© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 1
Starting and Financing a Starting and Financing a Small BusinessSmall Business
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 2
The Small BusinessThe Small Business
• Independently owned and operated
• Not dominant in its field
• Relatively small annual sales
• Fewer than 500 employees
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 3
Roles of Small BusinessRoles of Small Business
• Provide new jobs
• Introduce new products
• Service large corporations
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 4
Roles of Small BusinessRoles of Small Business
• Inject money into the economy
• Take business risks
• Provide specialty goods and services
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 5
Types of Small BusinessTypes 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
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 6
The Typical Small The Typical Small BusinessBusiness
• Few products or services
• Narrow customer base
• Close market contact
• Limited resources
• Increased innovation
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 7
How Entrepreneurs Spend Their How Entrepreneurs Spend Their TimeTime
• Dealing with employees
• Keeping records
• Direct selling
• Production
• Maintenance
• Dealing with suppliers
• Arranging financial matters
• Planning growth and change
• Other services
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 8
Innovation in Small Innovation in Small BusinessBusiness
• Faster decisions
• Access to owners
• Individual expression
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 9
Factors Contributing to Factors Contributing to Small Business GrowthSmall Business Growth
• E-commerce and the Internet
• Women and minorities
• Downsizing and outsourcing
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 10
Characteristics of Characteristics of EntrepreneursEntrepreneurs
• Highly disciplined
• Like to control their destiny
• Listen to their intuition
• Relate well with others
• Eager to acquire new skills
• Learn from their mistakes
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 11
Characteristics of Characteristics of EntrepreneursEntrepreneurs
• Stay abreast of market changes
• Willing to exploit new opportunities
• Seldom follow trends
• Driven by ambition
• Think positively
• Prefer risk taking over security
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 12
Develop a Business PlanDevelop a Business Plan
• Summarize the business
• Communicate goals
• Highlight plans
• Show customer benefits
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 13
Importance Importance of a Business Planof a Business Plan
• Guide company operations
• Outline a strategy
• Attract lenders and investors
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 14
Starting a New BusinessStarting 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
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 15
Buying an Existing Buying an Existing BusinessBusiness
+ Customer base
+ Business systems
+ Product or service
+ Location
+ Financing
– Alienated customers
– Obsolescence
– Location
– Personality clashes
– Outstanding receivables
Advantages Disadvantages
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 16
The Franchise The Franchise AlternativeAlternative
• Franchisee
• Franchisor
• Types of franchises
–Product
–Manufacturing
–Business-format
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 17
How to Evaluate a How to Evaluate a FranchiseFranchise
• Initial franchise
• Periodic royalties
• Trademarks and names
• Advertising and promotion
• Business location
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 18
How to Evaluate a How to Evaluate a FranchiseFranchise
• Exclusive territory
• Right of first refusal
• Equipment and supplies
• Agreement and termination
• Franchise assignment
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 19
The Pros and Cons of The Pros and Cons of FranchisingFranchising
Advantages
Get a viable business
Name recognition
Network of support
Blueprint for success
Disadvantages
No guarantee of success
High monthly royalties
Limited independence
Limited flexibility
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 20
Why New Businesses FailWhy New Businesses Fail
•Management IncompetenceManagement Incompetence
•Lack of ExperienceLack of Experience
•Insufficient FinancingInsufficient 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
•Poor Entrepreneurial SkillsPoor Entrepreneurial Skills
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 21
Sources of Small Sources of Small Business AssistanceBusiness Assistance
• SCORE
• Incubators
• The Internet
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 22
Financing A New Financing A New BusinessBusiness
• Length of term
• Cost of capital
• Debt or equity
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 23
Length of TermLength of Term
• Short-term
–Maintain liquidity
–Meet financial obligations
• Long-term
–Acquire buildings and equipment
–Start-up or expand operations
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 24
The Cost of CapitalThe Cost of Capital
• Risk factors
• Interest rates
• Funding vehicles
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 25
Obtaining CapitalObtaining Capital
• Debt financing
–Secured loans
–Unsecured loans
• Equity financing
–Stock
– Initial public offering
© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 26
Debt Versus EquityDebt 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
Top Related