Chapter Six: Entrepreneurship and Starting a Small Business

  I. THE AGE OF THE ENTREPRENEUR.

 A. One poll of college seniors showed that 51% of the men and 31% of the women were attracted to STARTING THEIR OWN BUSINESSES rather than joining a corporation.

 B. One study revealed that the average respondent had already started 2.3 businesses.

 C. Colleges are responding by offering more courses on the subject of entrepreneurship.

 D. An ENTREPRENEUR is an innovator who assumes the risks of starting and managing a business.

 II. THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED STATES.

 A. One of the major issues in the U.S. today is the need to CREATE MORE JOBS.

 B. You can get some idea about the JOB-CREATING POWER of entrepreneurs when you look at some of the great American entrepreneurs from the past and the present.

 C. The text lists a number of examples including past entrepreneurs George Eastman of Kodak and Henry Ford of Ford Motor Company and contemporary entrepreneurs Steve Jobs, Michael Dell, and Craig McCaw.

 III. WHY PEOPLE TAKE THE ENTREPRENEURIAL CHALLENGE.

 LEARNING GOAL 1. Explain why people are willing to take the risks of entrepreneurship; list the attributes of successful entrepreneurs; and describe the benefits of entrepreneurial teams and intrapreneurs.

 A. Reasons why people are WILLING TO TAKE THE RISKS of business ownership include:

 1. OPPORTUNITY.

 2. PROFIT.

 3. INDEPENDENCE.

 a. Many entrepreneurs do not enjoy working for someone else.

 b. Some have found more self-satisfaction in starting their own businesses.

 4. CHALLENGE.

 a. Some believe that entrepreneurs are excitement junkies who flourish on taking risks.

 b. Many content that entrepreneurs take moderate, calculated risks.

 c. In general, entrepreneurs seek achievement more than power.

 B. WHAT DOES IT TAKE TO BE AN ENTREPRENEUR?

 1. The list of ENTREPRENEURIAL ATTRIBUTES includes:

 a. SELF-DIRECTED.

 b. SELF-NURTURING.

 c. ACTION-ORIENTED.

 d. HIGH ENERGY LEVEL.

 e. TOLERANT OF UNCERTAINTY.

 2. More entrepreneurs don't get the ideas for their products and services from some FLASH of inspiration-often the source of innovation is more like a FLASHLIGHT.

 3. An entrepreneurial test to determine if you have the entrepreneurial spirit is provided at the end of the chapter.

 C. ENTREPRENEURIAL TEAMS.

 1. An ENTREPRENEURIAL TEAM is a group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product. 2. This gives the company the COMBINATION OF SKILLS need to get the new company off to a great start.

 D. MICROPRENEURS AND HOME-BASED BUSINESSES.

 1. Some business owners are MICROPRENEURS, owners interested in simply enjoying a better lifestyle and doing what they want.

 2. While entrepreneurs are committed to the quest for growth, micropreneurs can be happy with little expansion.

 3. Many micropreneurs are HOME-BASED BUSINESS OWNERS, and many are owned by people who are trying to combine career and family.

 4. ADVICE FOR POTENTIAL HOME-BASED ENTREPRENEURS. Focus on:

 a. Opportunity instead of security.

 b. Getting results instead of following routines.

 c. Earning a profit not earning a paycheck.

 d. Trying new ideas instead of avoiding mistakes.

 e. Long-term vision not short-term payoff.

 E. ENCOURAGING ENTREPRENEURSHIP-WHAT GOVERNMENT CAN DO.

 1. The government passed the IMMIGRATION ACT OF 1990 to encourage more entrepreneurs to come to the United States.

 a. It created a category of 'INVESTOR VISAS' that allows 10,000 people to come to the United States each year if they invest $1 million in an enterprise that creates or preserves 10 jobs.

 b. Some believe that the more entrepreneurs that can be lured to the U.S., the more jobs will be created.

 2. One way to encourage entrepreneurship is through ENTERPRISE ZONES that feature low taxes and government support.

 a. The government could encourage entrepreneurship by offering investment TAX CREDITS to businesses that invest in creating jobs.

 b. The government could also institute a plan of public investment to REBUILD THE NATIONAL'S INFRASTRUCTURE.

 F. ENTREPRENEURSHIP WITHIN FIRMS.

 1. INTRAPRENEURS are creative people who work as entrepreneurs within corporations.

 2. By using company's existing resources- human, financial, and physical, they launch new products and generate new profits.

 3. Examples in the text focus on 3M, Hewlett- Packard, and Lockheed Corp.

 IV. GETTING STARTED IN SMALL BUSINESS.

 LEARNING GOAL 2. Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.

 A. The purpose of this part of the chapter is to explore small businesses, their role in the economy, and how they are started and managed.

 1. You will learn that, in general, the same principles apply to both small and large companies.

 2. All organizations demand capital, good ideas, planning, information management, budgets, accounting, marketing, employee relations, and good overall management.

 B. SMALL VERSUS BIG BUSINESS.

 1. SMALL BUSINESS is defined by the SBA as A BUSINESS THAT IS:

 a. INDEPENDENTLY OWNED AND OPERATED.

 b. NOT DOMINANT IN ITS FIELD OF OPERATION.

 c. MEETS CERTAIN STANDARDS IN TERMS OF EMPLOYEES OR ANNUAL RECEIPTS (for example, less than $2 million a year for service companies).

 2. Small businesses account for over 40% OF THE GROSS NATIONAL PRODUCT.

 3. The first jobs of about 80% of all Americans are in small business.

 C. IMPORTANCE OF SMALL BUSINESS.

 1. Ninety percent of the NATION'S NEW JOBS in the private sector are in small businesses.

 a. Dun amp; Bradstreet reports that the biggest employment increases in 1994 were in services, manufacturing, retail, and construction.

 b. The smallest job increases were in transportation, public utilities, mining, and government.

 c. As a result of the declining value of the dollar, small manufacturers that supply exporting industries are the winners in the 1990s.

 2. ADVANTAGES SMALL BUSINESSES HAVE over big companies are their more personal customer service and their ability to respond quickly to opportunities.

 3. Big businesses don't serve all the needs of the market-there is plenty of room for small businesses in niches.

 D. SMALL-BUSINESS SUCCESS AND FAILURE.

 1. FAILURE RATE.

 a. There is some debate about how many new small businesses fail each year.

 b. Conventional wisdom says that four out of five businesses (80%) fail in their first five years.

 c. Yet the SBA reports a 62% death rate within six years.

 d. However, a recent study by economist Bruce Kirchhoff shows that the failure rate is only 18% over the first eight years.

 e. It now seems that business failures are much lower than traditionally reported.

 2. Still nearly one out of five businesses that fails is left owing money to creditors.

 3. Many small businesses fail because of MANAGERIAL INCOMPETENCE and INADEQUATE FINANCIAL PLANNING.

 4. Choosing the RIGHT TYPE OF BUSINESS is critical to success.

 a. Many businesses with the lowest failure rates require advanced training to start.

 b. In general it seems that the easiest businesses to start are the ones that tend to have the least growth and the greatest failure rate.

 V. LEARNING ABOUT SMALL-BUSINESS OPERATIONS.

 LEARNING GOAL 3. Summarize ways to learn about how small businesses operate.

 A. LEARN FROM OTHERS.

 1. Investigate local community colleges for small business classes.

 2. Talk to others who have already done it.

 B. GET SOME EXPERIENCE.

 1. Go to work for others and learn all you can.

 2. Forty-two percent of small-business owners got the idea for their business from their prior jobs.

 3. The general rule is: 3 years of experience in a comparable business.

 C. TAKE OVER A SUCCESSFUL FIRM.

 1. After many years, some small business owners feel stuck in their businesses.

 2. The text describes a method of becoming successful small business managers.

 a. The first step is to find a businessperson running a successful small business.

 b. For another year or so, work hard to learn all about the business.

 c. At the end of two years, offer to become assistant manager.

 d. At the end of two years, offer to manage the business when the owner retires.

 e. You can establish a profit-sharing plan for yourself plus a salary.

 f. The owner benefits by keeping owner ship and earning profits without working.

 3. If profit sharing doesn't appeal to the owner, you may want to buy the business outright.

 VI. MANAGING A SMALL BUSINESS.

 LEARNING GOAL 4. Analyze what it takes to start and run a small business.

 A. Ninety percent of all failures are a result of 'POOR MANAGEMENT.'

 1. This could mean poor planning, poor record keeping, poor inventory control, poor promotion, or poor employee relations.

 2. It could likely include poor capitalization.

 3. This section explores the major functions of business as they pertain to small business:

 a. PLANNING your business (business plan.)

 b. FUNDING your business (finance.)

 c. KNOWING your customers (marketing,)

 d. MANAGING your employees (human resource development.)

 e. KEEPING RECORDS (accounting).

 B. BEGIN WITH PLANNING.

 1. A BUSINESS PLAN is a detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s)

 a. A business plan is mandatory for talking with bankers or other investors.

 b. Michael Celello, president of the People's Commercial Bank, says that fewer than 10% of prospective borrowers come to a bank adequately prepared and offers several tips.

 2. WRITING A BUSINESS PLAN.

 a. One of the most important parts of the business plan is the executive summary, which has to catch the reader's interest.

 b. There are computer software programs now to help you get organized.

 c. Getting the completed business plan in the right hands is almost as important as getting the right information in.

 C. GETTING MONEY TO FUND A SMALL BUSINESS.

 1. Entrepreneurs often are not highly skilled at obtaining, managing, and using money.

 a. Inadequate capitalization or poor financial management can destroy a business, even when the basic idea is good.

 b. One of the secrets of finding the money is knowing where to look for it.

 2. New entrepreneurs have several SOURCES OF CAPITAL: personal savings, relatives, former employers, banks, finance companies, venture capital organizations, government agencies, and more.

 a. STATES ALSO PROVIDE SUPPORT FOR ENTREPRENEURS.

 (i) State commerce departments serve as clearinghouses for these programs.

 (ii) States also create incubators and technology centers to reduce startup capital needs.

 b. INCUBATORS provide LOW-COST OFFICES with BASIC BUSINESS SERVICES such as accounting, legal advice and secretarial help.

 c. Technology-minded entrepreneurs often have the best shot at attracting start-up capital.

 d. Other than personal savings, individual investors are the primary source of capital for most entrepreneurs.

 e. VENTURE CAPITALISTS may ask for a hefty stake (as much as 60%) in your company in exchange for the cash to start your business.

 3. THE SMALL BUSINESS ADMINISTRATION (SBA)

 a. The SBA may provide the following types of FINANCIAL ASSISTANCE:

 (i) Direct loans.

 (ii) Guaranteed loans.

 (iii) Participation loans.

 (iv) Loans from Minority Enterprise Small Business Investment Companies (MESBICS).

 (v) Loans from the women's financing section.

 (vi) Microloans.

 b. The SBA's MICROLOAN PROGRAM awards loans on the basis of belief in the borrowers' integrity and the soundness of their business idea.

 c. You may also want to consider requesting funds from SMALL BUSINESS IN VESTMENT COMPANIES (SBICS). SBICs are private investment companies which the Small Business Administration licenses to lend money to small businesses.

 d. SMALL BUSINESS DEVELOPMENT CENTERS (SBDCs), funded jointly by the federal government and individual states, can help evaluate the feasibility of your idea, develop your business plan, and complete your funding application.

 4. Obtaining money from banks, venture capitalists, and government sources is very difficult for most small businesses.

 D. KNOWING YOUR CUSTOMERS.

 1. A MARKET CONSISTS OF PEOPLE WITH: (1) unsatisfied WANTS AND NEEDS, (2) with the RESOURCES, and (3) the WILLING NESS to buy.

 2. The goal of a businessperson is to FIND A NEED AND FILL IT.

 3. In order to fill these needs, one must FIRST IDENTIFY the WANTS AND NEEDS of potential customers.

 4. You will gain more insights about markets in Chapters 13 and 14.

 E. MANAGING EMPLOYEES.

 1. If you talk to small business owners, you will find that one of their Most difficult chores is to FIND, HIRE, TRAIN, AND KEEP GOOD EMPLOYEES.

 a. Nonetheless, employees of small companies are often MORE SATISFIED WITH THEIR JOBS than their counterparts in large companies.

 b. They find they are MORE CHALLENGED, their ideas are MORE ACCEPTED, and their BOSSES TREAT THEM WITH MORE RESPECT.

 2. As the business grows, it becomes necessary to DELEGATE AUTHORITY.

 a. This is touchy especially in businesses with employees who have been with the company since its start.

 b. These long-term employees may not have the necessary managerial skills.

 3. Attitudes such as you 'CAN'T FIRE FAMILY' or you must promote someone because 'They're family' can hinder growth.

 4. You'll learn more about managing employees in Chapters 7 through 12.

 F. KEEPING RECORDS.

 1. A businessperson who sets up an ACCOUNTING SYSTEM early will save much grief later.

 2. COMPUTERS make record keeping easier and let the business owner follow the progress of the business.

 3. A good accountant is invaluable in setting up record keeping systems and providing tax planning, financial forecasting, and choosing sources of financing.

 4. You will learn more about accounting in Chapter 18 focuses on accounting.

 G. LOOKING FOR HELP.

 1. Small businesspeople NEED HELP setting up their businesses early in the process.

 2. A necessary aide is a competent, experienced LAWYER who knows and under stands small businesses.

 3. A MARKETING CONSULTANT with small-business experience can help with marketing decisions.

 4. Two other valuable experts are a commercial loan officer and an insurance agent.

 5. The SERVICE CORPS OF RETIRED EXECUTIVES (SCORE) consists of 13,000 volunteers who provide consulting services for small businesses free.

 6. The SBA also sponsors the ACTIVE CORPS OF EXECUTIVES (ACE), volunteers who counsel small businesses.

 7. Other helpful contacts: other small business owners, chambers of commerce, the Better Business Bureau, and trade associations.

 VII. GOING INTERNATIONAL: SMALL-BUSINESS PROSPECTS.

 LEARNING GOAL 5. Outline the advantages and disadvantages of small businesses entering global markets.

 A. The WORLD MARKET is potentially a more lucrative market for small businesses that the U.S. alone.

 1. However, most small businesses still do not think internationally.

 2. Only 20% of small businesses executives say they export.

 B. Many potential international businesspeople DO NOT enter the global market BECAUSE:

 1. FINANCING IS MORE DIFFICULT to arrange.

 2. They DON'T KNOW HOW to get started.

 3. They DON'T UNDERSTAND THE CULTURAL DIFFERENCES.

 4. The BUREAUCRATIC PAPERWORK is over whelming.

 C. There are many good REASONS FOR SMALL BUSINESS PEOPLE TO CONSIDER GOING INTERNATIONAL:

 1. TWO-THIRDS OF THE WORLD'S MARKET lies OUTSIDE THE U.S.

 2. Exporting can ABSORB EXCESS INVENTORY.

 3. It can SOFTEN DOWNTURNS IN THE U.S. MARKET.

 4. It can EXTEND THE LIFE OF PRODUCTS.

 D. Small businesses have several ADVANTAGES OVER LARGE BUSINESSES:

 1. Overseas buyers enjoy dealing with individuals rather than with large corporate bureaucracies.

 2. Small companies can usually begin shipping much faster.

 3. Small companies provide a wide variety of suppliers.

 4. Small companies can give more personal service and more attention.

 E. SOURCES OF INFORMATION about international business can be obtained from the Commerce Department, SBA, banks, local freight forwarders, export management companies, and export trading companies.