Small Business Management

Small Business Management An Entrepreneur's Guidebook sixth edition Mary Jane Byrd University of Mobile Leon C. Megginson Emeritus University of Mobile McGraw-Hill Irwin Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

ThegPynamic Role of Small Business 1 Chatter 1 Starting Your Small Business 2 Profile: LogoLink 3 It's an Interesting Time to Be Studying Small Business 4 The Number of Small Businesses Is Growing Rapidly 5 The Public Favors Small Business 5 Interest Is Increasing at High Schools, Colleges, and Universities 5 Trend Is toward Self-Employment 6 Entrepreneurship Is Attractive to All Ages 6 Defining Small Business No Easy Task 8 What Is Small? 8 Distinguishing between Entrepreneurial Ventures and Small Businesses 9 Some Unique Contributions of Small Business 9 Encourage Innovation and Flexibility 10 Maintain Close Relationship with Customers and Community 10 Keep Larger Firms Competitive 11 Provide Employees with Comprehensive Learning Experience 11 Develop Risk Takers 12 Generate New Employment 12 Provide Greater Job Satisfaction 12 Some Current Problems Facing Small Businesses 12 Inadequate Financing 13 Inadequate Management 13 Burdensome Government Regulations and Paperwork 13 Some Current Trends Challenging Small Business Owners 13 Exploding Technology 14 Occupational and Industry Shifts 14 Global Challenges 15 Why People Start Small Businesses 15 Satisfy Personal Objectives 16 Achieve Business Objectives 18 Need to Mesh Objectives 19 Characteristics of Successful Entrepreneurs 19 Desire Independence 20 Have a Strong Sense of Initiative 20 Are Motivated by Personal and Family Considerations 20 Expect Quick and Concrete Results 20 Are Able to React Quickly 20 Are Dedicated to Their Businesses 21 Enter Business as Much by Chance as by Design 21 What Leads to Success in Managing a Small Business? 21 Doing an Introspective Personal Analysis 21 Where are the Opportunities for Small Business? 22 What Are the Fastest-Growing Industries? 22 Factors Affecting the Future of an Industry or a Business 22 Some Practical Ideas for Small Businesses 23 Some Areas of Concern for Small Business Owners 24 Poorly Planned Growth 24 Threat of Failure 25 Case 1.1: The Big Wash 28 Case 1.2: The American Dream 29 Chapter 2 Family-Owned Businesses 32 Profile: Farris-Feuerborn Memorial Chapel 33 Role of the Family-Owned Business 35 The Family and the Business 36 Family Interactions 38 Family Limitations 39 Culture and the Family Business 41 Family Resources 42 Preparing the Next Generation 42 Preparing for Management Succession 43 Why Succession Is a Problem 43 An Overlooked Problem 45 Plan Ahead! 45 Sudden Departure 45

Planned Departure 45 Selling to Family Members 47 Selling to Outsiders 47 Making the Transition Easier 48 Tax and Estate Planning 48 Tax Planning 48 Estate Planning 48 Estate Planning to Minimize Taxes 50 Estate Planning Issues 50 Estate Planning Techniques 50 Case 2.1: Tire Rack 52 Chapter 3 Forms of Ownership of Small Businesses 54 Profile: SpringHill Kitchens, LLC 55 Selecting the Right Legal Form 57 Factors to Consider 57 Relative Importance of Each Form 58 Why Form a Proprietorship? 59 Why Form a Partnership? 61 How a Partnership Operates 62 Types of Partnerships 62 Rights of Partners 63 j Why Form a Corporation? 63 How to Form a Corporation 65 How a Corporation Is Governed 65 The S Corporation 66 Other Forms of Business 66 The Limited-Liability Company (LLC) 67 The Limited Liability Partnership (LLP) 67 The Family Limited Partnership (FLP) 67 The Professional Service Corporation (PSC) 68 Nonprofit Corporations 68 The Cooperative 68 The Joint Venture 68 Fractional Ownership 69 How to Evaluate the Legal Form of Organization 69 Case 3.1: The Martin Family Grows a Business 71 Case 3.2: DB Bikes 72 Chapter 4 Maintaining Good Government Relations and Business Ethics 74 Profile: BSI: Thirty Years and Still Going 75 Understanding the Legal Environment 76 Some Basic Laws Affecting Small Business 77 The Uniform Commercial Code 77 Torts 77 Bankruptcy 78 Government Help fot Small Businesses 78 Small Business Administration (SBA) 78 Small Business Development Centers (SBDCs) 79 LJ.S. Department of Commerce 79 Other Government Agencies 79 Handling Government Regulations and Paperwork 80 Dealing with Regulatory Agencies 80 Some Benefits of Government Regulation 81 Some Problems with Government Regulation 81 How Owners of Small Firms Can Cope with Government Regulations 83 Dealing with Private Regulators 83 Choosing and Using a Lawyer 83 Choosing the Lawyer 84 Maintaining Relationships with Lawyers 84 Socially and Ethically Responsible Behavior 85 Social Responsibility 85 Business Ethics 87 Case 4.1: "Hannadowns" 92 Case 4.2: What to Do? 93 How to Plan and Organize a Business 95 Chapter 5 Becoming the Owner of a Small Business 96 Profile: Brynn Albretsen: Chick-Fil-a, Franchise Owner 97 How to Go into Business for Yourself 98 Finding Your Niche by Identifying a Needed Product 99 How to Decide on a Product 100 Choosing the Business to Enter 101

xvi Contents Studying the Market for the Product 103 Deciding Whether to Start a New Business, Buy an Existing One, or Buy a Franchise 105 To Start a New Business? 105 To Buy an Existing Business? 106 To Buy a Franchise? 108 Growing Opportunities in Franchising 109 What Is Franchising? 110 Extent of Franchising 110 Types of Franchising Systems 110 Why Franchising Is Growing in Importance 111 Recent Rapid Growth 111 Causes of Rapid Growth 112 How to Tell Whether a Franchise Is Right for You 112 See What the Franchise Can Do for You 114 Investigate the Franchise 115 Obtain Professional Advice 115 Know Your Legal and Ethical Rights 116 The Future of Franchising 117 Expected Areas of Growth 117 Other Areas of Expected Development 118 Global Franchising 119 Turning Your Dream into a Reality 120 Case 5.1: Tim Lewis Fills a Niche 123 Case 5.2: Failed Franchise 124 Chapter 6 Planning, Organizing, and Managing a Small Business 126 Profile: Sam and Teresa Davis Do Their Homework before Launch 127 Why Is Planning So'Important to Small Businesses? 128 Why Small Business Owners Neglect to Plan 128 Why Small Business Owners Need Planning 129 The Role of Strategic Planning 130 SWOT Analysis 131 Mission and Objectives 132 Strategies 134 The Role of Operational Planning 134 Setting Up Policies, Methods, Procedures, and Budgets 135 Planning to Operate the Business 135 The Role of Financial Planning 138 Estimating Income and Expenses 138 Es timating Initial lnves tment 13 9 Locating Sources of Funds 141 The Role of the Business Plan in Strategic and Operational Planning 142 Purposes of the Plan 142 What the Plan Should Include 142 Preparing the Plan 143 Who Should Prepare the Plan? 144 Developing Action Steps 144 Components of the Plan 144 Cover Sheet 145 Executive Summary 146 Table of Contents 146 History of the (Proposed) Business 147 Description of the Business 147 Definition of the Market 147 Description of the Produces) 148 Management Structure 148 Objectives and Goals 148 Financial Data 148 Appendixes 149 Presenting the Plan 149 Writing the Plan 149 The Written/Oral Presentation 150 Implementing the Plan 150 Sample Business Plan 151 APPENDIX: A Sample Business Plan: The Business Center 153 Chapter 7 How to Obtain the Right Financing for Your Business 178 Profile: Meet Sarah Coxwell of Davis Coxwell & Company LLC 179 Estimating Financial Needs 181 Principles to Follow 181 Using Cash Budgets 181 Reasons for Using Equity and Debt Financing 182

xvii Role of Equity Financing 182 Role of Debt Financing 182 Types of Debt and Equity Securities 183 Equity Securities 183 Debt Securities 183 Sources of Equity Financing 185 Self 185 Small Business Investment Companies (SBICs) 185 Venture Capitalists 186 Angel Capitalists 186 Other Sources 187 Sources of Debt Financing 188 Trade Credit 188 Commercial and Other Financial Institutions 189 Small Business Administration (SBA) 190 Small Business Investment Companies (SBICs) 192 U.S. Department of Agriculture (USD A) 192 What Lenders Look For 192 Case 7.1: Ella Williams: Making It on Her Own 195 Case 7.2: Karen & Co. 195 Howlto Market Goods/and Services 197 Chapier 8 Developing Marketing Strategies 198 Profile: Advanced Control Solutions 199 The Marketing Concept 201 Meeting Customers' Needs 202 Implementing the Marketing Concept 203 Seeking a Competitive Edge 204 Using Marketing Research to Implement the Marketing Concept 205 How Does Marketing Research Aid Marketing? 206 How to Do Marketing Research 206 Gathering Information on the Web 208 Using Computerized Databases 209 Developing a Marketing Strategy 210 Setting Objectives 210 Choosing Target Markets 211 Developing an Effective Marketing Mix 214 The Product Life Cycle 215 Stages of the Product Life Cycle 215 Need for a Wide Product Mix 217 Packaging 217 Pricing Your Product 218 Establishing Pricing Policies 218 How Prices Are Set by Small Businesses 220 Other Aspects of Pricing 222 Strategy for Marketing Services 222 Nature of Service Businesses 222 How Services Differ 223 Developing Service Marketing Strategies 223 Implementing Your Marketing Strategy 224 The Introductory Stage 224 The Growth Stage 225 Case 8.1: Parkview Drug Store: Adding the "Personal Touch" 227 Case 8.2: Buying Diamonds Online 228 Chapter 9 Promoting and Distributing 230 Profile: Springdale Travel, Inc. 231 Advertising 234 Types of Advertising 234 Developing the Advertising Program 234 Setting the Budget 234 Selecting Advertising Media 235 Developing the Message 237 When and How to Use an Advertising Agency 237 Measuring the Results of Advertising 237 Merchandising, Sales Promotion, and Publicity 238 Merchandising 238 Sales Promotion 238 Publicity 239 Considering Ethnic Differences 240 Opportunities for Small Firms in Global Marketing 240 Importing by Small Firms 241 Exporting by Small Firms 241 Distribution 243 Storing 243

xviii Contents Order Processing 243 Transportation 244 Choosing a Distribution Channel 245 Factors to Consider in Choosing a Distribution Channel 245 Distribution Channels for Consumer Goods 246 Distribution Channels for Industrial Goods 247 Selling through Intermediaries 248 Brokers 248 Agents 248 Wholesalers 248 Retailers 248 Selling with Your Own Sales Force 249 Need for Personal Selling 250 Steps in the Creative Selling Process 250 Attributes of a Creative Salesperson 253 Case 9.1: Taking Your Store to Your Customers 256 Case 9.2: Clark Copy International Corporation's China Experience 257 Hovy to Organize, Manage, and Operate the Effusiness 259 Chap er 10 How to Obtain and Manage Human Resources and Diversity in Small Companies 260 Profile: Mary H. Partridge and Michael Levy: Even Small Companies Merge! 261 Planning for Human Resource Needs 262 Determining Types of Employees Needed 263 Developing Sources from Which to Recruit Potential Employees 263 Recruiting and Selecting Employees 266 Methods of Recruiting Employees 266 Methods of Selecting the Right Person for the Job 267 Training and Developing Employees 271 Ways of Training Nonmanagerial Employees 272 Outside Help with Training 274 Selecting and Developing Managers 274 Selecting Managers 274 Developing Managers 275 Complying with Equal Employment Opportunity (EEO) Laws 275 Laws Providing for Equal Employment Opportunity 275 Enforcing EEO Laws 276 Compensating Employees 278 Legal Influences 278 Setting Rates of Pay 279 Using Money to Motivate 280 Compensating Managerial and Professional Personnel 281 Providing Employee Benefits 281 Legally Required Benefits 282 Some Other Popular Benefits 283 Flexible Approach to Benefits 284 Protecting Employees' Health and Safety 284 Factors Influencing Workers' Health and Safety 285 The Role of the Occupational Safety and Health Act 286 Environmental Protection 287 Case 10.1: The Case of Sam Sawyer 289 Chapter 11 How to Maintain Relationships with Your Employees and Their Representatives 292 Profile: Cathy Anderson-Giles: Master Motivator 293 Good Human Relations Is Needed in Small Firms 294 Exercising Effective Leadership 294 Communicating with Employees and Others 295 What Happens When You Communicate? 295 Barriers to Effective Communication 296 How to Improve Communication 296 Motivating Employees 297 What Is Motivation? 298 Why Motivate Employees? 298 How to Motivate Employees 299 Some Practical Ways to Improve Motivation 300 Motivation Is More than Mere Technique 301 Appraising and Evaluating Employees' Performance 301 Counseling Troubled Employees 303 Job-Related Areas Needing Counseling 304 Personal Problems Needing Counseling 305 Handling Employee Complaints 305

Imposing Discipline 305 Encouraging Self-Discipline 305 Using Positive Discipline 306 How to Discipline Employees Legally 306 Dealing with Unions 306 Laws Governing Union-Management Relations 307 What Happens When the Union Enters 308 Negotiating the Agreement 308 Living with the Agreement 309 Implement Your Plans 336 How to Improve Operations 336 State the Problem 337 Collect and Record Information 337 Develop and Analyze Alternatives 337 Select, Install, and Follow Up on New Methods 337 Setting and Using Performance Standards 337 Case 12.1: Telecommuting in the Rockies 339 Case 12.2: Nell Hill's: An Adventure in Shopping 340 Terminating Employees 310 Setting Up the Organizational Structure 310 Some Basic Organizational Concepts 310 Some Organizational Problems in Small Firms 311 Some Ways of Organizing a Small Business 312 Preparing an Organization Chart 314 Using Team Management to Improve Performance 314 Case 11.1: Personnel Policies Help Intermatic Grow 316 Case 11.2: Visiting Angels 317 Chapter 12 Obtaining and Laying Out Operating Facilities 320 Profile: Koi and Lilies 321 Developing Operating Systems 3.22 What Are Operating Systems? 323 How Operating Systems Work 323 How to Begin Operations 324 Choosing the Right Location 325 Why Choosing the Right Location Is So Important 325 Some Important Factors Affecting Location Choice 325 Locating Retail Stores 327 Types of Stores 328 Types of Locations 329 Locating Manufacturing Plants 331 Planning Physical Facilities 331 Determine Product to Be Produced 331 Identify Operations and Activities to Be Performed 332 Determine Space Requirements 332 How Telecommuting Affects Physical Facility Needs 332 Decide on the Best Layout 333 Chapter 13 Purchasing, Inventory, and Quality Control 342 Profile: Anders Book Stores: Dealing with Hundreds of Suppliers 343 The Importance of Purchasing 344 What Purchasing Involves 344 Why Purchasing Is So Important 345 Assign Responsibility for Purchasing to One Person 346 Selecting the Right Supplier 346 Types of Suppliers 347 Use Few or Many Suppliers? 347 Investigating Potential Suppliers 348 Evaluating Supplier Performance 348 Establishing an Effective Purchasing Procedure 348 Requisitioning Goods or Services 348 Making and Placing the Purchase Order 350 Paying a Satisfactory Price 350 Receiving the Items 350 Using Computers to Aid Purchasing and Inventory Control 351 Controlling Inventory 351 The Role Played by Inventory 352 Types of Inventory 353 Inventory Mix 353 Costs of Carrying Inventory 353 Determining When to Place an Order 354 Determining How Much to Order 354 Operations Planning and Control 354 Handling Variations in Demand 355 Scheduling Operations 355

Controlling Operations 355 Quality and Its Control 355 What Is Quality? 356 Improving and Controlling Quality 359 Case 13.1: Eddie & Company: Exceeding the Relevant Range 361 Basic Financial Planning and Control 363 Chapter 14 Basic Financial Planning 364 Profile: Carpe Diem 365 What Is Profit Planning? 367 How a Business's Financial Position Changes 368 Tracing Changes in a Company's Financial Position 368 Importance of Accounting 369 What Is the Financial Structute of a Business? 369 Assets 370 Liabilities 371 Owners' Equity 371 Profit-Making Activities of a Business 371 Revenue and Expenses 371 Profit 372 How to Plan for Profit in a Small Business 372 Need for Profit Planning 373 Steps in Profit Planning 373 Need for Realism in Profit Planning 373 Profit Planning Applied in a Typical Small Business 374 Step 1: Establish the Profit Goal 374 Step 2: Determine the Planned Sales Volume 374 Step 3: Estimate Expenses for Planned Sales Volume 376 Step 4: Determine the Estimated Profit 377 Step 5: Compare Estimated Profit with Profit Goal 377 Step 6: List Possible Alternatives to Improve Profits 377 Step 7: Determine How Expenses Vary with Changes in Sales Volume 378 Step 8: Determine How Profits Vary with Changes in Sales Volume 378 Step 9: Analyze Alternatives from a Profit Standpoint 380 Step 10: Select and Implement the Plan 380 Case 14.1: Eillen Dorsey and Walter Hill, Jr., Use Financial Planning 382 Case 14.2: The Need for a Cash Budget 383 Chapter 15 Budgeting and Controlling Operations and Taxes 384 Profile: Allen Smith: ego 385 What Is Involved in Control? 386 The Role 0/Control 386 Steps in Control 386 Setting Performance Standards 386 Characteristics of Effective Control Systems 387 Using Budgets to Communicate Standards 387 Types of Budgets 387 Preparing the Operating Budget 387 Preparing the Cash Flow Budget 388 Procedure for Planning Cash Needs 388 Using Budgetary Control 390 Controlling Credit, Collections, and Accounts Receivable 390 Other Types of Budgetary Control 390 Using Audits to Control the Budget 391 Obtaining and Using Performance Information for Control Purposes 391 Obtaining the Information 391 Comparing Actual Performance with Performance Standards 392 Determining Causes of Poor Performance 392 Evaluating the Firm's Financial Condition 393 Some Important Ratios and Their Meanings 393 Are Profits Satisfactory? 393 Are Assets Productive? 393 Can the Business Pay Its Debts? 394 How Good Are the Business's Assets? 395 Is Your Equity in the Business Satisfactory? 395 Ratios Are Interrelated 395 The U.S. Tax System 396 Who Pays the Taxes? 396 How Taxes Affect Small Businesses 396 Get Professional Help! 397

Types of Taxes 398 Taxes Imposed on the Business 398 Taxes and Fees Paid to Operate the Business 398 Excise and Intangible Property Taxes 398 State and Local Sales and Use Taxes 399 Federal, State, and Local Income Taxes 400 How the Form of a Business Affects Its Taxes 400 Treatment of Federal Corporate Income Taxes 401 Employment-Related Taxes 402 Income Tax Withholding 403 Social Security /Medicare Taxes 403 Unemployment Compensation Insurance 404 Workers' Compensation 404 Personal Taxes Paid by Owners 404 Taxes on Amounts Withdrawn from the Business 404 Taxes on Amounts Received from Sale of the Business 404 Recordkeeping and Tax Reporting 405 Maintaining Tax Records 405 Reporting Your Taxes 407 Credit Management 407 Methods of Payment 407 Setting Credit Policies 408 Carrying Out Credit Policies 409 Classifying Credit Risks 409 Investigating Customers' Creditworthiness 409 Establishing Collection Procedures 410 Case 15.1: Theme Restaurants 411 Case 15.2: How to Deal with Cash Flow Problems 413 Chapter 16 Using Computer Technology in Small Businesses 414 Profile: The Rosebud Flowers and Gifts 415 The Role of Information in Small Business 416 Elements of a Management Information System (MIS) 417 What Information Is Needed? 418 Timing of Information Flow(s) 420 Choosing an MIS 421 The Role of Technology in Business 421 The Laptop and Other Electronic Devices 421 RFID and Inventory Control 424 Strengths and Weaknesses of Computers for Small Firms 425 The Internet 425 Some Potential Problems with Computer Technology 425 Computers Require Added Security 426 Antivirus Programs 426 Reluctance of Some Owners to Use Computer Technology 428 Choosing Software, Hardware, and Employee Training 428 Small Business and E-Commerce 430 Internet Marketing 430 Web Design 431 The Seven Design Elements of the Customer Interface 432 Case 16.1: Herman Valentine: Customizing Computers for Military Use 435 Case 16.2: Switchpod.com 436 Chapter 17 Risk Management, Insurance, and Crime Prevention 438 Profile: Dr. Jeffrey F. Van Petten: A Unique Entrepreneur 439 Risk and Its Management 440 Types of Risk 440 Ways of Coping with Risk 441 Business Insurance 442 Using Insurance to Minimize Loss Due to Risk 443 Types of Insurance Coverage 443 Guides to Choosing an Insurer 446 Crime Prevention to Protect People and Assets 447 Armed Robbery 448 Theft 450 White-Collar Crime 452 Document Security 454 Safeguarding Employees with Preventive Measures 454 Case 17.1: Beware of "Softlifting" 456 Case 17.2: When Inventory and Sales Don't Balance 457 Workbook for Developing a Successful Business Plan 458 glossary 485 endnotes 494 photo credits 504 index 505