Chapter 6: Entrepreneurship and Small Business Management
Chapter 6: Entrepreneurship and Small Business Management
Small Business Management
6-1 Becoming an Entrepreneur
characteristics of successful entrepreneurs.
the importance of entrepreneurship in the
opportunities and risks of entrepreneurship.
Characteristics of Entrepreneurs
Entrepreneur – Someone who takes a risk in starting a business
to earn a profit. They have a real desire to be their own boss
and develop a good initial plan. They have special skills and
abilities and come up with innovative ideas.
Entrepreneurship – Process of starting, organizing, managing and
assuming the responsibility for a business.
What Does It Take?
Confidence and capability to turn an idea into a business.
Have an understanding of business operations and management
Don’t need a college degree but learn how to run a business in many ways
like asking others, working, reading.
Entrepreneurship and the Economy
Small businesses are responsible for most new employment.
Small businesses consist of less than 500 employees.
Most of the money for a new business comes from the entrepreneur or family and
Venture Capitalists – (Shark Tank) – Large investors finance new products and new
business that have a good chance to be profitable.
Late 1990’s, they supplied more than $100 billion to new businesses. 2005 that number
changed to $22 billion.
Loans from banks and financial institutions.
Produce a large volume of goods and services for the economy. Responsible for more
than half of the U.S. Gross Domestic Product each year. Account for 55% of all
innovative products and services developed.
Opportunities and Risks
New Business Opportunities
Innovation – Invention or creation that is brand new.
Computers, Post-It Notes (Arthur Fry and Spencer Silver), FedEx (Frederick Smith)
Improvement – Designed change that increases the usefulness of a product,
service or process.
Many more new businesses fail than succeed.
Of all new businesses – 1/3 are profitable, 1/3 don’t make a profit but
continue to operate and the final 1/3 lose money.
Over a 10 year time period, ½ businesses are discontinued.
Reasons businesses close:
Lack of adequate capital, low sales, higher than expected expenses, competitive
pressure, owner is unprepared to manage a growing business, operations requiring
more time than the owner is willing to commit.
6-2 Small Business Basics
important characteristics of small
the competitive advantages of small
problems faced by many small businesses.
Small Business Ownership
The greatest percentage of businesses in the United States is small businesses.
They employ half of all private sector employees.
Small Business Administration (SBA) defines small business as an independent
business with fewer than 500 employees.
More specific description of small business includes the following:
Small Business Employment
Owner is usually the manager, Operates in one or very few locations, Typically serves a
small market and It is not dominant in its field.
Responsible for creating 60-80% of all new jobs. Large number of service businesses.
Women own more than ¼ of all small businesses. More than 18% of small businesses have
African-American, Asian-American or Hispanic-American ownership.
Nearly 60% have finished come college work.
½ are home based businesses, because they may start as part-time and need less than
$5,000 startup money.
Small Business Advantages
Meeting Customer Needs
Serve customers where the number of product and services needed is small or
the requirements are too specialized for large businesses to make a profit.
Easier for a small business to meet the precise needs of customers than a large
business. Meet the unique needs of single customers.
Can’t match the lower operating costs of larger businesses, therefore, they have
to compete by paying attention to the customer. Have more contact with
Obtain direct feedback from customers.
Providing Unique Services
Must take a special interest in the customer.
Large businesses have a clear advantage when a large number of customers are
willing to buy standard products and prefer low cost and efficient delivery. Small
businesses gain an advantage when customers have unique needs, want more
individual attention and are willing to pay more for it.
Common Small Business Problems
Many failures result from the inability to pay expenses.
Not keeping adequate records, Not having enough start-up money, Lack of
management experience, 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 owners can get help from colleges and universities (faculty
members), Local Chamber of Commerce, Small Business Administration (SBA).
This government agency helps small business owners develop business plans and
obtain financing and other support.
6-3 Starting a Small Business
important factors to be considered
when starting a business.
the elements of a business plan.
types and sources of financing for a small
The Business Decision
An Idea Plus Experience
Every business begins with an idea. They can come from many sources; hobbies, interest
business experiences, others’ ideas, books, magazines.
Not many successful businesses continue without having some business experience (working).
Right Place and Time
Need good customer traffic, easily visible location, proximity to suppliers, transportation.
Many successful business start during a period when customer demand for certain products or
services is high.
Many business owners are independent. However, it’s not easy to run without the help of
May need some employees, but also assistance from those with specialized business knowledge
(i.e. bankers, lawyers, accountants).
Preparation and Research
Most important step in starting a business – the preparation.
Need information on customers, government regulations, competitors, operations of business.
Developing a Business Plan
All successful businesses develop and follow a business plan.
What is a Business Plan?
Elements: Description of the Business, Customer Analysis, Operations Plan, Marketing Plan,
A written description of the business idea and how it will be carried out, including all major
business activities. (the elements)
Steps in Developing the Business Plan
Owner is in charge of developing the plan. A well-developed plan will lay out an idea and will
require an owner to analyze the concept and make decisions about key business activities like
production, marketing, staffing and financing.
Some owners have someone else write the business plan
Pros and Cons: Someone experienced is writing your plan, they have other ideas. You are
paying someone to write your plan, your vision could be changed based on the perception
of the writer.
Owner should be familiar with their business and make the major decisions.
First step in developing the plan is to gather and review information (i.e. review other plans),
Next, develop strategic alternatives (i.e. alternative plans for production, marketing, staffing,
and financing). Finally, each section of the plan is written and reviewed.
Financing the Small Business
Types of Financing
Start-up Financing – Amount of money needed to open the business. Includes
the cost of buildings, equipment and inventory.
Short-term Financing – Money need to pay for the current operating activities
of a business. Obtained for a period of less than a year and often for one or
Long-term Financing – Money need for the main resources of a business (i.e.
land, buildings and equipment) that will last for many years.
Sources of Financing
Usually comes from the owner and then then some borrowed funds.
Depending on the ownership structure, the financing sources will be
different. Proprietorship (owner), Partnership (two or more people),
Borrowing – the owner needs to be aware of the cost of credit. How much
extra will it cost to borrow?