1. 1 | 1 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 1 Small Business: An Overview

2. 1 | 2 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After reading this chapter, you should be able to: Describe the characteristics of small business. Recognize the role of small business in the U.S. economy. Understand the importance of diversity in the marketplace and the workplace. Identify some of the opportunities available to small business. Suggest ways to court success in a small business venture. Name the most common causes of small business failure.

3. 1 | 3 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Facts About Small Businesses Represent more than 99.7% of all employers. Employ more than half of all private sector employees. Pay 44 percent of total U.S. private payroll. Created 64% of net new jobs over the past 15 years Represented 97.3% of all identified exporters. Produce 13 times more patents per employee than large firms. Create more than 50% of private GDP. Employ 40 percent of high-tech workers. Are 52 percent home based and 2 percent franchises. Small Businesses

4. 1 | 4 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What Is a Small Business Independently owned, operated, and financed Has fewer than 100 employees Has relatively little impact on its industry Definition of a Small Business Used in This Course Number of employees Sales revenue Total value of assets Value of owners’ equity How to Define Small Business

5. 1 | 5 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 1.1: Almost All Established Firms Are Small Businesses

6. 1 | 6 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Small Business and the SBA SBA Size Board’s Factors for Business Size Standards: Industry structure analysis Degree of competition Average firm size Startup cost Entry barriers, distribution of sales, and employment by firm size Effects of different size standard levels on objectives of SBA programs Comments from the public on notices of proposed rulemaking

7. 1 | 7 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 1.1: Small Business Size Standards

8. 1 | 8 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Class Exercise Using the SBA business size guidelines, which of the following are small businesses? A car assembly plant that employs 7,000 workers A local wholesaler with 95 employees A local retail store with $1.5M in yearly sales receipts A home builder with annual receipts of $2.8M A mall developer with a $50M construction contract A farmer with annual sales of $3M A farmer with annual sales of $500K A travel agent with annual sales from $1.2M to $2.5M A dry cleaning firm with $175K in annual receipts

9. 1 | 9 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 1.2: Small Business Employment Share of NAICS Industries SOURCE: Small Business Administration, Office of Economic Research, “Research Publications— Small Business Share of NAICS Industries,” Research Summary #218.

10. 1 | 10 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Small Businesses in the U.S. Economy Cottage firms and artisan studios Agricultural economy Early 1800s Economies of scale: mass production and assembly line factories lower unit costs Late 1800s: Industrial Revolution Paradigm shifts to the marketing concept Service sector grows as consumer incomes and spending increase, favoring small business growth 1950s-1960s

11. 1 | 11 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Recent Growth Trends Early 1970s Large firm profitability decreases as costs rise. Entrepreneurs establish small businesses in new industries. Other startups begin to outcompete older, larger competitors. 1980s-1990s to Present Downsizing and outsourcing creates opportunities for small business entrepreneurs. The global economic crisis that began in 2007-2010 has led to disruption of small business financing.

12. 1 | 12 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Recent Growth Trends Increased Business Startups Small business growth (startups) in last 30 years 1970 - 264,000 1980 - 532,000 1990 - 585,000 2000 - 574,000 2006 – 670,100 Increasing Interest at Colleges and Universities 1971 – 16 schools offer entrepreneurship courses 2010 – 2000 schools offer entrepreneurship courses

13. 1 | 13 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Recent Growth Trends: Forces Driving Change in 2011 Gen Y - Market of 76 million people wanting senior-friendly products such as supermarkets with lower shelves Growth of travel and tourism - Industry revenue expected to reach nearly $1.4 trillion “Mancession” -Increase in sales of men’s lifestyle products, such as bacon- flavored toothpicks Source: http://www.entrepreneur.com/trends/index.html

14. 1 | 14 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Best Industries for Starting a Business Right Now Candy Recession-resistant industry Snickers, Tootsie Pops, and 3 Musketeers started during the Great Depression iPhone Apps Marketplace predicted to be worth $1 billion someday Health-Care Technology Employment in field expected to grow by 18 percent between now and 2016, according to the BLS Source: http://www.inc.com/ss/best-industries-for-starting-a-business

15. 1 | 15 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Work Force Diversity and Small Business Ownership Aging population More women entering the work force Increased birthrate of minority groups Needs and abilities of people with handicaps Factors Increasing Work Force Diversity

16. 1 | 16 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Secrets of Small Business Success Identifying Your Competitive Advantage Remaining Flexible and Innovative Building Close Relations with Customers Small Business Success Factors

17. 1 | 17 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Innovation’s Role in Small Business Product Innovation Management Innovation Service Innovation Types of Innovation Process Innovation

18. 1 | 18 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Getting Started on the Right Foot Market size and definition Getting accurate information Gathering sufficient capital Right Tools to Succeed Finding and keeping effective employees

19. 1 | 19 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Understanding the Risks of Small Business Ownership What Is Business Failure? Voluntary or involuntary closure with a financial loss to a creditor Involvement in court action that results in loss of control of the business by the entrepreneur

20. 1 | 20 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Understanding the Risks of Small Business Ownership (cont’d) Inadequate Management Insufficient Capital Most Common Causes of Business Failure

21. 1 | 21 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 1.3: The Causes of Business Failures Are Many and Complex

22. 1 | 22 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Understanding the Risks of Small Business Ownership (cont’d) Termination occurs when a business no longer exists for any reason Failure occurs when a business closes with a financial loss to a creditor

23. 1 | 23 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Understanding the Risks of Small Business Ownership (cont’d) Common Mistakes That Invite Business Failure Planning: failing to look toward the future Understanding what is required: commitment and hard work Trying to do it all: not hiring enough employees or not using employees effectively Financial myopia: inaccurately estimating cash flows and capital requirements

24. 1 | 24 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 1.2: U.S. Business Startups, Closures, and Bankruptcies Myth: 90% of all new businesses fail within one year. Truth: Only about 18% of all businesses are forced to close their doors with a loss to creditors; the rest either close voluntarily or are still in business.

25. 1 | 25 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 1.4: Analysis of Business Closure