Entrepreneurship: Starting and Managing Your Own Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Entrepreneurship: Starting and Managing Your Own Business CHAPTER 5 © Hemera Technologies / AbleStock.com / Jupiterimages The Essentials of the Future of Business, 4th Edition McDaniel & Gitman Prepared by Deborah Baker Chapter 5 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

Learning Goals CHAPTER 5 Entrepreneurship: Starting and Managing Your Own Business 1 Why do people become entrepreneurs, and what are the different types of entrepreneurs? 2 Which characteristics do successful entrepreneurs share? 3 How do small businesses contribute to the U.S. economy? 4 What are the first steps to take if you are starting your own business? CHAPTER 5

Learning Goals (continued) Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 5 Why does managing a small business present special challenges for the owner? 6 What are the advantages and disadvantages facing owners of small businesses? 7 How does the Small Business Administration help small businesses? 8 What trends are shaping entrepreneurship and small-business ownership? CHAPTER 5

BIZFlixs Field of Dreams “People Will Come” Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Field of Dreams “People Will Come” Is Ray Kinsella an entrepreneur or a small-business owner? Assuming that Ray is in fact an entrepreneur, which of the types of entrepreneurs is he, and why did you choose that type? To make a going concern of his Field of Dreams, what steps should Ray take from this initial idea to a self-sustaining entity? If Ray decides to expand his Field of Dreams, how might he go about doing so? BIZFlixs BIZFlicks highlights a scene from the movie, Field of Dreams. The entrepreneurial spirit is as American as baseball and apple pie, and is evident in this Kevin Costner movie about building a baseball field in the middle of a cornfield. Costner’s character Ray Kinsella has heard voices telling him that “if you build it, he will come.” He interprets this as voices telling him to build a baseball field—his field of dreams. Even though he faces bankruptcy and loss of his farm and land, he continues to chase his dream. Ghost baseball players show up and start playing, encouraging him to pursue his dream. Kinsella presses on, and eventually, people do come. Field of Dreams examines the mind of the individual entrepreneur and innovative ideas, and the risk associated with turning an idea into a marketable entity.

The Economic Impact of Small Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Today’s Small Businesses: Represent 99.7 percent of all employer firms Employ half of private sector employees Pay 45 percent of the total U.S. payroll Have generated 60-80 percent of new jobs annually Create more than half of nonfarm private GDP Supplied 22.8 percent of total value of federal prime contracts in FY 2006 Hire 40 percent of high-tech workers Are 52 percent home-based and 2 percent franchises Made up 97 percent of identified exporters and produced 28.6 percent of export value in FY 2004 Produce 13 times more patents per employee than large patenting firms Companies started by entrepreneurs and small-business owners make significant contributions to the U.S. and global economies. They are hotbeds of innovation, taking leadership roles in technological change and the development of new goods and services. Small businesses make a major contribution to the economy. Exhibit 5.1 shows the economic impact of today’s small businesses. Exhibit 5.1 Source: U.S. Department of Commerce, Bureau of the Census

Entrepreneurship Today Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 1 Why do people become entrepreneurs, and what are the different types of entrepreneurs? Entrepreneurship has been a strong part of the U.S. business system for many years because today’s global economy rewards innovative, flexible companies that respond to rapid changes in the business environment. 1

Entrepreneurs 1 entrepreneurs Chapter 5 Entrepreneurship: Starting and Managing Your Own Business entrepreneurs People with vision, drive, and creativity who are willing to take the risk of starting and managing a business to make a profit, or greatly changing the scope and direction of an existing firm. 1

Types of Entrepreneurs Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Employees who apply their creativity, vision, and knowledge within a large corporation Risk takers who start their own companies Entrepreneurs who start a series of companies Multipreneurs Classic Entrepreneurs Intrapreneurs The term entrepreneur is often used in a broad sense to include most small-business owners. However, there is a difference between entrepreneurship and small-business management. Entrepreneurship involves taking a risk, either to create a new business or to change the scope of an existing firm. Entrepreneurs are innovators and visionaries who spot trends. Multipreneurs start a series of companies, thriving on the challenges of starting a business and watching it grow. Some entrepreneurs don’t own their own companies but apply their creativity, risk taking, and vision with a large corporation. Called intrapreneurs, these employees nurture their ideas and develop new products in an autonomous large enterprise environment. 1

Why Become an Entrepreneur? Chapter 5 Entrepreneurship: Starting and Managing Your Own Business The challenge of building a business The desire to control their own destiny Financial independence Frustration working for someone else Personal satisfaction Creating the desired lifestyle The most common reason to become an entrepreneur, as cited by CEOs of the Inc. 500, is the challenge of building a business, followed by the desire to control their own destiny. Most entrepreneurs feel that going into business for themselves was worth it. 1

CONCEPT check 1 Describe several types of entrepreneurs. Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Describe several types of entrepreneurs. What differentiates an entrepreneur from a small-business owner? What are some major factors that motivate entrepreneurs to start businesses? 1

Characteristics of Successful Entrepreneurs Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 2 Which characteristics do successful entrepreneurs share? 2

The Entrepreneurial Personality Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Ambitious Independent Self-confident Risk taking Visionary Creative Energetic Passionate Committed Being an entrepreneur requires special drive, perseverance, passion, and a spirit of adventure, in addition to managerial and technical ability. Entrepreneurs are the company, and tend to work longer hours and take fewer vacations. They also share other common characteristics, as shown on this slide. © Peter Kramer / Getty Images for IMG 2

CONCEPT check Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Describe the personality traits and skills characteristic of successful entrepreneurs. What does it mean when we say that an entrepreneur should work on the business, not in it? 2

Small Business: Driving America’s Growth Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 3 How do small businesses contribute to the U.S. economy? 3

What is a Small Business? Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Locally based Independently managed Owned by an individual or a small group Not a dominant company In recent years, small businesses have come to the forefront of the U.S. economy. Corporate greed and downsizing of large corporations have made more people look toward smaller companies for employment. Small businesses represent about half of U.S. economic output and employ about half the private-sector workforce. There is a range from 5 million to over 22 million small businesses, depending on the size limits defined by government agencies. The Small Business Administration classifies all companies with under 500 employees as a small business. In addition, a small business has the characteristics shown on this slide. 3

Snapshot of Small Business Owners Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 10.1 million adults are creating new businesses at any one time Two-thirds of owners reported their business as their primary source of income African Americans are 50 percent more likely to engage in startup activities than whites 14 percent are veterans 49 percent spend more than 40 hours per week in their business 74 percent of businesses with employees are owned by men, 26 percent by women 24 percent have a bachelor’s degree and 19 percent have a graduate degree 3 Exhibit 5.4 Source: “Panel Study on Entrepreneurial Dynamics, “Ewing Marion Kauffman Foundation Entrepreneurial Research Portal 2005.

Home-Based Businesses, by Industry Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Home-Based Businesses, by Industry Industry Services Construction Retail Manufacturing, finance, transportation, communications, wholesale Percentage 60% 16% 14% 10% Small businesses in the United States can be found in almost every industry. Home-based businesses represent 53% of the small-business population. 3 Exhibit 5.5 Source: “”The Small Business Economy 2004,” United States Government Printing Office, http://www.sbaonline.sba.gov (March 21, 2006).

CONCEPT check Chapter 5 Entrepreneurship: Starting and Managing Your Own Business What are the criteria the Small Business Administration uses to define a small business? What social and economic factors have prompted the rise in small business? 3

Ready, Set, Start Your Own Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 4 What are the first steps to take if you are starting your own business? 4

Ready, Set, Start Your Own Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Buy a Franchise Buy an Existing Business Start from Scratch © AP Images / Bebeto Matthews Three options for starting a business are: Start from scratch Buy an existing business Buy a franchise About 75 percent of start-ups involve brand-new organizations, with the remaining 25 percent representing purchased companies or franchised. 4

Checklist for Starting a Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Before your start your own business… Identify your reasons Self-analysis Personal skills and experience Finding a niche Market analysis Planning your startup Finances The first step is to determine whether you have the personal traits needed to succeed, and if so, what type of business is best for you. Exhibit 5.6, shown on this slide, offers some guidelines to consider before starting a business. Exhibit 5.6 Source: “Checklist for Starting a Business,” http://www.sba.gov/survey/checklist/(March 20, 2006). 4

Finding the Idea 4 Sources of Inspiration Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Finding the Idea Sources of Inspiration Working in the same or related industry Personal experiences as a consumer Hobbies and personal interests Suggestions from customers, family, and friends College courses or other education Entrepreneurs get ideas for businesses from many sources. Someone identifies a need and then finds a way to fill it. An excellent way to keep up with small-business trends is by reading entrepreneurship and small-business magazines and by visiting their Web sites. Refer to Exhibit 5.7 for a list of Entrepreneur’s Young Millionaires. 4

Choose a Form of Business Organization Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Choose a Form of Business Organization Sole proprietorship Partnership Corporation Limited liability company Type of business Number of employees Capital requirements Tax considerations Level of risk The decision on whether the business will be a sole proprietorship, partnership, corporation, or LLC, depends on the type of business, number of employees, capital requirements, tax considerations, and level of risk involved. 4

Developing the Business Plan Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Key Features General description of the company Qualifications of the owner(s) Description of the product or service Analysis of the market Financial plan Once you have the basic concept for a product or service, you must develop a plan to create the business. This planning process is called a business plan. The key features of a business plan are shown on this slide. It can help attract loan financing, minimize the risks involved, and be a critical determinant to success… or failure. 4

Developing the Business Plan Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Outline for a Business Plan Title Page Table of Contents Executive Summary Vision and Mission Statement Company overview Product and/or service plan Marketing plan Management plan Operating plan Financial plan Appendix of supporting documents The business plan is a formal written statement that describes in detail the idea for a new business and how it will be carried out. The key features of a business plan are a general description of the company, the qualifications of the owner, a description of the product or service, an analysis of the market including demand, customers and competition), and a financial plan. The most common use of business plans is to persuade lenders and investors to finance the venture. As a result, it should be written to capture the interest of investors. However, business plans are dynamic documents and should be updated on a regular basis. Exhibit 5.8 Source: From ACP-ECollege—Small Business Management: An Entrepreneurial Emphasis, 13th edition, by Longenecker/moore/Petty/Palich. ©2006. Reprinted with permission of South-Western, a division of Cengage Learning. http://www.thomsonrights.com. Fax 800-730-2215. 4

Financing the Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Equity Debt Angel investors Venture capital Once the business plan is complete, the next step is to obtain financing. The two forms of business financing are: debt—borrowed funds that must be repaid with interest over a stated time period equity: Angel investors—investors who provide financing for start-up businesses by investing their own funds. Venture capital—obtained by venture capitalists who invest other people’s money. They receive an ownership interest and a voice in management. 4

Common Causes for Business Failures Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Economic factors Financial causes Lack of experience Personal reasons Running a business is not as easy as it may sound. About 600,000 small businesses fail each year, according to data from the SBA and the Census Bureau. The most common causes of business failures and/or closures are: Economic factors: business downturns and high interest rates. Financial causes: inadequate capital, low cash balances, and high expenses. Lack of experience: inadequate business knowledge, management experience, and technical expertise. Personal reasons: the owners may decide to sell the business or move on to other opportunities Inadequate planning is often at the core of later business problems. Personal stress and rapid growth of the company can also take its toll. 4

CONCEPT check Chapter 5 Entrepreneurship: Starting and Managing Your Own Business How can potential business owners find new business ideas? Why is it important to develop a business plan? What should such a plan include? What financing options do small-business owners have? What risks do they face? 4

Managing a Small Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 5 Why does managing a small business present special challenges for the owner? 5

Managing a Small Business Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Managing a Small Business Using outside consultants Hiring and retaining employees Entering the global marketplace The main job of the small-business owner is to carry out the business plan through all areas of the business. The small business owner must be ready to solve problems and move quickly when market conditions change. As the company grows, others will make many day-to-day decisions while the owner focuses on managing employees and planning for the firm’s long-term success. One way to help manage the business is to hire consultants, such as a certified public account to help with financial record keeping, tax planning, and decision making. Second, quality and fit of new employees is important to success. Small companies may have to be creative to find the right employees and to convince them to join their firm. Last, the global marketplace represents a huge opportunity for U.S. businesses. Many small businesses hire international trade specialists to get started selling overseas. 5

CONCEPT check Chapter 5 Entrepreneurship: Starting and Managing Your Own Business How does the small business owner’s role change over time? How does managing a small business contribute to its growth? What are the benefits to small firms of doing business internationally, and what steps can small businesses take to explore their options? 5

Small Business, Large Impact Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 6 What are the advantages and disadvantages facing owners of small businesses? 6

Why Small Businesses Thrive Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Independence and a better lifestyle Personal satisfaction from work Best route to success Rapidly changing technology Major corporate restructuring and downsizing Outsourcing Resilience The National Federation of Independent Businesses reports that 85 percent of Americans view small businesses as a positive influence on American life. This slide shows some of the reasons that small businesses thrive. ©Design Pics Inc. / Alamy 6

Why Stay Small? 6 React more quickly to changing market forces Chapter 5 Entrepreneurship: Starting and Managing Your Own Business React more quickly to changing market forces Develop innovative product ideas faster, with fewer financial resources and fewer people Serve specialized markets Offer a higher level of personal service Small businesses are resilient and can respond to changing market forces by refocusing their efforts on personal service, 6

Disadvantages of Being Small Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Difficulties in obtaining adequate financing Limited managerial skills may impact growth Expensive to comply with federal regulations Requires a major commitment by owner On the other hand, being small is not always an asset. Limited managerial skills or difficulties finding adequate financing are both obstacles to the growth of a small business. 6

CONCEPT check 6 Why are small businesses becoming so popular? Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Why are small businesses becoming so popular? Discuss the major advantages and disadvantages of small businesses. 6

The Small Business Administration Chapter 5 Entrepreneurship: Starting and Managing Your Own Business 7 How does the Small Business Administration help small businesses? 7

The Small Business Administration Chapter 5 Entrepreneurship: Starting and Managing Your Own Business The Small Business Administration Small Business Administration (SBA) A government agency that helps people start and manage small businesses, helps small-business owners win federal contracts, and speaks on behalf of small business. The Small Business Administration’s mission is to help people start and manage small businesses, help them with federal contracts, and speak on behalf of small businesses. Its network of local offices provides support in the areas of finance and management. In the fiscal year ending September 30, 2005, the SBA backed more than $19 billion in loans to almost 98,000 small businesses. It also provided more than $9 billion in rebuilding loans for victims of 2005’s costly hurricane disasters. Visit the SBA Website to view details on its programs. http://www.sba.gov 7

The Small Business Administration Chapter 5 Entrepreneurship: Starting and Managing Your Own Business The Small Business Administration Guarantees on loans made by private lenders SCORE and ACE management consulting Assistance for women, minorities, and veterans In FY 2005, the SBA provided about $6 billion to minority-owned firms and $3.3 billion in loans to businesses owned by women. Other SBA programs include the New Markets Venture Capital Program, which promotes economic development and job opportunities in low-income geographic areas. SCORE and ACE are volunteer groups offering management consulting, advice, training, and educational programs. 7

CONCEPT check 7 What is the Small Business Administration? Chapter 5 Entrepreneurship: Starting and Managing Your Own Business What is the Small Business Administration? Describe the financial and management assistance programs offered by the SBA. 7

Trends in Entrepreneurship and Small Business Ownership Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Trends in Entrepreneurship and Small Business Ownership 8 What trends are shaping entrepreneurship and small-business ownership? 8

Trends in Entrepreneurship and Small Business Ownership Chapter 5 Entrepreneurship: Starting and Managing Your Own Business Trends in Entrepreneurship and Small Business Ownership Demographics Society Technology Entrepreneurial opportunity comes from major changes in demographics, society, and technology. Social entrepreneurs are launching companies for the betterment of the world. The result is a blending of charity and for-profit work. However, raising money may be difficult. The fastest-growing segment of self-employed workers is the aging baby boomers—those people ages 55 to 64. The growing number of baby boomer entrepreneurs has promoted some forward-thinking companies to recognize opportunities in technology. Cell phones, computers, etc., will be designed with aging population needs in mind. Opportunities exist for entrepreneurs of all ages and backgrounds, with minority business owners continuing to increase. Technology plays a large role in the U.S. economy. Web-driven entrepreneurs represent 25 percent of all U.S. small businesses. 8

CONCEPT check Chapter 5 Entrepreneurship: Starting and Managing Your Own Business What significant trends are occurring in the small- business arena? How is entrepreneurial diversity impacting small business and the economy? How is technology affecting small business? 8