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Chapter 5: Small Business, Entrepreneurship, and Franchises

Terms in this set (21)

The SBA (Small Business Administration) periodically revises and simplifies its small-business size regulations
- profit is only a small percentage of total sales (a firm may earn $40,000 on yearly sales of $1 million = small compared to medium-sized or large firms)
- most small firms have annual sales well below the max limits in the SBA guidelines
- rules for small businesses (pg. 135)

- typically takes less than a week and $500 to establish a business as a legal entity
- steps include:
1) registering the name of the business
2) applying for tax IDs
3) setting up unemployment and workers' compensation insurance
(Japan has a much longer process)
- Americans take advantage of their freedom to start a business
- only 18,469/27.5 million employ more than 500 workers (large companies)
- part-time entrepreneurs have increased fivefold in recent years; they now account for one-third of all small businesses
- 69% of new business survive at least two years, 50% survive at least 5 years, and 31% survive at least ten years (high failure rate due to lack of business know-how, yet many small businesses succeed modestly)

- 3 broad categories of industry
1) distribution
2) service
3) production
- 74% of real estate, rental, and leasing industries; 61% of the businesses in the leisure and hospitality services; and 86% of the construction industries are dominated by small businesses
- knowledgeable entrepreneurs choose areas with which they are familiar, and these are most often the more established industries
- businesses that are big from the start are due to their ability to gather the capital required to start one
- a number of other industries require only a low initial investment and some special skills or knowledge

1) Distribution Industries (account for approximately 33 percent of all small businesses)
- 3/4 are involved in retailing (sale of goods directly to consumers)
- slightly less than 1/4 of the small distribution firms are wholesalers (purchase products in quantity from manufacturers and then resell them to retailers)
- includes retailing, wholesaling, transportation, and communications (industries concerned with the movement of goods from producers to consumers)

2) Service Industries (accounts for more than 48% of all small businesses )
- 3/4 provide non-financial services as medical and dental care; watch, shoe, and TV repairs; haircutting and styling; restaurant meals; and dry cleaning,
- 8% of small service firms offer financial services, such as accounting, insurance, real estate, and investment counseling

3) Production Industries (19% of all small businesses are in this group)
- includes construction, mining, and manufacturing industries
- only 19% are small businesses because these industries require relatively large initial investments
- U.S. population is quite entrepreneurial when compared with those of other countries
- more than 70% of Americans would prefer being an entrepreneur to working for someone else
- small businesses typically are managed by the people who started and own them

- entrepreneurial spirit is the desire to create a new business

- independence
- a desire to determine one's own destiny
- willingness to find and accept a challenge
- family background
- age (more than 70% who create their own business are between 24-44)

- a person may decide that he or she simply has "had enough" of working and earning a profit for someone else
- a person may lose his or her job for some reason and decides to start the business he or she has always wanted rather than to seek another job

- they have good statistics over women owning businesses (pg. 138)

- high-tech teen entrepreneurship is definitely exploding
- teen entrepreneurs face unique pressures in juggling their schoolwork, their social life, and their high-tech workload
- a young entrepreneur must possess "the five P's of entrepreneurship"
1) planning
2) persistence
3) patience
4) people
5) profit

- small businesses are prone to failure
- capital, management, and planning are the key ingredients in the survival of a small business, as well as the most common reasons for failure
- experience a number of money-related problems
- may take several years before a business begins to show profit
- there are a series of cash flow predicaments that usually ends in a business failure
- fail to meet financial backers' expectations are denied a second wave of investment dollars to continue their drive to establish a profitable online firm
- entrepreneurs lack the management skills required to run a business
- money, time, personnel, and inventory all need to be managed effectively if a small business is to succeed
- success and expansion sometimes lead to problems
- The President of the US has proclaimed National Small Business Week to recognize the contributions of small businesses to the economic well-being of America

- invention and innovation are part of the foundations of our economy
- new ways to do a job with less effort for less money
- small firms produce two-and-a-half times as many innovations as large firms relative to the number of persons employed
- small firms employ 40% of all high-tech workers such as scientists, engineers, and computer specialists
- many of the inventions created by small businesses sparked major new U.S. industries or contributed to an established industry by adding some valuable service

- seven out of the ten industries that added the most new jobs were small-business-dominated industries
- creating the most new jobs recently included business services, leisure and hospitality services, and special trade contractors
- small businesses provide 67% of workers with their first jobs and initial on-the-job training in basic skills
- represent 99.7% of all employers, employ more than 50% of the private workforce, and provide about two-thirds of the net new jobs added to our economy

- small businesses challenge larger, established firms in many ways, causing them to become more efficient and more responsive to consumer needs
- a small business cannot, of course, compete with a large firm in all respects

- small firms also provide a variety of goods and services to each other and to much larger firms
- Sears purchases merchandise from approximately 12,000 suppliers and most of them are small businesses
- large firms generally buy parts and assemblies from smaller firms because it is less expensive than manufacturing the parts in their own factories
1) Personal Relationships with Customers and Employees
- small-business owners often become involved in the social, cultural, and political life of the community
- relationships between owner-managers and employees tend to be closer in smaller businesses
- personal service small businesses offer to customers is a major competitive weapon
2) Ability to Adapt to Change
- an owner may add or discontinue merchandise or services, change store hours, and experiment with various price strategies in response to changes in market conditions
- through personal relationships with customers, the owners of small businesses quickly become aware of changes in people's needs and interests, as well as in the activities of competing firms
3) Simplified Record Keeping
- many small firms need only a simple set of records
- record keeping might consist of a checkbook, a cash-receipts journal in which to record all sales, and a cash-disbursements journal to record all amounts paid out
4) Independence
- small-business owners are the masters of their own destinies
5) Other Advantages
- most profitable companies in the US are small firms that have been in business for more than ten years and employ fewer than 20 people
- small-business owners also enjoy all the advantages of sole proprietorships (able to keep all profits, the ease and low cost of going into business and going out of business, and being able to keep business information secret)

1) Risk of Failure
2) Limited Potential
3) Limited Ability to Raise Capital
- most small-business financing comes out of the owner's pocket, personal loans from lending institutions provide only about one-fourth of the capital required by small businesses
*A well conceived business plan may help avoid the risk of failure

*Business Plan = a carefully constructed guide for the person starting a business
- 3 Basic Purposes
a) Communication
- a business plan serves as a concise document that potential investors can examine to see if they would like to invest or assist in financing a new venture
- shows whether a business has the potential to make a profit
b) Management
- the business plan helps to track, monitor, and evaluate the progress
- the business plan is a living document; it is modified as the entrepreneur gains knowledge and experience
- the business plan establishes time lines and milestones and allows comparison of growth projections against actual accomplishments
c) Planning
- the business plan guides a businessperson through the various phases of business (helps identify obstacles to avoid and to establish alternatives)

- the businessperson should strive to keep it easy to read, uncluttered, and complete
- business plan should answer four questions banking officials and investors are most interest in:
1) what exactly is the nature and mission of the new venture?
2) why is this new enterprise a good idea?
3) what are the businessperson's goals?
4) how much will the new venture cost?
Small Business Administration (SBA) = a governmental agency that assists, counsels, and protects the interests of small business in the United States
- provides both financial assistance and management counseling
- the SBA provided training, technical assistance, and education to more than 3 million small businesses
- helps small firms to bid for and obtain government contracts, and it helps them to prepare to enter foreign markets

- most failures in small businesses are related to poor management
- SBA places special emphasis on improving the management ability of the owners and managers of small businesses

1) Management Courses and Workshops
- management courses offered by the SBA cover all the functions, duties, and roles of managers
- management consultants, bankers, lawyers, and accountants can be instructors
- SBA offers one-day conferences that are aimed at keeping owner-managers up-t0-date on new management developments, tax laws, and the like
- The Small Business Training Network (SBTN) is an online training network consisting of 83 SBA-run courses, workshops, and resources
2) SCORE (Service Corps of Retired Executives)
= a group of more than 13,000 retired and active businesspeople including more than 2,000 women who volunteer their services to small businesses through the SBA
- experts in areas of accounting, finance, marketing, engineering, and retailing provide counseling and mentoring to entrepreneurs
- a small-business owner who has a particular problem can request free counseling from SCORE
- the counselor offers a plan for solving the problem and helping the owner through the critical period

- Americans who are members of minority groups have had difficulty entering the nation's economic mainstream
- members of minority groups are, of course, eligible for all SBA programs, but the SBA makes a special effort to assist those minority groups who want to start small businesses or expand existing ones (Minority Business Development Agency = awards grants to develop and increase business opportunities for members of racial and ethnic minorities)
- helping women become entrepreneurs is also a special goal of the SBA

1) *Small-Business Institutes (SBIs) = groups of senior and graduate students in business administration who provide management counseling to small businesses
- like SCORE volunteers, they analyze and help solve the problems of small-business owners at their business establishments
2) *Small-Business Development Centers = university-based groups that provide individual counseling and practical training to owners of small businesses
- SBDCs draw from the resources of local, state, and federal governments, private businesses, and universities (these groups provide managerial and technical help, data from research studies, and other types of specialized assistance of value to small businesses)
3) SBA Publications
- issues management, marketing, and technical publications dealing with hundreds of topics of interest to present and prospective managers of small firms

- small businesses seem to be constantly in need of money
- he or she may require more money to finance increased operations during peak selling season, to:
a) pay for required pollution control equipment
b) to finance an expansion
c) to mop up after a natural disaster such as a flood or terrorist attack

1) Regular Business Loans
- most SBA's business loans are actually made by private lenders such as banks, but repayment is partially guaranteed by the agency
- SBA may guarantee that it will repay the lender up to 90% of the loan if the borrowing firm cannot repay it
2) * Small-Business Investment Companies = a privately owned firm that provides venture capital to small enterprises that meet its investment standards
- the SBA licenses, regulates, and provides financial assistance to small-business investment companies
- the aid that SBA offers allows them to invest in small businesses that otherwise would not attract venture capital
*Venture Capital = money that is invested in small (and sometimes struggling) firms that have the potential to become very successful

- "our government cannot guarantee a company's success, but it can help create market conditions that allow small businesses to thrive"