BUS 101 Ch. 5 notes
BUS 101 Ch. 5 notes BUS 101
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Date Created: 09/21/16
Ch. 5 Small Business, Entrepreneurship, and Franchises 5-1 Small Business: A Profile Small Business- One that is independently owned and operated for profit and is not dominant in its field. Small businesses Represent 99.7% of all employer firms Employs half of all private sector employees Pay 42% of total U.S. private payroll Generated 63% of net new jobs over the past 20 years Create more than half of the nonfarm private GDP Hire 37% of high-tech workers… Ex.) scientists, engineers 52% home-based and 2% franchises Made up 97.5% of all identified exporters and produced 33% of export value Produced 16.5% times more patents per employee than large patenting firms The Small Business Sector - It is an easy and fast process to start a small business in the U.S. (registering the name of the business applying for tax ID’s setting up unemployment and workers compensation insurance) - The number of small business have increased greatly - Part-time entrepreneurs now account for 1/3 of all small businesses - There is a high failure rate as years go by because of lack of business know how Industries That Attract Small Businesses - Some industries require huge investments for equipment in order to start. (Ex. Auto manufacturing) - Businesses that have a low initial investment are usually the ones to attract new businesses. -Business falls into 3 broad categories of industry Distribution Industries -33% of all small businesses -Includes: retailing (sale of goods directly to consumers Ex. Pet stores, jewelry stores), wholesaling (purchase products in quantity from manufactures and then resell them to retailers), transportation, and communications Service Industries -48% of all small businesses -3/4 provide services like medical & dental care, shoe & T.V. repairs, haircutting…. etc. -8% offer financial services like accounting, and real estate Production Industries -Includes construction, mining, and manufacturing industries -Only 19% of small businesses are in this group -unattractive to people because of the large initial investment into the business -Usually make parts and goods for larger companies 5-2 The People in Small Businesses: The Entrepreneurs Characteristics of Entrepreneurs - Entrepreneurial Spirit- the desire to create a new business Other Personal Factors Independence Desire to determine one’s own destiny Willingness to find and accept a challenge Family background Age (more than 70% are between 24 & 44 years of age) Motivation - There must be motivation to start a business Women as Small-Business Owners - WBC’s assist women in starting and growing small businesses and seek to “level the playing field” for women entrepreneurs. - SBA’s Office of Women’s Business Ownership oversees the WBC network, provides entrepreneurs, especially women who are economically or socially disadvantaged, comprehensive training & counseling on business topics in several languages. Teenagers as Small-Business Owners - The SBA helps young entrepreneurs to manage and grow their business - Knowledge and ability are the most important factors to run a business. Why Some Entrepreneurs and Small Businesses Fail - Capital, management, and planning are the ingredients to survival and failure. - A series of cash flow predicaments - Overexpansion 5-3 The Importance of Small Business in our Economy Providing Technology Innovation -New ways to do a job with less effort for less money - Small firms produce 2 ½ times as many innovations as large firms relative to the # of persons employed. -Small firms produce 16 to 17 times more patents per employee than large patenting firms. -In the past small companies or individual inventors have created things like air-conditioning, airplane, FM radio, power steering and more (pg.142) * These inventions sparked major new U.S. industries or contributed to an established industry by adding some valuable service Providing Employment - 7/10 industries that added the most amount of new jobs were small businesses - Small businesses that are creating the newest jobs include: Business services Leisure and Hospitality services Special trade contractors - Most of the employees hired by small firms are younger workers, older works, women, or workers who want to work part-time. Providing Competition - Small business challenge larger established firms, which causes them to: Be more efficient Be more responsive to consumer needs - 1 small business cannot compete with a large business, but many of them in the same particular category can. Filling Needs of Society & Other Businesses - Small firms provide a variety of goods and services to each other and to much larger firms. - Large firms buy parts and assemblies from smaller firm’s b/c: It is less expensive than manufacturing the parts on their own factories This lowers the price that consumers have to pay 5-4 The Pros & Cons of Smallness Advantages of Small Business: Personal Relationships with Customers and Employees i. Small business owners can become involved in the social, cultural, & political life of the community ii. Close relationships w/ employees help small businesses to keep effective workers that could get paid more at larger firms. Ability to Adapt to Change i. Does not need anyone’s permission ii. Able to quickly become aware of changes in people’s needs and interests along with the activities of competing firms. Simplified Record Keeping i. Just need a checkbook, cash receipts journal to record sales, cash-disbursements journal to record all amounts paid, and records to fill out tax returns Independence i. “the masters of their own destinies” Other Advantages i. the most profitable companies are small firms who have been in business for more than 10 years and employ fewer than 20 people ii. They are sole proprietorships. With this comes: keeps all profits, the ease and low cost of going into and out of business, and being able to keep information secret Disadvantages of Small Business: Risk of Failure st i. 50% survive the 1 5 years ii. Older, well established small firms can be hit hard by a business recession b/c they don’t have financial resources to hold out during an extended difficult period Limited Potential i. Many times small business starts up to make a living for their family. Ex.) hairstylist, electrician. These small business are likely to grow large due to their limited skill Limited Ability to Raise Capital i. Financing comes out of the owner’s pocket. Loans usually provide only ¼ of the money required to start up a small business The Importance of a Business Plan - Business Plan: A carefully constructed guide for the person starting a business - Business plan has 3 basic purposes 1.) Communication potential investors can examine to see if they would like to invest or assist in financing a new venture Shows if the business has a potential to make a profit 2.) Management helps to track, monitor, and evaluate the progress. Modified as the entrepreneur gains knowledge. Establishes time lines and milestones allows comparison of growth projections against actual accomplishments. 3.) Planning guides a businessperson through the various phases of business helps to identify obstacles to avoid and to establish alternatives Components of a Business Plan - Should be easy to read, uncluttered, and complete - Should answer these 4 questions banking officials and investors are interested in 1.) What is the nature and mission of the new venture? 2.) Why is the new enterprise a good idea? 3.) What are the business person’s goals? 4.) How much will the new venture cost? 5-5 The Small Business Administration Small Business Administration(SBA)- a government agency that assists counsels, and protects the interests of small businesses in the U.S. SBA Management Assistance - Most failures are related to management, so this is why they put so much emphasis on improving management - Includes free counseling, courses, conferences, workshops, and a wide range of publications Management Courses & Workshops - Covers all of the functions, duties, and roles of management. - Instructors are either professors or professionals SCORE - Service Corps of Retired Executives(SCORE): a group of business people who volunteer their services to small businesses through the SBA - The volunteers have worked for big notable companies. Experts in areas such as accounting and finance provide counseling and mentoring to entrepreneurs. - Free counseling Help for Minority-Owned Small Businesses -Members of minority groups are eligible for all SBA programs. Such as women. Small- Business Institutes - Small-Business Institutes (SBIs): groups of senior and graduate students in business administration who provide management counseling to small businesses. - Students work in small groups guided by facility advisors and help solve the problems of small- business owners at their business establishments. Small- Business Development Centers - Small-Business Development Centers (SBDCs): university based groups that provide individual counseling and practical training to owners of small businesses. - Draw from the resources of local, state and federal governments, private businesses and universities - Can provide marginalia and technical help, data from research studies, and other types of specialized assistance SBA Publications - Issues management, marketing, & technical publications dealing with hundreds of topics of interest to present. - Most of the publications are free, but some are a small fee SBA Financial Assistance -Small businesses may have enough money to start up but not enough to recover from things like a natural disaster or terrorist attack - SBA grants loans to small businesses, homeowners, and renters in situations of crisis and disaster - Although their main function is to guarantee loans to eligible businesses Regular Business Loans - Made by private lenders like banks - Repayment is guaranteed by the agency - The SBA may guarantee that it will repay the lender up to 90% of the loan if the borrowing firm can’t repay it. Small Business Investment Companies - Venture Capital: Money that is invested in small (and sometimes struggling) firms that have the potential to become very successful. - Many times firms are unable to grow from a lack of capital - The SBA licenses, regulates, and provides financial assistance to small-business investment companies (SBICs): privately owned firms that provide venture capital to small enterprises that meet their investment standards. 5-6 Franchising Franchise: a license to operate individually owned business as though it were part of a chain of outlets or stores. (the business itself) What is Franchising? -Franchising: The actual granting of a franchise -Franchisor: An individual or organization granting a franchise Supplies a known and advertised business name, management skills, the required training and materials, & a method of doing business. -Franchisee: a person or organization purchasing a franchise Supplies labor and capital, operates the franchised business & agrees to abide by the provisions of the franchise agreement Types of Franchising 1.) A manufacturer authorizes a # of retail stores to sell a certain brand-name item. This arrangement is one of the oldest. (passenger cars, trucks, farm equipment, shoes, paint, and petroleum) 2.) A producer licenses distributors to sell a given product to retailers. Most common in the soft drink industry. Franchise independent bottlers who then serve retailers. 3.) A franchisor supplies brand name, techniques, or other services instead of a complete product. Most typical today 5-7 The Growth of Franchising Are Franchises Successful? -The success rate for business operated by franchises is much higher than the success rate of business that are run independently. - Franchising is not a guarantee of success - Too rapid expansion, inadequate capital, or management skills can cause failure Advantages of Franchising To the Franchisor - Gains fast and well controlled distribution of its products without the high cost of constructing and operating its own outlets - Has more capital available to expand production and use for advertising - Outlets are maintained and operated according to its own standards - The franchisee is likely to be highly motivated - More sales, which translate into higher royalties for the franchisor To the Franchisee - Start a business with limited capital - Have an outlet with a nationally advertised name - If problems arise, the franchisor gives guidance and advice - Doesn’t have to pay for this help - Receives materials to use in local advertising - Take part in promotional campaigns sponsored by the franchisor - Franchisee may be able to minimize the cost of advertising, supplies, and various business necessities by purchasing them in cooperation with other franchisees. Disadvantages of Franchising - The disadvantage of franchising affects the franchisee - The franchisor has control over everything - To arbitrate disputes between franchisors and franchisees, the National Franchise Mediation Program was established - Franchises have been demanding government regulation of franchising - Franchise holders pay for their security, usually with a one-time franchise fee and continuing royalty and advertising fees - Success and growth can also cause problems, because franchisees try to break away when they become successful Global Perspectives in Small Businesses - More than 70% of the worlds purchasing power is outside the U.S. - The SBA offers help to the nations small-business owners who want to enter the world markets. - This includes: Counseling small firms on how and where to market overseas Matching the U.S. small-business executives with potential overseas customers Helping exporters to secure financing. - International trade will become more important to small- business owners
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