13 Topic 7 Entrepreneurial Networking

13 Topic 7 Entrepreneurial Networking
INTRODUCTION
Networking is a business tool that plays a very significant role for the
entrepreneur's 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.

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
7.1

Topic 7 Entrepreneurial Networking

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe three advantages of having good networking;
2. Explain two types of networking;
3. Discuss six important reasons for networking;
4. Explain seven techniques in establishing and building confidence in
networking; and
5. Identify five barriers in network building.

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.

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 company's 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.

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
entrepreneur's goals and objectives to be achieved in running the business by
utilising their interaction with others and determining the best action that should
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 the existing ones.

TYPES OF NETWORKING
The two types of networking 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, 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.

7.4
Outline the advantages that an entrepreneur would gain from good
networking.
EXERCISE 7.1

Figure 7.1: Informal networking circle

THE IMPORTANCE OF NETWORKING

Now let us look at the importance of networking. Figure 7.2 shows the
importance of networking.

Figure 7.2: The importance of networking

(a) Build Confidence
In business, entrepreneurs may face uncertainties, for example, investment,
losses, competitors and products which cannot penetrate into 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
(iii) Changes in customer satisfaction
7.5

(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.
(iv) Eliminating irresponsibility („passing the buck‰).

(c) Increase Information
Networking will build an entrepreneur's 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 entrepreneur's products or services. Trust also motivates
people to promote the entrepreneurs products or services by word of
mouth.

(e) Create an Interdependent Situation
Someone's success might come from another's contribution. Maybe your
success too comes from someone else's 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 opportunity. 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
(v) Suggest new ways of promoting the product

HOW TO ESTABLISH STRATEGIC NETWORKING FOR ENTREPRENEURS

There are three ways for entrepreneurs to establish strategic networking as
shown in Figure 7.3:

Figure 7.3: Three ways to establish strategic networking
7.6

Describe three ways to establish strategic networking for entrepreneurs.

EXERCISE 7.2

To be a successful entrepreneur, one must have the strength to work together
with others. Here are some strategies for developing effective networking.
(a) Ready to listen;
(b) Ready to compromise;
(c) Skills in giving confidence; and
(d) Very much at peace.

When we are ready to listen to other people, we will get some ideas that could
help us change. We need to compromise with others and show our confidence.
Every entrepreneur who wishes to engage good networking strategies must
possess these qualities. Any failure to build good networking will:
(a) Increase cost;
(b) Waste time;
(c) Waste the resources of the company;
(d) Damage the entrepreneur's reputation;
(e) Damage the company's reputation; and
(f) Create dilemmas.

STRATEGIC NETWORKING CONSOLIDATION

These strategies are techniques in developing relationships between
entrepreneurs and other people to build good networking. Good relationships
with other people could help us to make positive changes. These strategies also
help entrepreneurs to overcome changes. The strategies are as follows:

(a) Strategy for Networking Consolidation
This strategy is a technique for developing relationships between
entrepreneurs and other people who have business experience and those
who will be involved in the business in the future. In addition, the
entrepreneur must also make the effort to keep other people in mind even
though they may not have any business dealings now. There are many
ways to develop strategic networking consolidation. These include:
• Paying visits;
• Participating in formal functions;

7.8
7.7

• Networking through third persons;
• Giving souvenirs;
• Sending cards e.g. Congratulatory cards, condolence cards,
invitation cards;
• Writing letters and e-mails as well as replying them;
• Giving out business cards;
• Sending facsimiles; and
• Talking on the phone.

(b) Strategy for Developing Self-confidence
Entrepreneurs must show their capacity, personality and skills when
responsibility is given to them. They should also show their responsibility
and make sure the person who gave the responsibility will be satisfied and
ready to give more responsibility in future. When we make changes, we
must be responsible and do our best, so that our ideas will not fail. Some
important matters for attention include the following:
C Ability to do something which others cannot do.
C Ability to solve problems which others cannot solve.
C Ability to generate ideas constructively when needed.
C Ability to show that we can compete with others.
C Ability to make interpretations.
C Ability to show we are a place of reference for others.
C Always be right in decision-making.
C Make someone comfortable or happy when communicating with us.
C Expression, which does not suggest dominating leadership.
C Ability to control tone of voice when talking.
C Not taking advantage of others.
C Always ready to talk frankly.
C Ready to accept opinions other than one's own.
C Ready to accept and appreciate other people and their abilities.
C Accept other's advice and give advice to others.
C Be able to control ourselves.
C Flexible.
C Give and take when conflicts start.

Such strategies will help an entrepreneur overcome many personal shortcomings
and enable him to conduct his business as smoothly as possible with the people
he is involved with.

TECHNIQUES FOR DEVELOPING CONFIDENCE AMONG ENTREPRENEURS

As an entrepreneur, you must have the trust of many people. People will have
confidence in an entrepreneur who shows that he can successfully do the work
given. These are some strategies that could help you to be confident.

(a) Communicate Effectively and with Full Confidence
An inability to deliver a message or opinion effectively will affect the
confidence people have in you. To communicate well, be prepared with
accurate information and data. Also, keep in mind that your audience may
have a perspective quite different from your own. Face changes confidently
and be prepared to talk about any problems and ideas for solutions that
you have.

(b) Prove Your Abilities to Others
You must remember that people develop confidence in you when they
know that you are capable of doing the work assigned to you. As an
entrepreneur, you must prove that you are capable of managing changes
and guiding others to cope with the changes.

(c) Show Concern for Other People
Show that you are ready to help others. When you are ready to help a
person who needs help, you will make them remember you. You can also
guide the people who find it difficult to adapt to the changes.
7.9

You have planned a Thanks giving party in your house. You have
invited your friends and relatives to the party. Explain how you will
develop good networking with them in the party.

ACTIVITY 7.1

(d) Always be Fair
If you are not fair in your actions, you will destroy the network that you
have built. So, to avoid problems you must be fair when mentoring, as well
as giving help, benefits and attention. You must adapt to changes in a team.

(e) Always be Ready to Admit Your Own Mistakes
Every human being will make mistakes. So when you make mistakes, you
must be ready to admit your mistakes. Such humility will show others that
you are sincere. You must always be ready to ask whatever you do not
understand. Avoid asking questions which purposely test other people.
When you share an idea with others, you help yourself to cope with
changes. This is because you will have many new ideas and thus, you
should be able to make good decisions.

(f) Show Teamwork Spirit
We must always consider ourselves a team member and make sure others
feel they belong to the same team. Avoid being a loner or dissipating
others. We must be friendly with all team members to know how they feel
about the organisation so that we are able to work together to solve
problems and make any new changes.

(g) Be Confident of Others
When we show our confidence in others, they will also tend to be confident
in us. One of the ways we could prove our faith in others is to be ready to
share information. When we show confidence, people accept our ideas
more readily and their co-operation is more easily gained.
You have just been appointed as the team leader in your organisation.
How would you react if your team members do not agree with your
opinions?

Describe some strategies that you could use to bolster your confidence.

ACTIVITY 7.2
SELF-CHECK 7.1

BARRIERS IN BUILDING STRATEGIC NETWORKS

There are five main barriers, which must be avoided by entrepreneurs keen on
building effective strategic networking. If we fail to implement an effective
network strategy, we will also fail to adapt to changes. First, entrepreneurs must
take the initiative to identify their own weaknesses. The five barriers are shown
in Figure 7.4.

Figure 7.4: Five barriers in building strategic networks

(a) Emotional
Barriers may arise from emotional flaws apparent in the characteristics,
personality and ego of an entrepreneur. These barriers will create a social
space which will separate the entrepreneur from others. A social space
could cause entrepreneurs to fail to adapt to changes. Emotional barriers
are caused by the following elements or flaws in the personality of an
entrepreneur:
(i) Overly aggressive;
(ii) Fearful;
(iii) Speech which reveals a negative tendency to assume the authority
of a principal leader;
(iv) Carelessness in actions;
(v) Thinking and acting in ways that suggest one is better than others;
(vi) Arrogance;
7.10

(vii) Hypocrisy;
(viii) Being a perfectionist but taking perfection to extremes;
(ix) Indecorous assumption of leadership;
(x) Never punctual;
(xi) Unwilling to admit one's mistakes; and
(xii) Unwilling to recognise other people's talents and abilities.

(b) Physical
Physical barriers might arise from an entrepreneur's personal lack of
confidence in himself or from his inattention to other important matters
with respect to manners and attire. An entrepreneur who has little regard
for his own personal deportment could easily fail to inspire confidence
among his fellow colleagues. People often feel that an individual whose
manners, appearance or attire are wanting will likewise be incapable of
running an organisation well. They will thus have a greater tendency to
resist any changes that such an entrepreneur may seek to introduce. The
following are pitfalls in physical deportment which will raise unnecessary
barriers to strategic networking:

(i) Improper attire;
(ii) Physical appearance suggesting poor health or exhaustion;
(iii) Poor or total lack of self-management;
(iv) Nervous behaviour;
(v) Manners or speech that betray a lack of confidence;
(vi) Habitually avoiding eye contact when speaking to others;
(vii) An unfriendly countenance;
(viii) Overly expressive body language when attempting to communicate
with others; and
(ix) Speaking in an unnecessarily high tone or pitch.

(c) Psychological
Factors and characteristics affecting the psychological make-up of an
entrepreneur will influence his ability to build strategic networks.
Psychological barriers affect an entrepreneur's interactions with other
people. If, for instance, he is one who is prone to feelings of loneliness or
inferiority, he will face difficulties building an effective network. An
entrepreneur who is psychologically well-balanced has a better chance of
inspiring support and confidence. He will also be in a position of strength
when attempting to bring about needed changes in an organisation. One
who lacks this balance will instead create a bad impression and face an
uphill battle mustering support.
Psychological barriers include behavioural characteristics indicative of:
(i) Nervousness;
(ii) Indecision;
(iii) Emotional problems resulting in strong feelings such as hatred or
anger towards others;
(iv) Loneliness;
(v) Frustration;
(vi) Failure to achieve goals;
(vii) Shyness;
(viii) Strong need for approval and acceptance;
(ix) Desire to be pre-eminent;
(x) Obsessive passion; and
(xi) Inability to discuss problems.

(d) Behavioural
 The way we behave will determine whether we are closed or distant from
others. Good behaviour will help us generate good changes. Bad behaviour
characteristics include:
(i) Slandering other people;
(ii) Carelessness in making decisions;
(iii) Always wanting to be first;
(iv) Always wanting to be the leader;
(v) Teasing other people;
(vi) Making other people appear foolish;
(vii) Pretending to know everything;
(viii) Thinking and acting as if other people were incapable of making
mistakes;
(ix) Reluctance to accept other people's opinion; and
(x) Not appreciative of other people's contributions.

(e) Negative Expressions

Expressions could help build, or spoil a strategic network. The way we
express ourselves, is important. When we are careless about the way we
express ourselves, we might easily offend others. Garnering their support in
a network will then be difficult. Expressions to avoid include the following:
(i) Expressions Indicating Dominance
(ii) Expressions Indicating Ridicule or Mockery

(iii) Expressions Indicating an Inferiority Complex

(iv) Expressions Indicating an Egoistic Nature

An entrepreneur must therefore do his best to avoid the five barriers to building
a strategic network. By confidently applying the knowledge that he possesses,
the entrepreneur should be able to set up an effective network for successful
business. Such a network would be mutually advantageous to both the
entrepreneur and others within the network. The entrepreneur who is keen on
achieving his full potential through a good network will understand that he
cannot strive to dominate others. Instead, it is important to seek cooperation from
all concerned. Also, in any situation where changes need to be implemented, the
opinions of other members must be considered. Treating fellow workers or
associates with consideration and respect yields better results than attempting to
control, intimidate or offend them into submission.

• 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
(a) Formal networking and
(b) 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 one's 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.
What kinds of expressions should you avoid in order to maintain
good networking?

SELF-CHECK 7.2

• To establish and build confidence in networking, you can apply the following
seven techniques:
a communicate effectively and with full confidence;
a prove your abilities to others;
a show concern for other people;
a always be fair;
a always be ready to admit your own mistakes;
a show team spirit; and
a be confident of others.
• Barriers to network building include physical, emotional, psychological,
behavioural, and expressive barriers.

Formal networking
Informal networking
Strategic networking
Barriers to network building

13.2 Topic 8 Evaluation of Entrepreneurial Opportunities.

13 Topic 8 Evaluation of Entrepreneurial Opportunities.

INTRODUCTION

The number of new ventures have been increasing in the past few years. There
are several reasons for entrepreneurs starting up new ventures. 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.

Topic 8 Evaluation of Entrepreneurial Opportunities.

LEARNING OUTCOMES
By the end of this topic, you should be able to:
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.

PITFALLS IN SELECTING NEW VENTURES

The stage of transition from an idea to a potential venture can be the most critical
for understanding new venture development. Below are six common pitfalls that
an entrepreneur may encounter in the process of selecting a new venture
(see Figure 8.1).

Figure 8.1: Six pitfalls in selecting new ventures

Okay, 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
the careful examination they should do for 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. 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 well as introducing the products
at the right moment.

(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 entrepreneur's
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 rival's 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 copyrights and patents to protect one's products and creations.
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 friends during a tutorial session.

ACTIVITY 8.1

CRITICAL FACTORS FOR NEW VENTURE DEVELOPMENT

Another thing we must consider in new venture development is the critical factors.
Vesper (1990) stated that an entrepreneur should use a checklist of new venture
ideas which covers eight areas as shown in Figure 8.2.

Figure 8.2: Eight areas to be considered in new venture development

Describe six pitballs in selecting new ventures.

EXERCISE 8.1

Table 8.1 shows a checklist of new venture ideas that an entrepreneur should
consider in the assessment of a new venture.
Table 8.1: A Checklist of New Venture Ideas

No. Area Assessment Question

(a) Basic Feasibility of the Venture
• Can the product or service work?
• Is it legal?

(b) Competitive Advantages of the Venture
• What specific competitive advantage will the product or service offer?
• How are the competitors likely to respond?

(c) Buyer Decision in the Venture
• Who are the customers likely to be?
• How much will each customer buy and how many customers are there?

(d) Marketing of the Goods
and Services
• How much will be spent on advertising?
• What share of the market will the company
capture?
• Who will perform the selling function?

(e) Production of the Goods
and Services
• Will the company make or buy what it sells?
• Are sources of supplies available at
reasonable prices?

(f) Staffing Decision in the
Venture
• How will competencies in each area of the
business be ensured?
• Who does the hiring?

(g) Control of the Venture • What records will be needed? When?
• Will any special controls be required?
(h) 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 for the
development of a new venture?

WHY NEW VENTURES FAIL

Many newly established businesses vanish within a year or two. Only a small
percentage are successful. According to Bruno et al (1987) and Karakaya and
Kobu (1994), there are three major causes that contribute to the 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 below describes the causes of failure.

Table 8.2: Causes of Failure

No Causes of Failure Factors

(a) Product/market problems
• Poor timing
• Product design problems
• Inappropriate distribution strategy
• Unclear business definition
• Over-reliance on one customer

(b) Financial difficulties
• Initial undercapitalisation
• Assuming debt too early
• Venture capital relationship problems

(c) Managerial problems
• Concept of a team approach (e.g. hiring and promotions
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).

8.3

THE EVALUATION PROCESS
A critical task of 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 as follows:
(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?

8.4

(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 business 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 calender 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
It refers to a more comprehensive and systematic feasibility analysis that
incorporates external factors.
There are two major factors involved in a comprehensive feasilibility study
of a new venture (see Table 8.3).

Table 8.3: Two Major Factors Involved in a Comprehensive Feasibility Study
of a New Venture

Technical Feasibility Marketability
It means identifying the technical
requirements for producing a product or
service that will satisfy the expectations
of potential customers.
The important criteria for the
requirement are as follows:
• Functional design of the product and
attractiveness in appearance.
• Flexibility, for example, permitting
ready modification of the external
features of the product to meet
customer demands or technological
and competitive changes.
• Durability of the materials from
which the product is made.
• Reliability, for example, ensuring
performance as expected under
normal operating conditions.
It means how saleable the product or
service is in the market and what is the
demand like. Three major areas in this
type of analysis are:
• Investigating the full market potential
and identifying customers for the
goods or services.
• Analysing the extent to which the
enterprise might exploit this potential
market.
• Using the market analysis to
determine the opportunities and risks
associated with the venture.

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).

C 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.

C By asking the right questions, making a profile analysis and carrying out a
feasibility criteria study, the feasibility of an entrepreneur's product or
service can be assessed.
State the main reasons why new ventures fail.

EXERCISE 8.2
Critical factors
Customer availability
Legal requirements
Marketability
Product availability
Product differentiation
Profile analysis
Technical feasibility
Uniqueness

13 TOPIC 10 ACHIEVING ENTREPRENEUR'S PERSONAL FINANCIAL DREAMS

TOPIC 10 ACHIEVING ENTREPRENEUR'S PERSONAL FINANCIAL DREAMS

INTRODUCTION
Have you ever heard of this saying „what matters is how much you save, not
how much you earn‰. In other words, higher earning does not guarantee you are
financially better off than others who are earning lower than you, if you spend
more than what you have earned. It is always better to spend below your means
and make a habit to save. However, besides saving, one must learn and practise
investing a 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 a proper protection i.e. insurance. Finally, you
need to know when you are falling into financial difficulty. This serves as the
financial self-check that should not be overlooked in order to achieve true
personal financial success.
Achieving
Entrepreneur's
Personal Financial
Dreams

Topic 10

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the meaning and various ways of saving;
2. Discuss your investment goals, and the relationship between risk and
return;
3. Explain various types of investments, insurance, takaful and loan;
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.

ENTREPRENEUR WEALTH BUILDING
We have 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 or 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 automatic. 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% of your salary every
month. It is even better if you can save 20% to 30% because this will translate into
more money for your future. Remember that the more you save now, the easier it
would 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.
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 a by
making it automatic!
Give an instruction to your bank to transfer at least 10% 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 would not miss. In the meantime, the amount of
money in your savings account will just grow and 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, 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.

10.1.2 Increasing Net Worth via Saving 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 diversify your investment.

(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.
What is the meaning of savings? How is it different from investment?

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. Let us take a look at some
questions below:
(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, e.g. 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.
Remember to make your financial and investment goals 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 (i.e. the interest rate) is lower
compared to other forms of investment, but it is not risky. You can go to
sleep at night and not be worried 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 form of investments can give
you better returns, they also sometimes carry greater risks, i.e. 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 8%.

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, agent's commission, stamp duty and bank loan interests.
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, i.e. 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 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 a bond or equity fund.

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 exactly alike! You are the only one who can decide
which options to choose and how much to spread your savings amongst
the types of investment products available.

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 we will look at

Figure 10.1 to find out the types of investment available in the financial
marketplace.

Figure 10.1: Types of investments
1. What are your investment goals? Give examples to elaborate.
2. Discuss the relationship between risk and return, using examples.

SELF-CHECK 10.1

Let us look at the explanation of each type in detail.

(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.
(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 company's
performance drops. Shares are generally suitable for investors who:

• Want to build a nest egg for medium-term and long-term
financial goals;
• Have a longer investment time-frame; and
• 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 are 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.
(ii) You can earn rental income from tenants.
Like shares, property prices go up and down and have periods of
sustained high returns and sustained 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.

 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 control over us more 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 brings about
feelings of fear, depression and worry. How do we cope with such uncertainty?
Well, in this section, we will discuss several tips on how to deal with
uncertainties, for instance the need to get insured, the types of insurance we
should take and what takaful is.

What are your preferred types of investment? Why?
ACTIVITY 10.2
State the main types of investment.
EXERCISE 10.1

10.2.1 The Need of Getting 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), where your ability to meet
these commitments have been impaired, 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 a 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 you 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 incidences 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 know more about insurance, BNM has
produced a series of booklets, which you can get from branches of
insurance companies. Alternatively, you can visit www.insuranceinfo.
com.my.

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

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?
ACTIVITY 10.3

(a) Life Insurance
A life insurance policy insures you and your life against risks such as premature
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, semiannually
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 damages 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 shows us 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 death,
third party property loss or damage, and loss or damage to your
own vehicle due to an accident, fire or theft.
A basic fire policy covers the 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.

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.

This covers items such as computers, handphones, notebooks and
cameras against loss or theft.
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.

10.2.3 Takaful
As in banking where you can choose between conventional and Islamic banking
products and services, the insurance industry in Malaysia also offers conventional
insurance as well as takaful.

Takaful is insurance protection based on Shariah principles. You contribute a
sum of money to a common takaful fund in the form of participative
contribution. You undertake a contract (aqad) to become one of the participants
by agreeing to mutually help each other, should any of the participants suffer a
specified loss.

Both insurance and takaful have similar basic principles. For example, in both
insurance and takaful, you suffer a financial loss when the insured event occurs.
While takaful offers products similar to conventional insurance, it has some
unique features:

(a) The surplus of the fund is shared between you and the takaful company
based on a pre-agreed ratio. The amount in the surplus fund is calculated
after deducting expenses such as claims, technical reserves, management
expenses and re-takaful.

(b) You are entitled to this surplus, if you had not made a claim during the
period of the takaful.
Figure 10.4 shows us two types of takaful.

Figure 10.4: Types of takaful

(a) Family Takaful
 Family takaful is a combination of protection and long-term savings and
usually covers a period of more than a year. It provides financial benefits if
you suffer a tragedy as well as gives you investment profits. Contribution
payments can be paid monthly, quarterly, semi-annually or annually. Now
look at Table 10.2 for the basic types of family takaful.

Table 10.2: Types of Family Takaful

Types of Family Takaful Explanation
Individual Family
• With plans that include education, mortgage and
health, you and your beneficiary will receive
financial benefits arising from death or permanent
disability.
• There are also long-term savings and investment
profits are distributed upon claim, maturity or
early surrender.
Retirement Annuity
• This is a plan that provides you with a regular
income upon retirement.
Investment-linked
• Combining investment and protection, part of
your contribution is used to buy investment units
while the balance goes towards providing
coverage in the event of death or permanent
disability.
Medical and Health
• This covers the costs of medical treatment,
including hospitalisation and surgery.

(b) General Takaful
This product protects you on a short-term basis, usually for a one-year
period, for any loss or damage to your property or personal belongings.
You pay a one-time contribution on an annual basis. Please refer to Table
10.3 for the main types of general takaful.

Table 10.3: Types of General Takaful
Types of General Takaful Explanation Home Takaful

• A house owner takaful covers your home against
loss or damage caused by flood, fire and other
similar perils, while a house holder takaful covers
loss or damage to the contents of your house.

• You may participate in either one or both.
Motor Takaful • You are covered against loss or damage to your
vehicle due to fire, theft or an accident as well as
bodily injury or death of a third party and loss or
damage of a third party's property.
• As with general motor insurance, the two types of
cover are third party and comprehensive.
Personal Accident • This provides you or your beneficiaries with
compensation in the event of death, disablement or
injuries arising from an accident.
• This plan is also available for a short duration,
such as when travelling abroad.
For more information on takaful, you may want to surf this website:
http://www.insuranceinfo.com.my.

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 a with interest!

Describe each type of insurance and takaful. Which do you prefer and
why?

SELF-CHECK 10.2
Discuss the basic types of Family Takaful.

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 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 get behind on your
payments.
(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 10.5.

Figure 10.5: Types of loan
Now we will discuss in detail each type of loan.

(a) Personal Loan
This is a loan offered for your 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 towards 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. Conversely, some of the
interest rates can be very high.
As stated earlier in this topic, ask yourself some important questions before
you apply for such a loan. Be clear about the purpose of the 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. 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 5% interest per annum with a fiveyear
tenure. The effective interest rate works out to be 9.15%.
Do know the basics of hire purchase? Table 10.4 provides you some
details on hire purchase basics.
Table 10.4: Hire Purchase Basics
Terms Explanation
(a) Minimum Deposit This is about 10% of the cash value of the car but financial
institutions can request for a higher deposit.
(b) Interest Rate This is a fixed rate and the maximum allowed is 10%.
(c) Effective Interest
Rate
This is the actual interest that you pay after taking into
account annual compound interest on the loan over its
tenure.

(d) 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.
(e) 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.
(f) Insurance You must purchase insurance coverage for your car.
Financial institutions require a car owner to undertake a
comprehensive insurance policy.
(g) 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 reposessor.
Having your car taken away from you can be a traumatic and embarrassing
experience. Before taking any action, the repossessor must show you his
Monthly instalment: RM1,042
Total interest payment: RM12,500
Total loan + interest: RM62,500
Approximate effective rate per annum: 9.15% 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 14 days after the Fourth Schedule is issued
a 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, e.g. 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 offers 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 downpayments 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 housing loan (Table 10.5). The
principal sum of a loan is reduced each time an instalment is paid.

Table 10.5: Method of Payment for Housing Loan

Method of Payment Explanation
(a) 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.

(b) Partial Prepayment of
the Outstanding Loan
You can shorten the loan tenure by making partial
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 passes away, 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 Card
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
Well, 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 can be seen in Figure 10.6.

Figure 10.6: Types of card

Below is detailed explanation of each type of card listed above.
(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 0% 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. Similiar to credit card, it is convenient to use 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 a 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 month, which is charged on a
daily basis and compounded monthly.

Earlier in this module we have 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 to the original amount you paid for the product or
service. Remember to always pay in full a 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 statements, 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 credit bureau and debt repayment
problem.

(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 borrower's
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 a financial institutions will impose finance
charges on a tiered basis depending on your repayment behaviour.
If you wish to find more information on Credit Bureau, surf 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 i.e. your expenses are more than
your income;
(ii) You have more debts than you can manage to pay;
(iii) You are only able to pay the minimum 5% 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 counselor as soon as possible.

• 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 an 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
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?

SELF-CHECK 10.3
Discuss the main types of loan..

EXERCISE 10.3

unlicensed money lenders. 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
Borrowing
Cash
Credit
Financial Scams
Fixed interest investment
Insurance
Insurance coverage
Insurance premium
Investment
Loan
Property
Real Estate Investment Trust (REIT)
Risk and return
Saving
Shares
Takaful
Unit trust funds
Wealth

13.2 u Answers

13.2 u Answers

TOPIC 1: INTRODUCTION TO ENTREPRENEURSHIP

Exercise 1.1
1. The ten myths of entrepreneurship are:
(a) Entrepreneurs Are Doers, Not Thinkers
(b) Entrepreneurs Are Born, Not Made
(c) Entrepreneurs Are Always Inventors
(d) Entrepreneurs Are Academic and Social Misfits
(e) Entrepreneurs Must Fit the „Profile‰
(f) All Entrepreneurs Need Is Money
(g) All Entrepreneurs Need Is Luck
(h) Ignorance Is Bliss for Entrepreneurs
(i) Entrepreneurs Seek Success but Experience High Failure Rates
(j) Entrepreneurs Are Extreme Risk Takers (Gamblers)

2. Entrepreneurship is important because of the following reasons:
(a) It is a catalyst for economic change and growth.
(b) It increases per capita output and income.
(c) It involves initiating and constituting change in the structure of
business and society.
(d) It increases a country's output and productivity.
(e) It encourages innovation and creativity.
(f) It develops new products or services for the market to fulfil human
needs. Society will get better goods and services at cheaper prices.
(g) It stimulates investment interest in the new ventures.
(h) Entrepreneurship, through its process of innovation, creates new
investment of new ventures.
(i) More ventures are created and new jobs are produced, thus reducing
the unemployment rate.
(j) It creates and promotes wealth distribution.

3. Entrepreneurship has existed in Malaysia (Malaya) since the interaction of
Malacca with foreign traders. However, when the British colonised the
Malay Peninsular, 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 to the Malays and Indians.

 After independence, the Malaysian Government realised the importance of
entrepreneurship to individuals, society and 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 (1971a1990), the National Development Policy (1990a2000) 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. In 1995, the government incorporated the
Ministry of Entrepreneurship Development as a specific body to manage
and promote the growth of entrepreneurship in Malaysia. Today, this
ministry is named the Ministry of Entrepreneurship Development and Cooperation.

TOPIC 2: IDENTIFYING ENTREPRENEURIAL CHARACTERISTICS

Exercise 2.1
The common characteristics of successful entrepreneurs are:
(a) Initiative and responsibility
(b) High degree of commitment
(c) Opportunity orientation
(d) Moderate risk taker
(e) Confidence and optimistic
(f) Creative and innovative
(g) Seeking feedback
(h) Drive to achieve
(i) Vision
(j) Skill at organising
(k) Internal locus of control
(l) Tolerance for failure
(m) High level of energy
(n) Team building
(o) Independence
(p) Flexibility

TOPIC 3: DEVELOPING ENTREPRENEURIAL CREATIVITY AND INNOVATION

Exercise 3.1
Creativity involves the development of unique and novel responses to problems
and opportunities. There are four main phases or steps in the creative process:

(a) Phase 1: Background or Knowledge Accumulation
 This involves some form of reading, discussion with others working in the
same field, attending professional seminars or workshops and so forth in
order to gather related information.

(b) Phase 2: The Incubation Process
 Individuals are not involved with any business-related activities directly to
solve the problems. Instead, they will try to get rid of the problems and let
their subconscious minds work on it.

(c) Phase 3: The Idea Experience
 During this phase, the long sought after solution or answer for an existing
problem is finally found. This phase is also referred to as the „Eureka
factor‰.

(d) Phase 4: Evaluation and Implementation
 In the final phase, an entrepreneur will transform an idea into reality. This
is an extremely difficult phase because it requires courage, self-regulation,
high confidence and perseverance.

Exercise 3.2
The following are the techniques for generating creative ideas:

(a) 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.

(b) Nominal Group
 Nominal groups are used to generate ideas and evaluate solutions face-toface
in non-threatening group circumstances, in which members do so by
writing down silently as many ideas as possible.

(c) Brainstorming
 Brainstorming is the most common and powerful technique used to
hatch ideas. During a brainstorming session, all the members of a group
suggest ideas that are then discussed. The ideal number of group members
involved in brainstorming is between four and seven.

TOPIC 4: VENTURES ENVIRONMENT ASSESSMENT

Exercise 4.1
Business environments can be divided into two parts, which are known as:
(a) The macro view of the external environment; and
(b) The micro view of the external environment and the internal environment.
Each of these consist of many components that need to be assessed.
The macro environment consists of the following elements:
C Politics and legislation;
C Economy;
C Socio-cultural; and
C Technology.

The micro environment consists of the following elements:
C Customers;
C Competitors;
C Suppliers;
C Financial institutions;
C Non-government organisations; and
C Government agencies.
The internal organisation environment consists of the following elements:
C Organisation structure;
C Culture; and
C Resources.

Exercise 4.2
Entrepreneurs need to analyse each component of macro and micro
environments because of the following reasons:

(a) The macro environment, also known as the external environment, is
important for entrepreneurs because they can identify opportunities and
threats after scanning and assessing it. This environment can influence
business decision making in the long term and comprises uncontrollable
elements.
(b) The micro environment of a business venture is also part of the venture's
external environment but can directly influence entrepreneur's decisions
and activities. It is also known as industrial environment.
(c) The internal environment can also influence the decision making of
entrepreneurs directly. But they control these elements.

Exercise 4.3
The seven potential sources of opportunity are:

(a) The Unexpected
 Opportunities can be found when situations and events are unanticipated.
The event might be unexpected success/good news or unexpected failure/
bad news that can be an opportunity for entrepreneurs to pursue.

(b) The Incongruous
Incongruous situations happen when there are inconsistencies in 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.

(c) The Process Need
 Entrepreneurial opportunities could also surface throughout the 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.

(d) Industry and Market Structures
 Changes in technology, social value and customer's tastes can change the
structure of an industry and market. These situations, however, will give
entrepreneurs opportunities to innovate their product or services.

(e) 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.

(f) Change in Perception
Perception is one's view of reality. Changes in perception get to the heart of
people's psychographic profiles of what their values are, what they believe
in, and what they care about. Changes in these attitude and values create
potential market opportunities to alert entrepreneurs.

(g) 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.

TOPIC 5: BUSINESS PLAN

Exercise 5.1
Business plans are important for entrepreneurs because of the following reasons:
(a) Increase opportunities for success.
(b) Develop mission and vision.
(c) Identify the main competitor(s).
(d) Identify the right way of managing the business.
(e) Increase the stakeholdersÊ confidence.
(f) Identify barriers to business.
(g) As a performance tool.
Exercise 5.2
The important elements in a good business plan are:
(a) Executive summary
(b) Market analysis
(c) Marketing and sales strategies
(d) Services or product line
(e) Organisation and management
(f) Funding request
(g) Financials
(h) Appendix

Exercise 5.3
The factors which contribute to the failure of business plans are:
(a) No realistic goals.
(b) Failure to anticipate obstacles.
(c) No commitment or dedication.
(d) Lack of business or technical experience.
(e) No market niche.

TOPIC 6: STARTING AN ENTREPRENEURIAL NEW VENTURE

Exercise 6.1
1. A start-up company is a recently formed company. It is a process where an
entrepreneur creates a completely new business starting from scratch.
2. The three phases in a start-up are:
(a) Pre start-up.
(b) Start-up.
(c) Post start-up.
3. The critical factors that are important for new-venture assessment are as
follows:
(a) The uniqueness of the venture.
(b) The investment size at start-up.
(c) The expected increase in sales and profits as the venture cruises
through the start-up phase.
(d) The availability of products during the two phases.
(e) The availability of customers during the two phases.

Exercise 6.2
1. (a) The five advantages of a start-up are as follows:
(i) The freedom of making oneÊs own decisions.
(ii) The opportunity of using oneÊs ideas.
(iii) The freedom to select the ideal location, plant, equipment,
products or services, employees, suppliers and bankers.
(iv) Undesirable precedents, policies, procedures and legal
commitments of existing firms are not a problem for a start-up
venture.
(v) It will not affect the reputation of the business because it is a
new venture.

(b) The five disadvantages of a start-up are as follows:
(i) It requires a lot of time, money and additional effort.
(ii) At the initial stage of the business, entrepreneurs will make
minimal profits or losses.
(iii) There is no history of business records.
(iv) There are no ready customers.
(v) The difficulty of obtaining loans from financial institutions.
2. Buying an existing business means buying or acquiring either the shares of
an existing company or all of the assets of an existing company or business.

3. (a) The advantages of buying an existing business are as follows:
(i) Immediate operations
(ii) Easier financing
(iii) Quick cash flow
(iv) A market for the product or service will have already been
established.
(v) Existing customers
(vi) A business plan and marketing method should already be in
place.

(b) Disadvantages of buying an existing business are as follows:
(i) Costly
(ii) A neglected business needs a large investment.
(iii) Outstanding contracts
(iv) Inherent problems
(v) Personal conflicts
(vi) Obsolete goods
Exercise 6.3
1. The three legal forms of organisations are as follows:
(a) Sole proprietorship
(b) Partnership
(c) Corporation

2. (a) The advantages of sole proprietorships are as follows:
(i) Ease of formatio.
(ii) Sole ownership profits
(iii) Decision-making and control vested in one owner
(iv) Flexibility
(v) Relative freedom from governmental control

(b) The disadvantages of sole proprietorship are as follows:
(i) Unlimited liability
(ii) Lack of continuity
(iii) Less available capital
(iv) Relatively difficult to obtain long-term financing
(v) Relatively listed viewpoint and experience

Exercise 6.4
(a) The five advantages of partnerships are as follows:
(i) Ease of formation
(ii) Direct rewards
(iii) Growth and performance facilitated
(iv) Flexibility
(v) Relative freedom from governmental control and regulation

(b) Disadvantages of partnerships are as follows:
(i) Unlimited liability
(ii) Lack of continuity
(iii) Relatively difficult to obtain large sums of capital
(iv) Bound by the acts of just one partner
(v) Difficulty of disposing of partnership interest

Exercise 6.5
(a) The five advantages of a corporation are as follows:
(i) Limited liability
(ii) Transfer of ownership
(iii) Unlimited life
(iv) Relative ease of securing capital in large amounts
(v) Increased ability and expertise
(b) The five disadvantages of a corporation are as follows:
(i) Activities restricted
(ii) Lack of representation
(iii) Extensive governmental regulations and reports required
(iv) Organising expenses
(v) Double taxation

Exercise 6.6
Five sources of capital that an entrepreneur can use in starting up or buying an
existing business are as follows:
(a) Personal funds
(b) Family and friends
(c) Retirement account
(d) Banks and other financial institutions
(e) Government loans
(f) Stock markets
(Any five answers)

TOPIC 7: ENTREPRENEURIAL NETWORKING

Exercise 7.1
The advantages that an entrepreneur would gain from good networking are:

(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 entrepreneurs to attract
members in networking circles to give priority to the product or services
they produce.

\(c) Expectations
These can both facilitate and restrict the freedom of the company's 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.

Exercise 7.2
The three ways to establish strategic networking for entrepreneurs are:
(a) Good Planning
To be successful in the entrepreneurial process and management, we must
have good planning. Every plan must begin with the questions:
(i) What your goals?
(ii) What are your strengths?
(iii) What are your weaknesses?
(iv) What do you want to achieve through networking?

(b) Ask Yourself
Every entrepreneur must know what to achieve in the networking exercise.
An entrepreneur should ask himself what he wants and how many
networking relationships he wants in one month. Then, he must identify
his customers, what kind of business gives profits and what are the
contributions he can make to others.

(c) Learning Networking Technique
As an entrepreneur, he must attend business association meetings and join
associations such as business, sports and computer associations. By doing
so, the entrepreneur will acquire the spirit to achieve his business plan.

TOPIC 8: EVALUATION OF ENTREPRENEURIAL OPPORTUNITIES

Exercise 8.1
The six pitfalls in selecting new ventures:
(a) Lack of Objective Evaluation
(b) No Real Insight into the Market
(c) Inadequate Understanding of Technical Requirements
(d) Poor Financial Understanding
(e) Lack of Venture Uniqueness
(f) Ignorance of Legal Issues

Exercise 8.2
The main reasons why new ventures fail:
(a) Product/Market Problems
(i) Poor timing
(ii) Product design problems
(iii) Inappropriate distribution strategy
(iv) Unclear business definition
(v) Over reliance on one customer
(b) Financial Difficulties
(i) Initial undercapitalisation
(ii) Assuming debt too early
(iii) Venture capital relationship problems

(c) Managerial Problems
(i) Concept of a team approach (e.g. hiring and promotions based on
nepotism rather than qualification; poor relationships with parent
companies and venture capitalist; founders who focus on their
weaknesses rather than their strengths; incompetent support
professionals).
(ii) Human resource problems (e.g. kickbacks and subsequent firings;
deceit on the part of the venture capitalist; verbal agreements not
honoured; protracted lawsuits).

TOPIC 9: ENTREPRENEUR AND PERSONAL
FINANCIAL PLANNING

Exercise 9.1
The five steps in deriving your net worth:
(a) Step 1 : List the things of value that you own
(b) Step 2 : Total up your assets
(c) Step 3 : List the things that you owe to others
(d) Step 4 : Total up your liabilities
(e) Step 5 : Assets minus Liabilities

Exercise 9.2
The considerations to prepare a successful budget:
(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.

TOPIC 10: ACHIEVING ENTREPRENEUR’S PERSONAL FINANCIAL DREAMS

Exercise 10.1

The main types 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 a so they are very secure.

(b) Shares
 Shares (also known as equities or stocks) represent ownership in a
company. When you buy a share, you become a part-owner in the company
and become entitled to share in its future value and profits.

(c) Unit Trust Funds
 In a unit trust, money from hundreds of individual investors are 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.

(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.
(ii) You can earn rental income from tenants.

(e) 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.

(f) 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.

Exercise 10.2

The basic types of family takaful include:
(a) Individual Family
 With plans that include education, mortgage and health, you and your
beneficiary will receive financial benefits arising from death or permanent
disability. There are also long-term savings and investment profits are
distributed upon claim, maturity or early surrender.
(b) Retirement Annuity
 This is a plan that provides you with a regular income upon retirement.
(c) Investment-linked
 Combining investment and protection, part of your contribution is used to
buy investment units while the balance goes towards providing coverage in
the event of death or permanent disability.
(d) Medical and Health
 This covers the costs of medical treatment, including hospitalisation and
surgery.
Exercise 10.3
The main types of loan:
(a) Personal Loan
 This is a loan offered for your 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 towards your marriage.
(b) Car Loan
 You become the hirer of the car while the financial institution is the owner.
As the hirer, you pay installments to the financial institution based on their
terms and conditions. You become the owner after completing all your
payments.
(c) Housing Loan
 The market for housing loans today is very competitive and financial
institutions now offers all kinds of loans to attract customers. Some loans
are even packaged with free gifts.