Chapter 5: Small Business

Posted on Sep 6, 2024 in Economy

CHAPTER 5

2. Which Two Areas of Business Generally Attract the Most Small Businesses? Why Are These Areas Attractive to Small Businesses?

There are two areas of business that generally attract a large number of small businesses: service industries and distribution industries:

Distribution Industries: This category includes retailing, wholesaling, transportation, and communications. These industries are concerned with the movement of goods from producers to consumers. Of these, almost 3/4 are involved in retailing (the sale of goods directly to consumers). For example: Clothing, jewelry stores, pet shops, bookstores, and grocery stores.
Service Industries: This category attracts small businesses for over 48%. Of these, about 3/4 provide such non-financial services as medical and dental care; watch and shoe repairs; restaurants; and dry cleaning. Only 8% of the small service firms offer financial services, such as accounting, insurance, real estate, and investment counseling.

4. What Kinds of Factors Encourage Certain People to Start New Businesses?

The motivation to start a business develops slowly as individuals gain the knowledge and ability required for success as a business owner. Knowledge and ability, especially management ability, are probably the most important factors involved.

Factors:

Desire and determination to own your own business.
The “entrepreneurial spirit”: the desire to create a business.
Independence: the desire to determine one’s own destiny and the willingness to find and accept a challenge.
Motivation: Dissatisfaction with current work, job loss, or having a new product idea.
Willingness to accept challenges.

5. What Are the Major Causes of Small-Business Failure? Do These Causes Also Apply to Larger Businesses?

Small Businesses: The major causes of small-business failure are lack of capital, management, and planning. Businesses can experience several money-related problems. Entrepreneurs not only need the capital to open a business but also the money to operate it. One cash-flow obstacle often leads to others, and a series of cash-flow predicaments usually ends in business failure.
Larger Businesses: The major causes of larger business failure differ from those of small businesses. Overexpansion is a common cause. Many entrepreneurs with successful small businesses make the mistake of overexpanding. Fast growth often results in dramatic changes in a business. Thus, entrepreneurs must plan carefully and adjust competently to new and potentially disruptive situations.

6. Briefly Describe Four Contributions of Small Businesses to the American Economy.

The contributions of small businesses to the American economy are listed below:

Providing Technical Innovation: Many inventions sparked major new U.S. industries or contributed to an established industry by adding some valuable service. Examples include the helicopter, airplane, penicillin, and personal computer.
Providing Employment: Small businesses provide 67% of workers with their first jobs and initial on-the-job training in basic skills. Small businesses thus contribute significantly to solving unemployment problems.
Providing Competition: Small businesses challenge larger, established firms in many ways, causing them to become more efficient and more responsive to consumer needs.
Filling Needs of Society and Other Businesses: Small firms also provide a variety of goods and services to each other and to much larger firms.

7. What Are the Major Advantages and Disadvantages of Smallness in Business?

Advantages of Smallness in Business:

Personal Relationships with Customers and Employees: The owners of retail shops get to know their customers by name and deal with them on a personal basis. Through such relationships, small-business owners often become involved in the social, cultural, and political life of the community.
Ability to Adapt to Change: Through personal relationships with customers, the owners of small businesses quickly become aware of changes in people’s needs and interests, as well as in the activities of competing firms.
Simplified Recordkeeping: Many small firms need only a simple set of records. Recordkeeping might consist of a checkbook, a cash-receipt journal, and a cash-reimbursement journal.
Independence: Small business owners are the masters of their own destinies, at least with regard to employment. For many people, this is the prime advantage of owning a small business. Other advantages include keeping all profits, ease and low cost of going into business, and the ability to keep business information secret.

Disadvantages of Small Businesses:

Risk of Failure: New small businesses run a heavy risk of going out of business—about two out of three close within the first six years. Well-established small firms can be hit hard by business recessions, mainly because they do not have the financial resources to weather an extended difficult period.
Limited Potential: Many small business owners have a simple purpose: to make a living for their family. The owner may have some technical skills (e.g., hair stylist or lumber) to start their work, but such a business is unlikely to grow into a big business.
Limited Ability to Raise Capital: Small businesses typically have a limited ability to obtain capital. Most small-business financing comes out of the owner’s pocket.

8. What Are the Major Components of a Business Plan? Why Should an Individual Develop a Business Plan?

Components of a Business Plan:

Introduction: Name, address, phone number, date the plan was issued, statement of confidentiality.
Executive Summary: Overview of the business plan.
Benefits to Community: Business impact on the community.
Company and Industry: Background of the company, products/services to be offered.
Management Team: Discussion of skills, talents, and job descriptions of the management team.
Manufacturing and Operations Plan: Facilities, space, capital, labor, and purchasing requirements.
Labor Force: Quality of skilled workers.
Marketing Plan: Markets, pricing, distribution, and promotion needed.
Financial Plan: Investment, sales, and cash-flow forecasts.
Exit Strategy: Succession plan or going public.
Critical Risks: Weaknesses of the business.
Appendix: Résumés of owners.

Individuals should develop a business plan to guide themselves in starting a business. It also serves as a concise document that potential investors can examine to see if they would like to invest in or assist in financing a new venture.

12. What Is Venture Capital? How Does the SBA Help Small Businesses Obtain It?

Venture Capital: Venture capital is money that is invested in small firms that have the potential to become very successful. The people who invest in such firms expect their investment will grow with the firms and become quite profitable.
SBA Assistance: The aid the SBA offers allows small businesses to invest in ventures that otherwise would not attract venture capital.

13. Explain the Relationships Among a Franchise, the Franchisor, and the Franchisee.

Franchise: A license to operate an individually owned business as though it were part of a chain of outlets or stores.
Franchisor: An individual or organization granting a franchise.
Franchisee: A person or organization purchasing a franchise.

15. Cite One Major Benefit of Franchising for the Franchisor. Cite One Major Benefit of Franchising for the Franchisee.

Franchisor Benefit: The franchisor gains fast and well-controlled distribution of its products without incurring the high cost of constructing and operating its own outlets. The success of the franchise means more sales, which translate into higher royalties for the franchisor.
Franchisee Benefit: The franchisee gets the opportunity to start a business with limited capital and make use of the business experience of others. Franchisees also may be able to minimize the cost of advertising, supplies, and various business necessities by purchasing them in cooperation with other franchisees.