CHAPTER 6 Entrepreneurship and Starting a Small Business

CHAPTER 6 – ENTREPRENEURSHIP AND STARTING A SMALL BUSINESS

LEARNING GOALS

After you have read and studied this chapter, you should be able to:

1. Explain why people take the risks of entrepreneurship; list the attributes of successful entrepreneurs; and describe entrepreneurial teams and intrapreneurs, and home and Web-based businesses.

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

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

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

5. Outline the advantages and disadvantages small businesses have in entering global markets.

LEARNING THE LANGUAGE

Listed here are important terms found in this chapter. Choose the correct term for each definition and write it in the space provided.

1.A ______consists of people with unsatisfied wants and needs who have both the resources and willingness to buy.

2. Governments try to attract private business investment to specific geographic areas known as ______by offering lower taxes and other government support.

3.A group of experienced people from different areas of business who join together as a(n) ______form a managerial team with the skills needed to develop, make, and market a new product.

4.A ______is independently owned and operated, not dominant in its field of operation, and meets certain standards of size in terms of employees or annual receipts.

5.Individuals or companies known as ______invest in new businesses in exchange for partial ownership of those businesses.

6.Centers called______offer new businesses low-cost offices with basic business services.

7.The SBA office known as the ______has volunteers from industry, trade associations, and education who counsel services for small businesses at no cost, except for expenses.

8.______is accepting the risk of starting and running a business.

9.Creative people known as ______work as entrepreneurs within corporations.

10.A ______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 owners.

11.The program through which private investment companies are licensed by the Small Business Administration to lend money to small businesses is called the ______.

12. ______are entrepreneurs willing to accept the risk of starting and managing the type of business that remains small, lets them do the kind of work they want to do, and offers them a balanced lifestyle.

13.The U.S. government agency called the ______advises and assists small businesses by providing management training and financial advice and loans.

14.An internet-based marketing strategy in which a business rewards individuals or other businesses (affiliates) for each visitor or customer sent to its web site is known as ______

ASSESSMENT CHECK

Learning Goal 1

Why People Take the Entrepreneurial Challenge

1.What are four reasons why people become entrepreneurs?

a. ______

b. ______

c.______

d. ______

2. Five desirable attributes for entrepreneurs are:

a.______

b.______

c.______

d.______

e.______

3.You may have a business idea that is a good opportunity if:

a. ______

b. ______

c. ______

d. ______

4.Why might entrepreneurial teams be better than an individual entrepreneur?

5.Describe a micropreneur and how he or she differs from an entrepreneur.

6.Describe the reasons for the growth of home-based businesses

a. ______

b. ______

c. ______

d. ______

7.Identify 5 challenges faced by the owners of home-based businesses.

1. ______

1. ______

1. ______

1. ______

1. ______

8.If you are interested in getting into a home office, you should focus on:

1. ______instead of ______

1. ______instead of ______

1. ______instead of ______

1. ______instead of ______

1. ______instead of ______

9.How “big” are Web based businesses?

10.What must Web-based businesses do to be successful?

11.Describe affiliate marketing. What is a widget, and how does it work?

12.Describe a shopping widget operator, such as Lemonade Stand.

13. What is the difference between an entrepreneur and an intrapreneur? What is the idea behind intrapreneurs?

14.What was part of the intention of the Immigration Act of 1990? What are investor visas?

15. In addition to investor visas, what are two ways governments could encourage entrepreneurship?

a. ______

b. ______

16.What kinds of services are offered by incubators? How do they help businesses survive?

Learning Goal 2

Getting Started In Small Business

17.What are three criteria used by the SBA to classify a business as "small"?

a.______

b.______

c.______

18. How is it that a business that employs 1,500 people, or has revenues of $22 million, be considered small?

19.What are some statistics that illustrate the impact of small business on the American economy?

a. ______

b. ______

c. ______

d. ______

e. ______

f. ______

g. ______

20.What are two advantages small business owners believe they have over big business?

21.What is the failure rate of small business? Why are the statistics misleading?

22.a. If you want to be both independent and rich, you need to go after: ______

b. In general the easiest businesses to start are: ______

c. In general the easiest businesses to keep alive are: ______

d. In general the businesses that can make you rich are: ______

Learning Goal 3

Learning About Small-Business Operations

23.What are three ways to learn about small business?

a.______

b.______

c.______

24.What will other small business owners tell you when you talk to them about running your own business?

a. ______

b. ______

c. ______

d. ______

25.What is the “rule of thumb” about getting experience in small business? How do you get this experience?

26.Three factors used to determine the value of a business are:

a.______

b.______

c.______

Learning Goal 4

Managing a Small Business

27.What two management functions are of primary concern when you are first starting your business? What three functions are of concern after the start-up, when managing the business?

28.A business plan is: ______

______

29.List the tips for small business owners who want to borrow money from a bank.

a. ______

b. ______

c. ______

d. ______

e. ______

f. ______

g. ______

30.List the information that generally should be included in a business plan.

a. ______

b. ______

c. ______

d. ______

e. ______

f. ______

g. ______

h. ______

i. ______

j. ______

31.What are two software programs that can help with writing a business plan?
32.List several sources of small business funding.

a.______

b.______

c.______

d.______

e.______

f.______

g.______

h.______

i.______

j. ______

33.According to the text, the most common source of funding is ______.

34.Describe an angel investor.

35.What is peer-to-peer lending?

36.What is one potential drawback with using venture capital?

37.If you’re a very small company, which funding source are you more likely to use, venture capital or an angel investor? Why?

38.What are microloans and what criteria are used to award microloans?

39.A Small Business Investment Company can help small businesses from defaulting on loans by

______

______

40.Describe a Small Business Development Center, and how they help small businesses.

41.Three important factors for success in your small business are:

1. ______

1. ______

1. ______

42.Once you have identified your market and its needs, you must:

______

43.What is one of the greatest advantages small businesses have over larger businesses?

44.What three criteria are critical for a small business owner with regard to managing employees?

1. ______

1. ______

1. ______

45.How do employees of small businesses often feel about their jobs? Why?

46.What are the challenges in small businesses regarding promotion and delegating authority?

47.Small business owners say they need the most assistance in the area of ______.

48.Computers can help a small business owner in the area of accounting by:

______

______

______

49.How can an accountant help in managing a small business?

50.What are five areas in which you may need assistance as a small business owner?

a. ______d. ______

b. ______e. ______

c. ______

51.In what ways can a lawyer help a small business owner?

52.In what areas will a marketing research study help a small business owner?

a. ______

b. ______

c. ______

53.Would an Internet site be important if you aren’t planning to sell products online?

54.How would a small business owner benefit from the advice of a commercial loan officer and an insurance agent?

55.Describe some important sources of information for small business owners.

a. ______

b. ______

c. ______

d. ______

e. ______

f. ______

g. ______

h. ______

Learning Goal 5

Going International: Small-Business Prospects

56.In general, what is the level of small businesses involvement in the global market place?

57.What are four hurdles small businesses face in the international market?

a. ______

b. ______

c. ______

d. ______

58.Small businesses have advantages over large business in the international market because:

a. ______

b. ______

c. ______

d. ______

CRITICAL THINKING EXERCISES

Learning Goal 1

1.Eric is a young man with a vision. He sees himself as heading up a large corporation someday, a company that he has started and helped to grow. He has basically supported himself since he was fifteen, and has, at the age of 20, already started and sold 2 successful small businesses. Right now he is going to college full time because he feels that getting an education will be beneficial to him in the long run. He is supporting himself partially with the money he received from the sale of his last business. He intends to start yet another business as soon as he graduates.

Eric's most recent business was in a fairly competitive market in the area in which he lives. He says that while he received some encouragement from a few friends, for the most part they all said he was crazy to work as hard as he was working. But Eric says he just felt that he "had to do things my own way" and built his business to become the second largest of its type in the area.

How does Eric portray the entrepreneurial attributes your text identifies?

Learning Goals 2, 3

2.Eric seems to have beaten the odds already. What do you think Eric would tell you about success (or failure) and how to learn to be a successful small business owner?

3.Now, fast forward a few years. Eric has graduated from school, and is ready to start his new business. He has never applied for a bank loan, and has come to you for advice on how to continue beat the odds. What will you tell him?

4.Maria Ruiz has a degree in business, but at this point in her business career has decided to stay home with her small children. Maria would like to start a small home-based business helping other small business owners write business plans, and contracting with other, larger business, in writing grant proposals. What would you tell Maria about home-based businesses and the challenges she will face?

Learning Goals 3, 4

5.After planning and financing, the functions necessary to be successful in running your small business include:

Knowing your marketKeeping efficient records

Managing employeesLooking for help

Read the following situation, keeping in mind what you have learned about operating successful small businesses. Do you think this small business will "beat the odds?"

Dave and Kevin worked together as sales representatives for a clothing manufacturer in Michigan. They were successful, but were interested in working on their own, and developed a plan for a partnership as manufacturer's representatives selling clothing and hats to their current customers, using a supplier network they would develop. While they were working full time, Dave and Kevin spent 6 months finding backers and lining up suppliers, and got a feel for which of their current customers they could count on later. They casually consulted with an accountant and a lawyer.

Finally they decided they were ready, and opened up under the name of Premium Incentives, Inc. Here is the situation on the day Premium Incentives opened:

* They each worked at home.

* They had promises, but no written contract from two suppliers to lend them a total of $100,000 over a one year period in return for all their business.

* They decided not to do a business plan, as they already had financing.

* Dave's wife agreed to do the bookkeeping as a favor. She had a degree in business, but not in accounting. However she had a full time job and a three-year-old child and was expecting another child in 5 months.

* They hired sales representatives to help with sales outside their home state, and planned to pay them on commission.

* They set up a price schedule designed to under-cut their competitors by a significant amount.

After two months in business, Dave and Kevin were still hopeful, but disappointed. They had made $5000 in sales, but hadn't yet been paid, as the product hadn't been delivered to the customers, and they had over $3,000 in start-up expenses. This would not have been a problem had the suppliers come through on their promises to finance Premium Incentives. However, one of the suppliers, after reconsidering, decided not to lend them any money, and the second dropped his offer down to $5000 a month for six months, with repayment beginning in the seventh month. Since Premium Incentives, Inc. did not have a written contract, they had no legal recourse. Dave and Kevin didn't worry too much about repaying the loan, as they figured they still had four months to build up the business. The problem was, their customers weren't buying as much as Dave and Kevin had anticipated, and they weren't sure what to do to find new customers.

Dave's wife was having problems keeping up with the books, so Dave began spending several days a week working on that, in addition to trying to sell. His wife suggested they develop some way of billing a customer, then re-billing if they hadn't paid within 15 days. Dave and Kevin disagreed about what to do, and eventually did nothing. They did finally hire a bookkeeper after several months of doing the books themselves. They continued to struggle with not knowing when a customer was going to pay, and therefore had no idea how much income they were going to have each month.

What do you think? What did Dave and Kevin do right? What did they do wrong? What are their chances of success?

Learning Goal 4

6.A. Draw up a list of the types of consultants whose services you may need in starting and managing your small business.

a. ______e.______

b. ______f.______

c. ______g. ______

d. ______

B. What other sources of information are available?

a. ______d. ______

b. ______e. ______

c.______f. ______

Learning Goal 5

7.Chad Lane is the owner of a small software business based in California. Chad is interested in growing his business, but he has seen that the market in the U.S. has become very competitive, and the technology market as a whole has slowed considerably. He is considering the possibilities of “going global” with his small business, and would like to explore some international opportunities. What would you tell him as his advisor?

PRACTICE TEST

MULTIPLE CHOICE – Circle the best answer

Learning Goal 1

1.Entrepreneurs take the risk of starting a business for all of the following reasons except:

a.they want independence.

b.they like the challenge and the risk.

c.they want to make money for themselves.

d.they want to work less.

2.Steve Jacobie is an entrepreneur to the max. Steve has started three businesses, two of which he sold for a great deal of money. He is now involved in running his third business, with plans to sell it shortly and start yet another one. When commenting on his success as an entrepreneur, he says that once an idea comes to him, he just can’t wait to start working on it and bring it to reality, and that is what he focuses on. Which of the traits of successful entrepreneurs does this suggest is characteristic of Steve?

1. Action-oriented
2. Self nurturing
3. Self-directed
4. Tolerant of uncertainty

3.An entrepreneurial team is:

a.a group of people who work within a corporation to launch new products.

b.a group of experienced people who join together to develop and market a new product.

c.a group from the Small Business Administration which consults with small business owners.

d.a group of managers who get together to find creative solutions to problems.

4.Federico Romero is a business owner who works from home as a freelance video producer. He really enjoys his work, but isn’t looking to “set the world on fire” with his company. He just wants to make a good living and spend time with his family when he can. Federico would be classified as a(n)

a.entrepreneur.

b.intrapreneur.

c.micropreneur.

d.venture capitalist.

5.An incubator is:

1. A U.S. government agency that advises and assists small businesses.
2. A program through which private investment companies licensed by the S.B.A. lend money to small businesses.
3. A center that offers new businesses low-cost offices with basic business services.
4. A specific geographic area to which governments try to attract private businesses by a variety of means.

6.Which of the following is among the challenges faced by those with home based businesses?

a.Computer technology

b.Managing time

c.Changes in social attitudes

d.New tax laws

7.Affiliate marketing is:

a.an internet-based marketing strategy in which a business rewards individuals or other businesses for sending visitors to their website.

b.a social networking strategy.

c.a marketing strategy for developing business plans that will work for many types of related businesses.

d.a strategy for marketing similar, or complementary, types of businesses on the Internet.

Learning Goal 2

8.Which of the following is a false statement about small business?

a.Small businesses account for more than 50 percent of G.D.P.

b.The vast majority of non-farm businesses in the U.S. are considered small.

c .The first job for most Americans will probably not be in a small business.

d.The majority of the country’s new jobs are in small business.

9.A small business:

a.must have fewer than 100 employees to be considered small.

b.is considered small relative to other businesses in its industry.

c.cannot be a corporation.

d.should be an S corporation.

10.Miriam Njunge wants to start a small business importing some products from her native Kenya. Before she starts, some good advice to Miriam would be:

a.talk to others who have been or are in the import business.

b.get a loan right away.

c.find a business to buy as soon as possible.

d.incorporate immediately.

11.In measuring the value of a small firm, which of the following would not be included?