ENTREPRENEURSHIP-NATURE AND DEVELOPMENT

 

 

MEANING OF ENTREPRENEURSHIP

 

Entrepreneurship is the process of designing and running a new business venture for earning profits. It is a process that brings innovation that is new ideas, products, and services in the market. Entrepreneurship is the ability to create, manage and operate a new business and bears all of its risk with a view to earn profits. A person who develops new business and undertakes all risks and challenges associated with it is termed as Entrepreneur.

Entrepreneurship is defined as an act of looking for an investment and production opportunity, then creating and managing a business venture for earning profits. It involves arranging for materials, labor, land, capital, bringing new techniques and product and recognizing new sources for enterprises. The risk associated with entrepreneurship is high but at the same, it may also provide high rewards to a person starting a venture.

 

Entrepreneurship results in creativity, innovation, employment opportunities and leads to the overall economic development of the country. Entrepreneurship is of the following kinds: – Small Business Entrepreneurship, Large Company Entrepreneurship, Scalable Startup Entrepreneurship, and Social Entrepreneurship.

 

NATURE OF ENTREPRENEURSHIP

 

Creation Of Enterprise

Entrepreneurship is a process that refers to the creation and running of a new enterprise. It is an activity under which a person called an entrepreneur starts a new venture using a new idea.

Economic Activity

Entrepreneurship is an economic activity as it involves creating and running a new business through optimum utilization of all combined resources. It ensures that all scarce resources are efficiently used for deriving better returns in the form of profit. 

Profit

Profit earning is the sole objective of an entrepreneur for undertaking risk. Entrepreneurs start a new venture with a view to earning profits.

Gap Filling

Entrepreneurship is a process of recognizing and filling the gap between customer needs and available products or services. It focuses on removing the deficiencies from the currently available products to fulfill the needs of customers.

Organizing Function

It is an organizing function that brings together different factors of production like land, labor, and capital. Entrepreneurship is concerned with coordinating and managing all resources engaged within the enterprise.

Innovation And Creativity

It is the process of discovering new ideas and concepts and implementing them in business ventures. Entrepreneurship involves bringing innovation in the market by introducing new products or process that delivers better service.

 

Risk Bearing

It is an activity which involves huge risk which every entrepreneur needs to undertake for starting a venture. New ideas developed and implemented by the entrepreneur are uncertain and may result in losses.

DEVELOPMENT OF ENTREPRENEURSHIP

Earliest Period

In this period the money person (forerunner of the capitalist) entered into a contract with the go-between to sell his goods. While the capitalist was a passive risk bearer, the merchant bore all the physical and emotional risks.

 

Middle Ages

In this age the term entrepreneur was used to describe both an actor and a person who managed large production projects. In such large production projects, this person did not take any risks, managing the project with the resources provided. A typical entrepreneur was the cleric who managed architectural projects.

 

17th Century

In the 17th century the entrepreneur was a person who entered into a contract with the government to perform a service Richard Cantillon, a noted economist of the 1700s, developed theories of the entrepreneur and is regarded as the founder of the term. He viewed the entrepreneur as a risk taker who "buy[s] at certain price and sell[s] at an uncertain price, therefore operating at a risk."

 

18th Century

In the 18th century the person with capital was differentiated from the one who needed capital. In other words, entrepreneur was distinguished from the capital provider. Many of the inventions developed during this time as was the case with the inventions of Eli Whitney and Thomas Edison were unable to finance invention themselves. Both were capital users (entrepreneurs), not capital providers (venture capitalists.) Whitney used expropriated crown property. Edison raised capital from private sources.

 

A venture capitalist is a professional money manager who makes risk investments from a pool of equity capital to obtain a high rate of return on investments.

 

19th and 20th Centuries

In the late 19th and early 20th centuries, entrepreneurs were viewed mostly from an economic perspective. The entrepreneur "contributes his own initiative, skill and ingenuity in planning, organizing and administering the enterprise, assuming the chance of loss and gain."

 

Andrew Carnegie is one of the best examples of this definition, building the American steel industry on of the wonders of industrial world, primarily through his competitiveness rather than creativity.

 

In the middle of the 20th century, the notion of an entrepreneur as an innovator was established. Innovation, the act of introducing something new, is one of the most difficult tasks for the entrepreneur. Edward Harriman and John Pierpont Morgan are examples of this type of entrepreneur. Edward reorganized the Ontario and southern railroad through the northern pacific trust and john developed his large banking house by reorganizing and financing the nation's industries. This ability to innovate is an instinct that distinguishes human beings from other creatures and can be observed throughout history.

 

THE ENTREPRENEURIAL DECISION PROCESS

 

(Deciding to become an entrepreneur by leaving present activity)

Many individuals have difficulty bringing their ideas to the market and creating new venture. Yet entrepreneurship and the actual entrepreneurial decisions have resulted in several million new businesses being started throughout the world. Although no one knows the exact number in the United States, Indeed, millions of ventures are formed despite recession, inflation, high interest rates, and lack of infrastructure, economic uncertainty and the high probability of failure.

The entrepreneurial decision process entails a movement from something to something-- a movement from a present life style to forming a new enterprise.

 

To leave a present live-style to create something new comes from a negative force--disruption. Many companies are formed by people who have retired, moved, or been fired. Another cause of disruption is completing an educational degree. The decision to start a new company occurs when an individual perceives that forming a new enterprise is both desirable and possible.

Entrepreneurship is a process, a journey, not the destination; a means, not an end. All the successful entrepreneurs like Bill Gates (Microsoft), Warren Buffet (Hathaway), Gordon Moore (Intel) Steve Jobs (Apple Computers), Jack Welch (GE) GD Birla, Jamshedji Tata and others all went through this process.

To establish and run an enterprise it is divided into three parts – the entrepreneurial job, the promotion, and the operation. Entrepreneurial job is restricted to two steps, i.e., generation of an idea and preparation of feasibility report. In this article, we shall restrict ourselves to only these two aspects of entrepreneurial process.

 

The Entrepreneurial Decision Process

 

1.Idea Generation:

To generate an idea, the entrepreneurial process has to pass through three stages:

a. Germination:

This is like seeding process, not like planting seed. It is more like the natural seeding. Most creative ideas can be linked to an individual’s interest or curiosity about a specific problem or area of study.

b. Preparation:

Once the seed of interest curiosity has taken the shape of a focused idea, creative people start a search for answers to the problems. Inventors will go on for setting up laboratories; designers will think of engineering new product ideas and marketers will study consumer buying habits.

c. Incubation:

This is a stage where the entrepreneurial process enters the sub­conscious intellectualization. The sub-conscious mind joins the unrelated ideas so as to find a resolution.

2. Feasibility study:

Feasibility study is done to see if the idea can be commercially viable.

It passes through two steps:

a. Illumination:

After the generation of idea, this is the stage when the idea is thought of as a realistic creation. The stage of idea blossoming is critical because ideas by themselves have no meaning.

b. Verification:

This is the last thing to verify the idea as realistic and useful for application. Verification is concerned about practicality to implement an idea and explore its usefulness to the society and the entrepreneur.

 

Audit Planning

 

Definitions

 

Prof. L.R.Dicksee. "auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate.

 

Comptroller and Auditor General of India, defines audit “an instrument of financial control.—It acts as a safeguard on behalf of the proprietor against extravagance, carelessness or fraud on the part of the   roprietor's agents or servants in the realization and utilisation of the money or other assets and

—it ensures on the proprietor's behalf that the accounts maintained truly represent facts and that the expenditure has been incurred with due regularity and propriety. —The agency employed for this purpose is called an auditor."

 

Audit Planning

“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business”.

 

As per Auditing and Assurance Standard 1, “Basic Principles Governing an Audit”, Audit Planning is one of the basic principles.  Accordingly, it states

“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business.

 

Plans should be made to cover, among other things:

·         acquiring knowledge of the client’s accounting systems, policies and internal control procedures;

·         establishing the expected degree of reliance to be placed on internal control;

·         determining and programming the nature, timing, and extent of the audit procedures to be performed; and

·         coordinating the work to be performed.

Plans should be further developed and revised as necessary during the course of the audit.

SA-300, “Planning an Audit of Financial Statements” further expounds this principle. According to it, planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.

Benefits of Planning in the Audit of Financial Statements

·         Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan. Adequate planning benefits the audit of financial statements in several ways, including the following:

·         the auditor to devote appropriate attention to important areas of the audit.

·         Helping the auditor identify and resolve potential problems on a timely basis.

·         Helping the auditor properly organize and manage the audit engagement so that it is performed in an effective and efficient manner.

·         Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks, and the proper assignment of work to them.

·         Facilitating the direction and supervision of engagement team members and the review of their work.

 

Planning the Flow of Audit Work

Ethical Clearance from Previous Auditor

The clause provides for communication with previous auditor where he has an opportunity to safeguard his interest and also public interest, the provision of Clause 8 requiring a communication with the previous auditor is absolute and applicable even in cases where the member is aware that the previous auditor had been made aware of the appointment

Letter of Engagement

The engagement letter documents and confirms the auditor's acceptance of the appointment, the objective and scope of the audit, the extent of the auditor's responsibilities to the client and the form of any reports.

Acknowledgment from Client

The auditor should obtain the acknowledgement and agreement of Client and, where appropriate, those charged with governance that they understand their responsibilities

Find Out the Background and Operational System in Theory

ISA 200, “Objective and General Principles Governing an Audit of Financial Statements” states that audits are conducted on the premises that these responsibilities are acknowledged and understood by management and, where appropriate, those charged with governance.

Discover the Operational System in Practice

A condition for acceptance of an assurance engagement is that the criteria referred to in the definition of an assurance engagement are suitable and available to intended users. Criteria are the benchmarks used to evaluate or measure the subject matter including, where relevant, benchmarks for presentation and disclosure. Suitable criteria are required for reasonably consistent evaluation or measurement of a subject matter within the context of professional judgment. For purposes of the ISAs, the applicable financial reporting framework provides the criteria the auditor uses to evaluate or measure the preparation and presentation of the financial statements.

Identify the Strengths and Weaknesses of the System

Strengths and weaknesses of the oversight over the auditing profession using modern techniques tries to find the tape and discovers that the oversight system of the auditing and accounting profession was obsolete.

Evaluate the Relative Effect of Strengths and Weaknesses in Each major Operational Area

Conducting a SWOT analysis can help to use resources efficiently, improve operations, uncover opportunities, mitigate risk, and become more competitive. probably most in tune with internal operations, so begin by evaluating the internal factors specific to your business strengths and weaknesses.

Determine the Reliability of the Underlying Records as a Basis for Preparation of the Financial Statements

The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

Ensure that the Financial Statements are in Agreement with the Underlying Records

Form an Opinion on the Accounts - Whether they Give a True and Fair View and Comply with Statutory and Other Requirements.

Express Opinion in the Audit Report

An auditor expresses an adverse opinion when he considers that the misstatement is so material and pervasive that a qualification of the report is not adequate to disclose such misstatements of financial statements. The auditor shall express an adverse opinion after obtaining sufficient and appropriate audit evidence.

 

 

 

INTRODUCTION TO RISK AND TYPES

 

INTRODUCTION TO RISK

Risk

—  According to federation of insurance institute, “ risk may be thought of as the degree of variation in the possible outcome from an uncertain event or as the variable in the possible outcomes”

—  According to LIC India, risk may be defined as “a condition where there is possibility of an adverse deviation from the desired outcome that is expected or hoped for, there is no requirement that possibility be unmeasurable, only that must exist”.

Peril

—  A peril refers to the cause of loss or the contingency that may cause a loss.

—  In literary sense, it means the serious and immediate danger.

—  Perils refer to the immediate causes of loss.

—  Perils may be general or specific and may resulting in a financial loss

—  E.g., fire may affect assets like building, automobile, machinery, equipment and also, humans.

Hazards

—  Hazards are the conditions that increase the severity of loss or the conditions affecting perils.

—  These are the conditions that create or increase the severity of losses.

—  Economic slowdown is a peril that may cause a loss to the business,

—  But it is also a hazard that may cause a heart attack or mental shock to the proprietor of the business.

Hazards can be classified as follows

Physical Hazards — Property Conditions

—  Physical hazard relates to the physical characteristics of the risk, such as the nature of construction of a building, security protection at a shop or factory, or the proximity of houses to a riverbank. Therefore a physical hazard is a physical condition that increases the chances of loss

A physical hazard is an agent, factor or circumstance that can cause harm with contact. They can be classified as type of occupational hazard or environmental hazard. Physical hazards include ergonomic hazards, radiation, heat and cold stress, vibration hazards, and noise hazards

Intangible Hazards — Attitudes and Culture

Moral Hazard — Fraud

Moral hazard concerns the human aspects which may influence the outcome. Moral hazard is dishonesty or character defects in an individual that increase the chance of loss. For example, a business firm may be overstocked with inventories because of a severe business recession. If the inventory is insured, the owner of the firm may deliberately burn the warehouse to collect money from the insurer. In effect, the unsold inventory has been sold to the insurer by the deliberate loss. A large number of fires are due to arson, which is a clear example of moral hazard.

Moral hazard is present in all forms of insurance, and it is difficult to control. Dishonest insured persons often rationalise their actions on the grounds that "the insurer has plenty of money". This is incorrect since the company can pay claims only by collecting premiums from other policy owners.

Because of moral hazard, premiums are higher for all insured, including the honest. Although an individual may believe that it is morally wrong to steal from a neighbour, he or she often has little hesitation about stealing from an insurer and other policy owners by either causing a loss or by inflating the size of a claim after a loss occurs.

 

Morale Hazard — Indifference

This usually refers to the attitude of the insured person. Morale hazard is defined as carelessness or indifference to a loss because of the existence of insurance. The very presence of insurance causes some insurers to be careless about protecting their property, and the chance of loss is thereby increased. For example, many motorists know their cars are insured and, consequently, they are not too concerned about the possibility of loss through theft. Their lack of concern will often lead them to leave their cars unlocked.

The chance of a loss by theft is thereby increased because of the existence of insurance.

Morale hazard should not be confused with moral hazard. Morale hazard refers to an Insured who is simply careless about protecting his property because the property is insured against loss.

Moral hazard is more serious since it involves unethical or immoral behaviour by insurers who seek their own financial gain at the expense of insurers and other policy owners. Insurers attempt to control both moral and morale hazards by careful underwriting and by various policy provisions, such as compulsory excess, waiting periods, exclusions, and exceptions.

When used in conjunction with peril and hazard we find that risk means the likelihood that the hazard will indeed cause the peril to operate and cause the loss. For example, if the hazard is old electrical wiring prone to shorting and causing sparks, and the peril is fire, then the risk, is the likelihood that the wiring will indeed be a cause of fire.

Societal Hazards — Legal and Cultural

Social hazards, also called complex emergencies, seriously limit a population's access to health services, water, food, and transportation, all of which are determinants of health. They also often lead to a lack of safety and tend to come hand in hand with natural disasters such as floods.

TYPES OF RISK

—  Pure and speculative Risks,

—  Other types of Risk

◦      Dynamic risk,

◦      Static risk

◦      Fundamental risk and

◦      Particular Risks

Pure and speculative Risks,

Pure risk situations are those where there is a possibility of loss or no loss. There is no gain to the individual or the organization on it.

Pure risk is a category of risk that cannot be controlled and has two outcomes: complete loss or no loss at all. There are no opportunities for gain or profit when pure risk is involved.

Pure risk is generally prevalent in situations such as natural disasters, fires, or death. These situations cannot be predicted and are beyond anyone's control. Pure risk is also referred to as absolute risk.

 

Speculative risks are those where there is possibility of gain as well as loss. The element of gain is inherent or structured in such a situation.

Speculative risk is a risk category, which results in an uncertain degree of gain or loss when undertaken. All theoretical risks are made as deliberate decisions and are not merely the product of uncontrollable circumstances. The speculative risk is the contrast of pure risk (the possibility of a failure only and no gain potential) because there is some chance of a gain or a loss.

Classifying Pure Risks

Personal Risks

Personal risk is the potential for losses that impact an individual or family. Risk surrounds everything in life such that individuals inherently manage risk in everyday situations. It is also possible for individuals to apply formal risk management techniques such as identifying and treating risks

Example,

Risk of Premature Death

Risk of Insufficient Income during Retirement

Risk of Poor Health

Risk of Unemployment

Property Risks

The term “property risk” refers to risk events that specifically impact an organization's facilities and other physical infrastructure. Risk events such as fires, adverse weather conditions, and terrorist attacks all fall into the category of property risk.

Eg. Direct Loss, Indirect or Consequential Loss

Liability Risks

A liability risk involves the threat of the company or individual having to bear the consequences of damage or of breaching standards due to operations, a product, an act or neglect. A liability risk survey involves the analysis, through interviews and review of documents, of the company's key liability risks.

 

Other types of Risk

Dynamic risk

—  A dynamic risk assessment is the process of continually observing and analysing risks and hazards in a changing, or high-risk, environment. This allows workers to quickly identify new risks and remove them. Formal risk assessments are prepared in advance, recorded and monitored on a regular basis

—  Dynamic risks are those resulting from the changes in the economy or the environment.

—  Eg. economic variables like inflation, income level, price level, technology changes etc.

Static risk

A static risk refers to damage or loss to a property or entity that is not caused by a stable economy but by destructive human behavior or an unexpected natural event. This risk can be covered by insurance.

—  Static risks are risks connected with losses caused by the irregular action of nature or by the mistakes and misdeeds of human beings.

—  Eg. Assets possession as result of dishonesty or human failure.

Fundamental risk

Fundamental Risk. Exposure to loss from a situation affecting a large group of people or firms, and caused by (a) natural phenomenon such as earthquake, flood, hurricane, or (b) social phenomenon, such as inflation, unemployment, war. Fundamental risks may or may not be insurable.

—  Fundamental risks affect the entire economy or large numbers of people or groups within the economy.

—  Eg. high inflation, unemployment, war, and natural disasters such as earthquakes, hurricanes, tornadoes, and floods.

Particular Risks

Particular risks are risks that affect only individuals and not the entire community. Examples of particular risks are burglary, theft, auto accident, dwelling fires. With particular risks, only individuals experience losses, and the rest of the community are left unaffected.

—  Particular risks are risks that affect only individuals and not the entire community. With particular risks, only individuals experience losses, and the rest of the community are left unaffected.

—  Eg , theft, auto accident, dwelling fires.

 

METHODS OF HANDLING PURE RISK

Avoidance of risk

Avoidance is a method for mitigating risk by not participating in activities that may incur injury, sickness, or death. Smoking cigarettes is an example of one such activity because avoiding it may lessen both health and financial risks

Loss control (Loss prevention and Loss reduction)

Loss Control

Loss control is another important method for handling risk. Loss control consists of certain activities undertaken to reduce both the frequency and severity of losses. Thus, loss control has two major objectives:

(a) Loss prevention.

(b) Loss reduction

Loss prevention

Loss prevention aims at reducing the probability of loss so that the frequency of losses is reduced. Several examples of personal loss prevention can be given. Automobile accidents can be reduced if motorists pass a safe driving course and drive defensively. Dropping out of college can be prevented by intensive study on a regular basis. The number of heart attacks can be reduced if individuals watch their weight, give up smoking, and follow good health habits.

Loss prevention is also important for business firms. For example, a boiler explosion can be prevented by periodic inspections by a safety engineer; occupational accidents can be reduced by the elimination of unsafe working conditions and by strong enforcement of safety rules; and fire can be prevented by forbidding workers to smoke in an area where highly flammable materials are being used. In short, the goal of loss prevention is to prevent the loss from occurring.

Loss reduction

Although stringent loss prevention efforts can reduce the frequency of losses, some losses will inevitably occur. Thus, the second objective of loss control is to reduce the severity of a loss after it occurs. For example, a warehouse can install a sprinkler system so that a fire is promptly extinguished, thereby reducing the loss; highly flammable materials can be stored in a separate area to confine a possible fire to that area; a plant can be constructed with fire resistant materials to minimize a loss; and fire doors and fire walls can be used to prevent a fire from spreading.

 

Risk retention

Retention is the acknowledgment and acceptance of a risk as a given. Usually, this accepted risk is a cost to help offset larger risks down the road, such as opting to select a lower premium health insurance plan that carries a higher deductible rate. The initial risk is the cost of having to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more serious or life-threatening, then the health insurance benefits are available to cover most of the costs beyond the deductible. If the individual has no serious health issues warranting any additional medical expenses for the year, then they avoid the out-of-pocket payments, mitigating the larger risk altogether.

Non insurance transfer

A noninsurance transfer is the transfer of risk from one person or entity to another by way of something other than a policy of insurance. Most commonly, the techniques used involve hold harmless agreements, indemnity clauses, leases, hedging, and insurance provisions in contracts that require you to be added as an additional insured, thus granting you insurance protections under their policy.

While the noninsurance transfer of potential financial consequences might be tempting as you can save on paying insurance premiums, it can also be risky. There is the possibility that the contract may be challenged in court or the party you have transferred the liability to is unable to pay and so the plaintiff pursues you instead of compensation. Where possible, noninsurance risk transfers should be used as part of a risk management strategy alongside an adequate insurance policy.

A noninsurance transfer is also sometimes known as a contractual risk transfer. It is important to make the distinction that not all contractual risk transfers are noninsurance transfers as an insurance policy is also technically a contract.

Examples,

◦      Transfer of risk by contract

◦      Hedging prices

◦      Incorporation of business firm

Insurance

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.

Insurance is a contract (policy) in which an insurer indemnifies another against losses from specific contingencies or perils. There many types of insurance policies. Life, health, homeowners, and auto are the most common forms of insurance. The core components that make up most insurance policies are the deductible, policy limit, and premium.