Chapter 6

Lessons 1. Becoming an Entrepreneur 2. Small Business Basics 3. Starting a Small Business EQ: What role does small business play in the U.S. economy and how can I start one?

Becoming an Entrepreneur  Entrepreneur: someone who takes a risk in starting a business to earn a profit  Entrepreneurship: the process of starting, organizing, managing, and assuming responsibility for a business  Is there a product/service not being offered that could be in demand?  Could you offer a product/service more efficiently than others are now?  Is there a special talent you have that could become a starting point for business? 6-1: Becoming an Entrepreneur

What Does It Take?  Desire to be your own boss  Must have both the confidence and capability to turn an idea into a business  Important to have an understanding of business operations and management  formal education  life experience  other people  informal education 6-1: Becoming an Entrepreneur

Personal Characteristics Entrepreneurs are MoreThey Have PersistentProblem-solving skills InquisitiveTolerance for ambiguity EnergeticStrong integrity Goal orientedPersonal initiative IndependentAbility to secure resources Self-confidentCapability to learn from failure CreativeWillingness to work hard Reliable Competitive 6-1: Becoming an Entrepreneur

Entrepreneurship and the Economy  Employment  small businesses are responsible for most new employment  Financing  Most money comes from the entrepreneur or family and friends  Venture capital: 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  Productivity  Small businesses responsible for more than half of U.S. GDP  Account for 55% of all innovative products/services developed 6-1: Becoming an Entrepreneur

New Business Opportunities  Opportunity begins with the creation of a new or improved product/service  Innovation: an invention or creation that is brand new  Improvement: a designed change that increases the usefulness of a product, service, or process 6-1: Becoming an Entrepreneur

Recognizing Risks  50% of all new businesses fail within the first 10 years  Primary reasons:  Lack of adequate capital  Low sales  High than expected expenses  Competitive pressure  An owner unprepared to manage a growing business  Operations requiring more time than the owner is willing to commit 6-1: Becoming an Entrepreneur

Small Business Ownership  Small business: an independent business with fewer than 500 employees  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  99.9% of the 26 million U.S. businesses are small businesses  25 million of these businesses employ less than 100 people  20 million are proprietorships  Nearly 18.6 million have no staff other than the owner 6-2: Small Business Basics

Statistics  Responsible for creating 60-80% of all new jobs  Women own more than ¼  18% have African-American, Asian, or Hispanic ownership  25% of the owners are under age 35  Almost all owners have a high school diploma with nearly 60% having some college completed  Half are home-based 6-2: Small Business Basics

Small Business Advantages  Meeting customer needs  Easier to satisfy unique, precise needs  Serve fewer customers more frequently  Can compete by paying attention to their customers (direct contact)  Provide unique services  Satisfy customers by spending time determining needs and discussing alternatives  More individual attention 6-2: Small Business Basics

Common Small Business Problems  Not keeping adequate records  Not having enough start-up money  Lack of management experience  Lac of experience with the type of business  Not controlling operating expenses  Poor location for the business  Failure to manage credit offered to customers  Owner burn-out (long hours, hard work) 6-2: Small Business Basics

Small Business Assistance  University and College faculty  Chamber of Commerce  Local group of businesspeople  Small Business Administration (SBA)  Government agency that helps small business owners develop business plans and obtain financing and other support   Offers information, publications, counseling 6-2: Small Business Basics

The Business Decision  An Idea Plus Experience  Experience working in a small business, training in variety of business operations, management opportunities  Right Place and Time  Need good customer traffic, time of high customer demand  Team Approach  Choosing team members (employees) is very important  Also need assistance from specialized business people  Bankers, lawyers, accountants  Preparation and Research  Preparation is most important step  Having enough information to make good decisions will save time and avoid later problems  Need information about customers, competitors, important operations, government regulations, etc. 6-3: Starting a Small Business

Developing a Business Plan  Business plan: a written description of the business idea and how it will be carried out, including all major business activities  Most developed for one year and then updated for next year  Required when seeking financing Elements of a Business Plan 1. Description of the Business 2. Customer Analysis 3. Operations Plan 4. Marketing Plan 5. Financial Plans 6-3: Starting a Small Business

Elements of a Business Plan 1. Description of the Business  The business idea  Major products and services  Ownership structure  Strengths/weaknesses  Long and short-term goals 2. Customer Analysis  Description of customers  Location, number, and resources of customers  Sales forecasts 6-3: Starting a Small Business

Elements of a Business Plan 3. Operations Plan  Organization of the company  Description of major operations  Analysis of resources needed  Human resource plans 4. Marketing Plan  Description of major marketing activities  Description of resources needed  Schedule of marketing activities 5. Financial Plans  Start-up costs  Short and long-term financial needs  Sources of financing  Budgets and financial statements 6-3: Starting a Small Business

Steps in Developing a Business Plan  Gather and review information  Review other business plans  Study activities and financial performance of similar businesses, especially potential competitors  Develop strategic alternatives  Alternative plans for production, marketing, staffing, and financing  Select best choice from all alternatives  Write business plan  Have business experts review and offer advice about strengths and weaknesses 6-3: Starting a Small Business

Financing the Small Business  Types  Start-up financing: amount of money needed to open the business (cost of buildings, equipment, inventory, supplies, licenses, etc.)  Short-term financing: money needed to pay for the current operating activities of a business (less than a year)  Long-term financing: money needed for the main resources of a business that will last for many years (land, buildings, equipment) 6-3: Starting a Small Business

Financing the Small Business  Sources  Owner-supplied  Borrowed funds  Loans from banks or other financial institutions  Other people  Credit from suppliers (equipment, materials)  Be careful: costs of credit, when payment is due 6-3: Starting a Small Business