Entrepreneurial Small Business Final

Managing risks

*Best strategy is to develop a business environment that minimizes: -Probability of the event occurring -Amount of loss that can be experienced if the event does occur *You create this strategy by: -Making specific plans for, and arrangements to deal with, foreseeable events -Creating and enforcing an appropriate code of conduct for yourself and all employees -valuable assets are physically secure -physical hazards are rid of

Hourly fees

-A basis for legal charges in which the rate is based on a price per hour. -Often lawyers will charge for fractions of an hour

Three elements to most aspects of business law

-Finding the right information, -Negotiating the specific outcome you want -Taking care of the paperwork associated with it

Equity capital from the owner's view

-financing with equity is expensive and guaranteed to create problems -supposed you sell half of your business to raise capital. You have just sold half of you future profits, future growth, and future wealth

3 components of operating as chief executive

-innovation -operation -inspiration

Property involves specific forms of risk

-inventory can be stolen, machinery can break -buildings can be damaged -land may become contaminated -patents may be infringed upon

Managing accounts receivable

-minimize the time that passes between credit sale and when the cash is received -keep number of bad accounts as low as possible

Minimize operation cost

-outsource -subcontract -rent space -rent equipment -work from home

Using your AR as a source of financing

-pledged receivables -factoring (sell your receivables to a finance company)

Risks associated with specific business operations

-property -personnel -customers

Three guidelines for training

1.Give your employees opportunities to use their new skills 2. Make training an ongoing process 3. Think of training as an investment as opposed to an expense

Writing a job description

1.Start with a title 2. Give a job overview 3. Define the duties and responsibilities 4. Knowledge, skills, and abilities 5. Credentials and experience 6. Special requirements

Design patent

A 14-year patent for a new, original, and ornamental design for an article of manufacture

Arm's length transaction

A business deal where the parties have a prior relation or affiliation, but where the business is conducted as if they were unrelated. -Approach is done to help guard against potential conflicts of interest.

Return on investment (ROI)

A capital budgeting equation used to measure the relationship between initial investment and the profits that are expected to be received from making the investment

Check the box taxation

A choice LLCs can make on their tax returns to be taxed as a corporation or a partnership

Insurance

A contract between two or more parties in which one party agrees, for a fee, to assume the risk of another

Subcontract

A contract by which a new party agrees to perform a duty that one of the original parties to a contract was already legally obligated to perform

Co-insurance

A contract stipulation that requires a policyholder to carry insurance in an amount equal to a stated minimum percentage of the market value of the property insured

Limited Partnership

A legal form of business organization that is created by filing required documentation with a state government -One or more partners may have no liability for the debts and actions of the partnership

Debt

A legal obligation to pay money in the future

Operating lease

A long-term rental in which ownership of the asset never passes to the person paying for the lease

Nepotism

A management philosophy of selecting and promoting people based on family ties

Meritocracy

A management philosophy of selecting and promoting people based solely on their being the most capable person for the job

Flat fees

A method of billing for lawyers in which a fixed amount is paid for a certain task

Internal control

A set of rules and procedures that work to limit the opportunity for employee theft or malfeasance

Hold harmless

A type of waiver in which a party agrees not to hold another party responsible for certain events

Best practices

Activities identified by authoritative bodies as examples of optimal ways to get things done in a particular industry, profession, or trade

Articles of partnership

Agreement between the partners of a firm on matters pertaining to the formation and operation of the partnership

Joint venture

An agreement between two or more entities to pool resources in order to complete a project

Surety bonds

An agreement with an insurance or bonding company that will pay a specified amount in the event that the entity bonded fails to comply with specified contractual requirements

Deductible

An amount of loss that will not be paid by an insurance company

Employee referral

An underused, low-cost method for finding workers that rewards your employees for recommending potential candidates that would be a great employee fit

Capital assets

Assets that are expected to provide economic benefits for periods of time greater than one year.

Fidelity bonds

Bonds that repay employers for losses caused by dishonest or negligent employees -also called dishonesty bonds

Trade secret

Confidential information within a company that gives that company a competitive advantage

Coverages

Contractual provisions of insurance policies that specify what risks the insurance company is assuming

Cost of owning

Cost incurred in financing, insuring, taxing, or tracking an asset

Cost of disposition

Cost incurred in the activities necessary to get rid of an asset

Job description

Defines and discusses all the essential knowledge, skills, and abilities that are needed to fill a position

Inventory valuation

Determination of the amount of assets held by the firm for sale or production

Trademark

Distinctive word, slogan, or image that identifies a product and its origin

Articles of organization

Document setting forth information about a limited liability company that is filed with the state to establish an LLC

Key employees

Employees whose experience and skills are critical to the success of a business -Loss of key employees is a particularly acute risk for small businesses

Copyright

Exclusive right given to the creator of a literary or artistic work to make use of that work

Contingency fee

Fee paid by a client to an attorney for legal services that is dependent upon the outcome of a case

Assumed name filing or a fictitious name filing

Filing made with a state(s) in which the business operates disclosing the trade name or assumed name of the business along with the owners of the business

Point-of-sale system

Hardware and software combinations that integrate inventory management directly into accounting software.

Off the job

Includes lectures, special study, videos, television conferences, case studies, role-playing, simulation, programmed instruction, and laboratory training

Virtual employees

Independent contractors who provide specialized business services or support from a distance, through the Internet, telephone, fax, or another method of communication

Vicarious (indirect) liability

Indirect liability or responsibility for the actions of another

Buyout insurance

Insurance that provides money to owners of a business to buy the shares of any deceased owner from that owner's heirs

Job analysis

Job analysis should include: -The reason the job exists -The mental or physical tasks involved -How the job will be done -The qualifications needed

Regulation of the workplace

Laws and governmental rules that limit the freedom of business owners to manage their businesses as they please

Equipment

Machinery, tools, or materials used in the performance of the work of the business

Employee theft

Misappropriation of business property by employees of that business

Debt capital

Money borrowed for the purpose of investment in a business

Equity Capital

Money contributed to the businesses in return for part ownership of the business

Bar coding

Obtaining a Universal Product Code number and scan-ready visual tag, and printing it on the product or its packaging. Bar codes can then be scanned and recognized by others.

Waiver

Part of a contract in which a party intentionally gives up legal rights or claims

Exculpatory clause

Part of a contract in which a party to the contract states that he or she will not be responsible for certain actions

noncomplete clause

Part of a contract in which a person agrees not to open a certain type of business or seek employment doing certain things in a particular area for a period of time

Product liability

Payment for injury or damage that occurs during the use of the business's products

Independent contractors

Persons working to achieve a certain goal without being subjected to substantial controls by another

Intellectual property

Property coming from some sort of original thought; for example, patents, trade secrets, trademarks, and copyrights

Intangible property

Property that has no value of its own but that represents value, such as a stock certificate

Choosing a business form

Six major factors at play: -Personal liability of the business owner -Taxation of both the entity and its owners -Complexity and organizational costs in setting up -Control of the business -Continuity of the business -Ability of the business to raise capital

Infringer

Someone who uses intellectual property without the permission of the owner

Protected classes

States of being that are expressly prohibited from suffering discrimination: race, color, religion, sex, national origin, gender, age, or disability

Insurable value

The amount of an asset for which a company will write an insurance policy

Payback period

The amount of time it takes a business to earn back the funds it paid out to obtain a capital asset

Efficiency

The comparison of productivity ratios to see the extent that an organization has generated more outputs with fewer inputs

Replacement value

The cost incurred to replace one asset with an identical asset.

Insuring the property of the business

The cost of property insurance is determined: -Property's insurable value -Amount of deductible loss -Amount of co-insurance required -Loss limits of the policy

Book value

The difference between the original cost of an asset and the total amount of depreciation expense that has been recognized to date.

Cost of operating

The direct cost incurred in using an asset for the purpose for which it was intended

Piercing the veil

The dissolution of a corporate form, making it back into a sole proprietorship or general partnership, if the court finds that the owner carelessly mixed up personal and business assets or finances

Fair market value

The price at which goods and services are bought and sold between willing sellers and buyers in an arm's-length transaction.

Feedback

The process of communicating within or to the organization about how the outputs worked or were received

Capital budgeting

The process of deciding among various investment opportunities to create a specific spending plan

Operations

The process of transforming materials, labor, and energy into goods or services

Microinventory

The purchase of inventory only after a sale is made; very typical with Internet firms.

Productivity

The ratio measure of how well a firm does in using its inputs to create outputs, literally, productivity is outputs divided by inputs Productivity= outputs/inputs

Whole of life costs

The sum of all costs of capital assets, including acquisition, ownership, operation, and disposal

Acquisition cost

The total cost of acquiring an asset, including such costs as purchase price, transportation, installation, testing, and calibrating in order to ready it for its first productive use

Replacement cost

The total cost of replacing an asset with an essentially identical asset

Independent contractor argument

To be an independent contractor the person has to display three characteristics: -Behavioral: The contractor solely decides how the work is to be done. -Financial: The contractor pays his own expenses directly -Relational: The independent contractor is employed for a project and the service the contractor provides is not central to the operation of the business

Fair credit reporting act

US federal legislation specifying consumers' rights vis a vis credit reporting agencies

Safety stock

a amount of inventory carried to ensure that you will not run out of inventory because of fluctuating levels of sales

Sole proprietorship

a business owned by a single individual who is responsible for all debts and claims against the business

Credit reporting agency

a business that collects, collates, and reports information concerning an entity's use of debt

Corporation

a legal "artificial" entity that is formed by filing specify documents with a state government

Limited liability company (LLC)

a legal form of business organization that is created by filling required documentation with a government -Have a choice, under federal tax lax, of being taxed as either corporations or partnerships

Tax abatement

a legal reduction in taxes by a government

Lock box

a locked receptacle for money, the keys to which are not available to those who physically handle the receptacle

Community development organization

an organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area

Accelerator

an organization that supports startup technology businesses by providing inexpensive office space, a variety of support services, and resources -mostly associated with universities

Personnel insurance

available to protect both you and your employees from specific risks -Life, Disability, Medical coverage

Standard contacts

company can just fill in the blanks as needed

Credit insurance

covers abnormal losses from credit customers not paying their bills

Tax credits

direct reduction in the amount of taxes that must be paid, dependent upon meeting some legal criteria

Grants

gifts of money made to a business for a specific purpose

Pledging receivables

giving a third party legal rights to debts owned your business in order to provide assurance that borrowed money will be repaid

Entrepreneurial leadership

leadership really means administration two key factors: -task -person

Outside equity

money form selling part of your business to people who are not and will not be involved in the management of the business

Medical

most highly desired form of insurance for most employees

Dividends

payments of profits to the owners of corporations

Small business investment companies

private businesses that are authorized to make SBA insured loans to start-ups and small buisnesses

Periodic inventory

process of physically counting business assets on a set schedule

Key person insurance

protects you in the event that a key employee dies or is disabled and cannot work

Life insurance

provided to employees to provide security for their families

Perpetual inventory

recording the receipt and sale of each item as it occurs

Factoring

selling the rights to collect AR to an entity outside your business

Collateral

something of value given or pledged as security for payment of a loan -may consist of financial instruments, like stock, bonds, or physical goods, like trucks, land

Living wage

the amount needed for a person to meet the basic necessities of life from a single job

Optimum stocking level

the amount of inventory that results in the minimum cost, when considering the cost of lost sales resulting from running out of stock, the number of units sold per day, and the number of days required to receive inventory -Also known as the reorder point

Mediation

the dispute is put to a neutral third party who is not a judge

Weighted average cost of capital (WAC)

the expected average future cost of funds

Risk

the level of probability that an investment will not produce expected gains

Cost of capital

the percentage cost of obtaining future funds

Diversify

to invest in multiple investments of differing risk profiles for the purpose of reducing overall investment risk

Probationary period

trial period in which an employee has temporary status before a formal offer to work full time is presented

Partnership

two or more people cooperating to conduct a business enterprise

4 Cs of borrowing

-character -capacity -conditions -collateral

Utility patent

A 20-year patent covering a process, machine, article of manufacture, composition of matter, or any new or useful improvement of an existing one

Separation of duties

A type of internal control that separates the physical control of an asset from the person accounting for that asset

Inputs

The materials, labor, and energy put into the production of a good or service

Disposal value

The net amount realized after subtracting the costs of getting rid of an asset from its selling price.

Financial leverage

a measure of the amount of debt relative to total investment

Angel investor

a wealthy individual who invest in companies in relatively early stages of development

Business risk

the level of probability that the future economic state of the business will be worse than expected

Evaluating job prospects

-Create same specific questions you will ask of all candidates -Ask that person to demonstrate their skills -Consider involving one or two other interviewers -Never hire a moderately qualified just because you need someone now

On the job training

-Delivered to employees while they perform their regular jobs -Techniques include orientations, job instruction training, apprenticeships, internships and assistantships, job rotation, and coaching.

Maximize returns from employee expense

-Student interns -Overtime -Contractors

You and the law

-There are always unavoidable risks -In a 2002 poll, less than 1 in 10 small business had been sued in the prior five years -It is easy to underestimate the number of laws that apply to small businesses -State laws applicable to small businesses are extraordinarily varied

HR practices

-Transparent procedures with consistent application -Job basics -Job metrics -Task repair -Lines of communication -Clear termination rules -Line of appeal

Plant patent

A 20-year patent that covers new strains of living plant organisms, algae, or macro fungi

Legal entity

A being, human or nonhuman, such as a corporation, that is recognized as having rights and duties, such as the right to own property

Physical inventory

A count of all the inventory being held for sale at a specific point in time

Arbitration

A dispute resolution process held instead of court cases in which both sides present their case to a legal professional

Sarbanes-Oxley Act

A federal law describing the steps publicly traded businesses must take to protect and provide their key financial information

Retainer

A fee paid by a client to an attorney to engage the attorney's services

Capital lease

A lease in which at the end of the lease period the asset becomes the property of the lessee, possibly with an additional payment

Pull-through system

A term for just-in-time inventory systems in which product is ordered and placed into production only after a sale has been completed.

Pass through (taxation)

Earnings of the business are distributed to the business owners and those owners pay individual tax on the earnings

Single taxation

Earnings of the business are taxed once with the owners paying the taxes

Double taxation

Earnings of the business are taxed twice with the business as well as its owners being subject to tax

Trade name or assumed name or a doing business as (dba)

The name under which a business is operated

Gain on investment

The percentage amount that the payout of an investment differs from original cost -calculated as (payout-investment+dividends)/investment

Outputs

The service or product that is produced for sale

Risk of nonpayment

by customers is experienced by all businesses that offer credit Must balance: -giving credit to customers will increase your sales -offering credit guarantees sooner or later some customer will not pay as promised

Supply chain

the line of distribution of a product from its start as materials outside the target firm to its handling in the target firm to its handling by sellers into the hands of customers

Employee fit

the match between the needs, expectations, and culture of the small business with the expectations and the skills of the individual employee

Just in time inventory

the practice of purchasing and accepting delivery of inventor only after it has been sold to the final customer

Optimum capital structure

the ratio of debt equity that provides the maximum level of profits

Handling ADA Requirements

-Determine if you are subject to any of the provisions of the ADA -Obtain the services of experts on the ADA to evaluate the level of your compliance -Work diligently to meet the requirements to which you are subject

Managing risk from employee violation of government regulations

-Have a written policy provided to each employee -Conduct training of managers and employees concerning those policies, -Immediately and consistently act upon receipt of any complaint.

Training your employees

-Where is training needed? -What key areas need the most attention? -What specifically must an employee learn in order to be more productive? -Who needs to be trained?

Financing with debt: getting a loan

-direct loans of cash -guaranteeing loans made by commercial banks -reducing taxes by allowing interest to be deducted

Methods to obtain equity capital

-external equity capital is not available for most small business start-ups -banks do not loan to start-up businesses -owners often do not want to share ownership -owners usually want to be their own bosses -owners typically do not want to be responsible to others for losses of the business

Litigation

A formal dispute resolution method that operates using the court system, typically with a lawyer representing each party

Property

A general term for real estate, but it can also be applied as a legal term for anything owned or possessed

Plant

A general term for the facilities of a business

Patent

A grant by the U.S. government to an inventor for an idea that is new, useful, and non-obvious, giving the inventor the exclusive right to make, use, or sell his idea

Using an internal audit as a tool to manage risk

A properly conducted, independent internal audit will give you: -An evaluation of your overall level of business risk. -An objective evaluation of your risk control structure. -A systematic analysis of your business processes and controls. -Information on irregularities detected during the audit process. -Review of your firm's compliance with relevant regulations. -A review of the existence and value of the assets of your business. -Review of operational and financial performance. -Recommendations for more effective and efficient use of resources

Interest

a change for the use of money, usually figured as a percentage of the principal

Contracts

agreements in which the parties exchange promises

Foundation

an institution to which private wealth is contributed and from which private wealth is distributed for public purposes

Specialty contracts

unique contract terms, large dollar amounts at stake

Bootstrapping

using funds generated by business operations to capitalize growth

Gift

valuable assets or services donated to the business without any obligation to repay or give up any ownership interest

Open book policy

-Concept that key employees should be able to see and understand a firm's financials -should have a part in moving the numbers in the right direction -should have a direct stake in the strategy and success of the firm.

Developing a comprehensive insurance program

-Identifying risk is the first task -Determine which risks are to be covered Vehicle liability Worker's compensation General liability Various types of malpractice coverage

The scope of authority argument

-If employees make a decision requiring more authority than they really possess, the business can argue that it was not liable for the problem -Firm must fully train employees of the exact authority they possess

Events related to customers

-Injuries suffered while upon business property -Injury or damage that is caused during the use of the business's products.

Managing risk to intangible property

-Intellectual property rights comprise the legal rights to use unique features of products or services that provide competitive advantage. -If the holder of the intellectual property rights promptly reacts to infringement by making written objections to any and all infractions, can the legal rights be maintained

Managing risk from violations of tax regulation

-Keep complete, accurate accounting records -Establish a relationship with both an accountant and a lawyer who are expert in tax issues -Make paying your taxes your first financial priority

Tax codes

-Laws and regulations that specify the requirements of taxation -include franchise or corporation taxes, income taxes, employee taxes, sales and use taxes, and property taxes

Internet recruiting

-Method of recruiting that allows you to search a résumé database or post a job description to the Web -A small business owner who knows exactly what he or she wants can use filters to search vast numbers of résumés with pinpoint accuracy

Hiring employees

-No decision is as important or complex as the decision to hire an employee -Of the more than 27.3 million businesses in the United States in 2010, over 21.7 million had no employees at all -Adding employees increase amount of work that can be done - serving more customers, staying open longer

Equity capital for the investor's view

-Owners and investors want to make money -To get money from other people, you've got to show them that your business probably can make gains from them -Growth potential is a primary concern for equity investors

Dividing up ownership and dividends

-Owners of corporations often receive the base of their compensation as a salary -Family members receive similar packages Higher than non-family members Create profit sharing plans or bonus system for non-family members

4 steps to structure a negotiation

-Prepare what you need to achieve -Position by putting your best foot forward -Propose solutions that provide value and balance -Pounce when agreement on any part of the negotiation appears at hand

Psychological contract

-Refers to employees' beliefs about the promises between the employee and the firm -Beliefs are based on the perception that promises have been made in exchange for certain employee obligations

Sources of financing for small businesses

-The number one source is from the owners themselves -The other major sources include family and friends, lenders

You need a good attorney

-Usually with legal issues it is best to confront potential problems before they have a chance to get serious. -Timely decisions and action may avoid a problem altogether or may make solving the problem much easier and cheaper

Quality

a product's or service's fitness for use, measured as durability, reliability, serviceability, style, ease of use, and dependability

Economic order quantity (EOQ)

a statistical technique that determines the quantity of inventory that a business must hold to minimize total inventory cost

Accounts Receivable

money that is owned to your business by yours customers -Relatively few small businesses today provide credit to customers

Pros and Cons of offering credit

-providing credit usually results in higher sales revenue because of increased repeat business -reduces cost of selling -credit delays receipt of cash -must replace the "missing" cash -sooner or later a customer will not pay

When giving a gift

-put you agreement into writing -if it is a gift, have the agreement specially say so -if it is a loan, have the agreement specify the exact interest and payment terms -if it is an equity investment, consider nonvoting stock

Why use equity capital?

-reduce exposure to financial loss -business will not have increased costs in the form of interest -bringing outside investors into an existing business can reenergize it