Business, Value, & You

Identify five potential advantages to starting your own business.

-Be your own boss. -Accommodate a desired lifestyle. -Achieve financial independence. -Enjoy creative freedom. -Use your skills and knowledge.

Evaluate the advantages and disadvantages of several small business ownership options—starting a business from scratch, buying an existing business, and obtaining a franchise.

-Starting from scratch. This is the most common—and riskiest—option. Advantage: You start with a clean slate and build the business the way you want. Disadvantage: It's up to you to develop your customer base and build your reputation. -Buying an existing business. This option is not as risky as starting a business from scratch, but it has some drawbacks. Advantages: You'll already have a proven product, current customers, active suppliers, a known location, and trained employees. Disadvantages: It's hard to determine how much to pay for a business; perhaps the current owners have disappointed customers; maybe the location isn't as good as it used to be. -Buying a franchise. Under a franchise setup, a franchiser (the company that sells the franchise) grants the franchisee (the buyer) the right to use a brand name and to sell its goods or services. Advantages: You've bought a prepackaged, ready-to-go business that's proven successful elsewhere; you also get ongoing support from the franchiser. Disadvantages: The cost can be high; you have to play by the franchiser's rules; and franchisers don't always keep their promises.

Explain what it takes to start a business.

-What, exactly, is my business idea? Is it feasible? -What type of business is right for me? What industry do I want to get into? -Do I want to run a business that's similar to many existing businesses, or do I want to innovate? -Do I want to start a new business, take over an existing one, or buy a franchise? -Do I want to start the business by myself, or do I want company? -What form of business organization do I want?

Discuss the importance of planning for your business, and identify the key sections of a business plan.

A business plan tells the story of your business concept, provides an overview of the industry in which you will operate, describes the goods or services you will provide, identifies your customers and proposed marketing activities, explains the qualifications of your management team, and states your projected income and borrowing needs. -In your business plan, you make strategic decisions in the areas of management, operations, marketing, accounting, and finance. Developing your business plan forces you to analyze your business concept and the industry in which you'll be operating. Its most common use is persuading investors and lenders to provide financing. -Executive summary. One- to three-page overview. -Description of proposed business. Brief description of the company that answers such questions as what your proposed company will do, what goods or services it will provide, and who its main customers will be. -Industry analysis. Short introduction to the industry in which you propose to operate. -Mission statement and core values. Declaration of your mission statement, which are fundamental beliefs about what's important and what is (and isn't) appropriate in conducting company activities. -Management plan. Information about management team qualifications and responsibilities, and designation of your proposed legal form of organization. -Goods, services, and the production process. Description of the goods and services that you'll provide in the marketplace; explanation of how you plan to obtain or make your products or of the process by which you'll deliver your services. -Marketing. Description of your plans in four marketing-related areas: target market, pricing, distribution, and promotion. -Global issues. Description of your involvement, if any, in international markets. -Financial plan. Report on the cash you'll need for start-up and initial operations, proposed funding sources, and means of repaying your debt. -Appendices. Supplemental information that may be of interest to the reader.

Explain how corporations are formed and how they operate.

A corporation (sometimes called a regular or C-corporation) is a legal entity that's separate from the parties who own it. Corporations are owned by shareholders who invest money in them by buying shares of stock. They elect a board of directors that's legally responsible for governing the corporation.

Discuss the advantages and disadvantages of the corporate form of ownership.

A corporation has several advantages over a sole proprietorship and partnership: -An important advantage of incorporation is limited liability: Owners are not responsible for the obligations of the corporation and can lose no more than the amount that they have personally invested in the company. -Incorporation also makes it easier to access financing. -Because the corporation is a separate legal entity, it exists beyond the lives of its owners. -Corporations are generally able to attract skilled and talented employees. A corporation has several disadvantages over a sole proprietorship and partnership: -The goals of corporate managers, who don't necessarily own stock, and shareholders, who don't necessarily work for the company, can differ. -It's costly to set up and subject to burdensome regulations and government oversight. -It's subject to "double taxation." Corporations are taxed on their earnings. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends.

Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies.

A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another with no new company being formed. Companies merge or acquire other companies to gain complementary products, attain new markets or distribution channels, and realize more-efficient economies of scale.

Identify the different types of partnerships, and explain the importance of a partnership agreement.

A partnership (or general partnership) is a business owned jointly by two or more people. The impact of disputes can be lessened if the partners have executed a well-planned partnership agreement that specifies everyone's rights and responsibilities. The agreement might provide such details as the following: -Amount of cash and other contributions to be made by each partner -Division of partnership income (or loss) -Partner responsibilities—who does what -Conditions under which a partner can sell an interest in the company -Conditions for dissolving the partnership -Conditions for settling disputes Limited Partnerships & General Partnerships

Describe the advantages and disadvantages of the partnership form of organization.

A partnership has several advantages over a sole proprietorship: -It's relatively inexpensive to set up and subject to few government regulations. -Partners pay personal income taxes on their share of profits; the partnership doesn't pay any special taxes. -It brings a diverse group of people together to share managerial responsibilities. -Partners can agree legally to allow the partnership to survive if one or more partners die. -It makes financing easier because the partnership can draw on resources from a number of partners. A partnership has several disadvantages over a sole proprietorship: -Shared decision making can result in disagreements. -Profits must be shared. -Each partner is personally liable not only for his or her own actions but also for those of all partners—a principle called unlimited liability.

Define a small business.

A small business is independently owned and operated, exerts little influence in its industry, and (with minimal exceptions) has fewer than five hundred employees.

Describe the sole proprietorship form of organization, and specify its advantages and disadvantages.

A sole proprietorship is a business owned by only one person. Advantages of a sole proprietorship include the following: -Easy and inexpensive to form; few government regulations -Complete control over your business -Get all the profits earned by the business -Don't have to pay any special income taxes Disadvantages of a sole proprietorship include the following: -Have to supply all the different talents needed to make the business a success -If you die, the business dissolves -Have to rely on your own resources for financing -If the company incurs a debt or suffers a catastrophe, you are personally liable (you have unlimited liability)

Define entrepreneur.

An entrepreneur is someone who identifies a business opportunity and assumes the risk of creating and running a business to take advantage of it.

Discuss ways to succeed in managing a business, and explain why some businesses fail.

Business owners face numerous challenges, and the ability to meet them is a major factor in success (or failure). As a business owner, you should do the following: -Know your business. Successful business people are knowledgeable about the industry in which they operate, and they know who their competitors are. -Know the basics of business management. To manage a business, you need to understand the functional areas of business—accounting, finance, management, marketing, and production. -Have the proper attitude. You should believe in what you're doing and make a strong personal commitment to it. -Get adequate funding. Plan for the long term and work with lenders and investors to ensure that you'll have sufficient funds to get open, stay open during the start-up phase, and, ultimately, expand. -Manage your money effectively. You need to pay attention to cash flow—money coming in and money going out—and you need to know how to gather the financial information that you require to run your business. -Manage your time efficiently. You must develop time-management skills and learn how to delegate responsibility. -Know how to manage people. You need to develop a positive working relationship with your employees, train them properly, and motivate them to provide quality goods or services. -Satisfy your customers. Commit yourself to satisfying—or even exceeding—customer needs. -Know how to compete. Find your niche in the marketplace, keep an eye on your competitors, and be prepared to react to changes in your business environment. Businesses fail for any number of reasons, but many experts agree that the vast majority of failures result from some combination of the following problems: -Bad business idea. Like any idea, a business idea can be flawed, either in the conception or in the execution. -Cash problems. Too many new businesses are underfunded. -Managerial inexperience or incompetence. Many new business owners have no experience in running a business, and many have limited management skills. -Lack of customer focus. Some owners fail to make the most of a small business's advantage in providing special attention to customers. -Inability to handle growth. When a company grows, some owners fail to delegate work or to build an organizational structure that can handle increases in volume.

Describe the three characteristics of entrepreneurial activity.

Innovating. An entrepreneur offers a new product, applies a new technique or technology, opens a new market, or develops a new form of organization for the purpose of producing or enhancing a product. Running a business. Entrepreneurship means setting up a business to make a profit from an innovative product or process. Risk taking. Risk means that an outcome is unknown. Entrepreneurs, therefore, are always working under a certain degree of uncertainty, and they can't know the outcomes of many of the decisions that they have to make.

Identify the industries in which small businesses are concentrated.

Many small businesses in the service-producing sector are retailers—they buy goods from other firms and resell them to consumers, in stores, by phone, through direct mailings, or over the Internet. Other small business owners in this sector are wholesalers—they sell products to businesses that buy them for resale or for company use. A high proportion of small businesses in this sector provide professional, business, or personal services.

Explain the differences among three types of start-up firms.

Money. Granted, without the cash, you can't get very far. What to do: Conduct some research to find out where funding is available. Security. A lot of people don't want to sacrifice the steady income that comes with the nine-to-five job. What to do: Don't give up your day job. At least at first, think about hiring someone to run your business while you're gainfully employed elsewhere. Competition. A lot of people don't know how to distinguish their business ideas from similar ideas. What to do: Figure out how to do something cheaper, faster, or better.

Identify sources of small business assistance from the Small Business Administration.

Services available to current and prospective small business owners from the SBA include assistance in developing a business plan, starting a business, obtaining financing, and managing an organization. The SBDC (Small Business Development Centers) matches business people needing advice with teams of retired executives who work as volunteers through the SCORE program.

Explain why small businesses tend to foster innovation more effectively than large ones.

Small businesses tend to foster environments that appeal to individuals with the talent to invent new products or improve the way things are done. They typically make faster decisions, their research programs often are focused, and their compensation structures frequently reward top performers.

Describe some of the ways in which small companies work with big ones.

Small firms supply many of the components needed by big companies. They also provide large firms with such services as accounting, legal, and insurance, and many provide outsourcing services to large companies—that is, they hire themselves out to help with special projects or handle certain business functions. Small companies (such as automotive dealerships) often act as sales agents for the products of large businesses (for example, car makers).

Examine special types of business ownership, including S-corporations, limited-liability companies, cooperatives, and not-for-profit corporations.

The S-corporation gives small business owners limited liability protection, but taxes company profits only once, when they are paid out as dividends. It can't have more than one hundred stockholders. A limited-liability company (LLC) is similar to an S-corporation: its members are not personally liable for company debts and its earnings are taxed only once, when they're paid out as dividends. But it has fewer rules and restrictions than does an S-corporation. For example, an LLC can have any number of members. A cooperative is a business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members. A not-for-profit corporation is an organization formed to serve some public purpose rather than for financial gain. It enjoys favorable tax treatment.

Describe the goods-purchasing and service-producing sectors of an economy.

The goods-producing sector includes all businesses that produce tangible goods. The service-producing sector includes all businesses that provide services but don't make tangible goods.

Explain the importance of small businesses to the U.S. economy.

The nearly twenty-seven million small businesses in the United States generate about 50 percent of our GDP. They also contribute to growth and vitality in several important areas of economic and socioeconomic development. In particular, small businesses do the following: -Create jobs -Spark innovation -Provide opportunities for women and minorities to achieve financial success and independence

Summarize the advantages and disadvantages of business ownership.

There are several advantages that, generally speaking, come with success in business ownership: -Independence. As a business owner, you're your own boss. -Lifestyle. Because you're in charge, you decide when and where you want to work. -Financial rewards. In spite of high financial risk, running your own business gives you a chance to make more money than if you were employed by someone else. -Learning opportunities. As a business owner, you'll be involved in all aspects of your business. -Creative freedom and personal satisfaction. As a business owner, you'll be able to work in a field that you really enjoy, and you'll gain personal satisfaction from watching your business succeed. There are also a number of potential disadvantages to consider in deciding whether to start a small business: -Financial risk. The financial resources needed to start and grow a business can be extensive, and if things don't go well, you may face substantial financial loss. In addition, you'll have no guaranteed income. -Stress. You'll have a bewildering array of things to worry about—competition, employees, bills, equipment breakdowns, customer problems. -Time commitment. Running a business is extremely time-consuming. In fact, you'll probably have less free time than you'd have working for someone else. -Undesirable duties. You'll be responsible for either doing or overseeing just about everything that needs to be done, and you'll probably have to perform some unpleasant tasks, like firing people.