Wiley Pathways Small Business Management

PART I: SMALL BUSINESS IN THE UNITED STATES

1 An Introduction to the Small Business Life—A Large Contribution to the U.S. Economy 1

Introduction 2

1.1 Defining the Small Business 2

1.1.1 The U.S. Government Definition 3

1.1.2 Other Factors Making a Business “Small” 4

1.1.3 Small Business Owners vs. Entrepreneurs 5

Self-Check 5

1.2 The Contributions of Small Business 6

Self-Check 8

1.3 The Advantages and Disadvantages of Small Business 8

1.3.1 The Advantages of Owning a Small Business 9

1.3.2 The Disadvantages of Owning a Small Business 10

Self-Check 12

1.4 Small Business Failure 12

1.4.1 Some Causes of Failure 13

1.4.2 Avoiding Management Traps Leading to Failure. 14

Self-Check 16

1.5 Ethics in Small Business. 16

1.5.1 Ethical Practices and Codes of Conduct 18

1.5.2 Ethical Leadership 18

1.5.3 Social Responsibility 20

Self-Check 22

Summary 22

Key Terms 23

Summary Questions 25

Applying This Chapter. 27

You Try It. 29

2 Small Business Opportunities—Exploring the Options 30

Introduction 31

2.1 Starting a New Small Business 32

2.1.1 Identifying the Business Opportunity 32

2.1.2 Conducting a Market Analysis 32

2.1.3 The Action Plan 34

Self-Check 37

2.2 Buying an Existing Business 37

2.2.1 Advantages of Buying an Ongoing Small Business 38

2.2.2 Key Questions to Ask 39

2.2.3 Determining the Price 42

2.2.4 Negotiating the Deal and Having an Action Plan 45

Self-Check 46

2.3 Exploring the World of Franchising 46

2.3.1 The Nature of Franchising 46

2.3.2 The Advantages and Disadvantages of Franchising 48

2.3.3 Researching a Franchising Opportunity 49

Self-Check 51

2.4 The Growing World of Home-Based Businesses 51

2.4.1 The Changing Workplace 51

2.4.2 Advantages and Disadvantages 52

2.4.3 Getting Started 52

2.4.4 Skills for Self-Management 54

2.4.5 Attention to Office Organization 55

2.4.6 Management of the Operations 57

Self-Check 58

2.5 Determining Location and Layout 58

2.5.1 General Factors in Selecting a Location 59

2.5.2 Business Specific Factors in Selecting a Location 60

2.5.3 Leasing, Buying or Building 63

2.5.4 Adapting the Facility 63

2.5.5 Designing the Layout 64

Self-Check 68

Summary 68

Key Terms 69

Summary Questions 71

Applying This Chapter. 72

You Try It. 74

3 The Family-Owned Business—Understanding the Unique Opportunities and Challenges 75

Introduction 76

3.1 Advantages and Disadvantages of Family-Owned Businesses 76

3.1.1 The Advantages 77

3.1.2 The Disadvantages 78

Self-Check 82

3.2 The Difficult Issue of Succession and Transitions 82

3.2.1 Legal Succession Issues 83

3.2.2 Succession and Transitions, the Nature of the Challenge 84

Self-Check 88

3.3 Developing a Succession Strategy. 88

3.3.1 Understanding the Contextual Aspects 88

3.3.2 Identifying Successor Qualities 90

3.3.3 Carrying Out the Succession Plan 92

3.3.4 A Summary Checklist 94

Self-Check 95

Summary 95

Key Terms 95

Summary Questions 96

Applying This Chapter. 96

You Try It. 98

PART II: STARTING A SMALL BUSINESS

4 Developing a Business Plan—Creating a Roadmap for Success 99

Introduction 100

4.1 Why Develop a Business Plan? 100

4.1.1 The Importance of a Business Plan 101

4.1.2 What is a Business Plan? 101

Self-Check 103

4.2 The Elements of a Business Plan 103

4.2.1 Executive Summary 103

4.2.2 Business Description 104

4.2.3 Marketing 105

4.2.4 Research, Design, and Development 106

4.2.5 Location 107

4.2.6 Management 107

4.2.7 Critical Risks 109

4.2.8 Financial Forecasting 109

4.2.9 Milestone Schedule 111

4.2.10 Appendix. 111

Self-Check 111

4.3 Preparing the Business Plan 112

4.3.1 Creating a Professional Image 112

4.3.2 Analyzing a Completed Business Plan 116

Self-Check 117

4.4 Keeping a Business Plan Up to Date 117

Self-Check 118

Summary 118

Key Terms 119

Summary Questions 121

Applying This Chapter. 123

You Try It. 125

5 Sources of Financing—Getting the Money to Start a New Business 126

Introduction 127

5.1 Estimating a Small Business’s Financial Needs 127

5.1.1 Calculating Startup Financing 127

5.1.2 Preparing to Work with Financing Sources 129

Self-Check. 130

5.2 Basic Types of Financing 131

5.2.1 Debt Financing 131

5.2.2 Equity Financing 132

Self-Check. 133

5.3 Sources of Equity Financing 134

5.3.1 Self 134

5.3.2 Family and Friends 135

5.3.3 Venture Capitalists 136

5.3.4 Small Business Investment Companies 137

5.3.5 Angel Investors 137

Self-Check. 139

5.4 Sources of Debt Financing 139

5.4.1 Trade Credit. 139

5.4.2 Banks 140

5.4.3 Small Business Administration 142

5.4.4 State and Local Development Companies 144

5.4.5 Factors 145

5.4.6 Other Sources of Debt Financing 145

Self-Check 146

Summary 147

Key Terms 147

Summary Questions 150

Applying This Chapter. 152

You Try It. 155

6 Forms of Small Business Ownership—Selecting the Right Type of Legal Organization 156

Introduction 157

6.1 Selecting the Right Legal Form 157

Self-Check. 158

6.2 Sole Proprietorships. 158

6.2.1 Advantages of Sole Proprietorships 158

6.2.2 Disadvantages of Proprietorships 159

Self-Check 161

6.3 Partnerships 161

6.3.1 Types of Partnerships 162

6.3.2 Limited Liability Partnerships 164

6.3.3 Advantages of Partnerships 165

6.3.4 Disadvantages of Partnerships 166

Self-Check. 167

6.4 The Corporation 168

6.4.1 Organizing a Corporation 168

6.4.2 The Corporate Structure 168

6.4.3 Advantages of Corporations 170

6.4.4 Disadvantages of Corporations 172

6.4.5 The S Corporation 173

Self-Check. 176

6.5 Other Forms of Business 176

6.5.1 Limited Liability Companies 176

6.5.2 Joint Ventures 177

6.5.3 Corporations 178

6.5.4 Nonprofit Corporations 178

Self-Check 180

Summary 181

Key Terms 181

Summary Questions 184

Applying This Chapter. 186

You Try It. 188

PART III: MANAGING A SMALL BUSINESS

7 The Basics of Small Business Management—Meeting the Challenge 189

Introduction 190

7.1 The Management Process in General 190

Self-Check 191

7.2 The Planning Process 191

7.2.1 Be Aware of Opportunities 191

7.2.2 Set Objectives 191

7.2.3 Forecast the Environment 191

7.2.4 Determine Alternative Courses of Action 192

7.2.5 Evaluate the Alternative Courses of Action 192

7.2.6 Select and Implement a Course of Action 193

7.2.7 Formulate Support Plans 193

7.2.8 Budget the Plan 193

Self-Check 194

7.3 Organizing. 195

7.3.1 Job Descriptions 195

7.3.2 Departmentalization 195

7.3.3 Span of Control 196

7.3.4 Delegation of Authority 197

Self-Check 199

7.4 Directing 199

7.4.1 Communicating 200

7.4.2 Leading 200

Self-Check 204

7.5 Control Process 204

7.5.1 Basic Ideas in Controlling 205

7.5.2 Budgeting 206

7.5.3 Break Even Point 206

7.5.4 Use of Best Practices 207

Self-Check 208

7.6 Unique Managerial Concerns of Small Businesses 209

7.6.1 Advantages and Disadvantages of Small Size 209

7.6.2 One-Person-Band Syndrome 209

7.6.3 Time Management 210

7.6.4 Community Obligations 210

7.6.5 Continuing Management Education 211

7.6.6 Other Issues in Formative Years 211

7.6.7 Key Elements of Growth 211

7.6.8 The Transition from Entrepreneur to Manager 213

7.6.9 Balancing the Roles of Entrepreneur and Manager 214

7.6.10 Outside Managerial Assistance 214

Self-Check 215

Summary 216

Key Terms 216

Summary Questions 219

Applying This Chapter. 221

You Try It. 223

8 Legal Concerns of Small Businesses—Introducing Fundamental Legal Concepts 224

Introduction 225

8.1 Contracts 225

8.1.1 Agreement 225

8.1.2 Consideration 227

8.1.3 Contractual Capacity 227

8.1.4 Legality 228

8.1.5 Reality of Consent 229

8.1.6 Form of Contract 230

8.1.7 Breach of Contract 230

Self-Check 231

8.2 Other Legal Issues 232

8.2.1 Warranties 232

8.2.2 Product Liability 233

8.2.3 The Agency Relationship 234

8.2.4 Patents, Copyrights, and Trademarks. 234

8.2.5 Bankruptcy 237

Self-Check 240

Summary 241

Key Terms 242

Summary Questions 244

Applying This Chapter. 245

You Try It. 246

9 Managing Human Resources in a Small Business Environment—Selecting, Developing and Retaining Employees 247

Introduction 248

9.1 Today’s Human Resources Environment 248

9.1.1 Changing Work and Workforce 248

9.1.2 The Regulatory Environment 249

Self-Check 254

9.2 Building Your Workforce 255

9.2.1 Assessing Staffing Needs 255

9.2.2 Recruiting 255

9.2.3 Screening Potential Employees 256

9.2.4 Selecting and Indoctrinating Employees 257

9.2.5 Training 257

Self-Check 260

9.3 Getting the Most from your Workforce 260

9.3.1 Evaluating Employee Performance. 260

9.3.2 Compensation Systems 266

Self-Check 268

9.4 Keeping your Employees 268

9.4.1 Job Satisfaction 268

9.4.2 Examining the Pay/Performance Link 269

9.4.3 Developing a Positive Work Environment and Teamwork 270

Self-Check 271

9.5 Additional Human Resources Management Information 271

Self-Check 272

Summary 272

Key Terms 272

Summary Questions 274

Applying This Chapter. 275

You Try It. 276

PART IV: MARKETING FOR GROWTH

10 Understanding Markets and Pricing—The Building Blocks of a Strong Marketing Plan 278

Introduction 279

10.1 What is a Market? 279

10.1.1 Customers and Market Niches 279

10.1.2 Relevant Price Range 280

10.1.3 Competition 280

Self-Check 283

10.2 Examining the Market Niche 283

Self-Check. 285

10.3 Marketing Research 286

10.3.1 Secondary Sources of Information 287

10.3.2 Survey Research 288

10.3.3 Types of Surveys 288

10.3.4 Using Research Data 289

Self-Check. 291

10.4 Pricing Considerations. 291

10.4.1 Demand for the Product 291

10.4.2 The Competition 291

10.4.3 The Marketing Strategy 292

10.4.4 General Business Conditions 293

10.4.5 Setting Prices 293

Self-Check. 295

10.5 Pricing Strategies 295

10.5.1 Skimming Pricing 295

10.5.2 Penetration Pricing 297

10.5.3 Sliding Price Strategy 298

10.5.4 Odd Pricing. 298

10.5.5 Leader Pricing 299

10.5.6 Price Lining 299

10.5.7 Geographic Pricing 300

Self-Check. 301

10.6 Using Discounts 301

10.6.1 Seasonal Discounts 301

10.6.2 Special Group Discounts 301

10.6.3 Quantity Discounts 302

10.6.4 Cash Discounts 302

Self-Check 302

Summary 302

Key Terms 303

Summary Questions 305

Applying This Chapter. 307

You Try It. 309

11 Promotion and Selling—Attracting Customers and Making Sales. 310

Introduction 311

11.1 Promotion Plans 311

11.1.1 Tying the Plan to the Marketing Mix 311

11.1.2 Developing and Implementing a Promotion Budget 313

Self-Check 316

11.2 Advertising, Publicity and Public Relations 316

11.2.1 Advertising Basics 317

11.2.2 Selecting the Right Media 320

11.2.3 Determining Advertising Effectiveness 328

11.2.4 Publicity and Public Relations 330

Self-Check 331

11.3 Selling 331

11.3.1 Sales Fundamentals 331

11.3.2 The Selling Process 333

11.3.3 Sales Psychology 337

11.3.4 Organizing and Staffing for Success 341

Self-Check 343

Summary 343

Key Terms 344

Summary Questions 345

Applying This Chapter. 346

You Try It. 347

12 E-Commerce and the Small Business Owner—Using the Internet to Reach Customers 348

Introduction 349

12.1 The Internet and E-Commerce 349

12.1.1 Gathering Information on the Internet 349

12.1.2 Selling on the Internet 350

12.1.3 The Value of the Internet 351

Self-Check. 353

12.2 Setting up a Web site 353

12.2.1 Creating a Web site 353

12.2.2 Web-Hosting Services 355

Self-Check. 356

12.3 The Mechanics of Web sites Sales. 356

12.3.1 Shopping Carts 356

12.3.2 Selecting a Quality Shopping Cart 357

Self-Check. 359

12.4 Internet Marketing 359

12.4.1 Banner Ads and Co-marketing Deals 359

12.4.2 Become a Popular Link 360

12.4.3 Contests and Specials 360

Self-Check. 361

12.5 Online Customer Relationship 361

12.5.1 Web site Statistics 361

12.5.2 Customer Service 362

Self-Check. 363

12.6 Internet Security 364

12.6.1 Secure Servers 364

12.6.2 Firewalls 365

12.6.3 Virus Protection 365

Self-Check 367

Summary 367

Key Terms 367

Summary Questions .370

Applying This Chapter. 372

You Try It. 373

PART V: MANAGING FINANCES AND INVENTORY

13 Using Financial Statements—The Scorecards of Business Success—or Failure 374

Introduction 375

13.1 The Balance Sheet 375

13.1.1 What is a Balance Sheet? 375

13.1.2 Understanding the Balance Sheet. 376

13.1.3 Why the Balance Sheet Always Balances 381

Self-Check. 383

13.2 The Income Statement 383

13.2.1 What the Income Statement Reports 384

13.2.2 Understanding the Income Statement 384

Self-Check. 387

13.3 Keeping Proper Records. 388

13.3.1 Managing the Books 390

13.3.2 Computers, Software, and Financial Preparation 390

Self-Check. 391

13.4 Analyzing the Balance Sheet 391

13.4.1 Current Position Ratios 392

13.4.2 Long-run-position Ratios 396

Self-Check. 397

13.5 Analyzing the Income Statement 397

13.5.1 Income Statement Ratios 398

13.5.2 Combination Ratios 398

Self-Check 401

Summary 402

Key Terms 402

Summary Questions 405

Applying This Chapter. 407

You Try It. 409

14 Budgeting and Taxes—Effective Financial Planning and Giving the Government its Fair Share 412

Introduction 413

14.1 Financial Budgeting 413

14.1.1 Sales Budget 413

14.1.2 Cash Budget 414

14.1.3 Other Budgetary Considerations 417

Self-Check. 418

14.2 Tax Strategies for New Businesses 418

14.2.1 Tax Identification Numbers 418

14.2.3 Business Bank Accounts and Credit Cards 419

14.2.4 Tax Assistance 420

14.2.5 First-Year Taxes 421

Self-Check. 422

14.3 Business Forms and Taxes 422

14.3.1 Sole Proprietorships 422

14.3.2 Partnerships and LLCs. 422

14.3.3 C Corporations 423

14.3.4 S Corporations 423

Self-Check. 424

14.4 Accounting Periods and Methods. 424

14.4.1 Accounting Periods 424

14.4.2 Accounting Methods 426

Self-Check. 428

14.5 Other Taxes 428

14.5.1 State Income Taxes 428

14.5.2 Employment Taxes 429

14.5.3 Self-Employed Individuals 430

14.5.4 Sales and Use Taxes 430

14.5.5 Excise Taxes. 431

Self-Check 432

Summary 432

Key Terms 433

Summary Questions 435

Applying This Chapter. 437

You Try It. 439

15 Purchasing and Inventory Control—Buying and Holding Materials and Merchandise 440

Introduction 441

15.1 Purchasing 441

15.1.1 Steps in the Purchasing Process 442

15.1.2 Purchasing Policies 443

Self-Check 446

15.2 Inventory Control 446

15.2.1 The Basic Inventory Dilemma 447

15.2.2 Costs Associated with Inventory 447

15.2.3 Tracking Inventory 452

15.2.4 Determining How Much to Reorder. 454

15.2.5 Determining When to Reorder 458

15.2.6 ABC Classification System 459

15.2.7 Material Reserves and Balance-of-Stores Ledger 460

15.2.8 Supply Chain Management 462

15.2.9 Technology and Inventory Control 462

Self-Check 463

Summary 464

Key Terms 465

Summary Questions 466

Applying This Chapter. 467

You Try It. 469

Appendix 471

Endnotes 514

Glossary 526

Index 538