IT364 Summary PDF

RK ‫اذكروني بدعوة‬ IT364 Summary Week 2 : Chapter 1 Entrepreneur is one who establishes new business in a situation that is full of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on those opportuni...

RK ‫اذكروني بدعوة‬ IT364 Summary Week 2 : Chapter 1 Entrepreneur is one who establishes new business in a situation that is full of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on those opportunities. Entrepreneur Characteristics:  Desire and willingness to take initiative  Preference for moderate risk  Confidence in their ability to succeed  Self-reliance  Perseverance  Desire for immediate feedback  High level of energy  Competitiveness  Future orientation  Skill at organizing  Value of achievement over money  High degree of commitment  Tolerance of ambiguity  Flexibility  Tenacity Serial Entrepreneurs are those who create multiple companies and usually run more than one business simultaneously.  Entrepreneurship is a skill that is learned.  Anyone can become an entrepreneur irrespective of age, race, gender, color, national origin, or any other characteristic.  Success in entrepreneurship does not depend on a single characteristic rather diversity seems to be a central characteristic of successful entrepreneurs. How to Spot Entrepreneurial Opportunities?  Creativity and Innovation are the keys to solve problems and capitalize on opportunities that people face every day.  Creativity refers to the ability of developing new ideas and discovering new ways of looking at problems and opportunities.  Innovation refers to the ability of applying creative solutions to those problems and opportunities to enhance or to enrich people’s lives.  Creativity is thinking new things and Innovation is doing new things. Techniques that can be used to identify business opportunities  Monitor trends and exploit them early on  Take a different approach to an existing market  Put a new twist on an old idea  Look for creative ways to use existing resources  Realize that others have the same problem you do  Notice what is missing The Benefits of Owning a Small Business  Opportunity to gain control over your own destiny  Opportunity to make a difference  Opportunity to reach your full potential  Opportunity to reap impressive profits  Opportunity to contribute to society and be recognized for your efforts  Opportunity to do what you enjoy doing Social Entrepreneurs: Entrepreneurs are starting businesses because they see an opportunity to make a difference in a cause that is important to them. The Potential Drawbacks of Entrepreneurship  Uncertainty of Income  Risk of losing your entire invested capital  Long hours and hard work  Lower quality of life until the business gets established  High levels of stress  Complete responsibility  Discouragement Factors that have led to this age of entrepreneurship include:  Entrepreneurs as heroes  Entrepreneurial education  Economic and Demographic factors  Shift to a service economy  Technology advancements  Outsourcing  Independent lifestyle  E-commerce and the World Wide Web  International opportunities  Cultural diversity is one of the entrepreneurship’s greatest strengths. The contributors to the cultural diversity include:  Young entrepreneurs  Women entrepreneurs  Minority enterprises: Hispanics, Asians, and African-Americans, respectively, are most likely to become entrepreneurs.  Immigrant entrepreneurs  Part-Time entrepreneurs: A major advantage of going into business part-time is the lower risk in case the venture flops.  Home-Based business owners  Family business owners: A family-owned business is one that includes two or more members of a family with financial control of the company.  Copreneurs: are entrepreneurial couples who work together as co-owners of their businesses.  Corporate castoffs: victims of corporations have been downsizing, shedding their excess bulk, and slashing employment at all levels in the organization.  Corporate “Dropouts”: “dropouts” from the corporate structure who then become entrepreneurs.  Retired baby boomers: Members of the Baby Boom Generation (1946–1964). 20 Rules of a Successful Home-based Business Rule 1. Do your homework Rule 2. Find out what your zoning restrictions are Rule 3. Create distinct zones for your family and business dealings Rule 4. Focus your home-based business idea Rule 5. Discuss your business rules with your family Rule 11. Be firm with friends and neighbors Rule 12. Maximize your productivity Rule 13. Create no-work time zones Rule 14. Take advantage of tax breaks Rule 15. Make sure you have adequate insurance coverage Rule 6. Select an appropriate business name Rule 16. Understand the special circumstances under which you can hire outside employees Rule 7. Buy the right equipment Rule 17. Be prepared if your business requires clients to come to your home Rule 8. Dress appropriately Rule 18. Get a post office box Rule 9. Learn to deal with distractions Rule 19. Network Rule 10. Realize that your phone can be your best Rule 20. Be proud of your home-based friend … or your worst enemy business The Contributions of Small Business Small business refers to a business that employs less than 100 people. - 99.7% of the total businesses in the United States are categorized as “small”. Putting Failure into Perspective  About 54 percent of new businesses fail within 4 years  Entrepreneurs are not paralyzed by the fear of failure  Failure is a natural part of the creative process  Successful entrepreneurs exhibit the ability to fail intelligently Week 3 : Chapter 2  World’s economy has shifted from a base of financial to intellectual capital. Intellectual capital refers to the knowledge and information a company acquires and uses to create a competitive advantage in its market segment.  The key is learning how to utilize the knowledge a company accumulates over time as a strategic resource and as a competitive weapon. Knowledge management is the practice of gathering, organizing, and disseminating the collective wisdom and experience of a company’s employees for the purpose of strengthening its competitive position. - Small businesses have advantage over large companies due to their size and simplicity when it comes to knowledge management. Intellectual capital has three components: 1. Human capital - refers to the talents, skills, and abilities of a company’s workforce. 2. Structural capital - refers to the accumulated knowledge and experience in its industry and in business in general that company possesses. It may include processes, software, patents, copyrights etc. 3. Customer capital - refers to the established customer base, positive reputation, ongoing relationships, and goodwill a company builds up over time with its customers. Strategic management is a process that involves developing a game plan to guide the company as it strives to accomplish its vision, mission, goals, and objectives and to keep it from straying off its desired course. The idea is to give the entrepreneur a blueprint for matching the company’s strengths and weaknesses to the opportunities and threats in the environment. Competitive advantage is the aggregation of factors that differentiates a small business from its competitors and gives it a unique and superior position in the market. The key to business success is to develop a unique competitive advantage that: - Creates value for customers - Is sustainable - Is difficult for competitors to duplicate Core competencies refer to a unique set of skills, knowledge, or abilities that a company develops in key areas including: - Superior quality - Customer service - Innovation - Engineering - Team-building - Flexibility - Speed - Responsiveness Core competencies are built in no more than three to five areas. The key to success is to build core competencies and concentrate them on providing superior service and value for a company’s target customers. In order to develop core competencies, an entrepreneur is required to use Creativity, Imagination, Experience, and Vision to identify or develop those things that the business does best and that are most important to its target customers. The strategic management procedure for a small business should include the following features: - Use a relatively short planning horizon – 2 years or less for most small companies - Be informal and not overly structured; a “shirt-sleeve” approach is ideal. - Encourage the participation of employees and outside parties to improve the reliability and creativity of the resulting plan. - Do not begin with setting objectives because extensive objective-setting early on may interfere with the creative process of strategic management - Maintain flexibility; competitive conditions change too rapidly for any plan to be considered permanent - Focus on strategic thinking, not just planning, by linking long-range goals to day-to-day operations Strategic management is a continuous process that consists of nine steps: Step 1. Develop a clear vision and translate it into a meaningful mission statement - A vision statement addresses the question “What kind of company do we want to become?” - Vision is the organizational sixth sense that tells us why we make a difference in the world. - A vision is the result of an entrepreneur’s dream of something that does not exist yet. - A clearly defined vision helps a company in four ways:  Vision provides direction  Vision determines decisions  Vision motivates people  Vision allows a company to persevere in the face of adversity - Three core values to guide the business:  Teamwork (people-focused)  Integrity (highest ethical standards)  Commitment (client-driven) - A Mission Statement addresses the first question of any business venture: “What business am I in?” - Establishing the purpose of the business in written-form gives the company a sense of direction. - Mission statement answers the questions: “why we are here” and “where we are going.” - Mission statement reflects the company’s core values. Elements of a mission statement:  The purpose of the company  The business we are in  The values of the company Step 2. Assess the company’s strengths and weaknesses - Strengths are positive internal factors that contribute a company’s ability to achieve its mission, goals, and objectives. - Weaknesses are negative internal factors that inhibit the accomplishment of its mission, goals, and objectives. - Strengths should be exploited, and weaknesses should be compensated while developing a competitive strategy. - One effective technique for taking a strategic inventory is to prepare a balance sheet of the company’s strengths and weaknesses. The positive side should reflect important skills, knowledge, or resources that contribute to the company’s success. The negative side should record honestly any limitations that detract from the company’s ability to compete. All key performance areas of the business should be analyzed that include: - Human resources - Finance - Production - Marketing - Product development - Organization Step 3. Scan the environment for opportunities and threats facing the business - Opportunities are positive external options that the company can exploit to accomplish its mission, goals, and objectives. The number of potential opportunities is limitless, but an entrepreneur should focus only on a small number of opportunities that are consistent with the company’s vision, core values, and mission. - Threats are negative external forces that hamper a company’s ability to achieve its mission, goals, and objectives. Threat may include a new competitor entering the local market, a government mandate regulating a business activity, an economic recession, rising interest rates. Step 4. Identify the key factors for success in the business Key success factors come in a variety of different patterns depending on the industry. These factors determine a company’s ability to compete successfully in an industry. Step 5. Analyze the competition The primary goal of a competitive intelligence program include: - Avoid surprises from existing competitors’ new strategies and tactics. - Identifying potential new competitors. - Improving reaction time to competitors’ actions. - Anticipating rivals’ next strategic moves. - Improving your ability to differentiate your company’s products and services from those of your competitors. - Defining your company’s competitive edge. 3 Types of competitors: - Direct competitors offer the same products and services, and customers often compare prices, features, and deals from the competitors as they shop. - Significant competitors offer some of the same products and services. Although their product or service lines may be somewhat different, there is competition with them in several key areas. - Indirect competitors offer the same or similar products or services only in a small number of areas, and their target customers seldom overlap yours. An entrepreneur should: 1. Monitor the actions of direct competitors 2. Maintain a solid grasp of where the significant competitors are heading 3. Spend minimal resources while tracking indirect competitors A competitive profile matrix allows entrepreneurs to evaluate their companies against the major competitor on the key success factor for their market segments. 1. The first step is to list the key success factors identified in Step 4 of the strategic planning process and to attach weights to them reflecting their relative importance. 2. The next step is to identify the company’s major competitors and to rate each one (and your company) on each of the key success factors. 3. Once the rating is completed, the owner simply multiplies the weight by the rating for each factor to get a weighted score. 4. Then add up each competitor’s weighted scores to get a total weighted score. Step 6. Create company goals and objectives - Goals are the broad, long-range attributes that a business seeks to accomplish they tend to be general and sometimes even abstract. - Objectives are more specific targets of performance. They define the things that entrepreneurs must accomplish if they are to achieve their goals and overall mission. Well-written objectives are: 1. Specific: Objectives should be quantifiable and precise. 2. Measurable: a well-defined reference point from which to start and a scale for measuring progress. 3. Assignable: Creating objectives without giving someone responsibility for accomplishing them is futile. 4. Realistic: Objectives must be within the reach of the organization or motivation evaporates. 5. Timely: A time frame for achievement is important. Step 7. Formulate strategic options and select the appropriate strategies - A strategy is a road map an entrepreneur draws up of the actions necessary to fulfill a company’s mission, goals, and objectives. - Mission, goals, and objectives spell out the ends, and the strategy defines the means for reaching them. - A strategy is the master plan that must be action-oriented. - A flawed strategy — no matter how brilliant the leadership, no matter how effective the implementation is doomed to fail. VS A successful strategy is comprehensive and well-integrated, focusing on establishing the key success factors that the entrepreneur identified in Step 4. The number of strategies are infinite. - Three basic strategic options include    Cost leadership: strives to be the lowest-cost producer relative to its competitors in the industry. Differentiation: seeks to build customer loyalty by positioning its goods or services in a unique or different fashion. In other words, a company strives to be better than its competitors at something that its customers value. The primary benefit of successful differentiation is the ability to generate higher profit margins because of customers’ heightened brand loyalty and reduced price sensitivity. Focus: The principal idea of this strategy is to select one (or more) segment(s); identify customers’ special needs, wants, and interests; and then approach them with a good or service designed to excel in meeting these needs, wants, and interests. Focus strategies build on differences among market segments. Step 8. Translate strategic plans into action plans Implement the strategy: To make the plan workable, business owners should divide the plan into projects, carefully defining each one by the following: 1. Purpose 2. Scope 3. Contribution 4. Resource requirement 5. Timing When putting their strategic plans into action, small companies must exploit all of the competitive advantages of their size by: 1. Responding quickly to customers’ needs 2. Remaining flexible and willing to change 3. Continually searching for new emerging market segments 4. Building and defending market niches 5. Erecting “switching costs” through personal service and special attention 6. Remaining entrepreneurial and willing to take risks 7. Acting with lightning speed to move into and out of markets 8. Constantly innovating Step 9. Establish accurate controls  Everyone in the organization needs to understand and to be involved in planning and controlling process.  Controlling projects and keeping them on schedule means that the owner must identify and track key performance indicators.  Balanced scorecard is a set of measurements unique to a company that includes both financial and operational measures and gives managers a quick yet comprehensive picture of the company’s total performance against its strategic plan. The balanced scorecard looks at a business from five important perspectives: 1. Customer perspective 2. Internal business perspective 3. Innovation and learning perspective 4. Financial perspective 5. Corporate citizenship Week 4 : Chapter 3 & 4 The key to choosing a form of ownership is understanding how each form’s characteristics affect an entrepreneur’s specific business and personal circumstances. Following are most important issues an entrepreneur should consider in choosing a form of Ownership : 1. Tax considerations 2. Liability exposure 3. Start-up and future capital requirements 4. Control 5. Managerial ability 6. Business goals 7. Management succession plans 8. Cost of formation The Sole Proprietorship Sole proprietorship: The simplest and most popular form of ownership. The sole proprietor is the only owner and ultimate decision maker for the business. Its simplicity and ease of formation make the sole proprietorship the most popular form of ownership, comprising nearly 72 percent of all businesses in the United States. Advantages of a Sole Proprietorship: 1. Simple to create 2. Least costly form to establish 3. Profit incentive 4. Total decision-making authority 5. No special legal restrictions 6. Easy to discontinue Disadvantages of a Sole Proprietorship: 1. Unlimited personal liability 2. Failure of the business can ruin a sole proprietor financially 3. Limited access to capital 4. Limited skills and abilities 5. Feelings of isolation 6. Lack of continuity for the business The Partnership Partnership: an association of two or more people who co-own a business for the purpose of making a profit Partnership agreement: a document that states all of the terms of operating the partnership for the protection of each partner involved, Addresses in advance potential conflicts. A partnership agreement contains: 1. Name of the partnership 2. Purpose of the business 3. Location of the business 4. Duration of the partnership 5. Names of the partners and their legal addresses 6. Contributions of each partner to the business 7. Agreement on how the profits or losses will be distributed 8. Agreement on salaries or drawing rights against profits for each partner 9. Procedure for expansion through the addition of new partners 10. Distribution of the partnership’s assets if the partners voluntarily dissolve the partnership 11. Sale of the partnership interest 12. Absence or disability of one of the partners 13. Voting rights 14. Decision-making authority 15. Financial authority 16. Handing tax matters 17. Alterations or modifications of the partnership agreement The Uniform Partnership Act Codifies the body of law dealing with partnerships in the United States. THREE key elements: 1. Common ownership interest in a business 2. Sharing the business’s profits and losses 3. Right to participate in managing the partnership Partners must abide by: 1. Duty of loyalty: Each partner has a fiduciary responsibility to the partnership and, as such, must always place the interest of the partnership above his or her personal interest. 2. Duty of obedience: This duty requires each partner to adhere to the provision of the partnership agreement and the decisions made by the partnership. 3. Duty of care: Each partner is expected to behave in ways that demonstrate the same level of care and skill that a reasonable manager in the same position would use under the same circumstances. Failure to live up to this duty is considered negligence. 4. Duty to inform: All information relevant to the management of the business must be made available to all partners. Advantages of the Partnership 1. Easy to establish 2. Complementary skills 3. Division of profits 4. Larger pool of capital 5. Ability to attract limited partners 6. Little government regulation 7. Flexibility 8. Taxation Disadvantages of the Partnership 1. Unlimited liability of at least one partner 2. Capital accumulation 3. Difficulty in disposing of partnership interest 4. Potential for personality and authority conflicts 5. Partners are bound by the law of the agency Limited partnership: a partnership composed of at least one general partner and one or more limited partners.  The general partner in a limited partnership is treated exactly as in a general partnership.  The limited partner has limited liability and is treated as an investor in the business.  The limited partner does not take an active role in managing the business. Limited liability partnership: a partnership in which all partners in the business are limited partners, having only limited liability for the debts and obligations of the partnership. Usually restricted to professionals – attorneys, physicians, dentists, accountants, etc. The Corporation The corporation is the most complex of the three major forms of business ownership. Corporation: an artificial legal entity created by the state that can sue or be sued in its own name, enter into and enforce contracts, hold the title to and transfer property, and be found civilly and criminally liable for violations of the law. - C-corporations: creations of the state. - Domestic corporation: A corporation that conducts business in the state in which it is incorporated. - Foreign corporation: When a corporation conducts business in another state. - Alien corporation: a corporation formed in another country but doing business in the United States. - Publicly held corporation: a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. - Closely held corporation: a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends. Requirements for incorporation: - The corporation’s name - The corporation’s statement of purpose - The company’s time horizon - Names and addresses of the incorporators - Place of business - Capital stock authorization - Capital required at the time of incorporation - Provision for preemptive rights, if any, that are granted to stockholders, preemptive rights state that stockholders have the right to purchase new shares of stock before they are offered to the public. - Restrictions on transferring shares  Shares the corporation itself owns are called treasury stock. To maintain control over their ownership, many closely held corporations exercise this right, known as the right of first refusal. - Names and addresses of the officers and directors of the corporation - Rules under which the corporation will operate  Bylaws are the rules and regulations the officers and directors establish for the corporation’s internal management and operation.  With the corporate charter as proof that the corporation legally exists. Advantages of the Corporation: 1. Limited liability of stockholders 2. Ability to attract capital  A corporation can sell its stock to a limited number of private investors, called a private placement, or to the public, which is referred to as a public offering. 3. Ability to continue indefinitely 4. Transferable ownership Disadvantages of the Corporation: 1. Cost and time involved in the incorporation process 2. Double taxation 3. Potential for diminished managerial incentives  Corporations also can stimulate managers’ and employees’ incentive on the job by creating an employee stock ownership plan, or ESOP, in which managers and employees become part owners in the company. 4. Legal requirements and regulatory red tape 5. Potential loss of control by the founders Alternative Forms of Ownership S corporation: a distinction that is made only for federal income tax purposes No different from any other corporation from a legal perspective For tax purposes, however, an S- corporation is taxed like a partnership, passing all of its profits (or losses) through to the individual shareholders. To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year. S-corporations must meet the following criteria: - Must be a U.S.-based corporation - No nonresident alien shareholders - Only one class of common stock - No more than 100 shareholders (increased from 75) - No more than 25% of corporate income from passive investment sources - Corporations and partnerships cannot be shareholders Advantages of an S Corporation: 1. 2. 3. 4. 5. All of the advantages of a regular corporation Passes all of its profits or losses through to individual shareholders Income is only taxed once at the individual tax rate Avoids the double taxation disadvantage of the C corporation Avoids the tax C corporations pay on assets that have appreciated in value and are sold. Disadvantages of an S Corporation: 1. Tax advantages may not be permanent 2. When is an S Corporation a Wise Choice? - Beneficial to start-up companies that anticipate net losses and to highly profitable firms with substantial dividends to pay to shareholders. - Also attractive to companies that plan to reinvest most of their earnings to finance growth. The Limited Liability Corporation The Limited Liability Company (LLC) is a hybrid structure that features elements of a partnership and a corporation. Because of the advantages it offers and its flexibility, the LLC is the fastest growing form of business ownership. LLCs provide owners with many of the benefits of S corporations but are not subject to the restrictions imposed on S corporations. Two documents: 1. Articles of organization 2. Operating agreement An LLC cannot have more than two of these four corporate characteristics: 1. Limited liability 2. Continuity of life 3. Free transferability of interest 4. Centralized management Franchising: Semi-independent business owners pay fees and royalties to a parent company in exchange for the right to sell its products and services under the franchiser’s trade name and often to use its business format and system. Three basicTypes of Franchising 1. Tradename franchising involves being associated with a brand name, such as True Value Hardware or Western Auto. In tradename franchising, a franchisee purchases the right to become identified with the franchisor’s trade name without distributing particular products exclusively under the manufacturer’s name. 2. Product distribution franchising involves licensing the franchisee to sell specific products under the manufacturer’s brand name and trademark through a selective, limited distribution network. This system is commonly used to market automobiles (General Motors and Toyota), gasoline products (Exxon and Chevron), soft drinks (Pepsi Cola and CocaCola), bicycles, appliances, cosmetics, and other products. 3. Pure franchising (or comprehensive or business format franchising) involves providing the franchisee with a complete business format. This highly structured relationship includes a license for a trade name, the products or services to be sold, the physical plant, the methods of operation, a marketing strategy plan, a quality control process, a two-way communications system, and the necessary business services. The franchisee purchases the right to use all of the elements of a fully integrated business operation. Business format franchising is the most common and the fastest growing of the three types of franchising. The Benefits of Buying a Franchise 1. Primary reason to buy a franchise is the mutual benefits to the franchisor and franchisee. 2. Franchisees are buying the franchiser’s experience 3. Franchisees get a proven business system and avoid having to learn by trial-and-error. What do you get when you buy a franchise? - A business system - Management training and support - Brand name appeal - Standardized quality of goods and services - National advertising program - Financial assistance - Proven products and business formats - Centralized buying power - Site selection and territorial protection - Increased chance for success What are the drawbacks of a franchise? - Franchise fees and ongoing royalties - Strict adherence to standardized operations - Restrictions on purchasing - Limited product line - Market saturation - Limited freedom - No guarantee of success Franchisors are required to file a Franchise Disclosure Document (FDD) - Key tool for protection - Franchisers must deliver a copy of a FDD before any offer or sale of a franchise - The FTC requires that FDDs use ‘plain English’ The FDD contains information on 23 topics, including: - Franchiser’s business experience - Franchise fees and costs - Lawsuits involving the franchiser - Financial assistance available - Territorial protection granted - Restrictions on purchasing The Right Way to Buy a Franchise Preparation, common sense, and patience are vital ingredients in choosing the right franchise. - Evaluate yourself What do you like and dislike? - Research the market - Consider your franchise options - Get a copy of the FDD and study it - Franchise turnover rate - Talk to existing franchisees - Ask the franchisor some tough questions - Make your choice A franchise contract summarizes the details that will govern the franchisor-franchisee relationship. - Outlines the rights and obligations of each party, Often favors the franchisor - FTC requires that franchisees receive a complete and revised contract at least 5 days before signing it. Three terms responsible for most disputes: 1- Termination Franchisees are usually prohibited from terminating the agreement, but franchisors can terminate ‘with or without cause’. 2- Renewal Franchisors usually have the right to renew or refuse contract renewal. 3- Transfer and buybacks Franchisees are usually not free to sell their business without approval. Franchise Contracts Pros New Franchise 1. Can be new and exciting 2. Business concept can be fresh and different in the market 3. Possibility of getting lower fees as a “pioneer” of the concept 4. Potential for a high return on investment ROT Cons 1. Business is not tested or established in the market 2. Unknown brand and trademark 3. Possibility that the concept is a fad with no staying power 4. Franchiser may lack the experience to deliver valuable services to franchisees 1. Business concept likely is well-known to 1. High franchise fees and costs that consumers and market for the products or often are non-negotiable services is already established 2. Concept may be on the wane in the 2. Franchiser has experience in delivering market Established services to franchisees 3. Franchiser’s brand and trademark Franchise 3. Franchiser has had time to work the “bugs” may remind customers of an out of the business system outdated concept 4. Franchiser’s “trade dress” may be in need of updating and redesigning Today’s franchisees are: More diverse Better educated More experienced More financially secure Multiple unit franchising In multiple-unit franchising (MUF), a franchisee opens more than one unit in a broad territory within a specific time period. According to the International Franchise Association, 19.8 percent of franchisees are multiple-unit owners, a number that is expected to increase over the next several years. - - Intercept marketing, the idea is to put a franchise’s products or services directly in the paths of potential customers. Conversion franchising, in which owners of independent businesses become franchisees to gain the advantage of name recognition. Refranchising is reducing the number of company-owned stores. A master franchise (or subfranchise or area developer) gives a franchisee the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees. A master franchisee buys the right to develop subfranchises within a territory or, sometimes, an entire country. Cobranding (or piggybacking) outlets—combining two or more distinct franchises under one roof. - Entrepreneurs can use franchising as a growth strategy. To create a successful franchise operation, you need: 1. A unique concept 2. A replicable concept 3. An expansion plan 4. To do due diligence: researching legal issues, acquiring necessary trademarks, creating a Web site, and writing training manuals for franchisees. 5. Legal guidance 6. Initial cost to launch a franchise business is $100,000 to $750,000 To provide support for franchisees. Week 5 : Chapter 5 Buying an existing business can help reduce risk for the entrepreneur. Conduct a thorough analysis of the business and the opportunity it presents. Important questions:  Does the business meet your lifestyle and financial expectations?  Do you have the ability to operate the business successfully? Advantages of Buying an Existing Business: 1. Business may continue to be successful 2. Leverage the experience of the previous owner 3. Owning a business guarantees a job 4. The turnkey business 5. Superior location 6. Employees and suppliers in place 7. Equipment installed with known production capacity 8. Inventory in place 9. Trade credit established 10. Easier access to financing 11. High value Disadvantages of Buying an Existing Business: 1. Cash requirements 2. Business is losing money 3. Paying for “ill will” 4. Unsuitable employees 5. Unsatisfactory location 6. Obsolete or inefficient equipment and facilities 7. Customers may be loyal to previous owner 8. Change may be challenging to implement 9. Obsolete inventory 10. Value of accounts receivable 11. Business is overpriced To avoid blowing a deal or making costly mistakes, an entrepreneur-to-be should follow these steps: 1. Conduct a self-inventory, objectively analyzing your skills, abilities, and personal interests to determine the type(s) of business that offers the best fit.  The first step in buying a business is conducting a “self-audit” to determine the ideal business.  Conducting a self-inventory beforehand will help the entrepreneur develop a list of criteria that a company must meet before it becomes a purchase candidate. 2. Develop a list of the criteria that define the “ideal business” for you.  The goal is to identify the characteristics of the “ideal business” for you so that you can focus on the most viable candidates as you wade through a multitude of business opportunities. 3. Prepare a list of potential candidates that meet your criteria.  Typical sources for identifying potential acquisition candidates include the following:  The Internet  Bankers  Accountants  Attorneys  Investment bankers  Trade associations  Contacting owners  Newspapers and trade journals  Networking 4. Thoroughly investigate the potential acquisition targets that meet your criteria. This is also called Due diligence process.  Due diligence involves studying, reviewing, and verifying all of the relevant information concerning the top acquisition candidates. This step involves investigating the most attractive business candidates in greater detail. The goal of the due diligence process is to discover exactly what the buyer is purchasing and avoid any unpleasant surprises after the deal is closed.  The due diligence process involves investigating five critical areas of the business and the potential deal: 4.1 Motivation: Why does the owner want to sell? 4.2 Asset valuation: What is the real value of the firm’s assets? Other important factors that the potential buyer should investigate include the following: o Accounts receivable o Lease arrangements o Business records o Intangible assets o Location and appearance 4.3 Market potential: What is the market potential for the company’s products or services? Two important aspects of a market analysis include learning about customers and competitors: i. Customer Characteristics and Composition ii. Competitor Analysis 4.4 Legal issues: What legal aspects of the business represent known or hidden risks? The most significant legal issues involve: o Liens o Bulk Transfers: A bulk transfer is a transaction in which a buyer purchases all or most of a business’s inventory (as in a business sale). o Contract Assignments o Covenants Not to Compete o Ongoing Legal Liabilities o Physical Premises o Product Liability Claims o Labor Relations 4.5 Financial condition: Is the business financially sound? Some of the financial records that a potential buyer should examine includes: o Income Statements and Balance Sheets for at Least 3 Years o Income Tax Returns for at Least 3 Years o Owner’s and Family Members’ Compensation o Cash Flow 5. Explore various financing options for buying the business. 6. Negotiate a reasonable deal with the existing owner. 7. Ensure a smooth transition of ownership. Methods for Determining the Value of a Business  Business valuation is part art and part science.  Assessing tangible assets is usually straightforward.  Valuing intangible assets is difficult  Goodwill: Goodwill is the difference between an established, successful business and one that has yet to prove itself. Goodwill is based on the company’s reputation and its ability to attract customers. Three basic techniques to determine the value of a Business: 1. Balance Sheet Technique Computes the book value of the company’s net worth or owners' equity (net worth = assets liabilities).  Variation: Adjusted Balance Sheet Technique: A more realistic method for determining a company’s value is to adjust the book value of net worth to reflect the actual market value. 2. Earnings Approach The earnings approach is more refined than the balance sheet method? because it considers the future income potential of the business.  Variation 1: Excess Earnings Approach  Estimates goodwill o Compute adjusted tangible net worth o Calculate the opportunity cost of investing in the business: Opportunity costs represent the cost of forgoing a choice; that is, what income does the potential buyer give up by purchasing the business? o Project net earnings o Compute extra earning power: extra earning power is the difference between forecasted earnings (step 3) and total opportunity costs of investing (step 2). o Estimate the value of intangibles o Determine the value of the business  Variation 2: Capitalized Earnings Approach Divides estimated net earnings (after subtracting the owner’s reasonable salary) by the rate of return that reflects the risk level.  Variation 3: Discounted Future Earnings Approach Using the Discounted Future Earnings approach, the buyer estimates the company’s net income for several years into the future and then discounts these future earnings back to their present value.  The discounted future earnings approach has five steps: A. Project earnings for five years into the future. B. Discount these future earnings using the appropriate present value factor. C. Estimate the growth stream beyond five years. D. Discount the income estimate beyond five years using the present value factor for the sixth year. E. Computer the total value of the business. 3. Market Approach Uses the price/earnings ratios of similar businesses to establish value. A company’s price/earnings ratio (or P/E ratio) is the price of one share of its common stock in the market divided by its earnings per share (after deducting preferred stock dividends). To get a representative P/E ratio, the buyer should average the P/Es of as many similar businesses as possible.  Disadvantages: o Necessary comparisons between publicly traded and privately owned companies o Unrepresentative earnings estimates o Finding similar companies for comparison o Applying the after-tax earnings of a private company to determine its value Negotiating the Deal: The structure of the deal – the terms and conditions of payment – is more important than the actual price the seller agrees to. The ‘art of the deal’ – Both parties need to work to achieve their goals, while making concessions to keep the negotiations alive. The following negotiating tips can help parties reach a mutually satisfying deal:  Know what you want to have when you walk away from the table.  Develop a negotiating strategy.  Recognize the other party’s needs.  Be an empathetic listener.  Focus on the issue, not on the person.  Avoid seeing the other side as “the enemy”.  Educate, don’t intimidate.  Be patient.  Remember that “no deal” is an option.  Be flexible and creative. The Seller’s Goals:  Get the highest price possible for the company.  Sever all responsibility for the company’s liabilities.  Avoid unreasonable contract terms that might limit future opportunities.  Maximize the cash from the deal.  Minimize the tax burden from the sale.  Make sure the buyer will make all future payments. The Buyer’s Goals:  Get the business at the lowest price possible.  Negotiate favorable payment terms, preferably over time.  Get assurances that he is buying the business he thinks it is.  Avoid enabling the seller to open a competing business.  Minimize the amount of cash paid up front. Structuring the Deal: To make a negotiation work, the buyer and the seller must structure the deal in a way that is acceptable to both parties. Several options are available: 1- Straight business sale: o Often the safest exit for an entrepreneur o Usually, the most expensive option o Seller must be willing to finance part of the purchase price 2- Sale of Controlling Interest: o Business owners sell a majority interest in their companies to investors, competitors, suppliers, or large companies with an agreement that the seller will stay on after the sale. o A variation on this option is an earn-out, a deal in which the seller agrees to accept a percentage of the asking price and stays on to manage the business for a few more years under the new owner. 3- Restructure the Company: o Another way for business owners to cash out gradually is to replace the existing corporation with a new one, formed with other investors. 4- Other Alternatives: 4.1 Family Limited Partnership: Entrepreneurs who want to pass their businesses on to their children should consider forming a family limited partnership. 4.2 Employee Stock Ownership Plan (ESOP): An ESOP is a form of employee benefit plan in which a trust created for employees purchases their employers’ stock. 4.3 Sell to International Buyer: In an increasingly global marketplace, small U.S. businesses have become attractive buyout targets for foreign companies. Ensure a Smooth Transition:  Once the parties have negotiated a deal, the challenge of facilitating a smooth transition arises.  To avoid a bumpy transition, a business buyer should do the following:  Concentrate on communicating with employees.  Be honest with employees.    Listen to employees. Devote time to selling the vision for the company to key stakeholders. Consider asking the seller to serve as a consultant until the transition is complete. Week 5 P2 : Chapter 6 & 9 Conducting a Feasibility analysis: The easiest part of launching a new business is coming up with the idea, But the great idea is just the start. Planning for a new business requires:  Feasibility analysis: should we proceed with this idea?  Business model: how should we proceed with this idea?  Business plan: transforming the idea into a successful business. Elements of a Feasibility Analysis A feasibility analysis consists of three interrelated components: 1- Industry and market feasibility analysis, The focus in this phase is twofold: 1. To determine how attractive an industry is overall as a “home” for a new business: A useful tool for analyzing an industry’s attractiveness is Porter’s Five Forces  Rivalry among competing firms: When a company creates an innovation or develops a unique strategy that transforms the market, competing companies must adapt or run the risk of being forced out of business.  Bargaining power of suppliers: The greater the leverage that suppliers of key raw materials or components have, the less attractive is the industry.  Bargaining power of buyers: Just as suppliers to an industry can be a source of pressure, buyers also have the potential to exert significant power over businesses, making it less attractive.  Threat of new entrants  Threat of substitute products or services 2. To identify possible niches a small business can occupy profitably. A niche strategy can be a good way to enter a market, but carries some risks:  Can require adaptability of initial plans  Niches change  Niches can go away  Niches can grow 2- Product or service feasibility analysis: Is There a Market?  Determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce it.  Two questions:  Are customers willing to purchase our good or service?  Can we provide the product or service to customers at a profit? 3- Financial feasibility analysis: Is There Enough Margin?  Capital requirements  Must have an estimate of how much start-up capital is required to launch the business. o Bootstrapping: the most common source of equity funds used to start a small business is the entrepreneur’s pool of personal savings, a technique known as bootstrapping.  Estimated earnings  Forecasted income statements.  Time out of cash  Surviving at current rate of negative cash flow.  Return on investment:  How much investors can expect their investments to return. 4- Entrepreneur Feasibility: Is This Idea Right for Me? Entrepreneurial readiness: knowledge, experiences, and skills necessary to have any chance of being successful. Developing and Testing a Business Model  Most entrepreneurs use a visual process such as whiteboarding when developing their business models.  1.  2.  Develop a business model canvas comprised of nine segments. Value Proposition Products and/or services offered to meet the needs of the customers Customer Segments Narrowing the target market focuses resources on serving a specific group of customers. 3.  4.   5.  6.  7.  8.  9.  Customer Relationships How do customers want to interact with the business? Channels Channels refer to both communication channels and distribution channels Define how the customers seek out information about this type of product Key Activities Build a basic checklist of what needs to be done Key resources Human, capital, and intellectual resources needed Key partners Suppliers, outsourcing partners, and so on Revenue streams How will the value proposition generate revenue? Cost structure What are the fixed and variable costs necessary? Week 6 : Chapter 6 & 9 A business plan is a written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities. Common elements of a business plan:  Title page and table of contents  Executive summary  Mission and Vision Statement  Company history  Business and industry profile  Business strategy  Description of products/services  Marketing Strategy:  Showing customer interest  Documenting market claims  Target market  Advertising and promotion  Market size and trends  Location  Pricing  Distribution  Competitor Analysis  Goals and objectives  Description of the management team  Plan of operation  Pro forma (projected) financial statements: One of the most important sections of the business plan is an outline of the proposed company’s financial statements—the “dollars and cents” of the proposed venture.  Forecasts should be realistic  Include a statement of assumptions  The loan or investment proposal  Funding sources  Repayment schedule  Implementation timetable Tips for an Entrepreneur 1. Make sure the plan has an attractive cover 2. Rid your plan of all spelling and grammatical errors 3. Make the plan visually appealing 4. Include a table of contents to allow readers to navigate the plan easily 5. Make it interesting! 6. Use spreadsheets to generate financial forecasts 7. Always include cash flow projections 8. Keep your plan “crisp” – long enough, but not too long 9. Tell the truth – always What Lenders and Investors Look for in a Business Plan? The five Cs of credit: 1. Capital 2. Capacity 3. Collateral 4. Character 5. Conditions A business plan presentation should cover five basic areas: 1. Your company and its product or services 2. The problem to be solved – use a compelling story 3. A description of your solution to the problem 4. Your company’s business model 5. Your company’s competitive edge Market Diversity: Pinpointing the Target Market First step in building a marketing plan:  Identify the company's target market: the group of customers at whom the company aims its products or services.  An effective marketing program depends on a clear, concise definition of the firm's targeted customers, not a “one-size-fits-all approach”  Technology is replacing the power of mass marketing  Use the long tail of marketing Determining Customer Needs and Wants Through Market Research  Market research: the vehicle for gathering the information that serves as the foundation for the marketing plan.  Spot important demographic, social, and cultural trends and adjust strategies to fit.  Do research before investing in a business! How to Conduct Market Research? 1. Individualized (one-to-one) marketing: a system of gathering data on individual customers and then developing a marketing plan designed specifically to appeal to their needs, tastes, and preferences. Primary Research involves collecting data firsthand and analyzing it; Primary research techniques:  Customer surveys and questionnaires  Social media  Focus group involve enlisting a small number of potential customers (usually 8 to 12) to provide feedback on specific issues about your product or service (or the business idea itself).  Daily transactions  Secondary Research involves gathering data that has already been compiled and is available, often at a very reasonable cost or sometimes even free. Secondary research techniques:  Business directories.  Direct mail lists. You can buy mailing lists for practically any type of business.  Demographic data.  Census data.  Forecasts  Market research. Someone may already have compiled the market research you need.  Articles. Magazine and journal articles pertinent to your business are a great source of information.  Local data.  The Web. Most entrepreneurs are astounded at the marketing information that is available on the Web. Using one of the search engines, you can gain access to a world of information—literally! Other definitions:  Prototype is an original, functional model of a new product that entrepreneurs can put into the hands of potential customers so that they can see it, test it, and use it.  In-home trial involves sending researchers into customers’ homes to observe them as they use the company’s product or service. Data mining: process in which computer software that uses statistical analysis, database technology, and artificial intelligence finds hidden patterns, trends, and connections in data so business owners can make better marketing decisions and predictions about customers’ behavior. Three types of information: 1. Geographic 2. Demographic 3. Psychographic The Marketing Mix  Product  Place  Price  Promotion Product  Products travel through various stages of development  Product life cycle: measures the stages of growth  Introductory  Growth and acceptance  Maturity and competition  Market saturation  Product decline Promotion  Use the power of publicity  Publicity: any commercial news covered by the media that boosts sales bit for which a small company does not pay.  Don’t just sell – entertain  Entertailing o Connect with customers on an emotional level  o Build a consistent branding strategy Embrace social media  Facebook and Twitter Price  1. 2. 3.  The right price for a product or service depends on: A small company’s cost structure, An assessment of what the market will bear. The desired image the company wants to create in its customers’ minds. Non-price competition can be more effective for many small companies. Place  1. 2. 3. 4. Four common channels of distribution for consumer goods: Manufacturer to consumer. Manufacturer to retailer to consumer. Manufacturer to wholesaler to retailer to consumer. Manufacturer to wholesaler to wholesaler to retailer to consumer. Channels of Distribution  Two common channels of distribution for industrial goods: 1. Manufacturer to industrial user 2. Manufacturer to wholesaler to industrial user Week 6 P2 : Chapter 10 & 11 Entrepreneurs should build their advertising messages on a Unique Selling Proposition (USP), a key customer benefit or a product or service that sets it apart from its competition. To be effective, a USP must actually be unique—something the competition does not (or cannot) provide—and compelling enough to encourage customers to buy. - Answers the critical question that every customer asks: "What's in it for me?" - Advertising is an investment in a company’s future. - Identify your product or service's USP by describing the primary benefit it offers customers and then list other secondary benefits it provides. - Focus on intangible or psychological benefits. Build brand equity : - One of the first steps is to define a company’s unique selling proposition. Creating a Promotional Strategy Promotion: any form of persuasive communication designed to inform consumers about a product or service and to influence them to purchase goods or services Includes:  Publicity  Personal selling  Advertising Publicity: any commercial news covered by the media that boosts sales but for which the small business does not pay. 1. 2. 3. 4. 5. 6. 7. Write an article of interest to customers Sponsor an event to attract attention Involve celebrities “on the cheap” Offer to be interviewed on TV and radio stations Publish a newsletter Speak to local organizations Sponsor a seminar Personal selling: the personal contact between sales personnel and potential customers resulting from sales efforts. Top sales people: 1. Are enthusiastic and alert to opportunities 2. Are experts in the products or services they sell and understand how their products and services can help their customers 3. Concentrate on select accounts with the greatest sales potential 4. Plan thoroughly 5. Use a direct approach with their customers. Advertising: any sales presentation that is non-personal in nature and is paid for by an identified sponsor. Tips for effective advertising: 1. Plan more than one ad at a time 2. Set long-run ad objectives and measure performance 3. Use ads, themes, and media that appeal to target customers 4. View advertising expenditures as investments, not expenses 5. Use advertising that is different from your competitors’ advertising 6. Choose the media vehicle that’s best for your business 7. Consider using some else as the spokesperson on your commercials 8. Focus ads on your company’s USP. Selecting Advertising Media Questions to ask when selecting advertising media:  How large is my firm's trading area?  Who are my customers and what are their characteristics?  What budget limitations do I face?  Which media do my competitors use? Media Options  Word-of-mouth advertising  Internet advertising  E-mail advertising  Social media  Sponsorships and special events  Television                   Radio Newspapers Magazines Banner ads: are small rectangular ads that reside on Web sites. An impression occurs every time an ad appears on a Web page, whether or not the user clicks on the ad to explore it. Another common way of judging the effectiveness of banner ads is the click-through rate, which is calculated by dividing the number of times customers actually click on the banner ad by the number of impressions for that ad. An interstitial ad is an ad page that appears for a short time before a user- requested page appears. Contextual ads are ads on Web sites that are correlated to a particular user’s interests or online behavior. Pay-per-click ads require companies to bid on top-ranking search engine listings using key words that they expect Internet users to type into a search engine when they are interested in purchasing a particular product or service. Specialty advertising: This category includes all customer gift items such as pens, shirts, caps, and umbrellas that are imprinted with a company’s name, address, telephone number, Web site, and slogan. Specialty items are best used as reminder ads to supplement other forms of advertising and help to create goodwill among existing and potential customers. Point-of-purchase ads: In-store advertising has become popular as a way of reaching the customer at a crucial moment—the point of purchase. Outdoor advertising: Out-of-home advertising is popular among small companies, especially retailers, because well-placed ads serve as reminders to shoppers that the small business is nearby and ready to serve their needs. Transit ads: A variation of out-of-home advertising is transit advertising, which includes advertising signs on the inside and outside of the public transportation vehicles such as trains, buses, and subways throughout the country’s urban areas. Direct mail Trade shows: Trade shows provide manufacturers and distributors with a unique opportunity to advertise to a preselected audience of potential customers who are inclined to buy. E-mail advertising: whereby companies broadcast their advertising messages by e-mail. Permission E-Mail: involves sending e-mail ads to customers with their permission; Spam is unsolicited commercial e-mail. How to Prepare an Advertising Budget? Four methods: 1. What is affordable 2. Matching competitors’ advertising expenditures 3. Percentage of Sales  Past Sales  Forecasted Sales 4. Objective-and-Task Advertising Scheduling Strategies How to Advertise Big on a Small Budget? Three techniques: 1. Comparative advertising: manufacturer shares the cost of advertising with the retailer if the retailer features its products in its ads. 2. Shared advertising: a group of similar businesses forms a syndicate to produce generic ads and then dubs in local details. 3. Stealth advertising: innovative ads that do not look like traditional ads and may be located in unexpected places. Other ways to save  Repeat ads that have been successful  Use identical ads in different media  Hire independent copywriters, graphic designers, photographers, and other media specialists  Concentrate advertising when customers are most likely to buy. Pricing: A Creative Blend of Art and Science Price range: the area between the price floor that is established by a company’s total cost to produce the product or provide the service and the price ceiling, which is the most the target customers are willing to pay. - Odd Pricing: They set prices that end in odd numbers (frequently 5, 7, or 9), because they believe that an item selling for $12.69 appears to be much cheaper than an item selling for $13.00. - Dynamic (Or Customized) Pricing: in which they set different prices on the same products and services for different customers using the information they have collected about their customers. - Leader Pricing: is a technique in which the small retailer marks down the customary price (i.e., the price consumers are accustomed to paying) of a popular item in an attempt to attract more customers. - Small businesses whose pricing decisions are greatly affected by the costs of shipping merchandise to customers across a wide range of geographic regions frequently employ one of the Geographic Pricing techniques. - Multiple unit pricing: is a promotional technique that offers customers discounts if they purchase in quantity. When facing rising costs, consider the following strategies:  Communicate with customers  Include a service charge instead of raising prices  Eliminate discounts, coupons, and freebies  Offer smaller sizes or quantities  Improve efficiencies  Absorb increases to maintain important customers  Emphasize value  Raise prices incrementally  Shift to less expensive raw materials  Modify products or services to lower costs  Lock in raw material prices early Pricing Techniques for Service Businesses Establish price based on materials used to provide the service, the labor employed, an allowance for overhead, and a profit. The Impact of Credit on Pricing - Linking pricing strategy with credit strategy has become essential in today’s business world. Three options for selling on credit: 1. Credit cards 2. Installment credit 3. Trade credit Week 8 : Chapter 7 & 8 A significant positive relationship exists between formal planning in small companies and their financial performances. Basic Financial Reports 1. The Balance Sheet  “snapshot” of a business, providing owners with an estimate of the company’s worth on a given date.  Its two major sections show the assets a business owns and the claims creditors and owners have against those assets.  The balance sheet is usually prepared on the last day of the month.  The first section of the balance sheet lists the company’s assets (valued at cost, not actual market value), and shows the total value of everything the business owns.  Current assets consist of cash and items to be converted into cash within 1 year or within the normal operating cycle of the company, whichever is longer, such as accounts receivable and inventory.  fixed assets are those acquired for long-term use in the business.  Intangible assets include items that, although valuable, do not have tangible value, such as goodwill, copyrights, and patents.  The second section shows the company’s liabilities—the creditors’ claims against the company’s assets.  Current liabilities are those debts that must be paid within 1 year or within the nor- mal operating cycle of the company.  long-term liabilities are those that come due after 1 year. This section of the balance sheet also shows the owner’s equity, the value of the owner’s investment in the business. It is the balancing factor on the balance sheet, representing all of the owner’s capital contributions to the business plus all accumulated earnings not distributed to the owner(s). 2. The Income Statement  profit and loss statement, or “P&L”) compares expenses against revenue over a certain period of time to show the firm’s net income or loss.  Income from other sources (rent, investments, interest) also must be included in the revenue section of the income statement.  Cost of goods sold represents the total cost of purchasing (including shipping) the merchandise that the company sells during the year.  Subtracting the cost of goods sold from net sales revenue results in a company’s gross profit.  Dividing gross profit by net sales revenue produces the gross profit margin.  Operating expenses include those costs that contribute directly to the manufacture and distribution of goods.  Total revenue minus total expenses gives the company’s net income (or loss). 3. The Statement of Cash Flows  shows the changes in a company’s working capital from the beginning of the accounting period by listing the sources of funds and the uses of these funds.  Many small businesses never need such a statement; instead, they rely on a cash budget, a less formal managerial tool that tracks the flow of cash into and out of a company over time. Creating Projected Financial Statement Projected financial statements answer questions such as:  What profit can the business expect to earn?  If the founder’s profit objective is x dollars, what sales level must the business achieve?  What fixed and variable expenses can the owner expect at that level of sales?  They estimate the profitability and the overall financial condition of the business in the immediate future  They are an integral part of convincing potential lenders and investors to provide the financing needed to get the company off the ground or to expand. Below is Financial Forecasting Model Ratio analysis Ratio analysis, a method of expressing the relationships between any two accounting elements, provides a convenient technique for performing financial analysis. When analyzed properly, ratios serve as barometers of a company’s financial health. 12 Key Ratios 1. Liquidity ratios tell whether a small business will be able to meet its maturing obligations as they come due. The two most common measures of liquidity are current ratio and the quick ratio. A. current ratio measures a small company’s solvency by showing its ability to pay current liabilities from current assets. B. quick ratio (or the acid test ratio) is a more conservative measure of a firm’s liquidity because it shows the extent to which its most liquid assets cover its current liabilities. This ratio includes only a company’s “quick assets”—those assets that a company can convert into cash immediately if needed. 2. Leverage ratios measure the financing supplied by a company’s owners against that supplied by its creditors; they show the relationship between the contributions of investors and creditors to a company’s capital base. Leverage ratios serve as gauges of the depth of a company’s debt. These ratios show the extent to which an entrepreneur relies on debt capital (rather than equity capital) to finance the business. A. A small company’s debt ratio measures the percentage of total assets financed by its creditors. B. debt to net worth ratio also expresses the relationship between the capital contributions from creditors and those from owners. This ratio com- pares what the business “owes” to “what it is worth.” It is a measure of a company’s ability to meet both its creditor and owner obligations in case of liquidation. C. Times interest earned ratio earned is a measure of a small company’s ability to make the interest payments on its debt. It tells how many times the company’s earnings cover the interest payments on the debt it is carrying. This ratio measures the size of the cushion a company has in covering the interest on its debt load. 3. Operating ratios help entrepreneurs evaluate their companies’ performances and indicate how effectively their businesses are using their resources. The more effectively its resources are used, the less capital a small business will require. A. average inventory turnover ratio measures the number of times its average inventory is sold out, or turned over, during the accounting period. This ratio tells owners how effectively and efficiently they are managing their companies’ inventory. It indicates whether their inventory level is too low or too high and whether it is current or obsolete and priced correctly. B. average collection period ratio (or days sales outstanding, DSO) tells the average number of days it takes to collect accounts receivable. To compute the average collection period ratio, the entrepreneur must first calculate the firm’s receivables turnover. C. average payable period ratio (or days payables outstanding, DPO), tells the average number of days it takes a company to pay its accounts payable. Like the average collection period, it is measured in days. To compute this ratio, first calculate the payables turnover ratio. D. net sales to total assets ratio (also called the total assets turnover ratio) is a general measure of its ability to generate sales in relation to its assets. It describes how productively a company employs its assets to produce sales revenue. Profitability ratios: Profitability ratios indicate how efficiently a small company is being managed. They provide the owner with information about a company’s ability to generate a profit. They focus on a company’s “bottom line;” in other words, they describe how successfully the business is using its resources to generate a profit. 10. The net profit on sales ratio (also called the profit margin on sales or the net profit margin) measures a company’s profit per dollar of sales. This ratio (which is expressed as a percentage) shows the number of cents of each sales dollar remaining after deducting all expenses and income taxes. 11. net profit to assets ratio (also known as the return on assets, ROA) ratio tells how much profit a company generates for each dollar of assets that it owns. This ratio describes how efficiently a business is putting to work all of the assets it owns to generate a profit. It tells how much net income an entrepreneur is squeezing from each dollar’s worth of the company’s assets. 12. net profit to equity ratio (or the return on net worth ratio) measures the owners’ rate of return on investment (ROI). Because it reports the percentage of the owners’ investment in the business that is being returned through profits annually, it is one of the most important indicators of a company’s profitability or management’s efficiency. Interpreting Business Ratios  In addition to knowing how to calculate business ratios, owners need to understand how to interpret them and apply them to the business  Key performance ratios vary across industries and within different segments of the same industry  Key performance indicators (KPIs): ratios that are unique to their own operations.  What Do All These Numbers Mean?  Goal: achieve ratios that are better than the industry average  Where necessary, understand why figures are out of line  Analyze figures over time  Ratios are snapshots of the situation in a single instance Break-Even Analysis break-even point is the level of operation (sales dollars or production quantity) at which it neither earns a profit nor incurs a loss. At this level of activity, sales revenue equals expenses; that is, the company “breaks even.”  Fixed expenses are those that do not vary with changes in the volume of sales or production (e.g., rent, depreciation expense, insurance, salaries, lease or loan payments, and others).  Variable expenses, in contrast, vary directly with changes in the volume of sales or production (e.g., raw material costs, sales commissions, hourly wages, and others). Calculating the Breakeven Point steps 1. Determine the expenses the business can expect to incur. 2. Categorize the expenses into fixed expenses and variable expenses. 3. Calculate the ratio of variable expenses to net sales. 4. Compute the break-even point by inserting this information into the following formula: modifies formula the to include the desired net income: Some small businesses may prefer to express the break-even point in units produced or sold instead of in dollars, Manufacturers often find this approach particularly useful. Constructing a Breakeven Chart The steps in Constructing a Breakeven Chart Step 1: On the horizontal axis, mark a scale measuring sales volume in dollars (or in units sold or some other measure of volume). Step 2: On the vertical axis, mark a scale measuring income and expenses in dollars Step 3: Draw a fixed expense line intersecting the vertical axis at the proper dollar level parallel to the horizontal axis. Step 4: Draw a total expense line that slopes upward beginning at the point at which the fixed cost line intersects the vertical axis. Step 5: Beginning at the graph’s origin, draw a 45-degree revenue line showing where total sales volume equals total income. Step 6: Locate the break-even point by finding the intersection of the total expense line and the revenue line. Cash Management Cash management involves forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly. The SBA recommends that businesses have enough cash on hand to cover at least six months of operating expenses. - Profit (or net income) is the difference between a company’s total revenue and its total expenses. It is an accounting concept designed to measure how efficiently a business is operating. - Cash flow measures a company’s liquidity and its ability to pay its bills and other financial obligations on time by tracking the flow of cash into and out of the business over time. - Cash budget, which is nothing more than a “cash map,” showing the amount and the timing of the cash receipts and the cash disbursements week-by-week or month-bymonth. Entrepreneurs use it to predict the amount of cash they will need to cover expenses, operate smoothly, and grow the business over time, making it a valuable tool in managing a company successfully. There are five steps to creating a cash budget: 1. Determine an adequate minimum cash balance 2. Forecast sales 3. Forecast cash receipts 4. Forecast cash disbursements 5. Estimate end-of-month cash balance Cash planning By planning cash needs ahead of time, a company can:  Increase amount and speed of cash flowing in  Reduce the amount and speed of cash flowing out  Develop a sound borrowing and repayment program  Impress lenders and investors  Reduce borrowing costs by borrowing only when necessary The “big three” of cash management are accounts receivable, accounts payable, and inventory. Avoiding the Cash Crunch  Bartering, the exchange of goods and services for other goods and services, is an effective way to conserve cash.  Use credit cards to make small purchases.  Establish an internal security and control system  Develop a system to battle check fraud  Change your shipping terms  Start selling gift cards  Invest surplus cash  Money market account  Zero surplus account (ZBA): A zero balance account is a checking account that technically never has any funds in it but is tied to a master account. The company keeps its money in the master account, where it earns interest, but it writes checks on the ZBA.  Sweep account  Be on the lookout for employee theft Week 10 : Chapter 13 Benefits of Selling on the Web 1. The opportunity to increase revenues and attract new customers. 2. The ability to expand their reach into global markets. 3. The ability to remain open 24 hours a day, 7 days a week. 4. The capacity to use the Web’s interactive nature to enhance customer service. 5. The ability to lower the cost of doing business. 6. The ability to spot new business opportunities and to capitalize on them. 7. It is accessible from anywhere around the globe with the availability of the internet. 8. You can get access to information or make information accessible to the world. 9. You can connect to people from anywhere by sitting in your home. 10. You can purchase products online from anywhere sitting in the comfort of your home. Factors to Consider Before Launching into E-Commerce before launching an e-commerce effort business owners should consider the following important issues:  How a company exploits the Web’s interconnectivity and the opportunities it creates to transform relationships with its suppliers and vendors, its customers, and other external stakeholders is crucial to its success.  Web success requires a company to develop a plan for integrating the Web into its overall strategy. The plan should address issues such as site design and maintenance, creating and managing a brand name, marketing and promotional strategies, sales, and customer service.  Developing deep, lasting relationships with customers takes on even greater importance on the Web. Attracting customers on the Web costs money, and companies must be able to retain their online customers to make their Web sites profitable.  Creating a meaningful presence on the Web requires an ongoing investment of resources— time, money, energy, and talent. Establishing an attractive Web site brimming with catchy photographs of products is only the beginning.  Measuring the success of its Web-based sales effort is essential to remaining relevant to customers whose tastes, needs, and preferences are always changing. Why are so many small companies hesitant to use the Web as a business tool? For many entrepreneurs, the key barrier is: 1. not knowing where or how to start an e-commerce effort, 2. whereas for others cost concerns are a major issue. Other roadblocks include 3. the fear that customers will not use the Web site and 4. the problems associated with ensuring online security. The following are essential to e-commerce success:  Acquiring customers  Optimizing customers  Maximizing Web site performance  Ensuring a positive user experience  Retaining customers  Use Web analytics as part of a cycle of continuous improvement Ten Myths of E-Commerce Myth 1: If I launch a site, customers will flock to it Myth 2: Online customers are easy to please Myth 3: Making money on the Web is easy Myth 4: Privacy is not an important issue on the Web Myth 5: Strategy? I don’t need a strategy to sell on the Web! Just give me a Web site and the rest will take care of itself Myth 6: The most important part of any e-commerce effort is Technology Myth 7: On the Web, customer service is not as important as it is in a traditional retail store. Myth 8: Flash makes a Web site better A site that performs efficiently and loads quickly is a far better selling tool than one that is filled with “cornea gumbo,” slow to download, and confusing to shoppers Akamai study: 47% of shoppers expect a Web page to load within 2 seconds and 40% of shoppers will abandon a site that takes more than 3 seconds to load Myth 9: It’s what’s up front that counts - Virtual order fulfillment (or drop-shipping) suits many e-tailers perfectly. When a customer orders a product from its Web site, the company forwards the order to its wholesaler or distributor, which then ships the product to the customer with the online merchant’s label on it. Myth 10: My business doesn’t need a Web site Strategies for E-Success Focus on a Niche in the Market Develop a Community Attract Visitors by Giving Away “Freebies” Make Creative Use of E-Mail, but Avoid Becoming a “Spammer” - click-through rates, the percentage of recipients who open an e-mail and click the link to the company’s Web site, Click fraud, which occurs when a person or a computer program generates ad clicks even though they have no interest in the advertiser’s product or service, is a danger to entrepreneurs who use pay-per-click ads.