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Chapter 6: Entrepreneurship and Small Business Management

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Presentation on theme: "Chapter 6: Entrepreneurship and Small Business Management"— Presentation transcript:

1 Chapter 6: Entrepreneurship and Small Business Management
Lesson 6-1 Becoming an Entrepreneur Lesson 6-2 Small Business Basics Lesson 6-3 Starting a Small Business 1

2 Lesson 6-1 Becoming an Entrepreneur
Objectives: Identify characteristics of successful entrepreneurs. Recognize the importance of entrepreneurship in the economy. Describe opportunities and risks of entrepreneurship. 2

3 Characteristics of Entrepreneurs
An entrepreneur is someone who takes a risk in starting a business to earn a profit. Entrepreneurship is the process of starting, organizing, managing, and assuming the responsibility for a business. Entrepreneurs create new product ideas and new businesses. Their ideas often respond to customer needs that are not being satisfied with current businesses. 3

4 What Does it Take? It takes unique skills and personal characteristics to develop a new idea for a product or service. Not all people who own or manage a business are entrepreneurs. It is important to have an understanding of business operations and management. Entrepreneurs come from all age, racial, gender and ethnic groups. Many entrepreneurs own their first business while in their teens while others may not take that step until retirement. 4

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6 Advantages of an Entrepreneurship
Satisfaction from taking a risk and becoming a success. Showing expertise and skills. Working from home / flexible schedule. Gaining profit. 6

7 Disadvantages of an Entrepreneurship
Total responsibility for the business. Long hours. Time and effort are important pieces to making a company successful. Financial risks. 7

8 Entrepreneurship and the Economy
Entrepreneurship is a key part of the U.S. economy. Nearly 1 in 10 of all Americans years old is involved in some type of entrepreneurship activity. About 40 percent of new business owners run their own businesses with no help. 8

9 Financing Most of the money needed to start a new business comes from the entrepreneur and his or her family and friends. 1 in 5 Americans has invested in a business of someone they know well. Family and friends invest over $100 billion in new businesses each year. Venture capital is another source of money. It is money provided by large investors to finance new products and new businesses that have a good chance to be very profitable. Loans from banks and financial institutions and credit from businesses are other sources of financing. 9

10 Productivity Small businesses are responsible for nearly half of the U.S. gross domestic product each year. Small businesses account for 55 percent of all innovative products and services developed. 10

11 New Business Opportunities
Opportunities begin with the creation of new or improved products and services. An innovation is an invention or creation that is brand new. Not all entrepreneurship opportunities emerge from inventions and innovations. Many come from an improved design, more effective procedures, or greater attention to quality. An improvement is a designed change that increases the usefulness of a product, service, or process. 11

12 Recognizing Risks Developing a successful new business is not easy. Many more new businesses fail than succeed. The National Federation of Independent Business reports that of all new businesses, about 1/3 are profitable, 1/3 do not make a profit but continue to operate, and the remaining 1/3 lose money. Over a ten year period, well over 50 percent of all new businesses are discontinued. 12

13 Primary Reasons New Businesses Close
Lack of adequate capital Low sales Higher than expected expenses Goals are NOT realistic Competitive pressure The owner is unprepared to manage a growing business Operations require more time than the owner is willing to commit 13

14 Lesson 6-2 Small Business Basics
Objectives: Identify important characteristics of small businesses. Recognize the competitive advantages of small businesses. Identify problems faced by many small businesses. 14

15 Small Business Ownership
According to the Small Business Administration (SBA), a small business is an independent business with fewer than 500 employees. Using that standard, 99.7 percent of the roughly 23 million U.S. business are small businesses. A more specific description of a small business: The owner is usually the manager. It operates in one or very few locations. It typically serves a small market. It is not dominant in its field. Many small businesses are run on a part-time basis from the owner’s home. 15

16 Small Business Employment
Small businesses employ nearly 50 percent of all U.S. workers. Small businesses generate more than half the nation’s income. A large number of small businesses are service businesses. Professional, scientific, and technical services are the most common types of small business. 16

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18 Small Business Employment in the U.S.

19 Ownership Diversity Women own over one-fourth of all small businesses.
Over 16 percent have African-American, Asian-American, or Hispanic-American ownership. The majority of small business owners are over 40 years old, but nearly 20 percent are under 25. (Remember baby boomers and mini boomers from last chapter). Almost all people starting a small business have at least a high school diploma. Nearly 30 percent have finished some college work. One half of all small businesses are home-based, part-time businesses and owners report that on average they needed $5,000 or less to start that type of business. Full-time businesses with buildings, equipment, and employees may require over $100,000 of initial capital. 19

20 Small Business Advantages
Meeting Customer Needs Serve customers where the number of products and services needed is small or the requirements are too specialized for large businesses to make a profit. It is easier for a small business to meet the precise needs of customers than a large business. Small businesses compete with large businesses by paying attention to their customers. 20

21 Small Business Advantages
Providing Unique Service Small businesses take the time to determine their customers’ needs and discuss alternatives. Large businesses may not find it profitable to spend that much time with each customer. Big business has a clear advantage when a large number of customers are willing to buy standard products and prefer low cost. Small businesses gain an advantage when customers have unique needs, want more individual attention, and are willing to pay a bit more for the product or service to obtain what they really want. 21

22 Common Small Business Problems
Reasons for Failure: Not keeping adequate records Not having enough start-up money Lack of management experience Lack of experience with the type of business Not controlling operating expenses Poor location for the business Failure to manage credit offered to customers 22

23 Small Business Assistance
Small business owners can get help from a number of sources to overcome each of the causes of failure. Universities and colleges have faculty members who can give advice and support. Local groups of businesspeople (Chamber of Commerce) have members who help others. The Small Business Administration (SBA) helps owners develop business plans and obtain financing and other support. The SBA sponsors Service Corps of Retired Executives (SCORE) who are retired local businesspeople who volunteer their services to counsel and mentor new business owners. 23

24 Lesson 6-3 Starting a Small Business
Objectives: Recognize important factors to be considered when starting a business. Describe the elements of a business plan. Identify types and sources of financing for a small business. 24

25 The Business Decision Many people think about starting a business.
The procedures followed to start a business often determine whether it will be successful. The process begins with an idea and ends with a careful study of information to establish whether the idea can be successful. 25

26 An Idea Plus Experience
Every business begins with an idea. Business ideas come from many sources (hobbies, interests, business experience, books, magazines, etc.) Few people should think about starting a business without working for some time in a small business. Several years of training in a range of business operations will prepare you for the role of owner. 26

27 Right Place and Time Putting your business idea into action means finding the right place to open the business. If the business is not easy to find or get to, many potential customers will stay away. Timing is another key factor in starting a business. Most successful businesses start when customer demand for certain products or services is high. 27

28 Team Approach A business is not easy to start without the help of others. Even the smallest businesses need a few full- or part-time employees to work as a team. Choosing the “team” members becomes one of the most important initial business decisions. In addition to employees, small business owners may need assistance from bankers, lawyers, and accountants. 28

29 Preparation and Research
The most important step in starting a business is preparation. Preparation includes having enough information to make good decisions about the business. The time spent gathering and studying information before the business is started will save time and avoid later problems. Information is needed about customers, competitors, important operations, government regulations, and many other topics. The information is available through libraries, colleges or universities, and small business assistance centers. 29

30 Developing a Business Plan
A business plan is the most important factor that is shown to make a difference between successful businesses and failed businesses. A business plan is a written description of the business idea and how it will be carried out, including all major business activities. Key features of a business plan are: General description of the company Credential of the owner(s) Description of the product or service Analysis of the market (demand, customers, and competition) Operations plan Financial plan Marketing plan Most business plans are developed for one year and then updated the next year. If business owners need financial help a business plan will usually be required. Developing a business plan forces the owner to think about the amount of time and costs. The process may identify potential problems. 30

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32 Steps in Developing the Business Plan
Gather & review information. Develop “game plan” (alternative plans for production, marketing, staffing, financing, etc. to allow the business to be prepared for the unforeseeable). Write each section of the plan (general description, basic legal form, major products/services, competition, potential customers, operations, marketing, finances.) 32

33 Example business plans

34 Financing Most of the money needed to start a new business comes from the entrepreneur and his or her family and friends. 1 in 5 Americans has invested in a business of someone they know well. Family and friends invest over $100 billion in new businesses each year. Venture capital is another source of money. It is money provided by large investors to finance new products and new businesses that have a good chance to be very profitable. Loans from banks and financial institutions and credit from businesses are other sources of financing. 34

35 Financing the Small Business
A new business with a good product or service may run out of money before it can become profitable. Several years of operation are required before most new businesses earn a profit. Finding adequate financing is a key step in starting and running a new business. 35

36 Types of Financing Start-up financing Short-term financing
The amount of money needed to open the business. It includes the cost of buildings, equipment, inventory (products or raw materials on hand), supplies, licenses, etc. Short-term financing The money needed to pay for the current operating activities of a business. Obtained for a period of less than a year and often for one or two months. Long-term financing Money needed for the main resources of a business (land, buildings, and equipment) that will last for many years. These resources require large amounts of money and will be paid for over many years. 36

37 Sources of Financing The money required to start and operate a new business usually comes from a mixture of owner-supplied and borrowed funds. The source of owner-supplied money depends on the ownership structure. In a proprietorship, one person will supply the money. In a partnership, the partners will be expected to contribute. A corporation is owned and financed by the shareholders. Borrowed funds are obtained through loans from banks and other financial institutions or through funding provided by other people, or credit from other businesses. 37

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