Small Business
Management
An Entrepreneur's
Guidebook
sixth edition
Mary J a n e 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
Chatter 1
Starting Your Small Business 2
Profile: LogoLink 3It'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
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 35The 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
Contents
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 55Selecting 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, FranchiseOwner 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
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
Contents 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 201Meeting 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 234Types 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
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! 261Planning 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 294Communicating 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
Contents
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 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
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
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
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
Contents
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 4 0 3 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 1 5 . 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