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Small Business Managegment 1 – Outline

Business
an organization that takes inputs of raw materials, capital, labor, & management skills to produce useful outputs of goods and services so as to earn a profit
Small business includes:
– a person, partnership, or corporation engaged in commerce, manufacuring, or services
– Entrepreneur
– Trends
– Small Business Administration Act (SBAA)
Entrepreneur
one who organizes, manages, and assumes the rish of a business firm
Trends of small business
– actively managed by the owners
– highly personalized
– largely local in it’s area of operations
– largely dependent on internal sources of capital
– independently owned & operated & does not dominate the field of operation
Small Business Administration Act (SBAA)
Principal government agency concerned with the funancing, operation, & management of a small business
– established by SBA in 1953 to combate growing monopolies by the larger businesses
– purpose is to encourage competition by small businesses as a basis for free interprised
– defines small business based upon number of employees
When was the SBA established?
1953
Why was the SBA established?
to combate growing monopolies by the larger businesses
What are the number of employees the SBA defines for Mining/Manufacturing?
500 – 1500 employees
What are the number of employees the SBA defines for Wholesale?
up to 500 employees
What are the number of employees the SBA defines for Retail?
25 – 100 employees
What are the number of employees the SBA defines for Service?
25 to 300 employees
What are the 4 divisions that the SAB defines the number of Employees?
Mining/Manufacturing (500 to 1500 employees)
Wholesale (up to 500 employees)
Retail (25 to 100 employees
Service (25 to 300 employees)
What is the Dollar Sale Volume defined for small businesses by the SBA?
3.5 million $ and up depending on the type of business
Types of small business activity
– Manufacturing business
– Merchandising business
– Service business
Manufacturing business
makes finished goods from raw materials by hand or machinery.
Merchanndising business
a business that purchases finished goods for re-sale
Service business
one that provides services as opposed to a product
Economic constributions of small business in the US
– Interdependence of business
– Stimulating economic competition
– Innovation
Interdepedence – 1 of 3 contributions to a small business
essential to enable a few large ones to concentrate on those economic activities where their efforst are more effect
creates 52% of all private employment (2002 data)
creates 51% of the nations total output of goods & services (2002 data)
Stimulation economic competition – 1 of 3 contributions to a small business
Economic development of the US has resulted from the efforts of small business
Innovation – 1 of 3 contributions to a small business
provides major source of new ideas, inventions, & innovations
What is the % of all private employment that comes from small businesses (2002 data)?
52%
What is the % of the US’s total output of goods & services (2002 data)?
51%
Management
– art & science of motivating people toward the achievement of a goal
– a process of planning, organizing, staffing, directing & controlling activities in an organization, in a systematic way in order to achieve a common goal
2 major factors that influence management?
External and Internal Environments?
External Environment (for management)
– factors outside company
1. competitors
2. technological change
3. economic conditions
4. Societal Values & attitudes
5. Political Process
6. Physical Condition
Competitors – 1 of the 6 EXTERNAL environments (for management)
managers need to recognize & understand the activities of their competitors in a market in order to make decisions about pricing, product, modifications & advertising
Technological Change – 1 of the 6 EXTERNAL environments (for management)
can lead to decrease in price due to the discovery of a cheaper method for manufacturing a product or can result in an organizations’s product becoming obselete
(used steel manufacturing as an example)
Economic Conditions – 1 of the 6 EXTERNAL environments (for management)
Inflation rate, interest rates
Societal Values & attitudes – 1 of the 6 EXTERNAL environments (for management)
Environment
Examples: 7-11 vs Playboy, cremation
Political Process – 1 of the 6 EXTERNAL environments (for management)
Federal, state & local taxes
Physical Condidtions – 1 of the 6 EXTERNAL environments (for management)
Natural events – Sunny, rainy, snowy, tornadoes, hurricanes, & earthquakes
Internal Environment
– factors inside company
a. employees
b. research & development
c. financing
d. marketing
e. advertising
Management Skills
1. Technical Skills
2. Human Skills
3. Conceptual Skills
Technical Skills (management skills)
abilities that are necessary to carry out a specific risk
Human Skills (management skills)
ability to work with, motivate, & direct individuals toward a common goal
Conceptual Skills (management skills)
ability to understand the degree of complexity in a given situation & to reduce that complexity to a level at which specific courses of action can be derived
Management Activites
1. Planning
2. Organizing
3. Motivating
4. Directing
5. Controlling
Organizing (management activities)
assignment & coordination of tasks and resources necessary to perform each task
Motivating (management activities)
goal directing forces that organize & give direction to tension caused by unsatisified needs
Planning (management activities)
the selection and ordering of tasks that are required to achieve an organization’s goal
Directing (management activities)
process of motivating, leading, influencing activities of subordinates
Controlling (management activities)
the collection, evaluation & comparison of info in order to correct any task improperly performed
Organizational goals
desired state of affairs which the organization tries to realize
Origanizations goals (5 goals)
– Two main functions of goals (look at other definition
– Purpose
– Mission
– Legitimacy
– Plans
Two main Organizations functions of Goals – 1 of 5 organizational goals
a. Goals affect the way the org relates to the environment, servicing to clarify the connection between organization activities & other orgs, groups, & individuals in the environment
b. Goals guide the internal activites of the org, providing employees knowledge of task, scope, decison guidelines, method of motivations, performance criteria, & a rational for organizing
PURPOSE – 1 of 5 organizational goals
reason for the org’s existance
without purpose the org need not exist which is why it is determined by the creators
MISSION – 1 of 5 organizational goals
the path that the mangers choose to achives their purpose
LEGITIMACY – 1 of 5 organizational goals
the acceptance of the org’s activities by non-members of the org
PLANS – 1 of 5 organizational goals
written statements of actions & decisions that will lead the company to its goals or mission: long range planning, Intermediate planning, Short-term planning
Long range planning – PLANS – org goals
over 10 years
Intermediate planning – PLANS – org goals
2 – 9 years
Short-term planning – PLANS – org goals
1 year or less
Problems & Risks of Business Ownership – Cause of Failure
External & Internal problems
EXTERNAL Problems of Business Ownership – Causes of Failure
a. Human Resource Planning
b. Capital Shortages – lack of available $, securing funds, good interest rates, maintaining cash reserves
c. Tax Burdens
d. Gov regulations – EPA, OSHA, EEOC, FTC, IRS
e. Consumerism
INTERNAL Problems of Business Ownership – Causes of Failure
a. lack of expertise (mismanagement
b. Financial shortage (poor cash flow)
c. Human resource management
Consumerism
a social movement that seeks to strengthen the rights consumers relate to sellers
Human Resource Management
the process of acquiring, training, developing, motivating & appraising a sufficient quantity of qualified employees to perform necessary activities
FACTORS to consider when BUYING an EXISTING business verses starting a new one
1. Reasons for the selling of the business
2. Profit protenial (profit record)
3. Tangible assets
4. Intangible assets
5. Competition
6. Human Resources
Reasons for the selling of a business
a. old age/illness
b. desire to re-locate in a different part of the country
c. decision to accept a position with another company
d. owner is about to loose a big contract
e. proposed changes in road routes or zoning
Profit potential (profit record)
a. secure fin statements from independent audit for accuracy & completeness of fin statements of business
b. insist upon seeing the records of bank deposits for at least 5 years (or less if the business has not been in business for 5 years)
c. ask to see the owner’s copy of his/her tax returns (any honest seller should be willing to show)
d. inspect all bills paid to suppliers & reconcile purchases with sales & mark-ups claimed (do the same for sales tax receipts
e. make certain all back taxes have been paid & int pmts & other current obligations are not in arrears
f. make sure there are no liabilities due from fed, state or city fines & penalties due for violations
Tangible assets
a physical asset that possesses genuine value
– examples: account rcvbl, notes rcvlb
– inventories: prepaid expenses, building, fixure & supples
– Equipment: old equipment vs. out-dated equipment
Inventory (for tangible assets)
1. timely, fresh, well balanced selection of materials & merchandise
2. consist of items the public wants
3. Raw materials & supplies that will be used up within a reasonable production time
4. “Close buying” is essential to profit in any business when just starting
5. don’t buy “dea” stock that seller lists as worth (org value), as the loss is rightly the orignal buyer’s loss
Intangible assets
a type of asset that is not able to be physically touched but is retained by a small business because (1) of its genuine value appeal (2) normal rate earned by other businesses of the same kind
Types of Intangible assets
a. Good will (not ill will)
b. Franchsises or restricted representation
c. Leases & other contracts
c. Patents, copyrights & trademarks
Goodwill
name of a funeral home enables a business to earn a profit
1. subjective
2. public acceptances over th eyears
3. the difference between the selling price & the appraised value of the tangible & other intangibles
Leases & other contracts
1. favorable lease in good location is a valuable business asset
2. new owner must determine if lease is transferable or must be renegotiated as well as the terms
Patents, copyrights, & trademarks
1. Patents protect a product idea from anauthorized use or infringement for a limited time
2. Copyrights protect a product idea from anauthorized use or infringement for a limited time
3. Trademarks provide protection again unfair competition in business. The chief function is to identify certain products & to create & maintain a demand for them.
Patents
protect a product idea from anauthorized use or infringement for a limited time
Copyrights
protect a product idea from anauthorized use or infringement for a limited time
Trademarks
provide protection again unfair competition in business. The chief function is to identify certain products & to create & maintain a demand for them.
Competition
a prostpective buyer should look into the extent, intensity & location of competing businesses. Question to ask? Is the competition losing or gaining ont he business?
Human resource questions
1. are the qualified people presently employed
2. how many will depart with the old owner
3. will key employees stay or leave
Reasons for buying an existing business
1. reduction of uncertainties; successful growing concern has demonstrated
2. Acquisition of ongoing operations and relationship a buyer usually obtain
3. A bargain price: must be determined by prospective new owners.
Reduction of uncertainties (good reasons)
– an ability to attract customers
– an ability to control cost
– an ability to make a profit
– have a track record under actual marketing conditions
Acquisition of ongoing operation & relationships
– personnel
– inventories, equipment & fixtures
– physical facilities
– established banking facilities
– ongoing relationships with trade suppliers
Bargain Price
– business is losing $
– location is detierating
– sellers may intend to re-open another business in competition
Investigating & evaluating the selling price (existing business)
1. Valuation of tangible assets
2. Terms of the sale
3. Sources of new venture ideas
4. preparing a business plan
Valuation of tangible assets
Market value approach
Replacement cost approach
Liquidation value approach
Earnings approach
Market Value Approach
valuation based upon the sale of similar business which depends upon:
– similarity of buisness
– recent sales of like businesses
real estate appraisals rely extensively on this method
Replacement cost approach
asset valuation that relies on replace value of the business and
1. attempts to find replacement value of tangible assets being pruchased
2. starts with most recent balance sheets
3. Ignores intangible assets
4. difficult if small business has poor business records, need good account records
Liquidation value approach
asset based methid that EQUATES THE SALVAGE VALUE of the business’s assets and
1. provides a “minimum” value/worst case scenario
2. it is the worst method for the seller
Earnings Approach
valuation based ont he business’s past earnings record and
1. centers on estimating the amt of potential inc that my be produced by the business
2. Capitalization of the average earning of the company (5 year average)
3. average annual earning are divided by expected rate of return (ROR)
4. Funeral homes rate of return (ROR) is about 12.9 %
Terms of the sale
1. Cash
2. Owner financing
3. 3rd party financing
Sources of new venture ideas
1. Prior work experience
2. Personal experience
3. Hobbies
4. Accidental discovery
5. deliberate search
Preparing a buisness plan
a written description of a new idea that projects marketing, operational & financial aspects for a proposed business
Projecttion
where do you expect to be

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