Entrep Final Exam Study Guide
Entrep Final Exam Study Guide MGMT 3850
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This 21 page Study Guide was uploaded by Alora Lornklang on Saturday May 7, 2016. The Study Guide belongs to MGMT 3850 at University of North Texas taught by Brandi Everett in Spring 2016. Since its upload, it has received 591 views. For similar materials see Foundations of Entrepreneurship in Entrepreneurship at University of North Texas.
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Date Created: 05/07/16
MGMT 3850 Foundations of Entrepreneurship Study Guide for Final Chapter 13 Sources of Financing: Equity and Debt Equity Capital Represents the personal investment of the owner(s) in the business Called risk capital because investors assume the risk of losing their money if the business fails. Primary advantage o Does not have to be repaid with interest like a loan Primary disadvantage o The entrepreneur must give up some ownership in the company to outside investors. Debt Capital Must be repaid with interest Is carried as a liability on the company’s balance sheet Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous Can be expensive, especially for small companies, because of risk/return tradeoff Layered financing The technique of raising capital from multiple sources Capital Any form of wealth employed to produce more wealth Bootstrapping A process in which entrepreneurs tap their personal savings and use create, low cost start up methods to launch their businesses Accredited investors Investors who have sustained a net worth of at least $1 million or annual income of at least $200,000 Sources of Equity financing Personal savings o The FIRST place entrepreneurs should look for money Friends/Family Crowd sourcing o Taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized web sites and raise money from ordinary people who invest as little as $100 o Jumpstart Our Business Statups (JOBS) Act expands the use of crowd funding—Final rules and forms are effective May 16, 2016 Accelerators o Programs, often sponsored by communities and universities, that provide a small amount of seek capital and a wealth of additional support for start up companies o Offer a structured program that lasts from 312 months Angels o Wealthy individuals, often entrepreneurs themselves, who invest in business startups in exchange for equity stakes in the companies. o Angels accept between 1015% of the deals that are pitched to them o Average angel investment = $50,000 o 52% lose money, 7% produce a return more than 10x the original investment Partners o Diluting ownership and sharing profits Corporations Venture capital companies o Private, forprofit companies that purchase equity positions in young businesses that they believe have highgrowth and highprofit potential Public stock sale Simplified registrations Going Public Initial public offering (IPO) o A method of raising equity capital in which a company sells shares of its stock to the general public for the first time Going public involves o Choosing the managing underwriter (investment banker) Helps to prepare the registration statement for an issue Promotes the company’s stock to potential investors o Negotiating a letter of intent An agreement between the underwriter and the company about to go public that outlines the details of the deal o Preparing a registration statement The document a company must file with the SEC that describes both the company and its stock offering and discloses information about the risk of investing. o Filing with the SEC, and o Meeting state requirements o Road show A gathering of potential syndicate members sponsored by the managing underwriter for the purpose of promoting a company’s IPO Sources of Debt Capital Prime rate o The interest rate that banks charge their most creditworthy customers Commercial banks o Lenders of first resort for small businesses Shortterm loans most common type of commercial bank loan granted to small businesses o Home equity loans o Commercial loans—“Traditional Bank Loans” o Lines of Credit A short term bank loan with a preset limit that provides working capital for daytoday operations o Floor Planning Installment and LongTerm Loans o Installment loans—used to purchase fixed assets o Term Loans Impose covenants Typically unsecured Based on past operating history Nonbank Sources of Debt Capital o Assetbased lenders Businesses can borrow money by pledging as collateral otherwise idle assets—accounts receivable, inventory, and others. Advance rate: The percentage of an asset’s value that a lender will lend Asset based financing techniques include: Discounting accounts receivable Inventory financing Purchase order financing o Credit Unions A nonprofit financial cooperative that promotes saving and provides loans to its members o Small Business Investment Companies (SBICs) Privately owned financial institutions that are licensed by the SBA and use a combination of private capital and federally guaranteed debt to provide longterm venture capital to small businesses o Vendor financing (trade credit) o Equipment suppliers o Commercial finance companies o Saving and Loan associations Most Popular Loan Programs 7(A) Loan Guaranty Program o An SBA program in which loans made by private lenders to small businesses are guaranteed up to a ceiling by the SBA Certified Development Company Program o A nonprofit organization licensed by the SBA and designed to promote growth in local communities by working with commercial banks and the SBA to make longterm loans to small businesses Microloan Program o Loans made through an SBA program aimed at entrepreneurs who can borrow amounts of money as small as $100 to a max of $50,000 SBAExpress Program o Loans up to $250,000 Small Loan Advantage o Encourages existing lenders to make smaller loans to benefit disadvantaged borrowers Community Advantage Loan Program o Encourages new lenders that operate in economically challenged communities to enter the 7a loan program The CAPline Program o An SBA program that makes shortterm capital loans to growing companies seeking to finance seasonal buildups in inventory or accounts receivable Loans Involving international trade Export Express Program o An SBA loan program that offers quick turnaround times to small companies that are developing or expanding their export initiatives Export Working Capital Program o An SBA loan program that is designed to provide working capital to small exporters International Trade Program o An SBA loan program for small businesses that are engaging in international trade or are adversely affected by competition from imports Disaster loans o An SBA loan program that makes loans to small businesses devastated by some kind of financial or physical loss Federally Sponsored Programs Economic Development Administration (EDA) o Loans to new or expanding businesses in areas with below avg. income levels and high unemployment rates Department of Housing and Urban Development (HUD) o Grants extended to cities or countries that in turn lend or grand money to entrepreneurs to strengthen the local community U.S. Department of Agriculture’s Rural Business (USDA) Cooperative Service o Financial assistance to businesses that create quality jobs and/or promote a clean rural environment in underserved rural communities Small Business Innovation Research o 11 federal agencies award cash grants or longterm contracts to small companies that want to initiate or expand their R&D efforts Small Business Technology Transfer programs (STTR) o Helps companies use reservoir of commercially promising ideas that originate in universities, federally funded R&D centers, and nonprofit research institutions. State and Local Loan Development Programs o Capital access programs (CAPs) A state lending program that encourages lending institutions to make loans to businesses that do not qualify for traditional financing because of their high risk Other Methods of Financing Factoring Accounts Receivable o Factor: A financial institution that buys business’s accounts receivable at a discount Leasing o Lease assets rather than buying them to avoid tying up capital Rollovers as Business Startups (ROBS) o A method of financing that allows entrepreneurs to use their retirement savings to fund their business startups Credit Cards Merchant cash advance o A provider prepurchase credit and debit card receivables at a discount Peertopeer lending o Webbased platforms that create an online community of lenders who provide funding to creditworthy small businesses. Loan brokers o Specialize in helping small companies find loans by tapping into a wide network of lenders. Chapter 14: Choosing the Right Location and Layout Choosing a Location Consider o The right region of the country o The right state of the region o The right city in the state o The right site in the city Questions to consider How large is the population? How fast is it growing? What is the makeup of overall population? Which segments are growing fastest? What is the trend in the populations income? Are other businesses moving into the region? Choosing the Region: Sources of Information Census data Zoom prospector Zipskinny Small Business Development Center Population Reference Bureau Euromonitor International Organization for Economic Development and Cooperation Choosing the State Proximity to markets Proximity to needed raw materials Wage rates Labor supply needs Business climate Tax rates Internet access Total operating costs Choosing the city Population trends Competition Clustering o Geographic concentration of interconnected companies, specialized suppliers, and service providers that are present in a region Compatibility with community Local laws and regulations o Zoning laws Laws that divide a city or country into small cells or districts to control the use of land, buildings, and sites o Variance A special exemption to a zoning ordinance Appropriate infrastructure Costs of utilities and public services Incentives Quality of life Location Criteria for Retail and Service Businesses Trading area o The region from which a business can expect to draw customers over a reasonable time span Retail compatibility o The benefits a company receives by locating near other businesses that sell complementary products and services or that generate high volumes of traffic Degree of competition Index of retail saturation o A measure of the potential sales per square foot of store space for a given product within a specific trading area; it is the ratio of a trading area’s sales potential for a product or service to its sales capacity Reilly’s law of retail gravitation o Uses analogy of gravity to estimate the attractiveness of a particular business to potential customers. Location Criteria for Retail and Service Businesses Transportation Network Physical and Psychological barriers Customer traffic Adequate parking Reputation Visibility Retail and Service location options Central Business Districts (CBDs) Neighborhood locations Shopping centers and malls Shopping Centers and Malls Strip shopping Centers o The smallest of all shopping centers, but make up the bulk of all the centers in the US. Neighborhood shopping centers o 3 to 12 Stores; anchor is supermarket or drugstore; serves up to 40,000 people. Community Shopping Centers o 12 to 50 stores; anchor is department or variety store; serves 40,000 to 150,000 people Theme or festival centers o Employ a unifying theme, often involving entertainment, to attract tourists Outlet centers o Feature manufacturers’ and retailers’ outlet stores selling name brand goods at discount prices, usually follows “open air” design Lifestyle centers o Located near affluent residential neighborhoods; designed to look more like a central business district than a shopping center or mall Power centers o Combine drawing power of a large regional mall with convenience of neighborhood shopping center; anchor stores typically occupy 80% of space Regional Shopping Malls o 50 to 100 stores; anchor is one or more major department stores; draws customers from a large trading area, often 515 miles or more Superregional shopping malls o Similar to a regional mall but bigger, trading area is 25 miles or more in all directions Evaluating a Location Is there a good fit with other products and brands sold in the mall or center? Who are the other tenants? Demographically, is it a good fit? How much foot traffic does it generate? What is the average sales per square foot? How much vehicle traffic does it generate? What is the vacancy rate? How much is the rent, and how is it calculated? Additional Retail and Service Location Options Near competitors Shared spaces/ Coworking o A situation in which two or more small companies share the same space Inside large retail store Nontraditional locations Homebased businesses On the road Manufacturing Locations Foreign Trade Zones o A specially designated area in or near a US customers port of entry that allows resident companies to import materials and components to import materials and components from foreign countries; assemble, process, manufacture, or package them, and ship the finished product while either reducing or eliminating tariffs and duties. Empowerment zones o Purpose was to create jobs in the most economically distressed areas of urban and rural areas through tax incentives and grants Business incubator o An organization that combines lowcost, flexible, rental space with a multitude space with a multitude of support services for its small businesses residents. o Ex: Ft. Worth Layout The logical arrangement of the physical facilities in a business that contributes to efficient operations, increased productivity, and higher sales External factors o Size and adaptability o Construction and appearance o Entrances Americans with Disabilities Act: A law that requires practicality all businesses to make their facilities available to physically challenged customers and employees o Drive through windows o Sigh, sound, and lighting Support brand and image using colors and visual cues Stores using natural light experience sales that are 40% higher than similar stores using fluorescent lighting Signs o The most direct method of reaching potential customers o Should: Tell customers who you are and what you’re selling Should have contrasting colors and simple typeface Should be visible, simple, and clear Should be legible both day and night Must be maintained properly Must comply with local sign ordinances Window displays that sell Keep displays simple Keep displays clean and current Change displays frequently Get expert help if necessary Building Interiors Ergonomics o The science of adapting work and work environment to complement employees’ strengths and to suit customers’ needs Layout for Retailers Know your customers’ buying habits and plan your layout accordingly Display merchandise as attractively as your budget will allow Display complementary items together Recognize the value of floor space; never waste valuable selling space with non selling functions Layout for Manufacturers Product (line) layout o An arrangement of workers and equipment according to the sequence of operations performed on a product Process layout o An arrangement of workers and equipment according to the general function they perform, without regard to any particular product or customer Fixed position layout o An arrangement in which materials do not move down a production line but rather, because of their weight, size, or bulk, are assembled on the spot. Avoid the seven forms of waste Transportation Inventory Motion Waiting Overproduction Processing Defects ARTICLE: 5 Common Mistakes Businesses Make When Picking Background Music 1. Playing your favorite music, not your audience’s 2. Using a cheap stereo 3. Not letting employees pick the music 4. Not paying royalties 5. Setting the wrong volume level Ch. 15 Global Aspects of Entrepreneurship Why “Go Global”? Offset sales declines in the domestic market Increase sales and profits Lowering manufacturing costs Lower product cost Improve competitive position Raise quality levels Become more customeroriented Trade Intermediaries Domestic agencies that serve as distributors in foreign countries for domestic companies of all sizes. Export management companies (EMCs) o Merchant intermediaries that provide small businesses with lowcost, efficient, offsite international marketing department Export trading companies (ETCs) o Businesses that buy and sell products in a number of countries and offer a wide variety of import and export services to their clients Manufacturer’s export agents (MEA) o Businesses that act as international sales representatives in a limited number of markets for noncompeting domestic companies Export merchants o Domestic wholesalers who do business in foreign markets Resident buying office o Governmentor privately owned operations of one country established in another country for the purpose of buying goods made there. Foreign distributors o Handle all of the marketing, distribution, support, and service functions in the foreign country Letter of Credit An agreement between an exporter’s bank and the foreign buyer’s bank that guarantees payment to the exporter for a specific shipment of goods Bank Draft A document the seller draws on the buyer, requiring the buyer to pay the face amount either on sight or on a specified date Joint Ventures Domestic joint venture o Two or more US companies form an alliance for the purpose of exporting their goods and services abroad Foreign joint venture o A domestic firm forms an alliance with a company in the target nation International Licensing Enter markets quickly and easily with virtually no capital investment Ideal for companies whose value lies in its intellectual property Minimize risk by ensuring that proper patents, trademarks, and copyrights are in place International Franchising steps 1. Identify the country or countries that are best suited to the franchiser’s business concept 2. Generate leads for potential franchises 3. Select quality candidates 4. Structure the franchise deal a. Direct franchising b. Area development c. Master franchising Global Approaches to Value Creation Adaptation strategy o Creating global value by changing one or more elements of a company’s offer to meet local requirements or preferences o Most widely used global strategy Aggregation strategy o Focus on achieving economies of scale or scope by creating regional or global efficiencies Arbitrage Strategy o A way of exploiting differences, rather than adapting to them or bridging them o Buy low in one market and sell higher in another Countertrade and Barter Countertrade o A transaction in which a company selling goods in a foreign country agrees to promote investment and trade in that country Barter o The exchange of goods and services for other goods and services Exporting Small and mediumsize companies account for nearly 98% of the 302,000 US businesses that export, but generate just 1/3 of the nation’s exports. o Small companies generate 2.1 bill in export sales Key benefits of exporting o Increased sales and profits o Ore diversified customer base Steps to Successful Exporting 1. Recognize that even the tiniest companies and least experienced entrepreneurs have the potential to export 2. Analyze your product or service 3. Analyze your commitment to developing export markets 4. Research potential markets and pick your target 5. Develop a distribution strategy 6. Find your customer a. US Dept. of Commerce b. International Trade Admin 7. Find financing for export sales 8. Ship your goods 9. Collect your money a. Cash in advance b. Letter of credit c. Bank draft d. An open account Establishing International Locations Benefits: o Lower startup costs o Lower labor costs o A better understanding of local customer preferences o A better understanding of local business practices Steps to Successful importing or Outsourcing Make sure that importing or outsourcing is right for your business Establish a target cost for your product Do your research before you leave home Be sensitive to cultural differences Do your groundwork Protect your company’s intellectual property Select a manufacturer Provide an exact model of the product you want manufactured Stay in constant contact with the manufacturer and try to build a longterm relationship Expat Entrepreneurs Keep their citizenship in their home country but live and run their businesses on foreign soil Barriers to International Trade Domestic Barriers o Attitude: “my company is too small to export.” o Lack of info about how to get started o Inability to obtain adequate financing International Barriers o Tariff A tax, or duty, that a government imposes on goods and services imported into that country. o Nontariff barriers Governments that protect domestic industries o Quota A limit on the amount of a product imported into a country o Embargo A total ban on imports of certain products into a country o Dumping Selling large quantities of goods at prices that are below cost in foreign countries in an effort to grab market share quickly Political Barriers o Rules, regulations, and political risks Business barriers o Different cost structures and business practices Cultural barriers o Differing languages, philosophies, traditions, and accepted practices o Culture The beliefs, values, views, and mores that a nation’s inhabitants share International Trade Agreements Major Agreements reducing barriers to free trade: o World Trade Organization (WTO) Through the agreements of 160 member nations, members commit themselves to nondiscriminatory trade practices and to reducing barriers to free trade o North American Free Trade Agreement (NAFTA) Free trade area with Canada, US, and Mexico who agree to eliminate trade barriers o Dominican Republic0Central American Free Trade Agreement (CAFTA DR) Promotes trade among the US and 6 Central American countries Guidelines For Success in International Markets Take time to learn before jumping in Seek out assistance from professionals Make yourself at home in all three of the world’s key markets North America, Europe, and Asia Appeal to the similarities in the various regions and recognize the differences in local cultures Develop new products for the world market Learn foreign customs and languages Ch. 16: Building a New Venture Team and Planning for the Next Generation We Generate Value With The idea The business plan Our commitment and risk Our skills, experience, track record, and contacts Taking responsibility Leaders are: Innovative Passionate Willing to take risks Adaptable Leadership The process of influencing and inspiring others to work to achieve a common goal and then giving them the power and the freedom to achieve it The lead entrepreneur must craft a vision, then lead, inspire, and persuade others to sign up and deliver the dream Successful entrepreneurs seem to anchor their vision of the future in certain philosophies Leadership is the process of influencing and inspiring other to work to achieve a common goal and then giving them the power and the freedom to achieve it. Management and leadership are not the same, yet both are essential to a small company’s success. Leadership without management is unbridled; management without leadership is uninspired. Leadership gets a small business going; management keeps it going. Effective Leaders Create a set of values and beliefs for employees and passionately pursue them Establish a culture of ethics Define and then constantly reinforce the vision they have for the company Develop a strategic plan that gives the company a competitive advantage Respect and support their employees Set the example for their employees Create a climate of trust in the organization Build credibility with their employees Are authentic Focus employees’ efforts on challenging and driving toward those goals Servant Leadership A leadership style in which a leader takes on the role of servant first and leader second Three Vital Tasks Of a Leader Add the right employees and constantly improve their skills Create a culture for retaining employees Plan for “passing the torch” to the next generation of leadership Building an Entrepreneurial Team 80% of employee turnover is caused by bad hiring decisions Development Dimensions International o 34% of hiring managers admit to making bad hiring decisions o They were under pressure to fill a job Leadership IQ Survey o 46% newly hired employees will fail in their jobs within 18 months o 19% of newly hired employees will achieve unequivocal success How To Reduce Employee Turnover Rates Provide rewarding, challenging work Pay employees fairly Provide training opportunities and mentoring relationships Offer flexible work schedules Provide simple (and inexpensive) rewards such as thank you notes for extra effort or “good job” notes for jobs well done Conduct exit interviews when employees leave to determine areas that require improvement How to Hire Winners Commit to hire the best talent Elevate recruiting to a strategic position in the company Create practical job descriptions and job specifications Plan an effective interview Conduct the interview Contact references and conduct and background check Strategic Recruiting Look inside the company first Look for employees with whom your customers can identify Make employment ads stand out Use multiple channels to recruit talent Encourage employee referrals Recruit on Campus Forge relationships with schools and other sources of workers Recruit “retired” workers Consider using offbeat recruiting techniques Offer what workers want Conducting a Job Analysis Job analysis o The process by which a firm determines the duties and nature of the jobs to be filled and the skills and experience required of the people who are to fill them Step 1: Create a job description o A written statement of the duties, responsibilities, reporting relationships, working conditions, and methods Step 2: Create a job specification o A written statement of the qualifications and characteristics needed for a job stated in terms such as education, skills, and experience Planning an Effective Interview Involve others in the interview process Develop a series of core questions and ask them of every job candidate Ask openended questions rather than questions calling for “yes or no” answers Create hypothetical situations candidates would encounter on the job and ask how they would handle them Situational interviews o An interview in which an interviewer gives candidates a typical job related situation to see how they respond to it Probe for specific examples in the candidate’s work history that demonstrates the necessary traits and characteristics Ask candidates to describe a recent success and a recent failure and how they dealt with them Arrange a “noninterview” setting that allows others to observe the candidate in an informal setting Break the ice Ask questions Puzzle interview o An interview that includes offbeat questions to determine how job candidates think and reason and to judge their capacity for creativity Interviewer should talk 25%, Interviewee talks 75% Sell the candidate on the company Checking References Checking an applicant’s references is an important part of protecting a company against making a “bad hire” 53% of all candidates either exaggerate or falsify info about their previous employment on their resumes Company Culture Culture: o The distinctive, unwritten, informal code of conduct that governs an organization’s behavior, attitudes, relationships, and style Characteristics of Positive Culture Respect for work and life balance Sense of purpose Sense of fun Engagement Diversity Integrity Participative management Learning environment Job Design Strategies Job simplification o The type of job design that breaks work down in to its simplest form and standardizes each task Job enlargement (horizontal job loading) o Adds more tasks to a job to broaden its scope Job rotation o The type of job design involves cross training employees so that they can move from one job in the company to others, giving them a greater number and variety of tasks to perform Job enrichment (vertical job loading) o The type of job design that involves building motivators into a job by increasing the planning, decisionmaking, organizing, and controlling functions that workers perform Five Core Characteristics o Skill variety o Task identity o Task significance o Autonomy o Feedback Flextime o An arrangement under which employees work a normal number of hours but have flexibility about when they start and stop work Job sharing o A work arrangement in which two or more people share a single fulltime job Flexplace o A work arrangement in which employees work at a place other than the traditional office, such as a satellite branch closer to their homes or at home Telecommuting o An arrangement in which employees working remotely use modern communications equipment to connect electronically to their workplaces. Rewards and Compensation Payforperformance compensation systems o Compensation systems in which employees’ pay depends on how well they perform their jobs Profitsharing plan o A reward system in which employees receive a portion of the company’s profits Openbook management o A system in which entrepreneurs share openly their companies’ financial results with employees Stock options o A plan under which employees can purchase shares of a company’s stock at a fixed price d o A plan under which employers provide certain basic benefits and then allocate a specific dollar Intangible Rewards Can be powerful, yet, inexpensive, motivators o Praise o Recognition o Celebrations Entrepreneurs tend to rely on nonmonetary rewards Family Business Account for 90% of all US businesses Account for 64% of U.S. GDP Employ 62% of private sector work force Comprise 33% of the Fortune 500 companies Created 78% of the U.S. economy’s net new jobs over the last two decades Passing the Torch Only 30% of the first generation businesses survive into the second generation Of those that do survive to the second generation, only 12% make it to the third generation Only 3% make it to the fourth generation and beyond Why is Management Succession So Difficult? Primary causes of lack of continuity among family businesses: o Inadequate estate planning o Failure to create management succession plan o Lack of funds to pay estate taxes o Sibling rivalries and personality conflicts Developing A Management Succession Plan 1. Select the successor 2. Create a survival kit for the successor 3. Groom the successor 4. Promote an environment of trust and respect 5. Cope with the financial realities of estate and gift taxes Coping With Estate Taxes Buysell agreement o A contract among coowners of a business stating that each agrees to buy out the others in case of the death or disability of one Trust o A contract between a grantor and a trustee in which the grantor gives the trustee assets that the trustee holds for the trust’s beneficiaries Revocable trust o A trust that a grantor can change or revoke during his or her lifetime Irrevocable trust o A trust in which a grantor cannot require the trustee to return the assets held in trust Estate freeze o A strategy that minimizes estate taxes by creating two classes of stock for a business: preferred voting stock for the parents and nonvoting common stock for the children Family limited partnership (FLP) o A strategy that allows businessowning parents to transfer their company to their children while still retaining control over it for themselves. Exit Strategies Entrepreneurs planning to retire often use two exit strategies: o Sell to outsiders o Sell to insiders Leveraged buyout (LBO) A situation in which managers and/or employees borrow money from a financial institution to purchase a business and then use the money form the company’s operations to pay off the debt Employee stock ownership plan (ESOP) An arrangement in which employees and/or managers contribute a portion of their salaries and wages over time toward purchasing shares of a company’s stock from the founder until they own the company outright
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