IME 4010: Entrepreneurial Engineering III Supply Chain Management

Chapter 1
Evaluating Your Potential as an Entrepreneur
Four factors of Production are: 1. Entrepreneurship 2. Land 3. Labor 4. Capital. The Objective: This section helps you evaluate your personal traits, likely motives, and the goals you have in order to determine whether you have what it takes to succeed as an entrepreneur. The Rationale: The success of your business venture depends on your qualifications and how seriously you take the evaluation of your attributes and motives. Detailed Objectives: By the conclusion of this section, you will be able to: 1. Describe entrepreneurship including: a. How it impacts American business b. The risk involved in entrepreneurship c. The key motivators for entrepreneurship. 2. Assess your own potential to succeed as an entrepreneur based on: a. Personal traits b. Natural aptitudes c. Acquired skills and abilities. 3. Define the foundation for success as an entrepreneur including: a. Identifying the common reasons and motives b. Comparing the advantages and disadvantages c. Promoting a professional image. 4. Explain the various types of goals and objectives including: a. How to revise them b. How to make them attainable. Before we begin: Determine whether you can already meet these objectives? What is an Entrepreneur? Definition: An entrepreneur is an individual who undertakes the task of operating a small business. Entrepreneurship involves all the functions involved in providing goods and/or services to consumers, including the social responsibility and legal requirements that comes with the territory.


• • •

Entrepreneurs operate businesses with fewer than 500 employees but collectively employ more than half the workers in the United States. There’s always risk involved with entrepreneurship because you can never be completely sure about what the needs and wants of the marketplace will be. Entrepreneur is derived from the French word for “undertake”, which is appropriate since the small business owners undertakes many risks when starting a company.

Motivators for the Small Business Owner: Key Motivator: Entrepreneurs derive motivation from the fact that failure looms if the business venture is unprofitable. Therefore, profitability is the key motivator for small business owners, but not the only one. Other Motivators: Small business owners are also often motivated by a social conscience and higher level needs such as: • Protection • Infrastructure • Education • Health care • Environment. Motivators for the Small Business Owner: • The development of a nation and the prosperity of its people fuel the needs of the marketplace. • Successful entrepreneurs must continuously anticipate the changing marketplace to ensure the prosperity of the nation and their personal security and satisfaction.

Personal Inventory: • Assess your potential: It is critical to enter into this venture with your eyes wide open and aware of what it takes to succeed. • Armed with this knowledge, you can bolster the areas in which you are weak by seeking out: o Experience o Training o Technical support. • Find the right area: Starting a business in an area that interests you is valuable. • Have vision: Most prosperous entrepreneurs are visionaries. Research shows that fastest growing businesses are forward thinking and goal oriented. • Components of success: The success of your small business depends on how well you perform on the job. Performance is a combination of the following components: o Personal traits o Natural aptitudes o Acquired skills and abilities.

Personal Traits: Some of the most common traits are: • Achievement oriented: They tend to be “doers” and “competitive”. • Enthusiastic: They focus energy to achieve their goals. • Flexible: They must be flexible in order to adjust to the changing marketplace and revise goals accordingly. • Goal oriented: Goals help envision the future and recognize how to make the most milestones. • Hard working: They have to be willing to put in long hours and tolerate slow progress. • Non-conformist: They tend to be very independent and secure about breaking away from the crowd. • Optimistic: An optimistic outlook allows entrepreneurs to see the potential for success in challenging situations. • Resourceful: They are able to accomplish a great deal by recognizing the need for certain resources, acquiring them, and then using their ingenuity to make something positive happen. • Risk taker: Risk is not a scary proposition, they feel that results are controllable, not a matter of luck. • Self-confident: Entrepreneurs need to be very confident in the decisions they make and actions they take, but ready to make adjustments if necessary. • Strong leader: To make it through tough times, entrepreneurs have to exhibit strong leadership. • Tough minded: They must be able to make difficult decisions and stick by them when others doubt the outcome.

Natural Aptitudes: These are the capabilities and talents that people have in specific areas. Some of the aptitudes that successful entrepreneurs share are: • Verbal and non-verbal communication • Verbal Comprehension • Logic • Artistic expression • Mechanical capability • Numerical capability • Clerical skills • Spatial understanding • Physical aptitude • Organizational skills • Intellectual aptitude. Acquired Skills and Abilities: These are specific skills and abilities that directly impact the success of entrepreneurs and their small businesses. Some of the skills and abilities that successful entrepreneurs share are: • Problem solving • Decision making • Human relations • Team building • Networking

Note: Successful entrepreneurs typically: • Have prior work experience • Are ready to accept the need to develop new areas of expertise by attending classes • And supplement these areas by hiring people who have the skills and abilities that they are lacking. The Foundation for Success Review your results: After taking personal inventory, what are the conclusions that you can objectively make? • Do you know the type of business for which you are the best suited? • If so, is it the kind of work for which you are interested in dedicating your time and talents? Observe local small business: Find out as much as you can about running your own business. Look for businesses that thrive and ones that are hanging by a thread. Ask yourself: • How long has the business been operating? • What seems to be their key to success? • What might they do differently to be more prosperous? Identify your reasons: Understanding the reasons that may prompt you to consider a specific option might help you define your business goals. The reasons may include: • Starting a part-time business on the side of your full-time job • Working for somebody else to gain experience • Engaging in a hobby • The need for employment. Reactive and Active Reasons and Motives: Reactive Reasons: o Promotion and salary policy o Adversity o Red tape and politics o Strong belief in your idea. Active Reasons: o To be your own boss o Fame and recognition o Personal financial gain o Joy of winning.

Your Professional Image: A professional image is important, because you are w symbol of the business and people judge the quality of your product by the image that you project. Some factors are: • Appearance • Speech and Writing • Etiquette • Integrity and Ethics.

Goals and Objectives: Realistic goals are essential in setting the right course for your business. Types of Goals: • Long-term • Short-term • Personal goals • Career goals. Revising Goals: As you gain experience, you’ll find it necessary to revise your goals. Flexibility allows you to take advantages of the opportunities and meet the challenges head on. The best way to fulfill your potential is to set your goals high. However, it is counterproductive to set them too high and cause yourself to fail.

Homework Assignment (To be done individually-please be concise and brief):
1. Question 1: Do you know an entrepreneur? If so what kind of a person he/she is? Describe him/her in terms of the attributes discussed in the chapter. 2. Self-assessment #1: Go through the list of personal traits and identify the ones that you have, the ones that you need to strengthen and determine the best way to do that. 3. Self-assessment #2: Go through the list of Natural Aptitudes and identify the ones that you already possess, the ones that you need to strengthen and determine the best way to do that. 4. Self-assessment #3: Go through the list of Natural Aptitudes and identify your own skills and abilities. Do they qualify you to run the business that you want to start? List the ones that you need to strengthen and determine the best way to do that. 5. Self-assessment #4: Identify your own reactive and active reasons for wanting to be an entrepreneur. 6. Self-assessment #5: a. Identify your own list of advantages and disadvantages of being somebody else’s employee and of being self-employed. b. Categorize the list according to Personal, Family, Social, and Career impacts. c. From the compiled comparison list identify which situation suits you best? 7. Self-assessment #6: Do you project a professional image? Can you identify areas in which you need to improve? 8. Self-assessment #7: What are your goals? a. Long-term b. Short-term c. Personal goals d. Career goals. Can you envision achieving these goals? What will it take to do so?

Chapter 2
Understanding the Nature of Small Business
Small business is comprised of a wide range of businesses in a vast array of industries. This section presents some of the most important economic principles on which the American economy is founded and suggests ways to investigate the businesses and industries that have grown to prominence.

Objectives: By the end of this chapter, you will be able to: • Describe the nature of small business including: a. The two major types of small business and their characteristics b. The shift in focus of small business in recent years c. Classification systems used to research businesses and industries d. The advantages and disadvantages of owning a small business. • Explain the four elements of the free enterprise system • Describe the business environment in a consumer-driven economy • Summarize the three laws of the free enterprise system: a. Supply and demand b. Profit motive c. Free competition. • Identify the opportunities and risks for small business in the international marketplace.

The Small Business Environment
• • • Small businesses (<500 employees) account for 99.7% of all employers in the US. They employ over 50% of all private sector employees They produce 13 to 14 times more patents per employee than larger companies.

Two Types of Small Business
1. Micro-business - is the largest segment of small business, and is characterized by: a. 20 or fewer employees b. Family or local ownership c. Limited credit needs d. Limited growth e. Important to local employment. 2. Macro-business – 20 or more employees a. Broad public and private owners b. National or international scope c. Emphasis on research and development d. Significant investment in plants and equipment.

Shift in Focus of Small Business: In response to American consumer demand, the shift has been from manufacturing to service industries. Classification System of Small Business: The primary system of classification can be viewed at North American Industry Classification System (NAICS) code, The resources can be used to research specific companies by major industry groups, both geographically and alphabetically. Advantages and disadvantages of Small Business: The primary advantage is personal achievement and the primary disadvantage is loss of personal life.

Free Enterprise System: Businesses are continually enhancing their offering in order to secure
sales to increase their profits. Adam Smith described a free enterprise system that was market-driven and based on these four basic elements: 1. Private property 2. Free competition 3. Freedom of choice 4. Freedom from government interventions. Today, these are still in place, but government has attempted to ensure a fair and consistent business climate by regulating business in areas such as: • Antitrust • Environment • Labor • Taxation.

Consumer-Driven Economy: The consumer lies at the heart of the free enterprise system. The
critical factors in a consumer-driven economy are customer care (through service and quality), and innovation. Customers have a profound influence on how much of their product the business owners will provide and how much they can charge for their goods and services. When considering your local business environment, the following factors are important: • Market: Look at demographics, psychographics, socioeconomics. • Suppliers • Competitors • Growth trends • Infrastructure: highways, railroads, airports, local universities, … • Government regulations: they have authority to enforce laws that affect everything from taxes to labor to environment.

The Law of Supply and Demand: The law of supply and demand guides the marketplace
activity in the customer-driven economy. Customers determine the products that they want and in which quantity. Influences on demand include: • Consumer income level • Consumer preference • Season of the year • Consumer confidence in the economy. Note: Gross Domestic Product (GDP) is all the goods and services produced each year in a nation. Market Equilibrium: The interaction of supply and demand results in market equilibrium. The market reaches equilibrium when the amount of product demanded and the amount supplied stabilize at a certain price. The quicker you recognize these changes and respond, the more likely you are to succeed. In the free enterprise system, profit is the incentive that drives you to respond to supply and demand in a way that returns the most profit. Every business venture involves some risk, since you invest time and money without any guarantee that customers will buy what you’re offering. After making enough profit to take care of your personal needs, the excess profit provides additional funds to reinvest in your business. Success is measured as the amount of profit you make!

The Law of Free Competition: Competition is the force that drives the free enterprise system.
It regulates the production of goods/services and sets the price that business owners can charge consumers.

The two pressures: the two pressures that impact supply and demand and also regulate prices are:
• • Consumer compete for available products Business owners compete for sales to customers.

Consumers benefit when businesses compete, because competition results in: • Lower prices • Higher quality • Increased variety • Better service. Intense competition affects businesses both negatively and positively, because competition results in: • Lower profits • Increase efficiency • Elimination of ineffective businesses that cannot match the competition • Market awareness that provides opportunity when changes occur.

Note: 1. With the interdependence between nations for products that we want and need, small business truly competes in a world economy, or in the global village! 2. As an entrepreneur, your opportunities are great. People around the world will always have unmet demands. 3. Your success depends on your ability to identify the scarcity of a product in a foreign country and become the main source of that item to those consumers. 4. Of course, as with any opportunity, risk is also part of the equation for success. You can minimize the risk by expanding your understanding of the international business environment. 5. One of your main sources of information is the Department of Commerce.

Homework Assignment (To be done individually-please be concise and brief):
Investigate potential business venture that you are interested in, by searching the web and gathering data (both objective and subjective) to become well-informed. Document your search and your findings.

Chapter 3
Making the Most of Marketplace Opportunity
Marketplace changes create opportunity. When the marketplace experiences a shift, respond quickly to take full advantage of the chance to do business by assessing how the market has changed and the impact that the shift will have on consumer demand.

Objectives: By the conclusion of this chapter, you will be able to: • Describe the market trends in the U.S. • Identify some high growth business opportunities. • Compare and contrast the various methods for using market research tools to evaluate business opportunity including: a. Surveys b. Focus groups c. Test marketing • Explain how you can create new opportunities for business. • Describe how a competitive advantage enhances your likelihood for success. Assessment: Determine whether you can already meet these objectives?

Market Trend in U.S.: Major changes constantly take place, which affects small business in areas such as: • Demographics • Economics • Industry • Technology • Consumer lifestyle • The natural environment.
Demographics: As baby Boomers grow older and Gen Xers become more mature, significant shifts in the market occur. Changes in demographics (like age and the stage of family life) require products that meet specific needs. Economics: The American economy plays a major role in marketplace shifts. The needs that people identify depend on what they can afford and its price relative to their wages. Phases of the economy: There are four distinct phases that could affect business opportunity: • Recession: unemployment rises while productivity and business investment decrease. • Depression: work is scarce and wages fall. Sales of large items drop faster than less expensive items. • Recovery: unemployment decreases while productivity and business investment increases. • Prosperity: consumers make big ticket purchases and buy luxury items.

The economy in your local community can differ greatly from the national economy. The best way to tell how your community’s economy is doing is to look at the unemployment rate. • If the unemployment is increasing then the economy is in a recession. • If the unemployment is decreasing then the economy is in recovery. • If the unemployment is very high then the economy is in a depression. • If the unemployment is very low then the economy is in prosperity. Industry: The tremendous increase in service-related industries continues to create drastic changes in the marketplace. As manufacturing firms become more efficient and require less labor, service industries (education, financial, insurance, health care, transportation, and communication) are using more people to meet consumer demand. Consumer Lifestyle: Americans place a high value on convenience and efficiency. Many popular products save time (either at home or in the office). • As the population ages, they ask for more leisure time, therefore tourism is thriving. • With the aging segment of the population on the rise, attention to health care is essential (treadmills, prescription medicine, vitamins, physical therapy, gym, …). The Environment: As more Americans become aware of the need to sustain a healthy natural environment, entrepreneurs develop many environmentally friendly goods and services. • Some products like laundry detergents and shampoos carry “green” labels. • Manufacturers create packaging and disposable products that are biodegradable. • Organic farming is on the rise, … • Recycling companies, environmental engineers, and holistic medicine practitioners are gaining prominence. The trend in U.S. is for: • The types of products like: games and gaming, sports outfits and gears, recreation vehicles, lodging, outdoor foods and gears, communication equipment, transportation equipment, and network infrastructure, … • The types of services like: hi-tech computer programming, network systems, telecommunication, calling centers, educational models, website development, software development, on-line banking, professional accounting, fraud and cyber protections, and process of data information.

High Growth Business Opportunities: Once a shift occurs and a new consumer demand
arises, there is a limited time period in which dramatic new business growth takes place. After the initial surge of new products and innovations, you may still find the opportunity if you offer goods or services superior to what is currently available. The window of opportunity is the small amount of time that you have to respond to a newly identified need in the marketplace.

The most prominent business opportunities are: 1. Service: o Consulting o Software development and maintenance o Employee training o Healthcare related specializations o Staffing 2. Retail: o Children’s apparel o E-commerce o Family entertainment o Nursery and landscaping o Health foods o Professional services.

Market Research Tools: Market research is a good basis for evaluating business opportunities.
Competitors and Customers are the two key elements in deciding where to establish your business and the goods and/or services to offer. Types of Market Research: depends on the kind of data you need and the nature of the product you offer. The three types of market research are: a. Surveys (mail, phone, web-based) b. Focus groups c. Test marketing. Surveys: This method is an effective way to gather quantifiable data, which helps you identify consumer preferences for your product. To yield statistically significant results, you have to survey a fairly large population that is randomly selected. You may use online, telephone, mail, or face-to-face method of surveying.

Focus Groups: An excellent way to gather qualitative data, which helps you identify how they feel about the product. Follow the rules of Delphi Method of brainstorming. Test Marketing: For inexpensive products, test marketing is an excellent way to determine consumer reaction to a new product. Be careful, competitors may find out about your innovative product!

Creating Business Opportunities: Creating business opportunities requires creative thinking. One way to be creative is to take an inventive approach. With an inventive approach, you can offer an entirely new product. It might be a variation of an existing product or an unusual application of something familiar.

Creative Process: The creative process involves these stages: 1. Problem recognition 2. Search for information 3. Incubation period 4. The ah-ha moment 5. Evaluation of ideas. Stimulate Your Creativity: Here are a couple of proven techniques for stimulating your creativity:

SCAMPER: This acronym stands for an approach to finding solutions to problems.
Choose a good or service that you use every day. Ask yourself how you might improve this product. S Substitute C Combine A Adapt M Modify/magnify P Put to other uses E Eliminate R Reverse/rearrange Follow these steps to jump start your creativity!

Gaining a Competitive Advantage: You have to stand out from the crowd by having a
competitive advantage, something that you do better than the competition. Analyze your competitive advantage in order to determine the % of the target market that you can realistically expect to capture. Use the SWOT analysis. S: Strengths W: Weaknesses O: Opportunities T: Threats

Homework Assignment (To be done individually):
1. Self Assessment #1: Do these areas of growing businesses give you any ideas about the kind of business that you want to operate? Start by considering your market, and then build your opportunity based on your own strength and abilities. 2. Self-Assessment #2: Ask yourself, “what kind of new business do I want to start and why?” a. Scan newspapers, magazines, regular mail, and the internet for unmet market needs that lead to new business ideas. Write down your ideas, even if they seem unrealistic at this point. Document your search and your findings, as well. b. Let the ideas flow freely. Ask yourself: Is the new business feasible? Will the idea lead to profitable business? What kind of market research should I do?

Chapter 4
Investigating Global Markets
The global marketplace grows ever closer and more accessible as technological advances bring us together. International trade offers the entrepreneur an opportunity to benefit from the trend in globalization and expand into new and exciting marketplace. Objectives: By the conclusion of this chapter, you will be able to: • Describe international trade in terms of its benefits to your type of business. • Identify opportunities for expanding into exporting and importing using: • Joint ventures • Licensing • Franchising • Direct mail/internet • Intermediaries. • Outline the major world trade regions. • Distinguish between cultures and state the impact of these differences on international trade. • Name any other differences that might affect your relationship with trade partners. • Identify the sources of technical assistance for international trade. • Describe the most effective research methods for exploring international trade. Assessment: Determine whether you can already meet these objectives?

What is International Trade: It is the exchange of goods and services throughout the entire world. More than ever, the balance of world trade is essential to the health of the American economy.
Benefits to Small Business: Besides improving the domestic trade balance, the benefits include:
• • • • • • • Increase in overall sale Increase in production volume that spreads out fixed costs resulting in lower costs Use of excess production capacity Compensation for seasonal fluctuation in domestic sales Opening up a new market Learning about advanced technology through joint ventures Acquisition of knowledge about international competition that improves your competitiveness.

Types of Businesses: with the internet, any type of business can benefit from accessing global markets. Different types of businesses that can benefit include:
• • • • • • • Services Manufacturers Wholesalers Retailers Agribusiness Financial institutions Franchisers.

Opportunities for Exporting and Importing: It includes both final products as well as raw
material. The decision to market internationally is one of the most crucial strategic decisions that you can make. After success in US marketplace, consider expanding into international markets using the same criteria as when you first started your company. To determine which countries might provide the greatest opportunity, contact: o Trade associations o Local and state chamber of commerce and indicate your interest in participating in local trade fairs and expositions. o Local export/import companies o Contact foreign embassies in US, and find out more about trade promotion organizations. o Local libraries for directories of suppliers from certain countries or regions. o Internet resources (

Global Sourcing: Global sourcing is a type of importing. It is the procurement of goods and raw materials used in the manufacturing of items for resale. Companies source globally because many foreign components have lower prices for higher quality.

Joint ventures: A joint venture is a business opportunity created when you seek assistance from a company with operations in the foreign market. This partnership is a financial arrangement where the two companies share the cost of market involvement in exchange for a share of the resulting profits. The benefits of strategic alliances revolve around sharing expertise, and the greatest risk is choosing an inappropriate partner.

Licensing: Licensing is the granting of permission to a foreign company to sell your product or services overseas. It facilitates very fast entry into a foreign market, but: • It doesn’t allow the original producer to maintain much control over the distribution, pricing, and positioning of the product as with a joint venture. • There is an inherent risk in selecting the licensee. Franchising: Franchising is the sale of a product concept to an international business owner resulting in that entrepreneur running the business in the same manner as in the home country. Benefits of Franchising over direct exporting and licensing: • The host can tailor the local marketing to best suit the environment. • Your research and guess work is reduced • The new franchiser is dedicated because his/her livelihood depends on it. Challenges of Franchising: • You lose some degree of control of your business. • The good or service must be very similar, or identical, across the various markets.

Direct Mail: Internet can be a great avenue to sell items that require direct mail. Direct mail tries to either make or sell or elicit a response to create interest from a qualified buyer. Direct mailing has the following benefits: • You don’t have to establish a permanent presence in the foreign country. With the internet and/or international toll-free number, you can run your company from anywhere in the world. • It allows the shopper to make purchases from the comfort of their home. • The price and quality of products are comparable with those you can buy in stores. Challenges of direct mail: • The hardest part is identifying qualified buyers. Accessing reliable mailing lists is challenging. The internet provides ways to overcome this challenge through websites, online auctions, and on-line banking.

Intermediaries: Intermediaries are middlepersons who broker goods manufactured in one country to buyers in another. They provide you with professional knowledge about:
• • • • Required paperwork Transportation of products Financing of exports Marketing programs.

Major World Trade Regions: You should explore the various trade regions (a group of countries in
the same area of the world that actively trade with one another)

in order to determine the likelihood of your

success. There are several ways of categorizing the countries of the world: 1. Economic Development: Industrialization (extent of business development and sophistication) and infrastructure (transportation and communication system) are indications of how well developed nations are.
• • • • Industrialized countries Middle income developing countries Major oil exporting countries Less developed countries.

2. Gross Domestic Product: GDP is the market value of all the goods and services produced by a given country during a given year.
• • • • • • US share of the world GDP: 25% North America: 35% Europe: 36% South/Central America: 6% Asia: 22% Africa: 1%

3. Population: The size and purchasing power of a nation is another factor. 4. Geography: Where a country is located also plays a role in international trade.

The major trade regions of the world are: • European Union South and Central America • Africa United States • Middle East Canada • Pacific Rim Mexico

The Impact of Cultural Differences: Since each country has its own set of customs and
cultural norms, strive to understand the differences that might motivate a foreign business owner to take certain course of action and be flexible in your own approach. Look for interesting ways to adapt to variations such as: • Religious tradition • Dietary practices • Business manners • Sense of humor • Standard of dress. Cultural differences impact: • Communication • Marketing • Negotiation • Culture shock. Language is the key to understanding the culture of a country. Both body language and the spoken word have widely ranging meanings in different cultures. Many problems have arisen in translating slogans or product names in a foreign market. So try to: • Employ someone with adequate language and cultural skills to facilitate communication and cooperation • Build a close working relationship with a contact in the foreign market to market your product • Proceed on your own and learn the language • Use established guidelines and documentation to clarify communication in formal contracts and proposals.

When writing Contracts and Proposals make sure to: • Draft contracts using clear and concise language. • Limit the technological and trade jargon. • Set realistic expectations and state them in certain terms. • List what you and your trading partner will bring to the partnership. • Invest in “back-translation”, the translation of your proposal from the foreign language back into English. • Use fixed price contracts to set the price of goods and services regardless of actual cost. Other issues facing an international trading are Legal Climate, Politics, and Exchange Rate.

Technical Assistance for International Trade: the federal government has established a wide
variety of programs to assist an entrepreneur who wants to engage in international trade. The Department of Commerce operates the International Trade Administration (ITA) with these four units ( 1. U.S. Commercial Services 2. Manufacturing and Services 3. Market Access and Compliance 4. Import Administration.

Researching International Trade Opportunities: Your expansion into the global marketplace will succeed or fail based on the degree of research that you do. • Primary Research answers specific questions pertaining to offering your product in the foreign market. It includes: o Questionnaires o Personal interviews o Focus groups o Telephone and internet surveys.
• Secondary Research is more affordable, and is the interpretation of research already done by someone else in your business situation or a very similar one. o Sources of Data: Information on global trends, specific trading partners, and particular industries is available from the: • Department of Commerce: • Department of Agriculture: • Department of State: • Department of Treasury: • US Embassies abroad:

Homework Assignment (to be done by the team):
1. Self Assessment: The team should ask the following questions: a. Is our business stable enough in the US to warrant investing the resources necessary to move into the global marketplace? b. Do we fully understand the legal, political, and social issues that will affect my business in the foreign country? c. Is the good or service that we offer needed or wanted in the foreign market? d. Can we market the product to meet consumer expectations? e. What is our competition in the foreign country? f. What are the risks that we face with international trade? g. Who would make the ideal trading partner for our business?

Chapter 5
Developing Your Business Plan
When starting your own business, it is essential to develop an effective Business Plan. The business Plan is your blueprint for sustaining a lucrative business. Please note that banks and lending agencies require this document before they will even consider funding your venture. Your Business Plan clearly describes your specifications for key areas of business operations such as finances, marketing, human resources, and legal issues. Objectives: By the conclusion of this chapter, you will be able to: • Describe a business plan and the kinds of information it includes. • State the benefits of developing a business plan and the consequences of not having one. • Relate the activities in preparing to write a business plan including: • Strategic planning • Conducting a feasible study • Organizing data. • Explain how to write a business plan, including: a. How to organize the information you’ve collected b. The parts of a comprehensive business plan. • Review a sample business plan in anticipation of writing your own. Assessment: Determine whether you can already meet these objectives?

What is a Business Plan: A Business Plan is a written document that describes the:
• • • Existing business opportunity Goals of the business Methods for achieving these goals.

Questions to ask yourself: Ask yourself the following questions and write down your thought in order to make sure that you have the data that you need to develop a realistic business plan: Roles and responsibilities: • What do I want to accomplish? • Do I have any business partners and, if so, who are they? • Who will the customer be? • How many employees will I need? How will I train them? How will I compensate them for their work? Product: • What is the good or service that my proposed business will market? • Why did I choose that product? • How will I promote the product?

Initial decisions: • What are the costs to start my business? • Where should my business be located? Profitability: • Why do I believe that my business will be profitable? • How soon will my business start to earn a profit? • Will m business remain profitable in the future? Basic Parts of a Business plan: The basic parts of a business plan are: • Description • Marketing • Management or organization • Operations • Financial.

Benefits of Writing a Business Plan: As an entrepreneur you will count on the business plan to run a business that prospers far into the future. As you strategically plan, keep in mind the entire life span of the business, not just the immediate future. With a well-defined business plan, you can avoid the costly mistakes to which many new businesses succumb.
You can learn a lot about running a business along the way, but how to start up a new business is not one of those things! You have to make a wide range of decisions with potentially serious consequences up front. Developing a business plan helps you: • Establish goals to guide the planning process. • Determine objectives to identify the small steps to take along the way to reaching the broader goals. • Assess resources required to achieve goals and objectives. • Strategize how to use these resources in each functional area to operate a successful business. • Evaluate the operational and financial feasibility of the strategy. • Make contingency plans to respond to internal and external changes. • Communicate your business plan clearly to all affected parties (lenders or investors, employees, suppliers, government agencies, and customers).

Raising Capital: A business plan is required when raising start-up capital. You can ask for money
from either Venture Capitalists (private investors, banks, and lending agencies) or the public (stock offerings). o Venture Capitalists lend you seed money (usually in the form of a loan) to finance your business venture. o Seed Money is also called venture capital or risk capital, because there is a degree of risk in any business venture. o Venture Capitalists know the risk involved and expect compensation through future profits, and anticipate playing a greater role in business operations.

o Initial Public Offering (IPO) is another way to raise start-up capital. If you organize your business as a corporation, you may sell stock in your company to the public. But an IPO is the last resort, because the public becomes part owner of your business. Advantages are: • you don’t have to spend your personal savings • Going public promotes your business • The money comes from many small individuals rather than a few large investors. Disadvantages are: • You have to compete against large firms • If your company turns a profit, the stock will be bid up, and vice versa! • The cost is high to file the proper paper work with SEC (Security & Exchange Commission).

Preparing to Write Your Plan: To maximize your likelihood of success, you need to
Strategically Plan for your business. • Strategic Planning is the first step in developing a business plan. • It is the process by which an organization defines its strategy and makes decisions on resource allocation, including its capital and people. • The decisions made during the strategic planning process will be incorporated in the business plan. Stages of Strategic Plan: 1. Define the mission of your business venture. 2. Make the forecasts applicable to your industry and market. 3. Develop your major goals and interim objectives. 1. Define the Mission: You define the key aspects of your desire to run a successful business: • Nature of the business you want to operate • Why you want to be in that business • How the mission responds to your potential customer needs • Why you believe that the business will be profitable. 2. Make Forecasts: Forecast is a scientific way to apply the predictions of industry and market analysts to your own situation. Consider the likely future trends in vital areas such as population, economics, competition, technology, consumer demand, and political and social events. 3. Develop Goals & Objectives: Strategic planning leads to the development og major goals supported by interim objectives. Follow these guidelines to set goals and objectives that are both realistic and clearly stated:
• • • • Create goals and objectives that are achievable. Make them challenging but realistic. Identify reasonable target dates for accomplishing these written goals and objectives. Set both long-term and short-term objectives that will allow you to track your progress on the way to achieving your ultimate goal. Be prepared to adjust your objectives at any point. To facilitate this effort, you should develop a contingency plan that allows you to adjust your master plan for different scenarios.

Conducting a Feasibility Study: A feasibility study is a preliminary study conducted before the
real work of implementing a business plan begins. It may be viewed as research to gather information about the potential for success of the business project. The collected information is then used to further develop the business plan, which the new business will use for guideline when it starts operation. Before expending the resources to conduct a formal feasibility study, assess the major factors that will affect your new business by completing: • Opportunity analysis • Economic analysis • Preliminary business plan. Note that: • Return on Investment (ROI) is the figure that determines whether your business is profitable. • Your feasibility study is based mostly on assumptions. These assumptions are realistic only if your economic analysis is an accurate reflection of current market conditions. • If you have correctly assessed market trends, needs, and the competition, your assumptions will be correct. • The effectiveness of your business plan relies on these assumptions being correct. 1) Opportunity Analysis: An opportunity analysis determines whether the potential profit is sufficient to start and sustain a lucrative business. This activity is an in-depth study of the fit between the product and target market that you have in mind. Answer the following questions in order to properly analyze the opportunity for success: (a) Personal information:
(i) What do I want to accomplish? (ii) Do I have the skills necessary to start a business? If not, where can I get the training that I need? (iii) What kind of technical assistance (legal, financial, IT, HR) do I need? If I need help, can I afford the assistance that I need? (iv) Will I be able to give up my present benefits and concentrate on starting my business? (v) Am I willing to take risk of investing the time, money, and effort in such an enterprise? (vi) Where do I see myself five, ten, or fifteen years from now? (b)

Business information:
(i) What kind of value does my business opportunity offer? (ii) Can I effectively relate this opportunity to market and industry conditions?

2) Economic Analysis: An economic analysis assesses the overall financial conditions of the area where you plan to locate your business. It includes a thorough study of:
• • • • • Economics Population Competition Layout Public transportation.

3) Preliminary Business Plan: Using the data collected for the opportunity and economic analysis, complete a preliminary business plan to estimate the overall costs of starting your own business and determining its profitability. An important element of this activity is identifying when the business will begin to recover the initial capital investment and turn a profit.

Next Step: with these analyses and the preliminary business plan in hand, you are ready for the feasibility study. This assessment tool will assist you in determining the likelihood that your new business will meet the expectations of your investors and your own. The Feasibility Study estimates the future Cash Flow & Income at various intervals for specified time. • Cash Flow Statement: all changes that affect cash for a specified period of time (sources of cash and uses of cash). • Income Statement: gives the operating results in terms of profit over a specific period of time (sales revenue, operating costs, start-up costs, total profits). You need to prepare: • Monthly cash flow during the first year • Annual cash flow during the first three years • Annual income report for the first three years.

Organizing Data: The body of data that you collect serves as the foundation for some very serious
decisions. Follow this guideline to collect and organize the data: • Arrange the information in a loose-leaf notebook with dividers to separate different categories. • List the broad categories and group the specific subtopics under each category. • Create a Table of Content for ease of locating information. Reference the page number as well. • When it is time to draft your business plan, create a blueprint by correlating the sections of the notebook to the parts of the business plan.

Writing Your Business Plan: Bankers receive hundreds of business plans each year, but few of
these documents persuade them to take the risk of lending money to an entrepreneur. Your plan has to be one of the best in order to convince the lender that your business plan is worth taking that risk.
Length Style Format Proofing Review Printing Charts Appendices Keep your business plan to fewer than 25 pages. Write short, concise sentences. Keep paragraphs short and crisp. Don’t repeat yourself. Introduce each part with short, clear headings. Use adequate white space between topics. Confirm that the final draft is free of errors. Ask a financial specialist to evaluate your business plan. Use a laser printer with high quality paper. Add an attractive cover page and place your business plan in a functional binder. Charts and graphs are important tools for presenting information. Remember “A picture is worth a thousand words.” Appendices help the reader gain a more-in-depth understanding of the facts, but don’t rely on them spending much time reading them.

Front Matter: Organizes the document and sets the tone of professionalism.
Cover Sheet • Name of the business and its officers • Address, phone number, and e-mail of the business and its officers • Date of the business plan presentation. Table of Content • Limit this part to one page for ease of locating the sections.

Body of the Document: Readers may quickly review this part to capture the essence of the
entire plan. Executive Summary • The purpose and objectives of the plan • A concise summary of marketing, financial, operational, and management or organizational plan • A brief description of your markets and products • The legal structure and the change addressed by the plan (if it is a modification). Description of the Business • A description of the business opportunity your perceive • An explanation of your product/service • Advantages and disadvantages relative to competitors • Your competitive edge (technology, quality, training, price, locations, distributions, suppliers, …) • Growth opportunity • Reasons for believing you will be successful • Your work experience and expertise, as well as that of any partners, managers, and associates • A brief history of your business (if you have been in the business for a while).

Market Data: Correlate your marketing plan to the market analysis to show how the purchasing
habits of potential customers relate to your marketing plan. Point out how the Four P’s of Marketing (Product, Price, Promotion, and Place) fit well with market conditions (product life cycle, seasonal patterns, competition, …) Marketing Plan
• • • • Strategy – your marketing strategy for entering the marketplace and gaining your market share Advertising – outline of your sales promotion plan, advertising programs, and selling methods Acquisition – description of your purchasing plan, suppliers, distributors, and research and development Physical assets – description of your location, layout, facilities, equipment, and machinery.

Market Analysis
• • • Target market – description of your target market, an analysis of its size and nature, and why you chose that market Customer – description of your potential customers(including their financial profile, needs, purchasing behavior, price sensitivity, …) and how you plan to attract and retain their business Competitors – identification of direct and indirect competitors (how many, locations, suppliers, distribution channels, pricing, their advantages …) and comparison of their practices to yours.

Specific Plans: This part includes the plans you have made in specific areas of your proposed
business (management/organization issues, operations, and finances):
• • • • •

Management/Organizational Plan
A description of the personnel and supervisory procedures The number of employees needed and training provided Job descriptions and tasks involved with each job Justification for hiring consultants or specialists Legal structure and how it will support the business(officers, organizational chart, compensation methods and levels, employment contracts, partnership agreements, patents, trade secrets, and other contracts)

Operational Plan Every business needs a plan for operations. Assess the operational components of your business including:
o o o Location, layout, facilities, equipment, machinery, fixtures, and furnishings Quality control, inventory, and production methods Purchasing methods for raw materials and finished goods.

Financial Plan: Make sure your projections are reasonable; be truly conservative. Don’t force growth by projecting a moderate growth for the first year followed by a sharp increase the next. Lenders have seen too many business plans to be fooled! They know when assumptions are credible.
o o o o o o o o An analysis of the capitalization plan that identifies the sources and uses of funds Capital equipment list of start-up costs, which can serve as collateral for future loans. Summary of how you will use the money on capital expenditures ROI that you will offer to investors and lenders in the future Beginning balance sheet with financial conditions at start-up Projected income statements Projected cash flow Break-even analysis identifying the point at which expenses equal gross revenue or the sales revenue less the cost of goods sold.

This part includes information to further support your business plan that is not vital. Place it here to avoid overloading the reader. Appendices
• • • • Resumes of key managers Articles from magazines and newspapers Summaries of market research Technical descriptions of your product or processes.

Back Matter:

Homework Assignment (To be done by the team):
Realizing that by the end of the semester you HAVE TO HAVE a Business Plan for the team, in this assignment the team has a choice. Either:
• • Write your Business Plan as comprehensively as possible, or Use the web to identify at least five well-written Business Plan from different industries. Then pick the best one and critically review it to highlight the topics that are of importance and interest to you.

Here is a sample of different web sites that you may start with:

Part IV Business Plan Template

Introduction You can use the business plan template that follows develop your own business plan. The text in all caps [LIKE THIS] tells you where to enter your own information and gives additional guidance on what information to include.






This Business Plan is confidential and is the proprietary property of [INSERT YOUR BUSINESS NAME HERE]. No reproduction of any kind or release of this document is permissible without prior written consent of [INSERT YOUR BUSINESS NAME HERE].

Continued on next page

Business Plan Template, continued

Table of contents
Section I. Executive Summary ················································································

Section II. Description of the Business ·····································································

Section III. Marketing Plan and Market Analysis···························································

Section IV. Management/organizational Plan·····························································

Section V. operational Plan··················································································

Section VI. Financial Plan·····················································································

Section VII. Appendix·······················································································

Continued on next page

Business Plan Template, Continued

Section I. Executive Summary


Continued on next page

Business Plan Template, Continued

Section II. Description of the Business




Continued on next page

Business Plan Template, Continued

Section II. Description of the Business (continued)

Continued on next page

Business Plan Template, Continued

Section III. Marketing Plan and Market Analysis

Continued on next page

Business Plan Template, Continued

Section III. Marketing Plan and Market Analysis (continued)
H. Milestones and Measures 1. Goals



Continued on next page

Business Plan Template, Continued

IV . Management/Organizational Plan
A. Owner and Managers

B. Employees

C. Consultants and Advisors

D. Organizational Structure/Communications

E. Individual and Organizational Development

F. Management Strategies

Continued on next page

Business Plan Template, Continued

Section V. Operational Plan


Continued on next page

Business Plan Template, Continued

Section V. Operational Plan (continued)

Continued on next page

Business Plan Template, Continued

Section VI. Financial Plan
A. Financial Assumptions


Continued on next page

Business Plan Template, Continued

Section VII. Appendix

Chapter 6
Finding help for Your Small Business
As an entrepreneur, you will perform a wide variety of essential tasks and make some critical decisions for which you may or may not be prepared. It is an area of expertise with which you are unfamiliar; consider looking outside your business for specialized help. Recognition of need for help is not an indication of weakness, but a sign that you are serious about succeeding. Objectives: By the conclusion of this chapter, you will be able to: • Name the sources of technical assistance. • Explain how to prepare for technical assistance. • Describe securing technical assistance including: • How to select your technical assistance resource • Long-term assistance • Selection criteria. • Elaborate on obtaining technical assistance for international trade including : a. Accessing resources b. Identifying contacts. • Explain business networks, both domestic and international. Assessment: Determine whether you can already meet these objectives?

What is a Technical Assistance (TA): TA is the outside help you will need to start and operate
a small business. A wealth of TA is available to you. By tapping into this reservoir of expert advisors, you will get their objective opinion about the areas where you can improve. Duties before and after starting up: the duties that you will perform fall into two broad categories: 1) Duties you perform before you begin 2) Duties that sustain after you have been operating the business for a while. Before:
• • • • • • • • • • • • Assess your aptitude for entrepreneurship Identify business opportunities Develop a financial plan Develop a marketing plan Select a business location Select a legal structure. Manage finances Manage marketing Manage sales Manage human resources Manage customer relations Protect the business.


Do You Need Help?
Question to ask yourself: Are you qualified to perform all of the above duties? Remember that each of the broad categories can be divided into a multitude of more specific tasks, each requiring a specialized competency. If your answer is no, then you are perfectly normal and wise to seek TA with some of the following tasks:
Manufacturing and Production
• • • • • • • • • Production planning Engineering Production methods Quality control Cost control Materials handling Plant layout Warehousing logistics • • • • • • • • • •

Research Strategies Purchasing Inventory management Pricing Packaging Warehousing Distribution Selling methods Promotion • • • • • • •

Organization and Management
System design Policy/procedure Legal structure Public relations Human resources Record keeping Administration • • • • • • • •

Taxes Planning Analysis Accounting Credit Collections Investment Financing

If you decide that you might need some support, consider the category of help you need:
Manufacturing and Production To find help with: • Business associations • Educational institutions • Government agencies • Professional consultants • Publications • Internet Organization and Management To find help with: To find help with: • Researchers • Business associations • Suppliers • Educational institutions • Business associations • Government agencies • Educational institutions • Professional consultants • Government agencies • Publications • Professional • Internet consultants • Publications • Internet Marketing Finances To find help with: • Accountants • Bankers • Business associations • Educational institutions • Government agencies • Professional consultants • Publications/Internet • suppliers

Notes: • You may have the choice of paying for services, or you can take advantage of the free services offered by some industries and government agencies. • Competition is an unusual resource of technical assistance. It is in your best interest to maintain a friendly relationship with your competitors.

1. Business Affiliations: Business affiliations are groups of companies legally joined for mutual benefit. The two kinds of business affiliations are: a. Franchises: Franchises are forms of marketing where the parent company sells a product or service through local businesses while maintaining control over the operating methods.
i. The parent company provides the logo, the recipes, advertising plan, marketing plan, and operational plan. ii. The local entrepreneur pays the parent company for the help provided, generally a large amount at startup and then a share of the profits along the way.

b. Cooperatives: cooperatives are businesses owned and operated by a number of different companies for their mutual benefit (farmers, credit unions, day care centers).
i. You get lower prices from suppliers (because of the purchasing power for large quantities), for storage (because of sharing space), and for advertising (due to sharing the expense). ii. But there are membership dues or fees. 2.

Business Associates: There are a large number of national business associations that will
support you. Many have state, regional, and local offices ready to serve their members (Chamber of Commerce, Farm Bureau, …). i) They publish newsletters and magazines, offer training, and lobby for legislation of interest to the business. ii) They often hold meetings and annual trade shows. iii) They may have a membership fee!

3) Educational Institutions: With entrepreneurship education on the rise, many educational institutions offer relevant programs. Take advantage of the opportunity for lifelong learning. 4) Governmental Agencies: The federal government will provide you with a wide variety of information at little or no cost. The three prominent agencies are the: 1. Small Business Administration (SBA); SBA is devoted to finding and organizing sources of assistance for small businesses. It offers:
• Staff specialists to counsel you • Special assistance to help veterans with loan applications, training, procurement, … • Small Business Development Centers (SBDC) offer training and one-on-one assistance for start-up and existing businesses • Consultation services by the Service Corps of Retired Executives • Small Business Investment Companies (SBIC) offer extended long-term loans to small businesses • Publications and videos on starting up and operating a small business • Educational programs in local communities co-sponsored vocational educational agencies • Programs to support women and minorities.

2. Department of Commerce; Provides informative publications.
• • • • The U.S. Census of Business offers statistical information for businesses operating in the U.S. The Minority Business Development Agency assists minorities The Business Development Center helps minorities with business plan and funding agencies The Manufacturing Extension partnership provides services they need to succeed.

3. Department of Labor; Assists anyone who needs and wants to work. It also provides information on federal laws for small business owners.

4. Professional Consultants A whole consulting industry has evolved to provide technical assistance to you. 5. Publications You may find many interesting and useful ideas about how successful business owners started and manage their own ventures. Some of the most popular journals are:
• • • • INC Magazine Entrepreneur Business Week Venture 1-800-468-0800

6. Internet With the growing technology, the internet is also a source of technical assistance. Access to the internet is easy and you can use e-mail or online chat rooms to get answers to an array of questions. But the quality or reliability of the information may be uncertain. One helpful tip would be to make sure you are viewing a site from a trusted source, such as websites that end in .edu or .gov.

Preparing for Technical Assistance (TA): It is ideal to get to know the technical resources available before your business faces challenges. In order to make the most of these resources, you have to prepare for TA. The following steps help you:
1. 2. 3. 4. 5. Define the problem. Identify the expected benefits. Analyze the cost effectiveness. Consider any personal constraints. Review the options available to you.

Note: • The major consideration is whether the cost of TA will be offset by the benefit to your business. • There are free services, predetermined fees and per day or hourly fee, retainer fee. • As a business owner, your days will be extremely busy, so make sure that you can manage time to take advantage of the advice you get. Securing Technical Assistance (TA): To select the right TA, take a systematic and methodical approach. The following steps help you:
1. 2. 3. Set up a technical assistance file. Identify job requirements. Search for potential consultants.

Long-Term Assistance: If you need long-term assistance, you will probably have to pay for it. Common areas where you need ongoing TA are legal/financial. Become familiar with the services of: • Attorneys: legal structure; taxation; insurance; union activity; leases and real estate transactions; •
contracts and agreements; government regulations; estate planning.

Accountants: o preparing financial statements and periodic audits of records o determining cashflow and working capital requirements o developing purchasing and inventory controls o preparing tax returns o evaluating insurance coverage . Management consultants.

Once you have selected a consultant, take a team approach to addressing the problem. You each have an important role to play in this partnership and you share the responsibility for communicating clearly and frequently. Reach an agreement on the following issues before signing a contract: • Scope of the work and expected outcomes • Working methods from beginning to end • Schedule for conducting activities without interfering with daily business • Pay rate and schedule of payment • Reporting and implementation procedures • Channels of communication between the whole team. Note: • It is beneficial to do your homework before venturing into the world of international trade. • The return in the time you invest in research can be lucrative. • Use technical assistance resources to investigate the many trade barriers that exist such as: o Tariffs o Quotas o Licenses o Product standards. • The Department of Commerce has identified the options below as possible foreign market channels of distribution: o sales representatives or agents o distributors o foreign retailers o selling direct to the end-user o state controlled trading agencies. Business Networking: • As a small business owner, you can network your way to success much faster than if you work on your own. Networks are an inexpensive way to help others in order to help yourself run a more successful business. • The most effective way to establish a network is to talk to your friends and business associates in order to generate interest in your idea. Next tell everyone when and where you will meet. • Some of these potential links include suppliers, bankers, established professional organizations, and government regulators. Even business owners whom you consider as the competition can be a valuable link in your chain. • The ideal contact in a foreign market would be an entrepreneur in the same business as you. • The potential obstacles in foreign markets might be less daunting if you have a contact who can verse you in the following areas: o Market conditions o Cultural differences o Economic barriers o Resource availability o Skill gaps.

Chapter 7
Choosing the Right Type of Ownership
During the planning phase of entrepreneurship, you must decide which type of ownership would be best suited for the specifics of your business. The three major types of business ownership, each with distinct advantages and disadvantages are: • Sole proprietorship • Partnership • Corporation. Objectives: By the conclusion of this chapter, you will be able to: • State the three types of ownership. • Compare and contrast the three types of ownership. • Describe the advantages and disadvantages of each. • Identify the type of ownership that is best suited to your situation. Assessment: Determine whether you can already meet these objectives?

What Are the Various Types of Ownership: As the situation changes, you should review your choice of ownership in order to determine whether a different form of ownership would be more advantageous. The three major types of business ownership, each with distinct advantages and disadvantages are: • Sole proprietorship • Partnership • Corporation.
Sole Proprietorship (Individual Proprietorship): This is the most common form of business organization, and has the following characteristics: • There is usually just one owner, and that person usually operates the business. • A few employees may help run the business, and they are often family members. • Sole proprietorships exist in a vast range of businesses. • Minimal capital resources are required for operation. • Sole proprietorships are the least complicated of businesses, the easiest to enter into and to terminate. Note:
• • Entry requires a location, expertise in a specific area, a source of capital, the ability to handle contracts, sometimes a license, and the desire to run a business. Termination requires only paying your debts and closing the doors.

Partnership: The next simplest form of business is the partnership. This type of business has the following characteristics: • It has two or more co-owners. • Often it is formed when the sole proprietor takes on additional owners to help with a specialized skill or to provide an additional source of capital for expansion. Partnerships exist in a vast range of businesses. • Forming a partnership may b e a good choice for many businesses, especially ones that require more skills or capital than one person can provide.. • Partnerships may involve either general or limited partners. Corporation: A corporation is the most complex from of business. This type of business has the following characteristics: • The corporation is an entity created by state law for the purpose of doing business. • There may be more than one owner. • The law treats the corporation like a separate legal entity, completely separate from its owners. • It has the power to transact business in its own name, such as enter into contracts and sue or be sued. • The corporation acts on its own through the corporate officers. • Officers have the authority to make contracts and carry out business for the corporation.
Factors to Consider: to select the best type of ownership, weight the following factors: • Startup cost • The degree of control you want to have • The level of personal risk you are willing to assume • Your need for assistance in particular areas of the business • The amount of regulation that you are willing to undertake.

Sole Proprietorship: Most small business owners choose to be sole proprietors because it is the
easiest arrangement to form and operate, but it also carries with it the highest level of personal liability. Advantages: You are the boss and make all the decisions, for better or worse. As long as you follow the law, you can run your own business any way that you choose. Moreover:
• • • • • The cost of staring the business is minimal – no legal fee. It has few legal requirements, only business licenses and registering the name (if different than the owner’s name). You have greater freedom from government regulations and paperwork. All profits go to the sole proprietor. Taxes are simplified since the business owner handles business profits and losses as part of his or her personal income.

Disadvantages: The main disadvantage is that you have unlimited liability. Any business venture carries a risk, but in a sole proprietorship there is no one to share the risk with you.
• • • • The creditors can force the business to close if its debts remain unpaid. But in a sole proprietorship, the creditors can also claim the business owner’s personal property (car, house, …) if the business debts remain unpaid. It can make it difficult to raise capital. You have no assistance operating the business. The life of the business can be limited. If you get sick, the business may either temporarily close. .

• Taxes are a definite advantage to the sole proprietor. The tax rate for personal income is often lower than the corporate tax rate. And you can offset some losses against other sources of personal income, whereas corporate losses may not be offset against the personal income of its owners. The income earned by a corporation may be subject to double taxation. First it is taxed at the corporate rate, and then it is taxed again when it is distributed to the owners as individuals. If a single-owner business is started without the owner choosing an organizational structure, it becomes a sole proprietorship (by default).

• •

Partnership: A business is a partnership if it has more than one owner and is not incorporated. Although there is no legal requirement that forces business partners to have a written partnership agreement, it is strongly recommended that they discuss the details of their business relationship and put them down in writing.
Partnership Agreement: Usually an attorney helps identify potential problems and proposing ways to handle them. The following is some common elements of a partnership agreement:
• • • • • • Duration Authority and duties Amount invested Salaries Adding partners or selling partnership Termination. .

Two Types of Partnerships: The two types of partnership are: 1. General Partnership: When all the partners want to play a role in actively managing the business. General partners are personally liable for all business debts. 2. Limited Partnership: Here there are two classes of partners –general and limited. This arrangement is usually made when the entrepreneur needs more capital or expertise but doesn’t want to share management duties. The following is some common elements of a partnership agreement:
• • General – general partners in a limited partnership have the same rights and liabilities as they would in a general partnership. They can be held personally liable for business debts. Limited –limited partnership have very different rights and liabilities. a) Limited partners are not allowed to participate in the management of the business at all. b) And they are not personally liable for business debts. If the business fails, the most they can lose is their investment in the business.

Advantages: Each partner contributes his or her specific skills. Moreover:
• • • • • • • • • There are more sources of capital. It is easier to enter and terminate a partnership than a corporation. Startup costs are similar to those of a sole proprietorship. There are fewer government regulations and less paperwork. If one of the partners is ill, it is likely the business will go on.

Disadvantages: The general partners have unlimited liability. Moreover:
It is difficult to control what happens when partners want to leave. One partner may not contribute as much time and effort as another. Profits have to be split evenly regardless of time and effort expended. It may be difficult to find suitable partners.

• Taxes are commonly a big advantage to the partnership. Taxes are handled as personal income and the tax rate is often lower than the corporate tax rate. And you can offset some losses against other sources of personal income, whereas corporate losses may not be offset against the personal income of its owners. The income earned by a corporation may be subject to double taxation. First it is taxed at the corporate rate, and then it is taxed again when it is distributed to the owners as individuals.

Corporations: Although there are more American businesses classified as sole proprietorships than
corporations, the corporation is the largest form of business organization (as far as dollars earned and people employed). In legal terms, the corporation is considered a separate entity from its owners. The owners of a corporation are its stockholders. The number of stock certificates that the individual purchases determines the extent of his or her ownership in the business. After the corporation has been chartered, stockholders elect a board of directors. The board of directors appoints the officers who actually manage the business (in a small business, the principal owner and his or her family might own all of the stock, serve on the board of directors, and manage the business). Advantages: A major advantage is the limited liability of the business owners. Creditors can seize only corporate assets to pay debts, not the owner’s personal assts. But if the corporation is unable to pay its creditors, the stock becomes valueless. Moreover:
• • • • • It is easier to raise capital and get credit with multiple owners. The owners can raise capital by issuing new stock and selling it to the public. More than one owner means a more diverse body of competence. Ownership responsibilities can be transferred simply by selling stock. The corporation can continue to function despite changes in ownership.

Disadvantages: It is more complex and expensive to start and operate than sole proprietorships and partnerships. Moreover:
• • • Owners must obtain a charter and have a certificate of partnership drawn up by an attorney. The corporation can engage in only the activities stated in this charter. The corporation must file reports regularly with the government, which may require hiring experts. Each state has laws that require the corporation to: a) Hold shareholder meetings b) Hold board of directors meetings c) Record meeting minutes d) File various reports. Profits have to be shared amongst the multiple business owners. Corporations are subject to double taxation. Corporations are subject to higher rate of taxation than the other forms of business organizations (as an exception, a corporation might be able to avoid these tax disadvantages if it qualifies for S Corporation status for tax purposes, and have its income taxed only once and at the same rate as individuals).

• • •

• Two categories of incorporation for taxation purposes exist: 1. C Corporations – any business can choose to be taxed as a C Corp. 2. S Corporations – Congress created the S Corp tax status in 1986 to encourage small business development by eliminating double taxation of their profits (they are treated like a partnership). The requirements include:
a. b. c. d. The firm must have 35 or fewer shareholders. The corporation must be domestic. Shareholders cannot be nonresident aliens. Shareholders must be individuals, trusts, or estates.

Cooperatives: A cooperative is also a corporation and therefore has perpetual life and limited liability of investors, and it is controlled by a board of directors elected by members. However, certain structural characteristics and a guiding body of principles set it apart from other corporations.
Like all corporations, cooperatives need to generate profits in order to survive and grow. However, cooperatives distribute all or most of the profits back to the member-users on the basis of use as patronage refunds – not based on level of investment. This creates a different set of objectives for the cooperatives corporations – the cooperatives must be member-oriented rather than investor-oriented.

Forming a Corporation: One element common to all states is the corporate charter. Some of the
information called for in the charter includes:
• • • • • • • Name Purpose Names and addresses of directors and incorporators Location Duration Capital stock data Voting rights.

The corporation’s original owners must draw up a set of bylaws, the internal rules and regulations of the corporation. Bylaws protect all the owners, present and future, from unwise or selfish decisions by the board of directors.

How Do I Choose the Right Type of Ownership: After gaining a working knowledge of the
different types of ownership, identify the factors specific to you and the advantages and disadvantages of each type of ownership in your particular situation. The considerations are your:
1. 2. 3. 4. Financial situation Personal characteristics Tolerance for risk taking Plans for the future.

Financial Situation: Your financial situation is an important factor in the type of ownership that you choose. Two financial considerations are: 1. Personal Liability – The more personal assets you have, the more protection you need. Decide which type of ownership best protects your personal assts. 2. Taxes – The greater your tax liability, the more closely you should examine the various types of ownership in order to choose the one that will lessen your tax burden the most.

Personal Characteristics: Ask yourself whether you like to take risks or play it safe. And can you tolerate a high degree of regulation and accompanying paperwork? Consider these realities of owning a business:
• • • • Corporations are considered less risky than sole proprietorships or partnerships. To own a corporation, you have to be detail-oriented and self-disciplined because the government requires you to keep extensive records and file forms by stated deadlines. Sole proprietorships allow you to make all the decisions affecting your business yourself. Partnerships involve more than one owner, so teamwork is an important element in running this type of ownership.

Tolerance for Risk Taking: The riskier your business, the more you should consider the corporate structure. Using the right combination of insurance and the protection of a corporation shields your personal assets from creditors in the event of a problem with the business.

Plans for the Future: • If you plan to implement a great idea that requires a lot of capital, then choose a partnership or corporation, since it is easier to raise capital with more than one owner. • If you plan to take on co-owners or sell part of the business, then choose corporation, since it is easier to transfer ownership. • If you plan to fly solo and run the business exactly how you want to, then choose sole proprietorship, since nobody else to answer to.

Homework Assignment (To be done by the team):
Self Assessment: identify how the four stated factors relate to your team and your situation. Then list both the advantages and disadvantages of each type of ownership, and consider which one is most likely to help your team achieve your explicit objectives.

Chapter 8
Developing a Marketing Strategy
The careful development of a marketing strategy, from market analysis to the final marketing plan, is one of the most important activities that you will carry out as an entrepreneur. Whenever goods are sold or services provided, you have to make some marketing decisions that increase the probability that the consumer will choose your product over the competition. Objectives: By the conclusion of this chapter, you will be able to: • Describe marketing including:
a. b. c. d. A brief synopsis of the free market system Types of marketplaces An overview of the disciplined approach to marketing The stages of developing a marketing strategy.

• • • •

Explain the purpose of the situational analysis and identify its components. State the characteristics of sound marketing objectives. Describe the process of selecting target markets by analyzing consumer demand. Describe the design of a strategic market mix including:
a. b. c. d. The 4 Ps of the marketing mix Developing the right mix Goods classification Life cycle analysis.

Name the sections of the written market plan and state the benefits of each.

Assessment: Determine whether you can already meet these objectives?

What Is Marketing? Marketing is a system of business activities designed to plan, price, promote,
and distribute goods/services and attract customers to buy in order to meet organizational objectives. Marketing concept is the vision that a business has to provide customers satisfaction with the longterm goal of making a profit. If you adopt a marketing concept, you commit to basing your management decisions on achieving customer satisfaction. Free Market System: The American economy is a free market system. This means that business owners are allowed to sell any goods or services that they want to offer. And consumers can spend their money to buy any product that they select. • Cost: in most cases, you are free to charge whatever you choose. With the exception of oil, electricity, and other government-related goods, consumers are to shop among shop among several businesses until they find the best price for items they want to buy. • Making Choices: the free market is efficient, but business owners don’t always make sound decisions. Pricing a product too low or too high or of a poor quality could be disastrous. • Supply and Demand: the free market system is based on supply and demand as follows:
i) If consumers want more of a product than the business can provide then the demand is high and the price usually increases. ii) If more of a product is available than the consumer want to buy then the demand is low and the price usually decreases.

Types of Markets: Three types of markets exist in the American economy. • Consumer Market – consists of individual buyers or households that buy products for personal use and do not intend to make a profit. • Industrial Market – individuals or organizations that make purchases to resell the product for a profit or use it in the operation of their own business. The types of industrial markets are:
• • • • Producers - they buy products to be used in the production of their own goods. Resellers - wholesalers and retailers who buy finished goods and then resell them for the purpose of making a profit. Government – federal, state, county, and local government spend billions of dollars annually for a variety of goods and services to support their operations and provide taxpayers with products that they need. Non-business Market – institutions and groups with non-profit service goals.

Developing a Marketing Strategy: the stages of the strategic planning process are: Stage 1 - conduct a situational analysis: A Situational Analysis is a review of the existing marketing program already in place. It includes these components:
(a) An assessment of the external environmental forces and the non-marketing resources surrounding the business marketing program (b) A detailed review of the company’s present marketing mix – product, promotion, price, and place.

Stage 2 - set marketing objectives and define measureable goals: As with organizational goals, marketing objectives should be realistic, specific, measurable, consistent, achievable, and in writing. Stage 3 - select target markets and measure market demand: The Target Market is a group of potential customers with similar needs whom you strive to satisfy with your product. Target Market that you select is a key step in developing a marketing plan. So make sure to:
(a) (b) (c) (d) analyze existing market in detail identify potential markets that you might enter decide how to segment your market forecast your sales in various segments of your market.

Stage 4 - design a strategic marketing plan, and prepare an annual marketing plan.

Consumer Decision-Making Process: In order to evaluate your potential market, you should
understand the process that consumers go through when they purchase products. The stages of the decision-making process that the consumer experiences are:
1. 2. 3. 4. 5. Stage I Stage II Stage III Stage IV Stage V Recognize an unsatisfied need. Identify the alternate ways of achieving satisfaction. Evaluate the alternatives. Make a purchasing decision. Conduct the post-purchase analysis.

• • • • • At any stage of the decision-making process, the consumer can choose to stop before making the purchase or simply skip a stage. After evaluating alternatives, the customer decides whether to buy. The factors that come into play include store; brand; quality; price; color; and appearance. People generally find it difficult to make decisions. Anything you can do to simplify the consumer’s decision making process is to your own advantage. Sometimes you can even combine several decisions and market them as one packaged product. To reduce consumer’s post-purchase anxiety, you can reassure them that they have made the right decision. What are some means of achieving that goal? For expensive and infrequent purchases, your post-sale service program can be a significant factor in increasing customer satisfaction and loyalty.

Buying Motives:
i) Product buying motives: These are the reasons that the consumer buys a particular product. ii) Patronage buying motives: These are the reasons that the consumer shops at a certain store. Some of the patronage buying motives, asides from Social Class, are: • Convenience of the business location • Speed of service • Ease of locating merchandise • Quality of product or service • Uncrowded conditions • Reasonable price • Wide variety • Services offered • Attractive business appearance • Caliber of personnel • Overall quality.

Market Value Determination: Many new business owners ignore the information available and
rush into producing goods or services that they want to sell rather than what the consumer wants to buy. To avoid this costly mistake, study the market carefully before going too far in planning the business. Customer Traits: You have to identify enough of a customer base to justify offering your product. Your potential customers are characterized by having:
• • • The need for your product The resources to buy what you are offering The authority to make the purchase Accessibility to your business.

Market Value Formula: Estimate the value of the market (how much money consumers will spend to satisfy the identified need):
(Number of people) x (Average value of available money) x (% of funds devoted to the identified need)

Market Value vs. Your Share: Market value is the total amount expected to be spent by customers at all places of business in the marketplace. Your share is the amount related to your area that you can bring in separate from the rest of the businesses. Differences in Marketplaces: Regional differences do account for product and brand preferences. People are different in various parts of the country, and their buying habits prove it. Customer traits such as age; ethnic background; gender; and level of education can influence their purchase habits. Notes: • Select a target market compatible with your organization’s goals and image. • Match the marketing opportunity with your company’s resources. • Continuously seek markets that will generate sufficient sales volume at a low enough cost to result in a profit. • Choose a market where the number of competitors and their size are minimal. • All markets change, and the consumer market is especially vulnerable to change. You’ll need to continuously review and adapt your marketing plan to address any changes.

Types of Marketing Research: The entrepreneur conducts marketing research in order to
objectively and completely gathers and analyzes data pertaining to prevailing marketing issues. The two types of market research are quantitative and qualitative. • Quantitative Research is the method of gathering data through customer surveys. There are two types of quantitative research: 1. Customer-based research: This is a narrow approach, where the results provide you info about your
own customers.

2. Market-wide research: This research provides info about the overall purchaser base of people who
might or do use the product you are interested in investigating.

Qualitative Research typically involves interviewing small groups of consumers and asking them to tell you why they like or dislike a particular product. The results add depth and richness to market research results. It goes beyond the number of people who dislike the product and finds out why they dislike it.

Marketing research tends to be done on a project-to-project basis, each with a specific starting and end date. Many companies have failed because they have not properly carried out marketing research. The following table describes how to effectively conduct market research: Step 1 Define the problem with your product. Step 2 Develop a theory of the cause of the problem. Step 3 Collect data related to the issue. Step 4 Interpret the findings of your study. Step 5 Act on the results of your market research.

Evaluating Marketing Strategies: After researching your target market to develop the right
marketing mix, you are ready to determine a marketing strategy that will determine the direction your business will take. Every marketing strategy is evaluated on two criteria - Effectiveness and Efficiency. The best approach combines these two standards in a way that enhances your bottom line. Effectiveness – Refers to how well the strategy achieves your business goals and satisfies customers. Efficiency – The overall cost of the strategy determines whether it is an efficient one.

Stages of Analysis: Market analysis consists of two distinct stages:
1. Stage 1 - Identify the anticipated sales level: (1) Define the size of your market. (2) Assess the competition by estimating their current share of the market. 2. Stage 2 - Implement your marketing strategy: (1) Define your target market according to descriptive characteristics, major buying motives, and difference and similarities to the competition’s customers. (2) Describe the goods classification and life cycle stages appropriate for your product. (3) List the specifics of the marketing mix elements below needed to satisfy customers and improve upon what your competitors offer:
(a) (b) (c) (d) Product Promotion Price Place.

(4) Identify the factors that might interfere with the successful implementation of the proposed market mix such as:
(a) (b) (c) (d) (e) Economy Laws and regulations Costs Competition Technology.

(5) Describe the evidence that you will need in order to determine the success of your marketing strategy and how to collect it including:
(a) (b) (c) (d) (e) Profits Sales Costs Performance Customer satisfaction.

Design a Strategic Marketing Mix: After identifying your target market, develop a marketing
mix that enables your business to satisfy the wants and needs of your target market and achieve your marketing goals. The marketing mix refers to the four components of the marketing system and how they work together to form the core of your marketing plan. The Four P’s are:
• • • • Product Promotion Price Place.

In what follows, we focus on the Four P’s. The key point of the discussion is to develop your business based on a product that appeals to the customers in your target market and promote it with a competitive price. Customers drive the market and determine your level of success.

Product: The product is classified in the marketplace as either a Good or Service. Consider both
Quantitative and Qualitative factors when developing your product. Quantitative factors help you calculate numerically specific sales objectives. They are calculated first in order to develop hard numbers based on objectives input. In defining sales objectives, a good place to start is the past. Major indicators of future sales are:
• • • • • Market sales – consider trends vs. fads. Company vs. total market sales – compare how your company sales are projected from year to year compared to total market sales. Market share trends – consider the change in your market share. Size and trend of your target market. Budget, profit, and pricing consideration.

Qualitative factors are more subjective because of the difficulty quantifying certain types of vital information or data that may be unavailable. Interpretation of subjective factors leads to an adjustment of quantitatively based sales objectives.

One factor affecting sales objectives, is difficult to forecast – the economy. Although you cannot control economic factors, you can thoroughly evaluate the affect that they might have on your business, and then you can adjust your objectives for the short and long terms. Follow these guidelines when considering economic factors:
Adjust your sales objectives based on your estimate of the economic factors that will directly affect your business (local, national, and international). Determine whether you are forecasting sales for a recession, inflationary, or stable period. Plan for any upcoming changes in tax laws.

Another factor is the competition. Strong and growing competitors can seriously dilute the large and growing market that you have identified. Consider whether a major competitor has taken any of the following actions to increase sales:
Expansion of its sales force Increase in the number of trade deals to retailers Addition of distribution channels or store locations Change in its product mix Introduction of a new product or service Increase in its level of spending on advertising.

The following list describes the five distinct stages of gaining a competitive edge through advertising your product in a crowded marketplace:
Stage I Stage II Stage III Stage IV Stage V Awareness – consumers become aware that the product exists, but have little info. Interest – the potential customer is self-motivated to get more info. Valuation – the consumer decides whether the product will satisfy the criteria to meet a personal need. Trial – the customer uses or experiences the product for the first time. Adoption - the customer chooses this specific product when the need arises.

Promotion: The means by which you can most effectively communicate the availability and benefits of your product to consumers. Deciding the best way to communicate with potential buyers involves careful analysis of the product, price, and place components of the marketing mix.
Consumers must be informed about a product and motivated to buy it. Promotion increases a product’s growth in the marketplace by enticing potential customers to choose it instead of the alternatives. The major communication method for promoting your product is advertising. The goals of advertising are to attract new customers and keep the old ones. To do so, advertisements must follow the AIDA formula. • A = Attention: get the desired audience’s attention. • I = Interest: once you have their attention, you must to hold their interest. • D = Desire: when they are interested, create desire for them to buy your product. • A = Action: after potential buyers want your product, you must motivate them to act. Although advertising is an effective tool for communicating with consumers, it is not a cure-all. It cannot make a business succeed if the company offers an inferior product, or the ads are misleading.

Price: Price is the monetary value of a product. In order to determine this value, you will need to
conduct many pricing surveys and analysis. You may have to hire an outside firm to conduct studies of the target market to determine how much the customers are willing to pay for your product.

The amount you add to the cost of the product necessary to realize a profit is the markup. This profit margin must cover all business expenses and provide for a net profit. Correct pricing is an essential part of your marketing plan. • If your product is priced too high, then your business will struggle because the consumer won’t buy the product at the exorbitant price. • If your product is priced too low, then your business will struggle because your profit will suffer.

Place: Place, or distribution, is the passing of a product from the producer or seller to the consumer.
Selecting distribution channels is one of the most important decisions you will make because it directly affects how rapidly and economically your product will be in the hands of the public. When determining the best channels of distribution, consider these factors:
• • • • Nature of the product Size and location of the market Availability of suitable channels members Your ability to manage the marketing activities.

To select the proper distribution channel, you have to be knowledgeable about various modes of transportation available, and select the type that best suits your business needs:
• • • • • Common carriers (trucks) Contract carriers Private carriers Airfreight Railroads.

Developing the Right Mix: If you can identify the behavior related to when and how
consumers choose to buy specific products, you can develop the best mix for that customer base. Try different combinations of product, price, place, and promotion until the formula attracts consumers. Consumers direct their buying behavior as follows:
• • • They first try to satisfy their most basic of needs. This type of purchase relies on the rational thought process for direction. After making purchases based on basic survival, consumers buy things to fulfill many other types of needs and wants. At this point, the thought process is both rational and emotional. With basic needs met and a little beyond that standard, consumers buy products to satisfy emotional needs. They will look for quality, and value, but factors like pride and individualism play a role as well.

Industrial users tend to be more rational in their buying behavior than consumers who buy for personal use. They make purchases to satisfy business needs. Examples of emotional motivation are:
• • • • • • pride in personal appearance social achievement ambition cleanliness pleasure increased leisure time.

Examples of rationale motivation are:
• • • • • • durability economy in use economy in purchase handiness efficiency in operation dependability in use.

The two planning tools for developing the right mix are Goods Classification and Life Cycle Analysis. • Goods Classification describes the ways in which consumers shop for similar products. You should understand this pattern to market your products in a way that satisfies customer need. • It helps you determine:
Whether customers are more interested in location, price, product features, or accompanying services Whether they are likely to switch brands Which info shoppers need before purchasing your product Which promotional approach is most likely to be effective. The goods classification system consists of four categories of products based on the preceding decisions. Convenience goods: have relatively low value and little difference between brands. Shopping goods: have greater value and large differences between brands and prices. Specialty goods: customers judge that one brand is superior to all others. Unsought goods: they aren’t bought they are new or customer feels no need for them.

Life Cycle Analysis describes the type of competition faced by businesses for their products. To be most accurate and realistic, base your sales goals and objectives on the product’s life cycle position as follows:
• • The product’s current point in its life cycle determines your short-term objectives. The life cycle level toward which your product is headed serves as the basis for your long-term goals.

Ask Yourself:
• • • Do I have a new product just being introduced to a large pool of untapped target market, minimal competition, and substantial growth potential? If the product has already been introduced to consumers, can I expect sales to grow, plateau, or even decline? How does the product’s point in its life cycle affect the way I plan the advertising strategy?

Prepare an Annual Marketing Plan: Because of the variety and number of marketing
activities that you need to carry out, carefully plan and coordinate every move. Develop your marketing plan to help you determine the: • important marketing tasks • personal roles and relationships • timeframe for completion of each • standards of performance\mechanism for ongoing evaluation and revision.

Usually the marketing plan looks from six to eighteen months ahead and should include these equally important parts: • Market analysis: When conducting the market analysis, you will benefit by answering: What are the industry characteristics and trends? Who are my target market customers? What is the current and potential size of my market? Who are my competitors? What are my projected sales and market shares? How will I continually evaluate the market? • Market demands: You will benefit from identifying the demands of your market: Who is the competition? How does your product or service compare to the competition? What does the public demand from this type of product or service? Marketing strategy: When devising your market strategy, you will benefit by answering: How will I advertise and promote my product? What is my pricing strategy? What is my sales strategy? How will I distribute my product? Which product support will I offer (warranty, product service, customer training)?

Written details of the plan: A well-written marketing plan has these characteristics: This document identifies marketing activities and responsibilities for a specific period of time, usually one year. Whether long or short, it should include enough information to give your marketing effort both substance and flexibility. Write a thorough marketing plan that states intended outcomes and provides the means for assessing the results of each task. Provide a flow chart of your business’s total schedule of activities and how each one interrelates. Make sure that you have addressed revising the plan to adapt to changes along the way.

Marketing Objectives: State the specific objectives for a particular period of time. Relate these goals to all relevant factors including: sales and profits market share customers products. Competition: Describe anything related to the competition including: who they are their products their strengths and weaknesses customer serviced.

Marketing Mix: Specify each detail of the Four Ps. Ensure that you describe: each activity in the marketing mix timetables for completing these activities who is responsible for each one? Budget: Present the anticipated budget and explain how funds will be spent for the various marketing activities. Marketing Plan Template: A marketing plan is designed to: direct company activities towards the satisfaction of customer needs determine what the customer wants develop a product or service to meet those needs get the product or service to the end user communicate with the customer – at a profit!

Let’s Create a Marketing Plan Template that covers all the important issues that need to be addressed.

Marketing Plan Template
Who? Who is the company? Who are the principals? Who are the employees? Who is the community? What is the Product or Service? What is the company’s goal? Where is the site to be established? How does the company intend to meet its: • Objectives? • Production Levels? • Sales Volumes? Why was the product or service developed? What are its attributes or qualities? How is it superior to existing products?


Where? How?


Market Analysis
What is the company’s Initial proposed market? Local State Regional National How does the company fit in the chain of basic markets? Consumer Industrial Government International Supplier Manufacturer Wholesaler What are the target market Boundaries? By consumer group Geographically Define the dollar value of the total potential sales within the proposed target market

Market Analysis, Continued
Describe the targeted user groups by major customer groups: Age: Gender: Lifestyle: Values: Define the company’s sales level objectives and what percentage of total market share they represent:

Describe how planned production capability compares to proposed market demand:

Outline any outside influencing factors that may affect the marketability of the product or service and how they can be overcome: Packing/labeling regulations: Sales tax and effect on consumer priced acceptance: Buyer preferences (e.g., health food vs. junk food): Technology changes to production (extrusion method): Describe when the product/service is usually purchased: On impulse As a regular grocery shipping item: Does the proposed marketing strategy address these trends? Who usually does the purchasing of the product or service? Who makes the purchasing decision? Is the marketing strategy properly directed to this group?

Describe the varieties of the product available: Quality Price Packaging Variety What are the markets for the each of the above?

Where is the product normally purchased?

Retail Department Stores Specialty shops Supermarkets Discount stores Convenience Stores Vending machines

Wholesale Manufacturer Distributor Franchiser Wholesaler

Are the marketing efforts properly targeted to these locations?

Market Demands
Who is the competition? What are their products or services? How does this product or service compare to the competition? Quality Price Packaging Variety? What percentage of the total market does each competitor enjoy?

What can this company realistically expect to obtain as market share? (Provide sales forecast)

What does the public normally demand from this type of products or service?

Does it meet these demands?

Do the packaging, sales aids, and point of purchase displays emphasize the qualities of the product or service Packaging Sales Aids Point of purchase displays

What level of growth is anticipated over the next three years?

Can the plan deliver the production levels necessary to support this growth?

What are the company’s long range plans?

Marketing Strategy and Details of the Plan Product Pricing
What is the consumer acceptance price range for this type of product or service?

How does the proposed product’s or service’s price compare?

Is there sufficient margin between the manufacture’s cost and the consumer acceptance price level to provide for markups at the wholesale, distributer, and retail level.

Does the price allow for freight, projected profit, price fluctuations in the market price, and consumer interpretation of value?

Are coupons or discounts being considered to promote consumers to try other varieties?

What is the product cost breakdown? Costs of goods sold - Direct labor - Direct materials - Selling expenses - communications expense - general and administration expenses (including freight)

Operating expenses

What markups are allowed at each level of distribution? Manufacturer Wholesaler Retailer Example:

Are the most economical and cost efficient methods of processing and packaging utilized (including raw materials inputs) to keep product or service costs down?

Marketing Strategy and Details of the Plan, Continued Distribution Channels
How does the company plan to get the product or service to the end user? What channel of distribution is to be used? Direct (manufacturer to consumer) One Stage (manufacturer to retailer to consumer) Traditional (manufacturer to wholesaler to retailer to consumer) Multi-stage (manufacturer to broker to wholesaler to retailer to consumer) Who or what company will carry out the distribution?

Are commissioned salespersons to be used?

What the costs associated with the proposed distribution channels?

How do these channels affect delivery or production time frames?

What delivery terms?

How are products to be packaged for shipping and end-user display?

What physical handling is required?

Are display aids (e.g. clip racks, bins) to be provided to retailers? Is packaging… Eye-appealing? Complementary to product? Identified and priced with universal product codes? (UPC)

How is the customer satisfaction and quality control feedback gathered? What minimum shipping orders are required? What minimum inventory levels are needed to prevent late deliveries, back orders, split shipments? What system is to be used for processing orders, shipping, billing? What trade terms will be enforced?

Marketing Strategy and Details of the Plan, Continued
Promotions Describe the company’s promotions package Advertising Selling Sales promotion Publicity How much is budgeted in Year 1 in each category? Advertising Selling Sales Promotion Publicity

Advertising What percentage of each media is to be used in your overall advertising package? Television Radio Newspapers Magazines Billboards Business Cards Co-operative advertising with wholesalers/retailers Other Selling What type of sales persons are to be used? Brokers Commissioned salespersons Other….etc. What tools are to be provided to salespersons to assist getting orders Volume Discounts Purchasing shelf space Other…etc. Will a sales training program be offered? How will sales effectiveness be measured? What incentives will be offered to salespersons for new accounts and other achievements?

Sales Promotions What sales promotion activities are planned? Point of purchase displays Sales aids Samples Coupons

Chapter 9
Finding the Best Location
The location of your business is a major factor in how successful you will be. Business volume can be greatly impacted by the geographic area and specific site where you locate. Maximizing profits depends on doing business where you can both attract customers and deliver the goods and services advertised. Objectives: By the conclusion of this chapter, you will be able to: • State the importance of selecting the right location for your business. • Explain the factors to consider when evaluating geographic areas. • Describe how to assess a specific business site including:
a. b. • • • comparing and contrasting natural vs. planned sites distinguishing the most common types of business sites.

Explain how to conduct a feasibility study to select the location most suitable for your business. Identify the key elements in appraising business locations. Name the various sources of assistance available to you when evaluating business locations.

Assessment: Determine whether you can already meet these objectives?

How Important is the Right Location? Where you decide to locate your business will have a
lasting effect on your bottom line. Customer demand for your goods or services is determined to a great extent by your business location. If your customer have to be near the business, a poor location means that you must attract customers by reducing prices, by increasing promotions, or by some other means that reduces profits. Although there are some general factors to consider when locating your business, the relative importance of these conditions varies with the type of business operation: • Retail Firms: Easy access and traffic patterns are prime consideration Customers need to reach these businesses from major roads Customers need ample parking. • Wholesale Firms: Rail, truck, and air carriers need easy access Zoning regulations addressing the facilities, equipment, and fixtures may limit the number of suitable sites. • Service Firms: Proximity to a shopping center may be advantageous. • Manufacturing Firms: These firms have the most restrictive zoning regulations. Also investigate the availability of shipping facilities, the distance from raw material, and potential market. Be sure that the location allows for future expansion.

Notes: • The business owner should periodically evaluate the effectiveness of his or her current location and consider alternate locations as needed. • If you decide to move your company, take into consideration the impact of the change on employees and customers.

Evaluating the Geographic Area: Investigate the geographic area (a
comparison to the more specific site)

relatively large area in

where you want to locate your business. You want to be there for a long time and the characteristics of the area can determine your future success and stability. When determining an appropriate geographic area, consider these four general factors: • Economy – The type of industry in an area influences the economic conditions. Diversification of industry is important. The industrial base is constantly affected by numerous forces including:
o o o o Road construction Influence of labor unions Infusion of funds from government contracts or grants Availability of adequate venture capital at affordable rates.

Therefore consider these factors when examining the economy of a potential area:
o o o o o o o • Determine whether industry is substantial and permanent or seasonal in nature. If business is seasonal, decide whether seasonal jobs offered will affect your workforce. Evaluate whether businesses are moving into the area or are relocating elsewhere. Assess the strength of local industry on labor. Examine local tax laws on business, including tax incentives for attracting new business. Identify the extent to which the community tries to attract new employers to the area. Also look into transportation availability and natural resources of the area.

Population – Consider these factors when examining the population of a potential area:
o o o o o o o Gather info about the average income and whether it is a mixture of levels or just one. Identify any trends in growth, decline, or stability of the population. Assess the population’s standard of living and quality of life. Determine the chronological age and education level of the population in relation to the types of products they are likely to purchase and type of labor available to you. Identify the employment trends and whether the labor force is stable or transient. Explore whether people own or rent their homes. Uncover any changes that have occurred and examine the cause and effect of the change.

Competition - Consider these factors when examining the competition in a potential area:
o o o o o o o o o Identify the number, size, and types of competition you will face. Determine whether your competitors would be alert and progressive or interested in just maintaining the status quo. Note the presence of chain stores, franchises, and other regional or national firms. Examine the possible reasons for mergers, failures, and changes in ownership in local businesses. Find out how many companies similar to yours have opened or closed in the past two years. Analyze indirect competition that provides goods and services similar to your own. Investigate what the competition’s customers think about their product. Identify the type of management in place at existing firms – cooperative o cutthroat. Determine the degree and quality of unionization in the region.

Public Transportation - Consider these factors when examining the public transportation in a potential area:
o o Determine whether public transportation is necessary for employees and consumers to access your goods or services. If so, decide whether existing public transportation meets your requirements in terms of employees and consumers getting to your facility.

Evaluating the Business Site: Once you have carefully analyzed and selected the geographic
area, closely investigate the actual business site where you will locate your company. The business site is the other part of the entire location. In comparison to the geographic area, it is small and more specific.

Retail Firms:
The success of a retail company is tied to its ability to attract customers. Another consideration is compatibility of neighboring stores. The customers of nearby businesses should be the same kind of person that would want to shop at yours. Make it as easy as possible for customers to reach your store. Other factors are: zoning and local ordinance, the cost of the site, and the general appearance of the surrounding area.

Wholesale Firms:
They sell to retailers or other wholesalers, so some positive factors include prosperous retailers, a growing population, and a broad economic base. Make sure the site is close to major highways or rail lines (to keep distribution channels open). Wholesale firms could be successful in older, established wholesaling district. But recently, many have located on the outskirts of town near highway interchanges, so carefully analyze the site to make sure it is right for the company. You should also consider zoning and local ordinances, the cost of the site, space for expansion, quality of local emergency services, and quality of local utilities.

Service Firms:
The site of service firms has the same basic criteria as for retail firms.

Manufacturing Firms: Site location for small factories requires you to consider:
Quantity and quality of the labor supply Availability and access to raw material Energy and fuel Community attitude toward the industry. You should also consider access to customers, reliable public transportation, space for expansion, and quality of local emergency services.

Note that the three components of layout are: design, space, and configuration. So, consider these factors when examining the layout, or physical arrangement, of a potential site.
Design the flow of the available space to make sure all parts of the facility get the needed space. Be creative and utilize the space effectively. Consult an architect or engineer to avoid any safety issues or damage to the existing structure.

Studying a Community: When studying a community to determine the best business site, carefully assess the following factors: Promotion – Find out the media available for advertising. Identify radio and TV stations as well as any local newspapers and where they have the heaviest circulation.

Business Climate – Determine whether you will be able to build close relationships with customers and other businesses in the area. Explore the success and failure rates for businesses similar to yours as well as the construction costs for new businesses and expansion. Housing – Confirm that the housing situation affords you safe and decent housing at a convenient price. Emergency Services – You should also consider the quality of local emergency services. Community Environment – Evaluate the community in terms of:
Public safety Good school systems Well funded and attended recreational and cultural programs Influence of active service clubs Adequate utilities and infrastructure Services to support your industry Availability of subcontractors.

Labor – Evaluate the quantity and quality of available labor in terms of:
Whether it is concentrated in a particular area of the city Local worker attitude Education Whether workers have deep community roots Relationships with the business community Average wages and whether salaries are paid regularly. Explore taxation requirements including city, state, and federal income taxes. Identify the property tax rate and whether there is a personal property tax or any other special taxes.

Types of Business Sites: As you proceed with your evaluation of possible sites, you will notice
that businesses tend to form clusters. This happens because many factors, both general and specific, influence why a business selects a certain site. There are two distinct types of business sites: 1. Natural Sites: These sites are formed to serve a specific population within a geographical area. 2. Planned Clusters: The intent of planned clusters of businesses is to spread the cost of operations among several businesses.

Conducting Your Own Feasibility Study: When evaluating alternative locations, consider the
market potential and availability of desirable premises. This section guides you through the completion of a feasibility study for locating your specific business venture. Phase 1 – Evaluate the Market Potential of Various Geographic Areas
1 2 3 Select the geographic area for consideration. Survey several areas within a broad geographic area. Establish geographic area selection criteria.

Phase 2 – Analyze the Factors in Selecting a Site
4 5 6 Determine your exact need – to build, renovate, or relocate. Assess the need to lease. Review your analysis and make an objective site selection.

Step 1- Select the geographic area for consideration: Based on personal experience and your knowledge of current business conditions, select two or three broad geographic areas with the potential. These geographic areas can be as large as an entire state, but if you currently operate a business, include the geographic area surrounding your present site. Ask yourself:
• • Will I benefit most from a large metropolitan area, suburb, or small city or town? Should I choose a newly developing city or an established, well developed urban area?

Step 2 - Survey several areas within a broad geographic area: Survey the promising geographic areas and collect data on economic and competitive conditions as well as the general population. Consider these specific factors:
• • • • • • Market characteristics (education level, income level, prominent occupation) Permanency of its inhabitants Type of housing (apartment vs. houses) Availability of labor Market proximity Availability of transportation.

Step 3 - Establish geographic area selection criteria: After you have identified one or two areas as strong possibilities, evaluate the market potential of the area. Establish the criteria for rating them before beginning this assessment according to the nature of your business. Consider:
• • • • • • • • Competition in the trading area Neighborhood conditions Traffic volume and type Area history Single or multiple occupancy options Real estate taxes Zoning restrictions Cost of complying with OSHA regulations.

Step 4 - Determine your exact need – to build, renovate, or relocate: The first three steps have led you to an evaluation of market potential that revealed two or three promising sites. Now, identify your exact need before making a final selection. Your options are to build on the chosen site, renovate an existing structure, or simply redecorate. Ask yourself:
• • • • • • • • How much time will it take to renovate the business? How much will my profits decrease during this period due to lost sale? What will the cost of labor, materials, fixtures, and equipment be? Can I find a reputable, competent contractor to do the job? Will I need to borrow money? If so, will I be able to pay it back? How much will the depreciation allowances and tax credits help me? What will the costs associated with city building permits and architectural fees be? Availability of transportation.

Step 5 - Assess the need to lease: Leasing a building is a common practice among business owners. If you decide to take that option, carefully review the lease agreement in order to avoid potential problems. When considering whether to lease, consider the points listed below:
o o o o o o o
Rent – Determine how much rent will cost and whether it will be a flat fee or a percentage of your sale. Duration – Identify how long the lease is in effect and whether you can cancel before it expires. Renewal – Study the provisions for renewal. Restrictions – Inquire as to whether the owner restricts the facility to include only specified uses. Maintenance – Identify who will be responsible for maintenance and if there is a fee for maintaining the property. Improvements – Evaluate the site to determine whether any improvements should be made. If so, identify to whom the additions will belong and who has the authority to define the specifics of the improvement. Subleasing – If you might be interested in subleasing the property, find out any restrictions that exist.


Insurance – Determine the insurance that the owner has on the site. Also identify any insurance that you are required to have in order to conduct business at the location.

Step 6 - Review your analysis and make an objective site selection: Carefully review the data collected for each potential site. Compare your findings with a perspective of the future. Think about your business and how it will fare in five years, ten years, etc. Although you have analyzed objective data, you may have to make your decision on less objective data than desirable. Since planning just one year in advance can be risky, looking ahead 10 tears is pure speculation.

Appraising the Business Site: As a potential buyer, carefully analyze the business site in order
to determine its worth. Consult with experts including accountants, lawyers, real estate agents, etc. Key questions are:
o o o o o o
Why does the owner want to sell the property? What is the profit potential of the business? If the seller has an exclusive selling agreement with a supplier, can it be transferred to you? Does the business have a good reputation with its customers? Are there any special licenses required because of the change in the ownership? Will the customer base continue to patronize the business after a change in ownership?

Before you decide to buy the business, arrange for an audit of the seller’s records and financial statements, and request information on past sales and profit figures. Arrange for an expert appraisal, or physical inventory, of the business assts to determine their current worth. Also examine the condition of the inventory so that you can decide:
o o o
How much of the stock that you can sell Whether the inventory is balanced How much of a loss you will take by getting rid of unsatisfactory items.

Homework Assignment - Self Assessment of your Business (To be done by the team): Will your business fall into one of the categories listed below, and is it natural or planned? Central shopping district: The consumers for retail and service firms are often in the central
shopping district and all kinds of goods and services are available. Major department stores provide the drawing power, but theaters, restaurants, and specialty stores also increase customer traffic. These businesses usually have advertising programs of their own.

Mini-warehouse mall Neighborhood shopping areas: These clusters attempt to locate in heavily populated areas and can
be developed quickly to take advantage of rapid growth areas. They often share many advantages such as lower square footage and operating costs; repeat business; and a well-balanced assortment of stores that lure customers.

Office complex Shopping centers: These planned business clusters have grown, and usually located on the outskirts
of towns and near a major highway. Shopping centers rely on their ability to attract customers by providing appealing shopping environment, which is enhanced by planned tenant mix, ample parking, pooled advertising, and promotional programs. The three basic types of shopping centers are: neighborhood community regional.

Business incubator Industrial parks: They are the manufacturing and wholesaling equivalent of retail shopping centers.
They are usually located on the outskirts of towns, where rent is more affordable.

Executive suites Factory outlet mall Home-based business: Thoroughly check the zoning ordinances. You may have to obtain a special
permit or zoning variance in order to conduct business at home.

Chapter 10
Developing a Pricing Strategy
Pricing is the determination of the most lucrative and reasonable amount of money to ask for your goods or services. The price that you set directly impacts your bottom line. Consider the factors that affect your profit margin and the influences in your marketplace in order to establish a price that maximizes your profit. Objectives: By the conclusion of this chapter, you will be able to: • Explain how pricing fits in to the total marketing mix. • Describe the factors that affect pricing including:
a. b. c. variable and fixed costs supply and demand stages of the product life cycle various mark-up strategies.

• • • •

d. Describe pricing incentives and how they affect sales. Relate how competition impacts your approach to pricing. Define the role of product image on pricing. Identify the best pricing strategy for your own business.

Assessment: Determine whether you can already meet these objectives?

What Is Pricing? Pricing is one of the four Ps of the marketing mix. Each “P” represents a
component of the product that impacts its consumption in the marketplace. These four components are: Price Ask consumers to pay an amount that represents the actual value of the product and is acceptable to them. Product Create a product that meets consumer needs. Promotion Advertise the product in a way that allows consumers to appreciate its value. Place Make the product available to consumers.

Factors Affecting Your Pricing Strategy: The price you receive for your product must be
higher than the cost of producing and distributing it, or you will lose money on each sale. For this reason, always coordinate pricing with other factors when setting the price for your goods or services. When determining how to price your product, consider these factors:
a. b. c. d. e. variable and fixed costs supply and demand for the product its stage in the product life cycle distribution costs various mark-up strategies.

Range: You have some degree of flexibility with pricing. The pricing band is that range in prices at which your product or service might sell for a profit. The range depends on market conditions and product life cycle stages.
• • at the low end is the cost you incur to produce the product, at the high end is the price that consumers perceive as a poor value and where they become discouraged from buying your product.

Optimal Price: The price most profitable to you lies within this pricing band. Consider the costs involved in doing business before deciding what price to charge. Types of Costs: The two categories of costs that make up the total cost are variable and fixed. Since you know what to expect with fixed costs, you can allocate these expenses into your pricing over the period in which they will be incurred. When projecting fixed costs, add a specific amount to your anticipated expenses in order to provide a margin of error. Set a price for your product that covers your total cost (variable+fixed costs) while generating the highest profit possible. This figure is also called the floor price.

Supply and Demand: The pricing band in which your product will be profitable is determined not
only by the costs incurred but also by sales volume. Find the ideal production level in order to price your goods or services at a point where sales volume and profit per unit combine to produce the maximum profit. Demand Curve and Pricing: In most cases, the demand for an item increases as the price of the product decreases. There are some products with inelastic demand for which a decrease in price does not trigger an increase in demand (Example: insulin). Luxury products are another exception, for which even a severe price reduction does not increase the demand (Example: baby grand piano).

Stages in the Product Life Cycle: The influence that price has over the purchasing decision also
depends on the position of the product in the product life cycle. The life cycle identifies the competitive stages that an item will undergo over time. The four stages of the product life cycle are: Stage 1 Introduction: The product is new and unique, so pricing has the least amount of influence during this stage. Stage 2 Growth: Competition begins to duplicate a product that has proven to be successful. Stage 3 Maturity: The product widely available and has numerous competitors. Stage 4 Decline: The market demand decreases for the entire product category. Notes: • During stage 1, the business owner has a great deal of flexibility in setting the price:
If the business owners want to capture as much market share as possible, then they will price the product low and adopt a “penetration” approach. If the business owners want to generate as much profit per unit as possible, then they will price the product high and adopt a “skimming” approach.

• During stage 2, pricing becomes more important as businesses compete to give consumers the best value. A quality image in packaging, promotion, and product features justifies a higher price. • During stage 3, consumers have widely accepted the product as a permanent fixture in the marketplace. Therefore, pricing plays a significant role in the decision to purchase the product at this stage. Cut-priced producers enter the market during the maturity stage, and attempt to draw customers away from the original product with lower-quality goods or services at a reduced price. But by promoting their differences and higher quality, established businesses can fend off such attacks with higher promotional budgets.

• Finally, during stage 4, to maintain profitability, business owners must pay close attention to profit margins and costs. They usually decrease their promotional budget in declining product categories and reinvest in high growth items. Businesses slash the price of the product to the lowest possible point, and when it is no longer profitable, they stop offering the product all together.

Mark-up Strategies: One way to establish the price of your product is to use a mark-up strategy. This is done by adding a percentage to the total cost of goods sold.
You can use a standard mark-up percentage on all products (practical when it is difficult to evaluate between alternatives). Another option for businesses offering a wide variety of products, each with a different appeal to consumers, is the variable mark-up system. If pricing is a major factor that customers consider when evaluating which product to buy, the mark-up should be narrow. In this case, watch the items carefully and make adjustments to pricing as necessary.

Pricing Incentives: With accurate info about the conditions that affect pricing, you have a great deal of flexibility in pricing tactics. A common form of rapid price change is the strategic discount. Don’t make the decision to discount your product hastily. Discount pricing sends a signal to the marketplace of which the interpretation by consumers isn’t easy to control.
There are many situations in which a strategic discount will increase sales. You can use it for a variety of objectives such as:
attracting new customers to the market increasing usage of the product by existing customers taking customers away from competitors discouraging existing customers from switching to the competition encouraging customers to buy now instead of later discriminating between different types of buyers using the low price of one product to sell another product in the same line.

Communicating with consumers: The impact of the discount will depend on how you communicate it to consumers. Make communicating with potential and existing customers a priority when developing your pricing strategy. In addition, maintain the effectiveness of the discount by continually measuring its effect on sales and adjusting your strategy as necessary. Common Types of Pricing Incentives: Tactical Discount – a temporary price reduction that increases the perceived value of the product to consumers. Quantity Discount – reduce the price when customers buy large quantities of a particular item. This discount strategy is practical because many of the overhead costs involved in producing goods or providing services are reduced when spread over a greater number of units sold. Cumulative Discount – encourages consumers to buy from one supplier over an extended period of time. This discount becomes more valuable the longer the customer remains loyal to the supplier. Trade Discount – a reward offered by a wholesaler to the retailer for pushing a particular item to the public. It encourages the retailer to feature the product to consumers. Giving a trade

discount is sometimes the only way to work your own product into the distributor’s stock or list of services that they offer. Cash Discount – the majority of sales are made on credit. The retailer buys the product on credit and pays the manufacturer after selling it. Offering a cash discount for making the payment before it is due gives the retailer an incentive to pay the manufacturer for the product as soon as possible.

Competition: The freedom available to consumers of goods and services provide them with the
freedom to choose the most desirable product based on factors like pricing. Whenever the consumer is able to choose among alternatives, the supplier of goods and services is facing competition. Depending on which side of the fence you are on, competition may be considered either good or bad, or sometimes both: If you are the seller, then the competition is bad because the consumer may choose the other product. In order to stay in business, your product has to be superior. This fact makes your job more difficult and costly, but it can also propel the quality of your goods and services to new heights. If you are the consumer, then the competition is good because it ensures that the business owner offers high-quality goods and services at reasonable prices. Competition may also force the entrepreneur to invest time and money in research and development that ultimately benefits the consumer. When there is only one supplier in the marketplace, that business has a monopoly. They can charge exorbitant prices without worrying about quality. Can you think of any monopolies in the U.S.?

Product Image: The image of your product affects how much you can charge for it, and conversely the price that you charge affects its image. Consumers not only buy an item based on how it functions, they also rely on its image to indicate product quality. Targeted Consumers – Manufacturers target specific groups of consumers by projecting product image that the desired audience finds appealing. This image is as much a part of the item as its physical makeup. Integrity in Pricing – Since consumers often choose the most expensive product, assuming it is of the highest quality, businesses might charge high prices to make their own products look good. But if customers buy a mediocre product at a high price, they will be disappointed, and ….
Bottom Line – Sell your product at a price that more than covers your cost and adjusts to market demand. Calculate the fixed and variable costs, and determine a reasonable profit margin.

Develop Your Own Pricing Strategy: Developing the most effective approach to pricing is important to your marketing program and resulting sales. Determine which pricing strategy is most appropriate for your own situation after carefully evaluating each factor related to the pricing strategy.

The following chart describes how to choose a pricing strategy that will be most effective: Phase One – Evaluating Marketplace Conditions 1. Identify the needs, wants, and desires of consumers. 2. Determine your market position. 3. Assess your competition. Phase Two – Analyze Your Financial Situation 4. Conduct a complete cost analysis. 5. Prepare product or service line financial statements. 6. Assess existing and future operations. Phase Three – Communicating with Parties Involved 7. Communicate with close partners including employees, distributors, and retailers. 8. Communicate with buyers and users. Phase Four – Following Up the Results 9. Monitor the results of your strategy. Notes: • Establish exactly where your business stands in the marketplace. Answer these questions:
o o o o what do consumers think of your goods or services? is your product a viable alternative to the other items offered? what are the strengths and weaknesses of your product? is your offering vulnerable to attack by competitors? If so, from which direction and which tactics are they likely to use?

Examine the activity of your competition up close. take the following measures to evaluate what they are presently doing and the overall path that the market is taking:
o o o o visit the major points of distribution in your area. observe your competitor’s marketing mix, and compare their pricing strategy to your own. evaluate the competition’s promotional effort and the means they use to attract customers. identify any new products or improvements to existing products that your competitors are offering to consumers.

It is very important to know the exact contribution to profitability of each item in the line of goods and services. This knowledge allows you to determine the role that each product plays in overall business operations.

Homework Assignment - Self-Assessment (To be done by the team):
Use the knowledge that you gained in this chapter to develop a pricing strategy of your own for the product that you developed in IME 3010 or the one you are doing in this course. Explain all the assumptions and details.

Chapter 11
Financing Your Business
Finding adequate financing to start and sustain your small business is a major challenge that you will face as an entrepreneur. Although the financing barrier may seem insurmountable, you can overcome it with careful planning to identify your money needs and potential sources of funding. Objectives: By the conclusion of this chapter, you will be able to: • Describe the cost factors in starting a new business including:
a. b. c. d. e. f. g. • a. b. c. • • the nature of your business size location economic conditions trade assistance the nature of the inventory required credit policies. start-up costs operating costs personal expenses.

Explain how to estimate cash needs for:

Describe the sources for equity and debt financing. Compare and contrast the different types of loans:
a. b. c. short-term intermediate-term long-term

• •

Explain the two kinds of lenders, commercial and governmental. Describe the contents of a loan application package and the checklist items to address.

Self-Assessment: Determine whether you can already meet these objectives?

Cost Factors in Start-up: Prospective entrepreneurs often underestimate the amount of money it
takes to start a business, and they do not realize how much money it actually takes. Both overestimating and underestimating the amount of financing necessary to start a business are impediment to success. Underestimating Overestimating If you underestimate the money required for start-up, you will not be able to meet your financial obligations and the endeavor will fail. If you overestimate the money required for start-up, you will carry a heavy load of debt that may prevent your business from realizing a profit.

The crucial question is. “Exactly how much money do I need to start my business?” The answer depends on the following factors:
• • • • • • • • the nature of your business its size the location current economic conditions available trade assistance the nature of the inventory required credit policies timing.

Nature of your Business: The nature of your business impacts the money needed: Manufacturing Start-up costs include:
• • • expensive machinery and technology large facilities in which to house equipment large number of employees.

Retail/wholesale Service

requires financing for inventory of the merchandise you will sell. requires no inventory and less equipment to operate.

Size of your Business: Large businesses require more money than small ones. Therefore, it may be wise to start small and finance your growth through self-generated profits in order to avoid accumulating debt. Location of your Business: The following guidelines apply to finding the best spot for a start-up business:
• • • For retail businesses, it is important to choose a convenient location with ample parking along a heavily travelled street. For manufacturing businesses, the location may not be as expensive, but it is desirable to locate near access to transportation and other needed infrastructure. For service businesses, location may depend less on convenience if the service is provided at the consumer’s location. Consider how to best serve the customer, and then find the most desirable and least expensive place from which to operate.

Economic Conditions: Your business is a small part of a very large economic system, and you are dependent on these other participants to set the stage for your success.
• • If the economy is bad, then you will face financing problems like high interest rates, lower demand, more time needed to make a profit, and higher start-up costs. If the economy is good, then you may be able to borrow money at a lower interest rate, which could accelerate your return on investment.

Nature of Inventory: The nature of the inventory you carry affects start-up costs. Both the type and selection of merchandise impact your financial requirements: Type If you inventory consists of more expensive items, you need more money to stock them. Selection If you sell a wide variety of merchandise, it is more expensive than if you carry a narrow selection. So, consider starting with limited inventory and then expand. Credit Policy: Whether you offer credit and the terms of the credit if you decide to offer it impacts the financing you need to get your business off the ground.
Bad Debt Long-term Benefits You will likely experience some bad debts and have to absorb these losses and factor them into your financial plan. You should develop a policy for managing bad debts. Providing credit to customers will increase sales in the long-term, but will drain your resources, so you must be able to properly manage cash flow.

Estimating Cash Needs: Consider the categories of expenses that you have to address when
estimating the cost of running your business. There are basically three types of costs:
Start-up Costs Operating Costs These are one-time expenses for items necessary to open your doors for business (licenses, starting inventory, advertising, attorney fees, utility deposit). Then you will incur some expenses on a monthly basis (rent, utilities, payroll, inventory, debt repayment). You will have to pay for your own house, food, clothing, and other expenses of daily living. Make sure to include a salary or wages for yourself, and yourself a paycheck. Do not mix the business finances with personal finances.

Personal Expenses

Cushion for Meeting Costs: Financial advisors recommend that you have savings as a cushion to cover at least three months of living expenses. On the average it takes three to nine months before a new business shows enough profit to support the personal living expenses of the owner.

Sources of Financing: After determining how much money you need to start your business, the next issue is where to obtain funding. When you systematically calculate the amount of money needed, you will see how large that amount actually is. A combination of financial sources may be the answer to where you can obtain funding. The two major types of financing are equity and debt. • Equity financing consists of money that you, as the owner, and others invest in the business. • Debt financing involves borrowing money to get the business started.
Equity Financing: Raising money by issuing and selling shares of common or preferred stock or
taking on a partner in a partnership, as opposed to incurring debt or borrowing. Small businesses must exercise care in obtaining money in this manner because control of the business could be lost, or earning may be reduced. Sole Proprietorships – Frequently, a small business is started by a single individual, providing equity financing by investing his or her personal savings. Advantages are:
total ownership of profits amount of debts reduced complete control over decisions high degree of motivation sense of personal achievements.

Disadvantages are:
total liability for the risk potential to lose personal savings or collaterals initial lower standard of living sacrifice of personal comfort loss of future returns on saving.

Partnerships – If two or more people go into business together, they form a partnership, general or limited, and each shares in the ownership of the business. Advantages are:
possible sources of financing some degree of shared liability increased skill set for operations.

Disadvantages are:
less control over decisions problems when one partner wants or needs to leave the business.

Corporations – When you need a large amount of financing, you could incorporate and sell shares of ownership in the business. Advantages are:
more funding available limited legal liability tax advantages.

Disadvantages are:
less control over decisions decreased authority complex and costly to form.

Venture Capital – You can seek financing from a private company that buys partial ownership in new businesses and assumes the risk in return for the promise of large returns on the investment. They are characterized as:
that are very selective about where they invest, generally business with high growth potential they may set limits (say 20%) on their investment return they exchange their money for common or preferred stock they may contribute to major decisions.

Advantages are:
large amount of funding offered shared risk expertise from venture capitalists.

Disadvantages are:
difficult to qualify for funding by venture capitalists if your business does not promise high enough returns.

Small Business Investment Companies (SBIC) – The federal government started a program in 1958 that authorized Small Business Administration (SBA) to grant loans to SBICs:
SBICs act as private venture capital operations and, in turn, invest this money in small businesses that might not qualify for regular venture capital. SBICs must have at least $500,000 of private capital. Then for every dollar of their own money, they may borrow $3 to $4 from the SBA. SBIC exchange their money for some type of ownership in the small business, frequently in the form of common or preferred stock.

Advantages are:
Designed to meet the need of small business overlooked by venture capitalists. Same as for venture capitalist.

Disadvantages are:
Favor given to expanding businesses rather than start-ups.

Note: Minority Enterprise SBIC is a spun off from SBIC in 1969, specialize in investing in small businesses with at least 51% ownership by ethnic minority entrepreneurs. Debt Financing – Borrowing money you need to start your business. Like equity financing, there are several available sources, each with advantages and disadvantages: Advantages are:
It is easier and quicker than equity financing. Repayment may be delayed. The cost of borrowing to buy inventory or equipment may save money in the long-run. Interest and other costs are tax deductible as business expenses. Loans can be paid back with “cheaper” dollars during inflation.

Disadvantages are:
You may pay higher interest rates. It is easier to adopt as a habitual remedy for cash management problems. You risk borrowing more money than you can realistically repay. You may have to sign a personal guarantee pledging personal assets to back up the loan.

Other Sources – Other sources for financing each have specific advantages and disadvantages. Franchising – In exchange for receiving considerable financial assistance, you must pay back the money with interest and operate the business within the franchiser’s set restrictions. Trade Credit – Suppliers often allow their customers to purchase inventory or equipment on trade credit, which allows you to generate sales without paying for the purchase right away. However, it usually requires paying interest or foregoing the cash discount on purchases. Selling Accounts Receivable – You can raise cash by selling your accounts receivable to another company (a factor). The factor pays less than the face value of your accounts but you get cash now instead of waiting. Cost Reduction – Every dollar you save by reducing start-up and operating costs decreases the amount of financing required. Some methods of cost reduction are:
i. ii. iii. iv. v. buying used equipment and furnishing bargaining for the most favorable lease and supplier terms maintaining rigorous control of direct expenses (travel, postage, supplies). pursuing accounts receivable with much rigor managing accounts payable effectively to maintain a solid credit rating and take advantage of available discounts.

Loans: When researching the different types of loans available, evaluate financing in terms of what best meets your specific need. Consider these factors when assessing financial options: your intended purpose the characteristics of each type of loan your ability to repay it according to stated terms.
There are three basic types of loans: 1. Short-term (within 1 year) To satisfy an intermediate, temporary need. Because the length of the loan is short, the amount of
interest paid is small. Since the risk to the lender is slight, this loan is usually less expensive.

2. Intermediate-term (1 to 5 years) To buy items like equipment during the normal course of operation, to expand the business, and or replace long-term indebtedness. It is more costly than short-term loan. 3. Long-term (5 years or more) To start your business and or expensive assts. It is more costly than other types of loan but
different lenders offer a variety of terms, so shop around!

Lenders: Lenders are either commercial or governmental. Government sources usually require the
participation of a commercial lender. There are various types of lenders:

Commercial: banks credit unions commercial finance companies consumer finance companies life insurance companies savings and loan associations. Governmental (Federal, State, Local): Small Business Administration (SBA) Economic Development Administration (EDA) Farmers Home Administration. Local Development Agencies. Banks make a large number of assorted loans to entrepreneurs, whom they have carefully screened. Banks are conservative in nature, and are very interested in your personal credit history and ability to repay the loan. They also examine:
experience in the proposed industry your management skills the financial position of your business expected business profits the likelihood for growth and success.

The interest rate charged by the banks for small business loans are based on several factors including:
The cost of money they borrow affects the rate they charge. Short-term loans tend to fluctuate according to supply and demand in the marketplace. a fairly accurate gauge for short-term borrowing is the prime rate, or the level of interest charged to the most reliable and trustworthy large businesses. The length of time allowed for repayment increases the possibility of nonpayment and affects interest rate. The risk is greater when the repayment period is long. The rate you use in your initial plan may not be available when you actually use the money.

Small business loans may be either Secured or Unsecured. With a secured loan, the borrower pledges as asset as collateral to be forfeited if he or she doesn’t repay the money. Common forms of collateral include personal savings, accounts receivable, life insurance, and real estate. With an unsecured or signature loan, the lender grants the loan without collateral. When a small business earns a good credit rating, it may receive a Line of Credit. This arrangement is an ongoing loan to be use, repaid, used, and repaid on a continual basis. They are often used for inventory financing. Credit Unions operate for the personal savings and loan needs of individual members, but they also make loans for starting a business. To obtain a loan, you have to belong to the credit union. Personal loans may be either secured or unsecured, but they are usually short or intermediate term, have limited financing capability. Commercial Finance Companies are usually willing to accept some of the risks that conventional banks reject (they charge higher interest rates and are willing to take a chance to earn a larger profit).

As a business specializing in making commercial loans, these companies are keenly interested in the borrower’s collateral. The three forms of collateral most often accepted are:
real estate equipment inventory

The most common types of loans provided by commercial finance companies are short-term receivables financing and intermediate 2- to 5-year loans with equipment as collateral. However, they also write long-term mortgage for commercial and industrial real estate. These companies don’t usually require as much financial info and don’t take as much time as banks to process a loan. Consumer Finance Companies will lend you from $30,000 to $50,000 loan for your start-up, if you have personal property (car. camper, or both) or real estate as collateral. Since they are willing to take risks that banks and commercial finance companies will not, they charge higher interest rates. Life Insurance Companies may lend you money using your life insurance policy that builds cash value. This component is often a standard part of the life insurance contract, and is available for either personal or business use. Because the policy’s cash value is based on cash that the policyholder has already paid in, the insurance company assumes a very slight risk when making this type of loan, so they are very easy to obtain and interest rates are substantially below the prime rate. Savings and Loan Association may lend you money for commercial and industrial loans, but they tend to be as conservative as banks.

Loan Application package: To determine whether a small business venture is a good risk, potential lenders require detailed info about your plans in order to assess your potential for success. The presentation of this data is organized in a loan application package. The SBA suggests including the following info in a loan application package to present when obtaining financing to start a small business:
Identify the type of business you plan on operating. Describe your experience and managerial capabilities. Prepare an estimate of how much you and others have to invest in the business and how much you need to borrow. Develop a financial statement that details your net worth. Prepare a detailed monthly income statement for the first year of business with less detailed projections for the following two years. Prepare a detailed monthly cash flow forecast for the first year of business. List the collateral you have to offer to secure the loan. Indicate your estimate of the current market value of each item.

Homework Assignment (To be done by the team): 1. Self-Assessment #1: Fill the Start-up Cost Worksheet and Personal Expenses Worksheet for your business. 2. Self-Assessment #2: Fill the Loan Application Package for your own business.

Estimating Cash Needs

Cushion for meeting costs Financial advisors recommend that you have savings as a cushion to cover at least three

months of living expenses. On the average, it takes three to nine months before a new business shows enough profit to support the personal living expenses of the owner.

Sample Start-Up Cost Worksheet
A. Cash Available Now Costs 1. Purchase fixed assets (land, equip, building, vehicles) 2. Remodeling costs (fixtures, signs, paint, cleaning) 3. Installation fees 4. Deposits (utilities, lease, phone, leased equipment) 5. Fees and Licenses 6. Legal Fees 7. Accounting and other professional fees 8. Insurance 9. Pre-opening labor expense 10. Pre-opening training costs II. Beginning inventory of merchandise or materials 12. Supplies (letterhead, forms, price tags, etc.) 13. Promotional efforts (grand opening, prizes, giveaways) 14. Advertising (initial media, direct mailings, coupons) 15. Other Expenses 16. 17. 18. B. Total Start-Up Costs C. Beginning Cash Balance Or Additional Cash Required To calculate: A - B = C IfC is a positive number, the amount is your beginning cash balance.
3. 4. 5. Estimating Cash Needs, Continued If C is a negative number, the amount is the additional cash required.

Estimating Cash Needs, Continued

Sample Personal Expense Worksheet
Expenses Housinz Rent/Mortgage Electricity Gas Water/Sewer Telephones Food Home Lunches Household Supplies Transportation Car Payment Gasoline Parking Repairs Insurance License Plates/Registration -Public Transportation Clothing Children Self/Spouse Cleaning/Laundry Medical Doctor Dentist Medications Medical & Life Insurance Entertainment Children Dining Out Hobbies Cable TV Education Tuition Books/Newspapers/Magazines 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Amount

Estimating Cash Needs, Continued Sample Personal Expense Worksheet, Continued
Expenses Credit Payments Loans Credit Card Charges Miscellaneous Bank Charges Taxes Household Repairs Alimony/Child Support/Daycare Pet Care Donations (Church and Non-profit) Allowances (Children/personal) Vacations Total Expenses Monthly Household Income Salary & Wages Interest & Dividends Rental Property Income Income from Business/Professions Child Support/Alimony Other Total Income Net Income (Total income minus total expenses) Amount


Chapter 12
Addressing Legal Issues
Compliance with the many laws affecting small business is essential to starting up and staying in business. Although you are wise to consult legal experts in many instances, this chapter familiarizes you with the basic concepts and issues that you face in the legal realm.

Objectives: By the conclusion of this chapter, you will be able to: • Explain the basics of legal issues including:
a. b. c. • • • how laws affect the business stages your role in handling legal issues the role of business law.

Define a contract and its essential components. Describe the of contracts –lease and sales. Explain government laws protecting:
a. b. c. d. e. competition employees consumers the environment business people.

Self-Assessment: Determine whether you can already meet these objectives?

Legal Basics: As a small business owner, you are obligated to treat consumers, suppliers,
employees, and the general public fairly and in compliance with established laws. In order to operate within the bounds of the law, you need to know how to effectively address legal issues as they arise. In today’s regulatory environment, the time spent up front will ensure that you are protected in your business venture. How Law Affects Business Stages: Startup When you first start your business, you have to carry out several activities of a legal nature. They range from obtaining the required licenses to filing ownership paperwork to complying with laws specific to your industry. Daily Operations Once underway, small businesses are subject to regulation in every area of business. Some regulated areas are:
contracts employee safety lending and credit labor relationships real estate taxes consumer protection.

Shut Down

Even if you decide to close your doors, you are faced with legal issues. You have agreements to fulfill, wages to pay, and tax obligations to meet.

Although you are not an expert in the area of business law, you can perform basic tasks independently after initial review of the procedures and practices by a legal expert (i.e.: hiring employees, engaging in contractual arrangements to buy and sell goods or provide services). Knowing about business law helps you sustain a successful business: You can identify issues that may involve the law and require specialized assistance from a legal expert such as an attorney and or an accountant. You can interact with your attorney and accountant more effectively, saving both time and money in the long run. Staying on top of changing laws is challenging, but doing so is worthwhile and even required I order to avoid breaking any laws.

What Is a Contract? Almost every day-to-day transaction in the business world involves some
kind of contract – written or verbal, formal or informal. Ensuring that your contracts are enforceable is essential to building a successful enterprise. A Contract is a legally enforceable agreement between two or more people. These people are the parties to the contract. A contract defines the rights and obligations of the parties to the contract. It protects each party’s interest in the relationship. It provides recourse when one party doesn’t fulfill the terms of the contract. If one party doesn’t do what was promised, the other party can sue him or her in a court of law for breaking the contract. Essential Components: A contract has the following five essential components:
1. 2. 3. 4. 5. agreement consideration contractual capacity legality of purpose mutuality of consent.

1. Agreement: The first and most important component of a contract. For agreement to exist,

there must be a reasonably definite understanding between the parties. a. Conditions: Agreement occurs in the following stages:
i. Offer: An offer is made. An offer is a proposal that expresses a desire to enter into a legally binding agreement. ii. Acceptance: The offer is followed by acceptance. Acceptance occurs when the party to whom an offer has been made agrees to the proposal. iii. Reasonably Definite Understanding: The offer and the acceptance create a reasonably definite understanding between the parties involved in the contract.

b. Intent to Contract: When people talk business, they often do so in exploratory terms. This interaction results in no agreement and no contract. For a contract to exist, the parties must intend to contract, or be willing enter into a contract and meet the terms thereof. c. Reasonable Definiteness: In order for an agreement to exist, the offer has to be reasonably definite. The terms have to be specific enough to determine when the parties to the contract have met their obligations.

2. Consideration: Is something of value exchanged between the parties to a contract. Often

consideration is money, goods, or services. However, it can be as simple as exchanging one promise for another. Note: If a person promises to do something that he or she is already required to so, this situation is a preexisting obligation. A promise to perform a preexisting obligation is not valuable consideration and doesn’t support the creation of a contract.
3. Contractual Capacity: All parties to the contract must be competent to understand and make

legally binding agreements; they must have contractual capacity. Minors, people with mental illness, or intoxicated people do not have the capacity to enter into a contract.
4. Legality of Purpose: Courts enforce only contracts with legality of purpose. If the purpose of

the contract is illegal, it is void and unenforceable. If only a portion of the contract involves illegal purpose, the illegal portion is void, and the remainder of the contract is still enforceable.
5. Mutuality of Consent: The parties to the contract must know the deal that they were making

and must have entered freely into the agreement, which is to say that they must have mutuality of consent. This element is missing if there is:
Fraud or misrepresentation: making untrue statements to entice someone to enter into a contract. Duress: coercion on the part of one party to force the other into entering a contract. A mistake made: both parties were mistaken about an important fact in the contract.

Types of Contracts: The two most common types of contracts are leases and sales contracts.

Lease Contracts: As you start your business, you will probably lease the site for your operations rather than buy it. A lease is the special contract that establishes a relationship between the property owner (lessor) and tenant (lessee) who takes possession of the lessor’s property. Types of Leases: You can sign various types of leases: • Tenancy for years: the tenant leases the site for a definite period of time. • Tenancy from month-to-month • Periodic tenancy: the tenant leases the site for an indefinite period of time. • Tenancy at will: the tenant leases the site for a indefinite period of time. The lease can be continued or terminated on short notice by either party. Content: Since a lease is a legal document, you should observe certain precautions before signing. The following guidelines apply to signing leases: • Avoid narrow restrictions on merchandise that you may sell or services that you may provide. • Include details such as duration, amount of rent, date on which rent is paid, and the penalty for late payment or nonpayment. • Arrange for subleasing, subletting, and assignment of the site to another business owner. • Confirm provisions in case of fire or other damage that makes the premises unusable and for the lessor’s obligations concerning repairs. • Arrange for options and renewals.

Leasing Equipment: Leasing equipment (besides leasing the site) has some very definite advantages because it: • Doesn’t tie up capital since there is little down payment required • May eliminate the need for some types of insurance protection • May provide tax savings (because lease payments may be deductible as a business expense) • May save on maintenance costs (often included in the terms of the lease).

Sales Contracts: Sales contracts may involve sales of items or services to customers or the purchase of items for your business. Make sure the sales contract includes these items: • a description of what is being sold • the purchase price • the method of payment • a statement of how adjustments will be handled at the time of closing (such as inventory sold, • • • • •
rent, payroll, and insurance premiums).

buyer’s assumptions of contracts and liabilities seller’s warranties (such as warranty protection for the buyer against false statements by the seller,
inaccurate financial data, and undisclosed liabilities).

seller’s obligation and assumption of risk pending closing the covenant of the seller not to compete with the business time, place, and procedures of closing.

Note: The buyer will want to take possession as soon as possible after signing the contract.

Laws: Laws pertaining to small business are written at the federal, state, and local levels. They are
written to achieve desired economic and social goals. Preserving fair competition and protecting the rights of individuals are important objectives of business law. Laws can be burdensome for small businesses. They may create a great deal of paperwork and cost. They also affect your plans and daily operations of the business by influencing basic management decisions including: which lines of business to enter which investment to finance which goods and services to offer under which conditions to offer goods and services how to market your product how to price your goods or services how to maximize your profit. Classifications: We classify laws according to the entities they are intended to protect. The five categories of laws are: 1. Competition 2. employees 3. consumers 4. the environment 5. business people.

1. Protecting Competition: Competition is the cornerstone of the free enterprise system. Over

the years, laws, known as antitrust laws, have been made to protect fair competition. Through the Sherman, and Clyton Acts, the government protects competition by prohibiting: i. price fixing ii. price discrimination iii. exclusive and tying contracts iv. intercorporate stockholding.
2. Protecting Employees: Many laws exist to protect employees. The U.S. Dept of Labor is an

excellent resource for understanding labor laws (
Occupational Safety and Health Act (OSHA): Ensures a safe workplace. Fair Labor Standards Act: Provides for a minimum wage, maximum hours, overtime pay, equal pay, and child labor limitations. Worker Compensation: Protects employees from financial loss resulting from a work-related injury or illness. Unemployment Compensation: Protects employees from financial loss when they are unable to find employment. Social Security Act: Protects employees and their families when they retire, are disabled, or die. Medicare makes health care benefits available to persons 65 and older and to some under 65 who have a disability.

3. Protecting Consumers: A wide range of laws protect consumers from harm when carrying

out tasks as varied as borrowing money, reading food labels, and shopping for an education:
Consumer Credit Protection Act (Truth-in-Lending): Clarifies the meaning of credit terms. Federal Equal Credit Opportunity Act: Ensures that consumers are not denied credit based on sex, marital status, age, race, religion, or national origin. Pure Food and Drug Act: Forbids adulteration and misbranding of foods and drugs sold in interstate commerce. Federal Food, Drug, and Cosmetic Act: Adds cosmetic and therapeutic devices to the FDA jurisdiction.

4. Protecting The Environment: Concern for the environment has resulted in the passing of

many antipollution laws. They are designed to prevent people, particularly businesses, from polluting our natural resources. They address waterways, the air, noise pollution, handling hazardous materials, disposing of hazardous waste, and landfills.
5. Protecting Business People: Several laws exist solely to protect your interests as a small

business owner. The Uniform Commercial Code has been adopted by almost every state in order to make business transactions uniform and efficient. It provides for one set of rules governing business transactions such as contracts, sales, bank deposits, bank transfers, letters of credit, commercial papers, and collections. Laws governing patents, trademarks, service marks, and copyrights help businesses protect their ideas and inventions.

o Patents:
Protects a new and unique item invented in the process of operating a business. Obtained on new products, industrial or technical processes, machines, designs, and other items involved in the process of doing business. Gives exclusive rights to the inventor to make, use, or sell the invention for a set period of years.

o Trademark:
Protects a word, name, symbol, or device, or a combination of these items, used to identify a product. When registered, the trademark is in effect for 20 years.

o Service Mark:
Protects a word, name, symbol, or device, or a combination of these items, used to identify a service. Distinguishes the services of one firm from another.

o Copyright:
Protects printed material such as literary and artistic work. In effect for the life of the author plus an additional 50 years. Entrepreneurs may want to copyright advertising material (catalogs).

Homework Assignment - Self-Assessment (To be done by the team): Which laws apply to your business? What is your plan to make sure you and your business is complying with the laws.

Title Occupational Safety and Health Act (OSHA) Fair Labor Standards Act

Description Ensures a safe workplace. Provides for a minimum wage, maximum hours, overtime pay, equal pay, and child labor limitations Protects employees from financial loss resulting from a work-related injury or illness. Protects employees from financial loss when they are unable to find employment. • Protects employees and their families when they retire, are disabled, or die. • Medicare makes health care benefits available to persons 65 and older and to some under 65 who have a disability. Provides rules that govern pension plans and other benefit plans. Protects persons with disabilities against discrimination on the job. Protects persons against unfair employment practices based on race, religion, age, or sex. Ensure fair employment practices . Supports a balance on the demands of the workplace with the needs of families. Protect the public trust in accounting and reporting practices.

Workers Compensation

Unemployment Compensation Social Security Act

Employee Retirement Income Security Act of 1974 (ERISA) Rehabilitation Act of 1973 and the Americans with Disabilities Act (ADA) Civil Rights Act of 1964 Equal Pay Act, Age Discrimination in Employment Act, and Equal Employment Act Family Medical Leave Act Sarbanes-Oxley Act

Chapter 13
Managing Basic Business Functions
As the owner of a small business, you are the team leader, key communicator, and major decisionmaker. The managerial skills that you may already posses will be tested, and the wide range of responsibilities charged to you will challenge you to expand your managerial competencies even more. The way you manage basic business functions will make or break your enterprise. Success depends on your commitment to managing your staff well and making sound business decisions.

Objectives: By the conclusion of this chapter, you will be able to: • Define the role of the manager in a small business environment including:
a. b. • • a. b. a. b. c. d. • • • • a. b. a. b. Identifying the rewards associated with managing a company Naming the major functions that managers perform. The types of plans involved in running a business The tools available for planning. Delegation Span of control The tools available for organizing Internal organizational structures. Leadership Communication. Standards Evaluation methods.

Describe the planning function including: Describe staff organizing function including:

Describe the staff directing function including: Describe the performance evaluation function including: Identify the stages of the decision making process. Explain business ethics including:
a. b. c. Challenges and pitfalls Involved parties Codes of conduct.

Self-Assessment: Determine whether you can already meet these objectives?

The Management Role: To be successful entrepreneur, you need to develop sharp skills in key
areas as well as observe proper ethics when implementing policies and procedures. Effective business practices and strong ethics are the foundation of a successful business.

Management Functions: Entrepreneurs are accountable for certain basic functions that are integral
to every small business operation. These activities are:
1. 2. 3. 4. 5. 6. Planning business operations Creating a staffing plan Directing staff Evaluating performance Making decisions Observing business ethics.

1. Planning Business Operations: Planning is the process of setting objectives and then determining the steps required to meet these objectives. Planning for business operations ranges from long-term to planning for specific events. The types of planning include: Business plan Short-term plans Daily plans Special event planning. Note: When you write objectives, make statements specific and meaningful in order to support desired job performance. Business Plan: A business plan serves as your company’s blueprint. It helps you make decisions, allocate resources, and communicate with employees, consumers, and others. Your Business Plan results in: • Business objectives • Company policy and procedures • Operating methods. When developing business plan, define expectations and set timetables for each operation area such as: Product Development
Market survey Test of market Product generation Product improvement

Market Development
Sales/promotion Distribution Pricing Credit policy.

Process design/facilities Capacity planning/scheduling Inventory acquisition/control Quality management Technology strategy.

Profit Budget Financial analysis Accounting.

Human Resources
Recruiting Training Retention Compensation.

Short-term Plans: They complement the business plan because they establish the objectives to be accomplished at shorter intervals in order to achieve the business plan. o It usually addresses days, weeks, or months whereas the business plan sets course for one year or longer. o With short-term plans you can solve problems that couldn’t be anticipated when the business plan was developed. o Post your short-term plan where employees can see it and track their success in achieving objectives. This involvement leads to increased employee morale. Daily Plans: You can organize your activity according to importance and urgency, and modify your daily plan throughout the day in order to adjust to changing demands. When an urgent situation arises, drop the least important task on your list to make the time to put out the fire. Special Event Planning: It addresses an event apart from the everyday routine. Planning Tools: There are some tolls proven to be helpful with the planning process:
o o o o o Budgets Schedules Standards Policy Procedures.

Crisis Intervention: Even good planning cannot prevent crises from arising. Use these guidelines:
o o o o Get into a relaxed state of mind. Focus on logical outcomes of different solutions. Act decisively once you reach a decision. Don’t be afraid of failure.

2. Creating a Staffing Plan: A staffing plan coordinates efforts among employees in order to ensure maximum efficiency. It involves everything from the individuals who carry out tasks to the tools, equipment, and supplies that they need to do so. `The three elements of staff organization are: I. Division of work: Assign specific units of work in the various functional units. II. Facilities: Identify the physical aspects of operating your business such as workplace, tools, equipment, and supplies. Assign the duty of acquiring the identified resources needed to accomplish every task. Arrange the layout in a way that ensures a smooth workflow. III. Employees: Evaluate each employee’s qualifications. Assign job duties that realistically match the skill set of each employee. Make assignments in manageable units.

Notes: o To maximize your efficiency, Delegate some of your authority to supervisors. o Span of Control refers to the number of employees directly supervised by one person. Establish a reasonable span of control that limits the number of people supervised and maintains a manageable workload. o There are two principal types of internal organization structures: 1. Line Organization: All authority and responsibility can be traced in a direct line from the owner down to the person in the most basic position in the company. Each employee is responsible to only one supervisor. 2. Line and Staff Organization: Large volumes of work or complex work is handled by two types of personnel. Line personnel may not be skilled in all the specialties of those they supervise. In order to address this deficiency, staff specialists (advisors) are added to assist in these areas.

o Some of the Organizing Tools proven to be helpful with the organizing process are: 1. Position Description: Lists the duties assigned to each job. Use them to clearly define your expectations for each employee and ensure that work is divided into manageable units. 2. Organizational Chart: Illustrates the structure of the business and the relationship among employees as well as how the work is divided. Use it to identify each person’s area of responsibility and to whom they report. Staffing Plan: Organizes available staff for completing required work. The plan include:
Identifying available human resources Matching the skills needed to employees available Aligning staffing with the project schedule Defining roles and responsibilities for the project Identifying non-labor resources to support the effort.


3. Directing Staff: Once you have organized your staff, you have to direct them to get the job done. Accomplish this by communicating with employees and motivating them to want to do their jobs well. Recognize each employee’s contribution to your overall business success. Not only will it motivate that individual to sustain a high level of job performance, it will also increase employee morale in general. There is different Styles of Leadership. Develop an overall leadership style that matches your personality and business philosophy. Most common leadership styles are:
o Hands-off: Focuses on the manager’s responsibility for the initial stage of the decision-making process and then give employee the freedom to work uninhibited. Autocratic/directive: Emphasizes rational control of all aspects of the decision-making process. Allows for little employee involvement to take place. Employee involvement.



Leadership Attributes and Skills: Leadership is a combination of attributes and skills. Research has shown the following characteristics to be common among effective leaders:
Positive attitude Willing to learn from others Ability to manage stress/conflict Empathetic Ability to motive others Sense of fairness Creative, original, and visionary Good listener Good interpersonal skills Assertive Sense of humor Responsible Good work skills Risk taker Good work habits Ability to delegate work Personal/professional integrity Confident Consistent decisions Dependable, reliable, and trustworthy

Communication Skills: The leader has to have the following range of communication skills to be effective communicator:
Listening Feedback Verbal Non-verbal Written

Communication breaks down when barriers exist. Common barriers include:
o o o o o Difference in opinion Missed meanings Physical problems Shyness Selective listening.

4. Evaluating Performance: It involves judging how well each employee has met his or her assigned objectives and then taking corrective action when objectives have not been met. The Evaluation Process involves these three stages: 1. Establish performance standards. 2. Compare actual performance against those standards. 3. Take corrective action if necessary. The Types of Standards to consider when evaluating performance are: 1. Quality 2. Quantity 3. Time 4. Cost. Guidelines for Evaluation Performance: Follow these guidelines to evaluate performance: • Focus on the behavior that you need to change or develop. Immediately correct the undesirable behavior, and provide immediate positive feedback when you observe desirable behavior. • Conduct regular performance evaluations. First ask the employee to do a self-assessment, and then compare your evaluation with his or hers. Include the employee in objective setting, and follow up with appropriate reinforcement for both positive and negative behavior. • Seek feedback from your customers on how well your employees are providing the goods and services they want and need. • Set a regular time to review financial and operations record systems in order to evaluate your progress in reaching your objectives.

5. Making Decisions: Your business succeeds or fails based on the decisions that you personally make. The five stages of the decision making process are: I. II. III. IV. V. Identify the problem: By identifying the problem, you can find the right solution. If you don’t address the real issue, you’ll arrive at a solution that is useless and counterproductive. Define the alternative solutions: The more choices you have from which to choose, the more
likely you are to find the best solution.

Gather information about the alternatives: Gather as much info as possible about your
options in order to make an informed decision.

Evaluate the alternatives: From the info you have gathered, assess the advantages and disadvantages of each option and identify which one would be the best way to solve your problem. Formulate an action plan: Determine what has to be done and how to do it within the bounds of
your resources.

SWOT Analysis: You can use the SWOT Analysis of Strengths, Weaknesses, Opportunities, and Threats to help plan and make decisions that affects your business. S = Strength Parts of your organization that will support your achievement of the objective. W = Weaknesses Parts of your organization that will interfere with achieving the objective. O = Opportunities External conditions that will be helpful to achieving the objective. T = Threats External conditions that will be harmful to achieving the objective. The SWOT Analysis serves these purposes:
• • • • identifies the things you do well determines the areas in which you need to improve recognize any threats in the marketplace suggests how you can turn these threats into opportunities for growth.

SWOT Analysis is only useful if you start by identifying the desired objective. With a clear objective identified, you can use SWOT analysis to help achieve that objective. 6. Observing Business Ethics: Besides your role as manager, you have another responsibility as the business owner to a number of groups within your community. Ethical business practices include observing the highest legal and moral standards in your relationships with community members such as:
competition customers suppliers employees neighbors.

Fair and consistent interaction with people in your realm is not only good business, but it also ensures that you and your employees will make a positive contribution to the community that is sustainable through the years. Be especially careful to avoid the following unethical business practices: False or misleading advertising Unfair treatment of suppliers Giving or receiving gifts among sales or purchasing staff Inaccurate income and expense account reporting Poor image projected by employees to customers and the general public. State your expectations to staff clearly by developing a formal Code of Ethics in writing. Address the above challenges and include any concerns specific to your business and industry. Include your employees in the creation of this document as much as possible. Their input will promote buy-in and adherence to the rules. Illustrate your ethical standards by including specific examples of what you mean. Here are some of the common pitfalls that you and your employees may face in terms of ethical issues: Key suppliers may offer you free lunches and holiday gifts Customers may receive products with known quality defects Paying employees for overtime in cash may be convenient Somebody may offer you private information about a competitor Sharing of financial information with business associates may be tempting Inflating accounting numbers to make your profits look better may be enticing.

Homework Assessment (To be done by the team): 1. Self-Assessment # 1: Research the internet, and use the knowledge you gained to create a “Position Description From” and a “Staffing Plan” for your own business. Try to be as detailed as possible. 2. Self-Assessment # 2: Can you create a useful and simple SWOT Analysis Form? 3. Self-Assessment #3: Put together a Formal Code of Ethics for your own business. Do you foresee some challenges in its implementation?

Chapter 14
Managing Your Human Resources
Successful entrepreneurs are very effective managers of the people who work for them. The human resources that drive your organization are the most valuable, yet costly, asset that you have. Manage them wisely and your business will flourish for years to come. Your business needs dedicated employees to perform well in order to succeed.

Objectives: By the conclusion of this chapter, you will be able to: • Explaining the importance of human resource management including: •
a. b. a. b. c. d. a. b. a. b. c. d. its impact on the bottom line challenges to managing effectively. job analysis job description recruiting methods making the final decision. its intended results the types of training programs. the types of compensation how to establish a pay system record keeping requirements available compensation plans.

Explaining the recruiting and hiring processes including:

• •

Describe the training and development process including: State the relevance of compensation and explain:

• • •

Identify the components of leadership and explain how they work together Explain the three types of relationship building Name the obligations that employers have toward employees.

Self-Assessment: Determine whether you can already meet these objectives?

What is Human Resource Management (HRM)? Small business owners often start by
hiring family members and friends as employees. As the business grows, other people come on board. The following chart describes how HRM fits into some of the basic business functions:
Basic Function Organizing Staff HR Application • Identifying the employees you need to hire. • Training them on specific job duties. Directing Staff • Leading and motivating your employees. • Building solid work relationships. Evaluating Performance • Assessing employee job performance. • Rewarding them for their work.

• • Competent HRM leads to retention of a satisfied and skilled workforce. Treat your employees with care and concern for their well being. Any of them, especially the most qualified ones, might seek better jobs with competitors if they are dissatisfied. When valuable employees leave, you have to train and develop new employees while maintaining your business operations. The cost of hiring and training employees is high. Avoid turnover by managing people effectively. Carefully develop procedures that support employees and make working conditions as safe and rewarding as possible.

• • •

A key factor in running a successful business is matching the right applicants to each specific job. Apply proven techniques for assessing your human resource need, and then follow through by recruiting the right person to fill the vacancy.

Recruiting and Hiring:

Job Analysis: In order to find the best person for a particular job, start by defining the specific tasks involved in each duty required by the position. Job Analysis is the process of identifying these tasks as well as other job requirements including knowledge; skills; behavior; experience; and education. Job Description: The job description is a written document summarizing the data collected in
the job analysis. The following guidelines apply to creating a job description: • Make the document comprehensive yet concise in its level of detail. It will be a profile of the person you need to recruit and hire. • List the job duties, and provide details on required skills and knowledge, reporting relationships, and also on the desired levels of experience and education for the job. • Limit the job description to one or two pages.

Recruitment: With the job description in hand, you can begin to search for the most
qualified candidates to consider for the open position. Most common methods used by small businesses for recruiting job application are:
Referrals Word of mouth Employment agencies Newspaper ads School placement services Professional organizations Online searches Inexpensive, but you may get unqualified candidates. Inexpensive, but has no guaranteed results. Expensive, but you get a pool of screened applicants. Attracts local candidates, but you get unqualified candidates. Pool of screened applicants, but applicants may lack experience. Expensive, but appeals to qualified candidates with skills. Inexpensive, but may attract unqualified candidates.

After recruiting several applicants, base your final decision on a review of the information on the application related to previous employment, education, and personal data. If the candidate meets the minimal requirements, you can schedule the next step –the face-to-face interview. Use the job application to make a list of questions to ask during the interview. Take this opportunity to clarify any ambiguous data on the form. During the interview evaluate the candidate’s communication skills, composure, and appearance.

Note that Federal legislation prohibits discrimination in hiring based on race, color, national origin, religion, sex or age. Take the following steps to prepare for and conduct the interview:
Review the candidate’s application. Prepare the questions that you want to ask during the session. Greet the candidates and make him or her feel comfortable. Guide the conversation toward the topics that you need to cover. Do not dominate it. Ask open-ended questions that encourage the candidate to talk. Don’t ask questions to which the answer is “yes’ or “no”. Seek specific examples in a candidate’s history that demonstrate an ability to perform required tasks of the job description. Keep the interview business-like and professional. Don’t lose focus and waste time. Contact the candidate’s references. Ask the candidate about his or her qualifications and whether a former employer would rehire him or her based on past experience.

Training and Development: After hiring the most qualified person for the job, you may have to train him or her. Base your program on realistic but challenging goals and objectives. You might need to address training areas such as: Using software applications Operating special equipment Following established procedures.
The results that you strive to achieve through training include: Increased productivity Decreased absenteeism and turnover Decreased cost of waste due to errors More pay raises for employees Less supervision of employees. Newly hired employees require special training in the form of orientation to the specific job as well as the organization. This activity is your first chance to make a good impression. Typical orientation programs include: Business overview, mission, and vision Roles and responsibilities Policy and procedures Specific job duties and tasks.

Compensation: A major employee concern is compensation, and rightfully so. What you have to offer employees in the way of wages, health insurance, and other benefits has a great impact on their job satisfaction and morale. The benefits that you might include in the compensation package include: Wages Health insurance Life insurance Paid time off (vacation, holidays, and sick leave) Profit-sharing programs Retirement benefits.

As owner and possibly the HR manager, you need to know what other local businesses are offering their employees. You will compete with them for the most qualified potential employees and may lose a good prospect, if your compensation is inferior. Check the SBA web site for the suggested procedure for establishing a pay system at: A specialist in payroll and record keeping is required to administer employee compensation packages. He or she will know the most current practices and documentation requirements for performing tasks such as: Tracking hours worked, regular and overtime Taxes paid by the business Taxes withheld from employee paychecks Insurance paid Unemployment compensation paid Profit-sharing dividend paid.

Leadership: The most effective managers lead by example. Employees look to you for direction and incentive. In small business, there are few levels of management so you will be very accessible to employees. Make sure that you develop strong leadership skills in key areas such as communication, motivation, and evaluation.
Some means of communication are employee meetings, employee handbooks, newsletter, e-mail, and memo. In each case, when interacting with employees try to be very short and concise. Along with communicating effectively, inspiring leaders are good Motivators. They know how to show their appreciation by expressing to employees how much they mean to the organization. Motivation involves providing incentives for employees to perform their best. Three types of motivators are: Basic needs: a good place to start is to motivate satisfying their basic needs (safety and wellbeing, respect, sense of self-worth)

Extrinsic motivators: they come from outside the employee and you can influence them. Intrinsic motivators: they come from inside the employee and are difficult to impact. Many employee transitions, from promotion to termination, happen as a result of Evaluation. You can objectively determine the correct way to respond to job performance by using proven evaluation techniques. To Evaluate Job Performance, use the following procedure to conduct the performance appraisal and set goals: Step 1 Establish set intervals for meetings with each employee privately to assess their job performance. Step 2 Review the data gathered about the job performance of each employee including performance measures, direct observation of behavior, and supervisor input. Step 3 Discuss the results of your evaluation with the employee. Step 4 Set goals and objectives in collaboration with them. Step 5 “Contract” with the employee for future performance and agree upon the compensation he or she will receive for meeting the set objectives.

Relationship Building:

Developing a harmonious relationship with your employees will be a real asset to the organization. Work hard to form a strong bond that will last for a long time. The three main areas of employee relations are: Health and safety: OSHA requires you to provide a safe and healthful working environment for your employees. Follow all OSHA guidelines to make the work environment safe. Unions: As a small business owner, you are less likely to be involved in union activity, but if it happens, you don’t have to regard the presence of a union as detrimental. You can have a positive, productive, and mutually beneficial relationship with union members. Company-sponsored group: These activities are an excellent means to increase morale among the employees, by helping employees get acquainted with each other away from work.

Homework Assignment (To be done by the team):
1. Exercise 1: Search the internet and local businesses for a sample of Employee Handbook. Write down a suggested Table of Contents for the Employee Handbook. 2. Exercise 2: Create Job Descriptions for the top five job positions in your company. 3. Exercise 3: Create Compensation Package for the same top five job positions in your company.

Chapter 15
Promoting Your Business
A carefully designed promotional strategy is a valuable tool for the entrepreneur. With an understanding of your customer base, you can communicate with them about your goods and services in order to increase sales and project a positive image. The right combination of promotional mix, promotional media, and specialized help will ensure that you reach your target market with useful information.

Objectives: By the conclusion of this chapter, you will be able to: • Define promotions. • Describe promotional mix including:
a. b. c. a. b. c. a. b. c. d. e. The factors to consider in determining the mix. The four elements of the promotional mix. How to select the right mix for your business. The factors to consider when choosing the media to use. How to select the right media for your business. The cost factors in choosing promotional media. Evaluation tools Recognition and recall tests Single-source data analysis Measurement of sales How to decide who will develop your campaign.

Identify the media available for promotions and explain :

Describe how to stage an effective promotion campaign including:

Self-Assessment: Determine whether you can already meet these objectives?

What is Promotion? Promotion is a form of persuasive communication, getting others to do what you want them to do. It informs consumers about a product and then takes the steps necessary to convince them to buy it. Promotion is a vital element in your business strategy for surviving today’s competitive marketplace.
Forms of Promotion: Promotion takes many forms. A customer may see your item for sale on TV or be given a sample at the local grocery store. He or she may have seen a colorful exhibit in the airport lounge or a sign on a bus. Promotions Through Consumer Education: Successful businesses educate their consumer base about what they have to offer. Maximizing your exposure in the marketplace is the purpose of promotions and consumer education is one way to get exposure. Consumer education includes informative seminars, how-to clinics, in-store demonstration, open houses, and other ways of reaching out to the public.

Promotional Mix: You can select the elements of promotion that promise the best outcome for
you in a specific situation. You can assess the possibilities and then choose the various elements of promotion in the right proportions for each particular situation. This is the promotional mix. Factors to Consider: When determining your promotional mix, take these factors into consideration: Goods or services being promoted Nature of the potential consumers General market conditions Funds available for promotion Ways to determine how effective the promotion will be. Four Elements of Promotional Mix: 1. Advertising 2. Personal Selling 3. Public Relations 4. Sales Promotion. 1. Advertising: A sales message to promote goods and services to a target audience through one or more mass media. The company paying for the advertisement is the sponsor. The channels of advertising are the media available – Internet, TV, radio, newspaper, magazines, direct mail, and billboards. Advantages - Advertising is cost-effective because you can reach a high number of potential customers at a low cost per person. Disadvantages: The total dollar cost can be extremely high. The feedback from advertising is often slow, which makes it difficult to measure its impact on sales. Has less of a persuasive effect on consumers than personal selling.

2. Personal Selling: The direct effort of a sales person to convince a customer to purchase a product. This campaign is directed toward one person or a small group of consumers through direct communication. Advantages: Has greater impact on potential customers. You receive feedback immediately, which facilitates measuring the exact impact quickly and making adjustments to strengthen the effort and respond better to the input from consumers. Disadvantages: The cost of reaching customers individually is considerably higher per person than through mass marketing.

3. Public Relations (PR): A broad set of communication activities used to create and maintain favorable relations between an organization and the public. You can hire an entire firm to carry out this process of building good will. Effect of Human Behavior: Research has provided knowledge of the motivation behind individual behavior, group dynamics, and psychological and sociological factors that create interest and form public opinion. PR experts strive to promote your business to the public that is your consumer base including:
Customers Stockholders Governmental officials Community members.

Publicity: A major form of PR, is free exposure for a business in the form of newspaper or TV coverage. PR differs from advertising in several ways including:
Publicity comes free as part of a news-type story, whereas you pay for the advertising resources of time and space. Publicity is just informative, but advertising is both informative and persuasive. Publicity is more subdued whereas advertising has an immediate impact. Publicity releases don’t identify sponsors as their sources and advertisements explicitly state them. Publicity is disseminated once whereas advertising can be repeated.

There are a variety of mechanisms through which publicity can be sent:
News Release: Single page with less than 300 words describing the newsworthy item. Feature Article: Longer manuscript of up to 3,000 words describing the business in detail. Captioned Photograph: Photograph with a brief description of the item. These are especially effective for showing a new or improved product with highly visible features. Press Conference: Meeting with media contacts to announce a major event. Letters to the Editors: Letters sent to newspaper and magazine editors. Videotape/DVD: Footage of events happening at the business or including the business in some way.

The negative impact of bad publicity can be swift and dramatic. It something unexpected happens, it could destroy your image and set your promotions campaign back months or even years. If something happens, follow these guidelines to lessen the negative impact:
Act quickly. Expedite news coverage of the event rather than trying to cover it up. Make sure that the facts are stated correctly. Have a single spokesperson to communicate to the public in a way that minimizes the damage and restores their faith in your company.

4. Sales Promotion: Any activity that supplements or coordinates advertising and personal selling by enticing the customer with offer added value or purchase incentives (coupons, trial periods, free samples, contests, sweepstakes and games). Sales promotion improves the effectiveness of other promotional mix ingredients, especially advertising and personal selling. Displays: or visual merchandising, are an important part of sales promotion. They are most attractive when the exhibit is close to the point of sale.

Although you can use all four elements in your promotional mix, you usually need fewer. Choose the specific promotional mix ingredients and how much of each to use based on your Budget, Objectives and Ploicy:
If your promotional budget is small, then consider using personal selling and public relations. If your promotional budget is large, then consider using advertising and promotional mechanisms. If your objective is to create mass awareness of a convenience item, then consider using advertising and public relations. If your objective is to educate consumers about the features of durable items, then consider using advertising and personal selling. If your objective is to produce immediate sales of non-durables, then consider using sales promotion.

Policy: You can either choose to implement the Push Policy or the Pull Policy. Push Policy: Promote your product only to the next player down the market channel. Pull Policy: Promote your product directly to customers with the intention of developing strong consumer demand.

Promotional Media: Base your decision of which media to use on the specific details of your
situation. Different media (TV, newspapers, radio, magazines, direct mail, directories, outdoor advertising, Internet) provide different advantages to you depending upon the promotional mix that you have selected. When determining your promotional media, take into consideration the content of your message and the: characteristics of your target audience size and type of audience promotional costs time or space available suitability of that medium to consumers. Your promotional message is key to successful advertising. Research indicates that a promotional message has to be repeated at least six times during the decision period in order for the consumer to remember its message. An ad placed just once on TV or radio is highly ineffective.

Planning Your Promotional Campaign:

Putting your campaign into motion requires extensive planning. Once underway, make adjustments based on collected data and continue only the promotional mix and media that are proving effective.

Notes: Do not forget the shopping seasons (Christmas, Valentine’s Day, Easter, … ). Pretest the market. Test an ad or personal selling technique with a group of potential customers who are willing to assess the ad’s effectiveness. Posttest the market. Measure the change in sales resulting from the promotional effort. Decide when to run ads by considering how often the ad runs and the time of year.

Homework Assignment - Self-Assessment #1 (To be done by the team): Describe your Promotional Strategy in detail. Identify the mix, media and extent.

Chapter 16
Maximizing Sales
Selling is the process of persuading customers to purchase your product or service. The three basic steps of selling are fundamental: finding your customers, helping with buying decision, and providing quality service after the sale. Objectives: By the conclusion of this chapter, you will be able to: • State the role of selling and the challenges you might face. • Describe the selling process including:
a. b. c. a. b. c. a. b. finding customers helping with the buying decision providing quality customer service. personal traits skills and knowledge training requirements. identifying motives factors influencing motives.

Define the successful salesperson in terms of:

• •

State the customer buying motives and address: Develop your own sales plan.

Self-Assessment: Determine whether you can already meet these objectives?

What is the Role of Selling?

Selling keeps the American economy thriving. This business activity impacts the economic condition by creating jobs that employ people in: the manufacturing of goods the delivery of services the sales of these goods and services.

Most small business owners don’t like to sell or don’t know how to do it. They believe in their product and like to make the goods or perform the services, but often they don’t care for the selling function. By developing realistic sales goals and training employees to be skillful salespeople who close sales, you can strengthen your bottom line. Sales Goals: Plan your goals carefully. Once defined, state both long-term and short-term objectives in precise, measureable terms. Salespersons: To be a successful salesperson, you have to be a good communicator, both speaker and listener, with positive attitude and confidence in both your abilities and the product. The fundamental skills for selling include: o developing a prospective plan o preparing for the pre-call o planning the sales presentation o emphasizing benefits over features.

the product, but its benefit to them).

Product Knowledge: Customers buy a product to address a need or desire (they are not purchasing Effective salespeople emphasize the benefits, not the features, of the product. So train them to convert the features into benefits specific to the customer.

Competitive Advantage: Gives you a head start over other companies offering the same goods and services. Don’t just try to keep up with the competition; this attitude puts your business in a reactive position. Set the pace for the competition by advertising aggressively. Note that small businesses have an advantage over large businesses: they keep in touch with their customers through
personal contact that makes it easier to satisfy their needs.

The Selling Process: An effective selling process attracts new customers as well as continues to serve old ones. Although there is no single method for successful selling, there are certain tasks common in any productive sales effort.
Three basic stages to selling and the tasks involved in each one are: Stage I Finding Your Customer
Identifying prospects Preparing for the presale Approaching the customer

Obtaining Leads is the process of identifying potential customers. Leads are the name, contact info, and available background data. Different customers have different characteristics (browsing, talkative, silent, undecided, decided, impatient) should be handled differently.

Stage II

Helping with the Buying Decision
Determining customer need Making the sales presentation Handling objections Closing the sale

Potential buyers go through a decision-making process before making the purchase, which allows opportunities for your sales staff to make a difference by providing information. When the salesperson approaches a customer for the first time, the impression the salesperson make leads to either success or failure. Sales staff should be neat and polite and project a confident and compassionate image. They should identify the expectations of the potential customer by avoiding close-ended questions and utilizing active listening and probing questions to determine how to completely satisfy the customer. Canned sales approaches rarely generate sales. It takes a solid analysis of potential customers to identify their needs and desires. Once motives have been identified, a productive salesperson tailors the sales presentation to appeal to the motive uncovered in the customer’s expectation. When a prospective customer raises an objection, consider the objection as evidence of a mismatch between what the customer needs and what is offered. Try to highlight more benefits or reemphasize the ones already stated. But never argue when overcoming objections, and never magnify an objection. The longer you discuss an objection, the more significant it seems.

Stage III Providing Quality Customer Service
Call back for thank you Follow up on promises made Suggestion selling.

Customers are usually hesitant when making purchasing decisions, even if the purchase is in their best interest. A salesperson with the right stuff has the ability to communicate the benefits of their product to potential customers and interact in a way that promotes trust and good will. Customers respond to competent salespeople by continuing to buy and by referring new business to them and their company. Selling is essentially your salesperson matching the customer’s needs with the goods or services available. A skillful salesperson listens and responds to what customer say they need or want. Salespeople are a different breed. They possess a very specific set of traits required to be effective. The main characteristics of good salespeople are: pride, dependability, proactivity, integrity and honesty. Salespeople possess a very specific set of skills (interpersonal skills, communication skills) and body of knowledge that enable them to be successful. The salesperson needs to know what he or she is talking about in order to appear both confident and competent.

Profile of the Successful Salesperson:

Training Salespeople: Sales training include a wide range of instructional activities. The delivery method can be classroom, self-study, or on-the-job. Role-playing is excellent for developing the salespeople’s skills in identifying a customer’s needs and giving them confidence.
Before training even begins, you have to recruit and hire the right people. Certain types of people are more likely to succeed, and a carefully crafted job description and interview script will assist you in making sure that you hire qualified candidates.

Customer buying Motives:

Buying motives are needs, desires, and impulses that convince a customer to purchase a particular good or service. Buying motives explain why customers buy certain products and how they choose between vendors. People have Basic Needs that affect their buying decisions. The list of needs that they seek to satisfy for themselves and loved one includes: physiological needs – food, water, shelter, clothing, rest, and exercise safety and protection – comfort, health, security(physical and job) love and belonging – affection and acceptance self-esteem – respect from self and others, achievement, and recognition self-actualization – fulfillment of personal goals and potential.

In addition to Basic Needs, people have Learned Wants that are acquired as they mature. These motives are largely a result of the environment in which we live and work. convenience bargin price efficiency construction dependability design. Learning how to appeal to basic needs and learned wants helps the salesperson capitalize on buying motives and sell more. First determine whether the customer is thinking rationally or reacting emotionally. The customer’s state of mind can be a clue to what he or she is motivated to buy.

A customer may make a particular purchase because he or she has entered an Itch Cycle. Each product has its own itch cycle, or the point in time that the customer is eager to buy the newest style or latest version of the good or service. An alert salesperson tracks these cycles and follows up accordingly. There are a number of factors that combine to Influence Buying Motives. Many cannot be impacted by the salesperson, but they are useful information in identifying customers.
Environmental Factors are: Culture, subculture, social class, reference group, family members, and status. Personal Factors are: Age and life stage, occupation, economic situation, lifestyle, and self-concept. Psychological Factors are: Motivation, perception, learning, beliefs/attitudes.

Developing Your Sales Plan:

A detailed, long-range sales plan will guide you through each phase of business development. The basic components of your sales plan are: establishing revenue goals for the company determining how to get a competitive advantage developing a strategic action plan including: o identifying your target market o defining sales territories o setting sales quotas o developing a sales training program o creating a post-sale strategy.

After forming your sales plan, develop a Sales Forecast to predict the volume of product that you expect for a given time period. To estimate sales dollars, you need the following data: long-term sales trend report reflective of normal growth rates conditions outside the business that may affect sales conditions within the business that may affect sales past sales figures projected changes in population and demographics.

Homework Assignment (To be done by the team):
1. Self-Assessment #1: Develop a detailed Sales Plan for your business. 2. Self-Assessment #2: Develop a detailed Forecast for your goods/services.

Chapter 17
Maintaining Accurate Records
Successful entrepreneurs follow sound record keeping practices. Maintain financial stability and increase your likelihood of continuing success by keeping detailed records and acquiring the help of qualified professionals when necessary. A common reason that businesses fail is lack of adequate record keeping. Keep accurate and complete records to maintain stability and profitability. Objectives: By the conclusion of this chapter, you will be able to: • Explain why your business will benefit from precise record keeping and the results of improper record keeping on your bottom line. • Identify the people who may play roles in your record keeping effort. • Describe the features and benefits of various records including:
a. b. c. Basic records Required records Recommended records.

• • •

State the main rule of the double-entry accounting method. Describe the types of accounts found on the general ledger. Describe inventory control including:
a. b. c. d. Types of inventory Maintaining proper inventory levels Stock turnover levels Functions of inventory control.

Name some other potential record keeping needs.

Self-Assessment: Determine whether you can already meet these objectives?

Why Keep Records?

Your business records are the most efficient way to keep track of your operations. With a current set of records, you can: Track day-to-day, week-to-week, and month-to-month operations (sales, costs, inventory, credits) Control costs and develop competitive, profit-inducing prices Obtain financing and credit from creditors and suppliers Meet tax and legal obligations Provide information to potential partners and stockholders and buyer Control your investments in inventory, accounts receivable, buildings, and equipment. Understand consumer buying patterns for implementing your business strategy.

You need to know where your business stands on a day-to-day basis. Annual reports are useful, but timely knowledge of operating conditions is even more important in order to grow your business. Controlling your Cash Flow enables you to meet your monthly expenses and reconcile bank statements with your own records.

Who Keeps Records? When you first start out in business, you might choose to keep your own
records. An accountant could help you setup a system. As your business grows, you may feel that the job is too large to handle yourself. You can delegate selected record keeping tasks to a qualified employee, or hire a part-time accountant to assist you with record keeping duties. As your business continues to grow, the job may get more complex and require more specialized skills. At this point, you may find it beneficial to hire a full-time accountant to:
Make daily entries Redesign your record keeping procedures Prepare taxes Conduct regular financial analyses.

You will want to maintain control over in more vital areas. The tasks that you should retain for yourself include:
Signing checks Reviewing contracts Monitoring inventory Conducting periodic review.

Most small businesses don’t need an elaborate record keeping system. You can obtain info about standardized systems from:
Office supply stores Trade groups and business associations Books on record keeping and documentation SBA.

Features and Benefits of Various Records: A good record keeping system doesn’t have
to be complicated and difficult to maintain. Effective record keeping systems are comprised of a few basic components that give it integrity. Implement a system that incorporates: Source documents capturing each business transaction Procedures specifying how to retain, summarize, and use this information Reports and formats supporting managerial decision making and regulatory compliance. When keeping records, follow a few Simple Record Keeping Guidelines to comply with regulatory standards and company policy: Keep the records in a specified location Maintain records for the prescribed duration Identify a means to back up the files (paper copy as well as electronic copy). The following Basic Records are kept in most companies: Checkbook: Keep your personal and business checking accounts separate in order to prevent serious tax and record keeping problems. Bank Statement: Reconcile the balance on the statement with the amount carried forward in your checkbook. Daily Sale and Cash Summary: Provides you with data about total cash received. Account Receivable: Documents sales made on credit. Accounts Payable: Reports how much you owe to others for cash items such as inventory purchases, repair services, and payroll taxes. Payroll Records: Records payroll tax deductions for your employees.

The following list identifies the Types of Record required by Regulatory Agencies: Federal: o Tax withholding ( o Hazardous materials ( o Interstate commerce ( o Agriculture ( o Food and drug ( State: o o o o o

Tax withholding Unemployment insurance Worker’ compensation Corporate registration Industry permits and licenses

County and Local: o Tax withholding o Sales tax o Vendor licenses o Zoning o Construction At the end of each quarter, you are required to report taxes withheld from each employee. IRS will provide you with instructions on calculating and filing quarterly tax reports.

Double-Entry Accounting Method: Double-enter record verifies that assets equal liabilities
plus capital. Therefore, any transaction will always affect two accounts in opposite directions in order to maintain the equations balance (The major rule is that for every debit there must be a credit of an equal amount). The double-entry accounting method ensures that an accuracy and completeness check occurs.

The largest ledger is the largest grouping of accounts that, in turn, reflect groupings of your most frequent expenses. Ledger entries summarize the following Categories of Financial Information: Balance of assets Balance of liabilities Net worth of your business Income accounts (sales) Expense accounts. The process for reconciling accounts at the close of business year is: Stage I Sales and expense items are transferred to the profit-and-loss account. Stage II The profit-and-loss account is then transferred to the capital account. Stage III Balances of all other account categories in the general ledger (assets, liabilities, and net-worth) appear on the balance sheet.

General Ledger:

Although every business requires different types of accounts, some Basic Account Categories are common to most. Te following Basic Accounts is part of most ledgers: Assets: Assets are items that a company owns. Some typical accounts for assets are: Cash in banks Cash on hand Accounts receivable Prepaid expenses Inventory Building Equipment. Liabilities: Liabilities are debts that a company owes. Typical accounts for liabilities are: Federal Insurance Contributions Act (FCIA) tax payable (which supports Social Security and Medicare) Federal withholding tax payable State withholding tax payable Mortgage payable Notes payable. Net worth is the balance of your investment in the business. This group of accounts also reflects the accumulation of profit-and-loss balances from income and expense statements. Some typical accounts for net worth are: Proprietorship account Proprietorship withdrawals Retained earnings. Income reflects the business income, and it shows a credit balance. Entries for this category originate from your sales records. This group of accounts is closed out at the end of the business year, and the amounts are transferred to the profit-and-loss statement. Some typical accounts for income are: Retail sales Service income Miscellaneous income. Expenses reflect the cost of doing business, and this category of accounts is usually the largest. Some typical accounts for expenses are: Salaries and wages Payroll taxes Contract labor Utilities Rent Insurance Office supplies Interest on debts Depreciation Travel Entertainment Advertising.

Net Worth:



Budgeting Systems:

A budget is an estimate of future income and expenses. Among other decision-making duties, following a budget helps you avoid overbuying and anticipate when borrowing is necessary. The comprehensive budget is comprised of several specialized ones. The major types of smaller budgets include: Sales Merchandising Purchasing Advertising.

1. Sales Budget: The Sales Budget forecasts sales for a specified period of time. It computes
estimated sales on the basis of sales territory, salespeople, and particular commodities or services. You can use your sales budget to develop sales quotas or goals for your sales staff. It is also one input for preparing other budgets such as merchandizing and purchasing. Use the following Factors as a guide to budget sales: • Previous sales • Sales force • Economic trends • Buying habits • Shifting population • Availability of merchandise • Weather conditions • Location • Season of the year.

2. Merchandising and Purchasing Budget: After preparing the sales budget, develop both the
merchandising and purchasing budgets, which are closely related. When you have determined these budgets, you can determine: • The kinds of stock to have on hand • When they should be available • Inventory levels • Cash needs • Supply sources • Delivery schedules • Requisitions and orders.

3. Advertising Budget: the development of your advertising budget depends on projected sales.
Keep advertising expenses within reason, because it is not true that sales will always be in direct proportion to advertising. Because sales budget and advertising budget are closely related, you will benefit from developing your advertising budget along with your sales budget.

Inventory Control Systems:

Inventory is a large item for manufacturing, wholesaling, and retailing. It tracks the raw materials, goods to be sold, shop and office supplies, machinery, and equipment that the business uses to operate. The purpose of the inventory is readiness for sale to customer when needed. Inventory Costs are usually broken down into Invoice Price and Transportation Charges from seller to buyer.

There are three Types of Inventory for accounting purposes: Raw Material: Items acquired but not part of WIP. WIP: This category represents the costs incurred while working on goods that have been started but not yet completed. WIP inventory includes these three cost elements: raw materials currently in use, direct labor, and factory overhead. Finished Goods: This inventory usually refers to the items carried by retail stores inventories. It includes the total costs incurred to produce sale units that have not yet been sold. The Challenge of Inventory Control is to maintain enough inventory to satisfy customer demand without keeping too large an inventory. Excess inventory has the following drawbacks: It ties up capital You risk holding goods that may become outdated Storage cost can be costly and a drain on your bottom line. When determining inventory levels for retail, it is tempting to take advantage of quantity discounts in order to get the lowest per unit cost. But to get quantity discount, you may have to but an excessive quantity and tie up capital on items that can abruptly become outdated. Calculating Inventory Turnover Rates help determine the amount of inventory to keep on hand. Use the formula below to calculate the number of times during a given period that the average inventory is sold (Turnover Rate):

Cost of Goods Sold / Average Inventory = Stock Turnover Rate
A high turnover rate does not always mean greater profits. Turnover Rate does not reflect the profit on sales that were lost because you failed to have enough inventory or the right inventory, available for sale. You could have a high turnover rate on inventory while losing business because you turned customers away dissatisfied. Tips for Maintaining Proper Levels: Retail: Please note that turning away sales because of understocking is more harmful than having markdowns on overstocked items. SO make your investment realistic and based on objective data about trends and customer demand. Manufacturing: The cost of excessive inventory severely limits your competitiveness. JIT has been developed to allow a much lower minimum levels of inventory. Functions of Inventory Control: Each variation of inventory control systems supports four basic business functions in accounting and inventory management: Decision-making: You can base your business decisions about when and how much to order on sound financial data. Reporting: Both exception and regular management reports based on inventory level allow you to take corrective action or refine inventory policy. Forecasting: Your record keeping system is a valuable source of information for forecasting the demand for supplies. Counting: There are two types of inventory counting system (Perpetual and Physical). These systems are often combined with the support of electronic tracking and automatic input of inventory data.

Perpetual Inventory: The continuous tracking of receipt and withdrawal of inventory. With this counting system, you have a running total of current stock of goods as you bring them into the business (added), keep them in stock (on hand), and ultimately sell them (subtracted). A bin system integrates decision-making rules about buying stock (when and how much) with the basic accounting operations. Adapt this system to fit your business need. In a two-bin system, you divide your storage locations into two parts. When the stock in the first bin is depleted, open the second bin and place an order for the appropriate quantity of items. Physical Inventory: Taking physical inventory consists of counting and listing the goods in stock with their cost and resale price. Even if you keep a perpetual inventory system, these physical counts are required to check the accuracy of unit balances on individual records. With this approach, you can easily determine mistakes and losses due to spoilage or theft.

Homework Assignment (To be done by the team):
1. Self-Assessment #1: Identify what types of records would you plan to keep? Why? 2. Self-Assessment #2: Describe the types of accounts that you are going to create? Why? 3. Self-Assessment #3: Identify the optimum level of raw material, WIP and Finished Goods that you plan to keep?

Chapter 18
Managing Your Finance
Small business owners lack the vast array of resources for managing financial affairs that large corporations have. As an entrepreneur, you face the challenge of identifying the right tools, procedures, and financial experts to maintain you company’s financial well-being. Objectives: By the conclusion of this chapter, you will be able to: • Outline the basis of financial analysis including:
a. b. c. a. b. c. a. b. c. Your role Major activities Potential trouble spots. The components of working capital Preparing the cash flow projection Developing controls. Assets Liabilities Net worth.

Explain cash forecasting including:

Describe the balance sheet including these entries:

• •

Clarify the income statement including its components and how they vary between types of business. Explain depreciation accounting including these contrasting methods:
a. b. c. a. b. c. a. b. c. d. Straight-line Declining balance Sum-of-year digits. The formula for identifying your BEP Data resulting from the analysis Conclusions drawn from the evaluation. Liquidity Solvency Efficiency fund management Profitability.

Describe the break-even analysis including:

State the formulas for and basic components of key business ratios in the areas of:

Identify the financial advisors for the various stages of your business’s life.

Self-Assessment: Determine whether you can already meet these objectives?

Financial Analysis Basics: Your Role in managing financial affairs is a major one and most
likely will require you to surround yourself with trusted and competent advisors. As the owner and operator of the enterprise, you are responsible for: Controlling the state of and balancing the various assets, liabilities, and owners equity involved in your business. Overseeing working capital, especially planning for the cash you need to operate consistently. Managing both short- and long-term debts. Implementing sound credit terms and programs for credit sales. Appraising the rate of return on your investment based on the amount of both money and time invested. In carrying out your Role, the Major Activities in which you will be involved include: Planning for future financial requirements in the context of your cash flow Analyzing the components of the balance sheet and income statements Calculating depreciation on assets for accounting purposes Identifying your break-even point Considering key business ratios Working with an accountant and/or other financial advisors. When examining your financial situation, look closely for potential Trouble Spots such as: Expenses greater than gross profits Inadequate cash levels at the end or start of the month Business expansion without new capital becoming available Excessively high accounts receivable not discounted at the bank Cash reduced below an acceptable balance because you had to buy fixed assets recoverable only through depreciation.

Financial Analysis Basics: Cash forecasting for future needs is vital to survival. Unless you plan for the cash required to operate and then develop the proper controls, you cannot meet your financial obligations. Business growth is associated with a need for cash that grows faster than cash receipts. Planning for this circumstance is essential because you have to pay for assets such as inventory sooner than you collect accounts receivable.
Working Capital is your current assets minus current liabilities. You have to forecast cash flow to manage working capital most effectively in regard to the interrelationships among the key components of: • Cash • Accounts receivable • Inventory • Accounts payable.

Working Capital = Current Assets – Current Liabilities
Current Assets = those assets that can be readily converted to cash, usually within one year or less. Current Liabilities = debt due for payment within one year.

Preparing a Cash Flow Projection: Figures used in preparing cash flow projection are Cash Receipts and Payments. Develop cash flow projections on a monthly basis from three months to a year in advance. Each month, compare the estimates with actual results and revise your projection accordingly. To be able to forecast cash flow accurately, you have to develop some Key Assumptions by which to operate such as: • All charge purchases will be paid within one month according to your credit policy. • Sales will increase by a designated amount per month throughout the projected period. • All sales are sold on credit. A simple technique for projecting money in and out every month is described as: Step 1 Add estimates of your expected income (sales, accounts receivable, etc.) during the next month to the cash balance at the end of the present month. Step 2 Subtract projected expenses for the next month from that figure. This is the cash available at the end of the month and your cash on hand to begin the next month. To estimate you cash flow for the next year, repeat the above steps for the next 12 months.

Step 3

As you maintain book control of the receipts and disbursements of business funds, you may detect patterns in your cash flow. These patterns indicate activity such as: • How much cash comes in • How much cash goes out • How much money is left at the end of the month • Seasonal trends in cash flow • A gradual increase in expenses in a specific category • Changing collection patterns • Unexplained inventory growth. Develop Financial Controls to regulate the constant demands that operating a business places on your cash flow. The following Guidelines apply to controlling funds: Keep your personal funds separate. Write yourself a pay check regularly. Record incoming cash (amount, date, source) Never make a disbursement from your daily cash receipts. Make disbursements only if you have either an invoice from the supplier or a receipt dated and signed by the person to whom you give the cash or check. Deposit each day’s receipt on the day you receive them. Pay all bills with checks in order to have a record of the transaction. Use petty cash only for very small expenses, and balance the fund on a regular basis. Establish a regular schedule for reviewing the procedures and documentations. Ask was this a necessary expense? Does it occur regularly? Has the expense been properly allocated?

Balance Sheet:

Your Balance Sheet must always balance! Assets have to equal liabilities plus net

Assets = Liabilities + Net Worth
The Balance Sheet gives you a picture of what your business owns and owes at a certain point in time. Assets are balance sheet entries documenting what your business owns. You can categorize them as Current, Fixed, or Intangible. Current Assets: Cash, merchandise, and amounts receivable are normally defined as current assets on a balance sheet. These assets can be converted into cash within 12 months (Note that accounts receivable items are not considered current assets if payment is due in more than 12 months or if inventory is either seasonal or out of style and will not sell within 12 months). Fixed Assets: Assets used over a period of several years under normal conditions are fixed assets. When looking at a balance sheet with only fixed assets, remember that the value of fixed assets may be based on cost minus depreciation. A more realistic estimate of worth may be the market value, or the value that buyers in the market are willing to pay for the asset. Intangible Assets: The goodwill from playing a positive role in the community and respectability from servicing the public are two examples of intangible assets to which hit is difficult to assign a value. However, if you buy or sell a business, a portion of the purchase price likely would be for intangible assets. Other examples are franchise fees, patents, and copyrights. Other Assets: Anything that doesn’t fall into one of the above categories. Examples are: life insurance policy you have purchased yourself, accounts receivable and investment such as stocks and bonds that you have in other companies. Business Liabilities express the cash value of what you owe to others. They are closely tied to business assets in the sense that liabilities are debts incurred in order to acquire assets. Liabilities are either Current or Long-Term. Current Liabilities: A current liability is an obligation owed to an individual or firm that usually matures, or comes due, within 12 months. Most common type of current liability is accounts payable, a debt usually to be paid within one year, withholding and social security taxes payable, money withheld for payroll and income taxes, and the present years’ payment due on mortgages and long-term notes. Long-term Liabilities: A debt that comes due after 12 months of maturity. Examples include real estate mortgages and long-term loans. Net Worth is your equity (or investment) in the business as owner. You acquire these assets by either incurring a debt (borrowing money) or investing your own funds (using your own cash).

Net Worth = Assets - Liabilities
Net Worth is cash value of assets (cash, real estate, equipment) minus liabilities (amount you owe to repay loans or accounts payable)

An income statement reflects the income and expenses of your business over a certain period of time. It contrasts with the balance sheet, which gives the financial snapshot on a given date. The components of an income statement are: Gross sales Cost of goods sold Gross profit on sales Expenses Net profit. Gross Sales is the total revenues received from sales for the year. Adjust this item to figure net sales by deducting returned merchandise and allowances for spoiled or damaged merchandise. If you provide services instead of selling goods, gross sales are called gross billings. Cost of Goods Sold – This item represents the price of the goods or services sold by your company and no other business expenses. It is the total price paid for the product sold during a specified accounting period plus transportation costs. Gross Profit – After you find the net sales (gross sales minus returns and allowances) and cost of goods sold, you can calculate the gross profit, or Gross Margin. This figure equals sales minus the cost of the sales. This amount is actually the dollar portion of your sales that represents your Markup on the inventory. If you discover that your profits are not as much as you want them to be, you can either increase your profit margin, or increase sales volume, realizing that increasing the markup may reduce volume, and increasing sales volume on the same markup is difficult. Note that gross margin does not take into account selling or operating expenses. Expenses – This component include two categories: Selling Expenses and other Operating Expenses. Selling Expenses are the cost of activities performed to increase the sales volume including: Salaries and commissions of salespersons Travel expenses for salespersons Delivery cost Advertising. Operating Expenses are the cost of managing and carrying out your business, not directly due to sales or service activities. These expenses including: Office expenses Salaries Accounting expenses Rent Telephone costs Utilities Equipment repairs Depreciation of equipment and buildings.

Income Statement:

Net profit (or loss) – This figure is the amount left after all usual costs and expenses for the accounting period have been deducted. It does not reflect any income taxes because income taxes are not considered a normal operating expense. If you operate a sole proprietorship, net profit (or loss) from your business is considered income on your individual federal income tax return.

Depreciation Accounting: See your IME 3100 notes. Break-Even-Analysis: See your IME 3100 notes.
In general an Operating Expense Ratio divides each separate operating expense by net sales. This technique is also referred to as the Common Size Statement. You can examine this ratio to evaluate the relationship of expense to net sales, as well as identify trends of costs to income by monthly or seasonal changes. Operating Expense Ratio = (Specific Operating Expense) / (Net Sales)

Key Business Ratios:

Key Business Ratios most commonly address these areas:
Liquidity o o Solvency o Debt to Tangible Net Worth Ratio Current Ratio Acid-Test (Quick) Ratio

Efficiency Fund Management o Inventory Ratio o Inventory Turn Ratio o Net Sale to Working Capital Ratio Profitability o

Net Income to Net Sale Ratio

1. Liquidity => Current Ratio = (Current Assets) / (Current Liabilities) Determines whether current assets are sufficient to cover debts with a margin of safety for possible losses Should be 2:1 2. Liquidity => Acid-Test Ratio = = (Cash + Receivables + Government Securities) / (Current Liabilities) Is a more accurate way to measure your debt-paying ability Uses only cash, amounts receivable, and near-cash marketable securities as current assets (no inventory) to adjust the current ratio for more precision Determines whether you can pay debts with available funds if cash flow stops Should be 1:1 or better. At 1.0 or higher, your business is considered liquid.

3. Solvency => Debt to tangible Net Worth Ratio = (Liabilities) / (Tangible Net Worth) Measures your ability to cover current and long-term debts by examining the relationship between borrowed funds and funds owned Tangible net worth is the value of your business minus intangible assets Should be at least 1:1. If debt-to-intangible net worth is greater than 1:1, you are undercapitalized and should reduce debt or find more capital to invest.

4. Efficiency Funds Management => Inventory Ratio = {(Beginning Inventory) + (Ending Inventory)} / 2 Compares cost of goods sold to average inventory

5. Efficiency Funds Management => Inventory Turn Ratio = (Total Revenue) / (Average Inventory) Determines how many times average inventory on hand is sold in a given time period Can be used to study turnover rates in similar businesses in order to establish the appropriate rate for your company A fairly high ratio indicates that inventory is current and saleable and you have good pricing policies An extremely high ratio indicates that inventory turns over too often, which may lead to shortages Inventory turnover may also be calculated as cost of goods divided by average inventory.

6. Efficiency Funds Management => Net Sales to Working Capital Ratio = (Net Sales) / (Current Assets + Liabilities) Shows how many sales dollars you make for every dollar in working capital owned A low ratio may indicate inefficient use of working capital to generate sales An extremely high ratio may indicate insufficient working capital to maintain high sales volume Is subject to seasonal sales fluctuations, so assess by comparing current figure with similar sales period in past years.

7. Profitability => Net Income to Net Sales Ratio = (Net Income) / (Net Sales) Shows how much net income (or net profit) comes from every dollar of net sales Is a signal of operating efficiency Can indicate increasing expenses so review it frequently Is a key ratio for new business owners to consider.

Homework Assignment (To be done by the team):
1. Self-Assessment #1: Develop a Sample Cash Flow Projection for your business using Excel. 2. Self Assessment #2: Prepare a financial report for your business and include a Sample Income Statement and as many Key Business ratios as you can.

Sign up to vote on this title
UsefulNot useful