eng economy Lecture5
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20-Oct-2014 -
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Transcript of eng economy Lecture5
Starting and Financing a Small Business
The Small Business
Not DominantNot DominantIn Its FieldIn Its Field
Not DominantNot DominantIn Its FieldIn Its Field
Fewer ThanFewer Than500 Employees500 Employees
Fewer ThanFewer Than500 Employees500 Employees
IndependentlyIndependentlyOwned and OperatedOwned and Operated
IndependentlyIndependentlyOwned and OperatedOwned and Operated
Relatively SmallRelatively SmallAnnual SalesAnnual Sales
Relatively SmallRelatively SmallAnnual SalesAnnual Sales
Economic Roles of Small Business
Provide New Jobs
Introduce New Products
Service Large Corporations
Engage in Specialization
Types of Small Business
LifestyleLifestyle High-GrowthHigh-Growth
Run by IndividualsRun by Individuals
Limited Products/ServicesLimited Products/Services
Limited ResourcesLimited Resources
Limited MarketplaceLimited Marketplace
Run by TeamsRun by Teams
Multiple Products/ServicesMultiple Products/Services
Investment CapitalInvestment Capital
Large MarketplaceLarge Marketplace
Innovation in Small Business
Faster DecisionsFaster Decisions
Access to OwnersAccess to Owners
Individual ExpressionIndividual Expression
How Entrepreneurs Spend Their TimeHow Entrepreneurs Spend Their Time
0% 5% 10% 15% 20% 25% 30%
Other Services
Planning Growth/Change
Arranging Financial Matters
Dealing With Suppliers
Maintenance
Production
Direct Selling
Keeping Records
Dealing With Employees
Factors Contributing to Small Business Growth
Technology and the Internet
Women and Minorities
Downsizingand Outsourcing
Women Starting Businesses
0% 10% 20% 30% 40% 50%
Reenter Workforce
Born Entrepreneur
Family Event
Fell Into It
Downsized
Bored in Job
Glass Ceiling
Entrepreneurial Idea
Characteristics of Entrepreneurs
• Highly disciplined
• Like to control their destiny
• Listen to their intuition
• Relate well with others
• Eager to acquire new skills
• Learn from their mistakes
Characteristics of Entrepreneurs
• Stay abreast of market changes
• Willing to exploit new opportunities
• Seldom follow trends
• Driven by ambition
• Think positively
• Prefer risk taking over security
Preparing a Business Plan
Summarize the Business
Communicate Goals
Highlight Plans
Show Customer Benefits
Importance of a Business Plan
Guides CompanyGuides CompanyOperationsOperations
Outlines StrategyOutlines Strategy
Attracts LendersAttracts Lendersand Investorsand Investors
Starting a New Business
+ Control your destiny
+ Reach your potential
+ Unlimited profits
+ Recognition
+ Doing what you enjoy
– Uncertainty of income
– Risk of loss
– Long hours & hard work
– Complete responsibility
– High stress levels
Advantages Disadvantages
Buying an Existing Business
+ Customer base
+ Business systems
+ Product or service
+ Location
+ Financing
– Alienated customers
– Obsolescence
– Location
– Personality clashes
– Outstanding receivables
Advantages Disadvantages
The Franchise Alternative
Franchisee Franchisor
Types
Product Manufacturing Business-Format
How to Evaluate a Franchise
What does the initial franchise fee cover?
How are periodic royalties calculated and when are
they paid?
Are all trademarks and names legally protected?
Who provides and pays for advertising and
promotion?
Who selects the location of the business?
How to Evaluate a Franchise
Is the franchise assigned an exclusive territory?
Does the franchisee have the right of first refusal on
additional nearby franchises?
Is the franchisee required to purchase equipment and
supplies from the franchisor?
How can the franchise agreement be terminated?
Can the franchise be assigned to heirs?
The Pros and Cons of Franchising
Advantages
Get a viable business
Instant name recognition
Built in support group
Marketing & advertising
Disadvantages
No guarantee of success
Expensive to obtain
High monthly royalties
Limited independence
Why New Businesses Fail
Management IncompetenceManagement Incompetence
Lack of Industry ExperienceLack of Industry Experience
Inadequate FinancingInadequate Financing
Poor Business PlanningPoor Business Planning
Unworkable GoalsUnworkable Goals
Diminished Customer BaseDiminished Customer Base
Uncontrolled GrowthUncontrolled Growth
Inappropriate LocationInappropriate Location
Poor System of ControlsPoor System of Controls
Lack of Entrepreneurial SkillsLack of Entrepreneurial Skills
TheTheInternetInternet
IncubatorsIncubatorsSCORESCORE
Sources of Small Business Assistance
Financing A New Business
Length of TermLength of Term
Cost of CapitalCost of Capital
Debt or EquityDebt or Equity
Length of Term
Short-TermShort-Term Long-Term Long-Term
Meet Financial Meet Financial ObligationsObligations
Meet Financial Meet Financial ObligationsObligations
Acquire buildings Acquire buildings and equipmentand equipment
Acquire buildings Acquire buildings and equipmentand equipment
Start-up or ExpandStart-up or ExpandOperationsOperations
Start-up or ExpandStart-up or ExpandOperationsOperations
Maintain LiquidityMaintain LiquidityMaintain LiquidityMaintain Liquidity
The Cost of Capital
Risk FactorsRisk Factors
Interest RatesInterest Rates
Funding VehiclesFunding Vehicles
Obtaining Capital
Debt FinancingDebt Financing Equity Financing Equity Financing
Unsecured LoansUnsecured LoansUnsecured LoansUnsecured Loans
StockStockStockStock
Initial PublicInitial PublicOfferingOffering
Initial PublicInitial PublicOfferingOffering
Secured LoansSecured LoansSecured LoansSecured Loans
Debt Versus Equity
CharacteristicCharacteristic DebtDebt EquityEquity
MaturityMaturity
Claim on IncomeClaim on Income
Claim on AssetsClaim on Assets
Influence OverInfluence OverManagementManagement
SpecificSpecific
Fixed CostFixed Cost
PriorityPriority
LittleLittle
NonspecificNonspecific
Discretionary CostDiscretionary Cost
ResidualResidual
VariesVaries
CorporateCorporateFinancingFinancingCorporateCorporateFinancingFinancing
PersonalPersonalAssetsAssets
PersonalPersonalAssetsAssets
CreditCreditCardsCardsCreditCreditCardsCards
VentureVentureCapitalistsCapitalists
VentureVentureCapitalistsCapitalists
BankBankLoansLoansBankBankLoansLoans
SmallSmallBusinessBusiness
AdministrationAdministration
SmallSmallBusinessBusiness
AdministrationAdministration
Private SourcesPrivate Sourcesof Financingof Financing
Private SourcesPrivate Sourcesof Financingof Financing
FriendsFriendsFriendsFriends
AngelAngelInvestorsInvestors
AngelAngelInvestorsInvestors