the price of the product, durability, features and additional support
or after sales services. Customers will have more confidence if the product
uses new technologies, is authorised by parties such as SIRIM and JAKIM,
and is in line with their culture.
(e) Suppliers
Suppliers need a business plan when considering approval for business
procurement on credit terms. Suppliers want to see the ability of a business
to pay back the credit on time. Thus, a good business plan is able to give a
clear picture of the capability of the business.
(f) The Employees

Most potential employees want information about business developments
and performance before they decide to join an organisation. They can get this
information from the business plan.

5.4 ESSENTIAL ELEMENTS OF A GOOD

BUSINESS PLAN
Every successful business plan should include something about each of the
essential elements of a good business plan (refer to Figure 5.3).
Figure 5.3: The eight essential elements of a good business plan
LetÊs look at these essential elements in further detail.
(a) Executive Summary

The executive summary is the most important section of a business plan. This
is the first section that needs to be looked at and it should tell readers where
the company is and where it is headed. Among the elements included in the
executive summary are the mission statement, the starting date of the
business, the name of the founders and the roles they play, the number of
employees, location of the business and their branches or subsidiaries (if
any), description of plans or facilities, products manufactured, bankersÊ
names, the progress of the company and its growth, financial status and a
summary of the managementÊs future plans.

(b) Market Analysis

The market analysis section illustrates the entrepreneurÊs knowledge about
a particular industry in which the business operates. It should also present a
general overview and conclusion of any marketing research data that has
been collected. However, specific details of marketing research studies
should be moved to the appendix section of the business plan. This
section should include an industry description and outlook, target
market information, market test results, lead times and an evaluation of
competition.
(c) Marketing and Sales Strategies

Marketing is the process of creating and attracting customers to the business.
Entrepreneurs should realise that customers are the lifeblood of a business.
A business plan should include a sales forecast based on market analysis. In
this section, the most important thing to do is to define the marketing
strategy. Marketing strategy should be a part of an ongoing self-evaluation
process and unique to the company. An overall marketing strategy would
include strategies for market penetration, business growth, channels of
distribution and communication. Overall sales strategy should include sales
force strategies and sales activities. It is also important to include the
marketing budget in this section.
(d) Services or Product Line

This section describes the uniqueness of the companyÊs services or products
and the benefits to potential and current customers. The entrepreneur should
focus on the areas where a distinct advantage exists by identifying the
problem for which the service or product provides a solution.
(e) Organisation and Management

This section includes companyÊs organisational structure, details about
the ownership of the company, a profile of management teams and the
qualifications of members of the board of directors, the remuneration plan
and the administrative budget.
(f) Funding Request

This section focuses on the amount of funding needed to start or expand the
business. If necessary, it can include different funding scenarios such as with
and without funding and their implications on the business. Therefore, this
section consists of project implementation cost, which includes capital
expenditure, operational expenditure, and sources of finance or funding. It
also

includes funding requirements at present and over the next five years, how
the funds received will be utilised and any long-term financial strategies that
would have an impact on the companyÊs financial progress.
(g) Financials
Financials should be developed after analysing the market and setting clear
objectives. In this section, the entrepreneur shows clearly the financial
projections such as cash flow pro forma, profit and loss pro forma, balance
sheets projections, etc.
(h) Appendix
The appendix section should be provided to readers on an as-needed basis.
In other words, it should not be included in the main body of the business
plan. The business plan is a communication tool. As such, it will be seen by
many people. The appendix includes a credit history, resume of key
managers, product pictures, letters of reference, details of market studies,
relevant magazine articles, licences, permits, legal documents, copies of
leases, building permits, contracts and list of business consultants, including
attorneys and accountants.
ACTIVITY 5.2
You are an entrepreneur who is running a bakery selling traditional

cakes at a local shopping mall. What are the details you will include
under the Marketing and Sales Strategy in your business plan? Discuss
with your coursemates and write down the details.
SELF-CHECK 5.1
What are the important elements of a good business plan?
5.5 GUIDELINES ON PREPARING A BUSINESS

PLAN
It is important to have an idea of how to prepare a business plan, so that you will
be better prepared at tackling obstacles that come your way. Figure 5.4 shows the
six guidelines to be followed in order to produce an effective business plan.

Figure 5.4: Guidelines on preparing a business plan

5.5.1 Pitfalls to Avoid in Planning

According to Kuratko and Hodgetts (2004), there are a number of pitfalls that should
be avoided by entrepreneurs in the formulation of a business plan. Some of these are
common errors that are usually committed by entrepreneurs and are easily noticed.
Table 5.1 describes five pitfalls and steps to be taken to avoid them.
Table 5.1: Pitfalls in Planning
Pitfall Facts How to Avoid

No realistic  Some of the business plans do not contain Good business plan should
goals attainable and clear goals that include a clear schedule with
entrepreneurs are trying to achieve. specific steps of action to be
 Lack of time frame. accomplished within a
specific time frame.
 No priorities.
 No action steps in the business plan.
Failure to Sometimes, entrepreneurs are so immersed in List down possible obstacles
anticipate their ideas that they are unable to see the that may arise and steps or
obstacles possible problems that may arise. There are no contingency plans if the
indicators to recognise the problems, no problems occur.
admission of possible mistakes or weaknesses
in the plan and contingency plans do not exist.
No Many entrepreneurs appear to lack commitment Entrepreneurs should follow
commitment to their business. Entrepreneurs should not give up important appointments
or dedication the impression that they donÊt take matters and be willing to demonstrate
seriously in doing business. The obvious financial commitment to their
indicators of lack of commitment are: business.
 Excessive procrastination.
 Missed appointments.
 No desire to invest personal money.
 Desire to make a quick profit.
Lack of Many investors look for entrepreneurs with They should give evidence of
business or actual experience and not merely with ideas, personal experience and
technical and who have true knowledge in the proposed background for this venture.
experience business. Thus, entrepreneurs should If they lack specific knowledge
demonstrate their knowledge and background or skills, they should get
experience in their business areas. assistance from those with
suitable qualifications.
No market Many entrepreneurs do not identify potential The best way to avoid this
niche customers for their products. Many new pitfall is to establish a
potential products never reach the customer specifically targeted market
because of the lack of a market niche or no segment and demonstrate
market was ever established for that product. why and how a specific
product or service will meet
that target group.

Entrepreneurs should avoid these pitfalls in order to improve the chances of their
business plan succeeding. These critical areas must be handled carefully before
developing their business plan. This will help the entrepreneur to establish a solid
foundation on which to develop an effective business plan.
SELF-CHECK 5.2
Describe the factors which contribute to the failure of business plans.
 Business planning is a management system. It integrates the management

functions of planning, organising, implementing and controlling.
 The business planning process provides management with basic tools and
information that describe the management and resource environment and
contributes to establishing the accountability framework needed to manage a
business in a dynamic environment. So, the execution of business planning is
very important to ensure the survival and expansion of the business.
Business plan Product line

Executive summary Pitfalls
Management function Shareholders
Market analysis Stakeholders

Utton, P. (2001). The importance of the business plan. Retrieved from

http://allafrica.com/stories/200109180286.html

Topic  Starting a New
6 Entrepreneurial
Venture
LEARNING OUTCOMES
1. State the three forms of business;
2. Explain the three phases in a start-up;
3. Explain the seven steps and processes in the buying of existing
business ventures;
4. Examine the franchise structure, its advantages and disadvantages;
5. Discuss the legal structures for new ventures; and
6. Identify six sources of capital for entrepreneurs.
 INTRODUCTION
Do you know what is an entrepreneur? According to Dictionary.com an
entrepreneur is a person who organises any enterprise, especially a business,
usually with considerable initiative and risk. So are you interested in becoming an
entrepreneur? Do you know how to set up a new business?
In this topic, we will examine the three most common types of businesses which are:
(a) Start-up;
(b) Buying an existing business; and
(c) Franchising.
We will also look into legal structures for new businesses and sources of capital
for business activities.

TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE  67
6.1 START-UP
In starting up a business, it is important that you know the definition of a start-up,
the phases in a start-up as well as the advantages and disadvantages of a start-up.
We will look at all these aspects in this subtopic. Let us start with defining a start-
up. Have a look at the following definition:
A start-up company is a company recently formed. It is a process where the

entrepreneur creates a completely new business starting from scratch.
Below are a few features of a start-up company:

(a) Many entrepreneurs start up their business by themselves;
(b) Usually, entrepreneurs will use funds from their savings or by borrowing
from others;
(c) An entrepreneur who wants to start up his business usually needs to have
lots of experience, knowledge, skills and interest in the field involved; and
(d) Start-up business usually involves the invention of new products or services.
6.1.1 Phases in Start-up

Any new business goes through three phases in start-up. They are pre start-up
phase, start-up phase and post start-up phase. Figure 6.1 illustrates the three
phases in a start-up.
Figure 6.1: Phases in start-up

68  TOPIC 6 STARTING A NEW ENTREPRENEURIAL VENTURE
6.1.2 Advantages and Disadvantages of Start-up

There are a few advantages and disadvantages of a business start-up. Table 6.1
describes six advantages and five disadvantages of start-up.
Table 6.1: Advantages and Disadvantages of Start-up
Advantages Disadvantages
 The freedom of making oneÊs own  It requires a lot of time, money and
decisions like answering all questions additional effort to search for a
such as when, how and what type of strategic location, obtain a licence,
products or services. purchase machines, find new
 The opportunity of using oneÊs suppliers, and hire and train new
ideas and developing own image workers to perform advertising
by identifying with the customerÊs activities.
needs.  In the initial stage of the business,
 The freedom to select the ideal an entrepreneur will obtain minimal
location, plant, equipment, products profits or losses because of the
or services, employees, suppliers large expenditure on numerous items
and bankers. These opportunities can related to start-up.
determine the success of a business.  There is no history of business
 The ability to avoid any undesirable records in which an entrepreneur can
precedents, policies, procedures and forecast sales, expenditures and
legal commitments of existing firms. profits.
 Will not affect the reputation of the  There are no ready customers. An
business because it is a new business. entrepreneur needs to take a lot of
effort to attract new customers and
 Ability to make changes to business. sales will expand very slowly and it
will take a long time before the
business brings in profits.
 The difficulty of obtaining loans from
financial institutions because these
institutions have less confidence in
new businesses compared with
established businesses.
ACTIVITY 6.1
You are planning to sell seafood-based crisps. Can you think of a way
to start your venture? List and compare your answer with those of your
coursemates.

SELF-CHECK 6.1
1. Define a start-up.
2. List the three phases in a start-up.
3. What are the critical factors that are important for new venture
assessment?
6.2 BUYING AN EXISTING BUSINESS

In buying an existing business, it is important for you to know:
(a) The definition of buying an existing business;
(b) The steps and processes in buying an existing business;
(c) The advantages of buying an existing business; and
(d) The disadvantages of buying an existing business.
Let us start by defining what „buying an existing business‰ means. Have a look
at the following definition.
Buying an existing business is buying or acquiring either the shares of an

existing company or all of the assets of an existing company or business.
If you are thinking of running your own business, buying a company that is
already established may be a lot less hassle than starting from scratch. According
to some business experts, buying an existing business is the safest and most
effective way for entrepreneurs to go into business. However, you will need to put
time and effort into finding the business that is right for you. Buying an existing
company allows the company to expand and provide the opportunity to enter new
markets.

6.2.1 Steps and Processes in Buying an Existing

Business
When buying an existing business, there are a few steps and processes that need
to be considered. These are as follows:
(a) Personal Priority

Ideally an entrepreneur needs to consider personal factors, lifestyles and
aspirations. Before you start looking, think about what you can bring to the
business and what you would like to get back in return.
(i) Your expectations in terms of earnings ă What level of profit do you

need to aim for to accommodate your needs?
(ii) Your commitment ă Are you prepared to put in hard work and
investment in the business to succeed?
(iii) Your strengths ă What kind of business opportunities will give you the
chance to put your background, experience and skills to good use?
(iv) The type of business ă Sole proprietorship, partnership, etc. that you
are interested in buying.
(v) The business sector you are interested in ă Learn as much as you
can about your chosen industry so that you can compare different
businesses.
(b) Business Opportunities

You can find potential opportunities by reading classified advertisements,
discussing opportunities with business brokers and checking industry
sources. Resist the temptation to buy the first business that looks good; step
back and look at it objectively.
Make an appointment with business sellers or brokers for initial introduction

to the opportunities. They should provide you with a brief financial report,
history, price and reason for sale. This will allow you to know more about
the business and how long it has been for sale.

(c) Reviewing Potential Target

The potential target must be examined closely to determine how well it
has been managed and maintained. For service businesses, speak to the
employees and even customers. Prepare a checklist of information needed,
which should include the following:
(i) Complete financial accounting of operations, including all income tax

returns and state sales tax forms for at least the past three years.
(ii) List all assets to be transferred to the new owner, including an itemised
breakdown of all inventories as of the last accounting period.
(d) Arrangement for Financing

Without proper financing, no business acquisition can move forward
successfully. There are usually several funding options. They must be
carefully scrutinised to determine the best fit for your needs. Lenders
generally require:
(i) Details of the business/sales particulars;
(ii) Accounts for the last three years;
(iii) Financial projections (if no accounts are available); and
(iv) Details of your personal assets and liabilities.
(e) Conduct Due Diligence

Due diligence is like detective work. It is the process of gathering information
by conducting investigations, searches as well as inquiries and is vital to any
share or asset purchased. The result of due diligence may help you decide:
(i) Whether to proceed with an acquisition;
(ii) Whether to buy shares or assets;
(iii) How much to pay and how to allocate the purchase price; and
(iv) What matters need to be covered in the purchase agreement for your
protection.

The process should guide your decision-making by providing valuable

insights into the new business and give you a good estimate of the value
at which a transaction should be undertaken, and the warranties and
indemnities that should be obtained from the vendors as part of the deal.
(f) The Formal Agreement

The preparation of the formal agreement gives the parties the opportunity to
carry out the basic agreement and work out a number of smaller matters, which
may not have been thought of by the parties in their initial negotiations. The
three basic components of the formal agreement are as follows:
(i) The basic elements

The first part of the agreement will usually cover the basic elements of
the agreement:
 The parties;
 The assets or shares being purchased;
 The purchase price;
 Adjustments to the purchase price, how, when the purchase price

and adjustments will be paid; and
 How tax will be handled.
(ii) Representations and warranties

They are given primarily by sellers on those matters, which are
important to your purchase of the business. You first have to consider
what facts and issues are important to your decision to purchase the
business and the amount you are willing to pay. Then, in addition to
conducting your due diligence on those matters, you will look for a
representation or warranty from the seller which proves that the
facts as represented to you are true. This is intended to protect you,
should there be other facts or information that you do not know about,
or if the seller has misled you on some important matter.

(iii) Closing matters

This portion of the agreement will generally set out the closing date,
and what must be exchanged at the time of the closing. It will also set
out any special conditions of closing which must be met before the sale
can be finalised. The typical conditions of closing are:
 All representations and warranties given prior to closing continue

to remain true and accurate as of the date of closing;
 You will receive the purchase assets or shares free and clear of all
encumbrances, except those to which you have agreed;
 Any special licences or consent have been received;
 All government clearance certificates or approvals have been

received;
 All other documents that form part of the transaction have been
signed and received; and
 You have tendered the payment as promised in the agreement.
(g) Ready for Business

At this point, you are the proud owner of a new business. If you have
conducted yourself with due diligence and have a good purchase agreement
in place, you are well on your way to success. Nevertheless, you may still
need ongoing consultation with the prior owners. So, it is always wise to
keep a good working relationship with them. You may also require the
ongoing assistance of your team of advisors because even though the
transaction is complete, the work has just begun.

6.2.2 Advantages of Buying an Existing Business

The advantages of buying an existing business are shown in Figure 6.2.
Figure 6.2: The advantages of buying an existing business

6.2.3 Disadvantages of Buying an Existing Business

The disadvantages of buying an existing business are shown in Figure 6.3.
Figure 6.3: The disadvantages of buying an existing business
ACTIVITY 6.2
Ali is planning to run a „nasi kandar‰ stall in Bangsar, Kuala Lumpur.

Dewi, who is AliÊs friend, asks Ali to buy her existing stall. What are the
benefits if he buys DewiÊs stall as compared with setting up a new stall?
Discuss with your coursemates.

SELF-CHECK 6.2
1. List five advantages and five disadvantages of a start-up.
2. Define what is meant by buying an existing business.
3. List five advantages and disadvantages of buying an existing

business.
6.3 FRANCHISING
When we talk about franchising, it is important to know:
(a) The definition of franchising;
(b) The advantages of franchising; and
(c) The disadvantages of franchising.
Before we discuss the advantages and disadvantages of franchising, have a look at

the following definition.
A franchise is any arrangement in which the owner of a trademark, trade name

or copyright has licensed others to use it and sell its goods or services.
A franchisee (a purchaser of a franchise) is generally legally independent but

economically dependent on the integrated business system of the franchisor
(the seller of the franchise). A franchisee can operate as an independent business
person but still realise the advantages of regional or national organisations. Some
examples of these franchises are McDonaldÊs (see Figure 6.4), Kentucky Fried
Chicken and Pizza Hut restaurants.

Figure 6.4: Examples of well-known franchises
6.3.1 Advantages of Franchising

Well, do you have any idea what are the advantages of franchising? Figure 6.5
shows some advantages of franchising.
Figure 6.5: The advantages of franchising
Let us look at the advantages in detail.
(a) Training and Guidance

The greatest advantage of buying a franchise, as compared with starting a
new business or buying an existing business, is that the franchisor will
provide both training and guidance to the franchisee.

(b) Brand Name Appeal

An entrepreneur who buys a well-known national franchise, especially a
large and famous one, has a good chance of succeeding. The franchisorÊs
name is the drawcard for the establishment. People are often aware of the
products or services offered by a national franchise and prefer them to those
offered by lesser known outlets.
(c) Proven Track Record

The franchisor has already proven that the operation can be successful. As
an organisation, they have been around for at least five to 10 years and must
have 50 or more units. Thus, it should not be difficult to see how the
operations have been thriving. If all of the units are still in operation and the
owners report that they are performing well financially, we can be certain the
franchisor has proven that the layout and location of the store, the pricing
policy, the quality of the goods or services and the overall management are
successful.
(d) Financial Assistance

A franchise is a good investment because the franchisor may be able to
help the new owner to secure the financial assistance needed to run the
operation. In fact, some franchisors have personally helped the franchisee get
started by lending money and not requiring any repayment until the
operation is running successfully. In short, buying a franchise is often an
ideal way to ensure assistance from the financial community.
6.3.2 Disadvantages of Franchising

The following are the disadvantages of franchising:
(a) Franchise Fees

No one gets something for nothing. The more successful the franchisor, the
greater the franchise fees would be. A franchise of a national chain would
charge a fee from RM5,000 to RM100,000. Smaller franchisors or those who
have not had great success would charge less. The prospective franchisee
must also pay for building the unit and stocking it, and although the
franchisor may provide assistance in securing a bank loan, additional fees
are usually tied to gross sales. A franchisee will have to pay a continual
royalty based on sales, usually between five and 12 per cent. Most franchisors
require buyers to have 25 to 50 per cent of the initial costs in cash. The rest
can be borrowed from the organisation itself. The cost of franchising involves
the following expenditure:

(i) Franchising fee;

(ii) Insurance;
(iii) Opening product inventory;
(iv) Remodelling and leasehold improvements;
(v) Utilities charges, payroll, debt services;
(vi) Bookkeeping and accounting fees, legal and professional fees;
(vii) State and local licences; and
(viii) Permits and certificates.
(b) Franchisor Control

In a large corporation, the company controls the employeeÊs activities. The
same situation exists in a small business. If an entrepreneur has a personal
business, he or she exerts control over his or her own activities. To a franchise
operator, the control is between these extremes. The franchisor generally
exercises control over the operation in order to achieve a certain degree of
uniformity. If entrepreneurs do not follow the franchisorÊs directions, they
may not have their franchise licences renewed when the contract expires.
(c) Unfulfilled Promises

In certain cases, among lesser known franchisors, the franchisees may not
receive all that they were promised. Many franchisees find themselves
with trade names that have no drawing power. Also, many franchisees
find the promised assistance from the franchisor not forthcoming. Quite
often, instead of being able to purchase supplies more cheaply through
the franchisor, many operators find themselves paying higher prices for
supplies. If the franchisees complain, they risk having their agreement with
the franchisor terminated, revoked or not renewed.
ACTIVITY 6.3
Is operating a franchise business more expensive compared with other

types of ventures? What is your opinion on this? Discuss with your
coursemates.

6.4 LEGAL STRUCTURES FOR NEW BUSINESS

Before deciding how to organise an operation, prospective entrepreneurs need
to identify the legal structures that will best suit the demands of the business. The
obligation for this is derived from changing tax laws, liability situations, the
availability of capital and the complexity of business formation. Three primary
legal forms of organisation are sole proprietorship, partnership and corporation.
Because each form has specific advantages and disadvantages, it is impossible to

recommend one form over the other. The entrepreneurÊs specific situations,
concerns and desires will dictate his choice.
6.4.1 Sole Proprietorship

A business is owned and operated by one person. The enterprise has no existence
apart from its owner. This entrepreneur has rights over all its profits and bears all
of the liabilities for the debts and obligations of the business. The entrepreneur also
has unlimited liabilities, which means his or her business and personal assets stand
behind the operation. If the company cannot meet its financial obligations, the
owner may be forced to sell the family car, house and whatever assets that would
satisfy the creditors.
To become a sole proprietor, a person merely needs to obtain the necessary local
and state licences to begin the operations. If the proprietor should choose a
fictitious or an assumed name, he or she also must file a „certificate of assumed
business name‰ with the state. Due to its ease of formation, the sole proprietorship
is the most widely used legal form of organisation. Table 6.2 describes the
advantages and disadvantages of sole proprietorship.

Table 6.2: Advantages and Disadvantages of Sole Proprietorship
 Ease of formation  Unlimited liability

Less formality and fewer restrictions The entrepreneur proprietorship is
are associated with establishing a personally responsible for all
sole proprietorship than with any business debts. This liability
other legal form. The proprietorship extends to all of the proprietorÊs
needs little or no governmental assets.
approval, and it is usually less
 Lack of continuity
expensive than a partnership or
The enterprise may be crippled or
corporations.
terminated if the owner becomes ill
 Sole ownership profits or dies.
The proprietorship is not required to
 Less available capital
share profits with anyone.
Ordinarily, proprietorships have
 Decision-making and control vested less available capital than other
in one owner types of business organisations, such
No co-owners or partners to be as partnerships and corporations.
consulted in the running of the
 Relatively difficult to obtain long-
operation.
term financing
 Flexibility Because the enterprise rests
Management is able to respond exclusively on one person, it often
quickly to business needs in the form has difficulty raising long-term
of day-to-day management decisions. capital.
 Relative freedom from governmental  Relatively limited viewpoint and
control experience
Except for requiring the necessary The operation depends on one
licences, there is very little person and this entrepreneurÊs
governmental interference in the ability, training, and expertise will
operation. limit its direction and scope.
 Freedom from corporate business
taxes
Proprietorship is taxed as
entrepreneur taxpayer and not as
business.

SELF-CHECK 6.3
1. Define briefly the three legal forms of organisation.
2. List five advantages and disadvantages of a sole proprietorship.
6.4.2 Partnership
A partnership is an association of two or more persons acting as co-owners of a
business for profit. Here, each partner contributes money, labour or skills and each
shares the profits as well as losses of the business. Though not specifically required
in the uniform Partnership Act, written articles of partnership are usually executed
and are always recommended. This is because unless otherwise agreed to in
writing, the court assumes equal partnership; that is, equal sharing of profits,
losses, assets management and other aspects of the business. A partnership
agreement clearly outlines the financial and managerial contributions of the
partners and carefully delineates the roles in the partnership relationship.
The following are examples of the type of information customarily written into a
partnership agreement:
(a) Name, purpose, domicile;
(b) Duration of agreement;
(c) Character of partners (general or limited, active or silent);
(d) Contribution by partners (at inception, at later date);
(e) Division of profits and losses;
(f) Draws or salaries;
(g) Right of continuity partner(s);
(h) Death of a partner (dissolution and wind-up);
(i) Release of debts;
(j) Business expenses (method of handling);
(k) Separate debts;
(l) Authority (entrepreneur partnerÊs authority on business conduct);
(m) Books, records and method of accounting;

(n) Sale of partnership interest;

(o) Arbitration;
(p) Settlement of disputes;
(q) Additions, alterations or modifications of partnership;
(r) Required and prohibited acts;
(s) Absence and disability; and
(t) Employee management.
In addition to the written articles, entrepreneurs must consider a number of different

types of partnership arrangements. Depending on the needs of the enterprise, one
or more of these may be used. It is important to remember that in a typical
partnership arrangement, at least one partner must be a general partner who is
responsible for the debts of the enterprise and who has unlimited liabilities. Table
6.3 describes the advantages and disadvantages of partnership.

Table 6.3: Advantages and Disadvantages of Partnership
 Ease of formation  Unlimited liability of at least one

Legal formalities and expenses are few partner
compared with those of a complex Although some partners can have
enterprise or corporation. limited liability, at least one must be a
general partner who assumes unlimited
 Direct rewards liability.
Partners are motivated to put forth their
best effort by direct sharing of profits.  Lack of continuity
If any partner dies, judged to be insane
 Growth and performance facilitated or simply withdraws from the business,
In a partnership, often it is possible to the partnership arrangement ceases.
obtain more capital and better range of However, operations of the business
skills than in a sole proprietorship. can continue based on the rights of
 Flexibility survivorship and the possible creation
A partnership is often able to respond of a new partnership by the remaining
quickly to business needs in the form of members or by the addition of new
day-to-day decisions. members.
 Relative freedom from governmental  Relatively difficult to obtain large sums

control and regulation of capital
Very little governmental interference Most partnerships have some problems
occurs in the operation of a partnership. raising a great deal of capital, especially
when long-term financing is involved.
 Possible tax advantage Usually the collective wealth of the
Most partnerships pay taxes as partners dictates the amount of total
entrepreneurs, thus escaping the higher capital the partnership can raise,
rate assessed against corporations. especially when first starting out.
 Bound by the acts of just one partner
A general partner can commit the
enterprise to contracts and obligations
that may prove disastrous for the
enterprise in general and for other
partners in particular.
 Difficulty of disposing of partnership
interest
The buying out of a partner may be
difficult unless specifically arranged for
in written agreement.
SELF-CHECK 6.4
State five advantages and disadvantages of partnerships.

6.4.3 Corporation
A Corporation is „an artificial being, invisible, intangible, and existing only in

contemplation of law‰.
Source: Adapted from Supreme Court Justice John Marshall, (1819).
From this definition, it is clear that a corporation is a separate legal entity apart
from the entrepreneurs that own it.
In Malaysia, a business organisation is created based on the Companies Act 1965.

This Act is the law that governs all companies in Malaysia. This Act was enacted
on 15 April 1966 and has been revised several times since. This Act was based on
company law enacted in Australia and the UK. The following looks at the
characteristics of a corporation as well as its advantages and disadvantages.
(a) Characteristics of a Company or Corporation

The following are characteristics of corporations:
(i) Rights and responsibilities

A corporation has responsibility over ownership of capital and can take
legal action against others or vice versa. However, a corporation cannot
take action against the entrepreneur. The implementer agent, the
driving force behind the corporation, will take action where necessary.
(ii) Life span

The life span of a corporation is not dependent on its members. The
corporation will continue even if its members have died or withdrawn
from the corporation. However, the corporation can be terminated if all
its members are not interested in continuing their business.
(iii) Liabilities
The liabilities of members of a corporation are only limited to the
amount of shares they subscribed. Therefore, members are not liable
even if the corporation were to incur bankruptcy. Corporations differ
from sole proprietorship and partnership in which there is no
separation in terms of business assets and personal assets. Hence,
where debt liability is involved, creditors may claim the personal assets
of the sole proprietor or partners of the firm.

(iv) Members
A corporation must have at least two members that are permanent
residents of Malaysia. The two members involved must act as directors
and the cornerstone of the corporation. In a corporation, its members
will elect the board of directors, which will be responsible for operating
the corporation as well as following specified rules and regulations as
stipulated by the Companies Act 1965.
(b) Advantages and Disadvantages of Corporation

The advantages and disadvantages of corporations are shown in Table 6.4.
Table 6.4: Advantages and Disadvantages of Corporation
 Limited liability  Restriction on activities

The stockholderÊs liability is limited to Corporate activities are limited by the
the entrepreneurÊs investment. This is charter and by various laws.
the most amount of money the person
can lose.  Lack of representation
The majority stockholders in the
 Transfer of ownership corporation outvote the minority
Ownership can be transferred through stockholders.
the sale of stock to interested buyers.
 Regulation
 Unlimited life Extensive governmental regulations
The Company has a life separate and and reports required by the state and
distinct from that of its owners and federal agencies often result in a great
can continue for an indefinite period. deal of paperwork and red tape.
 Relative ease of securing capital in  Organising expenses
large amounts A large amount of expenses is
Capital can be acquired through the involved in forming a corporation.
issuance of bonds and shares of stock
and through short-term loans made  Double taxation
against the assets of the business or Income taxes are levied both on
personal guarantees of the major corporate profits and on entrepreneur
stockholders. salaries and dividends.
 Increased ability and expertise
The corporation is able to draw on the
expertise and skills of a number of
entrepreneurs, ranging from major
stockholders to the professional
managers who are brought on board.

SELF-CHECK 6.5
Name five advantages and disadvantages of a corporation.
6.5 SOURCES OF CAPITAL FOR BUSINESS

ACTIVITIES
There are a variety of sources of capital for entrepreneurs that can be used to start,
expand and develop their businesses. The length of time you require will depend
on which of the many different sources of financing that best suits you and your
business. Figure 6.6 shows the sources of capital to finance your businesses.
Figure 6.6: Sources of capital for entrepreneurial activities
The following looks at the different kinds of sources of capital in further detail.
(a) Personal funds

Your personal savings is your first source of money. They may be funds that
you have saved from certain periods of time either in a savings account,
current account, money in a safe at home or cash that is readily available
when you need it. Very often, personal savings are quickly exhausted when
an entrepreneur starts a business.
(b) Family and friends

When you exhaust your personal funds, the next place to seek money is from
family and friends. They may be friends or colleagues who are in a position
to lend you money. Although it may seem like a good idea at the time, you
can almost guarantee that they will demand their money back when you can

least afford it. Therefore, it is important to get the terms of the loan written
down clearly and precisely in order to avoid any confusion later.
(c) Retirement accounts

You have saved these funds for retirement. Therefore, you can use this
money to fund the development of your business. However, the technology
development business is fraught with risks. If you fail in your business, you
may have to live more frugally in retirement.
(d) Banks and other financial institutions

These institutions loan money to people who have assets that can serve as
collateral for the loan. Table 6.5 shows three types of financing: long term,
medium term and short term.
Table 6.5: Three types of Financial Institutions Financing
Type of Financial
Institutions Description
Financing
Long Term This type of finance will be borrowed from external sources
over a long period, usually between 5 and 25 years. A
commercial mortgage or long-term loan agreement from one
of the main banks is an example of long-term financing. The
money can be used for acquiring fixed assets such as plant and
equipment.
Medium Term Any borrowing over a period of 2 to 7 years can be described
as medium-term financing. The finance is commonly based on
an agreement between yourself and the organisation that will
be providing it. It will cover hire purchase, leasing and loan
agreements.
Short Term The most typical and frequently used type of short-term
finance is bank overdraft facilities. Although the arrangement
fees can be high, you have the advantage of only paying
interest on the amount actually overdrawn. With a bank loan,
on the other hand, you have the use of a set amount of money
and you will have to pay interest whether you use the full
amount or not.
(e) Government loans

Contrary to public belief, the government is taking positive steps to
assist businesses and industry as a whole. Millions of ringgit are set aside for
the sole purpose of providing various grants and government subsidised
loans in a bid to encourage investment and development. Government
programmes are available and can reduce the effective interest rate of bank

loans and make debts available to business that would otherwise not have
access to this source of funding. In general, the government is looking to
assist projects which benefit areas of declining industry with a high level of
unemployment as well as promoting growth and improvement in rural
areas.
(f) Stock markets

These funds are obtained by offering stock in your business to the public.
Public stock offering must comply with federal regulations. Typically, the
services of an investment banker are used. In exchange for capital
investment, most offers typically include a percentage of ownership. This in
turn would give your investor a limited amount of control within the
business and share of any profits equal to the value of the percentage of
ownership. This would probably be in the form of dividends.
SELF-CHECK 6.6
Give five sources of capital that an entrepreneur can use in starting up
a business or buying an existing business for new business ventures.
 There are three forms of starting a new business, which are a start-up, buying
an existing business and franchising
 Each form has its own characteristics, advantages and disadvantages.
 Three primary legal forms for new business are sole proprietorship,
partnership and corporation.
 This topic also discussed six sources of capital for entrepreneurial activities,
namely:
– Personal funds;
– Family and friends;
– Retirement account;
– Bank/financial institution;
– Government loan; and
– Stock market.

Corporation Partnership
Due diligence Sole proprietorship
Franchisee Start-up company
Franchising
Companies Act 1965 (Act 125). Retrieved from

http://www.agc.gov.my/agcportal/uploads/files/Publications/LOM/EN
/Act%20125.pdf


Topic  Entrepreneurial
7 Networking
LEARNING OUTCOMES
1. Describe three advantages of establishing good networking;
2. Discuss two types of networking; and
3. Explain six important reasons for networking.
 INTRODUCTION
Networking is a business tool that plays a significant role in the entrepreneurÊs
success. If entrepreneurs have very good networking with both external and
internal customers, it will be easier for them to take advantage of business
opportunities and settle some of the problems related to their business. Good
networking relationships will enable them to gain support and cooperation from
networking circles. Therefore, every entrepreneur should develop networking
skills, as it will act as a catalyst to achieve business goals and objectives.
7.1 WHAT IS NETWORKING?

Networking is both an outcome of a past relationship strategy and a resource for
future strategy. Relationship rights and obligations are the results of the resources
which the company initially brought to the network, the experience it gained and
the investment it has made in its relationships. This means that in addition to the
analysis of the companyÊs relationship portfolio and understanding of networking,
this also involves a listing of those additional resources that have been built
through interaction. These could be analysed using a conventional view of the
bases of power which the company may possess.

92  TOPIC 7 ENTREPRENEURIAL NETWORKING
7.2 ADVANTAGES OF HAVING GOOD

NETWORKING
The advantages gained by an entrepreneur from having good networking are as
follows:
(a) Accessibility
Networking is very important for the entrepreneur to gain either tangible or
intangible resources directly or indirectly. Among the tangible resources are
financial support, transfer of technology and accessibility in gaining
information to produce the right product at the right cost and the right time
as demanded by the market. Intangible resources are the moral support,
guidance and confidence provided by various groups to entrepreneurs in
operating their business.
(b) Reputation
Reputation refers to the ability of entrepreneurs to exercise leadership or to
influence the decision-making of other network members, based on the
expertise that they have. A good reputation enables the entrepreneur to
attract members in networking circles to give priority to the products or
services they produce.
(c) Expectations
These can both facilitate and restrict the freedom of the companyÊs actions.
For example, network members could have the expectation that a particular
company will effectively set prices for a number of other companies. On the
other hand, a company may be expected not to take advantage of product
shortages by raising prices or to conform to conventional competition or to
set higher ethical standards than others.
SELF-CHECK 7.1
Outline the advantages that an entrepreneur would gain from good
networking.
7.3 WHAT IS STRATEGIC NETWORKING?

Being a strategic entrepreneur is to envision the future and take the necessary steps
to create that future. Strategic networking, then, is gaining clarity on an
entrepreneurÊs goals and objectives to be achieved in running the business by
utilising their interaction with others and determining the best action that should

TOPIC 7 ENTREPRENEURIAL NETWORKING  93
be taken. While it is tempting to jump into action, it is essential for entrepreneurs

to understand where they are now and where they want to go. Successful
networking is the result of proper planning and careful construction and
execution. Entrepreneurs need to find ways and means to create good networking
and gain maximum benefit from it. Networking should be one of the core
marketing tactics of most independent professionals and small business owners.
Entrepreneurs may use client-centred networking to lessen their reliance on cost
and time in getting and distributing information. Over time, this business building
strategy will reward the entrepreneur with a steady stream of new clients, besides
maintaining existing ones.
7.3.1 Types of Networking

There are two types of networking which are as follows:
(a) Formal Networking

Formal networking is the existing relationship between various people
who have a symbiotic relationship with the entrepreneur. Those who
have networking correlation are better prepared to take the initiative for
creating business opportunities and solving the problems they face in the
networking chain. Every member in the networking circle is ready to share
his experience and strength for mutual advantage.
(b) Informal Networking

Informal networking is established through relationships with childhood
friends, members of oneÊs family and people sharing common interests or
hobbies. It enables an entrepreneur to discuss his business informally,
without making appointments.
Informal networking provides opportunities for the entrepreneur to gain

new information or exchange of information. Services provided by informal
networking members are usually free of charge or with minimal charges.
Usually informal networking will enable the entrepreneur to get opinion,
advice, and moral and financial support. Such support will help
entrepreneurs to be more confident and increase their ability for effective
decision-making and minimises business risks. Members in informal
networking circles include friends, mentors and professionals. Figure 7.1
illustrates the members in an informal networking circle.

Figure 7.1: Informal networking circle
7.3.2 The Importance of Networking

Now let us look at the importance of networking. Figure 7.2 illustrates the
importance of networking.
Figure 7.2: The importance of networking
Let us now look at these factors in further detail:
(a) Build confidence

In business, entrepreneurs may face uncertainties, for example, investment,
losses, competitors and products which cannot penetrate the market. Good
networking can reduce these uncertainties. An entrepreneur may obtain
reliable information on investment opportunities, market share and product
preferences. Networking also helps the entrepreneur to face changes in
business environments, such as:
(i) Changes in competitorsÊ strategies;

(ii) Demographic changes; and
(iii) Changes in customer satisfaction.

TOPIC 7 ENTREPRENEURIAL NETWORKING  95
(b) Reduce bureaucracy

Rigid bureaucracy delays the process of business activities. Networking
helps to reduce red tape in decision-making by:
(i) Speeding up the application process;
(ii) Saving time, finance and other resources;
(iii) Preventing entrepreneurs from repeating mistakes; and
(iv) Eliminating irresponsibility („passing the buck‰).
(c) Increase information

Networking will build an entrepreneurÊs reputation as everybody in the
networking circle will know what the entrepreneur is doing. At the same
time, information like who is who in the networking circles will enable the
entrepreneur to get the information necessary for successful progress of his
business.
(d) Develop trust

Trust is one of the most important factors when establishing networking.
With trust, a member in the networking circle will be prepared to give
priority to the entrepreneurÊs products or services. Trust also motivates
people to promote the entrepreneurÊs products or services by word of mouth.
(e) Create an interdependent situation

SomeoneÊs success might come from anotherÊs contribution. Maybe your
success too comes from someone elseÊs contribution. People, thus, rely on
others. So whatever we do must benefit others. Everybody must react with a
symbiotic spirit. So, the concept of give-and-take is a must for developing
good networking relationships.
(f) Source of creativity

Networking is also a source of creativity for an entrepreneur operating a
business. Various groups in networking circles will help to develop new
ideas to create new products or services, and new ways of producing and
marketing. In addition, members in the networking circle will provide new
business opportunities. All these ideas may come from friends, workers,
customers and distributors. Support and various contributions from various
members of the networking circle will enable entrepreneurs to:
(i) Improve product quality;
(ii) Improve distribution;
(iii) Improve techniques of production;

(iv) Improve the technique for better after sales services; and
(v) Suggest new ways of promoting the product.
 Networking is both an outcome of past relationship strategy and resource for

future strategy.
 The advantages of networking include accessibility, reputation and

expectations.
 There are two types of networking:
 Formal networking; and
 Informal networking. Formal networking is the existing relationship

between various people who have a symbiotic relationship with the
entrepreneur. Informal networking is established through relationships
with childhood friends, members of oneÊs family and people sharing
common interests or hobbies.
 Networking is important because it builds confidence, reduces bureaucracy,

increases information, develops trust, creates an interdependent situation, and
generates creativity.
Formal networking Strategic networking

Informal networking


Topic  Evaluation of
8 Entrepreneurial
Opportunities
LEARNING OUTCOMES
1. Review six common pitfalls in the selection of new venture ideas;
2. Explain eight critical factors involved in new venture assessment;
3. Describe three major factors that underlie venture success;
4. Analyse four evaluation process methods; and
5. Outline the specific activities involved in a comprehensive feasibility
evaluation.
 INTRODUCTION
The number of new ventures has been increasing in the past few years. There are
several reasons for entrepreneurs to start up new ventures. However, as ideas
develop into new ventures, the real challenge is for these companies to survive and
grow.
What will make you a successful entrepreneur? Have you ever thought of the
necessary aspects that you should be familiar with? In order to face the real
challenges in the world of entrepreneurship, you need to have a very deep
knowledge and understanding of the common pitfalls in selecting a new venture.
This topic will help you to identify critical factors for new venture development
and underlying factors of venture success. We will also discuss an effective
evaluation process for new ventures.

98  TOPIC 8 EVALUATION OF ENTREPRENEURIAL OPPORTUNITIES
8.1 PITFALLS IN SELECTING NEW VENTURES

The stage of transition from an idea to a potential venture can be the most critical in
understanding new venture development. Figure 8.1 illustrates six common pitfalls
that an entrepreneur may encounter in the process of selecting a new venture.
Figure 8.1: Six pitfalls in selecting new ventures
Now let us look at a brief description of each pitfall.
(a) Lack of objective evaluation

Many entrepreneurs lack objectivity and do not realise the importance of
careful examination of their work. All ideas should be studied and
investigated to avoid this pitfall.
(b) No real insight into the market
(i) The importance of developing a marketing approach as the basis for a

new venture is often ignored by many entrepreneurs. According to
Levitt (1960), „they show managerial short sightedness‰.
(ii) They fail to take into account the life cycle of a new product/service.
(iii) Entrepreneurs must realise that timing is crucial. Projecting the life
cycle of new products is important, as is introducing the products at
the right moment.

TOPIC 8 EVALUATION OF ENTREPRENEURIAL OPPORTUNITIES  99
(c) Inadequate understanding of technical requirements
(i) Before initiating a new venture, entrepreneurs should conduct a

thorough study of the project.
(ii) Technical problems often arise, taking up a lot of the entrepreneursÊ

time, thus resulting in costly issues.
(d) Poor financial understanding
(i) Costs are often ignored by entrepreneurs. They might also not conduct
proper planning.
(ii) Underestimation of development costs by huge margins is not unusual.
(e) Lack of venture uniqueness
(i) Concepts with special designs and characteristics will attract customers
to a venture. Entrepreneurs would not be able to attract customers if
there is no uniqueness in their ventures.
(ii) Product differentiation is the best way to create awareness among

customers of differences between rivalsÊ products and their own.
(f) Ignorance of legal issues
(i) Major problems can arise if legal issues are overlooked.
(ii) Examples of legal requirements are creating a safe working

environment, ensuring quality control of products and services and
having copyright and patents to protect oneÊs products and creations.
ACTIVITY 8.1
Name two world-renowned firms that have failed in their „new‰

business ventures. What could have been their problems? Share this
information with your tutor and coursemates.
SELF-CHECK 8.1
Describe six pitfalls in selecting new ventures.

8.2 CRITICAL FACTORS FOR NEW VENTURE

DEVELOPMENT
There are several critical factors that affect new venture development. According
to Vesper (1990), an entrepreneur should consider eight vital factors as shown in
Figure 8.2.
Figure 8.2: Eight areas to be considered in new venture development
Table 8.1 shows an assessment checklist that an entrepreneur should use when
developing a new venture idea.

Table 8.1: A Checklist of New Venture Ideas
Area Assessment Question

Basic feasibility of the  Can the product or service work?
venture  Is it legal?
Competitive advantages of  What specific competitive advantage will the
the venture product or service offer?
 How are the competitors likely to respond?
Buyer decision in the  Who are the customers likely to be?
venture  How much will each customer buy and how
many customers are there?
Marketing of the goods and  How much will be spent on advertising?
services  What share of the market will the company
capture?
 Who will perform the selling function?
Production of the goods  Will the company make or buy what it sells?
and services  Are sources of supplies available at
reasonable prices?
Staffing decision in the  How will competencies in each area of the
venture business be ensured?
 Who does the hiring?
Control of the venture  What records will be needed? When?
 Will any special controls be required?
Financing the venture  How much will be needed for development?
 How much is the working capital?
 Who will provide the financing? At what
cost?
ACTIVITY 8.2
What are the critical factors that need to be considered in the
development of a new venture?

8.3 WHY NEW VENTURES FAIL

Many newly established businesses vanish within a year or two. Only a small
percentage of them are successful. According to Bruno, Leidecker and Harder
(1987) and Karakaya and Kobu (1994), there are three major causes of failure of
new ventures, as you can see in Figure 8.3.
Figure 8.3: Three major factors that contribute to the failure of new ventures
Meanwhile, Table 8.2 describes in detail the causes of failure.
Table 8.2: Causes of Failure
Causes of Failure Factors

Product/market  Poor timing
problems  Product design problems
 Inappropriate distribution strategy
 Unclear business definition
 Over-reliance on one customer
Financial difficulties  Initial undercapitalisation
 Assuming debt too early
 Venture capital relationship problems

Managerial  Concept of a team approach (e.g. hiring and promotions

problems based on nepotism rather than qualifications; poor
relationships with parent companies and venture capitalists;
founders who focus on their weaknesses rather than their
strengths; incompetent support professionals).
 Human resource problems (e.g. kickbacks and subsequent
firings; deceit on the part of the venture capitalist; verbal
agreements not honoured; protracted lawsuits).
8.4 THE EVALUATION PROCESS

A critical task in starting a business enterprise is conducting solid analysis and
evaluation of the feasibility of the product/service idea. Entrepreneurs might later
discover that a proposal contains many fatal flaws if the initial analysis was not
properly conducted.
Figure 8.4 illustrates the evaluation process provided by Kuratko and Hodgetts
(2004).
Figure 8.4: Evaluation process

The evaluation process comprises the following steps:
(a) Asking the right questions

Many important evaluation-related questions should be asked. Examples of
questions that entrepreneurs should ask themselves are:
(i) Is it a new product/service idea? Is it proprietary? Can it be patented

or copyrighted?
(ii) Has a prototype been tested by independent testers who try to blow the
system or rip the product to shreds? What are the weak points? Will it
stand up?
(iii) Has it been taken to a trade show? If so, what reactions did it receive?
Were there any sales made?
(iv) Is the product or service easily understood by customers, bankers,

venture capitalists, accountants, lawyers and insurance agents?
(v) What is the overall market? What are the market segments? Can
the product penetrate these segments? Can any special niche be
exploited?
(vi) Has market research been conducted? Who are the competitors?
(vii) What distribution and sales methods will be used?
(viii) How will the product be made? How much will it cost?
(ix) Will the business concept be developed and licensed to others or

developed and sold away?
(b) Profile analysis

A single strategic variable seldom shapes the ultimate success or failure
of a new business venture. In most instances, a combination of variables
influences the outcome. It is important to identify and investigate these
variables before new ideas are put into practice. The results of such a profile
analysis enable the entrepreneur to judge the businessÊ potential.

(c) Feasibility criteria approach

This approach was developed as a criteria selection list from which
entrepreneurs can gain insight into the viability of their venture. According
to Kuratko and Hodgetts (2004), the feasibility criteria approach asks the
following questions:
(i) Is it proprietary?
(ii) Are the initial production costs realistic?
(iii) Are the initial marketing costs realistic?
(iv) Does the product have potential for very high margins?
(v) Is the time required to get to market and to reach the break-even
point realistic?
(vi) Is the potential market large?
(vii) Is there any initial customer?
(viii) Is the cost of development and calendar time realistic?
(ix) Is it a growing industry?
(x) Can the product and the need for it be understood by the financial
community?
(d) Comprehensive feasibility approach

This refers to a more comprehensive and systematic feasibility analysis that
incorporates external factors.
There are two major factors involved in a comprehensive feasibility study of

a new venture as described in Table 8.3.

Table 8.3: Two Major Factors in a Comprehensive Feasibility Study

of a New Venture
Technical Feasibility Marketability

Identifying the technical requirements This analysis examines how saleable the
for producing a product or service that product or service is in the market and
will satisfy the expectations of potential what is the demand like. Three major
customers. areas in this analysis are:
The important criteria for the  Investigating the full market potential
requirement are: and identifying customers for the
goods or services.
 Functional design of the product and
attractiveness in appearance.  Analysing the extent to which the
enterprise might exploit this potential
 Flexibility, for example, permitting
market.
ready modification of the external
features of the product to meet  Using the market analysis to
customer demands or technological determine the opportunities and risks
and competitive changes. associated with the venture.
 Durability of the materials from
which the product is made.
 Reliability, for example, ensuring
performance as expected under
normal operating conditions.
To address these areas, a variety of informational sources must be found and used.
For a market feasibility analysis, general sources would include the following:
(a) Trends in the general economy (various economic indicators, etc.);
(b) Market information (customers, customer demand patterns);
(c) Pricing information (range of prices for similar, complementary and
substitute products; base prices and discount structures); and
(d) Competitive information (major competitors and their competitive strength).
SELF-CHECK 8.2
State the main reasons why new ventures fail.

 New venture selection may foresee a few pitfalls such as insufficient objective
evaluation of the venture, lack of market potential knowledge, little
understanding of the technical requirements, insufficient financial
understanding, lack of unique ideas and being unaware of legal issues.
 Major factors that may cause the failure of new ventures are insufficient market
knowledge, faulty product, ineffective sales and marketing strategy, lack of
awareness of competitive pressure, timing problems and insufficient capital.
 By asking the right questions, conducting a profile analysis and carrying out a
feasibility criteria study, the feasibility of an entrepreneurÊs product or service
can be assessed.
Critical factors Product differentiation

Customer availability Profile analysis
Legal requirements Technical feasibility
Marketability Uniqueness
Product availability
Bruno, A. V., Leidecker, J. K., & Harder, J. W. (1987). Why firms fail. Business
Horizons, 30(2), 50–58.
Karakaya, F., & Kobu, B. (1994). New product development process: An

investigation of success and failure in high technology and non-high
technology firms. Journal of Business Venturing, 9(1), 49–66.


Levitt, T. (1960). Marketing myopia. Harvard Business Review, 38(4), 45ă56.
Vesper, K. H. (1990). New venture strategies. Englewood Cliff, NJ: Prentice Hall.

Topic  Entrepreneur
9 and Personal
Financial
Planning
LEARNING OUTCOMES
1. Explain the meaning of financial planning;
2. Point out the importance of setting personal financial goals in
financial planning;
3. Calculate individual net worth with reference to personal balance
sheet; and
4. Prepare a budget for personal financial planning purposes and a
cash flow statement to track cash flow.
 INTRODUCTION
A well-thought out plan is half the success of a new venture. The same principle
applies to an entrepreneurÊs personal financial planning. It is either you do it or
you just ignore it. If you apply principles of financial planning in a proper manner,
you will definitely be better off financially. This topic will introduce some basic
knowledge about personal financial planning and serve as the foundation for
learning the other important aspects related to personal financial planning. Let us
do it together.

110  TOPIC 9 ENTREPRENEUR AND PERSONAL FINANCIAL PLANNING
9.1 NEED FOR PERSONAL FINANCIAL

PLANNING
Why do you think we need financial planning? Well, financial planning has an
effect on our future, dreams and goals. It will determine what we want to do in
our life, such as getting married, buying a car or a house, having children and
planning for their education.
You need to do proper financial planning to achieve your life dreams and goals. It
involves how you manage your budgeting, saving and spending money from time
to time.
According to the Financial Planning Association, financial planning is the long-

term process of wisely managing your finances so you can achieve your goals
and dreams, while at the same time negotiating financial barriers that
inevitably arise in every stage of life.
Remember, financial planning is a process, not a product.
9.1.1 Steps in Financial Planning

Do you know what sound financial planning involves? Figure 9.1 shows the five
steps in financial planning.
Figure 9.1: Five steps in financial planning
We will discuss more about these steps in the following subtopics.

TOPIC 9 ENTREPRENEUR AND PERSONAL FINANCIAL PLANNING  111
9.1.2 Benefits of Financial Planning

Most of us think that financial planning is a hassle and stops us from enjoying life.
If you consistently live on a budget, surely you would have to give up fun
activities, right? Think about it, if you save your money, you can always budget
your financial condition so that you have some money to spend on entertainment
with friends
You may want help getting started. If you set up good financial planning habits,
you can always ensure you have enough for more fun in the future!
If you have the time and knowledge, and your financial situation is not too
complicated, you may be able to do a lot of it on your own. With your own financial
plan, you will:
(a) Have more control of your financial affairs and be able to avoid excessive
spending, unmanageable debts, bankruptcy or dependence on others;
(b) Have better personal relationships with people around you, such as your
family, friends and colleagues, because you are happy with your life and you
are not going around borrowing money to make ends meet or expecting
handouts from others;
(c) Have a sense of freedom from financial worries because you have planned
for the future, anticipated your expenses and achieved your personal goals
in life; and
(d) Be more effective in obtaining, using and protecting your financial resources
throughout your lifetime, not only for yourself but also for the people you
love.
In other words, when you have a good personal financial plan, you will be more
informed about your future needs and the resources that you have. You will also
have peace of mind knowing that you are in control.
9.1.3 Life Stages and Financial Goals

In your adult life, you will go through various stages, from starting a career to
retiring, from being single to getting married, having children and sometimes
being single again. At various phases in your life, you will have different priorities,
responsibilities and financial goals.

Each stage of your life presents different investment opportunities and challenges.
Discipline and perseverance play an important role in maintaining a reliable
financial strategy. As your life changes, so will your needs and goals. Sound
financial planning will prepare you to meet the challenges and changes
successfully.
When you are in your 20s, you will be looking at money and spending it differently
from when you get into your 50s. For example, when you are single, you probably
want to have enough money to make a down payment on a car or go on a holiday
with friends. After you get married, you may want to buy a house. Later, when
you have children, you would want to plan for their education and maybe even
start a retirement fund.
As your needs change, your financial priorities will adjust to meet your needs at
different points of your life. Therefore, what you do with your money as you go
through your adult life depends on your financial goals. In the following subtopic,
we will go into detail on how you can achieve your financial goals. Nonetheless, it
is worthwhile to point out here that to achieve your financial goals, you need to
save your money!
ACTIVITY 9.1
1. What do you understand about personal financial planning?
2. What do you think of the relationship between an individualÊs

personal financial goals and life stages?
3. Why must you assess your current financial situation before setting
your financial goals?
SELF-CHECK 9.1
1. Define the term financial planning.
2. Describe three benefits of financial planning.
3. Do you think personal financial goals will change according to life

stages of an individual?

9.2 THE POWER OF MONEY

The previous subtopic discussed the importance of personal financial planning. It
stressed on the vital role money plays in our lives as it helps us achieve many
things. Have you heard the following quotation?
Money is power, freedom, a cushion, the root of all evil, the sum of blessings.
Carl Sandburg
It is important for all of us to understand the power of money in terms of building

our financial success. Gaining personal knowledge is important because financial
knowledge empowers us to make good decisions with our money. In this subtopic,
we will discuss how to set your goals, what important goals are – saving for
emergencies, and assets and liabilities, that is, what you own and owe. We will
also look into your net worth and learn how to derive your net worth.
9.2.1 How to Set Your Goals

Do you know that setting goals puts you in charge of your money and life? Your
goals can be short or long term, small or large; but they must be achievable.
When setting your financial goals, you need to sort out what your priorities are.
Without knowing your priorities, it will be difficult to set satisfying financial goals.
You will find it easier to set financial goals that you can achieve when you
understand your priorities.
How do you set your goals? Just having these goals in your thoughts are not
enough. You are very likely to forget the goals that you have set or you may even
have unconsciously changed them in your mind. It is best to write down your
financial goals. Writing them down will increase your chances of achieving them.
When writing down your financial goals, be as specific as possible. What is the
point of writing: „My goal is to have lots of money in the bank.‰ What do you
mean by „lots of money‰? Is it RM50,000 or RM500,000 or RM5,000,000? Be specific
and write your goals in terms that can be measured. Break down your goals into
those that are short term, medium term and long term.

For instance:
(a) Short-term Goals (Less than One Year)
 To save RM5,000 in six months.
 To pay the deposit for a new car.
(b) Medium-term Goal (One to Three Years)
 To pay a deposit of RM 20,000 for my first house.
(c) Long-term Goal (More than Three Years)
 To save RM100,000 within five years for my retirement account.
You may use Table 9.1 to help you write down your financial goals:
Table 9.1: Financial Goals
My Financial Goals
Short Term Medium Term Long Term
9.2.2 An Important Goal – Saving for Emergencies

What would happen if you suddenly could not afford to pay for your education?
Would you sacrifice your goal of attaining a degree or would you have a back-up
emergency plan?
In life, there are many uncertainties that you might face ă from a minor car
breakdown to the more serious death of the sole breadwinner in your family.
Unexpected events are, well, unexpected.
In most of these situations, money would be needed. It is extremely important that

you are always prepared with the right tools and knowledge for situations that
require you to think on your feet and deal with problems you might not be used
to. An emergency fund is one such tool you can use.

When you list your financial goals, include saving for an emergency fund. As a
rule of thumb, have an equivalent of at least six monthsÊ worth of your basic living
expenses in your emergency fund. Ideally, you should put aside about
12 monthsÊ worth.
For example: If you need about RM1,500 a month to pay for your living expenses,
including fixed payments such as housing loan or rent and insurance premium, as
well as electricity and water bills, you should have at least RM9,000 in your
emergency fund (i.e. RM1,500  6 months). If possible, keep aside RM18,000 in the
fund (RM1,500  12 months).
It might be difficult at first when you start working to have that kind of money
kept aside but make sure you build it over time; every little amount will help build
your emergency fund. Remember to make a conscious effort to save.
9.2.3 Assets and Liabilities: What You Own and Owe

In financial planning, you need to assess where you are now in financial terms,
that is, what you own and what you owe; how much money you have and after
making the various payments, how much money is left.
When doing this, two types of personal financial statements come in handy:
(a) Your personal balance sheet; and
(b) Your cash flow statement (discussed in the subtopic on „The Basics of
Budgeting ‰ later in this topic).
These statements will help you to:

(a) Provide information about your current financial position and a summary of
your income and expenditure;
(b) Measure your progress in meeting your short-term, medium-term and long-
term financial goals;
(c) Maintain information about your financial activities, such as investments and
spending patterns; and
(d) Provide data you can use when preparing tax forms or applying for a bank
loan.

Do you know what is a personal balance sheet? LetÊs look at the definition:
A personal balance sheet is your financial scorecard, which you can use to
regularly assess your financial standing. It can be a reference point in making
money-related decisions.
Your personal balance sheet reports on what you own and what you owe:
(a) What you own (assets) – Items such as cash, savings, real estate, unit trusts
or shares in companies.
(b) What you owe (liabilities) – All types of loans, whether to banks, family or
friends, as well as credit card debt and payments that are due, such as house
rental and utility bills.
An example of a personal balance sheet is provided in Table 9.2, which you can
use as the basis to prepare one for yourself. This personal balance sheet has a
positive net worth because the value of the total assets is more than the total
liabilities.

Table 9.2: Personal Balance Sheet

Asset Liability
Item
RM RM
Bank Accounts
Savings accounts 5,237
Current accounts 3,532
Fixed deposit accounts 25,835
Cash on hand 1,235
Properties
Apartment 250,000
House –
Land –
Jewellery 7,695
Car 60,000
Investments
Employee Provident Fund 55,267
Unit trust 15,982
Shares –
Bank Loans
Credit cards –
Study loan –
Borrowing from friends & family –
Hire purchase of furniture & electrical goods –
Total 424,783 254,292
Net Worth 170,491
9.2.4 Knowing Your Net Worth

Your net worth is your total assets minus your total liabilities. You will have a
positive net worth if you own more than what you owe. When this happens,
congratulations! This means that you are in a healthy financial position.
However, having a high net worth does not guarantee that you will never face
financial difficulties. You can have a high net worth and still be in for a rough
time. So how is it possible for someone with a positive net worth to get into
financial problems? Financial difficulties can occur when your assets are not
liquid! When assets are not liquid (easily converted into cash) there could be
potential problems looming ahead. Let us see how this is possible.

Say you have a house as your asset (which you live in), but you do not have cash
in your wallet or bank account and you have already defaulted on your credit card
payments. The most pressing thing now is, you need money for your daily
expenses. Out of a job with no possible way of making any money, you decide to
sell your house for money to support your expenses. Here is the problem. You
cannot sell your house immediately to get money because the house, being a non-
liquid asset, is not easily sold and finding a buyer may take several months. It is
also where you and perhaps your family live. You really cannot sell your home
unless you have somewhere else to go.
It is easy to conclude that being financially healthy means having a balanced

portfolio of assets so that you will not be short of cash at any time. That way, you
can ensure that financial freedom will be in your grasp.
When you owe more than you own, you have a negative net worth. In this
situation, you are unable to pay off your debts when they are due because you do
not have enough money or assets that can be easily converted into cash. You are
actually in financial trouble and may be made a bankrupt.
Your net worth gives an idea of your financial position on a given date. Do not
consider your non-cash items as cash as they may not be easily disposed of.

9.2.5 Deriving Your Net Worth

How do you derive your net worth? Figure 9.2 shows five steps in deriving your
net worth.
Figure 9.2: Five steps in deriving your net worth

There are several ways you can increase your net worth. These include increasing
your savings, reducing your spending and debts and selling some of your non-
income generating assets/belongings.
ACTIVITY 9.2
Use the personal balance sheet provided in Table 9.2 as an example and
prepare one for yourself. Calculate your net worth. Do you have a positive
or negative net worth?
SELF-CHECK 9.2
Describe the five steps in deriving your net worth.
9.3 THE BASICS OF BUDGETING

A budget is one of your best tools for reaching your goals – whatever your age or
stage in life. It is a plan of what money you expect to receive and how you expect
to spend it.
9.3.1 Budgeting and Spending Plan

In financial planning, it is important to prepare a budget. It is true that living
according to a budget requires a lot of discipline but it helps you to:
(a) Live within your monthly income;
(b) Keep aside money or savings;
(c) Reach your financial goals;
(d) Prepare for financial emergencies; and
(e) Develop good financial management habits, with regular checks of your cash
flow and net worth.
Prepare your budget at the beginning of the month or on the day you receive
your monthly salary.

When you prepare your personal budget:
(a) Refer to your financial goals. Compare your budget with your financial goals
to see whether or not you are achieving them. For example, if you have
targeted to put a down payment to buy a car in one year, make sure you do
monthly checks to ensure you are keeping money towards your goal.
(b) Estimate your income for the budget period. This covers your salary,
commissions, allowances and other sources of money.
(c) Put aside at least 10 per cent of your income for your savings (20 per cent to
30 per cent of your income as savings will be better because you are creating
a bigger pool of money for your future retirement).
(d) Put aside some money for your emergency fund.
(e) Estimate fixed expenses for the budget period. These are expenses that must
be paid or spent. These include house rental, loan instalment payments,
credit card payments and insurance premiums.
(f) Also estimate variable expenses for the period. These cover items such as
petrol, groceries, and electricity and water bills.
(g) Aside from that, estimate your discretionary expenses, such as for items that
you can choose whether to spend on or not. They include gifts, hobbies,
entertainment and holidays.
To prepare a successful budget, remember:
(a) Be patient and disciplined. A good budget takes time and effort to prepare.
Do not give up because you feel that there is too much to do!
(b) Be realistic. If you have a moderate income, do not expect to save a lot of
money in a short period of time.
(c) Be flexible. There will be unexpected expenses and changes in the prices of
groceries and other items. Revise your budget when needed.
(d) Set aside an amount of money to enjoy yourself. You are young and will want
to have a night out with friends or to watch a movie.
Remember: A budget will work only if you follow it!

9.3.2 Tracking Your Cash Flow

Preparing your personal budget is not the end of the process. You need to monitor
your actual spending every day, especially know where your money is going.
Another term for this is managing cash flow – the actual inflow and outflow of
cash during a given period of time (refer to Figure 9.3).
Figure 9.3: Actual inflow and outflow of cash
Your most important inflow is probably your income from employment. However,
you may have other sources of income, such as a business income and interest
earned on savings and investments. Outflows would be living expenses, loans and
other financial commitments.
If you have a cash surplus, that is fantastic! Put the money away in your savings.
However, if you have a cash deficit, take another look at your spending. Try
postponing any purchases or payments for the time being. Try not to use your
emergency fund unless it is absolutely necessary. If you have to use your credit
card, use it as a last resort as using your credit card will only add towards expenses
for the coming months.
In preparing next monthÊs budget, base it on the balance brought forward from the
previous month.
Make sure you review and revise both your budget and spending plan regularly.
If you need to decrease your spending, look at expenses you can do without or cut
down. A good idea is to take a look at expenses involving food and entertainment.
You may even have to revise your financial goals, if some of these are not realistic
in relation to your monthly income.
 Your balance sheet outlines your financial net worth.

 Your budget tells you how much is your planned income, savings and
spending to achieve your financial goals.
 Your cash flow statement tells you what you received and spent in terms of
cash over a period of time.

Table 9.3 is an example of a statement that combines a personal budget and cash
flow statement. In this example, the person has spent more than his budget due to
unforeseen circumstances, such as a car breakdown and extra travelling using the
car, resulting in additional spending on petrol, toll and parking expenses as well
as food.
Table 9.3: Monthly Personal Budget with Personal Cash Flow
Monthly Personal Budget with Personal

Cash Flow in One Statement
Monthly Income Budget Actual Cash Flow
RM3,450 RM3,450
Job #1 (net of EPF, SOCSO and PAYE
tax)
Job #2 RM0 RM0
Other sources RM0 RM0
Total monthly income RM3,450 RM3,450
Less monthly fixed savings (10% of RM345 RM345

monthly income)
Less savings for emergency funds RM100 RM100
Monthly income net of savings RM3,005 RM3,005
Less monthly fixed expenses
Rental of room RM300 RM300

Car payment RM650 RM650
Car insurance RM0 RM0
Total monthly fixed expenses RM950 RM950
Less monthly variable expenses
Food RM550 RM650

House utilities RM0 RM0
Handphone bill RM85 RM97
Bus and taxi fare RM50 RM30
Gas and oil RM200 RM270
Parking and toll RM150 RM198
Car Repairs RM250 RM598

Total monthly variable expenses
Less monthly discretionary expenses RM1,285 RM1,843
Medical expenses RM70 RM0

Clothing RM150 RM0
Entertainment RM100 RM186
Household items RM100 RM392
Personal items RM150 RM163
Gifts RM100 RM0
Other expenses RM100 RM0
Total monthly discretionary expenses RM770 RM741
Excess (Deficit) Income RM0 (RM529)
Excess of income over expenses + Fixed savings + Emergency funds = Extra

savings.
(If the amount is negative, you have spent more than your monthly income)
ACTIVITY 9.3
1. What are your personal financial goals and how are you going to
achieve them? Prepare a budget for the same purpose.
2. Prepare and analyse your own cash flow statement.
SELF-CHECK 9.3
State the considerations when preparing a successful budget.

 Financial planning is important to provide you with peace of mind, security

for your future and a better quality of life.
 Financial planning is essential in achieving your lifeÊs dreams and goals.
 Provided that money can earn interest, money you have at the present time is
worth more than the same amount in the future.
 Setting financial goals is important to achieve security and financial freedom.
Assets Net worth

Budgeting Personal balance sheet
Financial planning Personal cash flow statement
Liabilities


Prentice Hall.

Topic  Achieving
10 EntrepreneurÊs
Personal
Financial
Dreams
LEARNING OUTCOMES
1. Describe the meaning of and various ways of saving;
2. Discuss your investment goals, and the relationship between risk
and return;
3. Explain various types of investments, insurance, and loans;
4. Make an informed decision on buying an insurance policy;
5. Determine the risks of being a guarantor; and
6. Identify signs of financial difficulty.
 INTRODUCTION
Have you ever heard of this saying: „what matters is how much you save, not how
much you earn‰. In other words, higher earnings do not guarantee that you are
financially better off than others who are earning less than you. It is always better
to spend below your means and make a habit to save. However, besides saving,
one must learn and practise investing ă saving may not make you rich, but
investment does. Investment from the personal financial perspective will never be
complete if it is done without the knowledge of sustaining it and proper protection,
such as insurance. Finally, you need to know when you are falling into financial
TOPIC 10 ACHIEVING ENTREPRENEUR'S PERSONAL FINANCIAL DREAMS  127
difficulty. This serves as the financial self-check that should not be overlooked in
order to achieve true personal financial success.
10.1 ENTREPRENEUR WEALTH BUILDING

We discussed in the previous topic that the way to become smart with your money
is to build your wealth by owning more than you owe. Here, we will go further
into discussing how you can build your wealth and at the same time plan for future
uncertainties.
10.1.1 The Saving Habit

Putting money aside for the future is hard to do. There is more to it than spending
less money although that part alone can be challenging. How much money should
you save, where will you put it and are you sure you made the right decision?
Here are a few tips on how to set realistic goals and get the most out of your money.
According to www.businessdictionary.com, savings is the portion of disposable

income not spent on consumption of consumer goods but accumulated or invested
directly in capital equipment or in paying home mortgage, or directly through
purchase of securities.
You should make your savings an automatic part of your life. A savings plan is an
essential part of your financial plan. Without a savings plan, you will not be able
to achieve your financial goals. We suggest that you save at least 10 per cent of
your salary every month. It is even better if you can save 20 to 30 per cent because
this will translate into more money for your future. Remember that the more you
save now, the easier it will be to achieve your financial goals.
There are several ways that this percentage of your monthly salary can be put into
your savings account in the bank. You can:
(a) Write out a cheque every month and deposit it into your savings account;
(b) Carry out the transfer on the ATM; or
(c) Transfer money from your current account to your savings account via
Internet banking every month.

128  TOPIC 10 ACHIEVING ENTREPRENEUR'S PERSONAL FINANCIAL DREAMS
It is good if you are doing any of the above. However, after a few months, you may
forget to do so or find some reason to use the money for something else instead of
putting it into your savings account. You would have broken the pattern and, once
broken, it is possible that you will not get back to your savings plan.
So how do you make sure that you keep to your savings plan? Simple ă by making
it automatic.
Instruct your bank to transfer at least 10 per cent of your monthly salary from your
current account to your savings account every month. Have the transfer done as
soon as your salary is credited into your current account. What you do not see or
have, you will not miss. In the meantime, the amount of money in your savings
account will grow, bringing you closer to your financial goals.
As and when you can afford it, such as after you have received a raise or
promotion, instruct your bank to increase the amount to be transferred to your
savings account.
When you have saved the total amount of money that you had planned for,
transfer the whole sum into a fixed deposit or some other account that can earn
more returns.
However, continue to instruct your bank to make the monthly deduction. Never
stop it, as this would only break your habit. The money that you are
„automatically‰ saving can go towards another financial goal.
ACTIVITY 10.1
What is the meaning of savings? How are savings different from
investments?
10.1.2 Increasing Net Worth via Savings and

Investments
Building wealth is about increasing your net worth, which we covered in Topic 9.
Your assets minus your liabilities equals your net worth, which can be positive
(assets more than liabilities) or negative (liabilities more than assets).
In this topic, we will focus on increasing your assets through savings and
investments. We will look at your investment goals, investment risk and return,
and at diversifying your investments.

(a) Your investment goals

Once you save your money on a regular basis, you will need to start making
important decisions about how to invest your money. Now, how do you do
this? Easy, you can invest money sensibly by first stating your investment
goals.
However, how do you come up with investment goals that fit your needs?
Well, there are some crucial questions you should think about when coming
up with your investment goals. The following are some of these crucial
questions:
(i) What are your financial goals? Why do you need to save and invest
your money?
(ii) How much money do you need to save and how much to invest to
achieve your goals?
(iii) How long do you have to save or invest your money to achieve your
goals?
(iv) How much risk are you willing to take?
(v) How much return do you expect from your savings or investments?
(vi) What sort of sacrifices are you prepared to make to achieve these goals,
for example, changing your lifestyle and spending habits?
Be realistic when you consider your answers to the above questions. Look at
your sources of income and see how much you can consistently save and
invest. Your financial and investment goals should be reasonable and
achievable.
(b) Investment risk and return

Keeping your money in a savings or fixed deposit account with a bank is the
safest form of investment. The return (the interest rate) is lower compared
with other forms of investment, but it is not risky. You can sleep soundly at
night and worry about your money.
Of course, by keeping your money only in savings or fixed deposits, you

would not be able to build your wealth as fast as you would like to. However,
keep in mind that although other forms of investments can give you better
returns, they also sometimes carry greater risks, that is, there is a greater
chance of such investments losing their value.

For example, if you invest your money in the stock market, you face a greater
risk of losing your money than if you were to keep it in a savings account.
Share prices move up and down, depending on many factors. You may have
bought the shares of a company at RM5 per share, but this price can go up to
RM7 or it can go down to RM2.
When you invest your money, you expect to earn a return on that money. A
return on an investment is usually stated as an annual percentage. If you buy
shares at RM10 a share and the price goes up to RM10.80 after one year, then
your rate of return is eight per cent.
The actual return on an investment would, however, be after you have

deducted related expenses. If you buy a house, for example, and then sell it,
you will only know your return after you have deducted items such as legal
fees, agentÊs commission, stamp duty and bank loan interest.
Remember: When choosing your investment, the higher the return, the
greater the risk.
(c) Diversify your investment

When you invest your money, do not put it all into one type of investment.
If something happens to that investment, you would lose all your money. It
is important to diversify.
It is smarter to put your money in different types of investment. In other

words, plan for a balanced portfolio of investments. Spreading your money
across a variety of investments is the key to spreading your risks. When you
do this, you are highly likely to benefit substantially from your investments
while eliminating chances of financial losses.
How you invest is partly determined by your investor profile, that is,
whether as an investor, you are aggressive, moderate or conservative. Many
people actually fall in-between these types.
If you are a moderate investor, you might invest a high portion of your
money in a different asset class such as unit trust funds and the balance in
fixed income investments such as fixed deposits. The amount that you assign
to an asset class could be further divided among different segments such as
bond or equity funds.
If you are an aggressive investor, you might consider investing in more

volatile investments such as shares.
On the other hand, if you are a more conservative investor, you might
consider putting your money in less aggressive investments such as bonds
and fixed deposits.
No two investors are alike. Only you can decide which options to choose and
how to spread your savings among the types of investment products
available.
SELF-CHECK 10.1
1. What are your investment goals? Give examples to elaborate.
2. Discuss the relationship between risk and return, using examples.
10.1.3 Types of Investment

Do you know that good investment planning can turn your goals into realities? It
involves more than just trying to pick the right investment. Now have a look at
Figure 10.1 to find out the types of investment available in the financial
marketplace.
Figure 10.1: Types of investment
Let us look at the detailed explanation of each type of investment.
(a) Cash and fixed interest investments

Cash investments are the most common form of investment in Malaysia,
covering products such as bank savings accounts and fixed deposits. They
provide easy access to your money when you need it and there is no chance
you could lose any capital, so they are very secure.
However, while they do offer security, they usually provide very little
income and no capital growth. In actuality they can be quite risky in the long
run because inflation erodes the value of your investment. For most
investors, cash and fixed interest products are suitable for:
(i) Use as a transaction account;
(ii) Keeping cash on hand for short-term expenses and emergencies; and
(iii) Short-term savings where they cannot afford any risk to their capital.
(b) Shares
Shares (also known as equities or stocks) represent ownership in a company.
When you buy a share, you become a part-owner of the company and
become entitled to share in its future value and profits.
Shares in a company offer growth to investors in two key ways:
(i) As the overall value of the company increases, the value of the shares
also increases; and
(ii) You can earn dividends when the company chooses to pay part of its
profits to shareholders as income payment.
Shares have the potential to generate very high returns. However, they also
have the potential to fall in value if the companyÊs performance drops. Shares
are generally suitable for investors who:
(i) Want to build a nest egg for medium-term and long-term financial
goals;
(ii) Have a longer investment time-frame; and
(iii) Are comfortable with some volatility in their investment value over the
short term, in exchange for higher returns in the long term (in terms of
dividend income and capital gain).
(c) Unit trust funds

In a unit trust, money from hundreds of individual investors is pooled
together to buy a large number of different assets. Professional fund
managers decide what percentage of the fund should be invested in each
asset class, and also which countries, industries and companies have the best
prospects for good returns.

Each investor then receives „units‰ in the fund, with each unit representing
a mix of all the underlying assets such as shares, bonds and fixed deposits.
Unit trust funds are an ideal option for people who:
(i) Are new to investing;
(ii) Are happy to outsource the selection of investments to professional

managers;
(iii) Have a small initial amount to invest (with the option to make regular
additional contributions); and
(iv) Are seeking investment diversification to minimise risk.
(d) Property
Property is one asset class that most Malaysians are familiar with. Property
investment offers value to investors in two ways:
(i) Properties increase in capital value over time as house and land prices
rise; and
(ii) You can earn rental income from tenants.
Like shares, property prices go up and down and have periods of

sustained high and low returns; so property is generally only suitable
as a long-term investment. One of the most important factors to
consider when buying property is its location. Property is generally
suitable for investors who:
 Do not require „emergency‰ access to their money;
 Have a long-term investment time-frame; and
 Have the ability to meet mortgage repayments if interest rates rise

or if the property is not being tenanted.
(e) Other Types of Investments

Other types of investments are:
(i) Bonds
When you buy a government or corporate bond, you are „lending‰
your money for a certain period of time at a predetermined interest
rate. In return, you receive a steady income stream through regular
interest payments.

(ii) Real Estate Investment Trust (REIT)

This is similar to a unit trust except that the investments are in property
and real estate. The profits from such investments are passed on to
investors in the form of dividends.
ACTIVITY 10.2
What are your preferred types of investment? Why?
SELF-CHECK 10.2
State the main types of investment.
10.2 PLANNING FOR UNCERTAINTIES

Life has many ups and downs where accidents and disasters can and do happen
unexpectedly. When this happens we feel like life has more control over us than
we have control over it. This is especially so if we are not adequately prepared for
uncertainties. Whatever the uncertainty that comes, it usually creates feelings of
fear, depression and worry. How do we cope with such uncertainty?
Well, in the following subtopic, we will discuss several tips on how to deal with
uncertainties, for instance, the need to get insured and the types of insurance we
should take.
10.2.1 The Need to Get Insured

Before you take any insurance, you must understand what insurance is, the
purpose of insurance and how it works to protect you. Now let us go into details.
(a) What is Insurance?

When you make a financial commitment, such as purchasing a house by
borrowing money from the bank, you have locked part of your future
income. Should there be an unfortunate natural event (death or disability)
or an economic catastrophe (retrenchment), which affects your ability to
meet these commitments, the possibility of losing your hard-earned asset is
real.

There is a financial instrument that you can purchase to protect you from
such an eventuality – insurance. It is a means of giving you a financial buffer
or protection in case something happens to you, your family or your
belongings.
(b) Purpose of Insurance

In offering such protection, insurance is providing you with peace of mind.
The money you put towards insurance will enable you to:
(i) Pay for damages to your personal belongings or to replace items that
had been stolen (provided such items are insurable);
(ii) Pay for medical bills when you or your family members are
hospitalised;
(iii) Take care of your monthly living expenses, debts and financial
commitments when you are not able to work due to a serious illness or
an accident;
(iv) Provide some financial support to your family in the event of your
disability, serious illness or death, particularly if you are the
breadwinner of the family.
(c) How Does Insurance Work?

Upon payment of a relatively small fee (known as a premium), a licensed
insurance company will replace items lost or damaged due to an insured
peril, such as fire, accidents and theft. However, these incidents must occur
during the insurance period up to the limit of the sum insured.
The insurance company sells policies to thousands of people and the

premiums collected become part of a common fund. Not all who pay the
premiums will be affected by misfortune and when some do, they are not
affected at the same time. The common fund helps all those who contribute
to share the risks.
The insurance industry in Malaysia is regulated by Bank Negara Malaysia

(BNM). To help the public find out more about insurance, BNM has
produced a series of booklets, which are available at branches of insurance
companies. Alternatively, you can visit www.insuranceinfo. com.my for
more information regarding insurance.

ACTIVITY 10.3
1. Why would you pay high premiums to get your family members
and yourself insured?
2. How much insurance coverage is considered adequate? Is it the

same for all individuals?
10.2.2 Types of Insurance

You can insure almost anything under the sun but certain things absolutely need
to be properly insured. This typically includes your life, your health and your
property. Figure 10.2 shows us two types of insurance.
Figure 10.2: Types of Insurance
Let us look at these two types of insurance in further detail:
(a) Life insurance

A life insurance policy insures you and your life against risks such as pre-
mature death, illness, disability and hospitalisation. It is important to have
one if there are people depending on you, whether they are young children
or aged parents. The coverage period is usually more than a year and you
have a choice of making premium payments monthly, quarterly, semi-
annually or annually throughout the coverage period.

Figure 10.3 illustrates the main life insurance products.
Figure 10.3: The main life insurance products
Now, we will go into detail for each main life insurance product.
(i) Whole life

This offers lifelong protection but you must pay premiums throughout
your life. The claim amount (sum insured), including bonuses, will be
paid upon death, total and permanent disability or critical illness. Due
to the long-term nature of the policy, the premium is higher than for
term insurance and it provides cash value during the term of policy.
(ii) Term life

This offers protection for a limited period of time only. The money will
be paid only upon death, total and permanent disability or critical
illness during the term of the policy and according to the amount
agreed upon when buying the policy.
(iii) Endowment
This combines protection and savings. This policy provides cash
benefits at the end of a specific period or upon death or total and
permanent disability during the same period. The coverage period is
determined by the buyer.
(iv) Investment-linked
This combines investment and protection. Under this policy, you get to
choose the type of investment fund you wish to place your investment
and the amount of life insurance coverage you wish to have. The
amount of premium is flexible.

(v) Medical and health

This helps to cover the cost of medical treatment, particularly in regard
to hospitalisation and surgery.
(vi) Mortgage reducing term

This is usually a single premium policy with the coverage amount
matching the scheduled outstanding balance of the loan. In case you
default on the payments due to illness or disability or upon premature
death, the policy will settle the loan and the bank will release the
ownership of the house to you or your beneficiaries.
(b) General insurance

General insurance protects you against losses due to theft or damage to your
personal belongings. It also covers you if you cause damage to a third party,
or if there is accidental death, injury or hospitalisation. The period covered
is usually one year and you have to pay a one-time premium payment on an
annual basis. Table 10.1 describes the main general insurance products.

Table 10.1: The Main General Insurance Products
Product Explanation
It covers your motor vehicle against theft, accident or fire. If you
buy third party cover, you are insured against claims made against
you by a third party for injuries or death of other person (third
party) as well as loss or damage to the property of the third party
that is caused by your vehicle. If you buy comprehensive cover,
you are getting the widest coverage, i.e. third party injury and
Motor death, third party property loss or damage, and loss or damage to
your own vehicle due to accident, fire or theft.
A basic fire policy covers a building only against fire, lightning or
explosion. A house ownerÊs policy extends coverage of the building
to loss or damage due to flood, burst pipes and other calamities as
well. With a house holderÊs policy, the contents of the house, such
as furniture, are covered against theft, flood and fire. This policy
does not cover damage to the house itself.
House
This is good to buy when you travel overseas. It protects you
against travel-related accidents, flight delays or interruptions,
baggage lost in transit, medical and other expenses.
Travel
This covers items such as computers, handphones, notebooks and
cameras against loss or theft.
Personal
belongings
Before deciding on an insurance policy, make sure you check the perils and risks
that are covered by various policies offered by different insurance companies.

10.3 MANAGING DEBT: BORROWING BASICS

You may be tempted to spend more money than you have because of the
availability of loans and credit cards offered by financial institutions. These
institutions offer you money and credit on loan so you can buy a house, a car, pay
your bills or go on a holiday. It is crucial to keep in mind that this money is not
free. You have to pay it back ă with interest!
Before borrowing money, make sure you can manage debts. Remember that you
want to own more than you owe. You want to build wealth. If you borrow money,
you should use it to make more money. Try not to pay for things that will not
create value for you. Also, never use short-term loans, such as credit cards or
overdrafts, to fund long-term assets, for example, a house or building.
10.3.1 Loans and Credit

When you want to take a loan or use a credit card, ask yourself these questions:
(a) Is the product or service you want to buy important? Is it necessary?
(b) If it is important and you need to have it, can you afford to pay the
instalments?
(c) If it is a substantial purchase, such as a car or house, can you afford to put
down a larger down payment?
(d) If it is something you desire, can you control the feeling and delay your
decision to buy it since it is not that important?
(e) If you decide to take a loan or use your credit card to buy something, have
you worked out your cash flow to see if you are able to repay the money you
borrowed?
(f) Do you know the costs of borrowing and using your credit card? There are
interest rate costs as well as finance charges such as late payment fees.
(g) Do you understand the consequences of failing to repay money you borrow?
If you fail to do so, legal proceedings can be taken against you. You can even
be made a bankrupt.

Unless you are able to increase your income, you need to give up something to
make your monthly loan payment. Are you prepared to make this trade-off? For
example, are you willing to give up spending on your weekly entertainment to
make payments for your loan and credit card debt?
No matter how careful you have worked out your monthly cash flow to pay your
loan payment or credit card debt, something unexpected or an emergency can
happen and you will need extra cash. Are you able to still meet your commitments
if such a thing happens?
Hence, it is important not to over-commit on loans and purchases using credit

card. As a general rule, your total monthly payments on all your loans and credit
card debt should not exceed one-third of your gross monthly salary.
Never, ever borrow money from a loan shark because you will:
(a) Get a loan on very strict terms and conditions;
(b) Have to pay a very high rate of interest with daily compounding effect;
(c) Open yourself and your family to harassment if you fall behind on your
payments; and
(d) Be pressured into borrowing more from the loan shark to repay one debt
after another.
10.3.2 Types of Loan

There is a wide range of loans and credit facilities available in the market. We will
discuss the more common ones in this topic. The common types of loan are
illustrated in Figure 10.4.
Figure 10.4: Types of loan

Now we will discuss in detail each type of loan.
(a) Personal loan

This is a loan offered for personal use, not for a large purchase such as a
house or car but more for the purchase of a personal computer or money to
use for your marriage. It is tempting to apply for this type of loan because
the application process is usually fast and easy. Moreover, most banks do not
require a guarantor or collateral. However, some of the interest rates can be
very high.
As stated earlier, ask yourself some important questions before applying for
such a loan. Be clear about the purpose of your application and whether you
can afford to make the repayments.
(b) Car loan

Most people want to have their own car as soon as they start working. They
usually buy a car using a loan (also known as hire purchase or HP). If you do
so, you become the hirer of the car while the financial institution is the owner.
As the hirer, you pay instalments to the financial institution based on their
terms and conditions. You become the owner after completing all your
payments.
As with any loan you take, ask yourself the important questions before
deciding to borrow for the purchase of a car. Also work out your cash flow
to see how much monthly instalments you can afford to pay. When you
apply for a car loan, you can do so directly with the financial institution or
through the car dealer, who will then submit your application to the financial
institution.
As a hirer you should:
(i) Read all the fine print in the written agreement;
(ii) Check and ensure that the purchase price and HP terms in the
agreement are as agreed;
(iii) Know your rights under the Hire Purchase Act;
(iv) Know your obligations as a hirer so that you do not do anything to

breach the agreement;

(v) Keep all documents, such as the agreement and receipts, in a safe
place; and
(vi) Make your payments to authorised persons only as identified by the

financial institution.
However, before taking up a car loan, check on the effective interest rate as
it will work out to be much higher than the flat rate offered. Look at the
following example of a RM50,000 loan at five per cent interest per annum
with a five-year tenure. The effective interest rate works out to be 9.15 per
cent.
Monthly instalment: RM1,042

Total interest payment: RM12,500
Total loan + interest: RM62,500
Approximate effective rate per annum: 9.15%
Do know the basics of hire purchase? Table 10.2 provides some details on
hire purchase basics.
Table 10.2: Hire Purchase Basics
Terms Explanation
Minimum deposit This is about 10 per cent of the cash value of the car but
financial institutions can request for a higher deposit.
Interest rate This is a fixed rate and the maximum allowed is 10 per cent.
Effective interest rate This is the actual interest that you pay after taking into
account annual compound interest on the loan over its
tenure.
Late payment charges You will be charged a penalty if you are late in paying your
instalments. This interest is charged on a daily basis.
Guarantor Financial institutions may require a guarantor who will be
responsible for the unpaid portion of a loan including
interest, if you default on your loan.
Insurance You must purchase insurance coverage for your car.
Financial institutions require a car owner to undertake a
comprehensive insurance policy.
Repossession If you default on your payments, financial institutions can
repossess your car as they are the legal owners.

When you do not make your car loan payments on schedule, the financial
institutions can repossess your car by engaging a registered repossessor.
Having your car taken away from you can be a traumatic and embarrassing
experience. Before taking any action, the repossessor must show you his
identity and authority cards along with a repossession order issued by the
financial institution. He must then make a police report and bring the
repossessed car to a place indicated by the financial institution.
You will receive advance notice in writing, known as the Fourth Schedule,
before your car is repossessed. This notice expires in 21 days after which you
will receive a second notice of 14 days after the Fourth Schedule is issued –
this is a reminder to pay up or your car will be repossessed.
To avoid repossession, pay the outstanding arrears before the notice period
expires or return the car to the financial institution before the expiry date.
You will still need to pay any outstanding amount less the value of the car.
If your car has been repossessed, there is still a way to get it back. The
financial institution will issue you and your guarantors, if any, a Fifth
Schedule notice within 21 days of the repossession. You can have the car
returned to you if you pay all outstanding arrears or the due amount in full
and other expenses incurred by the financial institution. Alternatively, you
can introduce a buyer, for example, a family member or friend, to buy the car
at the price given in the Fifth Schedule.
Within 21 days of the Fifth Schedule issue, if you or your guarantors do not
settle the outstanding amount, the financial institution will sell your car by
public auction or give you the option to buy the car at a price lower than the
estimated price stated in the Fifth Schedule.
(c) Housing loan

The market for housing loans today is very competitive and financial
institutions now offer all kinds of loans to attract customers. Some loans are
even packaged with free gifts.
Do your research, get as much information as you can and compare items
such as interest rates before deciding on the loan suitable for you. As with
other loan products, you can choose between a conventional or Islamic
housing loan.

A housing loan is a large financial commitment, one that will stretch over
many years. Think very carefully about the various aspects of such a loan
before making your decision, some of which are as follows:
(i) Is the loan meant for buying a completed house or one under
construction? Are you buying land to build a house?
(ii) What is the value of the house or land you want to buy? How much
can you afford to pay in monthly instalments, depending on your
monthly cash flow?
(iii) Do you have enough money to make the down payments and the cash
flow to pay the loan instalments?
(iv) What are the incidental fees or costs that you have to pay? The more
common ones are legal fees, stamp duties, processing fees and
disbursement fees.
(v) Is the interest rate fixed or variable with the Base Lending Rate (BLR)?
(vi) How flexible can your loan payments be? There are several payment
schemes available.
(vii) Is there an early termination penalty if you repay your loan in full
before the tenure expires? Financial institutions may impose such a
penalty because of the attractive rates they may have packaged for the
loan.
Is it better to take a loan on a fixed or variable interest rate? With a fixed rate
loan, the interest is fixed and you therefore know the amount of instalments
you need to pay. With a variable rate loan, the rate changes according to the
BLR. If the BLR rises, your interest rate will increase and your monthly
repayments will be higher. On the other hand, if the BLR decreases you will
benefit from paying lower monthly repayments.
There are also variable interest rate loans with fixed monthly payments where
any changes to the interest rate will either increase or decrease the loan tenure.
There is more than one method of paying a housing loan (Table 10.3). The
principal sum of a loan is reduced each time an instalment is paid.

Table 10.3: Methods of Payment for Housing Loan
Method of Payment Explanation

Graduated payment This allows you to pay lower instalment payments
at the beginning of the loan. The amount will,
however, gradually increase over time. This scheme
is useful if you had just started working and your
salary will increase over the years.
Partial prepayment of the You can shorten the loan tenure by making partial
outstanding loan prepayments with your surplus savings or annual
bonus. If done during the early years of the loan
tenure, you can reduce your interest charges. There
may, however, be restrictions on how much you
can pay.
As a borrower you should:
(i) Read and understand all the terms and conditions of the loan;
(ii) Stick to these terms and conditions;
(iii) Ask questions on all aspects of the loan to your satisfaction;
(iv) Make payments on time; and
(v) Check that you have accurate information on your loan account on a
regular basis.
As with any loan, if you fail to pay your instalments, the financial institution
will take legal action against you to recover the loan.
To enhance the borrower's credit standing and enable them to obtain financing,
be it for car or housing loan, financial institutions may require guarantees from
prospective borrowers. You may be requested by a family member or friend to
become a guarantor for his or her loan. Think carefully before you agree to do
so because being a guarantor for a loan means that if the borrower cannot or
will not pay the loan, you are legally bound to do so.
Should you agree to be a guarantor, make sure that:
(i) You read and understand the nature of the guarantee and the
implications on you;
(ii) You do not sign a blank or partially filled document;

(iii) You do not become a guarantor to someone whose integrity you are
doubtful of; and
(iv) You are aware of your liabilities if variations are made to the terms and
conditions of the loan.
It is not easy to withdraw from being a guarantor. The decision is up to the

financial institution, which may agree, subject to conditions such as full
repayment of the principal debt. Even if the borrower dies, the financial
institution can seek recourse from the guarantor if there are no other sources
of repayment of the loan.
10.3.3 Types of Cards, Credit Trap and Tips on Using

Credit Cards
In this subtopic, we will look at the types of card available to us, the credit trap of
paying the minimum and tips on using credit cards.
(a) Types of card

There are few cards available these days to make our lives easier so we do
not have to carry cash every time we shop or pay for any service rendered.
The types of cards are shown in Figure 10.5.
Figure 10.5: Types of card
Below is detailed explanation of each type of card shown in Figure 10.6.
(i) Credit card

Credit cards allow you to buy items and pay for services electronically
without using cash. When you use a credit card, the credit card acquirer
will pay the merchant on your behalf and bill you later through your
issuing bank. This makes purchasing things a lot easier.

Credit card can be a useful payment instrument if you know how to

use it properly and wisely. Some of its benefits are as follows:
 It is a convenient and efficient method of payment;
 You can use the statement to track your spending for budgeting
purposes;
 Some credit cards provide personal accident and travel insurance,

depending on the type of card issued;
 Credit card issuers have introduced attractive schemes, such as zero

interest instalment scheme, flexi-pay scheme and zero per cent
balance transfer, to enable you to maximise on your purchases; and
 You can also earn loyalty points for usage of credit cards, a reward
that is unavailable when cash payments are made.
Normally, the credit card limit given is two or three times your monthly
salary. If you use your card up to this limit, you are effectively spending
at least two or three months of your salary in advance.
(ii) Charge card

Charge card is similar to a credit card. While credit card allows you to
make a minimum payment when you receive your monthly statement,
charge card does not. With a charge card, you must pay the total
amount due in full each month, failing which, late payment charges
will be imposed.
(iii) Debit card

Debit card is similar to an Automatic Teller Machine (ATM) card,
except that you do not have to withdraw cash from an ATM. You can
use the debit card at places where you pay for products or services. The
amount spent will be immediately deducted from your bank account.
Similar to credit card, it is convenient to use a debit card because you
do not have to carry cash with you.
(iv) Prepaid card

Prepaid card can be used to make purchases but there is a spending
limit equivalent to the amount of money you place on the card. It is like
a prepaid phone card or a Touch & Go card where you have a fixed
amount of money you can spend. When the amount placed on the card
gets low, you can reload up to the maximum amount as determined by

the card issuer. Debit and prepaid cards are better options for people
who are not financially disciplined.
(b) The credit trap of paying the minimum

It may be tempting to just pay the minimum monthly due on your credit card
statement. After all, it helps with your cash flow. Unfortunately there are
consequences of paying just the minimum each month – you will incur
interest charges and it will take you longer to settle your outstanding balance.
The result? Huge debts in a short time frame. At present, most card issuers
impose a finance charge of 1.5 per cent per month, which is charged on a
daily basis and compounded monthly.
Earlier in this module we discussed the effect of compound interest when

you save your money. Compound interest also applies in this situation,
where interest is paid on the principal amount plus the accumulated interest
amount owing.
It is important to realise that the longer you take to settle your credit card
debts by making minimum payments, the more money you will owe. With
high interest rates, you will end up paying more money to the financial
institution as compared with the original amount you paid for the product
or service. Remember to always pay in full – this will ensure you keep out of
financial trouble.
(c) Tips on using credit cards

Here are few tips that you may adopt when using your credit card:
(i) Pay the amount due in full when you get your monthly statement to
avoid paying interest;
(ii) Do not use a credit card if you cannot make the monthly payments;
(iii) Limit the number of credit cards you have;
(iv) Do not use your credit card to get cash advances from an ATM. Each
time you use your credit card to withdraw money, you are increasing
your loan commitments in addition to paying upfront withdrawal
charges and daily interest;
(v) Pay before the due date to avoid late payment charges and penalty
rates;
(vi) Be aware of the consequences of paying minimum amounts all the

time;

(vii) If you have a cash flow problem, pay the minimum amount for the
present but pay the full amount as soon as possible; and
(viii) Always check your credit card monthly statement to ensure proper
transactions and charges are recorded. The statement includes your
transactions, any fees and charges, the due date of payment and the
minimum payment. Call your bank if there is anything wrong with
your statement, or you have not received it.
10.3.4 Repayment and Default

A good paymaster is one who pays his or her monthly loan repayments on time
and in the amount required according to the terms and conditions of the loan
agreement. In this subtopic we will look into the credit bureau and debt
repayment problems.
(a) Credit bureau

The Credit Bureau of Bank Negara Malaysia (BNM) has been in operation
since 1982. It collects credit information on borrowers, including private
individuals, businesses (sole proprietors and partnerships), companies and
government entities, and supplies the information back to lenders.
The Credit Bureau keeps information in the Central Credit Reference

Information System (CCRIS), which is a computerised system that
automatically processes credit data received from financial institutions and
synthesises these information into credit reports. These reports are made
available to financial institutions on request.
Each time you make a new application for a loan, the financial institution will
check your payment history with the Credit Bureau. They will use the
information to decide whether to give you a loan or not. Other than the
Credit Bureau, there are also privately-owned companies that provide their
clients, including financial institutions, with information on a borrowerÊs
repayment record and status of legal actions, if any.
Keep a copy of your CCRIS report to track your loans with financial
institutions and monitor your loan and credit card repayment pattern. You
can check whether you have a healthy repayment schedule and defaults or
late payments appearing in your report. If your CCRIS report indicates late
repayment or default, a financial institution has the option of denying any
new loan applications because it indicates that you are not managing your
loans well or you have financial difficulties.

It pays to be a good paymaster because this will be reflected in your credit

report. In fact, effective 1 July 2008, you are rewarded for being prompt in
your credit card payments – financial institutions impose finance charges on
a tiered basis depending on your repayment behaviour.
If you wish to find more information on the credit bureau, go to this website:
http://creditbureau.bnm.gov.my
(b) Debt repayment problem

Defaulting on loan payments and failing to settle your credit card debt can have
terrible consequences. You will be sued by the financial institution. Your car or
property will be auctioned. Your family members will be affected because they
may have to help in paying your debts. Your guarantors, if any, will also suffer
because legal action can be taken against them. On top of that, you may become
a bankrupt if you fail to repay your loan.
You will suffer emotionally due to stress. You will be getting constant calls
and letters from lawyers and lenders to demand that you settle your debts.
In such situations, you can become unproductive and your work or health
may be affected.
Some signs to show that you are in financial difficulty are:
(i) You are not in control of your money, that is your expenses are higher
than your income;
(ii) You have more debts than you can manage to pay;
(iii) You are only able to pay the minimum five per cent every month on
your credit card bills;
(iv) You do not have any savings to meet personal or family emergencies;
(v) You get calls from debt collectors regularly; and
(vi) You are being served with legal notice of demand.
If you are facing any of the above problems, seek help and advice on your
finances from a professional financial counsellor as soon as possible.

SELF-CHECK 10.3
1. What are the risks of becoming a guarantor? How can you
minimise the risks of becoming a guarantor?
2. How do you determine whether an individual is facing financial

difficulty?
3. Discuss the main types of loan.
 In order to build wealth, start saving and invest now. You need to increase
your assets in order to increase your net worth. Diversify your investments in
order to spread your risks. The higher the return you get from an investment,
the greater the risk.
 The amount of life insurance to buy depends on how much money you need
to support your lifestyle and pay your expenses when you are critically ill or
disabled due to illness or accident.
 An insurance consultant or broker has to be licensed by BNM and be a member

of the Malaysian Insurance and Takaful Brokers Association.
 A life insurance agent must be appointed by a licensed life insurance company

and registered with the Life Insurance Association of Malaysia (LIAM).
 A general insurance agent must be appointed by a licensed general insurance

company and registered with Persatuan Insuran Am Malaysia (PIAM).
 When making a claim, ensure that you have all the documents needed by the
insurance company to speed up the process.
 When applying for a loan, ask yourself the purpose of the loan and whether
you can afford to make the instalments. Never ever resort to borrowing from
unlicensed moneylenders. Be aware of the terms and conditions of the loans
you take.
 Always ask for the effective interest rate on all your hire purchase and fixed
rate term loans. Your total monthly payments on all your loans and credit card
debt should not exceed one-third of your gross monthly salary.

 Do not fall into the trap of using credit and charge cards as if it is „free‰ money.
 Paying only the minimum monthly payment on your credit card statement can
result in a huge debt due to the compounding effect.
 Aim to be a good paymaster so that you will have a positive credit report.
Bonds Investment
Borrowing Loan
Cash Property
Credit Real Estate Investment Trust (REIT)
Financial Scams Risk and return
Fixed interest investment Saving
Insurance Shares
Insurance coverage Unit trust funds
Insurance premium Wealth


Prentice Hall.

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OR
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Centre for Instructional Design and Technology

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Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Adapted by: Prof Dr Mohd Ghazali Mohayidin

Developed by: Centre for Instructional Design and Technology

First Edition, August 2017

Copyright © Open University Malaysia (OUM)

Topic 1 Introduction to Entrepreneurship 1

Topic 2 Identifying Entrepreneurial Characteristics 11

Topic 3 Developing Entrepreneurial Creativity and Innovation 20

Copyright © Open University Malaysia (OUM)

Topic 4 Ventures Environment Assessment 36

Topic 5 Business Plan 54

Topic 6 Starting a New Entrepreneurial Venture 66

Copyright © Open University Malaysia (OUM)

6.4 Legal Structures for New Business 80

Topic 7 Entrepreneurial Networking 91

Topic 8 Evaluation of Entrepreneurial Opportunities 97

Topic 9 Entrepreneur and Personal Financial Planning 109

Copyright © Open University Malaysia (OUM)

Topic 10 Achieving Entrepreneur's Personal Financial Dreams 126

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COURSE GUIDE DESCRIPTION

As an open and distance learner, you should be acquainted with learning

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Table 1: Estimation of Time Accumulation of Study Hours

1. Explain the historical background, concepts and theories of

2. Develop a vision to become an entrepreneur and appreciate entrepreneurial

3. Acquire creativity and innovative development skills in entrepreneurship;

4. Identify entrepreneurial opportunity and transform it into a basic business

Topic 1 introduces and defines entrepreneurship and discusses the evolution of

Copyright © Open University Malaysia (OUM)

Topic 2 focuses on 16 of the most often cited entrepreneurial characteristics. The

Topic 3 is devoted to creativity and innovation. Entrepreneurs need to know the

Topic 4 focuses on the environmental assessment in pursuing business

Topic 6 describes the various types of ventures that an entrepreneur can

Topic 7 discusses the importance of networking for entrepreneurs. Networking is

Copyright © Open University Malaysia (OUM)

Topic 8 discusses the evaluation of entrepreneurial opportunities. It also explains

Topic 10 explains entrepreneur wealth building by having a good savings habit as

TEXT ARRANGEMENT GUIDE

Self-Check: This component of the module is inserted at strategic locations

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Copyright © Open University Malaysia (OUM)

Dollinger, M. J. (2007). Entrepreneurship: Strategies and resources. Lombard, IL:

Histrich, R. D., & Peters, M. P. (1998). Entrepreneurship: Starting, developing and

Kuratko, D. F., & Hodgetts, R. M. (2001). Entrepreneurship: Contemporary

Zimmerer, T. W., & Scarborough, N. M., (2007). Essentials of entrepreneurship and

TAN SRI DR ABDULLAH SANUSI (TSDAS)

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Source: Kuratko & Hodgetts (2001)

The concept of entrepreneurship was introduced in the 18th century by economists

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1.1 THE EVOLUTION OF ENTREPRENEURSHIP

The concepts of the entrepreneur and entrepreneurship are elaborated further in

Table 1.1: Evolution and Development of the Theory of Entrepreneurship

Copyright © Open University Malaysia (OUM)

Source: Kuratko & Hodgetts (2004)

1.2 CONCEPTS OF ENTREPRENEURSHIP

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Figure 1.1: The four basic aspects of entrepreneurship

Entrepreneurship as defined by Kuratko and Hodgetts (2004) is a process of

(c) Environmental; and