The Emerging Role (Future) Of Accounting

1. INTRODUCTION

Accounting has evolved as human beings have evolved and as the concepts of the accounting subject are directly coined out from its most fundamental principle of conservatism, it is not difficult to see why the style of accounting at every point in time has a direct link with the age. As man has developed from a primitive age to a modern interdependence age, living has advanced from being subsistent as a hunter-gatherer to a knowledge driven globalised world concept of ‘effectiveness turning to greatness’ and all along with this evolution, self accounting with the abacus has developed through stewardship accounting to financial accounting and now managerial accounting; which has a focus on decision making.

The Financial Accounting Standards Board (FASB) of the US which generally standardised and strengthened the globally adopted Generally Accepted Accounting Principles (GAAP) took significant strides in the year 2012 to come together with the International Accounting Standards Board (IASB) in a manner termed as ‘International Convergence’. Such a convergence is expected to gradually harmonise the GAAPs and the IFRS until they become one and the same in a bid to stream line corporate/company reports into a uniform process globally.

1.1 Statement of the Problem

There is no absolute certainty as to what the future holds for the Accounting Profession. It thus seems however, that the future age which definitely would be one of scientific advancement, would move man from greatness to something worthier for the time. Spiritualism, Environmentalism and Developmentalism could be key factors in the future age. This paper is to find out if Accounting itself would be more of a reality providing accurate solutions to financial problems where man’s ability to value natural capital fairly would give rise to a significant asset on the balance sheet in contrast to the industrial age when even man himself was regarded as labour and not being considered as important as the machines he operated.

2. LITERATURE REVIEW

This paper was approached from a content analysis view point – both conceptual and relational. A content analysis is “a research technique for the objective, systematic, and quantitative description of manifest content of communications” – (Berelson, 52). The conceptual analysis was simply to examine the presence of the problem, i.e. whether there is a stronger presence of positive or negative words used with respect to the specific argument while the relational analysis built on the conceptual analysis by examining the relationships among concepts. As with other sorts of inquiry, initial choices with regard to what is being studied determined the possibility of this particular paper.

2.1 Evolution of Accounting Theory

According to investopedia.com, Accounting Theory in the light of its evolution can be defined as the review of both historical foundations of accounting practice as well as the way in which accounting practices are verified and added to the study and application of financial principles. Accounting as a discipline is believed to have existed since the 15th Century. From that time to now businesses and economies have continued to evolve greatly. Accounting theory must adapt to new ways of doing business, new technological standards and gaps that are discovered in reporting mechanisms hence, it is a continuously evolving subject. As professional accounting organisations help companies interpret and use accounting standards, so do the Accounting Standards Board help continually create more efficient practical applications of accounting theory. Accounting is the foundation of efficient and effective business management and intelligent managerial decision making, without which businesses and trade world-wide would operate blindly and fatally. It is therefore necessary to link how it has evolved to its future role.

2.2 The Origin of Accounting

Luca Pacioli wrote a Maths book in 1494 (ehow) that consisted of a chapter on the mathematics of business. As this book is thought to be first official book on accounting, Luca Pacioli has severally been regarded as ‘the father of accounting’. In his Maths book, Pacioli explained that the successful merchant needed 3 things: sufficient cash or credit; an accounting system that can tell him how he is doing; and a good book keeper to operate it. Pacioli’s theory still holds today, it included both journals and ledgers and it is believed to have popularised the use of the double entry accounting that had been in place since the late 1300s.

2.2.1 The First Change in Accounting

During the depression of 1772, the Accounting profession went beyond book keeping to cost accounting. The theory and the idea were transformed into a method determining whether a business is operating efficiently or using an excess of labour and resources. The new theory of cost accounting allowed a trained book-keeper or an accountant to use the book kept to extract financial reports to show the efficiency represented by such data. This new idea led to the survival of businesses during the depression; business that would otherwise have failed without an intelligent management decision making informed by a cost accounting breakthrough.

2.2.2 The American Revolution/ British Courts Influence

The end of the American Revolution saw the first United States (US) governmental accounting system being created in 1789 and it was established to account for and manage the treasury of the US. The double entry practice and theory were adopted. The British courts ruled that they needed professional accountants to make financial information in relation to court cases. Chartered accounting bodies/ concepts were introduced in Britain (and in the US in particular, the Certified Public Accountant – CPA). In 1887, the first standardised exam emerged with Frank Broaker becoming US’s first CPA.

2.3 Modern Cost Accounting

This was first established by General Motors (GM) Company in 1923 and it developed methods that helped cut its costs and streamlined operations and this remained relevant for over 50 years. The new accounting techniques developed included return on investment, return on equity and GM’s flexible/adjustable budget concept.

2.4 Accounting Concepts and Conventions

This was established in US between 1936 and 1938 by the Committee on Accounting Procedure (CAP) thereby standardising Accounting practices for all companies throughout the US. In 1953, the Generally Accepted Accounting Principles (GAAP) was updated to new standards, CAP became Accounting Principles Board (APB) in 1959 and later in 1973, APB (having suffered from poor management) was replaced by Financial Accounting Standards Board (FASB) with greater powers and opinion for its professional stance.

2.5 International Financial Reporting Standards

FASB issued almost 200 pronouncements between 1973 and 2009 thereby establishing the foundation of Accounting Standards in use presently and is now making current moves to harmonise all accounting principles of GAAP with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB). It is widely believed that development of accounting profession in any nation and around the globe is a mixed effort of both accounting theoreticians and practicing accountants. Thus, the framework of accounting is a harmony of efforts whereby professional accounting bodies are usually in the lead of a path to regulation and standardisation of issues relating to accounting.

2.6 The Nigerian Scenario

In Nigeria, the case is not different from what has already been discussed. Most of the country’s accounting standards (concepts and conventions) were inherited from the British colonial masters. And because the world has indeed become a large global village with globalised accounting bodies supervising and making sure that all member countries are abreast with current Generally Accepted Accounting Principles, Nigeria has also tagged along making several public sector and private sector reforms the most recent and famous of which include the approval by the Federal Government in July 2010 to adopt International Public Sector Accounting Standards (IPSAS) for the public sector and the International Financial Reporting Standards (IFRS) for the private sector as a conscious effort to ensure a uniform chart of reporting system throughout the country by both the public sector and private sector.

2.7 International Convergence of Accounting Standards

This concept is both a goal and a path taken to reach such a goal. The FASB believed that the ultimate goal of convergence is a single set of high-quality, international accounting standards that, companies world-wide would use for both domestic and cross-border financial reporting. To this end, conscious efforts are being made by the FASB and the IASB to jointly eliminate the differences between the ‘GAAP’ and the ‘IFRS’. One such conscious effort was made on the April 5th 2012 when an update report was submitted to the Financial Stability Board Plenary on Accounting Convergence. The ever increasing demand by global capital markets driven by investors’ desire for high-quality internationally comparable financial information is as a result of the usefulness it is expected to immediately provide for decision making and thereafter accurate solutions to problem solving. The IASB was established 1st April 2001 as successor to International Accounting Standards Committee (IASC) and on March 1st 2001 the IASB, which is an independent accounting standard-setter based in London, England assumed the responsibilities for Accounting Standardisation. The IASB is responsible for issuing many accounting standards and pronouncements known as the International Financial Reporting Standards (IFRS).

3. PRESENTATION OF FINDINGS

To give a pictorial view to this paper, two (2) illustrations are used to make presentations (interpretations) of the findings. Illustration.1 traces the Evolution of Accounting; its principles, roles, concepts, professionalism, standardisation and internationalisation. Illustration.2 on the one hand relates Accounting evolution with Human evolution and on the other hand it broadens the understanding of the reader with regards to the subject matter. The reader (user) of this paper easily discovers a past-present-future view of the Role of Accounting and it purports to postulate finally what the future of Accounting could (or should) be. Self Accounting is not a terminology found in the literature of Accounting but is used here to depict any primitive Accounting system which was maintained by traders long before double-entry. Self Accounting, thus, was the past of Accounting when the role of Accounting was merely to have records of Incomes and Expenses, show Liabilities and not necessarily showing Assets and profits as distinguished from the personal or private earnings/estates of a trader. Assets at times might have been recorded as expenses. These are assumable because most businesses operated (and still operate) as sole-ownerships. The Present role of Accounting encompasses; stewardship, financial reporting and managerial decision making. These three provide the nexus of what Accounting is today. The stewardship aspect is so referred to because rich merchants in Europe and the Americas at that time trained their slaves to render book-keeping services. So the merchants themselves did not have to do the tasks. Financial Accounting was developed to give standard to financial reporting especially for the users of such reports who are largely to the businesses concerned. Managerial Accounting evolved to provide records that would aid the decision making process of the managers and owners of businesses. Generally all three roles of accounting as at present assist stakeholders to make good judgments regarding their dealings with businesses. These stakeholders may or ‘may not’ have rights to receive the reports so discussed. The stakeholders include; creditors and government (having rights to receive only financial reports); the shareholders, investors and management (who make use of both the financial reports and the managerial reports); the employee and the management team (who are the users of all the reports: book-keeping, financial reports and managerial reports); and the competitors, resident community and customers – who do not have rights to receive such reports but are able to retrieve financial reports (annual reports) to aid their decisions with regards any business of interest to them.

Having accurate records (reports) support good decision making but sometimes bad interpretation and judgment of the reports and their recorded results may lead to bad decisions taken. The three roles of accounting presently have been the bed-rock with which accounting standardisation of principles and procedures have evolved to date. The Emerging Role (Future) of Accounting then must be anticipated with keen readiness with regards to what should be probable. Illustration.2 would do justice to this concept.

Illustration.1- The Evolution of Accounting in the US (1300 – 2014)

Stewardship (prior 1300)

-Slaves trained to render basic book-keeping

Double Entry (1300)

-Introduction of Double Entry principles

Book-keeping improved (1494)

-Financial Reporting begins

Cost Accounting (1772)

-Managerial Accounting for Decision Making begins

Double Entry (1789)

-Principle of Conservatism fully adopted

Professionalism (1850)

-Concepts/Chartered bodies introduced

AICPA formed in US (1887)

-Providing standards and operational guidelines

-Certification process begins

Qualifying Exams (1897)

-First standardised exams introduced

Cost Accounting Revamped (1923)

-Modern cost accounting methods developed by General Motors Company and remained relevant beyond 1973

Concepts and Conventions (1936)

-Conservatism expanded into other concepts and conventions

-US Committee on Accounting Procedure (CAP) establishes standard accounting practices

CAP Evolves (1953)

-New standards of GAAP fully established

CAP further evolves (1959)

-CAP becomes APB (Accounting Principles Board)

APB evolves (1973)

-Due to poor management and inability to Accounting theory as desired, APB is replaced by FASB

FASB established (1973)

-Financial Accounting Standards Board replaces APB and makes over 200 pronouncements up to 2009

-The foundation of accounting Standards all over the world further strengthened

Influence from the England (2001)

-IASB established as an independent ‘International Accounting Standards-Setter’ based in London, England

-IASB assumes responsibilities from IASC on March 1st 2001

FASB and the International Convergence (2012-2014)

-GAAP (established by the FASB) is being considered for merger into the IFRS (established by the IASB)

3.1 Reality Accounting versus the Future Role of Accounting?

What is Reality Accounting and what then should Reality Accounting encompass? Wikipedia.com defines reality as the totality of all things, structures (actual and conceptual), events (past or present) and phenomena whether observable or not. Reality is thus seen as a term that links ideologies to world views or part of them (conceptual frameworks). Reality Accounting is close to ‘Fair Value Accounting’, which is both a basis and theory of accounting. And it seems to be transforming into the Future Role of Accounting. In Financial Accounting, it is easily seen that accounting reflects corporate and economic realities as they are, though it is common sense to know that accounting cannot adequately reflect reality particularly in relation to the technical limitation of double-entry bookkeeping and Fair Value Accounting. As part of the changes emanating from Reality Accounting, a new concept of ‘Natural Capital’ has surfaced. At the Rio+20 Summit on Sustainable Development organised by the United Nations Conference for Sustainable Development (UNCSD), which took place in Brazil on 20-22 June 2012. At the Conference, a Natural Capital declaration was made such that Natural capital is now understood to be comprising of all Earth’s natural assets (soil, air, water, flora and fauna) and the ecosystem services resulting from them, which make human life possible. It estimated that ecosystem goods and services from natural capital are worth trillions of US dollars per year and constitute food, fibre, water, health, energy, climate security and other essential services for everyone.

3.2 The Concept of Natural Capital

Neither the services, nor the stock of Natural Capital that provides them, are adequately valued compared to social and financial capital despite being fundamental to all that exists. The daily use of Natural Capital remains grossly undetected within our financial system. There is therefore the need to use Natural Capital in a manner that is sustainable. All stakeholders, including the private sector and governments must begin to appreciate and account for the use of Natural Capital and recognise the true cost of its economic growth as well as sustaining human wellbeing now and in the future.

3.3 Natural Capital Framework

Natural Capital though treated as a free good but must be seen as part of a global pool of wealth for which governments must act now and wisely to create a framework that shall regulate, reward or tax the private sector for its use. Reliable policy frameworks that can report the value, use and depletion of natural capital must be the intent of any government desirous of making a good start with this new accounting phenomenon. Deeper economic influence is given to accounting under Reality Accounting since all that are regarded as real are only truly real in their consequence and not in their physical. Therefore the value of Natural Capital for instance would be the value ascertained after considering various factors that give rise to such valuation. These factors include the size, presence of mineral resources, location, other natural resources, presence of plant and animal life etc.

Illustration.2- The Emerging Role (Future) of Accounting

HUMAN AGE………….HUMAN EVOLUTION…………………………….ACCOUNTING EVOLUTION

Primitive age………..Hunter – gatherer……………………………..Self Accounting

(Independence)……(Subsistent living)……………………………..(Abacus)



Colonial age…………Colonialisation…………………………………Stewardship Accounting

(Dependent age)…..(Being efficient)……………………………….(Book-keeping)



Modern Age………….Technology driven by Industrialisation…….Financial Accounting

(Independence)…….(Being effective)………………………………(Financial Reporting)



Modern Age………….Technology driven by Knowledge…………..Management Accounting

(Interdependence)…(From effectiveness to greatness)…………(Decision making)

?↓

The Future Age………Technology driven by advancements……..Reality Accounting?

(Efficiency…………….Environmentalism?…………………………..(Not as a tool for decision

based on……………..Developmentalism?………………………….making but providing

Interdependence……Spiritualism?…………………………………..accurate solutions to

…………………………(From greatness to what?)………………….financial problems)

4.0 CONCLUSION

As man seeks greater heights in a modern world full of scientific and research discoveries, Accountants must ponder what the emerging role of their profession must be. From merely providing information on the wellbeing of a business to financial reporting as a corporate responsibility and now decision making managerial approach for future forecasts, what then does that future hold for accounting or how is accounting expected to remain professional and relevant in that future which seems would be molded by environmental and developmental challenges all over the globe. As accurate records and reports have supported good decision making though sometimes bad interpretation and judgment of the reports and their recorded results have led to bad decisions taken, the present roles of accounting, which have formed the bed-rock with which accounting standardisation of principles and procedures have evolved are now facing evident changes.

Under the scope of Reality Accounting, it is clearly observed that concepts such as International Convergence, Natural Capital, Environmentalism, Developmentalism and Fair Value Accounting will sooner than latter set the path for the future of accounting.

This paper is to stimulate academic arguments for or against the subject matter in order to bring to the awareness of accountants about a subconscious change that is already taking place. It is recommended therefore that seasoned researchers should come forth with further ideas, summaries and reviews that can boost a clear pathway for the future of accounting.

REFERENCES

1. http://www.investopedia.com (Accounting Theory)

2. http://www.eHow.com (The History of Accounting Theory)

3. Berelson, Bernard. Content Analysis in Communication Research. New York: Free Press, 1952

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Tips On How To Create A Business You Love, And Make Money With It

Is your dream this year to own a business of your own? A business you can create out of the little things that bring you joy. Something you could devote all your passion, love and attention to, so you can make money out of it. Then, look no further because we have tips that will help you realize your dream within a short period of time.

1 BE YOURSELF

The first thing to do is to be different in creating your new business. Come up with something entirely different and refreshing from anything in existence out there in the business world. Create a business out of your hobby, a business idea that is purely original with a clear focus and a well-defined purpose on what you want it to achieve.

A business you will be happy to own. 95% of people all over the world are going into businesses to make money obviously, but if you create a business out of something you are familiar with and love to do, it becomes easier and enjoyable to make more money out of it. People who are associated with you and your business will also know that you enjoy your business, giving it your best and getting satisfaction from it.

2 CLEAR VISION

In every business there must be vision, which will accelerate and enable growth. You must devote enough time into your business which will create meaningful purpose and commitment.

Create set goals and strategies on how to run your business and also draw up a clear timetable that is definite based on how to achieve your set goals.

In today’s business environment, it is tough and highly competitive, getting a business up and running successfully, you must be clear what your business is about and stick to its principles so you avoid getting distractions or getting clustered with other business opportunities that are flying around you on a daily basis.

3 RESEARCH

Do a comprehensive research and find out the market for your chosen business. Locate the section of the society where your customers are likely to come from, and how best to offer and make available your business to them. Take some time to familiarize yourself with key information relating to your line of business in regards to planning, promoting, managing your market research.

And since almost every business today depends largely on resources available on the internet you should use available online information on how best to manage your business in a global environmental setting.

4 ADVERTISING

This is obviously the life wire of every business today. Depending on the financial resources available to you, you are advised to harness the benefits of both paid and free advertisement. Consistent advertising of your business will assist tremendously in generating the much needed traffic that will in turn be converted into buyers.

5 UNDERSTANDING THE EXISTENCE OF COMPETITION

Bear in mind that there are other businesses out there ready to run you out of business before your business could see the light of day.

With this knowledge, you should generate a uniqueness that will totally differentiate your business in terms of presentation of your product and your business concept, even when you are offering same product as others, people will chose your own product against the others for the simple reason that your marketing strategies are unique, fresh and second -to-none.

Overview of Zimbabwean Banking Sector (Part One)

Entrepreneurs build their business within the context of an environment which they sometimes may not be able to control. The robustness of an entrepreneurial venture is tried and tested by the vicissitudes of the environment. Within the environment are forces that may serve as great opportunities or menacing threats to the survival of the entrepreneurial venture. Entrepreneurs need to understand the environment within which they operate so as to exploit emerging opportunities and mitigate against potential threats.

This article serves to create an understanding of the forces at play and their effect on banking entrepreneurs in Zimbabwe. A brief historical overview of banking in Zimbabwe is carried out. The impact of the regulatory and economic environment on the sector is assessed. An analysis of the structure of the banking sector facilitates an appreciation of the underlying forces in the industry.

Historical Background

At independence (1980) Zimbabwe had a sophisticated banking and financial market, with commercial banks mostly foreign owned. The country had a central bank inherited from the Central Bank of Rhodesia and Nyasaland at the winding up of the Federation.

For the first few years of independence, the government of Zimbabwe did not interfere with the banking industry. There was neither nationalisation of foreign banks nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national ideology. However, the government purchased some shareholding in two banks. It acquired Nedbank’s 62% of Rhobank at a fair price when the bank withdrew from the country. The decision may have been motivated by the desire to stabilise the banking system. The bank was re-branded as Zimbank. The state did not interfere much in the operations of the bank. The State in 1981 also partnered with Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over and converted to Commercial Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over allegations of unethical business practices.

This should not be viewed as nationalisation but in line with state policy to prevent company closures. The shareholdings in both Zimbank and CBZ were later diluted to below 25% each.

In the first decade, no indigenous bank was licensed and there is no evidence that the government had any financial reform plan. Harvey (n.d., page 6) cites the following as evidence of lack of a coherent financial reform plan in those years:

– In 1981 the government stated that it would encourage rural banking services, but the plan was not implemented.

– In 1982 and 1983 a Money and Finance Commission was proposed but never constituted.

– By 1986 there was no mention of any financial reform agenda in the Five Year National Development Plan.

Harvey argues that the reticence of government to intervene in the financial sector could be explained by the fact that it did not want to jeopardise the interests of the white population, of which banking was an integral part. The country was vulnerable to this sector of the population as it controlled agriculture and manufacturing, which were the mainstay of the economy. The State adopted a conservative approach to indigenisation as it had learnt a lesson from other African countries, whose economies nearly collapsed due to forceful eviction of the white community without first developing a mechanism of skills transfer and capacity building into the black community. The economic cost of inappropriate intervention was deemed to be too high. Another plausible reason for the non- intervention policy was that the State, at independence, inherited a highly controlled economic policy, with tight exchange control mechanisms, from its predecessor. Since control of foreign currency affected control of credit, the government by default, had a strong control of the sector for both economic and political purposes; hence it did not need to interfere.

Financial Reforms

However, after 1987 the government, at the behest of multilateral lenders, embarked on an Economic and Structural Adjustment Programme (ESAP). As part of this programme the Reserve Bank of Zimbabwe (RBZ) started advocating financial reforms through liberalisation and deregulation. It contended that the oligopoly in banking and lack of competition, deprived the sector of choice and quality in service, innovation and efficiency. Consequently, as early as 1994 the RBZ Annual Report indicates the desire for greater competition and efficiency in the banking sector, leading to banking reforms and new legislation that would:

– allow for the conduct of prudential supervision of banks along international best practice

– allow for both off-and on-site bank inspections to increase RBZ’s Banking Supervision function and

– enhance competition, innovation and improve service to the public from banks.

Subsequently the Registrar of Banks in the Ministry of Finance, in liaison with the RBZ, started issuing licences to new players as the financial sector opened up. From the mid-1990s up to December 2003, there was a flurry of entrepreneurial activity in the financial sector as indigenous owned banks were set up. The graph below depicts the trend in the numbers of financial institutions by category, operating since 1994. The trend shows an initial increase in merchant banks and discount houses, followed by decline. The increase in commercial banks was initially slow, gathering momentum around 1999. The decline in merchant banks and discount houses was due to their conversion, mostly into commercial banks.

Source: RBZ Reports

Different entrepreneurs used varied methods to penetrate the financial services sector. Some started advisory services and then upgraded into merchant banks, while others started stockbroking firms, which were elevated into discount houses.

From the beginning of the liberalisation of the financial services up to about 1997 there was a notable absence of locally owned commercial banks. Some of the reasons for this were:

– Conservative licensing policy by the Registrar of Financial Institutions since it was risky to licence indigenous owned commercial banks without an enabling legislature and banking supervision experience.

– Banking entrepreneurs opted for non-banking financial institutions as these were less costly in terms of both initial capital requirements and working capital. For example a merchant bank would require less staff, would not need banking halls, and would have no need to deal in costly small retail deposits, which would reduce overheads and reduce the time to register profits. There was thus a rapid increase in non-banking financial institutions at this time, e.g. by 1995 five of the ten merchant banks had commenced within the previous two years. This became an entry route of choice into commercial banking for some, e.g. Kingdom Bank, NMB Bank and Trust Bank.

It was expected that some foreign banks would also enter the market after the financial reforms but this did not occur, probably due to the restriction of having a minimum 30% local shareholding. The stringent foreign currency controls could also have played a part, as well as the cautious approach adopted by the licensing authorities. Existing foreign banks were not required to shed part of their shareholding although Barclay’s Bank did, through listing on the local stock exchange.

Harvey argues that financial liberalisation assumes that removing direction on lending presupposes that banks would automatically be able to lend on commercial grounds. But he contends that banks may not have this capacity as they are affected by the borrowers’ inability to service loans due to foreign exchange or price control restrictions. Similarly, having positive real interest rates would normally increase bank deposits and increase financial intermediation but this logic falsely assumes that banks will always lend more efficiently. He further argues that licensing new banks does not imply increased competition as it assumes that the new banks will be able to attract competent management and that legislation and bank supervision will be adequate to prevent fraud and thus prevent bank collapse and the resultant financial crisis. Sadly his concerns do not seem to have been addressed within the Zimbabwean financial sector reform, to the detriment of the national economy.

The Operating Environment

Any entrepreneurial activity is constrained or aided by its operating environment. This section analyses the prevailing environment in Zimbabwe that could have an effect on the banking sector.

Politico-legislative

The political environment in the 1990s was stable but turned volatile after 1998, mainly due to the following factors:

– an unbudgeted pay out to war veterans after they mounted an assault on the State in November 1997. This exerted a heavy strain on the economy, resulting in a run on the dollar. Resultantly the Zimbabwean dollar depreciated by 75% as the market foresaw the consequences of the government’s decision. That day has been recognised as the beginning of severe decline of the country’s economy and has been dubbed “Black Friday”. This depreciation became a catalyst for further inflation. It was followed a month later by violent food riots.

– a poorly planned Agrarian Land Reform launched in 1998, where white commercial farmers were ostensibly evicted and replaced by blacks without due regard to land rights or compensation systems. This resulted in a significant reduction in the productivity of the country, which is mostly dependent on agriculture. The way the land redistribution was handled angered the international community, that alleges it is racially and politically motivated. International donors withdrew support for the programme.

– an ill- advised military incursion, named Operation Sovereign Legitimacy, to defend the Democratic Republic of Congo in 1998, saw the country incur massive costs with no apparent benefit to itself and

– elections which the international community alleged were rigged in 2000,2003 and 2008.

These factors led to international isolation, significantly reducing foreign currency and foreign direct investment flow into the country. Investor confidence was severely eroded. Agriculture and tourism, which traditionally, are huge foreign currency earners crumbled.

For the first post independence decade the Banking Act (1965) was the main legislative framework. Since this was enacted when most commercial banks where foreign owned, there were no directions on prudential lending, insider loans, proportion of shareholder funds that could be lent to one borrower, definition of risk assets, and no provision for bank inspection.

The Banking Act (24:01), which came into effect in September 1999, was the culmination of the RBZ’s desire to liberalise and deregulate the financial services. This Act regulates commercial banks, merchant banks, and discount houses. Entry barriers were removed leading to increased competition. The deregulation also allowed banks some latitude to operate in non-core services. It appears that this latitude was not well delimited and hence presented opportunities for risk taking entrepreneurs. The RBZ advocated this deregulation as a way to de-segment the financial sector as well as improve efficiencies. (RBZ, 2000:4.) These two factors presented opportunities to enterprising indigenous bankers to establish their own businesses in the industry. The Act was further revised and reissued as Chapter 24:20 in August 2000. The increased competition resulted in the introduction of new products and services e.g. e-banking and in-store banking. This entrepreneurial activity resulted in the “deepening and sophistication of the financial sector” (RBZ, 2000:5).

As part of the financial reforms drive, the Reserve Bank Act (22:15) was enacted in September 1999.

Its main purpose was to strengthen the supervisory role of the Bank through:

– setting prudential standards within which banks operate

– conducting both on and off-site surveillance of banks

– enforcing sanctions and where necessary placement under curatorship and

– investigating banking institutions wherever necessary.

This Act still had deficiencies as Dr Tsumba, the then RBZ governor, argued that there was need for the RBZ to be responsible for both licensing and supervision as “the ultimate sanction available to a banking supervisor is the knowledge by the banking sector that the license issued will be cancelled for flagrant violation of operating rules”. However the government seemed to have resisted this until January 2004. It can be argued that this deficiency could have given some bankers the impression that nothing would happen to their licences. Dr Tsumba, in observing the role of the RBZ in holding bank management, directors and shareholders responsible for banks viability, stated that it was neither the role nor intention of the RBZ to “micromanage banks and direct their day to day operations. “

It appears though as if the view of his successor differed significantly from this orthodox view, hence the evidence of micromanaging that has been observed in the sector since December 2003.

In November 2001 the Troubled and Insolvent Banks Policy, which had been drafted over the previous few years, became operational. One of its intended goals was that, “the policy enhances regulatory transparency, accountability and ensures that regulatory responses will be applied in a fair and consistent manner” The prevailing view on the market is that this policy when it was implemented post 2003 is definitely deficient as measured against these ideals. It is contestable how transparent the inclusion and exclusion of vulnerable banks into ZABG was.

A new governor of the RBZ was appointed in December 2003 when the economy was on a free-fall. He made significant changes to the monetary policy, which caused tremors in the banking sector. The RBZ was finally authorised to act as both the licensing and regulatory authority for financial institutions in January 2004. The regulatory environment was reviewed and significant amendments were made to the laws governing the financial sector.

The Troubled Financial Institutions Resolution Act, (2004) was enacted. As a result of the new regulatory environment, a number of financial institutions were distressed. The RBZ placed seven institutions under curatorship while one was closed and another was placed under liquidation.

In January 2005 three of the distressed banks were amalgamated on the authority of the Troubled Financial Institutions Act to form a new institution, Zimbabwe Allied Banking Group (ZABG). These banks allegedly failed to repay funds advanced to them by the RBZ. The affected institutions were Trust Bank, Royal Bank and Barbican Bank. The shareholders appealed and won the appeal against the seizure of their assets with the Supreme Court ruling that ZABG was trading in illegally acquired assets. These bankers appealed to the Minister of Finance and lost their appeal. Subsequently in late 2006 they appealed to the Courts as provided by the law. Finally as at April 2010 the RBZ finally agreed to return the “stolen assets”.

Another measure taken by the new governor was to force management changes in the financial sector, which resulted in most entrepreneurial bank founders being forced out of their own companies under varying pretexts. Some eventually fled the country under threat of arrest. Boards of Directors of banks were restructured.

Economic Environment

Economically, the country was stable up to the mid 1990s, but a downturn started around 1997-1998, mostly due to political decisions taken at that time, as already discussed. Economic policy was driven by political considerations. Consequently, there was a withdrawal of multi- national donors and the country was isolated. At the same time, a drought hit the country in the season 2001-2002, exacerbating the injurious effect of farm evictions on crop production. This reduced production had an adverse impact on banks that funded agriculture. The interruptions in commercial farming and the concomitant reduction in food production resulted in a precarious food security position. In the last twelve years the country has been forced to import maize, further straining the tenuous foreign currency resources of the country.

Another impact of the agrarian reform programme was that most farmers who had borrowed money from banks could not service the loans yet the government, which took over their businesses, refused to assume responsibility for the loans. By concurrently failing to recompense the farmers promptly and fairly, it became impractical for the farmers to service the loans. Banks were thus exposed to these bad loans.

The net result was spiralling inflation, company closures resulting in high unemployment, foreign currency shortages as international sources of funds dried up, and food shortages. The foreign currency shortages led to fuel shortages, which in turn reduced industrial production. Consequently, the Gross Domestic Product (GDP) has been on the decline since 1997. This negative economic environment meant reduced banking activity as industrial activity declined and banking services were driven onto the parallel rather than the formal market.

As depicted in the graph below, inflation spiralled and reached a peak of 630% in January 2003. After a brief reprieve the upward trend continued rising to 1729% by February 2007. Thereafter the country entered a period of hyperinflation unheard of in a peace time period. Inflation stresses banks. Some argue that the rate of inflation rose because the devaluation of the currency had not been accompanied by a reduction in the budget deficit. Hyperinflation causes interest rates to soar while the value of collateral security falls, resulting in asset-liability mismatches. It also increases non-performing loans as more people fail to service their loans.

Effectively, by 2001 most banks had adopted a conservative lending strategy e.g. with total advances for the banking sector being only 21.7% of total industry assets compared to 31.1% in the previous year. Banks resorted to volatile non- interest income. Some began to trade in the parallel foreign currency market, at times colluding with the RBZ.

In the last half of 2003 there was a severe cash shortage. People stopped using banks as intermediaries as they were not sure they would be able to access their cash whenever they needed it. This reduced the deposit base for banks. Due to the short term maturity profile of the deposit base, banks are normally not able to invest significant portions of their funds in longer term assets and thus were highly liquid up to mid-2003. However in 2003, because of the demand by clients to have returns matching inflation, most indigenous banks resorted to speculative investments, which yielded higher returns.

These speculative activities, mostly on non-core banking activities, drove an exponential growth within the financial sector. For example one bank had its asset base grow from Z$200 billion (USD50 million) to Z$800 billion (USD200 million) within one year.

However bankers have argued that what the governor calls speculative non-core business is considered best practice in most advanced banking systems worldwide. They argue that it is not unusual for banks to take equity positions in non-banking institutions they have loaned money to safeguard their investments. Examples were given of banks like Nedbank (RSA) and J P Morgan (USA) which control vast real estate investments in their portfolios. Bankers argue convincingly that these investments are sometimes used to hedge against inflation.

The instruction by the new governor of the RBZ for banks to unwind their positions overnight, and the immediate withdrawal of an overnight accommodation support for banks by the RBZ, stimulated a crisis which led to significant asset-liability mismatches and a liquidity crunch for most banks. The prices of properties and the Zimbabwe Stock Exchange collapsed simultaneously, due to the massive selling by banks that were trying to cover their positions. The loss of value on the equities market meant loss of value of the collateral, which most banks held in lieu of the loans they had advanced.

During this period Zimbabwe remained in a debt crunch as most of its foreign debts were either un-serviced or under-serviced. The consequent worsening of the balance of payments (BOP) put pressure on the foreign exchange reserves and the overvalued currency. Total government domestic debt rose from Z$7.2 billion (1990) to Z$2.8 trillion (2004). This growth in domestic debt emanates from high budgetary deficits and decline in international funding.

Socio-cultural

Due to the volatile economy after the 1990s, the population became fairly mobile with a significant number of professionals emigrating for economic reasons. The Internet and Satellite television made the world truly a global village. Customers demanded the same level of service excellence they were exposed to globally. This made service quality a differential advantage. There was also a demand for banks to invest heavily in technological systems.

The increasing cost of doing business in a hyperinflationary environment led to high unemployment and a concomitant collapse of real income. As the Zimbabwe Independent (2005:B14) so keenly observed, a direct outcome of hyperinflationary environment is, “that currency substitution is rife, implying that the Zimbabwe dollar is relinquishing its function as a store of value, unit of account and medium of exchange” to more stable foreign currencies.

During this period an affluent indigenous segment of society emerged, which was cash rich but avoided patronising banks. The emerging parallel market for foreign currency and for cash during the cash crisis reinforced this. Effectively, this reduced the customer base for banks while more banks were coming onto the market. There was thus aggressive competition within a dwindling market.

Socio-economic costs associated with hyperinflation include: erosion of purchasing power parity, increased uncertainty in business planning and budgeting, reduced disposable income, speculative activities that divert resources from productive activities, pressure on the domestic exchange rate due to increased import demand and poor returns on savings. During this period, to augment income there was increased cross border trading as well as commodity broking by people who imported from China, Malaysia and Dubai. This effectively meant that imported substitutes for local products intensified competition, adversely affecting local industries.

As more banks entered the market, which had suffered a major brain drain for economic reasons, it stood to reason that many inexperienced bankers were thrown into the deep end. For example the founding directors of ENG Asset Management had less than five years experience in financial services and yet ENG was the fastest growing financial institution by 2003. It has been suggested that its failure in December 2003 was due to youthful zeal, greed and lack of experience. The collapse of ENG affected some financial institutions that were financially exposed to it, as well as eliciting depositor flight leading to the collapse of some indigenous banks.

Top Eleven 2011 Trends for Entrepreneurs

As we launch into the new year, here are the top 11 trends that entrepreneurs need to be aware of, think about, and for which we should all prepare:

1. Economy will still Struggle: This is the biggest question on everyone’s mind. If experts in public relations and marketing were coaching me to write this blog to be popular, they would tell me to speak positively about the economic trends for 2011. But I just don’t see it on a macroeconomic level, and I refuse to sugarcoat things for the sake of writing a popular blog post. I know of some entrepreneurs who are thriving and some who are struggling or who have already shut their doors. But most are treading water. And this will be the same news come the end of 2011. I’m saying it, even though you probably wanted to hear something differently.

In his post Yet More Evidence of Hunkering Down Among Small Business, Jeff Cornwall expresses concern that if entrepreneurs aren’t positioning their enterprises to expand, a full economic recovery seems distant at best. But there are plenty of strong niches and unique opportunities that will continue to thrive at the hands of adept entrepreneurs.

2. Working Capital will be King: Yes, the saying usually says that cash is king. But tough economic times have taught many entrepreneurs that their working capital is sacred, primarily because it is the key to immediate and short-term cash. Those who make it more efficient (see Working Capital – Less is Often More) will out-perform their competitors. Those who protect it from being used on capital expenditures, excessive owner compensation, and other outflows not helpful to generating immediate and near-term gross profit, will find the empowerment it brings to succeed regardless of almost any external or economic pressure.

3. Results-Driven Marketing will be one of the biggest Difference-Makers of the Year: What happened to measuring marketing performance? Many entrepreneurs are so infatuated with marketing that they have become soft in measuring the results it generates. Some have justified spending more in marketing as a strategy to overcome the recession, and most of them are out of business now, having bled their working capital dry without a tool to measure if it was actually paying off. Marketing metrics will come back into fashion, and cost per lead and cost per customer acquisition will be numbers that successful businesses drive as low as effectively possible. John Donal Leavy has a lot more to say on this topic here: Outcome-Based Marketing in 2011.

4. Capital Expenditures will be up: Most businesses have held off on necessary capital expenditures in 2010 for two reasons. First, they were concerned they would not get the expanded Section 179 tax deduction for 100% of their purchases, and, second, they were concerned about over-spending in a tough economy. With the Section 179 deduction increase extended through 2011 and a still-shaky economy, most entrepreneurs are deferring that pent-up demand to 2011. Don’t be fooled by it, because capital expenditures will likely drop again in 2012. You can read more about this in an article I wrote for American Express OPEN Forum-Five Finance Trends Every Entrepreneur Needs to Know.

5. Going Green will no longer be a trend-it will be an Expectation: A little ahead of this trend, in my opinion, the folks at Willoughby Design wrote: Going Green is not a Temporary Craze-It’s an Expectation. If you haven’t accepted this fact, your competitors will gain more traction and sustainability than you. Period.

6. Fixed Fee and Flat Rate will win more business: Whatever it is you sell, have a fixed price for it. If your customers feels, in any way, that their cost for your product or services is variable, it will decrease your chances of getting the business. Figure out how to price your products and services and deliver what your customers need. The argument that every customers’ needs are different is becoming obsolete, and so are those who base their entire business model on it. Here is just one example from an attorney who wrote about how Customers Love Flat Fee Billing Based on Defined Deliverables.

7. Mobile, Cloud, and Social Technology will continue to converge: As these three technologies mature, they will continue to converge and become the future of how we think about and use technology. You can read just one of many opinions on this here: Convergence of Mobile, Cloud, and Social.

8. Entrepreneurial Borrowing will move further away from Traditional Sources: It will get harder and less attractive to get traditional loans from banks. Increasing an Entrepreneur’s opportunities to adequately fund his or her business is a topic of heated debate, but few seem to really get it. You can read more about these challenges at altconsulting.org, and you can also expect more innovation in getting entrepreneurs access to the funds they need in 2011.

9. Compliance Enforcement will Increase: The IRS has $300 million more to spend in enforcement programs in 2011, and many state and local tax and other compliance agencies are spending more in enforcement as well. Plan for it, and then you’ll be ready when it comes. It’s becoming more likely that it will.

10. Social Security Temporary Tax Cut is a sign of things to come: One provision of the Tax Relief Act of 2010 left me scratching my head. Everyone knows the social security system is underfunded and will be bankrupt in a few decades unless the program is overhauled. So why did Congress reduce the amount paid into the fund by two percentage points, or up to $2,136 per worker? It just doesn’t make sense, unless the long-term plan is to wipe-out the cap, currently set at $106,800, altogether, to match the same way the medicare tax is currently treated.

11. Hiring will focus on value-add, regardless of position or responsibility: Most studies and surveys say that hiring will be stagnant among entrepreneurial companies in 2011. But those who do hire will focus on the value each new employee and position will bring to the company. They will be Improving Your Business Hiring Practices and only hire when an employee is the only way to advance towards their goals and objectives.

Hopefully these trends and tips will help all of us turn 2011 into a year of prosperity and growth. To see the report card of my 2010 predictions, visit Report Card for Top 10 2010 Trend for Entrepreneurs.

Understanding The Gig Economy

Hearing the term Gig Economy recently caught my attention. I hadn’t given much thought to it but it is a big part of what we do as consultants in the employment agency industry. Where did this word gig originate? Musicians refer to their paid performances as gigs and really cool people refer to their temporary jobs as gigs. Put another way, the term “gigging” means having paid work or being employed.

Today a gig could be a temporary job in terms of length of employment. In the employment industry, we often refer to these assignments as either temporary or contract as it is usually for a defined period of time. Gigs can be full-time work hours and other times they are part-time hours.

Well, with our robust economy sitting at 4.0% unemployment it appears that all is well as it pertains to finding work? Many economists believe these numbers to be misleading. The feeling of prosperity is not being felt by many and this leads to the need to take on an extra job [or two] by millions of Americans just to make ends meet. We know by looking at the data that people tend to change jobs several times throughout their working lives and the gig economy can be seen as an evolution of that trend.

In the employment industry, we know that 1 in 5 workers in the workforce is contingent or flexible hourly labor. Many professionals are choosing contract employment because of the flexible work hours, work-life balance or a way to stay engaged in the workforce while keeping their technical and people skills sharp. While employment numbers count W-2 statements these employees could be working part-time or working this assignment until a better opportunity comes along. There are approximately 6 million people [4% of labor force] that make up the U.S. contingent workforce as these numbers have not been tracked in past years.

Capturing the gig economy is important when working to understand the employment numbers. Many employers are choosing a contingent labor force as they look for ways to remain competitive while controlling employment costs and expenses. When marketing or seasonal fluctuations impact sales companies know that a contingent workforce allows them to remain flexible and profitable.

“The gig economy is not new-people have always worked gigs..but today when most people refer to the “gig economy” they’re specifically talking about new technology-enabled kinds of work” I.e Uber, Pinot’s Palette, Airbnb, etc

Companies should know that the growth of the gig economy is a global trend and this trend does not show signs of slowing. People are looking for ways to find balance in their lives while providing for their families. Sometimes that requires a second job. As we look at these gig workers companies should know that these numbers are expected to increase from 4 million to over 9 million in 2021.

Smart companies know that a flexible workforce makes good business sense.

4 Great Reasons For Becoming an Entrepreneur

For some, true freedom is defined as being “able to do what you want, when, with whomsoever, wherever and however you want”. Others described it as ‘being able to wake up when you finished sleeping!”. The most common road taken to such freedoms as described above is by becoming an entrepreneur.

There are generally four major benefits of being an entrepreneur. They mostly explain why anyone would want to face the risk and frustration of owning a business. Starting a new business involves investing in substantial resources, chief of which is money. The initial learning curve is steep, many things can go wrong and a new business owner has to learn things fast to avoid failure.

So what are the benefits of becoming an entrepreneur, to make all the frustrations and risks worth taking? Often, the best reason is being able to explore your true passion. (As opposed to dragging yourself everyday to a dead-end job) It may seem silly but sometimes this motivation alone would motivate a person to persist against great odds, when others give up, in the pursuit of his goals.

Secondly, being your own boss is a very great incentive to start an enterprise. This is particularly if you are a self-reliant and independent person. To you, life is a risk and a business is no different. Thus ‘calling your own shots’ is very important and being an entrepreneur allows this.

Off course, if your business is successful, you would earn uncommonly more money than most. This would allow you to live a lifestyle associated with material wealth and success. Successful people are admired for their lifestyles; this reason, by itself, gives enough incentives for anyone to become an entrepreneur.

Should you make a lot of money and know how to turn them into solid assets, then your life of never having to worry about money i.e. financial freedom is achieved. Now, your assets would work for you; making you all the money you need. This picture of money and time freedom would drive most men to take the risk of starting a new business.

To avoid the many risks and heavy outlays, many are now turning to Internet Marketing as the way to being an entrepreneur. Starting an internet marketing business mostly involves investment in time and can be done part-time. If you are looking to become an entrepreneur, the website provided in the author’s resource box points you to a valuable resource for learning how to master Internet Marketing.

Forced Entrepreneur

The current recession is still on despite claims of recovery. President Obama recently spoke at the White House and quoted the Department of Labor which estimated that US citizens have lost 3.6 million jobs since recession began.

For most losing a job is a calamity and yet there are some who handle this setback better. The great American spirit of survival seems to exist in them. They look for alternatives to make a livelihood and to live well. They may not have opted out of their jobs, but they certainly can deal with it.

How do they manage it? Are their prepared for it? What’s their gameplan?

Forty eight year old Bob Carlos was expecting a promotion as the Vice President of his company. He was unprepared for the recession and it hit him below the belt. Carlos reeled but rallied back to life. It’s then that he decided to do what he enjoyed most in life- sail. Soon he started using his knowledge to train others and to lead small excursions. Bob Carlos now leads a full life enjoying his job. He is making money in a way he never dreamt of. He now has plans to expand online and increase the scope of his customers.

Bob relied on his talent and expertise to pull his new found business through. Through a well planned strategy he started organizing camps and workshops and hired more people.

Bob Carlos was not an entrepreneur by choice. He was a forced entrepreneur.

Entrepreneurship is the ONLY way you can beat the current situation. No one’s hiring, no one’s extending much credit, no one cares; and you need the money and an occupation to keep you going.

More and more Americans are turning to this solution. The number of non-employer firms has risen steadily in this decade, from 16.5 million in 2000 to an estimated 21.1 million in 2007. So now’s the time to go back to your core competency. To improve your skills that have been neglected over the years. You may steer away from the specific job or branch that you were into or use those skills to help others.

Many people are making the recession a blessing in disguise to hone their talent and skills, to spend time with family and community, and to get connected to themselves all over again!

All you need is

– An exemplary skill set

– An eye for detail

– Ability to plan

– Lot’s of enthusiasm.

Wait- Before you chuck your job and set out to challenge your skills there something you must know.

According to the SBA – an estimated 637,100 new employer firms began operations in 2007 and 560,300 firms closed that year.

“Two-thirds of new employer establishments survive at least two years, 44 percent survive at least four years, and 31 percent survive at least seven years, according to a recent study. “

These results were constant for different industries. Firms that began in the second quarter of 1998 were tracked for the next 28 quarters to determine their survival rate. Of special interest, the research found that businesses that survive four years have a better chance of surviving long term. After the fourth year, the rate of firm closings declines considerably.

Earlier research has found that the major factors in a firm’s survivability include an ample supply of capital, being large enough to have employees, the owner’s education level, and the owner’s reason for starting the firm.

So where do you begin. Start with your heart and move on to brains.

I. Take a mental printout of these five attitude steps

– Start small if you want to but start today.

– Do not be afraid to fail.

– Everything in life is a learning experience to make a better you

– Enjoy what you do

– Find opportunities on the way.

II. Next start with your entrepreneurship plans. Ask yourself the following questions and write them down

– Your best skills

– Your strengths

– What you enjoy most

– Five years on what you would like to be

– The objective of your business

III. Next jot down opportunities associated with each skill

– Start with broad, get to specific

– Use the internet to search for opportunities. You’ll be amazed at what you’ll find

– Try to identify at least three opportunities

Now you will broadly know what you want to do or think that you know what you would like to work on.

IV. Time to get your brains into action

– Start to plan how will start the business

– Take into account the costs, time, demographic structure and ROI period

– Think of the area of your business

– Try to find a niche

If you follow this step you’ll identify the most suitable business to start with.

V. Time for research

The strategy for research will depend on your line of skill sets and the opportunity for them. Here it might be time for some expert advice especially if you are a bit shaky. You can either hire an expert to do it or do it yourself. Be thorough and explore all possibilities and start building a strategy.

VI. Strategy Time

If you are starting for the first time, ask an expert. There are lots of experts online who are willing to give away a few minutes of free consultation. Make most of it.

Opportunities

Opportunities for online entrepreneurship are galore; everyone seems to be moving online and finding a niche.

You can become an infopreneur by packaging your knowledge and selling it. The methodology may vary, but the objective will be to sell.

You have to simply decide a topic. It can be anything. Knowledge from your previous work/business experience, a hobby, passion or anything that interests you; even your grandma’s recipe!

Success stories need

1. Diligent Planning

2. Strategic Information

3. Goal Setting

4. Innovation

5. Contemporary Methods

6. Visibility

7. Good Customer Relationship

8. Identification of Opportunities

9. Sheer Hard Work

If you are one of those who think you have nothing special, I’m just an ordinary person with no skills or talents there are opportunities for you too. All you need to have is a website. From that website you can find affiliate opportunities, make ad money, manage content or sell products by partnering with drop shippers.

If still in doubt ask the expert.

Copyright (c) 2009 Ajay Prasad

Inadvertent Partnerships

Walter obtained a lease on valuable property which could be developed for office and retail use. Walter, lacking the funds to develop the property borrowed money from Sam, delivering a promissory note for the amount loaned but told Sam that he would share the profits of the endeavor with him equally. The development was successful, but Walter merely paid the note to Sam and refused to give Sam an accounting of the financial experience of the development. Sam, though he used poor judgment in not documenting the formation of the partnership in writing, can recover his share of the development proceeds if he can prove that Walter made the statement to share the proceeds.

A partnership is the only business entity that can be formed by oral agreement. The parties do not have to have the intention of forming a partnership; they merely have to agree to share the profits and losses of an enterprise. Most states have adopted some form of the Uniform Partnership Act which states: “The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.”

If a partnership is formed, including inadvertently, without a written agreement between the partners, then in the event of a conflict about what the parties agreed, state law provides the partnership agreement. The terms of the default partnership agreement provided by state law are often a surprise to the partners.

What if a creditor agrees to wait for payment until some transaction occurs? Is a partnership formed? If an entity is formed for the purpose of carrying on business, but additional promises are made based on what would happen if certain goals are reached, is a partnership formed? Two knowledgeable entrepreneurs have a discussion over a beer about how they would plan and conduct a certain business built around an opportunity of which they were both aware; when one starts such a business successfully; can the other claim a partnership was formed?

There is only one defense to the inadvertent partnership. Make sure all business agreements are in writing. Do not act in recognition of an oral agreement until it has been documented in writing.

Entrepreneurship and Michael Dell’s Content, Commerce, & Community

If you want to be an entrepreneur, who better to study than Michael Dell? He is an inspiration to entrepreneurs everywhere. Starting in his college dorm room building computers, his understanding of business has made him an icon of success in the arena of technology businesses.

In two keynote addresses given almost a decade ago, Michael Dell defined three principles or concepts for successful internet businesses. Much of what he suggested is now standard practice and in some cases has been taken further than he probably imagined.

Theses principles are sometimes referred to as the 3 C’s. They are content, commerce and community. Careful study of these three principles can help entrepreneurs, those with home based businesses, and network marketers.

The first of the 3 C’s is content.

How did Michael Dell define content? Listen to the words he uses to define it for the Detroit Economic Club on November 1, 1999, “The first stage of content means providing compelling information. This is how we started our online operations in 1993, when we put our technical databases online for customers to access. It was a relatively simple start, but it showed us the tremendous interest from our customers.”

At the keynote address at the Southwest Government Technology Conference in 2000, he made similar suggestions to the ones he made earlier in that Detroit meeting.

He suggested this: “By content, we mean bringing information online. Anytime you have a form, a manual, or a document, put it online. This is the foundation of any Internet strategy. Once we brought information online, it became clear to us where the opportunities were in the transaction world: simple things like order status and commerce, and we have added more complex things over time. The key, again, is that it is experiential and you learn by doing.”

If you want to be an entrepreneur, what is the content you already have, what content do you need to develop?

Look at your present or future business from the content perspective? Define your content. Learn from those who have created that kind of content. Do what they did to create it.

You need products or services to provide to customers. Make a list of the content they will need to explain, troubleshoot, access, or know about your goods and services. A viable business start-up needs content tied to real-world products or services.

The second of the 3 C’s is commerce.

Read how Mr. Dell defined it in Detroit, “The next stage is commerce, which should be thought of as all transactions, not just buying things over the web. In fact, our first activity in this area had nothing to do with purchasing. It was simply order status.”

A few months later at the conference in the Southwest he reiterated, “The second stage is commerce. You should think of this as any kind of transactions. Our first experiment with transactions really had nothing to do with “commerce.” It was an online order status tool. We knew we were on to something when, in the first week, five thousand customers used this tool — and we didn’t even advertise that it was out there. This formed the foundation of our online sales effort.”

He continued, “Our ultimate goal is to deepen relationships with customers by providing added convenience, efficiency, and cost savings, and a wider array of services. The Internet creates an opportunity to move these key transactions online and drive transaction cost to almost zero.”

Does your commerce process resonate with Michael Dell’s suggestion? Think about the last quote. “The ultimate goal is to deepen relationships.” Commerce aspects may reduce costs and increase efficiency, but with a purpose. The ultimate goal is C # 3 which is community.

How important is community, the third C?

According to Mr. Dell, “The final stage is developing an online community. We are building two-way relationships over the web with both our customers and our suppliers.” – Detroit Economic Club.

He went on to express the goal of “establishing communities of suppliers and end users that share common interests”.

At the later conference in the Southwest he ended by observing, “In summary, the Internet is changing the face of the entire economic and social structure of not only this country but the entire world, and governments have a great opportunity to embrace it. We are seeing a transition from a brick-and-mortar government to an online government. The advantages will include things like velocity, efficiency, and a better customer experience.”

The internet has matured since Michael Dell first talked about the 3 C’s, but as a model they still make sense. If anything, community has become even more important. They are not a grocery list to pick one to keep and one to leave.

Today community is so important that it has ushered in a rebirth of web marketing, often called Web 2.0. It depends on social marketing, blogs, myspace and other elements to build that community. Content and commerce both serve the final C of community. It is in community where loyalities, relationships, and trust are built.

Where there is community there are repeat customers. Community-building is a vital skill to have if you want to be an entrepreneur.

The Entrepreneurial Code – Lessons Learned from a Failed Ivy League Entrepreneur

As a 21-year old college student at Wharton, the business school of the University of Pennsylvania, I embraced the ideals of entrepreneurship so whole-heartedly I started my own company. My classmates and I managed the company for two and a half years and it became our full time job after graduation. We wrote a business plan and believed we had a unique concept, a strong management team, and a viable “business model.”

Unfortunately, despite some initial success, my business eventually shut down. Our fate isn’t surprising when you consider the challenges faced by entrepreneurs starting new companies. Like many entrepreneurs, we lost a lot of money invested by friends and family. For two years, we lived in our offices, sleeping on the floors, working day and night with no personal lives. In the end it seemed as if those sacrifices had been for nothing.

Lessons Learned

I think the failure of my company can be attributed to inadequate leadership among its founders. After years of reflection, I’ve asked myself to define what being a “leader” means to me. My definition follows:

A Leader is someone with sound judgment, integrity, and a sense of responsibility for others. A leader motivates others towards common goals, provides hope and inspiration in times of uncertainty, and helps the organization to adapt to an ever-changing environment.

While some degree of technical competence is necessary, these attributes mostly stem from increased self-awareness. It was Sun Tzu who said, “Know your enemy and yourself and you will win 100 battles; know the enemy and not yourself and you will lose every time.” Unfortunately, as a first time entrepreneur, there was a lot about myself I didn’t know. While a lack of self-knowledge isn’t so unusual for someone in his early twenties, it’s a huge problem for an entrepreneur.

I have always found that a good acronym helps me to remember things. For example, “ROYGBIV” and “Please Excuse My Dear Aunt Sally” have locked the colors of the rainbow and the mathematical orders of operation into my brain since I was a high school student. As I was writing this manuscript, I wanted to create another mnemonic to help me remember the mistakes I made so I don’t repeat them in the future.

I have categorized these entrepreneurial mistakes into five elements (the “E CODE”). These five areas are as follows:

Egomania

Corporate Governance

Outlook (or Attitude)

Deeper Meaning

Emptiness

1. Egomania

As a college student, I heard stories how Michael Dell started his company from his college dorm room, and how Bill Gates dropped out of Harvard to start Microsoft, and how many of the wealthy benefactors of my university had been entrepreneurs. While I couldn’t possibly know the hardships and brushes with failure these men had, I latched on to their larger than life images of “success.” After all, I wanted to believe I could accomplish anything with my future. I wanted to believe in the unlimited potential of entrepreneurship.

In my mind’s eye, these tales were all that came close to meeting the “extraordinary expectations” I had of life. I was convinced that entrepreneurship was the single greatest wealth-building opportunity. At 21 years of age, I wanted to make my own decisions, to be my own boss, and to have a financial stake in the outcome of my work. At the same time, I didn’t want to spend 10 or 20 years slowly climbing the corporate ladder. By starting my business, growing it quickly, and selling it, I believed I could have my cake and eat it too.

It was Bill Walsh, former head coach of the San Francisco 49ers, who remarked that “ego” is a misused word in the United States. He said, “We Americans throw that around, using that one word to cover a broad spectrum of meanings: self-confidence, self-assurance, and assertiveness… But there is another side that can wreck a team…That is being distracted by your own importance… [It] ends up interfering with the real goal of any group .”

As a young entrepreneur, I considered it my right to serve my own self-interest. Since I was “taking the risk,” I believed I was entitled to the rewards. Therefore, I was very controlling about who I allowed to get involved in my business. Even if recruiting a larger team added benefits, I sometimes hesitated. After all, I viewed it as “my company,” so I didn’t want to share the upside with others unless it was absolutely necessary. If I had checked my ego, I would have been more likely to recognize my limitations and concentrate on assembling the right team of people, even if it meant slowing things down.

Unfortunately, my exorbitant expectations of entrepreneurship were difficult to meet. Soon, I became embarrassed to show people I worked in a small office with only a handful of employees. I wanted to live up to my lofty ideal of a “real entrepreneur.” So, I rushed to rent larger office space and expand my business prematurely. When the image I had in my head failed to live up to reality, I panicked. Why? Because I was far more excited to chase a “rags to riches” fairy tale than I was to hunker down and slowly build a business over a long period of time. I wanted results in a hurry, but it wasn’t going to happen that way. It was time for Peter Pan to grow up.

At the end of the day, an entrepreneur has the responsibility of stewarding his company and its many stakeholders, not just himself. There’s no room for large egos, because they lead to bad decisions. Entrepreneurship is not so different from other career paths as many of us would like to believe. It still takes many years to build a reputation and a strong client base. It still requires the founder to start at the bottom. If anything, it’s less glamorous, because there are fewer people around to help and a lot less resources at our disposal.

2. Corporate Governance

My partners and I had little corporate governance and no written policies or procedures. Oftentimes, we lacked the independent perspective necessary to critically evaluate our thinking. “GroupThink” was rampant, whereby everyone was entranced by the same views, so no one was thinking independently.

Although we didn’t think we needed advice, my company would have benefited from including independent directors on our Board. It would’ve forced us to share our assumptions with outside professionals. Inevitably, we would’ve had to test our theories, identify potential risks, and slow down our growth plans. At the very least, independent directors would have forced a system of checks and balances.

Although no entrepreneur wants to create bureaucracy, having some structure in place is essential to a healthy organization. Unfortunately, my partners and I thought the primary value of having independent directors was to tap into their business contacts. We weren’t concerned about corporate governance. Instead, we wanted directors to help us get financing or drum up new business. When it became difficult for us to recruit these “well-connected” people, we gave up looking.

As founders, we couldn’t afford to pay ourselves high salaries, so we were financially dependent on the value of our stock. While our ownership stakes were nearly worthless at the time, we assured ourselves that “equity” was the best motivational tool. Unfortunately, being solely dependent on the value of our shares made us more inclined to embrace riskier strategies. After all, our stock could never be worth less than zero. In that sense, it resembled a “call option,” so adding volatility to our business was a way to boost our equity value.

Ultimately, I grew so concerned with protecting my ownership that I turned away venture capital. Rather than selling a large chunk of my equity, I preferred to embrace a highly leveraged operating strategy. Now, I realize that anyone can bet his entire company on a risky financing strategy. The real whiz can capitalize his business in a way that doesn’t “sink the boat” if things take an unexpected turn for the worst.

I also realize that my company’s corporate culture lacked discipline. My partners and I were generally unkempt – we showered everyday at the gym and we slept on the floor of our office. We didn’t keep regular business hours and we had no planned schedules. As a result, the environment we created lacked professionalism. Unfortunately, our lack of discipline manifested itself in a negative way whenever we faced stressful situations.

Tense arguments between founders would turn into screaming matches. We became hotheaded and it spread into the way we managed our business. We were prone to knee-jerk reactions and quick changes of strategy. Although we viewed our nimbleness as a competitive advantage, we lacked the emotional intelligence to realize when we were behaving irrationally. Unfortunately, we lacked the balance in our culture to keep us grounded.

As founders, it was our job to mold the company’s values after our own beliefs. Unfortunately, we listed corporate values in our business plan, but they were just words on paper. Now I realize that corporate values are not pieces of PR fluff that companies put on their websites to appease investors. When these values are held deeply by managers, they help in making difficult decisions.

I think of the nationwide Tylenol recall by Johnson & Johnson whereby 7 people in the Chicago area died in 1982 because their Extra-Strength Tylenol had been laced with cyanide. J&J made a $100 million decision to do a nationwide recall and take its products off the shelves. J&J wanted to send a strong message to its stakeholders that customer safety came before profits. No doubt, it was a difficult decision, but senior management relied on the company’s corporate values to guide them through the crisis. At the end of the day, shared values are a much more reliable way to control behavior in unpredictable situations than are extrinsic controls.

Undoubtedly, part of the allure of self-employment had been the feeling of freedom from not having a boss to which I was accountable. However, the reality was that such freedom didn’t exist, because I was still accountable to my stakeholders. I couldn’t just behave however I wanted. Therefore, I needed to be willing to put checks and balances on my activities for the good of my company. That meant being clear about my company’s values, creating more structure in my organization, and including independent directors on our Board. In short, I needed to take corporate governance a lot more seriously and make it just as important of a goal as my quest for profits.

3. Outlook (or Attitude)

After becoming an entrepreneur, I often compared my life with those of friends who accepted the types of jobs I turned away. While I slept on the floor of my office, ate the cheapest thing on the menu, and was buried beneath a mountain of credit card debt, my peers had apartments in the city, corporate expense accounts, and were improving their credentials in the job market. I began to fear my friends were developing better resumes than I was, while I worked twice as hard for a fraction of the pay.

Comparing myself to others created a lot of unrest, because I was a competitive person and I didn’t want to feel like I was “falling behind.” Although I think it’s natural for entrepreneurs to contend with self-doubt, these emotions only impaired my judgment. They made me impatient, because I was scared of “wasting” years of my life as an entrepreneur, but never becoming “successful.”

After the initial excitement of writing a business plan and setting up my company, I was almost depressed to be sitting in my small office handing out debit cards to college students. I didn’t really have an appreciation for the work. In my mind, I had earned my degree from Wharton to become the manager of a tiny debit card office, but I probably didn’t need to go to college to do that. It made me feel as if I wasn’t living up to my “potential.” Therefore, I wanted to put my head down and focus on growing my business faster.

It sounds ridiculous, but a founder must train himself to find meaning in his daily toils, not just in the dream of his future victory. Otherwise, he’ll feel powerless every time the business takes an unexpected turn and leaves his prospects worse off than before. If a founder feels that he is powerless and at the whim of fate, his psyche can easily become easily damaged by the emotional roller coaster of potential failure and success. The stress can lead him to make bad decisions.

Experiencing failure is an inevitable part of success. Therefore, an entrepreneur has to view adversity as a necessary step that helps him to learn, to grow, and to become a stronger leader. In that regard, challenges and struggles can be hidden blessings, not curses. Entrepreneurs need to observe someone like Nelson Mandella, who survived many years of abuse and imprisonment, but never allowed the situation or his captors to break him. Rather, he used adversity as a tool to transform himself and grow stronger.

There are lots of stories of prisoners of war and concentration camp victims who use their experiences to their advantage. As Warren Bennis and Robert Thomas noted in their book, Geeks & Geezers, leaders often use periods of difficulty as opportunities for reflection that allow them to look deeper into themselves and make discoveries about their own character. It’s ironic, but without moments of desperation, many leaders would never have the opportunity to find their inner strength.

By looking at hardships as opportunities to conquer ego, an entrepreneur can mitigate the emotional swings. As Carlos Castaneda observed with his concept of the “petty tyrant,” life is filled with lots of petty obstacles and challenges, so we might as well learn to use them to our advantage and not allow them to drag us down. In fact, obstacles and hardship can teach entrepreneurs to keep a sense of humor about their plight. It can teach founders to laugh at life’s surprises, both good and bad.

In his book, Man’s Search for Meaning, Victor Frankl describes how life demands things from us, not the other way around. Therefore, we should condition ourselves to find meaning in answering life’s daily callings and use them as opportunities to live with dignity and find meaning in every moment. Learning to enjoy the unpredictability of life can enable an entrepreneur to appreciate the path chosen rather than stress about the uncertainties of future outcomes.

It was John Keats who said the most important attribute of a leader is the ability to be in “uncertainties, mysteries, doubts, without any irritable reaching after fact and reason.” I wish I had a better sense of humor when I was an entrepreneur. Not only would I have had more fun, but I would have been less likely to feel sorry for myself when my company faced challenges. Instead of wasting my energy worrying, I would have been poking fun at my anxieties, strengthening my character, and living in the present. This outlook would have kept me more even keeled and better able to make good decisions.

4. Deeper Meaning

It was Benjamin Disraeli who said, “The secret of success is a constancy of purpose.” I believe an entrepreneur must choose a “cause” to which he’s willing to devote himself, even in the face of failure. It should be a broader purpose that’s worth the fight regardless of the outcome. After all, of the approximately 1.8 million new businesses incorporated every year in the United States, less than a few thousand receive venture funding and a fraction of those ever go public. Clearly, there are no guarantees of success, so a founder’s reasons for choosing his journey have to be about more than the allure of financial gains.

In fact, there is so much volatility embedded in entrepreneurship that it can be difficult for founders to stay motivated by the prospects of riches. Too often the company will be in peril and the founder will be forced to reinvent aspects of the business. If the entrepreneur is only motivated by financial success, then he’ll probably lack the necessary staying power. In fact, most new ventures would probably never get started if a founder’s motivations were based purely on the risk-adjusted economic merits of the project.

At the end of the day, I believe the motivation to pursue a business has to come from a genuine commitment to serving a cause that’s bigger than ourselves. There has to be a responsibility we feel to serve others in a certain way. From my experiences I learned that even the best business plan can become a burden if you don’t believe in what you are doing. Our motivation can’t just be about benefiting ourselves, because when the company’s prospects diminish, most of us will be inclined to quit and do something else.

History is filled with tales of people risking their lives for causes in which they believe. By comparison, very little is written about mercenaries performing such acts of courage. Those who perform the greatest feats do it for reasons which hold deeper meaning to them, not just for money and accolades. Therefore, an entrepreneur should choose a purpose for his business that comes from someplace deep inside of him. Unfortunately, that was not something I did. Rather, I was simply trying to make money, so I could “cash out” and move on to something else.

That’s why I believe an entrepreneur with a long-term dedication will ultimately reap the benefits of his commitment. The right opportunity will eventually present itself. The long-term players will weather the storms and be in better positions to take advantage of the new opportunities when the clouds finally part.

5. Emptiness

There is an interesting poem from the Tao Te Ching that I have come to appreciate since my experiences as an entrepreneur. It follows:

“With a wall all around

A clay bowl is molded;

But the use of the bowl

Will depend on the part

Of the bowl that is void.

Cut out windows and doors

In the house as you build;

But the use of the house

Will depend on the space

In the walls that is void.

So advantage is had

From whatever is there;

But usefulness arises

From whatever is not.

–The Tao Te Ching

Like the poem from the Tao Te Ching, entrepreneurs must see the importance of emptiness, which requires a different way of looking at the world. While emptiness can be uncertainty, it can also represent opportunity.

As an entrepreneur assembles the pieces of his business into place, there will inevitably come a time when the viability of his company is in doubt. New markets are difficult to break into, customer needs are always changing, and the threat of new competition always seems to be lurking about. Sometimes, it’s hard to look into the unknown and see opportunity. It’s easy to doubt ourselves and be scared.

As a 22-year old entrepreneur, I looked into the unknown and I saw only two possibilities. I saw the possibility for personal success or failure. Working at my desk until the early hours of the morning, my mind’s eye was able to craft detailed scenarios for each. Either sleeping on the office floor was going to be part of a story I would tell guests on my yacht one day or I was wasting my potential with a business that would never succeed.

Unfortunately, I didn’t understand there was more an entrepreneur could see in his unknown future if he focused on something other than his “personal success.” He might also see the opportunity to fight for a cause that inspires him, regardless if he wins or loses. Whether he becomes rich or not, the future represents an opportunity to make a difference in the world.

That’s why the true “fire in the belly” of an entrepreneur should come from a vision that the future, while uncertain, holds possibilities for each of us to make an impact on the lives of others. To have maximum power, our vision shouldn’t be just about our own success or failure. It’s not about personal greed. To be truly inspirational, we need to see how our efforts will benefit the lives of others. By sharing that vision, we’ll be able to influence those around us to join our cause.