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Course Notes
BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 2
E-MAIL: QUALIFICATION: LECTURES & TUTORIAL: PRESCRIBED TEXTBOOK: PREREQUISITES: DURATION OF COURSE: EQUIPMENT REQUIRED: ASSIGNMENTS and TESTS: PROJECTS:
iQUIZ is being made available courtesy of iQuiz: online learning through assessment for reading Notes and answering Assignments and Tests online. Each student has been registered and will be granted an iQuiz Bursary to allow access to the questions and answers. Note that access to the Notes does not require registration. Notes: You will be able to access the course Guidelines by entering the iQuiz website, selecting Durban University of Technology and clicking on Reader. Select your course, Building Entrepreneurship IV. These course Guidelines are available by clicking on Guidelines (Level 0 in the top right panel). Assignments and Tests:
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To answer Assignments and Tests Login as: Student If you encounter an error in the Questions or Answers, click on REPORT. If you experience any problems, send me an email (click on my name in the top right corner). Peter Utting email: uttingpl@yahoo.com Note: If you wish to contribute to the development of iQuiz then click on Visitor, select Visit then click on Level 5: Payment for use banking details. Currently, NO royalties are paid, and all proceeds are being used to address the skills shortage in Mathematics and Construction. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 3
1 INTRODUCTION
An entrepreneur is a person who has possession of a new enterprise, venture or idea and assumes significant accountability for the inherent risks and the outcome. The term is originally a loanword from French and was first defined by the Irish economist Richard Cantillon. Entrepreneur in English is a term applied to the type of personality who is willing to take upon herself or himself a new venture or enterprise and accepts full responsibility for the outcome. Jean-Baptiste Say, a French economist is believed to have coined the word 'entrepreneur' first in about 1800. He said an entrepreneur is 'one who undertakes an enterprise, especially a contractor, acting as intermediatory between capital and labour. Entrepreneurship is often difficult and tricky, resulting in many new ventures failing. The word entrepreneur is often synonymous with founder. Most commonly, the term entrepreneur applies to someone who creates value by offering a product or service, by carving out a niche in the market that may not exist currently. Entrepreneurs tend to identify a market opportunity and exploit it by organizing their resources effectively to accomplish an outcome that changes existing interactions within a given sector.
Observers see them as being willing to accept a high level of personal, professional or financial risk to pursue opportunity. Business entrepreneurs are viewed as fundamentally important in the capitalistic society. Some distinguish business entrepreneurs as either 'political entrepreneurs' or 'market entrepreneurs,' while social entrepreneurs' principal objectives include the creation of a social and/or environmental benefit. In construction enterprises the term of entrepreneurship is used with the wider meaning of Employers and Freelancers because it was considered that the wider meaning of the term fulfils better both the engineering field and the thematic of the employment. An idea is not necessarily an opportunity. The focus of this course is to help you develop and systematically apply the entrepreneurial way of thinking in order to create opportunities and successfully bring them to market. The material in this course applies to new or innovative business ventures, whether they take place in new or existing firms, or in small or large firms. It is relevant for start-up and early stage entrepreneurs, entrepreneurial managers, and relevant stakeholders. The construction management programmes guest-lecture series will address key aspects of owning a construction business, discussing business startup and growth and how to identify trends that will move a company into different markets, capital formation, business strategies, the importance of building a strong construction team, and how to be an effective leader. In addition, it should challenge the students to become strong players in the construction business and the important role they play in changing the business. Hearing directly from these entrepreneurs and industry leaders is an incredible honour and learning experience for our students. Each speakers background and business story is unique, and aimed at engaging students in conversations around business practices and concepts, as well as offering valuable advice that our business-minded and entrepreneurial students can leverage as they enter the workforce. This course introduces tools for studying the economic environment of business in the construction industry to help managers understand the implications for their company. Students learn about the complex responsibilities facing business leaders today. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 4
2 COURSE OBJECTIVES
The curriculum focuses primarily on the conception, creation, and delivery of projects, with less emphasis on capital markets and the management of cash flowing real assets. The objective of this course is to help students develop the skills for formulating strategy. It provides an understanding of: A firm's operative environment and how to sustain competitive advantage. How to generate superior value for customers by designing the optimum configuration of the product mix and functional activities. How to balance the opportunities and risks associated with dynamic and uncertain changes in industry attractiveness and competitive position. Students learn to: Develop a mastery of a body of analytical tools and the ability to take an integrative point of view. Use these tools to perform in-depth analyses of industries and competitors, predict competitive behaviour, and analyze how firms develop and sustain competitive advantage over time. This course addresses the issues faced by managers who wish to turn opportunity into viable organizations that create value, and empower students to develop their own approaches, guidelines, and skills for being entrepreneurial managers. It teaches students how to: Identify potentially valuable opportunities. Obtain the resources necessary to pursue an opportunity and to create an entrepreneurial organization. Manage the entrepreneurial organization once it has been established. Grow the business into a sustainable enterprise. Create and harvest value for the organization's stakeholders.
Evaluate complex investments. Set and execute financial policies within a firm. Integrate the many financial decisions faced by firms. The focus of this course is on students who expect to be leaders in the global construction industry and its related specialties. In the near term, these students will lead in the built environment as project managers in property development, real estate investing, private equity in real estate, architecture, urban planning, construction, or other fields emphasizing project management. In the longer term, these students will be leaders in the built environment in an industry characterized by opportunities stemming from globalization, urbanization, resource scarcity, and complex infrastructure challenges. The prototypical student expects to be in a project management or similar developmentoriented role soon, and a principal in due course. The educational objectives of this course are to introduce students to the basic tools and concepts needed to be effective project managers and leaders in the built environment. The analytical tools address a set of management skills that grow from the project level to the firm level to the regional and industry levels. Skills range from understanding pro formas and schedules; to managing architects and contractors; to strategies for the real estate practice; to analyzing and anticipating impacts of major trends in the next decade in real estate development, design, and construction. Key among these trends are urbanization, resource scarcity/ sustainability, and conception and delivery of complex infrastructure projects. The purpose is to expose students on what is to be expected from construction practice as regards to professionalism, ethics, management, entrepreneurship, wealth creation and sustainable environmental issues. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 5
3 ATTENDANCE AT LECTURES
Lectures are an essential part of the course. Attendance at lectures is compulsory since the lecturer usually covers the essential contents of each section and gives guidance with regard to further readings, etc. Furthermore, announcements for example, about assignments and tests, are made in class from time to time. Students are expected to notify the Lecturer of inability to attend a class. The student course mark may be scaled by the attendance record. The construction programmes entrepreneurship lecture series is a compulsory facet of this course. The guest-lecture programme provides students the opportunity to hear leading design and construction industry executives discuss and share experiences and perspective related to the start up, operation, development and finance of a construction business. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 6
4 ACADEMIC DEVELOPMENT
Tutorials are integrated with the lectures. The basic outline of the course follows the pattern of lecture, written and oral presentation and discussion in each session, with assignments and tests completed online. Tutorials give students the opportunity to share their views and discuss problems with the lecturer and other students. The essence of a good tutorial is good participation. A cooperative approach is encouraged. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 7
LEVEL 0: Guidelines
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7 OUTCOMES
On completion of this course the student should be the person who perceives the construction market opportunity and then has the motivation, drive and ability to mobilise resources to meet the challenges. The major characteristics of building entrepreneurs include the following. Self confident and multi-skilled. The person who can make the product, market it and count the money, but above all they have the confidence that lets them move comfortably through unchartered waters. Confident in the face of difficulties and discouraging circumstances. Innovative skills. Not an 'inventor' in the traditional sense but one who is able to carve out a new niche in the market place, often invisible to others. Results-orientated. To be successful requires the drive that only comes from setting goals and targets and getting pleasure from achieving them. A risk-taker. To succeed means taking measured risks. Often the successful entrepreneur exhibits an incremental approach to risk taking, at each stage exposing him/herself to only a limited, measured amount of personal risk and moving from one stage to another as each decision is proved. Total commitment. Hard work, energy and single-mindedness are essential elements in the entrepreneurial profile. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 10
9 PROJECTS
A suitable construction project will be chosen for the Class Project, such as part of a low cost housing project, a residential property, etc. The class will be responsible for the successful establishment and completion of this project.
The students will form the following teams (tentative): Client Client team Consultant Consultant team Project management team Quantity Surveying team Legislative team Construction contractor Construction management team Site management team Labourers Bricklayers Plasterers Tilers Painters Roofers Painters Electricians Pavers Landscapers Quantity surveying team Accounts team Each team will form its own Close Corporation (cc) with a maximum of 10 members. Successful registration of a cc is 25% of iQuiz mark.
10 EXAMINATIONS
There will be a final three hour examination based on the exercises at the end of each chapter, your project and the iQuiz database. Students may bring into the examination one A4 sheet of notes in their own handwriting. Programmable calculators are not permitted. BLDE401: Building
Entrepreneurship IV
LEVEL 0: Guidelines
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11 ASSESSMENT
Assessment is on a continuous basis for the course work which counts 40% of the final mark and the examination 60%. The iQuiz mark may be scaled by the attendance record to give the course mark. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 14
12 CLASS POLICIES
It is very important for students to be on time and attend class regularly to be successful. Cell phones will not be tolerated during lectures. Any cell phone used during lectures will be confiscated and all available air time used. Should a student miss a lecture because of serious illness, a doctors certificate must be submitted to the lecturer. For any other reason, a sworn affidavit may be submitted. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 15
13 ADDITIONAL
Assignments and tutorials are all task-oriented and interactive. Communication and management are vitally important in any construction environment, and the goal is to help the student understand that their own experiences are deeply important in the creation and production of facilities. There are numerous tasks required throughout the course so that progress and understanding can be closely monitored. All written work submitted should be word processed or computer generated and have the student name, student number, class, and due date for submission. No handwritten or late submissions will be accepted. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 16
14 RECOMMENDED READINGS
Anything related to the subject area of the entrepreneurship, business and financial management, especially related to the construction industry. BLDE401: Building Entrepreneurship IV LEVEL 0: Guidelines Page 17
15 TOPICS TO BE COVERED
BLDE401: Building Entrepreneurship IV
1 BUILDING ENTREPRENEURSHIP
1.1 Entrepreneurship
FINANCIAL MANAGEMENT
1 Evaluating Financial Performance 1.1 Return on Equity 1.1.1 Why use ratios? 1.1.2 Calculating return on equities 1.1.3 Components of return on equity 1.2 Liquidity Ratios 1.2.1 Current ratio 1.2.2 Acid test or quick ratio 1.2.3 Defensive interval 1.2.4 Ratio of operating cash flow to current debit obligations 1.3 Asset Management Ratios 1.3.1 Accounts receivable turnover 1.3.2 Days in accounts receivable 1.3.3 Inventory turnover 1.3.4 Days in inventory 1.3.5 Operating cycle 1.3.6 Capital turnover 1.4 Profitability Ratios 1.4.1 Operating income to sales 1.4.2 Return on assets 1.5 Leverage Ratios 1.5.1 Debt to equity 1.5.2 Debt ratio
1.5.3 Times interest earned 1.6 Market Value Ratios 1.6.1 Earnings per share 1.6.2 P/E ratio 1.6.3 Book value per share 1.6.4 Dividend yield 1.7 Comparing Financial Statements 1.7.1 Vertical analysis 1.7.2 Horizontal analysis 1.8 Summary 1.9 Exercises 2 Financial Planning & Forecasting 2.1 The First Steps 2.1.1 Introduction 2.1.2 Start with strategic planning 2.1.3 The sales forecast 2.1.4 Percent of sales 2.2 Detail Budgets 2.2.1 Production budget 2.2.2 Materials budget 2.2.3 Labour budget 2.2.4 Overhead budget 2.2.5 Cost of goods sold budget 2.2.6 Marketing budget 2.2.7 General and administrative budget 2.3 Budgeted Financial Statements 2.3.1 Budgeted income statement 2.3.2 Estimated retained earnings 2.3.3 Capital expenditure budget 2.3.4 Change in fixed assets 2.3.5 Budgeted balance sheet 2.3.5.1 Calculate external financing needed 2.3.6 Prepare budgeted balance sheet 2.3.7 The cash budget 2.3.8 Summary of the budgeting process 2.4 Additional Concepts in Budgeting 2.4.1 Quantitative and qualitative techniques 2.4.2 Smoothing out the numbers 2.4.3 Regression analysis 2.4.4 Sensitivity analysis 2.4.5 Financial models 2.4.6 Financial model for cash 2.5 Making the Budgeting Process Work 2.5.1 Automate the process 2.5.2 Ten best practices in budgeting 2.6 Summary 2.7 Exercises 3 Capital Budgeting Analysis 3.1 The Overall Process 3.1.1 Capital expenditures 3.1.2 The three stages of capital budgeting analysis 3.1.2.1 Decision analysis 3.1.2.2 Option pricing 3.1.2.3 Discounted cash flows 3.2 Calculating the Discounted Cash Flows of Projects 3.2.1 Understanding relevancy 3.2.1.1 Make of buy decisions 3.2.1.2 Discontinue a product 3.2.1.3 Accept a special offer 3.2.1.4 Calculate relevant cash flows for capital project 3.2.1.5 Calculate terminal cash flow for capital project 3.2.2 Calculating the present value of cash flows 3.2.3 Calculating net investment
3.3 Three Economic Criteria for Evaluating Capital Projects 3.3.1 Net present value 3.3.2 Modified internal rate of return 3.3.2.1 Calculate internal rate of return 3.3.3 IRR distortions for reinvestment rate assumptions 3.3.3.1 Calculate modified IRR using a spreadsheet 3.3.4 Discounted payback period 3.3.4.1 Calculate discounted payback period 3.4 Additional Considerations in Capital Budgeting Analysis 3.4.1 Adjusting for risk 3.4.2 International projects 3.4.3 Post analysis 3.5 Summary 3.6 Exercises 4 Managing Cash Flow 4.1 Cash Flow Cycles 4.1.1 Introduction 4.1.2 Two cycles: disbursements and receipts 4.1.2.1 Disbursement cycle time 4.1.2.2 Calculate savings from remote bank 4.1.2.3 Calculate receipt cycle time 4.1.3 Measuring cycle times 4.1.3.1 Calculate cash flow cycle time 4.2 Cash Flow Planning 4.2.1 Cash flow forecasting 4.2.1.1 Monthly cash flow forecast 4.2.1.2 Calculate the expected value of receipts 4.2.1.3 Plot historical connection 4.2.2 Special bank accounts 4.3 Short-Term Financing 4.3.1 Bank financing4.3.1.1 Calculate effective rate for line of credit 4.3.2 Receivable financing 4.3.3 Inventory financing 4.3.3.1 Calculating costs of financing inventory 4.3.4 Unsecured financing 4.3.4.1 Calculate costs of commercial paper 4.4 Some Finer Points in Cash Flow Management 4.4.1 Collection practices 4.4.1.1 Collection letter after 90 days 4.4.1.2 Final collection letter 4.4.2 Disbursement Practices 4.4.3 Warning signs 4.4.3.1 Calculate the Z Score 4.5 Summary 4.6 Exercises 5 The Management of Capital 5.1 Basic Concepts and Theories 5.1.1 Introduction 5.1.2 The economics of capital 5.1.3 Basic considerations in managing capital 5.1.3.1 Calculate degree of financial leverage (DFL) 5.1.3.2 Calculate degree of operating leverage (DOL) 5.1.4 Approaches of managing capital 5.1.4.1 Calculate market value of business under net operating income approach to capital management 5.1.4.2 Calculate market value of business under net income approach to capital management 5.2 Calculating the Cost of Capital 5.2.1 Cost of debt 5.2.1.1 Calculate the cost of debt 5.2.2 Cost of common stocks 5.2.3 Dividend growth 5.2.3.1 Calculate the cost of common stock based on dividend growth
5.2.4 Capital asset pricing model (CAPM) 5.2.4.1 Calculate the cost of common stock based on CAPM 5.2.5 Bond plus 5.2.6 Cost of preferred stock (Cps) 5.2.6.1 Calculate the cost of preferred stock 5.2.7 Cost of retained earnings 5.2.7.1 Calculate weighted average cost of capital 5.2.8 Cost of equity and risk 5.3 The Financing Decision 5.3.1 Refinancing risk 5.3.2 Inflation 5.3.3 Flotation costs 5.3.4 Marginal cost of capital 5.3.4.1 Calculate marginal cost of capital 5.3.5 EBIT/EPS comparison 5.3.5.1 EBIT/EPS comparison 5.3.5.2 Calculate graph points for EBIT/EPS comparison 5.3.6 Assessing risk 5.3.6.1 Calculate coverage ratio for Alco Corporation 5.3.7 Targeted debt levels 5.3.8 The overall process 5.4 The Financial Marketplace 5.4.1 Investment bankers 5.4.2 Initial Public Offerings (IPO) 5.4.3 Private placements 5.5 Summary 5.6 Exercises 6 Mergers and Acquisitions (Part I) 6.1 Basic Concepts 6.1.1 M&A defined 6.1.2 Reasons for M&A 6.1.3 The overall process 6.1.3.1 Phase I: Pre-Acquisition review 6.1.3.2 Phase II: Search & screen targets 6.1.3.3 Phase III: Investigate & value the target 6.1.3.4 Phase IV: Acquire through negotiation 6.1.3.5 Phase V: Post merger integration 6.1.4 A reality check 6.2 Legacy and Regulatory Considerations 6.2.1 M&A agreement 6.2.2 Representations 6.2.3 Indemnifications 6.2.4 Confidentiality 6.2.5 M&A closing 6.2.6 The regulatory environment 6.2.7 Anti-Trust laws 6.2.7.1 Determine if a merger will raise anti-trust actions based on the HHI 6.2.8 Notifying the FTC and USJD 6.2.9 Security laws 6.2.9.1 Extension of tender offer period 6.2.10 Accounting principles 6.3 Due Diligence 6.3.1 Making due diligence work 6.3.2 What can go wrong 6.3.3 Reworking the financials 6.3.4 Going beyond financials 6.3.5 Reverse mergers 6.4 Summary 6.5 Exercises
1.1.1 The Business Plan 1.1.2 Meeting the Legal Requirements 1.1.3 Running an Efficient Office 1.1.4 Joining the Local Association 1.1.5 Insurance Matters 1.2 Financial Management 1.2.1 The Principles of Cash Flow 1.2.2 Drawing up a Cash Flow Statement 1.2.3 Principles of Bookkeeping 1.2.4 Bookkeeping 2 Double Entry System 1.3 Contractual Obligations 1.3.1 Types of Contract 1.3.2 National Building Regulations 2 Finding and Obtaining Work 2.1 Finding and keeping Customers 2.1.1 Creating the Right image 2.1.2 Quality Work 2.1.3 Marketing the Business 2.1.4 Joint Ventures 2.2 Estimating and Tendering 2.2.1 Basic Principles of Estimating 2.2.2 Basic Principles of Tendering 2.2.3 Putting together a Tender 3 Running an Efficient Building Project 3.1 Planning and Programming 3.1.1 Types of Programmes and their Uses 3.1.2 How to draw up a Bar Chart 3.1.3 Line of Balance Programming 3.2 Control and Progressing 3.2.1 Monitoring Progress 3.2.2 Working with Subcontractors 3.2.3 Certificates and Progress Payments 3.2.4 Effective Site Meetings 3.3 Work on Site 3.3.1 Planning a Building Site 3.3.2 Setting our a Building 4 General Information 4.1 Management of Staff 4.1.1 Principles of Human Behaviour 4.1.2 Motivation and Incentives 4.2 Safety, IR and Other Legislation 4.2.1 Implications of The Occupational Health and Safety Act 4.2.2 Running a Safe Site 4.2.3 Applying the Labour Relations Act