© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 1 Small Business: An Overview

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 2 Learning Objectives Describe the characteristics of small business Recognize the role of small business in the U.S. economy Understand the importance of diversity in the marketplace and the workplace Suggest ways to court success in a small business venture Name the most common causes of small business failure

1| 3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Describe the characteristics of small business

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 4 Small Business An independently owned, operated, and financed organization Includes fewer than 100 employees Involves a minor impact on the industry

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 5 Criterion Used to Identify a Small Business Number of employees Sales revenue Total value of assets Value of owners’ equity

1| 6 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Almost All Established Firms are Small Businesses Source: U.S. Census Bureau, Statistics of the U.S., “Number of Firms, Number of Establishments, Employment, and Annual Payroll by Employment Size of the Enterprise—Totals 2006,”

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 7 SBA Federally funded agency that provides loans and assistance to small businesses Establishes definitions of business size that vary by industry Definitions are based on annual sales revenue or number of employees which vary by industry codes assigned by the North American Industrial Classification System (NAICS)

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 8 Factors for Business Size Standards Considered by SBA’s Size Policy Board Industry structure analysis Degree of competition Average firm size Startup cost Entry barriers, distribution of sales, and employment by firm size Effects of different size standard levels on objectives of SBA programs Comments from the public on notices of proposed rulemaking

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 9 Class Exercise Using the SBA business size guidelines, which of the following are small businesses? A car assembly plant that employs 7,000 workers A local wholesaler with 95 employees A local retail store with $1.5M in yearly sales receipts A home builder with annual receipts of $2.8M A mall developer with a $50M construction contract A farmer with annual sales of $3M A farmer with annual sales of $500K A travel agent with annual sales from $1.2M to $2.5M A dry cleaning firm with $175K in annual receipts

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 10 Types of Industries Having Small business Operations Construction - Includes over 80 percent of companies classified as small by the SBA Manufacturers and mining Real estate Arts, entertainment, and recreational services Restaurants, lawn care, and telecommunications services

1| 11 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Recognize the role of small business in the U.S. economy

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 12 Small Businesses in the U.S. Economy Goods were produced in cottage firms and artisan studios U.S. economy was based on agriculture Early 1800s Small businesses grew due to economies of scale Economies of scale - Mass production and assembly line factories lower unit costs Late 1800s: The Industrial revolution

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 13 Small Businesses in the U.S. Economy Marketing concept: Determining consumers’ needs and providing goods which satisfy their needs Offers increased opportunities for small business Led to an increased importance ascribed to the service economy Service sector: Provide services, rather than tangible goods

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 14 Recent Growth Trends Early 1970s Corporate profits declined with increase of firms’ costs Entrepreneurs started small businesses and created new industries New companies addressed customer needs efficiently by their flat organization structures 1980s to present Downsizing and outsourcing created opportunities for small business entrepreneurs Downsizing: Reducing the size of a firm’s work force Small business owners faced difficulty in financing their business due to the economy crisis

1| 15 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Understand the importance of diversity in the marketplace and the workplace

1| 16 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Work Force Diversity Aging population Increased number of women entering the work force Increased birthrate of minority groups Attention to the needs and abilities of people with handicap Factors affecting employee diversity

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 17 Resources to Assist Women- and Minority- Owned Businesses Encourages access for socially or economically disadvantaged entrepreneurs to federal contracts Offers women and minority business owners preference in bidding on federal and certain state contracts SBA 8(a) federal certification program Provide networking, educational, and corporate contract information Professional organizations

1| 18 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Understand the importance of diversity in the marketplace and the workplace

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 19 Factors for Achieving Success in a Small Business Competitive advantage: Business feature that is better than that of the competition Recognizing competitive advantage Enhances the ability to react to new and changing markets Creative destruction: Replacement of existing products, processes, ideas, and businesses with new and efficient ones Remaining flexible and innovative Aids in providing individualized service and gives firsthand knowledge of customer wants and needs Developing a close relationship with the customers and striving for quality

1| 20 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Innovation Developing a new or improved product Product Providing a new or improved service for sale Service Discovering a method to organize physical inputs to produce a product Process Generating a novel way to organize a business’s resources Management

1| 21 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Starting Own Business Market size and definition Getting accurate information Gathering sufficient capital Right tools to succeed Finding and retaining effective employees

1| 22 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Name the most common causes of small business failure

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 23 Business Failure Voluntary or involuntary closure of a business with a financial loss to a creditor Business that closes as a result of a court action

1| 24 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Causes of Business Failures Are Many and Complex Source: Dun & Bradstreet Corporation, Business Failure Record, NFIB Foundation/VISA Business Cord Primer, as shown in William J. Dennis Jr., A Small Business Primer (Washington, DC: National Foundation of Independent Business, 1993), 23. Reprinted by permission of the National Federation of Independent Business

1| 25 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Business Termination versus Failure Termination Occurs when a business terminates operation for any reason Failure Occurs when a business closes with a financial loss to a creditor

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1| 26 Mistakes Leading to Business Failure Neglecting to plan for the future Failing to identify the commitment and hard work required Incapability to utilize existing employees optimally and hire additional employees in a timely manner Inaccurate estimates of cash flow and capital requirements

1| 27 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Analysis of Business Closure Source: With kind permission from Springer Science+Business Media. Small Business Economics, 21(1). August 2003, 51–61. Brian Headd, “Redefining Business Success: Distinguishing between Closure and Failure.”