Entrepreneurship and Small Business Chapter 6 Entrepreneurship and Small Business

6-1 Becoming an Entrepreneur CHARACTERISTICS OF ENTREPRENEURS Entrepreneur- someone who takes a risk in starting a business to earn a profit

Some key factors in starting your own business include: Wanting to be your own boss Having special skills and abilities Coming up with innovative ideas

Entrepreneurship- the process of starting, organizing, managing, and assuming the responsibility for a business

Entrepreneurs in Action Sometimes ideas for new products come from problems in every day life Examples: Abby watched her dad make bacon in the microwave and the bacon came out soaked in grease. She created the Makin Bacon ® microwave tray. She and her father convinced Armour brand bacon to sell the tray.

What Does it Take? Not all people who own or manage a business are entrepreneurs A person must be able to turn the idea into a business Entrepreneurs come from: All age categories, racial, and ethnic groups Both genders Varied amounts of educational background Many entrepreneurs own their fist business while in their teens

There are personal traits that are common among entrepreneurs including: Persistent Inquisitive Energetic Goal oriented Independent Self-confident Creative Reliable Competitive

Checkpoint>> Choose 2 of the 9 personal skills of a successful entrepreneur and tell why having each skill would be benefit for starting their own business.

ENTREPRENEURSHIP AND THE ECONOMY Entrepreneurship is a key part of the U.S. Economy Nearly one in ten of all Americans ages 18-64 are involved in some type of entrepreneurship activity

Employment Small businesses are responsible for most new employment Over 60% of new jobs were created by businesses with fewer than 500 employees Nearly as many small businesses close as begin each year

Financing Most of the money needed to start a new business comes from the entrepreneur, their family, or friends One in five Americans has invested in a business of someone they know well More than 50% lend financial support to a family member / relative 29% give to neighbors and friends 8% invest in businesses started by colleagues More than $100 billion in new businesses each year

In the late 1990’s, many venture capital companies were formed Venture capital- money provided by large investors to finance new products and new businesses that have a good chance to be very profitable In the late 1990’s, many venture capital companies were formed They supplied an additional $100 billion per year to start new businesses This amount dropped to $22 billion in 2005 More than 2,900 companies receive venture capital each year This shows that many people think new business provide a good investment opportunity

Other sources for start-up capital includes: loans from financial institutions, credit given by other businesses

Productivity New and small businesses produce a large volume of goods and services for the economy. Businesses with just a single owner and no staff account for more than $600 billion in sales annually. Small businesses are responsible for more than half of the gross domestic product.

Checkpoint>> What are the sources of financing that entrepreneurs use for their new businesses?

OPPORTUNITIES AND RISKS New Business Opportunities Innovation- an invention or creation that is brand new Improvement- a designed change that increase the usefulness of a product, service, or process

Inventors often develop innovations. Those inventions may become the basis for a new business. Examples of well-known innovations include: Apple personal computer and Post-It Notes

In addition to inventions, innovations create new services that become the basis for a new business Example: Frederick Smith envisioned an economical worldwide system for quickly and efficiently shipping packages. This idea led to the start of FedEx.

Recognizing Risks Many successful entrepreneurs and their businesses are well known. Their success encourages others to think about starting a new business. More new businesses fail than succeed.

The primary reasons businesses started by entrepreneurs close are: Lack of adequate capital Low sales Higher than expected expenses Competitive pressure An owner unprepared to manage a growing business Operations requiring more time than the owner is willing to commit

Checkpoint>> Where do entrepreneurship opportunities begin?

6-1 ASSESSMENT

6-2 Small Business Basics SMALL BUSINESS OWNERSHIP Business is often viewed as very large corporations. These companies employ thousands of people with locations all over the country. This is not an accurate picture of most businesses. The greatest percentage of U.S. businesses are small businesses Employ half of all private sector employees

Small business- an independent business with fewer than 500 employees 99.9% of the roughly 26 million U.S. businesses are small businesses

A more specific description of a small business includes the following: The owner is usually the manager It operates in one or very few locations It typically serves a small market It is not dominant in its field

Small Business Employment On average, small businesses are responsible for creating 60-80% of all new jobs Many small business services are professional and technical. Many construction companies operate as small businesses

Ownership Diversity Women own more than ¼ of all small businesses More than 18% of small businesses have African, Asian, or Hispanic-American ownership The majority of small business owners are over 35, but 25% are under 35 Almost all people starting a business have a high school diploma Nearly 60% have finished some college work

Half of all small businesses are home-based On average, $5,000 or less is needed to start due to part-time or service businesses being started Full-time businesses require 100,000 or more for initial capital to buy buildings, equipment, and employees (payroll)

Checkpoint>> What percentage of employees in the United States work for a small business?

SMALL BUSINESS ADVANTAGES Many services required by average people would be completed by a small business.

Meeting Customer Needs Small businesses play a vital role in the economy. Serve customers where the number of products and services is small or the requirements are too specialized for large businesses to make a profit It is easier for a small business to meet the precise needs of customers than a large business

Even though a large business has more resources, to operate efficiently it must focus on products and service that meet the needs of a large group of customers Small businesses are not able to match the operating costs of large businesses. They can compete by paying attention to customers by locating near them, depend less on having other businesses deliver their products, and getting direct information from their customers.

Providing Unique Services Small businesses are especially suited to provide unique services for customers. Examples: Planning a wedding or designing a customized sound system for your home. Business representatives must take special interest in the customer determining needs and discussing options.

Large businesses may not find it profitable to spend that much time with each customer and each employee may not have the expertise to design the service. Big business has a clear advantage when a large number of customers are willing to buy standard products. Small businesses gain advantage when customers have unique needs.

Checkpoint>> How can a small business compete successfully with larger businesses?

COMMON SMALL BUSINESS PROBLEMS Not all businesses succeed. The failure rate is much greater in small businesses than large businesses.

Reasons for Failure Not keeping accurate records Not having enough start up money Lack of management Lack of experience with the type of business

Not controlling operating expenses Poor location for the business Failure to manage credit offered to customers

Small Business Assistance Small business administration- government agency that helps small business owners develop business plans and obtain financing

Checkpoint>> Choose the 2 reasons for business failure that you think happen most often and tell why you feel they are the most wide spread?

6-2 ASSESSMENT

6-3 Starting a Small Business THE BUSINESS DECISION The procedures followed to start a business will often determine whether it will be successful.

An Idea Plus Experience Every business begins with an idea Business ideas come from many sources Hobbies, interests, and business experience Books and magazines suggest new opportunities including franchises

You shouldn’t consider starting a business without working for a small business Several years of training in a range of business operations will prepare you to be an owner Having responsibility for making decisions and opportunities to be the manager are key.

Right Place and Time Most retail businesses need good customer traffic If the business is not easy to find or requires a great deal of travel time, many people will stay away A wholesaler needs easy access to manufacturers where products are obtained for sale Manufacturers must be located in an area with access to the required raw materials Transportation systems must be easy to reach to distribute finished materials

Team Approach Many small business owners are quite independent. A business is not easy to run without the help of others Employees must be chosen carefully for their teamwork abilities. In addition to employees, owners will need assistance from people with specialized knowledge. Bankers, lawyers, and accountants

Preparation and Research The most important step in starting a business is preparation. Includes having enough information to make good decisions Time spent studying information before the business is started will save time and avoid later problems

Information is needed about: Customers Competitors Important operations Government regulations

This information is available through: Libraries Colleges Small business assistance centers Sometimes, the owner will have to do further research to collect current data.

Checkpoint>> Why is it important to use a team approach when starting a new business?

DEVELOPING A BUSINESS PLAN When successful businesses are compared to those who have failed, one factor stands out as the most important difference. The owners of a successful business develop and follow a business plan.

What is a Business Plan? Business plan- written description of the business idea and how it will be carried out Key features include: General description of the company Description of products / services sold Market analysis (demand, customers, and competition) Financial plan

Most business plans are developed for one year and updated the next year By developing a plan, the owner is forced to think about important activities, the amount of time they will take, and their cost. The plan serves as a guide to keep the business on track.

Steps in Developing the Business Plan The business owner is in charge of developing the business plan. The most popular use of business plans is to persuade investors and banks to finance the venture.

Gather and review information Step 1 Gather and review information Review other business plans and study information on the activities and financial performance of similar businesses

Develop strategic alternatives Step 2 Develop strategic alternatives Alternate plans for marketing, staffing, and financing

Each section of the business plan should be written. Step 3 Each section of the business plan should be written. Several sections for the description of the business Before the plan is completed, the owner should have business experts review and offer advice for strengths and weaknesses of the plan.

Checkpoint>> What are “strategic alternatives” in a business plan?

FINANCING THE SMALL BUSINESS A new business with a good product or service may run out of money before becoming profitable. Several years of operation are required before most new businesses can earn a profit. Finding adequate financing is a key step in starting and running a business.

Types of Financing Start-up financing- amount of money needed to open the business Includes the cost of buildings, equipment, inventory, supplies, and licenses Short-term financing- money needed to pay for current operating activities Less than one year Often for one or two months Long-term financing- money needed for the main resources of a business that will last for many years Land, buildings, and equipment

Sources of Financing Finding the money needed may be the most difficult part of starting a business. Comes from a mixture of owner-supplied and borrowed funds. In a proprietorship, one person will supply the money. In most partnerships, each partner will contribute. In a corporation, shareholders own the business and contribute the money. Borrowed funds are obtained through loans from banks, other financial institutions, or other people.

Checkpoint>> In addition to owner-supplied capital, what are several other sources of financing for small businesses?

6-3 ASSESSMENT