CHAPTER 1

Defining Small Business

“A small Business is one that is independently owned and operated and is not dominant in its field of operation”

Two of the following three reasons:

Management is independent since the manager usually own the Business

Capital supply is held by an individual or few individual

The area of operation is primarily local, market may not

More definitionsMore definitions An organization with a name, a place An organization with a name, a place

of operations, an owner, and one or of operations, an owner, and one or more workers other than the owner.more workers other than the owner.

business that is managed by not more business that is managed by not more than 3 managers or whose workforce than 3 managers or whose workforce does not exceed 100 persons.does not exceed 100 persons.

Any enterprise employing 500 or Any enterprise employing 500 or fewer employees.4fewer employees.4

A business which is independently A business which is independently owned and operated and has either owned and operated and has either fewer than 100 employees or less fewer than 100 employees or less than $1,000,000 in gross receipts.5than $1,000,000 in gross receipts.5

Distinguishing Between SmallDistinguishing Between Small Business &Business &Entrepreneurial VentureEntrepreneurial Venture

SMALL BUSINESS

o A small business does not engage in new or innovative practice

o It may never grow large

o It involves normal sales, profit and growth.

Entrepreneurial Venture

o Its Primary objective is profitability and growth.

o It involves innovative strategic products or practices

o Entrepreneurs are usually seeking rapid growth, immediate and high profits and sellouts with large profits.

o Entrepreneurial venture creates substantial wealth, in excess of Several million dollars of profit.

o Speed of wealth creation in entrepreneurship is great. A small Business might take a lifetime to generate several million dollars, But an entrepreneurial venture would take time of say 5 yrs.

o Risk is an entrepreneurial activity must be high.

Reasons of increased interest in Reasons of increased interest in SBMSBM

No. of SBM are growing rapidlyNo. of SBM are growing rapidly Small firms generates most new Small firms generates most new

employmentemployment The public favors small businessThe public favors small business Interests increasing at high schools Interests increasing at high schools

and collegesand colleges Trends towards self employmentTrends towards self employment Attractive to all agesAttractive to all ages

Contributions of Small Contributions of Small BusinessBusiness

Encourage innovation & FlexibilityEncourage innovation & Flexibility Maintain close relationship with Maintain close relationship with

customers & the communitycustomers & the community Keep larger firms competitiveKeep larger firms competitive Provide employees with Provide employees with

comprehensive learning experiencecomprehensive learning experience Develop risk takersDevelop risk takers Generate new employmentGenerate new employment

Problems Facing Small Problems Facing Small BusinessBusiness

TaxesTaxes Regulation and Red Regulation and Red

TapeTape Insurance CostsInsurance Costs Weak SalesWeak Sales Competition from Large Competition from Large

CompaniesCompanies Finding Good WorkersFinding Good Workers

25%25%

23%23% 11%11%10%10%8%8%

7%7%

Why SBM FailsWhy SBM Fails Lack of capitalLack of capital No business knowledgeNo business knowledge Poor managementPoor management Inadequate planningInadequate planning Inexperience Inexperience

Trends Challenging Trends Challenging Entrepreneurs & Small Entrepreneurs & Small

Business OwnersBusiness Owners A More Diverse Work ForceA More Diverse Work Force Empowerment & Team PerformanceEmpowerment & Team Performance Exploding TechnologyExploding Technology Occupational & Industry ShiftsOccupational & Industry Shifts

– Reengineering, reinvention, downsizingReengineering, reinvention, downsizing Global ChallengesGlobal Challenges

CHAPTER 2Why own & manage

small BusinessReasons For Starting Small Businesses

1. To Satisfy Personal Objectives: Personal objectives as independence, control and satisfaction are Met. People working as managers in larger firms tend to seek security,Place, power, prestige, high income and benefits.

i. To achieve independence Small business owners tend to want autonomy to exercise their Initiative. Owning your business provides satisfaction that may be Absent when working for someone else.

ii. To obtain additional incomeIn order to acquire more money people usually start their own small business

iii. The help their familiesiv. To provide products not available elsewhere

2. To achieve business objectives: Objectives should be set by the owner as they are the goals towards which activities of the business are directed.i. Service Objective Primary objective of a small business is to serve the customers by producing and selling goods and services.

ii. Profit Objective To earn profit is the reward for taking a risk. Profits are needed to create new jobs , acquire new facilities and develop new products.

iii. Social ObjectiveAssisting group and protecting the environment

iv. Growth Objective owners should be concerned with the growth of their business and must consider growth objectives in mind, so as to retain their current state or to expand the business

Characteristics of successful small business owners

1. Desire independence

2. Have a strong sense of initiative

3. Motivated by personal & family considerations

4. Expect quick & concrete results

5. Are able to react quickly

6. Dedicated to their business

7. Enter business as much by chance as by design

Characteristics to be a Characteristics to be a Successful EntrepreneurSuccessful Entrepreneur

Analyzing ur ValuesAnalyzing ur Values Analyzing ur Mental AbilitiesAnalyzing ur Mental Abilities Analyzing ur AttitudesAnalyzing ur Attitudes

What leads to Success in What leads to Success in Managing a Small Managing a Small

Business?Business? Serving an adequate & well-defined Serving an adequate & well-defined

market for the productmarket for the product Acquiring sufficient capitalAcquiring sufficient capital Recruiting & using human resources Recruiting & using human resources

effectivelyeffectively Obtaining & using accurate Obtaining & using accurate

informationinformation Coping with govt. regulations Coping with govt. regulations

effectivelyeffectively

Having expertise in the field on the Having expertise in the field on the part of both the owner and the part of both the owner and the employeesemployees

Managing time effectivelyManaging time effectively

What are the opportunities?What are the opportunities?– What are the Fastest Growing industriesWhat are the Fastest Growing industries– Factors effecting the future of an Factors effecting the future of an

industry or a businessindustry or a businessEconomicsEconomics

– GNP, interest rates, inflation rates, stages of GNP, interest rates, inflation rates, stages of business cycle, employment level, competitionbusiness cycle, employment level, competition

TechnologyTechnology– Artificial intelligence, robots, laser beam, new Artificial intelligence, robots, laser beam, new

energy sources etcenergy sources etc

CHAPTER 3Opportunities and Challenges

in Small Business

Life StyleLife Style– Career expectations, consumer activism, health Career expectations, consumer activism, health

concerns, desire to upgrade education and climb concerns, desire to upgrade education and climb for socioeconomic ladder etcfor socioeconomic ladder etc

political and legal forcespolitical and legal forces– Anti trust regulations, Environmental protection Anti trust regulations, Environmental protection

law, foreign trade regulations, tax changes, law, foreign trade regulations, tax changes, immigration laws, attitude of govt. and society immigration laws, attitude of govt. and society towards the particular type of industry and towards the particular type of industry and businessbusiness

DemographicsDemographics– Population growth rate, age and regional shift, Population growth rate, age and regional shift,

ethnic moves and life expectancy, number and ethnic moves and life expectancy, number and distribution of firms within the industry, size and distribution of firms within the industry, size and character of marketscharacter of markets

Practical ideas for small businessPractical ideas for small business CateringCatering Computer and office machine repairComputer and office machine repair Day care Day care Education services and productsEducation services and products Career counselingCareer counseling Financial planningFinancial planning Home health careHome health care Printing, copying and mailingPrinting, copying and mailing Marketing promotion and public relationsMarketing promotion and public relations Senior fitness and recreationSenior fitness and recreation Specialized delivery servicesSpecialized delivery servicesGROWTH OPPERTUNITIES FOR WOMENGROWTH OPPERTUNITIES FOR WOMEN

Areas of concern for Small Areas of concern for Small Business OwnersBusiness Owners

Poorly planned growthPoorly planned growth– Loss of Independence and ControlLoss of Independence and Control– Typical Growth PatternTypical Growth Pattern

Threat of FailureThreat of Failure– DiscontinuanceDiscontinuance– FailureFailure

FormalFormal InformalInformal

StagesStages Stage 1Stage 1 Owner only Owner only Stage 2Stage 2 Owner only with few Owner only with few

workerworker Stage 3Stage 3 Owner and Manager (s) Owner and Manager (s)

with workerwith worker

Chapter 04Chapter 04Legal Structures For New Legal Structures For New

BusinessBusinessVenturesVentures

Factors to ConsiderFactors to Consider Family tolerance level to physical, psychological Family tolerance level to physical, psychological

and emotional strainsand emotional strains Ease of starting, transferring and creating Ease of starting, transferring and creating

interest of othersinterest of others To what extent the owner and family ready to To what extent the owner and family ready to

accept financial risks of own savings and othersaccept financial risks of own savings and others How much do u want to expose to publicHow much do u want to expose to public Income tax considerationIncome tax consideration Amount of free time availableAmount of free time available ResponsibilityResponsibility

Sole ProprietorshipsSole ProprietorshipsA sole proprietorship is a A sole proprietorship is a

business business that is owned and operated that is owned and operated

by one person. The by one person. The enterprise has no existence enterprise has no existence

apart from its owner.apart from its owner.

AdvantagesAdvantages Ease of formationEase of formation Sole ownership of profitsSole ownership of profits Decision making and control vested in Decision making and control vested in

one ownerone owner FlexibilityFlexibility Relative freedom from governmental Relative freedom from governmental

controlcontrol Freedom from corporate business taxesFreedom from corporate business taxes

DisadvantagesDisadvantages Unlimited liabilityUnlimited liability Lack of continuityLack of continuity Less available capitalLess available capital Relative difficulty obtaining long-Relative difficulty obtaining long-

term financingterm financing Relatively limited viewpoint and Relatively limited viewpoint and

experienceexperience

PartnershipsPartnerships A partnership is an association of A partnership is an association of

two or more persons acting as co-two or more persons acting as co-owners of a business for profit.owners of a business for profit.

The articles of partnership clearly The articles of partnership clearly outline the financial and managerial outline the financial and managerial contributions of the partners and contributions of the partners and carefully delineate the roles in the carefully delineate the roles in the partnership relationship.partnership relationship.

AdvantagesAdvantages Ease of formationEase of formation Direct rewardsDirect rewards Growth and performance facilitatedGrowth and performance facilitated FlexibilityFlexibility Relative freedom from governmental Relative freedom from governmental

control and regulationcontrol and regulation Possible tax advantagePossible tax advantage

DisadvantagesDisadvantages Unlimited liability of at least one partnerUnlimited liability of at least one partner Lack of continuityLack of continuity Relative difficulty obtaining large sums Relative difficulty obtaining large sums

of capitalof capital Bound by the acts of just one partnerBound by the acts of just one partner Difficulty of disposing of partnership Difficulty of disposing of partnership

interest interest Fragile Fragile

Factors Associated with Partnership Factors Associated with Partnership SuccessSuccess

Partnership AttributesPartnership Attributes•CommitmentCommitment•CoordinationCoordination•InterdependenceInterdependence•TrustTrust

Communication BehaviorCommunication Behavior•QualityQuality•Information SharingInformation Sharing•ParticipationParticipation

Conflict Resolution TechniquesConflict Resolution Techniques•Joint ProblemJoint Problem Solving Solving•PersuasionPersuasion•SmoothingSmoothing

•DominationDomination•Harsh WordsHarsh Words•ArbitrationArbitration

Partnership SuccessPartnership Success•SatisfactionSatisfaction•Dyadic SalesDyadic Sales

CorporationsCorporations A corporation is “an artificial being, A corporation is “an artificial being,

invisible, intangible, and existing only invisible, intangible, and existing only in contemplation of the law”in contemplation of the law”**. As . As such, a corporation is a separate such, a corporation is a separate legal entity apart from the legal entity apart from the individuals who own it.individuals who own it.

AdvantagesAdvantages Limited liabilityLimited liability Representative managementRepresentative management Separate Legal EntitySeparate Legal Entity Transfer of ownershipTransfer of ownership Unlimited lifeUnlimited life Relative ease of securing capital in Relative ease of securing capital in

large amountslarge amounts Increased ability and expertiseIncreased ability and expertise

DisadvantagesDisadvantages Activity restrictionsActivity restrictions Lack of interestsLack of interests Lack of representationLack of representation Regulation- accounts to public Regulation- accounts to public Organizing expensesOrganizing expenses High Incorporation FeeHigh Incorporation Fee Double taxationDouble taxation Limited PowersLimited Powers

Specific Forms Specific Forms of of

Partnerships Partnerships and and

CorporationsCorporations

Limited PartnershipsLimited Partnerships Permits capital investment without Permits capital investment without

responsibility for management responsibility for management andand without liability for losses beyond the without liability for losses beyond the initial investment.initial investment.

Limited partnerships are governed by Limited partnerships are governed by the Uniform Limited Partnerships Act the Uniform Limited Partnerships Act (ULPA).(ULPA).

Limited Liability PartnershipsLimited Liability Partnerships The limited liability partnership (LLP) The limited liability partnership (LLP)

is a relatively new form of is a relatively new form of partnership that allows professionals partnership that allows professionals the tax benefits of a partnership the tax benefits of a partnership while avoiding personal liability for while avoiding personal liability for the malpractice of other partners.the malpractice of other partners.

S CorporationsS Corporations Formerly termed a Subchapter S Formerly termed a Subchapter S

corporation, the S corporation takes corporation, the S corporation takes its name from Subchapter S of the its name from Subchapter S of the Internal Revenue Code, under which a Internal Revenue Code, under which a business can seek to avoid the business can seek to avoid the imposition of income taxes at the imposition of income taxes at the corporate level yet retain some of the corporate level yet retain some of the benefits of a corporate form benefits of a corporate form (especially the limited liability).(especially the limited liability).

Commonly known as a “tax option Commonly known as a “tax option corporation,” an S corporation is corporation,” an S corporation is taxed similarly to a partnership.taxed similarly to a partnership.

Limited Liability CompaniesLimited Liability Companies The LLC is a hybrid form of business The LLC is a hybrid form of business

enterprise that offers the limited enterprise that offers the limited liability of a corporation but the tax liability of a corporation but the tax advantages of a partnership.advantages of a partnership.

Perhaps the greatest disadvantage Perhaps the greatest disadvantage is that LLC statutes differ from state is that LLC statutes differ from state to state, and thus any firm engaged to state, and thus any firm engaged in multistate operations may face in multistate operations may face difficulties.difficulties.

Other Corporation Other Corporation ClassificationsClassifications

Domestic and Foreign CorporationsDomestic and Foreign Corporations Public and Private CorporationsPublic and Private Corporations Nonprofit CorporationsNonprofit Corporations Professional CorporationsProfessional Corporations Close CorporationsClose Corporations

FranchisingFranchising A franchise is any arrangement in which the A franchise is any arrangement in which the

owner of a trademark, trade name, or copyright owner of a trademark, trade name, or copyright has licensed others to use it in selling goods or has licensed others to use it in selling goods or services. A services. A franchiseefranchisee (a purchaser of a (a purchaser of a franchise) is generally legally independent but franchise) is generally legally independent but economically dependent on the integrated economically dependent on the integrated business system of the business system of the franchisorfranchisor (the seller of (the seller of the franchise).the franchise).

AdvantagesAdvantagesTraining and guidanceTraining and guidanceBrand-name appealBrand-name appealA proven track recordA proven track recordFinancial assistanceFinancial assistance

DisadvantagesDisadvantagesFranchise feesFranchise feesFranchisor controlFranchisor controlUnfulfilled promisesUnfulfilled promises

The Costs of FranchisingThe Costs of Franchising1.1. The Basic Franchise FeeThe Basic Franchise Fee2.2. InsuranceInsurance3.3. Opening Product InventoryOpening Product Inventory4.4. Remodeling and Leasehold ImprovementsRemodeling and Leasehold Improvements5.5. Utility ChargesUtility Charges6.6. PayrollPayroll7.7. Debt ServiceDebt Service8.8. Bookkeeping and Accounting FeesBookkeeping and Accounting Fees9.9. Legal and Professional FeesLegal and Professional Fees10.10. State and Local Licenses, Permits, and State and Local Licenses, Permits, and

CertificatesCertificates

Chapter 05Chapter 05 How to Become the How to Become the

Owner of a Small Owner of a Small BusinessBusiness

Steps in Starting a BusinessSteps in Starting a Business Identifying a need product of find your Identifying a need product of find your

nicheniche– Identifying the productIdentifying the product

Idea generation and Idea Evaluation---Idea Sources Idea generation and Idea Evaluation---Idea Sources (Social Conversation “Bankers, consultant, Sales (Social Conversation “Bankers, consultant, Sales people, any individual”) people, any individual”)

– Identifying the nicheIdentifying the niche– Choosing the Business to EnterChoosing the Business to Enter

Capital requirementCapital requirementTime of investment repayTime of investment repayTime to reach desirable incomeTime to reach desirable incomeOwn spending till desirable incomeOwn spending till desirable income

Degree of riskDegree of riskSkills requirementSkills requirementEffort requirementEffort requirementBuying or establishing a businessBuying or establishing a businessPotential and chances of successPotential and chances of successSufficient information availabilitySufficient information availabilityIs it desirable/enjoyableIs it desirable/enjoyable

Studying the Market for the ProductStudying the Market for the Product– Methods of obtaining information about Methods of obtaining information about

marketmarketMarketing ResearchMarketing ResearchPublicationsPublicationsChamber of commerceChamber of commerceTrade associationsTrade associationsBusiness ownersBusiness ownersBankersBankers

– Methods Used to stud the marketMethods Used to stud the marketEstimating the size of the marketEstimating the size of the marketEstimating the competitionEstimating the competition

– Number of competitorsNumber of competitors– Level of competitionLevel of competition– Strengths of competitorsStrengths of competitors– Locale/National/GlobalLocale/National/Global

Estimating your Share of the marketEstimating your Share of the market– Determine geographic boundariesDetermine geographic boundaries– Estimate your product salesEstimate your product sales– Niche Niche

To start a new businessTo start a new business– Reasons: Liberty in:Reasons: Liberty in:

Defining the nature of businessDefining the nature of business Creating required physical facilities, selecting and Creating required physical facilities, selecting and

developing personneldeveloping personnel Fresh inventoryFresh inventory Installing latest tech, equipment, materials, toolsInstalling latest tech, equipment, materials, tools

– Problems: Avoid when fails to:Problems: Avoid when fails to: Deciding right business, assembling resources, Deciding right business, assembling resources,

locating facilities, non tested idea, production locating facilities, non tested idea, production problems, lack of establishing experience, lack of problems, lack of establishing experience, lack of established markets and distribution channelsestablished markets and distribution channels

Deciding whether to start, buy existing or buy Franchise

To Buy an existing businessTo Buy an existing business– ReasonsReasons

Trained personnel'sTrained personnel'sFacilities availabilityFacilities availabilityManagement system availabilityManagement system availabilityEstablished marketsEstablished marketsWell defined product lineWell defined product lineEstablished relationshipsEstablished relationshipsAssurance of revenues and good willAssurance of revenues and good will

To Buy an existing businessTo Buy an existing business– Reasons not to buyReasons not to buy

Old or bad physical facilitiesOld or bad physical facilitiesPoorly developed employeesPoorly developed employeesPast due or uncollectible A/RPast due or uncollectible A/RUndesirable locationsUndesirable locationsPoor financial conditionsPoor financial conditionsBad condition of inventoryBad condition of inventory

Buy or not to BuyBuy or not to Buy Why the business available for sale?Why the business available for sale? What are the intensions of present owner?What are the intensions of present owner? Are environmental factors are changing?Are environmental factors are changing? Are physical facilities are fit for present and Are physical facilities are fit for present and

future operations?future operations? Is the business operating efficiently?Is the business operating efficiently? What is the financial conditions of firm?What is the financial conditions of firm? How much investment is needed?How much investment is needed? What is the estimated return on investment?What is the estimated return on investment? Is the price right?Is the price right? Do you have the necessary managerial ability?Do you have the necessary managerial ability?

To Buy a Franchise?To Buy a Franchise? Reason to buyReason to buy

– Identified marketsIdentified markets– Sales are almost defined but not Sales are almost defined but not

guaranteedguaranteed– Brand recognitionBrand recognition– Available goodwillAvailable goodwill– Supplemental help in managing the Supplemental help in managing the

franchise by franchisorfranchise by franchisor– Free/shared promotion (may be worldwide)Free/shared promotion (may be worldwide)

Reason not to buyReason not to buy– Initial investment and feeInitial investment and fee– Royalty paymentsRoyalty payments– Franchisor requirements Franchisor requirements – Undesirable (not according to nature)Undesirable (not according to nature)– Poorly managed with no goodwillPoorly managed with no goodwill