Bahir Dar Institute of Technology (BiT)

Faculty of Mechanical and Industrial Engineering

Entrepreneurship for Engineers

5th year Automotive Engineering

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 Contents
Part 1 Introduction to Entrepreneurship

Part 2 Starting Technology based new venture

Part 3 Process of business development

Part 4 Choosing The Legal Form of Ownership

Part 5 Operations of Business startup

Part 6 Risk and insurance of Business enterprises

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 Chapter three: Business Development
Process

3.1 The process of Business Development

(Entrepreneurial cycle)
3.2 What is basic business idea
3.3 Steps in business setting
3.4 Conducting Feasibility study and Developing a
Business Plan

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 The process of Business Development

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 What is basic business idea?
It is logical to think of a goal for the unit in long run rather
than to look for the immediate tomorrow. This long-term
thinking is called basic business idea

Businessmen/businesswomen should think of long-term goal

and the profit when they start a business.

The basic business idea, which is at the top of the hierarchy, is

to meet the broadest needs of the customers, and has the long
life perhaps from 5-50 years.

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The basic business idea facilitates choice of product under
an overall plan.

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7
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 In a dynamic business scheme, one has to carefully assess
and evaluate the basic business idea and the business
opportunities in terms of
Its ability to generate quick returns
Its ability to permit quick changes in the
products/services
Its ability to achieve the founders long term goals

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 To be a successful entrepreneur, one major determinant
factor is the choice of a good business idea. In order to
select the best business idea, the following general steps
needs to be pursued:

a. Identify your problem

b. Define your objectives

c. Identify, develop and analyze the possible alternative

d. Select the best alternative in light of the specific criteria set

to the better fulfillment of the objective.

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 The Nature Of Business Opportunity
An opportunity is the chance to do something in a way which is

both different from, and better than, the way it is done at the
moment.
 In economic terms, different means an innovation has been

made. This might take the form of offering a new product in a

different way.
Better means the product offers a utility in terms of an ability to

satisfy human needs, that existing products do not.

It offers the possibility of delivering new value to the customer.
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 Cont..
 The key to opportunity recognition is to identify a product or
service that people need and are willing to buy, not one that an
entrepreneur wants to make and sell.
It is important to understand that there is a difference between an

opportunity and an idea.

An idea is a thought, an impression, or a notion. An idea may or

may not meet the criteria of an opportunity.

 Before excited by the idea entrepreneur should recognize

whether the idea fills a need and meets the criteria for an
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opportunity.
 Opportunity Scanning: Screening And Selecting
Opportunities

 Once the entrepreneur perceives opportunities, it becomes

important for him to scan the environment.

 It is quite possible that many of the promising
opportunities might not make commercial sense.
 Scanning involves close examination of the environmental

conditions and their impact upon the business idea.

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 Cont..
1. Environmental Analysis: An entrepreneur is affected by
and affects the environment.
An entrepreneur should identify specific environmental

factors specially micro environments;

o Political environment
o Technological environment
o Socio-cultural environment
o Legal environment
14 o Economic environment
 Cont..
2. Sectorial analysis:
After having understood the general environment in which the

business has to take birth, it is important to study the sector or

industry conditions in which the entrepreneur proposes to launch a
venture. This will help to put the proposed venture in the proper
context.
An entrepreneur should study the history of the industry, the future

trends, new products developed in the industry, forecasts made by the

government or the industry etc.
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 Cont..
3. SWOT analysis:
At this stage conducting a SWOT analysis will help the entrepreneur

to clearly identify his own strengths and weaknesses as well as the

opportunities and threats in the environment.
Strength: is an inherent capacity, which an organization can
use to gain strategic advantage over its competitors.
Weakness: is an inherent limitation or constraint, which creates
a strategic disadvantage
Opportunity: refers to any factor that offer promise or potential
for moving closer or more quickly towards the firms goal
Threat: is any factor that may limit or impede the business in
16the pursuit of its goals
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 Steps in business setting

1. The first key to success in any manufacturing

activity is to select the right product. These must be

examined with a view to assess:
a.The marketing aspects

b.Technical aspects

c. Financial aspects

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2. Having selected a product, a detailed project report to be
prepared. This will cover the following aspects.
a. A detailed estimate of demand is to be made.

b. Technical specifications of the process should be carefully

studied.
c. The equipment required and their sources are to be specified

d. Requirement of space.

e. The total cost of the project to be worked out, the means for

financing it identified
f. The economics of the entire scheme at projected operating

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level is to be assessed.
3. Implementation of the detailed project report. Includes:
a. Deciding on form of ownership and registration
b. Obtaining finance ,Obtaining license
c. Establishing necessary infrastructures

4. Once all the required authorizations and sanctions have

been obtained, simultaneous action is to be taken for the
following. Pre-commissioning requirement
a. Ordering machinery from suppliers
b. Obtaining utilities like power and water connections
after constructions of shed, if necessary.
c. Recruitment of staff,
d. Arranging supplies of materials
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e. Arranging for distribution of the products
5. Once these are complete, the plant is ready for
commissioning trial run may be made.

6. The unit is then ready for commercial production.

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 Business Model Canvas
The 9 building blocks of the business model canvas:

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 Business Model Canvas

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 1. Customer Segments
 Identify & define the different groups of people or organization.

 Make a conscious decision about which segments to serve and

which segments to ignore.

 Separate customer segments if:

their needs require and justify a distinct offer;

they are reached through different distribution channels;

they require different types of relationships;

they have substantially different profitability’s; and

they are willing to pay for different aspects of the offer

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 2. Value Proposition

For Each Customer Segment

•Describe the bundle of products and services that create value for each specific

customer segment.
Identify the reason why customers will turn to your company over its competitors.

It solves a customer problem or satisfies a customer need.

3. Distribution Channels
•Describes how your company communicates with and reaches its customer segments

to deliver the value proposition.

•Define the:
– communication channels
– distribution channels
25 – sales channels
 4. Customer Relations
• Describes the types of relationships your company needs to establish

and nurture/care with specific customer segments.

• Focused on: customer acquisition/finding and customer
retention/maintaining

5. Revenue streams
• Identify for what value is each customer segment truly willing to

pay?
• Identify and quantify the cash your company can generate from
each customer segment through one or more revenue streams (sales
26 pipelines/secret relationship for different things).
 6. Key Resources
 Identify, describe and quantify the assets,

E.g. land, buildings, equipment, facilities, platforms, systems, technology etc.

required to deliver on the value proposition to each of the identified customer
segments.

7. Key Activities
 Identify, define and describe the most important things (actions) your company
must do to:
• Create and offer a value proposition
• Reach markets
• Maintain customer relationships
• Earn revenues
• To make its business model work
• To operate successfully
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 8. Key Partnerships

• Identify and describes the network of suppliers and partners that

make the business model work, e.g.

– Strategic alliances between non-competitors;

– Co-operation: strategic partnerships between competitors;

– Joint ventures to develop new businesses;

– Buyer-supplier relationships to assure reliable supplies

9. Cost Structure
 Identify and quantify all costs incurred to successfully operate the
business model
 manufacturing costs (variable)
28  operating costs (fixed)
 New

Conducting feasibility study and

developing business plan

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 Conducting Feasibility study

Assessing the Feasibility of a New Venture

 As the name implies, a feasibility study is an analysis of the

viability of an idea. It focuses on helping answer the essential

question of “should we proceed with the proposed project
idea?” All activities of the study are directed toward helping
answer this question.
 Entrepreneurs with a business idea should conduct a feasibility

study to determine the viability of their idea before proceeding

with the development of the business.
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 Assessing the Feasibility of a New Venture…

 A feasible business venture is one where the business will

 generate adequate cash-inflow and profits,

 withstand the risks it will encounter,

 remain viable in the long-term and meet the goals of the

founders.

 The venture can be a new start-up business, the purchase of an

existing business, an expansion of current business operations

or a new enterprise for an existing business.

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 Elements in Evaluating New Ventures
 Market Opportunity: most early stage venture investors look for
companies addressing large markets.
 Industry Trends & Regulatory Matters: an early stage technology
company will usually need to find established partners that are early
adopters to validate a product and endorse it.
 Proprietary approach: is the intellectual property stand alone or
platform IP
 Technology impact - what is the nature and outgrowth of the
technology?
 Financials - is the model articulated for how products will be sold,
who will buy them, how much revenue is projected and by when?...
 Team - does the team have the requisite skills to move all aspects of
the company forward?
 SWOT is a series of steps one has to consider in evaluating a business
opportunity and arriving at a decision on starting a business or not.
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 Guidelines of business feasibility study
1. Description of the Business:
 Outline the general business model (i.e.. how the business will make
money).

 List the type and quality of product(s) or service(s) to be marketed.

 Specify the project time horizon.

 Identify economic and social impact on local communities.

 Identify environmental impact on the surrounding area.

2. Market Feasibility: Enterprise description, Enterprise

competitiveness, Market potential, sales projection, Access to market
outlets
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 Guidelines FS…
3. Technical Feasibility: Determine facility needs, Suitability of
production technology, Availability and suitability of site, Raw
materials, HR …

4. Financial Feasibility: Estimate the total capital requirements,

Estimate equity and credit needs and determine sources, Budget
expected costs and returns of various alternatives…

5. Organizational/Managerial Feasibility: legal structure of the

business, Business founders,

6. Study Conclusions: it contain the information you will use for

deciding
34 whether to proceed or not with creating the business.
 Group Case Study
Objective:
 The general objective of this case study is to apply the theoretical concepts of

entrepreneurship course learned in classes to real business.

Assignment two:
Select any small business and develop a business Model Canvas
(use A3 or A2 paper size)

 WARINING: Identical woks will not be evaluated!

 Submission date:
 Presentation Deadline:

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 DEVELOPING A BUSINESS PLAN

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 WHAT IS A BUSINESS PLAN?
A business plan is a comprehensive set of guidelines for a new venture.

A business plan is also called a feasibility plan that encompasses the

full range of business planning activities, but it seldom requires the

depth of research or detail expected for an establishment enterprise.

A business plan would present your basic business idea and all related

operating, marketing, financial and managerial considerations.

Every business should have a business plan.

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 What ever the name, it should lay out your idea, describe

where you are, point out where you want to go, and how
you propose to go there.
The business plan may present a proposal for launching an

entirely new business. More commonly, perhaps; it may

present a plan for a major explanation of a firm that has
already started operation

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 THE PURPOSE OF BUSINESS PLAN
1. It can help the owner/manager crystallize and focus his/her idea.

2. helps to understand the feasibility and viability of the proposed

venture

3. It can help the owner/manager set objectives and give him a

yardstick against which to monitor performance.

4. It can also use as a vehicle to attract any external finance

needed by the business. E.g. To get fund…

5. It can convince investors that the owner/manager has identified

high growth opportunities.

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6. Helps in providing guidance to the entrepreneur in organizing

his/her planning activities.

7. Facilitates in assessing and making provisions for the

bottlenecks in the progress and implementation of the idea.
8. It entails taking a long-term view of the business and its
environment.
9. It emphasizes the strengths and recognizes the weaknesses of
the proposed venture.

10. The plan can uncover weakness or alert the entrepreneur to

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sources of possible danger.
 WHEN THE BUSINESS PLANS ARE
PRODUCED?
At the start up of a new business: After the concept stage of initial
ideas and feasibility study, a new business startup may go through a more
detailed planning stage of which the main output is the business plan.
Business purchase: A detailed plan, which tests the sensitivity of
changes to key business variables, greatly increases the prospective
purchasers understanding of the level of risk they will be accepting, and
likelihood of rewards being available.
On going: Ongoing review of progress, against the objectives of either a
startup or small business purchase, is important in a dynamic
environment.
Major decisions: at a time of major change, For example, the need for
major new investment in equipment or funds to open a new outlet. It may
be linked to failure, such as a recovery plan for an ailing (or in bad
condition) business.
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 WHY THE BUSINESS PLANS ARE PRODUCED?
Assessing the feasibility and viability of the
business/project: it is in every ones interests to make
mistakes on paper, hypothetically testing for feasibility,
before trying the real thing.
Setting objectives and budgets: having a clear financial
vision with believable budgets is a basic requirement of
everyone involved in a plan.
Calculating how much money is needed: a detailed cash
flow with assumptions is vital ingredient to precisely
quantify earlier the likely funds required.
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 THE FORMAT OF A BUSINESS PLAN
1. Where are we now?
An analysis of the current situations of the market place, the
competitions, the business concept and the people involved. It
will include any historical background relevant to the positions
to date.

2. Where do we intend going?

Qualitative expression of the objectives, quantifiable targets
will clarify and measure progress towards the intended goals.

3. How do we get there?

Implementing of accepted aims is what all the parties to a plan
are interested in as a final result.
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 COMPONENTS OF BUSINESS PLAN (OUT LINE OF A BUSINESS
PLAN)
I. Analysis of the current situation (where are we now?)
1. Identification of the business
a. Introduction
- relevant history and background
- Proposed date for commencement of trading /beginning of a plan
b. Names
-name of the business and trading name
- name of the managers/owners
c. Legal identity
-company/partnership/sole-trade/cooperative
- details of share or capital structure
d. Location
-address-registered and operational
- brief details of premises.
e. Professional advisers, -Accountants, solicitors, bank
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 OUT LINE OF A BUSINESS PLAN…

2. The key people

a) Existing management- Outline of background experience,
skills and knowledge,- names of the management team
b) Future requirement -gaps in skills and experience and
how they will be filled ,- future recruitment intentions

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 OUT LINE OF A BUSINESS PLAN…

3.The nature of the business

a. Product(s)or service(s)
-Description and applications
-Key suppliers
-Planned developments of product or service
b. Market and customers
–Definition of target market, customer types
- Trend in market place
c. Competition- description of competitors; strength and
weakness of the major competitors.
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 II. FUTURE DIRECTION (where do we intend going?)

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III. IMPLEMENTATION OF AIM (how do we get there?)
1. Management of resources
a) Operation:-premises, materials, equipment, insurance, management
information system.
b) People/Human resource/- employment practices, recruitment, team
management, training etc.

2. Marketing plan
a)Competitive edge- unique selling point of business (Critical
products or service characteristics or uniqueness in relation to
competitors).
b) Marketing objectives - specific aims for product or service in the
market place.
c) Marketing methods- product, pricing, promotion, place( physical
distributions)=4P.
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 OUT LINE OF A BUSINESS PLAN…

3. Money: financial analysis

a. Funding requirement- start up capital, working capital,
asset capital, timing of funds required.
b. Profit and loss:-- 3 years forecast, sales variable costs,
profit, overheads, net profit.
c. Cash flow:-- 3 years forecast, payments, monthly and
cumulative cash flow, break-even analysis.
d. Balance sheet - use of funds, source of funds

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 Preparation of financial statements
 Financial statements: After the effect of the individual transactions
has been determined, the essential information is communicated to
users. The account statements that communicate this information are
called financial statements.
The principal financial statements are the income statements the
statement of owner’s equity, the balance sheet and the statement
of cash flow.
 The financial statements prepared for sole proprietorship, partnership
and corporation are almost the same.
 The major difference is in the capital section of the balance sheet.

 The capital section of these enterprises indicates the name of the

owner, the name of the partners and the capital stock (common stock)
50and/or the preferred stock in their respective order.
 Cont …
 Income statement: a summary of the revenue and the expenses of a
business entity for a specific period of time, such as a month or a
year.
ABC trading
Income statement
For month ended December 31, 2004
 Sales 10,000
Operating expenses:
 Wages expense 3,000
 Rent expense 2,000
 Suppliers expense 2,000
 Utilities expense 750
 Miscellaneous expense 250
Total operating expense (8,000)
Net income 2,000
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 Cont…

Statement of owner’s equity is a summary of the changes in

the owner’s equity of a business entity that have occurred
during a specific period of time such as a month or a year.

ABC trading
Statement of owner’s equity
For month ended December 31, 2004
Investment during the month 15,000
Net income for the month 2,000
Less withdrawals 500
Increase in owner equity 1,500
52 Mr. X, Capital, December 31,2004 16,500
 Cont…
 Balance sheet: is a list of the assets, liabilities and owner’s equity of
a business entity as of a specific date, usually at the close of the last
day of a month or year.
ABC trading
Balance sheet
December 31, 2004
Assets
Cash 10,000
Supplies 1,000
Land 8,000
Total asset 19,000
Liabilities
Accounts payable 2,500
Owner’s equity
Mr. X, capital 16,500
53 Total liabilities and capital 19,000
 Statement of cash flows

It is a summary of the cash receipts and cash payments of a

business entity for a specific period of time, such as a month or
a year.
It is customary to report cash flows (cash receipts and cash
payments) in three sections:

1. Operating activities
2. Investing activities, and
3. Financing activities

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 Cont…
ABC trading
Statement of cash flows
For month ended December 31,2004

Cash flows from operating activities:

Cash received from customers 10,000
Less cash payments for expense and payments to creditors (7,300)
Net cash flow from operating activities 2,700

Cash flows from investing activities:

Cash payments for acquisition of land (8,000)

Cash flows from financing activities:

Cash received as owner’s investment 15,000
Less cash withdrawal by owner (500)
Net cash flow from financing activities 14,500

Net
55 cash flow and December 31,2004 cash balance 9,200
 Break even analysis
One of the most common tools used in evaluating the
economic feasibility of a new enterprise or product is the
break-even analysis.
The break-even point: is the point at which revenue is
exactly equal to costs. At this point, no profit is made and
no losses are incurred.
The break-even point can be expressed in terms of unit
sales or dollar sales. That is, the break-even units indicate
the level of sales that are required to cover costs.
Sales above that number result in profit and sales below
that number result in a loss. The break-even sales indicates
the dollars of gross sales required to break-even.

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 Cont…
Break-even analysis is based on two types of costs: fixed
costs and variable costs.
Fixed costs are overhead-type expenses that are constant
and do not change as the level of output changes.
Variable cost are not constant and do change with the
level of output. Because of this, variable expenses are
often stated on a per unit basis.
Once the break-even point is met, assuming no change in
selling price, fixed and variable cost, a profit in the
amount of the difference in the selling price and the
variable costs will be recognized.
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 Cont…

There are three basic pieces of information needed to

evaluate a break-even point:

Average Per Unit Sales Price
Average Per Unit Variable Cost
Average Annual Fixed Costs

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 Cont…
 Profit = Revenue-Cost
Profit=(Revenue)-(Fixed cost (FC) + Variable cost)

Revenue =(selling price (SP))* quantity sold (Q))

Variable cost = (quantity sold * variable cost per unit
(VC))
 At break even point the profit is assumed to be zero.
 The basic equation for determining the break-even units
is=
Average Annual Fixed Cost
(Average Per Unit Sales Price - Average Per Unit Variable
Cost)
Q=FC/P-VC
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 Cont…

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 Cont…
Example: A small street side cafe offers fresh traditional coffee

to the general public. Total variable costs per coffee (including

coffee beans, water, firewood, sugar) amount to ETB 1.60 per
cup. The cafe has fixed costs per week of ETB 360.00, being
the rental of the place. The selling price is ETB 4.00.
 Calculate:

 The number of units to break-even

 break-even revenue and the profit / loss that the business will make

 The diagrammatic presentation of the break – even analysis.

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 PROFIT FORECAST
 Profit forecast tells you how much profit/loss you make in a

period.
 Profit and Loss is also essential in providing information

for Inland Revenue for Taxation purposes.

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 Example: Block Enterprise: prepare a profit forecast
Suppose you are the owner of hollow blocks manufacturing enterprise. Hollow
blocks are sold for ETB 850 per 100 blocks. The monthly cost structure of your
enterprise looks the following
 Salaries ETB 3,000 per month
Production Labor ETB 50 per 100 blocks
Rent ETB 3,000 per month
Cement, sand and stone ETB 500 per 100 blocks
Machine credit payment ETB 1,000 per month
Delivery costs ETB 50 per 100 blocks
Telephone / Communication ETB 500 per month
 Budgeted production and sells (quantities of bricks to be sold)
September October November
63 Blocks 5,000 6,500 7,000
 Solution

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 Cash flow forecast
Prepare a cash flow forecast for the period September,
October and November.
During August you produced and sold bricks to the amount
of ETB 30,000. All sales are on credit and debtors take one
month on average to pay. However, you pay cash for the
materials in the moment of production. You had ETB
25,000 in the bank at the end of March.
Summary:

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 Project work
• Select any small business and develop a business
plan (use the given outline).

 N.B. -- Make reasonable assumption and constraints wherever

necessary
 WARINING: Identical woks will not be evaluated!

 Submission date:
 Presentation Deadline:

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 THE END

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