McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Introduction to Business Dr. H. Ronald Moser Cumberland University

Entrepreneurship and Starting a Small Business Chapter 06 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Founded Roc-A-Fella Records before entering into a joint venture with Def Jam. Maintains control over the Jay-Z brand - including his clothing line and nightclub chain. Regarded as a business leader, he has met with Bill Gates, Warren Buffett and former President Bill Clinton. JAY-Z Roc Nation 6-3 PROFILE

Entrepreneurship -- Accepting the risk of starting and running a business. Entrepreneurship is about taking the risk and starting your own business. Remember if you can make money for the other fellow, you can make money for yourself. What is Entrepreneurship? 6-4 THE AGE OF THE ENTREPRENEUR

French immigrant Élruthère Irènèe du Pont de Nemours started Du Pont in 1802.Du Pont David McConnell borrowed $500 from a friend to start Avon.Avon George Eastman started Kodak with a $3,000 investment in 1880.Kodak Jeff Bezos started Amazon.com with investments from his family and friends.Amazon.com Notable Entrepreneurs 6-5 THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED STATES

Leanna Archer – At 12 years old, she has her own hair care line. Alexis Holmes – Started baking for a fundraiser, now the 16-year-old owns her own bakery. Jack Short & Daniel Lyons – The two medical students started Factory Green, a carbon neutral apparel company, as undergrads.Factory Green Mark Zuckerberg – Launched Facebook as a Harvard freshman.Facebook You’re Never Too Young to be an Entrepreneur (Spotlight on Small Business) 6-6 THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED STATES

Age Range Percent Identified as Self-Employed 55 to 5928% 60 to 6536% 66 to 7042% You’re Never Too Old to be an Entrepreneur Either! 6-7 THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED STATES

Opportunity – The opportunity to share in the American dream is a tremendous lure. Profit -- Profit is another important reason to become an entrepreneur. Independence – Many entrepreneurs simply do not enjoy working for someone else. Challenge – Some people just enjoy the excitement. Why Take the Risk? 6-8 WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE

Self-directed – You should be self-disciplined and thoroughly comfortable being your own boss. Self-nurturing -- You must believe in your idea when no one else does. What Does it take to be an Entrepreneur 6-9 Action-oriented – Great business ideas are not enough. Most important is a burning desire to realize, actualize, and build your dream into reality. Highly energetic – You must be emotionally, mentally, and physically able to work long and hard. Tolerant of uncertainty – Only take calculated risks.

Source: U.S. News and World Report, October You’re Never Too Old to be an Entrepreneur Either! The highest rate of entrepreneurship activity is in the age group! Since 1996, older Americans have opened businesses at a higher rate than year olds. Older entrepreneurs have greater experience and more financial resources What Does it take to be an Entrepreneur Paula Deen – Home-base catering business

It fills customers’ needs. You have the skills and resources to start a business. You can sell the product or service at a reasonable price and still profit. An Idea is Good Opportunity If: You can get your product or service to customers before the window of opportunity closes. You can keep the business going Turning Your Passions and Problems Into Opportunities WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE

Entrepreneurial team -- A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product. An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apple’s success.Apple Entrepreneurial Teams 6-12 WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE

Micropreneur -- Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle. Micropreneurs 6-13 Micropreneurs and Home-Based Businesses WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE Many micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc. Nearly 60% of home-based micropreneurs are men.

Computer technology has leveled the playing field, allowing home-based businesses to look and act as big as their corporate competitors. Corporate downsizing has led many to venture on their own. Social attitudes have changed. Where as home- based entrepreneurs used to be asked when they were going to get a “real” job, they are now likely to be asked for how-to-do it advice. Home-Based Business Growth 6-14 Micropreneurs and Home-Based Businesses WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE New tax laws have loosened restrictions on deducting expenses for home offices.

Ability to start your business immediately. Minimal startup capital needed - Got to be legal. No rent or excessive set-up charges. Comfortable working conditions. Benefits of Home-Based Businesses Reduced wardrobe expenses. No commuting. Tax benefits. Elimination of office politics. Low risk for trial and error Micropreneurs and Home-Based Businesses WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE

Difficult to establish work habits. Limited support system- Vendors like to sell to large retailers. Isolation. Work space may be limited. Clients may be uncomfortable coming to your home. Zoning restrictions- Local government may have a problem with your business. Success is based 100% on your efforts WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE Downsides of Home-Based Businesses

The latest outsourcing trend is using the Internet to find affordable labor around the world. Outsourcing Your Small Business (Reaching Beyond Our Borders) 6-17 Micropreneurs and Home-Based Businesses WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE Elance provides small businesses with a hub to find low-cost contractors. Thanks to the inexpensive freelancers, Elance now has 48,500 clients, up 70% since 2007.

Online Business Online sales reached $172.9 billion in 2010, 7% of all retail sales Web-Based Businesses WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE All retail sales were up 2.5% in However, online retail sales grew 11%. Affiliate Marketing -- An Internet-based marketing strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website.

Entrepreneurship Within Firms Intrapreneur -- A creative person who works as an entrepreneur within a corporation. Intrapreneurs 6-19 WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE Intrapreneurs use a company’s existing resources to launch new products for the company. Art Fry of 3M developed Post-Its when he was trying to mark pages of his hymnal without damage.3M

Encouraging Entrepreneurship: What Government Can Do Immigration Act passed in 1990 created a category of “investor visas” that encourage entrepreneurs to come to the U.S if they invest $1 million in an enterprise that creates or preserves 10 jobs. Government and Entrepreneurship 6-20 WHY PEOPLE TAKE THE ENTREPRENEURIALCHALLENGE What is in it for me Mr. U.S.A? United States Enterprise Zones -- Specific geographic areas to which governments attract private business investment by offering lower taxes and other government support. Tennessee Incubators -- Offer new businesses low-cost offices with basic services. Maybe some parts of West Tennessee.

Small Business -- Independently owned and operated, not dominant in its field of operation and meets certain standards of size. Businesses are “small” in relation to other businesses in their industries. Most do less than $ a year GETTING STARTED IN SMALL BUSINESS Small Businesses Small Versus Big Business

There are 27.8 million small businesses in the United States. Of all nonfarm business in the United States, almost 97% are considered small. Small businesses account for over 50% of the GDP. Small businesses generate 60-80% of new jobs. About 80% of U.S. workers first jobs were in small business. Small Business Statistics 6-22 GETTING STARTED IN SMALL BUSINESS Small Versus Big Business United States Ron’s Place

Importance of Small Business More personal customer service – More one on one relationships. The ability to respond quickly to opportunities – Big businesses are much slower to respond to market opportunities because the home-office must approve any changes that effect policy changes. Advantages of Small Over Big Business 6-23 GETTING STARTED IN SMALL BUSINESS

Small Business Success & Failure Owner closing a business to start another is reported as a “failure.” Changing forms of ownership is reported as a “failure.” Retirement is reported as a “failure.” Failures are Lower than the Reports because… 6-24 GETTING STARTED IN SMALL BUSINESS According to a study reported in the Monthly Labor Review, 56 percent of new business don’t last four years. Much higher in Tennessee, close to 75%.

Source: World Features Syndicate, Tommy Hilfiger – First store went bankrupt. Milton Hershey – First confectionary failed. H.J. Heinz – Company went bankrupt six years after start. They Did What? Famous Business Failures Walt Disney – First film company went bankrupt. Henry Ford – First two car companies failed. L.L. Bean – Almost went bankrupt in first year GETTING STARTED IN SMALL BUSINESS Small Business Success & Failure

They Did What? Famous Business Failures 6-26 GETTING STARTED IN SMALL BUSINESS Small Business Success & Failure When looking at the advantages and disadvantages of starting various types of businesses, it appears the businesses that offer a chance for high profits tend to be difficult to start and hard to keep going like restaurants. Often, the businesses that are easiest to start are the hardest to keep going. Businesses that are easy to duplicate are easy to start, but have high failure rates. The most common reason for failure in a small business is poor managerial ability. Do I need to go back to school? What about Dr. Moser’s Introduction to Business Class over at Cumberland?

Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs. Get Some Experience – Gain three years experience in the field; then start a part-time small business. Take Over a Successful Firm – Serve as an apprentice and eventually take over once the owner steps down LEARNING ABOUT SMALL-BUSINESS OPERATIONS Learning About Small Business

Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs. An examination of statistics about people who start their own businesses reveals that many small business owners got their entrepreneurial idea from a previous job they held LEARNING ABOUT SMALL-BUSINESS OPERATIONS Learning About Small Business Getting experience by learning from others is invaluable. Experts advise interested persons to apprentice in a business similar to the one they would like to start.

6-29 LEARNING ABOUT SMALL-BUSINESS OPERATIONS Learning About Small Business Manny is about to graduate from college and is looking for full time employment. He had decided to concentrate on looking for a job with a major corporation. His job search strategy is likely to limit his job prospects since most new jobs are with small businesses. Ron’s Place Small businesses currently create 60-80% of all new jobs.

Planning. Financing. Knowing customers. Managing employees. Keeping records. Major Business Functions 6-30 MANAGING A SMALL BUSINESS

Major Business Functions 6-31 MANAGING A SMALL BUSINESS The primary focus in managing a new business should likely be financing and planning. Beginning with a good plan and finding funds to start the business are the first two steps. Although all of the areas listed are important, undercapitalized firms have a greater chance of failure. Creating a business plan and a financial plan are very important. Also ever small businesses must keep accurate records. Many small businesses fail due to poor accounting records.

Business Plan -- A detailed written statement that describes the nature of the business, the target market, the advantages the business will have over competition, and the resources and owners’ qualifications MANAGING A SMALL BUSINESS Begin with Planning Business Plans A business plan forces potential owners to be specific about what they will offer. A business plan is mandatory for talking with bankers or investors.

Writing a Business Plan A good plan takes a long time to prepare. A good executive summary catches interest and tempts potential investors to read on. Getting the plan into the right hands is almost as important as getting the right information in it MANAGING A SMALL BUSINESS Planning in small businesses is frequently inadequate.

Writing a Business Plan 6-34 MANAGING A SMALL BUSINESS When seeking a loan from a bank, an entrepreneur hoping to start a new business should realize that bankers will expect the entrepreneur to have a well prepared business plan. The financial plan is an important part of the entire businesses plan. The financial section will have a three-year projection of revenues and expenses, and the balance sheet will show all anticipated sources of funds.

Getting Money to Fund a Small Business Personal savings. Relatives. Former employers. Banks & finance companies. Government agencies. Angel investors. Venture capitalists -- Individuals or companies that invest in new businesses in exchange for partial ownership. Sources of Capital 6-35 MANAGING A SMALL BUSINESS

Source: Inc., October Funding Your Dream Getting Cash When Financing Isn’t an Option 1. Get close to your customers. 2. Make clients pay upfront. 3. Outsource tasks on the cheap. 4. Get in front of customers quickly. 5. Become an expert. 6. Ask for help. 7. Be patient MANAGING A SMALL BUSINESS

Small Business Administration (SBA) -- A U.S. government agency that advises and assists small businesses by providing management training and financial advice. SBA started a microloan program in 1991 that provides very small loans to small business owners.SBA Program judges worthiness on belief of the borrower’s integrity and soundness of their business ideas. The Small Business Administration (SBA) 6-37 MANAGING A SMALL BUSINESS

Small Business Investment Company (SBIC) -- A program through which private investment companies licensed by the SBA lend money to small businesses. A SBIC must have a minimum of $5 million in capital and can borrow up to $2 from the SBA for each $1 of capital it has.SBIC The Small Business Investment Company 6-38 The Small Business Administration (SBA) MANAGING A SMALL BUSINESS SBICs are able to identify a business’s trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.

Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states and are usually associated with state and community colleges and universities. SBDCs are able to evaluate the feasibility of your idea, develop your business plan and complete your funding application – for no charge. Small Business Development Centers 6-39 The Small Business Administration (SBA) MANAGING A SMALL BUSINESS I wonder who is paying for all this service?

Announced by the SBA in February 2011, this program’s aim was to provide a simpler and easier way for lenders to make smaller loans in underserved areas. In March 2011, the House Small Business Committee recommended the SBA budget be cut and the program couldn’t be funded. Community Advantage and Small Loan Advantage Program 6-40 MANAGING A SMALL BUSINESS The Small Business Administration (SBA)

Source: Inc., October Help Please! More SBA Resources and Other Helpful Groups Small Business Investment CompaniesSmall Business Investment Companies The Office of Innovation & EntrepreneurshipThe Office of Innovation & Entrepreneurship SCORE Entrepreneurship.org 6-41 MANAGING A SMALL BUSINESS The Small Business Administration (SBA)

Market -- Consumers with unsatisfied wants and needs who have both resources and willingness to buy. Set out to fill the market’s needs by offering top quality and great service at a fair price. One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs. The Market 6-42 Knowing Your Customers MANAGING A SMALL BUSINESS

Hiring, training and motivating employees is critical. The firm next selects new employees by matching the traits of potential employees with job requirements. Employees of small companies are often more satisfied with their jobs – they feel challenged and respected. Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions MANAGING A SMALL BUSINESS Managing Employees

Keeping Records Computers simplify the process by helping with inventory control, customer records and payroll. A good accountant can help in:  Deciding whether to buy or lease equipment.  Deciding whether to own or rent a building.  Tax planning.  Financial forecasting.  Choosing sources of financing.  Writing requests for funds. Accounting Assistance 6-44 MANAGING A SMALL BUSINESS

6-45 MANAGING A SMALL BUSINESS Looking for Help Finding Good Help  The recruiting methods used depend upon what type of employee is sought and how hard the retailer wants to search for the best available candidate.  Businesses and retailers should use a combination of job applicant sources rather than just a single source in recruiting their applicants. Question  What are some recruiting methods that retailers use? Know someone Career Center Help wanted

Owners need outside consulting advice early in the process. Small and medium-sized firms cannot afford to hire experts as employees. A competent lawyer can help with:  Leases.  Contracts.  Partnership agreements.  Protection against liabilities. Legal Help 6-46 Looking for Help MANAGING A SMALL BUSINESS The SBDC and the SBI can help.

Marketing decisions need to be made long before introducing a product or opening a store. A marketing research study can help you:  Determine where to locate.  Select your target market.  Develop an effective strategy for reaching the market. Marketing Research 6-47 Looking for Help MANAGING A SMALL BUSINESS

A commercial loan officer can help: - Design an acceptable business plan. - Give financial advice. - Lend money. An insurance agent can help you: - Know the risks associated with the business. - How to cover risks with insurance. - How to prevent risks with safety devices. Service Corps of Retired Executives -More than 10,500 volunteers from Industry, trade associations, and education who counsel small business at no cost. Other Forms of Help 6-48 MANAGING A SMALL BUSINESS

Small and medium-sized businesses accounted for 99% of recent export growth. Advantages of global trade for small businesses:  Overseas buyers enjoy dealing with individuals directly.  Small companies can usually begin shipping much faster.  They provide a wide variety of suppliers.  They can give more personal service and attention. Small Business Prospects Abroad 6-49 GOING INTERNATIONAL: SMALL BUSINESS PROSPECTS

Small and medium-sized businesses accounted for 99% of recent export growth. Disadvantages of global trade for small businesses: On of the main reasons why many why many American small businesses are not involved in global business transactions is many potential exporters do not know how to get started. Small Business Prospects Abroad 6-50 GOING INTERNATIONAL: SMALL BUSINESS PROSPECTS What do I need to do?

3-51 The End!