© prentice hall, 2005business in action 3echapter 5 - 1 starting and financing a small business

© Prentice Hall, 2005 Business In Action 3e Chapter 5 - 1

Starting and Financing a Starting and Financing a Small BusinessSmall Business


The Small BusinessThe Small Business

• Independently owned and operated

• Not dominant in its field

• Relatively small annual sales

• Fewer than 500 employees


Roles of Small BusinessRoles of Small Business

• Provide new jobs

• Introduce new products

• Service large corporations


Roles of Small BusinessRoles of Small Business

• Inject money into the economy

• Take business risks

• Provide specialty goods and services


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


The Typical Small The Typical Small BusinessBusiness

• Few products or services

• Narrow customer base

• Close market contact

• Limited resources

• Increased innovation


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


Innovation in Small Innovation in Small BusinessBusiness

• Faster decisions

• Access to owners

• Individual expression


Factors Contributing to Factors Contributing to Small Business GrowthSmall Business Growth

• E-commerce and the Internet

• Women and minorities

• Downsizing and outsourcing


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


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


Develop a Business PlanDevelop a Business Plan

• Summarize the business

• Communicate goals

• Highlight plans

• Show customer benefits


Importance Importance of a Business Planof a Business Plan

• Guide company operations

• Outline a strategy

• Attract lenders and investors


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


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


The Franchise The Franchise AlternativeAlternative

• Franchisee

• Franchisor

• Types of franchises

–Product

–Manufacturing

–Business-format


How to Evaluate a How to Evaluate a FranchiseFranchise

• Initial franchise

• Periodic royalties

• Trademarks and names

• Advertising and promotion

• Business location


How to Evaluate a How to Evaluate a FranchiseFranchise

• Exclusive territory

• Right of first refusal

• Equipment and supplies

• Agreement and termination

• Franchise assignment


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


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


Sources of Small Sources of Small Business AssistanceBusiness Assistance

• SCORE

• Incubators

• The Internet


Financing A New Financing A New BusinessBusiness

• Length of term

• Cost of capital

• Debt or equity


Length of TermLength of Term

• Short-term

–Maintain liquidity

–Meet financial obligations

• Long-term

–Acquire buildings and equipment

–Start-up or expand operations


The Cost of CapitalThe Cost of Capital

• Risk factors

• Interest rates

• Funding vehicles


Obtaining CapitalObtaining Capital

• Debt financing

–Secured loans

–Unsecured loans

• Equity financing

–Stock

– Initial public offering


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


Private Sources of Private Sources of FinancingFinancing

• Personal assets• Friends• Corporate financing• Bank loans• Venture capitalists• Angel investors• Credit cards• Small Business Administration

© prentice hall, 2005business in action 3echapter 5 - 1 starting and financing a small business

Documents

small business slide

prentice hall

business risks

roles of small business

typical small business

new business control

innovation slide

outsourcing slide