MIE 201 Chapter 6 notes
MIE 201 Chapter 6 notes MIE 201
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This 11 page Class Notes was uploaded by Jenna Loehrer on Wednesday September 21, 2016. The Class Notes belongs to MIE 201 at North Carolina State University taught by M.K. Ward in Fall 2016. Since its upload, it has received 10 views. For similar materials see Intro to Management in Management at North Carolina State University.
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Date Created: 09/21/16
Chapter 6 Notes: Entrepreneurship and SmallBusiness Ownership Learning Objectives 1. Highlight the contributions small businesses make to the U.S economy. a. Small businesses provide jobs, employing about half of the privatesector workforce. They introduce new and innovative products, they supply many of the needs of larger organizations, they inject considerable amounts of money into the economy, they often take risks that larger organizations avoid, and they provide many specialized goods and services. 2. List the most common reasons people start their own companies, and identify the common traits of successful entrepreneurs. a. People start their own companies because: i. Want to gain more control over futures ii. Want to avoid working for someone else iii. Having new product ideas they are passionate about iv. Pursuing business goals that are important to them on a personal level v. Seeking income alternatives during tough employment markets b. Entrepreneurial Spirit: positive, forwardthinking desire to create profitable, sustainable business enterprises c. Successful entrepreneurs tend to: i. Love what they do and have a passion to succeed at it ii. Be disciplined and willing to work hard iii. Be confident and optimistic iv. Like to control their own destiny v. Relate well to others and the ability to inspire others vi. Be curious and want to learn from their mistakes without letting failure drag them down, vii. Be adaptable and tuned into their environments viii. Be moderate, but careful risk takers 3. Explain the importance of planning a new business, and outline the key elements in a business plan. a. Planning is essential because it forces you to consider the best ownership strategy for your needs and circumstances, and it forces you to think through the factors that will lead to success. Effective business plan should include your mission and objectives, company overview, management, target market, marketing strategy, design and development plan, operations plan, startup schedule, major risk factors, financial projections and requirements, and exit strategy (how investors can cash out or sell their investment). 4. Identify the major causes of business failures, and identify sources of advice and support for struggling business owners. a. Ten common reasons for business failures i. Managerial incompetence ii. Inexperience iii. Inadequate financing iv. Poor cash management Chapter 6 Notes: Entrepreneurship and SmallBusiness Ownership v. Lack of strategy planning vi. Ineffective marketing vii. Uncontrolled growth viii. Poor location ix. Poor inventory control x. Inability to make transition from corporate employee to independent entrepreneur b. Sources of Advice i. Government agencies and nonforprofit organizations 1. Numerous city, state, and federal agencies offer business owners advice, assistance and financing in some cases ii. Business partners 1. Some banks, credit card company, software companies, and other firms you do business with can provide support and advice iii. Mentors and advisory boards 1. Advisory Board: team of people with subject area expertise or vital contacts who help a business owner review plans and decisions iv. Print and online media 1. Local library and the internet offer information to help any small business owner face every challenge imaginable v. Networks and support groups 1. Ex: “entrepreneurship group” entrepreneurs meet regularly in small groups to analyze each other’s progress monthly vi. Business incubators: facilities that house small businesses and provide support services during the company’s early growth phases 5. Discuss the principal sources of smallbusiness private financing. a. Private financing: i. Bank loans → most important sources of financing for small businesses 1. In most cases, banks won’t lend money to start up that hasn’t established a successful track record ii. Microlenders: organizations, often nonforprofit, that lend smaller amounts of money to business owners who might not qualify for conventional bank loans iii. Venture Capitalists: investors who provide money to finance new businesses or turnarounds in exchange for a portion of ownership with the objective of reselling the business at a profit iv. Angel Investors: private individuals who invest money in startups, usually earlier in a business’s life and in smaller amounts than VSs are willing to invest or banks are willing to lend v. Credit Cards and Personal Lines of Credit vi. Small Business Administration Assistance b. Public Financing: selling shares of their company Chapter 6 Notes: Entrepreneurship and SmallBusiness Ownership 6. Explain the advantages and disadvantages of franchising. a. Advantages: i. Combines advantages of independent business ownership with resources and support of a larger organization ii. Less risky than starting or buying an independent business b. Disadvantages: i. Lack of control and costs (initial startup costs and monthly payments based on percentage of sales) Small Business: company that is independently owned and operated, is not dominant in its field, and employs fewer than 500 people (number varies by industry) ● Economic roles of small businesses: ○ Provide jobs ○ Introduce new products ○ Meet needs of larger organizations ○ Put considerable amount of money into economy ○ Take risks that larger companies sometimes avoid ○ Provide specialized goods and services ● Characteristics of small business ○ Modest operations with little growth potential ○ Called lifetime businesses because they are built around the personal and financial needs of an individual or a family ○ Have a narrow focus, offer fewer goods and services to fewer market segments ○ Limited resources to begin ○ More freedom to innovate and move quickly ● Factors contributing to the increase in number of small businesses ○ Ecommerce, social media, and other technologies ○ Growing diversity in entrepreneurship ○ Downsizing and outsourcing ● Entrepreneurial Spirit: positive, forwardthinking desire to create profitable, sustainable business enterprises ● Qualities of Successful Entrepreneurs Chapter 6 Notes: Entrepreneurship and SmallBusiness Ownership StartUp Phase: Planning and Launching a New Business ● SmallBusiness Ownership Options Chapter 6 Notes: Entrepreneurship and SmallBusiness Ownership ● Blueprint for Effective Business Plan ○ Business Plan: document that summarizes a proposed business venture, its goals and plans for achieving those goals ■ Guides the company operations and outlines a strategy for turning an idea into reality ■ Helps persuade lenders and investors to finance your business if outside money is required ■ Provide a reality check in case an idea isn’t feasible ■ Should be written before the company is launched ● Summary ● Mission and objectives ● Company overview ● Products or services ● Management and key personnel ● Target market ● Marketing strategy ● Design and development plans ● Operations plan → facilities, equipment, and personnel requirements ● Startup schedule ● Major risk factors Chapter 6 Notes: Entrepreneurship and SmallBusiness Ownership ● Financial projections and requirements → budget of startup and operating costs, projections for income, expenses, and cash flow for first three years of business ● Exit strategy → how investors can cash out or sell their investment ● Ten common reasons for business failures ○ Managerial incompetence ○ Inexperience ○ Inadequate financing ○ Poor cash management ○ Lack of strategy planning ○ Ineffective marketing ○ Uncontrolled growth ○ Poor location ○ Poor inventory control ○ Inability to make transition from corporate employee to independent entrepreneur Growth Phase ● 70% 90% of new business ventures fail ● Advice and support for business owners ○ Government agencies and nonforprofit organizations ■ Numerous city, state, and federal agencies offer business owners advice, assistance and financing in some cases ○ Business partners ■ Some banks, credit card company, software companies, and other firms you do business with can provide support and advice ○ Mentors and advisory boards ■ Advisory Board: team of people with subject area expertise or vital contacts who help a business owner review plans and decisions ○ Print and online media ■ Local library and the internet offer information to help any small business owner face every challenge imaginable ○ Networks and support groups ■ Ex: “entrepreneurship group” entrepreneurs meet regularly in small groups to analyze each other’s progress monthly ○ Business incubators: facilities that house small businesses and provide support services during the company’s early growth phases Financing Options for Small Businesses ● Seed money: first infusion of capital used to get a business started ● Banks and Microlenders ○ Bank loans → most important sources of financing for small businesses ■ In most cases, banks won’t lend money to start up that hasn’t established a successful track record Chapter 6 Notes: Entrepreneurship and SmallBusiness Ownership ○ Microlenders: organizations, often nonforprofit, that lend smaller amounts of money to business owners who might not qualify for conventional bank loans ● Venture Capitalists: investors who provide money to finance new businesses or turnarounds in exchange for a portion of ownership with the objective of reselling the business at a profit ● Angel Investors: private individuals who invest money in startups, usually earlier in a business’s life and in smaller amounts than VSs are willing to invest or banks are willing to lend ● Credit Cards and Personal Lines of Credit ● Small Business Administration Assistance Public Financing ● Initial Public Offering (IPO): corporation’s first offering of shares to the public Crowdfunding: soliciting project funds, business investment, or business loans from members of the public Franchise Alternative ● Franchise: business arrangement in which one company (franchisee) obtains the rights to sell the products and use various elements of a business system of another company (franchisor) ● Franchisee: business owner who pays for the rights to sell the products or use the business system of a franchisor ● Franchisor: company that supplies elements of its business system to other companies (franchisees) ● Types of Franchises ○ Product franchise: gives you the right to sell trademarked goods ○ Manufacturing franchise: gives right to produce and distribute the manufacturer’s products, using supplies purchased from the franchisor ○ Businessformat franchise: gives right to open a business using a franchisor’s name and format for doing business ● Advantages: ○ Combines advantages of independent business ownership with resources and support of a larger organization ○ Less risky than starting or buying an independent business ● Disadvantages: ○ Lack of control and costs (initial startup costs and monthly payments based on percentage of sales) Online Lecture Chapter 19 Notes: Financial Markets and Investments Stocks ● Stocks: ownership or equity in a company ● Share of stock: specific portion of ownership of stock ● Common Stock: ○ Most common ○ Realize capital gains ○ Income from dividends ○ Right to vote ○ Cons: ■ Risks/ no guarantees ■ Uncertainty ■ Last claim to assets ● Preferred Stock: ○ Hybrid of stock and bond ○ Equity in company ○ Increased stability over common stock ○ Callable ○ Greater claim to assets ○ Pays fixed dividends, at higher rates than other stocks or bonds ○ Significant tax advantages for US companies ○ Cons: ■ No voting rights ■ Less capital gain ● Capital gains ● Dividends: annual payments based on annual or semi annual income reports ○ Not all companies pay this Stock Valuation ● Book value: difference between assets and liabilities as listed on the balance sheet divided by the number of shares in circulation ○ Important for common stock ○ What company says they’re worth ● Market value: price at which stock is actually selling on the market ○ What market says company is worth ● Intrinsic value: attempt to establish what the company is really worth ○ Quantitative value factors and qualitative ● Par value: value assigned to each share when first issued ○ Important for preferred stock value on which dividend percent’s are based ● Priceearnings ratio: market value per share divided by earnings per share Online Lecture Chapter 19 Notes: Financial Markets and Investments ○ Used to see how a stock is priced based on earnings for the past year ● Stock split: divides each share into two or more shares, which reduces market value Corporate Bonds ● Face value or par value: amount of money or principal that bond buyer is issuing to bond issuer ● Maturity date: date on which principal will be payed in full ● Yield: interest income a purchaser receives from a bond ● Duration: how long it takes for a bond to mature ● Advantages over stocks: ○ Less risky than stocks ○ Less chance an investment will decline ○ Can provide regular source of income ○ Predictable rate ● Disadvantages over stocks: ○ Lower average returns ○ Bond can be downgraded ○ Defaults/ junk ○ Call provision ● Types of Bonds → classified by maturity ○ Treasury Bills: short term government bonds repaid in less than one year ■ Sold at a discount, sold at face value ○ Treasury Notes: intermediate long term bonds ■ Paid between 110 years after issue date ○ Treasury Bonds: long term bonds with maturity over 10 years ○ US Savings Bonds: issued by government, pay 50% of amount, received full amount ○ Municipal Bonds: issued by government agencies to build schools, roads, highways… etc ○ TIPS: principal amount is tied to consumer price index to protect against reduction of buying power over time ● Choosing Mutual Funds ○ Money market ○ Growth ○ Value ○ Income ○ Balanced ○ Sector ○ Target date Online Lecture Chapter 19 Notes: Financial Markets and Investments ○ Global ○ International ○ Socially responsible ○ Index ○ ETF’s ● Derivatives: transferring risk from a party who wants to decrease its risk exposure to a company that wants to increase its risk exposure for an opportunity to pursue higher profits ○ Options: purchased right (not obligation) to buy or sell a specified number of shares of stock or other security at a predetermined price during a specific period ○ Financial futures: legally binding contracts to sell a financial instrument ○ Commodities futures ○ Currency futures ○ Credit futures ● Financial Markets ○ Primary ■ IPO’s ■ Stocks and bonds ■ Investment bankers ○ Secondary ■ Stock Exchanges ● Ex: New York Stock Exchange (NYSE) ● Facilitate buying and selling ● Bond Market: ○ Over the counter ○ More decentralized ● Money market ○ Over counter ○ Help people meet short term needs ● Derivatives market ● Investment Strategies and Techniques ○ Why do you want to get more money? ○ How much do you need and when? ○ How much can you invest? ○ How much liquidity do you need? ○ What are the tax consequences? ● Analyzing Financial News: ○ Bull Market: prices rise over time ○ Bear Market: long term trend of falling prices Online Lecture Chapter 19 Notes: Financial Markets and Investments ● Creating an Investment Portfolio Asset Allocation ○ Cash ○ Income ○ Equities ● Buying and Selling Securities ○ Market order: best price ○ Limit order: highest price to buy and lowest price to sell ○ Stop order: sell if prices drops ○ Margin trading: buy with borrowed money ○ Short selling: trade on declining price
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