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* SOUTH-WESTERN
t CENGAGE Learning
Entrepreneurship: Ideas in Action,
Fourth Edition
Cynthia L. Greene
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Jack W. Calhoun
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Student Edition ISBN 13: 978-0-538-44614-3
Student Edition ISBN 10: 0-538-44614-5
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Student Edition with CD ISBN 10: 0-538-44626-9
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1 2 3 4 5 6 7 12 11 10 09 08
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Tatyana Berkovich
President and Founder
Ivy Academia
K-12 th grade Entrepreneurial Charter School
Woodland Hills, California
Becky Bernard
Coordinator/Instructor, Small Business
Vanguard Sentinel Adult Career Centers
Fremont, Ohio
Julie Carney
Program Manager
NFIB Young Entrepreneur Foundation
Washington, DC
Pat Edwards
Instructor, Hospitality Management
Fairfax County Public Schools
Chantilly Academy
Chantilly, Virginia
Mary A. Fugate
Business Education/OJT Instructor
Grants High School
Grants, New Mexico
Roger H. Fulk
Professor, Office Information Systems
Wright State University—Fake Campus
Celina, Ohio
Arlene Gibson
Director, Office of Career and
Technical Education
Career and Technical Education
Detroit Public Schools
Detroit, Michigan
Michael Hackman
Teacher, Business Department
Columbus North High School
Columbus, Indiana
Catherine Hayes
Teacher
Culinary Arts & Entrepreneurship
Albuquerque Public Schools
Del Norte High School
Albuquerque, New Mexico
Linda Hughes
Business Educator
Rapides High School
Lecompte, Louisiana
Susan Krebsbach
Teacher
Broken Arrow High School
Broken Arrow, Oklahoma
Carol T. Majors
Consultant
Consortium for Entrepreneurship Education
Lee’s Summit, Missouri
Azzie L. Olds
Business Instructor
North Caddo Magnet High School
Vivian, Louisiana
Michael Vialpando
Business Department Chair
La Joya Community High School
Phoenix, Arizona
Kim Watson
Marketing Teacher
The Academy of Irving
Irving, Texas
Jasper L. Wilson
Business Education Supervisor
Prince George’s County Public Schools
Upper Marlboro, Maryland
Reviewers III
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Contents
Should You Become
an Entrepreneur? 2
Making Job Connections 3
ftfl All about Entrepreneurship 4
Is Entrepreneurship Right for You? 10
Exploring Ideas and Opportunities 16
Problem Solving for Entrepreneurs 21
Be Your Own Boss 19
Develop Your Reading Skills 5
Did You Know? 11
Famous Entrepreneur 7
Net Bookmark 17
Teamwork 9, 15, 20, 25
What Went Wrong? 13
Lesson Assessment 9, 15, 20, 25
Chapter Assessment 28
Build Your Business Plan Project 31
Sharpen Your Entrepreneurial Skills
Effective Business Letters 26
Planning a Career in
Human Services 32
Winning Edge
BPA Presentation Management Team 33
Entrepreneurs in a
Market Economy 34
S Web Site Design 35
8 Entrepreneurs Satisfy Needs and Wants 36
How Economic Decisions Are Made 42
What Affects Price? 49
Be Your Own Boss 47
Develop Your Reading Skills 37
Did You Know? 46
Famous Entrepreneur 44
Net Bookmark 38
Teamwork 41, 48, 54
What Went Wrong? 53
Lesson Assessment 41, 48, 54
Chapter Assessment 56
Build Your Business Plan Project 59
Sharpen Your Entrepreneurial Skills
Effective Presentation Skills 55
Planning a Career in
Property Management 60
Winning Edge
FBLA Emerging Business Issues Event 61
Develop a Business
Plan 62
Turning an Idea into a
Business 63
« Why a Business Plan Is Important 64
What Goes into a Business Plan? 69
How to Create an Effective Business
Plan 78
Be Your Own Boss 80
Develop Your Reading Skills 65
Did You Know? 79
Famous Entrepreneur 67
Net Bookmark 81
Teamwork 68, 77, 82
What Went Wrong? 72
Lesson Assessment 68, 77, 82
Chapter Assessment 84
Build Your Business Plan Project 87
Sharpen Your Entrepreneurial Skills
Using Technology Tools 83
Planning a Career in
Landscape Architecture 88
Winning Edge
BPA Prepared Speech 89
IV Contents
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Identify and Meet a
Market Need 90
Serving Customers' Needs 91
§ Identify Your Market 92
Research the Market 97
Know Your Competition 104
Be Your Own Boss 107
Develop Your Reading Skills 93
Did You Know? 99
Famous Entrepreneur 98
Net Bookmark 101
Teamwork 96, 103, 110
What Went Wrong? 94
Lesson Assessment 96, 103, 110
Chapter Assessment 112
Build Your Business Plan Project 115
Sharpen Your Entrepreneurial Skills
Using Spreadsheets to Analyze Data 111
Planning a Career in
Marketing Research 116
Winning Edge
FBLA Multimedia Presentation 117
Market Your
Business 118
Turning Creative Fun into
Dollars 119
kA Develop the Marketing Plan 120
The Marketing Mix—Product 126
km The Marketing Mix—Price 131
Be Your Own Boss 136
Develop Your Reading Skills 121
Did You Know? 127
Famous Entrepreneur 122
Net Bookmark 129
Teamwork 125, 130, 138
What Went Wrong? 128
Lesson Assessment 125, 130, 138
Chapter Assessment 140
Build Your Business Plan Project 143
Sharpen Your Entrepreneurial Skills
Breakeven Point 139
Planning a Career in
E-marketing 144
Winning Edge
BPA Global Marketing Team Event 145
Distribution,
Promotion, and
Selling 146
Turning a Bad Experience
into a Million Dollars 147
8 The Marketing Mix—Distribution 148
The Marketing Mix—Promotion 154
Selling and Promoting 164
Be Your Own Boss 150
Develop Your Reading Skills 149
Did You Know? 155
Famous Entrepreneur 167
Net Bookmark 157
Teamwork 153, 163, 168
What Went Wrong? 161
Lesson Assessment 153, 163, 168
Chapter Assessment 170
Build Your Business Plan Project 173
Sharpen Your Entrepreneurial Skills
Marketing and the Web 169
Planning a Career in
Public Safety 174
Winning Edge
DECA Entrepreneurship Promotion Project 175
Contents V
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/ Select a Type of
Ownership 176
Capitalize on Youth
Marketing 177
Decide to Purchase, Join, or Start
a Business 178
Choose a Legal Form of Business 187
Legal Issues and Business Ownership 194
Be Your Own Boss 192
Develop Your Reading Skills 179
Did You Know? 184
Famous Entrepreneur 197
Net Bookmark 183
Teamwork 186, 193, 200
What Went Wrong? 190
Lesson Assessment 186, 193, 200
Chapter Assessment 202
Build Your Business Plan Project 205
Sharpen Your Entrepreneurial Skills
Effective Telephone Conversations 201
Planning a Career in
Franchising 206
Winning Edge
DECA Business Law and Ethics Management
Team Decision Making Event 207
Locate and Set Up
Your Business 208
Ideas in Action
A Neighborhood
Business 209
§ Choose a Location 210
Obtain Space and Design the Physical
Layout 218
<2> Purchase Equipment, Supplies, and
Inventory 224
Be Your Own Boss 227
Develop Your Reading Skills 211
Did You Know? 220
Famous Entrepreneur 221
Net Bookmark 222
Teamwork 217, 223, 228
What Went Wrong? 215
Lesson Assessment 217, 223, 228
Chapter Assessment 230
Build Your Business Plan Project 233
Sharpen Your Entrepreneurial Skills
E-Mail Etiquette 229
Planning a Career in
Architecture and Construction 234
Winning Edge
DECA Buying and Merchandising Management
Team Decision Making Event 235
Plan and Track Your
Finances 236
| Electronic Safekeeping 237
Finance Your Business 238
Pro Forma Financial Statements 246
Recordkeeping for Businesses 253
Be Your Own Boss 259
Develop Your Reading Skills 239
Did You Know? 245
Famous Entrepreneur 243
Net Bookmark 244
Teamwork 245, 252, 260
What Went Wrong? 256
Lesson Assessment 245, 252, 260
Chapter Assessment 262
Build Your Business Plan Project 265
Sharpen Your Entrepreneurial Skills
Prepare a Resume 261
Planning a Career in
Finance 266
Winning Edge
FBLA Business Financial Plan 267
VI Contents
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Operations
Management 268
Entertaining and
Planning 269
8 Operating Procedures 270
Inventory Management 276
Financial Management 283
Be Your Own Boss 278
Develop Your Reading Skills 271
Did You Know? 284
Famous Entrepreneur 281
Net Bookmark 272
Teamwork 275, 282, 290
What Went Wrong? 285
Lesson Assessment 275, 282, 290
Chapter Assessment 292
Build Your Business Plan Project 295
Sharpen Your Entrepreneurial Skills
Leadership Skills 291
Planning a Career in
Information Technology 296
Winning Edge
FBLA Partnership with Business 297
Human Resource
Management 298
Working for What You
Believe In 299
f Identify Your Staffing Needs 300
Staff Your Business 307
Direct and Control Human Resources 315
Be Your Own Boss 316
Develop Your Reading Skills 301
Did You Know? 311
Famous Entrepreneur 312
Net Bookmark 304
Teamwork 306, 314, 322
What Went Wrong? 318
Lesson Assessment 306, 314, 322
Chapter Assessment 324
Build Your Business Plan Project 327
Sharpen Your Entrepreneurial Skills
Promoting Teamwork 323
Planning a Career in
Audio-Video Technology 328
Winning Edge
FBLA Business Plan 329
Risk Management 330
Growth Is Risky 331
8 Business Risks 332
Insure Against Risks 338
Other Risks 345
Be Your Own Boss 336
Develop Your Reading Skills 333
Did You Know? 339
Famous Entrepreneur 351
Net Bookmark 335
Teamwork 337, 344, 352
What Went Wrong? 342
Lesson Assessment 337, 344, 352
Chapter Assessment 354
Build Your Business Plan Project 357
Sharpen Your Entrepreneurial Skills
Respect Cultural Diversity 353
Planning a Career in
Insurance 358
Winning Edge
DECA Business Services Marketing
Series Event 359
Contents VII
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Management for the
Future 360
Starting Young and
Moving Up 361
Growth Strategies 362
Ethical and Social Issues 370
Global Trends and Opportunities 378
Be Your Own Boss 380
Develop Your Reading Skills 363
Did You Know? 375
Famous Entrepreneur 383
Net Bookmark 374
Teamwork 369, 377, 384
What Went Wrong? 364
Lesson Assessment 369, 377, 384
Chapter Assessment 386
Build Your Business Plan Project 389
Sharpen Your Entrepreneurial Skills
Time Management 385
Planning a Career in
Transportation 390
Winning Edge
BPA Small Business Management
Team Event 391
Glossary 392
Index 397
VIM Contents
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Cynthia L. Greene taught business education at the high school level for 25 years. She taught in
the Fulton County School System in Atlanta, Georgia, and she was the program specialist for
Business and Information Technology for the Georgia Department of Education for six years. She
has been active in the National Business Education Association (NBEA), serving as NBEA President
in 2005-2006 and on the Entrepreneurship Standards Committee as a writer and reviewer and as a
writer for the Entrepreneurship Lesson Plans.
About the Author
IX
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Excellent Business Plan Coverage
Entrepreneurship: Ideas in Action takes you step-by-step through the entire process of owning
and managing a business. Business plan coverage has been moved earlier in the text and expanded.
You learn what it takes to get an entrepreneurial venture off to a good start.
BUILD YOUR n|
Bu siness Plan ^
This activity will help you develop the business plan for your business
idea.
Identify the target market for your business Use secondary data sour¬
ces to help you assess demand for your product or service.
Using the secondary research, develop a customer profile for you business.
Which market segment of you industry are you targeting’ Be specific
Conduct pnmary research for your business, using the steps outlined
in Lesson 4.2. Develop a questionnaire that will give you the informa¬
tion you need. Ask at least 30 people in your target market to com¬
plete the survey. Analyze you results and determine what course of
action you will take
Determine who your competitors are, both direct and indirect. Using
the Activity CD. open the activity 'Competitive Analysis.' Use the
chart to prepare a competitive analysis for your business. Determine a
strategy for dealing with each competitor
What are your strategies for maintaining customer loyalty? Describe
them and give reasons why you think each will work.
Comprehensive Coverage of
BPA, FBLA, and DECA
Competitive Events
Winning Edge features help you prepare for
competitive events.
BPA Presentation Management Team 33
FBLA Emerging Business Issues Event 61
BPA Prepared Speech 89
FBLA Multimedia Presentation 117
BPA Global Marketing Team Event 145
DECA Entrepreneurship Promotion Project 175
DECA Business Law and Ethics Management
Team Decision Making Event 207
DECA Buying and Merchandising Management
Team Decision Making Event 235
FBLA Business Financial Plan 267
FBLA Partnership with Business 297
FBLA Business Plan 329
DECA Business Services Marketing Series
Event 359
BPA Small Business Management Team
Event 391
Build Your Business Plan Project
concludes each chapter and is
designed to help you prepare a
complete business plan by the end
of the course.
The Kmcrpng Rinincu I»uo hail provide* itudcut* »nh an uppar-
ninny to lOUKb and ptevrn on emerging butane** The oeni
w ill he completed by a leant coiMttntg of (wo cir three member*.
FBLA provide* participant! a topic to mcarch. The team must
I hen proem an atfirmnne or negatin' argument about the topic, hated
upon random tclecimn tact! and working data thnuid be iccured
hum reliable source*. Alter drawing an alBmutne at a negative argu
mem, team* will hair five minute* to fuuh/c then preparaunt. hath
presentation wtU 1 m no longer than hie minute* Following each oral
pcocntatKm, the judge* haic three rramitc* to ad. quohont.
TOPIC t lining the border with Mctku hat become a heated
political ictue for the l'rated State*. Cammtakm, manufacTunng,
agriculture, and horticulture are a lew of the tnduune* that depend
luraiily on illegal immigrant* to fulhll labor need*. Some citi/cm and
poliricura want the cuuimv to thin down the border and deport iBc
gal immigrant* Other individuate want the jpitcmment to grant the
current illegal immigrant* a worker'* permit and develop a ttrategy to
enable them to become legal eitirenv One plan recommend* granting
cm/cndup to more than 12 million illegal immigrant* behwc tighten
mg up live border Other plan* vail (or fining huaanmo that lure illt
gal immigrant*. Your team will be called upon to argue the alhmutnc
igranting illegal rcwdcmi work pemutt and oti/emhipi or the nega
tne nine employer* and tend illegal retulem* home).
PERFORMANCE INDICATORS EVALUATED
• L'ndcrtund liow a current uwe allect* the economy
• Cvimmitnicilr an opinion hated upon fact* and figure*.
• WkI a* a team to perwade the auvfcrncc to tupport a ccrtani
• Manage time cllcctitcly lo rctcarch. outline, and proem a viewpoint.
• Demonirrite ctirctne reamworh and align idea* into a pemiawv
Go to tt* FBLA web the lor more detailed information
Pwnk Critically
1 What are two achantagn o> aflmwng ifeq
United Stale*?
t Mr/ are hauireue* concerned about the <j
illegal mrmjranci from Memo'
3 Why are poWmaoj conf-cted by the 1te9.1i
d How can the United State* emcee that A*
*ary wepi to obtaei injal otuemhp’
www.fbla.org
x
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Excellent Organization!
Each chapter is organized into lessons, making the text easy to use in all classroom environments.
Each lesson begins with a list of terms and goals for the lesson to help you focus your reading.
Each goal corresponds to a major heading. Loaded with activities, individual and group projects,
and reinforcement opportunities, this text will get you ready to launch your business ideas!
Lessons provide the appropriate amount of
material for each lesson.
Develop Your Reading Skills helps hone your
reading skills.
List all of the chapter key
terms on the board. Have
students write a definition
for each key term before
reading the chapter. When
a key term is introduced in
the chapter, have students
compare the definition to
the one they wrote and
correct their definitions as
needed.
a
Business
3.1 Why a Business
Plan Is Important
3.2 What Goes Into a
Business Plan?
3.3 How to Create an
Effective Business
Plan
ichool.cengage.coin/entrcprencur/idevii
Develop
Plan
Goals outline the main objectives of the lesson.
Terms are the new terms defined in the lesson.
Focus on Small Business provides a -
motivating introduction to the lesson.
Why a Business Plan
Is Important
\| Focus on Small Business
Look before you leap
Tony worked for a local automobile dealership at a tech
ructan for over 20 yean He wet the ben tcchneian at th
dealership, and he always received very high cuttomer
vervco ratings. One day, Tony deeded that became he
wat Midi a good technician, he could make more
money working on hit own At a local pent and
vrgnage shop. he had butinett cards printed and a
ugn made that read 'Tony the Technioeiv * He quit
bn job at the dealer on Friday, put hit vqn up on
Sunday, and wat open for butinett on Monday.
Work aa a Team Tony made hit doouon very tati
and jumped right «ilo owning his own butanes*
What do you think are Tony's chances for tuccott?
Discuss what adwee you would have yven Tony
if he had talked to you about his idea first
The Business Plan
Once you lute willed on a hutment idea, it st nine to start making
plant It >r the business. A business plan i- a written document tfi.it
dcunltt-t all ihc steps net c wary fur opening and operating a win cm
fill Isuwiscst In this chapter, you will leant what goes into a hutment
plan and begin the development of a businesa plan hie your btiunrst
Idea.
A business pkjn doe* the Mlmving
• Describes whal sour him new will produce, how you will pnnliKC
il, and who will buy yvmi product or tersicc
• Explains who will run vosir business and who will stipple n with
goods
• StJtcs how your business wtU win mo customers from sumpetitors
and what yuur business will do to keep sintomcrs
xi
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Career Coverage!
A variety of careers as an Entrepreneur are featured
for various Career Clusters in the Planning a
Career in... feature
Human Services 32
Property Management 60
Landscape Architecture 88
Marketing Research 116
E-marketing 144
Public Safety 174
Franchising 206
Architecture and Construction 234
Finance 266
Information Technology 296
Audio-Video Technology 328
Insurance 358
Transportation 390
Planning a Career in
Architecture and Construction
At
itcle i* inning mm out
West He iv excited about the
«ilar panel* he recently installed
at hi* home. Hi* city provided
a SI,000 rebate tor *olar panel
installation. To obtain the rebate,
tlic panel* need to annually di*
place 1,500 kilowatt hour* of grid
ha*cd power. My uncle'* utility
bill* luxe gone down. 1 Ic alwi
feel* good about doing hi* part
tu improve the environment In
drcrcaiing hi* dependence on the
grid”
How do individual* and
organization* transition then
energy resource* trim traditional
vouico to environmentally friendly,
renewable sources?
Solar pxmer i* a renew able
energy source that i» rapid!*
incrcaung in popularity. Many
coin|*ainc* are available to guide
individual* and corporation* in
utilizing xnlar energy and to assist
in Hilar panel inttaliation
EMPLOYMENT OUTLOOK
• Solar energy comumprion i*
expected to grow a* part of the
overall growth of U.S, energy
ci inuitn prion.
• Worker* who are trained to
participate in alternative energy
muree* may experience good
job protpeci*
• Individual* with college course-
work in high-end technology
will have the best opportunities
in the utilities industry'.
JOB TITLES
• Solar Installer
• ( ooMibant, Solar Energy
• Solar Energy Project Manager
• Photovoltaic Lighting Ucvigner
• Solar .System Design Engineer
NEEDED SKILLS
• A Bachelor'* Degree in Science,
with an engineering major, »
required for higher-level dcugn.
production, and management
jobs.
• Eipcttw in a variety of area*
including journeyman-level elec-
tncal knowledge, plumbing, and
mount racking system* i* needed
tor tolar panel inttallcrs.
What', ttfttlo work m Arctutoc
haw and Construct m* Paige, a
Halar panel installation contractor,
ha* obtained installation contract*
from a variety of companies The
companies tlut contracted for
Paige'* service* provide their client*
with on site consulting. ranging
(nan determining the optimal Idea
lion of wilar panels, to the filing of
paperwork f>« govcnimenl-lused
rebate and tax credit programs, t.i
providing a tix-month tiiBow-up
visit to ensure proper functioning
of panels
A* Paige has been installing
panel* for many scars, her expert
ence i* broad bated. (Sven tlie
breadth of her experience, the can
install panel* at residential, com
mcrcial, or industrial site*
Paige is planning to attend a
conference that will Incus on state
and federal solar energy Incentive
program*. Becoming more kmnvl
edgeablc about tl»c*c i*Mic* t* pan
of Paige'* continuing education
plan to prepare her to start her
own Hilar energy consulting
What about you! Would sou
like to help clean up the environ
ment by actively converting energy
consumers to renewable, "green”
energy source*?
Skills for Entrepreneurs!
Sharpen Your (Entrepreneurial, Teamwork,
Leadership, Technology) Skills features offer
skill-building information and pose critical-thinking
questions.
Effective Business Letters 26
Effective Presentation Skills 55
Using Technology Tools 83
Using Spreadsheets to Analyze Data 111
Breakeven Point 139
Marketing and the Web 169
Effective Telephone Conversations 201
E-Mail Etiquette 229
Prepare a Resume 261
Leadership Skills 291
Promoting Teamwork 323
Respect Cultural Diversity 353
Time Management 385
Sharpen Your
Entrepreneurial Skills
Rotpoct Cultural DtwnKy
lit today's global economy, sou will conic in contact with all kuids
of people. Many of these people will be from culture* different from
your own. You may work with people of different culture*. You may
also buy from and tell to people of different culture*. A* an entrepre¬
neur, you need to appreciate different cultures lot the
following reason*
• You need tu be comfortable w ith your customer*.
If you are open to other culture*, you can attract
mote customer*.
• I’coplc from different culture* may have differ¬
ent need* and want*. Gndcrsuitding thc*c can
help you market sour business more effectively
llow can you develop good relationship* with
everyone you do btninc** with? 'I here are at least
live thing* you can do to enhance thc*c relation ships:
1. Avoid stereotyping people. Don't assume that
all people front a {mi1icuI.ii ethnic or cultural group Isold the
same value* and opuiionv. behave the same way, or kkr the same
thing*.
2. Focus on similarities rather than differences. Most people,
rvgarslles* of their culture, want die same thing* in life
3. Learn about different cultures. Learning about a different
culture will make you more comfortable around people from that
culture Learn hoi* people in a different culture live and work.
4. Moke friends with someone from a different culture, llic
friendship will help you begin to appreciate other cultures
5. Try' •'* understand and identify' with other people's feeling*.
Try' to sec the world through the eye* of people from different
cultures Tty to understand cultural view* that are different from
your own.
TRY IT OUT
Before conducting business in another country, you will have to answer
many question* to address the risk* Will your product sell well ui
another country or wiD you have to make modifications to it? What
aspects of the country's culture could affect your business’ How can
you leotn about another country'* culture? L ung the .Activity CD,
open the activity “Competing in the Global Economy “ Print a copy
and complete the activity.
XII
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Case Studies of Entrepreneurs!
Ideas in Action presents stories of successful
young Entrepreneurs.
Making Job Connections 3
Michael Stahl, 4Teens Network
Web Site Design 35
Scott Smigler, Exclusive Concepts
Turning an Idea into a Business 63
Jeffrey Rodriguez and John Serrano, Latin Artist
Serving Customers'’ Needs 91
Brian Hendricks, StartUpPC and VB Solutions
Turning Creative Fun into Dollars 119
Sheri and Rich Schmelzer, Jibbitz
Turning a Bad Experience into a Million
Dollars 147
Jasmine Lawrence, Eden Body Works
Capitalize on Youth Marketing 177
Tina Wells, The Buzz International Marketing
Group
A Neighborhood Business 209
Ryan Williams, Rapappy
Electronic Safekeeping 237
Katelin Shea, GadgetSleeves
Entertaining and Planning 269
Andrew Jensen, Jx2 Productions
Working for What You Believe In 299
Omar Farulc, LogicLotus
Growth is Risky 331
Scott Alterman, The Icebox
Starting Young and Moving Up 361
Joseph Pascaretta, Alps Technology and
Alps Lawn Company
Famous Entrepreneurs features successful entrepreneurs throughout history.
Madam C. J. Walker 7
Paul Revere 44
Walter Elias Disney 67
Thomas A. Edison 98
Sergey Brin and Larry Page 122
Anne Barge 167
Eli Whitney 197
Rachel Ray 221
The Wright Brothers 243
Ganz Family 281
J. K. Rowling 312
Merv Griffin 351
Johnny Pag 383
XIII
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Special Features Enhance Learning!
What Went Wrong? highlights the pitfalls of real
entrepreneurs and includes critical thinking questions
to help students analyze the situations.
WHAT WENT WRONG
Partnership Woes
Stan and Peter met while working at a video
production company Stan was in charge of
editorial and production Peter ran the sales
force. Stan deeded to begin his own company
and invited Peter to join him SP Communica¬
tions seemed like a perfect partnership. Peter
would handle sales and administration, while
Stan managed clients and directed production
Things seemed to be going well until
Peter decided he wanted to be a part of the
creative process He spent most of his time
producing videos rather than looking for new
business Because of their friendship. Stan
trusted that Peter was taking care of his side
of the business.
As it turned out. Peter wasn’t very good
at the creative tasks he took on. He made mis¬
takes that reduced expected profits. In addi¬
tion. he wasn't making new sales contacts,
which was supposed to be his mam job
By the time Stan realized what was hap¬
pening to the business, it was too late There
weren't any new sales. What Stan thought
were profits were the result of
Peter not paying their bills.
Stan was left with more
than $1 SO.000 in unpaid
bills and other debts.
Peter left the business.
It took Stan three
years to dig out of
the financial mess
and get his new
company up and
running successfully.
Think Critically
1 How might Ova* your partners nsefy
Stan and Peter
have avoided the problems that led to the
end of their partnership?
2. Why is this situation a good example of
the difficulty in maintaining partnerships
between fnends?
3 What types of things should be spelled out
completely between partners at the begin¬
ning of the partnership?
Did You Know? offers additional
information that relates to
chapter topics.
did you KNOW?
According to a recent
report by IGD, » con '
sumer and droppe'
research company.
of shoppen visit only
the airier which they
believe have the >tem.
they need. Thit mdr-
cater the importance
of placing new prod¬
ucts or promoted rtemr
in key locationr to
enrure good product
exposure.
Be Your Own Boss gives you the opportunity
to complete the same types of activities that a
real entrepreneur might do.
OB
BE YOUR OWN BOSS
You are the owner and manager of a diner
located along a busy interstate highway. You do
a good business with travelers passing through
as well as locals who eat with you regularly.
Recently, there have been several robberies dur¬
ing operating hours in nearby businesses. Your
local customers are beginning to get a little
nervous about coming to your business. Outline
a plan to minimize your risk of robbery. Include
ways to make your customers feel safe.
Net Bookmark incorporates Internet
activities into every chapter.
tsEl sookm ark
What makes a memorable brand or product
name? Access school.cengage.com/entrepreneur/
ideas and click on the link for Chapter 5.
Author Phillip Davis provides some thoughts
in his e-zine article. What does Davis consider
the most common naming mistake? Do you
agree with him that "Apple" is a better brand
name than something like "United Computer
Manufacturers" or "Quality Computer Corpo¬
ration"? Why or why not? Provide one exam¬
ple of a product or business that you think
has a great name, and another that you think
has a poor name. Explain your answers.
school.cengage.com/entrepreneur/ideas o
What Would You Do? ethics activities will
help you think critically about ethical concepts.
■/ATldSLftHl DO?:
You asked two of your employees to work extra hours over the week¬
end to perform a physical inventory. You are certain that there were
three plasma television sets in stock prior to having the employees
take inventory. However, when the inventory was completed, the list
showed only two plasma television sets in stock. You checked the
stockroom, and you found only two. You have always trusted your
employees. What would you do? Will you confront the employees? If
so, how will you approach them? Working with a partner, role play
the conversations you will have with the employees.
J
xiv
greene_0538446145_FM, 1/15/8, 17:31, page: 15
Ongoing Assessment!
Ongoing review and assessment help you understand the material.
Checkpoint enables you to test your _
understanding at key points in each lesson.
Lesson Assessment contains activities to -
help you apply what you have learned
in the lesson.
Activities CD contains exercises that help -
you improve your entrepreneurial and
economic skills.
Teamwork provides you with opportunities
to work with classmates on cooperative
learning projects.
i2 Assessment
"► THINK ABOUT IT
1. Why do entrepreneurs n* *«d to conduct market research?
2. What are the llmiteboro of market research?
3. What Is the difference between primary and secondary data?
4. Why do you think short questionnaires are more effective than
long ones?
5. Why is it important to define the question you want your mar¬
ket research to answer?
ȣ*h
TEAMWORK
. MAKE ACADEMIC CONNECTIONS
6. MANAGEMENT Your family-owned business processes and sells
orange juice to food distributors. In order to grow, the business
needs to expand its product line Apply the six market research
steps to help determine an additional product for your business
7. COMMUNICATION It is Important to evaluate the effectiveness
of a survey. Using the Activity CD. open the activity ‘Market
Research Evaluation.* Print a copy and complete the activity.
Working with team members, come up with a new product that you
think will be very useful for students in your school. Develop a ques¬
tionnaire for potential consumers of this product to gauge their
interest. Have students from your school complete the questionnaire
Tabulate the results and determine if the product is a good idea
Chapter Assessment provides a summary of the main points and contains questions and
activities to test your knowledge.
Chapter 3 Assessment
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XV
greene_0538446145_chO 1, 12/21/7, 17:19, page: 2
an Entrepreneur?
1.1 All about
Entrepreneurship
1.2 Is Entrepreneurship
Right for You?
1.3 Exploring Ideas
and Opportunities
school.cengage.com/entrepreneur/ideas
1.4 Problem Solving
for Entrepreneurs
greene_0538446145_chO 1, 12/21/7, 17:19, page: 3
IDEAS !M ACTION!
Michael Stahl, 4Teens
Network, LLC
Making Job Connections
T he foundation of the U.S. economy is entrepreneur
ship. Today's large corporations were yesterday's
small businesses. Identifying a need and coming up
with a product or service to meet it are what entre¬
preneurship is all about. Some famous entrepreneurs
in history include Levi Strauss and Olive Ann Beech.
More recent entrepreneurs include Bill Gates and
Oprah Winfrey. You or someone you know could be
a future successful entrepreneur. Prepare yourself to turn
ideas into action and seize the opportunity when it comes!
As a chapter president of Future Business Leaders of America (FBLA),
Mike Stahl came across an idea for a business while coordinating a job
fair for the Blue Valley School District in Kansas City, Missouri. Fie heard
fellow students complain about not knowing where to look for jobs, and
he heard employers express a need for qualified help. This inspired Mike
to come up with the idea for 4Teens Network, LLC, which he ran with
his partner, Ephren Taylor, Jr. Through an interactive web site featuring
employer advertisements and registered job seekers, 4Teens Network
matched employers and employees.
Seeing the potential of this opportunity, Mike and Ephren tested the
business model before seeking outside financing. Their testing included
various web site designs, sales and marketing plans, and pricing structures.
In the first five months of testing, the company returned 300 percent on its
initial investment. This gain showed Mike, Ephren, and potential investors
that this venture had great possibilities. The time and energy spent in plan¬
ning and testing their business model helped prepare 4Teens Network, LLC,
for a successful future.
The web site asked job seekers a set of questions and used answers
to build a professional resume, which could be sent to job listings on the
site. Users get an e-mail account to receive e-mail replies from prospective
employers.
Mike and Ephren plan to build their business across the United
States and even internationally, but they aren't losing sight of their
original mission—to provide a service for their community.
What do you hnow?
Who do you think was one of the most important entrepreneurs of
the past?
Who do you think is one of the most important entrepreneurs of
the twenty-first century?
Can you identify a need in your school or community that might be
met by the creation of a new business?
3
greene_0538446145_ch01, 1/17/8, 13:57, page: 4
V
Focus on Small Business
Should you be your own boss?
"I'm so tired of someone telling me what to do all the time," Delia said
to her friend Gloria. "I know what you mean," Gloria answered,
"because I get the same thing." "It seems like there should be some way
we could be in charge," Delia said. "There's got to be a better way. I've
got an idea," Gloria said, "let's be entrepreneurs." "Entrepe... what?"
questioned Delia. "Entrepreneurs," Gloria answered. "Mr. Riviera talked
about them in my business class last week. They are people who start
and run their own businesses. We could do that!"
"What would we have to do? Would we make a lot of
money? Would it be fun? Would we get to do whatever
we wanted?" Delia's mind was overflowing with questions.
Gloria was getting very excited as she replied, "We could
be our own bosses! If we were the owners, we
would be in charge! We'd get to make all the
decisions!" "This is starting to sound pretty
good," Delia replied as she began to share
Gloria's excitement. "We could decide when
we work, what we do, and how we do it.
And, we can make lots of money! I can't
wait. When do we start?"
Work as a Team Many people go into
business just so they can be in charge and
make lots of money. Do you think this is
the most important reason to start your
own business?
Start-up companies stay alive
with new technology.
What Is an Entrepreneur?
The U.S. economy includes thousands of small businesses. Many of
these small businesses are owned and operated by men and women
who created their own companies. Some of these individuals have
become legends as you hear stories about their paths to success. But
what makes someone an entrepreneur? What impact have entrepre¬
neurs had in history? What impact do they have today?
4
Chapter 1
Should You Become an Entrepreneur?
Rubberball Productions
greene_0538446145_chO 1, 12/21/7, 17:19, page: 5
People who own, operate, and take the risk of a business venture
are called entrepreneurs. They are engaged in entrepreneurship,
the process of running a business of one’s own. Entrepreneurs come
from all types of backgrounds and create all kinds of businesses. Peo¬
ple of all ages choose to become entrepreneurs. Some own tiny craft
shops, while others own huge construction companies. Entrepreneurs
try to identify unmet needs in the marketplace. Then they provide a
service or product to meet those needs. When they succeed, their
businesses flourish, and profits are earned. But if their business idea is
unsuccessful, they may lose the money invested in their business.
Develop Your
Reading Skills
As you read this chapter,
write down questions
related to headings and
photos. Share your ques¬
tions with the class.
EMPLOYEES VS. ENTREPRENEURS Entrepreneurs assume risk. This
makes them different from employees, who are people who work for
someone else. Both may make decisions, but only the entrepreneur is
direcdy affected by the consequences of those decisions. Sam Jones
manages a record store owned by Felipe Santiago. Sam decides to
keep the store open until midnight during the week. If the additional
hours bring in customers and increase profits, Sam may be praised by
Felipe. He may even get a raise. However, Sam won’t direcdy receive
any of the profits because he is an employee. The additional earnings
will flow to Felipe, the owner.
WHY DO PEOPLE BECOME ENTREPRENEURS? People go into busi¬
ness for themselves for many reasons. Some want to leave the fast-
paced corporate environment and set their own schedules. Others
want to be at home but still earn an income. Still others want to pur¬
sue a personal dream. You might choose to become an entrepreneur
for completely different reasons.
Types of Entrepreneurial Businesses
There are generally four types of businesses, and there are opportunities
for entrepreneurs in each type. See the chart on page 6. Manufactur¬
ing businesses actually produce the products they sell. Using resources
and supplies, they create everything from automobiles to paper. Whole¬
saling businesses sell products to other businesses rather than the final
consumer. For example, a wholesaler supplies your local greeting card
store with items such as cards and wrapping paper. Retailing businesses ,
such as a greeting card store, sell products direcdy to those who use
or consume them. Service businesses sell services rather than products.
They include hotels, hairdressers, and repair shops.
OTHER BUSINESS AREAS Two other categories of businesses are
(1) agricultural and (2) mining and extracting businesses. Agricultural
businesses generate fresh produce and other farm products, such as
wheat. Mining and extracting businesses take resources like coal out
of the ground so they can be consumed.
Checkpoint
Describe different types of entrepreneurial businesses.
1.1 All about Entrepreneurship
5
greene_0538446145_chO 1, 12/21/7, 17:19, page: 6
TYPES OF BUSINESSES
Manufacturing
Wholesaling
Retailing
Service
Apparel and other textile
products
Chemicals and related
products
Electronics and other
electrical equipment
Fabricated metal
products
Food products
Industrial machinery and
equipment
Printing and publishing
Rubber and
miscellaneous plastic
products
Stone, clay, and glass
products
Apparel
Electrical goods
Groceries and related
products
Hardware, plumbing,
and heating equipment
Lumber and construction
materials
Machinery, equipment,
and supplies
Motor vehicles and
automotive equipment
Paper and paper
products
Petroleum and petroleum
products
Auto and home supply
stores
Building materials and
supply stores
Clothing stores
Florists
Furniture stores
Gift, novelty, and
souvenir stores
Grocery stores
Hardware stores
Jewelry stores
Retail bakeries
Shoe stores
Sporting goods and
bicycle stores
Appliance repair
Automotive repair
Babysitting
Bookkeeping
Consulting
Dance instruction
Electrical services
Exterminators
Flower decorating
House cleaning
Lawn care
Painting
Plumbing
Translating
Travel agency
Tutoring
Source: Small Business Administration
Recognizing Opportunity
Many of America’s most successful companies started with one person
who recognized an opportunity and came up with an idea for a busi¬
ness in response to that opportunity. Entrepreneurs have played an
important role in the history of America’s economy and will continue
to shape our economy in the future.
According to estimates from the U.S. Small Business Administra¬
tion’s Office of Advocacy, there were approximately 25.8 m ill ion busi¬
nesses in the United States in 2005. Recent census data show that there
were 5.8 million firms with employees and 18.6 million without
employees. Small firms with fewer than 500 employees represent
99.9 percent of the 25.8 mil li on businesses in the United States. Only
17,000 U.S. businesses are considered large. Small businesses contribute
billions of dollars to the U.S. economy every year and employ more
workers than all of the country’s large corporations combined. These
small businesses are found in virtually every sector of the economy.
Small companies can be more creative and take more risks than
large companies. Their experimentation and innovation lead to tech¬
nological change and increased productivity. This makes small busi¬
ness a significant part of the American economy.
Entrepreneurs Who Changed America
Entrepreneurs change American business decade after decade. They
establish new companies and fill unmet needs. They constandy change
how things are done and contribute to the overall good of the nation.
There are many businesses today that started small and have grown into
large companies that are making a major impact in our economic system.
6
Chapter 1
Should You Become an Entrepreneur?
greene_0538446145_chO 1, 12/21/7, 17:19, page: 7
STARBUCKS COFFEE COMPANY Starbucks Coffee Company was
founded in 1971, opening its first location in Seattle’s Pike Place
Market. Starbucks is named after the first mate in Herman Melville’s
novel Moby Dick. It is the world’s leading brand of specialty coffee.
Its stores receive more than 40 million customer visits per week at
coffeehouses in North America, Europe, the Middle East, Latin
America and the Pacific Rim. When Howard Schultz first joined the
company in the early 1980s, Starbucks was already a highly respected
local roaster and retailer of whole bean and ground coffees. A business
trip to Italy, where he was impressed with the popularity of espresso
bars in Milan, helped Schultz recognize an opportunity to develop a
similar coffeehouse culture in Seatde. Espresso drinks became an
essential element of Schultz’s vision. He purchased Starbucks with
the support of local investors in 1987. In addition to its well-situated
coffeehouses, Starbucks markets its coffee and tea products through
its web site and through many national retail supermarkets.
THE HOME DEPOT In 1979, Bernie Marcus and Arthur Blank
opened the first The Home Depot stores in Atlanta, Georgia, forever
changing the home improvement industry. The original stores stocked
around 25,000 products. An average store today offers 40,000 prod¬
ucts in approximately 105,000 square feet. Marcus and Blank’s vision
was of warehouse stores filled from floor to ceiling with a wide assort¬
ment of home improvement products at the lowest possible prices
and with the best possible service. Within five years, The Home
Famous
Madam C. J. Walter
You may have heard it said that
"necessity is the mother of inven¬
tion." Many entrepreneurs got their
start by creating something that they
themselves needed and then sharing
their product with others. That's
exactly what made Madam C. J.
Walker a millionaire. Walker, origi¬
nally known as Sarah Breedlove, suf¬
fered from a scalp ailment during
the 1890s and began experimenting
with homemade remedies. Her rem¬
edies worked well, so she began
offering them to other African-
American women. In 1905, she
moved to Denver, married news¬
paperman Charles Joseph Walker,
and started her own company. She
sold her products door to door and
bought ad space in newspapers.
Walker later opened Lelia College,
where she and her daughter trained
other women to use and sell the
product line, which had expanded
to include items such as complexion
soap and dental cream. At least
20 women completed the program
every six weeks. Besides becoming
a millionaire from the sales of her
products, Walker made a huge con¬
tribution to the African-American
community by empowering women
to make their own mark in the
business world.
Think Critically
Why is it important for entrepre¬
neurs to make contributions to
their community in addition to
offering a product or service?
Why do you think Madam C. J.
Walker became such a
successful entrepreneur?
1.1 All about Entrepreneurship 7
© Digital Vision
greene_0538446145_ch01, 12/21/7, 17:19, page: 8
Depot expanded from Georgia to Florida, Louisiana, Texas, and
Alabama. Today, it has more than 2,100 stores throughout the United
States, Canada, and Mexico. The company also runs EXPO Design
Centers and The Home Depot Supply wholesale stores.
HARPO PRODUCTIONS, INC. Oprah Winfrey’s love of acting and her
desire to bring quality entertainment projects into production prompted
her to form her own production company, HARPO Productions, Inc.,
in 1986. Today, HARPO is a formidable force in film and television
production. Based in Chicago, HARPO Entertainment Group includes
HARPO Productions, Inc., HARPO Films, and HARPO Video, Inc.
In October 1988, HARPO Productions, Inc. acquired ownership and
all production responsibilities for The Oprah Winfrey Show from Capitol
Cities/ABC, making Oprah Winfrey the first woman in history to own
and produce her own talk show. The following year, HARPO produced
its first television miniseries, The Women of Brewster Place, with Oprah
Winfrey as star and executive producer. Oprah also produced and
appeared in the made-for-television movies There Are No Children Here
(1993) and Before Women Had Wings (1997). In 1998, she starred in
the feature film Beloved , based on the book by Nobel Prize-winning
American author Toni Morrison.
1
Checkpoint
Describe how one of the entrepreneurs discussed above recognized
an opportunity to develop a successful business.
Why do you think some people choose to start their
own business?
Business Success or Failure
According to a recent study by the Small Business
Administration’s Office of Advocacy, two-thirds
of new businesses survive at least two years, and
44 percent survive at least four years. This means that
over half of all new businesses do not survive beyond
four years. These results are similar for different
industries. Many people think that there is a higher
failure rate for restaurants than other types of busi¬
nesses. However, leisure and hospitality establish¬
ments, which include restaurants, survive at rates only
slightly below the average. Major factors in a firm’s
success include having adequate capital, providing a
product or service that meets customer needs the
owner’s education level, and the owner’s reason for
starting the firm in the first place, such as freedom
for family life or wanting to be one’s own boss. The
reason must sufficiently motivate the entrepreneur to
have the perseverance to succeed.
The owner’s business experience is a factor
that contributes to the likelihood of success.
Experienced businesspeople have an understanding
8 Chapter 1 Should You Become an Entrepreneur?
greene_0538446145_chO 1, 1/17/8, 13:57, page: 9
of how to purchase products and services. They know how to plan,
negotiate with suppliers, raise money, negotiate leases, sell and market
their product or service, and manage finances. Many businesses fail
because the owner lacks business knowledge. Someone may have an
idea for a product or service but lack the necessary business skills he or
she needs to run a successful business. There is a major difference in
having expertise regarding a product or service and running a business
with that product or service.
Checkpoint
What factors contribute in helping a business to succeed?
Assessment
THINK ABOUT IT
1. What are your reasons for wanting to become an entrepreneur?
Do you think they are common to all entrepreneurs, or are some
of your reasons unique?
2. Why do you think entrepreneurship is important to the U.S.
economy? Provide specific examples of how entrepreneurs affect
the economy.
3. What do you think is the most important thing an entrepreneur
should do before starting a business?
MAKE ACADEMIC CONNECTIONS
4. MATH Suppose there are exactly 5,812,000 small businesses in
the economy today. Approximately 27 percent of those busi¬
nesses are service businesses. What is the number of service busi¬
nesses in the economy?
5. SOCIAL STUDIES Before Starbucks grew nationwide, there were
few places that people could go to have coffee and meet with
friends and business associates. Write at least one paragraph
about how Starbucks and other coffee shops have changed the
way people view coffee and its role in society.
6. COMMUNICATION Entrepreneurs can be of any age. Research
a teen entrepreneur. Write a one-page paper about his or her
business. Discuss whether or not you think the business idea is a
good one. Make recommendations for expanding the business.
TEAMWORK
Gather in teams. List advantages and disadvantages of being an
employee. List advantages and disadvantages of being an entrepre¬
neur. Compare and contrast the lists.
1.1 All about Entrepreneurship 9
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Is Entrepreneurship
Right for You?
Identify the characteris¬
tics of successful
entrepreneurs.
Identify the characteristics
of good team members.
Assess whether you have
what it takes to succeed
in your own business.
V
I Focus on Small Business
• self-assessment
• aptitude
Think it through!
Gloria and Delia were excited about starting their own business, but as
they continued their discussions, Gloria realized they needed to slow
down and think through the process carefully. "You know, Delia, it's not
really easy to start our own business. When we talked about this in class,
Mr. Riviera said that there are a lot of things to consider before starting
a business. First, we need to decide what we like to do and what we are
good at. Then we have to do a lot of research and planning if we want
to be successful."
Thinking about what Mr. Riviera told her in class, Delia sighed.
"This entrepreneur thing sounds like a lot of work. What do you think
we should do?"
Work as a Team Many people
go into business without first
taking time to examine
their strengths and weak¬
nesses and what they
really like to do. Do you
think it's a good idea for
Gloria and Delia to slow
down and really examine
their interests before Examine your strengths and weaknesses before
starting the business? starting a business.
Characteristics of Successful
Entrepreneurs
Many people dream of running their own businesses. They would like
to become entrepreneurs. Entrepreneurship can be exciting, but many
go into it not realizing how difficult it is to run their own business.
In fact, statistics show that most new businesses will fail within a few
years. These startup businesses fail because of the owner’s poor plan¬
ning, lack of business knowledge, lack of entrepreneurial characteristics,
inability to work with others, or failure to choose the right business.
10
Chapter 1
Should You Become an Entrepreneur?
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Researchers have identified several characteristics that distinguish
successful entrepreneurs from those that fail.
1. Successful entrepreneurs are independent. They want to make
their own decisions and do something they enjoy.
2. Successful entrepreneurs are self-confident. Entrepreneurs make
all the decisions. They must have the confidence to make choices
alone and bounce back from a poorly made decision.
3. Successful entrepreneurs have determination and perseverance.
Entrepreneurs persist through hard times until goals are met.
4. Successful entrepreneurs are goal-oriented. They know what
they want, and they are able to focus on achieving it.
5. Successful entrepreneurs have a need to achieve and to set high
standards for themselves. They are motivated by setting and
achieving challenging goals.
6. Successful entrepreneurs are creative. They think of new ways to
market their businesses and are always looking for new solutions to
problems.
7. Successful entrepreneurs are able to act quickly. They are not
afraid to make quick decisions when necessary, which helps them
beat their competitors.
8. Successful entrepreneurs keep up to date with technology. New
technologies emerge that can help with many business activities. In
order to run their business efficiently, entrepreneurs should always be
on the lookout for new technology they can apply to their business.
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Why would it be important for the owner of an auto repair shop to keep up to date on the
latest technology?
#
1.2
Is Entrepreneurship Right for You?
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Ryan Nelson has many entrepreneurial characteristics. Since he
was 14, Ryan played for his high school basketball team. Other boys
his height—just 5'8"—would not have enjoyed competing with much
taller boys. Ryan accepted that he would have to work harder to win.
He needed to be creative in handling the ball. Most of all, he had to
believe in himself. He did, and he became one of the top players on
his team. If Ryan opened his own business, the characteristics he dis¬
played as a ball player might help him succeed.
Checkpoint
Name three important characteristics of entrepreneurs.
Characteristics of Good Team Members
How can participation on a sports team help
prepare you to become an entrepreneur?
Entrepreneurs realize that there are other stakeholders in
their businesses—partners, investors, employees, suppliers,
customers, creditors, and so forth. They must work with
others to get their business up and running. They must
have good team-building skills as well as be effective team
members. Good team members display the following traits:
1. Commitment They are committed to team goals and
willing to work hard to achieve the goals.
2. Competency They have the right set of skills needed
to get the job done and to help accomplish the team’s
goals.
3. Communication They have good communication
skills and can share ideas with others in both oral and
written form.
4. Cooperation They must work well with others and
know that they will not always get their way. They are
willing to accept the decision of the group for the good
of the group.
5. Creativity They are able to look at things from differ¬
ent perspectives and suggest new ways of doing things.
Ryan Nelson displayed these traits as a member of his basketball
team. His experience will help him work effectively as part of a team
in the business world. If Ryan becomes an entrepreneur, he could
apply these skills when working with other people who will be impor¬
tant to his success.
Checkpoint
Why is it important for entrepreneurs to be good team members?
12
Chapter 1
Should You Become an Entrepreneur?
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Are You Right for Entrepreneurship?
Entrepreneurship is not for everyone. Some people lack the qualities
needed to become successful entrepreneurs. Others lack the aptitude
needed to run a business. To determine if entrepreneurship is right for
you, you first need to perform a self-assessment. A self-assessment is
an evaluation of your strengths and weaknesses. You can do this in a
number of ways. You can list what you believe to be your strengths
and weaknesses on a sheet of paper. You can ask others what they
believe your strengths are and where your weaknesses lie. There are
also professional tests you can take to assess your abilities.
Assess Your Interests
Success as an entrepreneur requires a strong commitment to a busi¬
ness and a lot of energy. To be able to commit yourself fully to a
business, you should choose a field that interests you and that will
provide you with an experience you will enjoy. Many entrepreneurs
WHAT WENT WRONG
>
Experience Needed
Louise was a theatre performer who sang and
danced in Broadway-style musicals. The work
was not always steady, so she earned additional
money working part time at a print shop. The
elderly couple who owned the shop allowed
Louise to work flexible hours so she could
pursue a music career. Sadly, the husband died,
and the wife decided to sell the business and
move away. Louise was excited about the
opportunity to purchase the business.
The former owner helped Louise gather
financial information and put together a business
plan. Louise's uncle cosigned a bank loan, and
she was in business. She modernized the decor
of the shop. Louise contacted all the existing cus¬
tomers to assure equal or better service. Sales
increased the first two months. But then . . .
The former owner left town earlier than
planned. Then Louise's chief printer quit. Using
part-time employees, Louise was frantically trying
to get large orders out on time. With no formal
business training and no management experience,
Louise couldn't begin to deal with all these
problems—problems that even an experienced
businessperson would find difficult. She ended
up selling the business at a $50,000 loss.
Think Critically
1. What characteristics did Louise possess that
led her to become an entrepreneur?
2. What circumstances out of Louise's control
led to the failure of this business?
3. What steps could Louise have taken to try
to save her business?
Get some business training before starting a business.
#
1.2
Is Entrepreneurship Right for You? 13
Digital Vision
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center a business on an interest or hobby. Analyzing past experiences
and jobs can also help. Building a business around jobs or experiences
that you found fulfilling could lead to success.
Assess Your Aptitude
Different jobs require different job aptitudes. Aptitude is the ability
to learn a particular kind of job. Auto mechanics must possess an apti¬
tude for solving mechanical problems. They must also be good with
their hands. People who sell insurance must have good interpersonal
skills. Answering questions like those in the Job Attributes Checklist
can help you identify the kinds of entrepreneurial opportunities that
might match your aptitudes and interests.
Job Attributes Checklist
□
1. I enjoy working with numbers.
□
2. I enjoy working outdoors.
□
3. I enjoy working with my hands.
□
4. I enjoy selling.
□
5. I like working with people.
□
6. I prefer to work alone.
□
7. I like supervising other people.
□
8. I like knowing exactly what it is I am supposed to do.
Assess the Advantages of Entrepreneurship
Many people see significant advantages in owning their own busi¬
nesses. Some of the biggest advantages include the following:
1. Entrepreneurs are their own bosses. Nobody tells an entrepre¬
neur what to do. Entrepreneurs control their own destinies.
2. Entrepreneurs can choose a business that interests them. Entre¬
preneurs work in fields that interest them. Many combine hobbies
and interests with business.
3. Entrepreneurs can be creative. Entrepreneurs are always imple¬
menting creative ideas they think of themselves.
4. Entrepreneurs can make large sums of money. Entrepreneurship
involves risk, but if the business is successful, the business owner
will reap the profits.
Assess the Disadvantages of Entrepreneurship
All prospective entrepreneurs must carefully weigh the advantages
against the disadvantages before making the decision to start a busi¬
ness. Disadvantages include the following:
1. Entrepreneurship is risky. There is the possibility of losing money
and going out of business.
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2. Entrepreneurs face uncertain and irregular incomes. Entrepre¬
neurs may make money one month and lose money the next.
3. Entrepreneurs work long hours. Entrepreneurs are never really
finished with their jobs. They can work long, irregular hours. They
receive no paid days off and often work evenings and weekends.
4. Entrepreneurs must make all decisions by themselves. Unless
they have partners, entrepreneurs have the final responsibility for
all decisions that are made regarding the business.
Checkpoint
What characteristics do you have that are best suited to
entrepreneurship?
3
mi
Assessment
THINK ABOUT IT
1. Entrepreneurs can fail even if they are committed and have the
characteristics needed to be successful. How can this happen?
2. What traits do good team members have?
3. Do you think the advantages of entrepreneurship outweigh the
disadvantages? Why or why not?
MAKE ACADEMIC CONNECTIONS
4. MATH One in three small companies begun this year will be
out of business within the next two years. What percentage is
this? Four years from now, only 44 percent of all businesses
started will survive. Out of 90 new businesses, approximately
how many will still be open in four years?
5. CAREER SUCCESS Choose a business idea that you think you
would like. Using the Activity CD, open the activity "Job Attrib¬
utes Checklist." Print a copy and complete the activity. Compare
your interests to your business idea. Is this a good choice for
you? Why or why not?
TEAMWORK
Work in teams to choose a successful entrepreneur. List the traits and
aptitudes this person has that have contributed to his or her success.
Develop a presentation about the entrepreneur to give to the class.
1.2
Is Entrepreneurship Right for You? 1 5
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• •
jS?
m
Exploring Ideas
and Opportunities
Identify sources for new
business ideas.
Recognize different busi¬
ness opportunities.
Identify your own per¬
sonal goals.
opportunities
ideas
trade shows
1 Focus on Small Business
Find an idea
Gloria and Delia realized that although there are many advantages of
owning your own business, there are many responsibilities and chal¬
lenges that a business owner has to face. Gloria knew that she and Delia
had their work cut out for them, but she had confi¬
dence they could do it if they put their minds to it.
They also knew that before they started, they really
needed to have a good idea and be
sure that there were people who were
willing to pay them for the product or
service they wanted to sell.
"How do we decide what kind
of business we should have?" Delia
asked Gloria.
"There are so many businesses in
our community," Gloria responded.
"We've got to come up with just the
right idea!"
Work as a Team How do people come
up with ideas for new businesses? How
do you think they decide if the idea is r ,‘ ,., ,
J J Spend time determining a good idea for
worth pursuing? your business.
Look for Ideas
Millions of entrepreneurs in the United States start their own busi¬
nesses. You may wonder how they decided what businesses to oper¬
ate. They may have acted on a new idea or an opportunity. An idea
is different from an opportunity. Opportunities are possibilities that
arise from existing conditions. Ideas are thoughts or concepts that
come from creative thinking. Ideas can come from many different
sources.
HOBBIES AND INTERESTS Many people get business ideas from
their hobbies or interests. Bill had always enjoyed working with his
16 Chapter 1 Should You Become an Entrepreneur?
© Stockbyte
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grandfather on the farm and had helped to
build and maintain many farm structures.
He built a garage and added a sunroom to
his own home. He also was able to make
plumbing, electrical, and carpentry repairs
around the house. He started doing this for
others in his spare time. Soon he had so
many people calling on him for these services
that he decided to start a general contracting
business. Making a list of hobbies and inter¬
ests can help you decide what business is
right for you.
bookmark
PAST EXPERIENCES Analyzing past experi¬
ences and jobs can help you come up with
ideas for a business you would enjoy owning.
People who excel at their jobs have generally
learned much about their profession and how
to satisfy customer needs. They also see how
successful marketing is conducted. Through
their work, they can build a network of
potential customers, suppliers, employees, and distributors. When they
feel confident that they can offer a product or service to this market
more effectively than their current employer, they can start a new
business.
Samantha Rodriguez worked as a computer network administra¬
tor for a large company. Recognizing that she could perform the
same computer services for other companies, Sam started her own
computer consulting service. She currently earns less money than she
did working for a large company, but she enjoys working flexible
hours and meeting new people.
Many of America's most successful companies
started with one person who recognized an
opportunity and came up with an idea for a
business in response to that opportunity. One
of those people was Bill Gates, chairman of
Microsoft, the largest software company in
the world. Believe it or not, there was a day
when even Microsoft was a small business.
Access school.cengage.com/entrepreneur/
ideas and click on the link for Net Bookmark
Chapter 1. Read the article "A Little Company
Called Microsoft." When and where was
Microsoft founded? Who was Bill Gates'
original business partner?
school.cengage.com/entrepreneur/ideas
DISCOVERY OR INVENTION Sometimes a business opportunity arises
from a discovery or invention. Someone may invent a new tool that
works better than tools that are currently available. The next step
would be to research and find out if the idea can be patented, who
the competition is, what the manufacturing process would be, and
who the target market is.
David enjoyed working in his garden, but he did not like any
of the tools he had for removing weeds from around the plants. He
took one of his tools and made modifications to it and found that it
worked perfectly. After several friends tried out the tool and liked it,
David decided to investigate obtaining a patent for it.
Checkpoint
Where do new ideas for businesses come from?
#
1.3 Exploring Ideas and Opportunities
17
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Investigate Opportunities
People often do research to determine what is missing in a particular
market—what needs exist that are not being met. By conducting this
research, they hope to find the perfect business opportunity.
The Internet and the library have resources that can help you
examine different opportunities. These include books on entrepre¬
neurship, magazines for entrepreneurs, trade magazines for certain
businesses, and government publications. County Business Patterns is
an annual series of publications providing economic profiles of coun¬
ties, states, and the country as a whole. Data include employment,
payroll, and the number of establishments by industry.
This is not the only place to investigate opportunities. The Small
Business Administration (SBA) is an organization that exists to help
small businesses and their owners. It publishes information that may
be helpful. Talking to entrepreneurs and attending trade shows,
which are special meetings where companies of the same or related
industry display their products, can also be beneficial.
Luanda Williams wanted to use her love of sports and dancing to
create her own company. She found books and magazine articles at
the library that gave her information on various kinds of businesses.
She also talked to owners of gymnastic centers, health clubs, and
dance studios. She discovered that there were not enough children’s
fitness programs to meet the demand in her area. All of the existing
children’s programs had long waiting lists. Her research revealed the
many opportunities available in the children’s fitness industry.
Compare Different Opportunities
Once you find appealing business opportunities, you need to identify
which ones have the best chance for success. Now is the time to assess
each business opportunity by asking yourself the following questions:
1. Is there a market in my community for this land of business? Will
people buy my product or service?
2. How much money would it take to start this business? Will I be
able to borrow that much money?
3. How many hours a week is it likely to take to run this business?
Am I willing to commit that much time?
4. What are the particular risks associated with this business? What is
the rate of business failure?
5. Does my background prepare me to run this kind of business? Do
most people who own this kind of business have more experience
than I do?
6. How much money could I make running this business?
Checkpoint
How can you find out about various business opportunities?
18 Chapter 1 Should You Become an Entrepreneur?
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Setting Goals
For everything you do in life, you set goals. Goals help you stay on
track and follow through with your plans. The best goals are SMART.
Smart goals provide more direction as shown below.
SMART GOALS
Specific Goals should be specific and answer "What?" "Why?" and "How?"
Measurable Goals should establish ways to measure your progress
Attainable Goals should not be too far out of reach
Realistic Goals should represent things to which you are willing to commit
Timely Goals should have a timeframe for achievement
Goal I will learn more about starting my own business.
SMART Goal I will learn more about starting my own catering business by
obtaining information from the Small Business Administration
and talking with the owners of three local catering businesses
by the end of the month.
As an entrepreneur, you will need to set many goals. Goals can be
categorized as financial and nonfinancial.
FINANCIAL GOALS Set specific financial goals before starting a busi¬
ness. Financial goals can include how much money you will earn and
how quickly you will pay off debts. Make sure your goals are realistic.
If one of your goals is to make large sums of money early on, you
almost certainly will be disappointed. It usually takes time for busi¬
nesses to become well established and profitable. This means that, at
first, an entrepreneur may earn less than he or she would have earned
working as an employee.
Goals should be measurable and easily attainable in the time allot¬
ted. Mo Yang wants to start a mail-order business for model trains,
planes, and cars. His income goal is to earn $27,000 at the end of the
first year. He estimates that after expenses he will earn $9 for each
item he sells. At this rate of profit, he would have to sell 3,000 models
to meet his income goal. Mo realizes
that this is not realistic. He would
have to lower his income goal or
find another business idea.
NONFINANCIAL GOALS Most peo¬
ple who own their own businesses
do so for more than just monetary
gain. They are looking for personal
satisfaction. They may serve a com¬
munity need, do something they
like, or enjoy the personal indepen¬
dence of being an entrepreneur. You
will want to specify what nonfinan¬
cial goals you want to achieve by
being an entrepreneur. Setting and
meeting nonfinancial goals can help
be your own boss
You are interested in starting your own business,
but you are not sure what kind of business it
should be. To help you get started, think about
something you do that you really enjoy. Now
think about ways that you might be able to turn
this activity into a business. Make a list of busi¬
nesses in your area that offer a related product
or service. Write a paragraph explaining your
business idea. How will your business be different
from the existing businesses you listed?
1.3 Exploring Ideas and Opportunities 19
© PhotoDisc/Getty Images
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an entrepreneur live a more satisfying and fulfilling life. Entrepreneur-
ship can benefit many aspects of life.
Checkpoint
Why are financial goals important? Name some nonfinancial goals an
entrepreneur may have.
i.3 Assessment
THINK ABOUT IT
1. Think about a business opportunity that appeals to you. For this
business, answer the six assessment questions listed in this lesson
on a sheet of paper. Is this a realistic choice for you? Why or
why not?
2. In terms of annual income, what financial goals have you set for
yourself for five years after you graduate? What nonfinancial
goals have you set that you might be able to fulfill by becoming
an entrepreneur? Are financial or nonfinancial goals more
important to you? Why?
3. Your friend has set the following goal: I plan to eat healthier. Is
this a SMART goal? Explain why or why not. What suggestions
would you make for improving it?
MAKE ACADEMIC CONNECTIONS
4. MATH You live near the beach and have a passion for snorkeling.
Your dream is to give snorkeling lessons. You estimate that after
expenses, you can earn an average of $10 per lesson. Each lesson
will be one hour long, and you plan to offer lessons five days a
week. Your income goal is $15,000 per year. How many lessons
do you need to give to achieve this goal? Is this goal realistic?
5. COMMUNICATION Write a letter to the Small Business Adminis¬
tration. In your letter, indicate your interest in starting a small
business. Be specific about the type of business you wish to start.
Ask what specific services the SBA provides to people who wish
to start this type of business. Give your letter to your teacher.
6. SOCIAL STUDIES Write a personal nonfinancial goal involving
your local community that you would like to achieve through
entrepreneurship. Be sure the goal is SMART. Write an outline
for a detailed plan you can follow to achieve this goal. Explain
how it would benefit your community.
TEAMWORK
Working with classmates who have similar interests, come up with an
idea for a business. Brainstorm a list of resources for finding informa¬
tion about similar businesses.
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Problem Solving
for Entrepreneurs
• List the six steps of the
problem-solving model.
• Describe ways to
improve your problem¬
solving skills.
• brainstorming
Focus on Small Business
Research your ideas
Gloria and Delia spent time on the Internet and in the local
library researching ideas for their new business. As a result,
they had come up with several ideas. Now they had to decide
what to do with these ideas.
As they discussed their options, Gloria said, "You know,
Delia, we can talk about these ideas, but we really need a sys¬
tem that we can use for solving problems. We want to be sure
that we make the very best decisions for our business."
"Yes," Delia responded, "You are right. I remember read¬
ing about a problem-solving model in one of the books we
found at the library. Let's go back and find it and see if we
can adapt it for our use!"
Work as a Team How important do you think it is to use a
system for solving problems?
©
Research will help you examine opportunities.
Use the Problem-Solving Process
As an entrepreneur, you will be faced with making decisions and solv¬
ing problems every day. Whether or not to become an entrepreneur
is a big decision. Many entrepreneurs make decisions casually or base
them on intuition. As a result, their decisions are based on faulty
assumptions or illogical thinking. The best entrepreneurs use formal
problem-solving models to gather information and evaluate different
options.
A formal problem-solving model helps people solve problems in a
logical manner. The model consists of six steps: define the problem,
gather information, identify various solutions, evaluate the alternatives
and select the best option, take action, and evaluate the action taken.
Step 1 Define the Problem
Before you can solve a problem, you need to diagnose it. Write down
what the problem is and why it is a problem. Try to quantify it too.
1.4 Problem Solving for Entrepreneurs
21
Digital Vision
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For example, you may be trying to decide
whether to start your own business or work for
another company. If you accept the job offer,
your income would be $30,000 a year. If you
reject the job offer, you would lose that income.
Quantifying the problem helps you figure out
how much it is worth to you to solve it.
Dan Parker knows what his problem is:
Should he start a web site design company? He
took many computer courses throughout high
school, and he is now attending college. He has
worked in the food industry throughout high
school and college to earn money to help pay for
his college expenses. Dan enjoys working at res¬
taurants and has gained valuable customer service
and management experience. In addition, he also
volunteers his web design skills on projects for his
university and local community programs. He
will be graduating in the next few months with a
degree in Computer Science. Dan is considering starting his own web
site design business, but he is not sure whether that is the right choice
for him.
Step 2 Gather Information
Once the problem has been defined, you need to gather information
that could help solve it. Relevant information may be obtained from
many sources, including company records, industry data, and trade
magazines. It is also a good idea to interview other people in the
industry to find out what their experiences have been and to learn
how they have solved similar problems.
In Dan’s case, it would be helpful for him to take a closer look
at himself. He should do a self-assessment to determine his strengths
and weaknesses. He also needs to consider his skills, experience, and
interests. Does he have the characteristics of a successful entrepreneur?
He also needs to examine the advantages and disadvantages of run¬
ning a web site design company. He should talk to other professionals
in the business and read trade magazines to gather information about
running a web site design business. Dan needs to thoroughly explore
every aspect of starting and running a web site design company.
Step 3 Identify Various Solutions
Most problems can be solved in various ways. Identify all possibilities
before you settle on a particular solution. Dan comes up with several
possible solutions to his problem.
1. Work as an employee in a position that ut il izes his customer service
skills and management experience.
2. Work as a web site designer for another company to gain more
experience and then start his own business in three to five years.
22 Chapter 1 Should You Become an Entrepreneur?
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3. Pursue his interests in the food industry and open his own
restaurant.
4. Start his own web site design company upon
graduation.
Step 4 Evaluate Alternatives and
Select the Best Option
The decision maker next needs to evaluate the
alternatives to determine the best solution. In
some cases, it may be possible to quantify the
costs and benefits of each alternative. In other
cases, quantifying each alternative may not be
possible, and the decision maker may simply
have to rank each alternative.
Dan ranks option 1 the lowest because of
his strong desire to be his own boss. All of the
information that Dan gathered indicates that he
has a strong chance of succeeding as an entre¬
preneur. He ranks option 3 next to lowest.
Dan has considerable experience in the food
industry and enjoys that type of work, but he
.... , , . . . Why is it important to evaluate the decisions you make?
decides he would rather pursue his mterests in
web site design. He ranks option 2 second
because he is already confident in his level of computer knowledge
and experience. After evaluating all of his alternatives, Dan decides
option 4 is the best solution.
©
Step 5 Take Action
Once you have selected the best solution to the problem, you need to
take action to implement it. Dan begins putting together a business
plan and spreading the word about his new venture.
Step 6 Evaluate the Action
The problem-solving process is not complete until you evaluate your
action since even a well-thought-out solution may not work. After
being in business for six months, Dan evaluates whether he is achiev¬
ing his financial and nonfinancial goals. It seems that Dan made the
right decision because his business is profitable and he is enjoying his
work. He has been able to fulfill his dream of working for himself
while providing a valuable service to others. Dan will continue to use
the problem-solving model to make the most effective decisions for
his new business.
Checkpoint
What are the six steps in the problem-solving process?
#
1.4 Problem Solving for Entrepreneurs 23
Getty Images/PhotoDisc
Digital Vision
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Problem-Solving Skills
The more often you use the problem-solving model, the better skilled
at decision making you will become. It will become a valuable tool to
you throughout your career. There are a few other things you can do
to improve your problem-solving skills.
Communicating
Good communication is important in the problem-solving process.
When trying to resolve problems and make decisions, you most likely
will have to interact with others. You may have to ask questions,
request information, and express your ideas
and opinions. On such occasions, it is impor¬
tant that you communicate clearly and confi-
dendy. You must also be a good listener. You
must carefully listen to information, opinions,
and suggestions from others. Listening to
others’ input can help you make informative
decisions.
Kris is the owner of a small boutique and
is looking for ways to increase sales. She decides
to conduct a meeting with her employees to
communicate her sales objectives. During the
meeting, she listens to her employees’ thoughts
and ideas for boosting sales. Through this
communication process, Kris is able to gather
lots of good information to help her solve her
problem.
How can communicating with others help you succeed in
business?
Brainstorming
Brainstorming is a creative problem-solving technique that involves
generating a large number of fresh ideas. Brainstorming is often done
in a group setting, but it is a very useful activity for an individual as
well. Think about the problem you are trying to solve. Brainstorm by
writing down as many possible solutions to the problem as you can
think of. Do not be afraid to write down any idea you have. The
point of brainstorming is not to judge your ideas as good or bad but
to come up with as many ideas as possible. Once you have made a list
of ideas, you can use the problem-solving model to determine the
best alternatives.
Learning from Mistakes
If you want to become an entrepreneur, you cannot be afraid to
make mistakes. Mistakes are likely to happen, but a negative can be
turned into a positive. You should view your mistakes as a learning
experience. Mistakes can help you learn what to do or what not to
do, which proves to be valuable in the problem-solving process.
24
Chapter 1
Should You Become an Entrepreneur?
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When you read about some of the nation’s most famous entre¬
preneurs, you will find that many of them failed before they came up
with a winning idea. Colonel Sanders of KFC fame is a good example.
He held many jobs and owned a motel chain, service stations, and
other restaurants that were unsuccessful. While running his restaurant,
he developed his secret recipe chicken. In 1952, at the age of 62, he
began traveling by car across the country selling his chicken. By 1964,
there were 600 KFC restaurants in the United States and Canada,
and Colonel Sanders sold KFC for $2 mil li on.
Checkpoint
How can you improve your problem-solving skills?
i 4 Assessment
THINK ABOUT IT
1. Must the six steps in the problem-solving model be performed in
the order described? Why or why not?
2. How do you think strong communication skills can improve the
problem-solving process? Provide specific examples of how a
business owner might use communication skills to resolve a
problem.
MAKE ACADEMIC CONNECTIONS
3 . MATH In the Identify Various Solutions stage of the problem¬
solving model, you list a variety of possible solutions to a
problem. For the four options Dan Parker came up with on
pages 22-23, assign a percentage weight to each based on
Dan's reasoning. Give the decimal equivalent for each percent¬
age. What must the decimal value of the four options total?
4. PROBLEM SOLVING You own a successful shop that buys, sells,
and services bicycles. In January, the owner of the building you
now lease tells you that she has found a buyer for the property
and plans to sell it in six months. Using the six-step problem¬
solving model, develop a plan for how to proceed.
Working as a team, identify some benefits to using a formal problem¬
solving method that are not given in the text. Provide some examples
of how entrepreneurs might use the problem-solving model in their
business.
1.4 Problem Solving for Entrepreneurs 25
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Sharpen Your
Entrepreneurial Skills
Effective Business Letters
As an entrepreneur, you might write letters to communicate your
business ideas, solicit business, respond to customer questions, negoti¬
ate purchases, or deal with suppliers. To do so effectively, you need
to develop your business writing skills. Writing a business letter is dif¬
ferent from writing a letter to a friend. A certain level of formality is
necessary, and certain standards must be followed. That doesn’t mean
business writing should be difficult to understand. Good business
writing communicates ideas clearly. It also gets results by being posi¬
tive and persuasive and by convincing readers that they should accept
what the writer is communicating.
Certain basic rules should be followed in writing business letters
as outlined below and as shown in the letter on the next page.
1. Key all formal correspondence. Send handwritten letters only
when they are intended as personal letters.
2. Spell all names correctly and have the correct address. No
matter how well written your letter is, its effect will be dramati¬
cally reduced if you misspell the name of the person to whom
you are writing or refer to his or her company by the wrong
name. Addressing a letter incorrectly may cause it to arrive late or
to be returned.
3. Always date your business correspondence. It may be necessary
to refer to this date at a later time.
4. Use names and titles appropriately. Use the person’s first name
if you know him or her well. If you do not know the person or
the letter is very formal, use the person’s last name, along with
the appropriate tide (Dr., Mr., Mrs., Ms., or Miss).
5. Be direct and positive. Always maintain a positive tone and por¬
tray your message in an optimistic light, even if your letter con¬
tains bad news.
6. Be persuasive and specific. Make sure the action or result you
want from the reader is clear. Use nonthreatening language that will
persuade the reader that this action or result is the most desirable.
7. Avoid using fancy language. Use straightforward language that
says exactly what you mean.
8. Be polite. Deal with complaints in a businesslike fashion. Don’t
whine or express outrage, and never become abusive or insulting.
Be especially polite in writing rejection or bad news letters.
9. Use an appropriate closing. Make sure your closing corresponds
to the content of the letter you have written. If you have written
26
Chapter 1
Should You Become an Entrepreneur?
greene_0538446145_chO 1, 12/21/7, 17:20, page: 27
a letter to a supplier complaining about poor service, do not use
“With warmest regards.” Common closings are “Sincerely” and
“Sincerely yours.”
10. Proofread for spelling and grammatical errors. The most per¬
suasive and positive letter can be ruined by a single mistake.
Creative Web Designs
10 E. 34th Street • Baltimore, MD 21218
(410)555-4321
April 11, 20-
Ms. Chelsey Wright
Advantage Marketers
692 Kemper Road
Baltimore, MD 21209
Dear Ms. Wright
Are you looking for new ways to energize your web site? If so, I
would like to introduce myself and talk with you about my company.
Creative Web Designs.
As a recent graduate of Piedmont State University with an Associate
degree in Computer Science, I am ready to put my skills to work for
you. After providing web development services for the local university
and for other local community programs for the past several years, I
have decided to offer my services to other local businesses such as
yours. Services provided include the following:
Creation of visibly appealing and compelling web pages
Revitalization of existing web sites
Hyperlink development
Technical support
Please call for a free consultation to discuss how you can have a web
site that works effectively for your company. Samples of my web site
creations are available for you to review. References can be provided
upon request. I look forward to hearing from you.
Sincerely
"Deut- T^a.nAe-1
Dan Parker
Owner
TRY IT OUT
You own a shop that sells comic books. Write a business
letter to your main supplier, a comic book wholesaler.
Tell the supplier that you have not received the ship¬
ment you ordered of the most recent edition of a popu¬
lar comic. Be sure to follow the basic rules for writing
business letters. Make up names for your business and
your supplier’s business.
Sharpen Your Entrepreneurial Skills 27
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Chapter 1 Assessment
SUMMARY
1.1 All About Entrepreneurship
1. Entrepreneurship is the process of running a business of one’s
own. The person who owns, operates, and takes the risks of a
business venture is called an entrepreneur.
2. More than 99.9 percent of the 25.8 million U.S. businesses are
considered small companies. Small businesses contribute more to
the U.S. economy than all large corporations combined.
3. Factors that contribute to a new business’s success or failure
include having adequate capital, providing a product or service
that meets customer needs, and the owner’s education level and
business experience.
1.2 Is Entrepreneurship Right for You?
4. Successful entrepreneurs tend to be independent, self-confident,
goal-oriented, and creative.
5. Entrepreneurs must have good team-building skills and be able to
work well with others.
6. To determine whether entrepreneurship is for you, you will need
to assess your strengths, weaknesses, interests, and aptitudes.
1.3 Exploring Ideas and Opportunities
7. Ideas for new businesses can come from many different sources,
including your hobbies and interests, your past experiences, and
from a discovery or invention.
8. You may investigate business opportunities through the Internet
and public library, the Small Business Administration, trade shows,
and other entrepreneurs.
9. Entrepreneurs should set SMART goals, which are specific, measur¬
able, attainable, realistic, and timely.
1.4 Problem Solving for Entrepreneurs
10. A problem-solving model consists of six steps: define the problem,
gather information, identify various solutions, evaluate alternatives
and select the best option, take action, and evaluate the action.
11. There are several ways to improve problem-solving skills, including
communicating, brainstorming, and learning from mistakes.
What do you fcnow now?
Read Ideas in Action on page 3 again. Then answer the questions a
second time. How have your responses changed?
28
Chapter 1
Should You Become an Entrepreneur?
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. People who work for someone else
2. An evaluation of your strengths and weaknesses
3. A creative problem-solving technique that involves generating a
large number of fresh ideas
4. Special meetings at which companies of the same or related indus¬
try display their products
5. People who own, operate, and take the risk of a business venture
6. Thoughts or concepts that come from creative thinking
7. The ability to learn a particular kind of job
8. The process of running a business of one’s own
aptitude
brainstorming
employees
entrepreneurs
entrepreneurship
ideas
opportunities
self-assessment
trade shows
REVIEW YOUR KNOWLEDGE
9. Barbara Wall had a great recipe for sweet bell pepper sauce. Her
friend Lynne Wilson convinced her that they should go into busi¬
ness together and sell the sauce. They now ship J.T.’s Red Sauce
to stores in 35 states. Wall and Wilson are examples of
a. intrapreneurs c. employees
b. entrepreneurs d. managers
10. Which of the following is not an example of an entrepreneur?
a. Diane Molberg started By Request, a successful home bakery
business.
b. Donna Cook started a cleaning service 10 years ago.
c. Gwen Morgan manages The Secret Garden, a business owned
by her sister.
d. Elmer Olsen created Bayfield Apple Jam and distributes the jam
nationally.
11. Team members who have the right set of skills needed to get the
job done are demonstrating —?—.
12. Jackson Hewitt Tax Service is an example of which type of
business?
a. manufacturing business c. retailing business
b. wholesaling business d. service business
13. The plant where Goodyear tires are made is an example of which
type of business?
a. manufacturing business c. retailing business
b. wholesaling business d. service business
14. According to the Small Business Administration’s Office of Advo¬
cacy, how many new businesses survive for at least two years?
a. 67 percent c. 25 percent
b. 44 percent d. 10 percent
Chapter 1
Assessment 29
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15. Which of the following is not an advantage of entrepreneurship?
a. Entrepreneurs are their own bosses.
b. Entrepreneurs can be creative.
c. Entrepreneurs take all the risks involved with starting a business.
d. Entrepreneurs can make large sums of money.
16. Which step of the problem-solving process involves performing
research and interviewing customers, suppliers, and employees?
a. Define the problem. c. Identify various solutions.
b. Gather information. d. Evaluate alternatives.
APPLY WHAT YOU LEARNED
17. The six categories of privately owned businesses include manufac¬
turing, wholesaling, retailing, service, agricultural, and mining and
extracting. In small groups, compile a list of specific industries and
companies that belong to each category of business. Share your
results with the class.
18. Is your personality suited for becoming an entrepreneur? Using the
Activity CD, open the activity “Entrepreneurship Aptitude Test.”
Print a copy and complete the activity. What does the test indicate?
MAKE ACADEMIC CONNECTIONS
19. MATH Ellen Greenberg loves to make and fly kites. Ellen is
planning to open a shop that sells custom-made kites. She asks
for your advice to help her set financial goals. Ellen estimates that
after expenses, she can make a $15 profit on each kite she sells. If
her annual income goal is $15,450, how many kites will she have
to sell? Assuming she can make only three kites per day and will
work five days a week year round, is this goal realistic?
20. HISTORY Find information on the life and career of a famous
historical entrepreneur. Find out information such as birthplace,
type of business started, and what effect the person had on the
economy and history. Is the business still operating? Write a short
report about your findings.
21. COMMUNICATION For the above History question, find a
creative way to present your findings to the class. Use visual aids,
skits, costumes, games, and so on.
WHAT WOULD YOU DO?
Nancy and Gayle had been best friends since elementary school. During
their senior year, Nancy told Gayle about an idea she had for a busi¬
ness in the local community. She had done some research and thought
that her idea had a good chance of turning into a profitable business.
After high school graduation, Nancy went off to college and Gayle
stayed home and went to the local community college. Since Nancy
had not acted on her business idea before leaving for college, Gayle
decided that she would try to open a business using Nancy's idea.
What do you think about Gayle's actions? Is she doing the right thing?
V_ ¥
30
Chapter 1
Should You Become an Entrepreneur?
greene_0538446145_chO 1, 1/15/8, 18:43, page: 31
BUILD YOUR
Business Plan
Project
This activity will help you identify a business opportunity that may be
right for you. You will use this business idea throughout the book.
Divide a sheet of paper into two columns. In the first column list all
your interests. In the second column, list business opportunities that
relate to each interest.
Make a list of your strengths and weaknesses. Compare this list with
your list of business opportunities. For which business opportunities
would your strengths most apply? For which business opportunities
would your weaknesses hurt the most? Based on your strengths and
weaknesses, cross out those business opportunities that no longer
seem suitable for you.
Assess your aptitude, using the checklist in Lesson 1.2. Put a check¬
mark next to the business opportunities that relate to your aptitudes.
For the business opportunities remaining on your list, assess the
advantages and disadvantages of each. Cross out any whose dis¬
advantages outweigh its advantages.
Using the library or Internet, find and list sources of information that
relate to the business opportunities that remain on your list. Locate at
least one of these sources for each business opportunity and write a
sentence stating the type of information contained in it. On your list,
cross out business opportunities for which you could not find any
information.
Choose one of the business opportunities remaining on your list.
Based on this business opportunity, answer the six questions listed
in the Compare Different Opportunities section in Lesson 1.3.
Set personal financial goals for a five-year period based on the busi¬
ness opportunity you chose. Demonstrate that your goals are SMART
(Specific, Measurable, Attainable, Realistic, and Timely). Assume you
will need to borrow money to get started. How much profit do you
hope to make in one year? Three years? Five years? Next, set nonfi-
nancial goals you hope to achieve with this business. Be sure to
include specific activities for each goal.
Write a letter to potential customers about the goods or services your
business will provide. On paper, plan a telephone conversation you
will use as a follow-up to the letter. Work with a classmate and do a
mock phone conversation based on your plan.
Plan ahead to prevent any problems that may arise in your business.
Think of a problem that could occur and use the six-step problem¬
solving model to deal with it now. Brainstorm solutions on your own
or with family members or friends.
Chapter 1
Assessment 31
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Planning a Career in
Human Services
U A
- i new health club opened near
my Grandma’s house, and she abso¬
lutely loves going there. The club is
open 24/7. As Grandma was a bit
intimidated by the high-tech exer¬
cise equipment at the club, she’s
hired a personal trainer to help her
learn how to use die equipment
and to hold her accountable for
her efforts. She says she feels much
more energetic and relaxed than she
used to. She’s even considering join¬
ing the volleyball team that’s been
established for seniors.”
In a high-tech, convenience-
oriented society that often results
in inactive lifestyles, how do indi¬
viduals maintain physical fitness?
When the weather prohibits out¬
door activities, where can people
go to exercise?
Fitness facilities provide the
location, equipment, and instruc¬
tion necessary for club members
to exercise. Personal trainers help
individual clients customize a
workout plan that will help them
achieve their personal fitness goals.
EMPLOYMENT OUTLOOK
• Faster than average growth is
anticipated.
• Aging baby boomers, who hope
to maintain fitness in later life,
are fueling the demand for fit¬
ness workers.
• Parents’ desire to keep children
fit as well as employers who
encourage employees to stay in
shape will contribute to the on¬
going need for fimess workers.
JOB TITLES
• Corporate Personal Trainer
• Fitness Advisor
• Certified Personal Trainer
• Fitness Consultant
• Personal Fitness Coach
NEEDED SKILLS
• A high school diploma and CPR
certification are usually needed.
• Fimess certification from a reputa¬
ble certification organization is
required.
• Continuing education is often
mandatory.
• Being physically fit and extro¬
verted and having strong inter¬
personal skills is necessary.
What's it like to work in Human
Services Nhu, a certified personal
trainer, spent the weekend at a
training seminar. The session was
part of her ongoing training to stay
current on developments in the
personal training field.
This morning Nhu taught a
group exercise class at a large fimess
center. She enjoyed leading a large
group of people and helping them
improve their fitness level. The class
also gave her the opportunity to
meet a large number of health
club members. Some of the class
attendees signed up for her personal
training services at the club.
Upon signing up for personal
training, club members can work
with Nhu on their individual fitness
goals for an hourly fee. If they
elect to buy a ten session pass,
then the hourly fee is reduced.
Over the years, Nhu has also
established a private personal train¬
ing service. When she attends a
client’s home for a training session,
she charges a higher hourly rate
for the training. Many clients with
busy schedules are more than
happy to pay the higher rate to
save the time of going to a gym.
What about you? Would you
find it gratifying to help individuals
improve their physical fitness levels?
32
Chapter 1
Should You Become an Entrepreneur?
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TEAM
Participants in this event will use current desktop technologies and
software to prepare and deliver an effective multimedia presentation.
A team will consist of two to four members. The team shall design a
computer-generated multimedia presentation on the assigned topic.
A new topic is selected by BPA every year. A word processed copy,
including cited works, must be submitted at the time of the presenta¬
tion. The team is to make effective use of current multimedia technol¬
ogy in the presentation (examples: sound, movement, digital video,
and so forth). Space, color, and text should also be used effectively in
the presentation.
TOPIC: Business Professionals of America is a forward-thinking
organization. Your team has been asked to research three growing
entrepreneurship opportunities for the next decade. You will develop
a presentation on these trends for the BPA Board of Trustees, includ¬
ing new competitions to measure skills in these areas.
Participating teams will have from seven to ten minutes for oral
presentations. Judges have an additional five minutes to ask questions
about the presentation.
PERFORMANCE INDICATORS EVALUATED
• Evaluate and delegate responsibilities needed to perform required
tasks.
• Demonstrate effective teamwork skills needed to function in a business
setting.
• Demonstrate knowledge of multimedia software and components.
• Demonstrate effective oral communication skills.
• Apply technical skills to create a multimedia presentation which
enhances the oral presentation.
Go to the BPA web site for more detailed information.
Think Critically
1. Why must entrepreneurs look at future trends when making business
decisions?
2. Why should entrepreneurs look beyond current technology trends when
making business decisions?
3. Why should statistics be used for this presentation?
4. How are entrepreneurs affected by a global economy?
www.bpa.org
Winning Edge
33
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Chapter 2
Entrepreneurs in a
Market Economy
2.1 Entrepreneurs Satisfy
Needs and Wants
2.2 How Economic
Decisions Are Made
2.3 What Affects Price?
school.cengage.com/entre
‘preneur/ideas
34
greene_0538446145_ch02, 12/21/7, 16:42, page: 35
IDEAS !M ACTIOM
Scott Smigler, Exclusive Con¬
cepts founder and president
Web Site Design
H ave you ever wondered why certain web
sites come up when you use a search engine
such as Google or Yahoo? The results you get may
be due to the work of Exclusive Concepts, Inc.
Scott Smigler, Exclusive Concepts founder and
president, balanced dual roles as a student and an
entrepreneur through high school and college. His company provides pro¬
fessional web design and online marketing solutions by helping businesses
design web sites that stand out when someone uses a search engine.
Scott ran the company by himself in the beginning. Eventually, Scott
moved from his home to his college dorm room to offices in Waltham,
Massachusetts, and hired a staff of 15. The company's estimated sales for
a recent year were $1,200,000. Today, Scott Smigler continues to serve as
CEO of Exclusive Concepts, and the company has grown five-fold.
Scott's ability to develop keyword strategies, write attention-getting
keyword ad copy, create and optimize bidding strategies, and analyze
results for continuous improvement helped him become a leader in the
field. In addition to running the company, he maintained a 3.7 GPA as a
finance major at Bentley College in Waltham, Massachusetts. He and Eric
Golden, also a Bentley student, started the Bentley Entrepreneur Society
to help other students with an interest in entrepreneurship.
Some important lessons Scott has learned include these:
• Perseverance Implementing dreams is not easy. You must be organ¬
ized and focused.
• Mentorship Have a network of mentors to help you with problems.
• Communication You need excellent communication skills, and written
agreements between your company and clients are essential.
• Capitalization Be prepared for everything to be more expensive than
you think, and plan for unanticipated expenses.
• Marketing Everyone is a potential customer or client. Work to acquire
new relationships while continuing to build existing ones.
Scott says that starting and running a business require focus, dedica¬
tion, and time, but it is important to remember that there is life outside
the business.
What do you fcnow?
What type of interests do you think Scott had that helped him find
success in this business?
Which of the lessons that Scott has learned do you think is most
important?
Why do you think it is important to find a balance between work
and play?
35
greene_0538446145_ch02, 1/17/8, 13:59, page: 36
• •
Entrepreneurs
Satisfy Needs
and Wants
l_
Goals
HI
• Distinguish between
needs and wants.
• Describe the types of
economic resources.
• Describe the role of
entrepreneurs in the
U.S. economy.
• needs
• wants
• economic resources
Focus on Economics
Do you want it or need it?
"Dad, I really need a new pair of shoes to wear to the Winter Dance,"
said Stephanie. "Do you need a new pair of shoes, or do you want a
new pair of shoes?" her father responded. "Want or need—what's the
difference?" Stephanie replied. Stephanie's father paused as he thought
about the valuable lesson he could teach his daughter and then said,
"That's a good question, Stephanie. Let's look at it this way. Do you
really need the shoes in order to survive, or will having the new shoes
make you feel better?"
Stephanie thought about what her father asked and said, "Well,
Dad, it won't keep me from going to the dance if I don't have the new
shoes, but I'd sure like to have new shoes to go with my new
dress. So, I guess I'd have to answer you by saying they would
make me feel better." "Then you want the shoes, but
you don't need them!" her father responded. That's
what economics is all about!" "Oh, Dad, you
always try to teach me something even when
I just want a new pair of shoes!"
Work as a Team Discuss needs and wants
that you have. Do you sometimes have a
difficult time telling the difference bet¬
ween a need and a want? Do you
peer pressure makes it more difficult to it is often difficult to distinguish
distinguish between a need and a want? between a want and need.
Is It a Need or a Want?
Think about your favorite piece of clothing. It may be a blouse, a
favorite pair of jeans, or maybe the latest in designer shoes. First, you
thought about what you wanted in clothing, and then you went out
and found it. Maybe you looked at several articles of clothing and
compared prices before you decided to spend your money. If someone
else gave you clothing as a gift, then that person had to think about
what you might like and then make a choice. Economics is all about
making choices and satisfying the wants and needs of consumers.
36
Chapter 2
Entrepreneurs in a Market Economy
Getty Images/PhotoDisc
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Do you know the difference in your needs and wants? Your needs
are things that you must have in order to survive. Needs include food,
basic clothing, and a place to live. Your wants are those things that
you think you must have in order to be satisfied. Wants add comfort
and pleasure to your life. Wants would include things like CDs, com¬
puters, jewelry, and designer clothes. The role of business is to produce
and distribute goods and services that people need and want.
Needs
People have many needs. Some are basic needs, while others are
higher-level needs. Abraham Maslow was a psychologist who devel¬
oped a theory on the hierarchy of needs. It identifies five areas of
needs—physiological, security, social, esteem, and self-actualization
needs. The theory suggests that people’s basic physiological needs,
such as food, clothing, and shelter, must be satisfied first before they
can focus on higher-level needs. Once basic needs are met, they will
try to satisfy their security needs. When this need is filled, individuals
turn their attention to social needs, such as friendship. Esteem needs
can be satisfied by gaining the respect and recognition of others. Self-
actualization needs usually involve something that provides a sense of
accomplishment, such as earning a college degree.
Develop Your
Reading Skills
As you read this chapter,
develop an outline of the
main topics. Write a short
summary for each topic
after you read it.
Self-Actualization
(to realize your potential)
Esteem
(respect and recognition)
Social
(friends, love, belonging)
Security
(physical safety and economic security)
Physiological
(food, sleep, water, shelter, air)
Maslow’s Hierarchy of Needs Pyramid
Beyond basic needs, not all people have the same needs. Needs
depend on a person’s situation. For example, you may live in a nice
house in a gated community, so your security needs are met. Some¬
one who lives in a high-crime area still may be trying to meet his or
her security needs.
Wants
Individuals have two different types of wants—economic wants and non¬
economic wants. Economic wants involve a desire for material goods
and services. They are the basis of an economy. People want material
goods, such as clothing, housing, and cars. They also want services, such
as hair styling and medical care. No economy has the resources necessary
to satisfy all of the wants of all people for all material goods and services.
The goods and services that people want must be produced. Clothes
must be made, houses built, and cars manufactured. Personal services
must be supplied.
2.1 Entrepreneurs Satisfy Needs and Wants 37
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MET ; rikmark
Over the past several years, gasoline prices in
the United States have been very unstable,
changing drastically from week to week or even
from day to day. Web sites such as GasBuddy
.com help consumers find the lowest gas prices
in their communities. Access school.cengage
.com/entrepreneur/ideas and click on the link
for Chapter 2. Use the chart of average gaso¬
line prices to determine whether U.S. gas pri¬
ces have increased or decreased in the past
week. How about the past month or year?
Click some of the Recent News links. What
accounts for recent changes in gasoline prices?
school.cengage.com/entrepreneur/ideas
People also have noneconomic wants,
or the desire for nonmaterial things. These
wants would include such things as sunshine,
fresh air, exercise, friendship, and happiness.
Needs and Wants Are Unlimited
Your needs and wants never end. You are
limited only by what your mind can think of
and what businesses make available for sale.
If you are going camping, you might need
to buy a tent for shelter. One purchase often
leads to another. After buying a tent, you
might also want to buy other camping sup¬
plies. Then you might want a bigger back¬
pack to carry your new supplies.
Checkpoint
What is the difference between needs and wants?
Economic Resources
Economic resources are the means through which goods and services
are produced. Goods are products you can see and touch. Services are
activities that are consumed as they are produced. Entrepreneurs use eco¬
nomic resources to create the goods and services consumers use. Con¬
sumers satisfy needs and wants by purchasing and consuming goods and
services. Goods are products you can purchase. A pair of shoes, a jacket,
food, and cars are all examples of goods. Services must be provided to
greene_0538446145_ch02, 12/21/7, 16:42, page: 39
you at the time you need them—they cannot be stored. A haircut, a pedi¬
cure, lawn mowing, and car detailing are all examples of services.
Factors of Production
In order to create useful goods and services, an entrepreneur may use
three types of economic resources. These resources are called the fac¬
tors of production and include natural resources, human resources, and
capital resources.
NATURAL RESOURCES Raw materials supplied by nature are natural
resources. The earth contains oil, minerals, and the nutrients needed
to grow crops and timber. Rivers, lakes, and oceans are the sources
of both food and water. All products you use begin with one or more
natural resources. The supply of many natural resources is limited.
Increased use of natural resources and
damage to the environment threatens
the continued availability of natural
resources in many regions of the world.
Conservation practices and the produc¬
tion of more efficient products help to
preserve and renew resources. Compact
fluorescent light bulbs (CFLs) cost more
than old-style incandescent bulbs, but
they last longer, use far less electricity,
save consumers' money in the long run,
and reduce greenhouse gases. When
consumers switch to CFLs, they help
preserve energy resources and the envi¬
ronment for future generations. One
CFL keeps a half-ton of greenhouse
gases (C02) out of the atmosphere.
HUMAN RESOURCES The people who create goods and services are
called human resources. They may work in agriculture, manufacturing,
distribution, or retail businesses. As an entrepreneur, you would also
be a human resource. Entrepreneurs have creative ideas and use these
ideas to create new goods and services, which in turn give consumers
more choices.
CAPITAL RESOURCES The assets invested in the production of goods
and services are called capital resources. Capital resources include build¬
ings, equipment, and supplies. They also include the money needed
to build a factory, buy a delivery truck, and pay the employees needed
to manufacture and distribute goods and services.
Limited Resources
All economic resources have a limited supply. Most resources can be
used to produce several different products and services. If resources
are used to produce one type of product, they may not be available
for the production of another product. Individuals, businesses, and
countries compete for access to and ownership of economic resources.
2.1 Entrepreneurs Satisfy Needs and Wants 39
How do compact fluorescent light
bulbs save energy?
greene_0538446145_ch02, 12/21/7, 16:43, page: 40
Those resources that are in very high demand or that have a limited
supply will command high prices. Because there is a limited amount
of natural resources, there will also be a limit to the amount of goods
and services that can be produced. Control of oil fields in the Middle
East has been an ongoing issue for many years. The United States has
a large demand for oil but a limited supply of oil, so it is important to
the United States to have access to oil from the Middle East. This
high demand contributes to high gasoline prices.
Checkpoint
List the three types of economic resources and give an example of
each.
Role of Entrepreneurs in the U.S.
Economy
Entrepreneurs play an important role in the U.S. economy. Because
all businesses that exist in the United States today began as an entre¬
preneurial idea, you could say that entrepreneurs are the backbone of
the U.S. economy. The development and growth of small businesses
help to ensure a strong economic future.
Supply and Demand
As business owners, entrepreneurs play an important role in supplying
goods and services to meet the demands of consumers. They look for
unmet needs or better ways to satisfy consumer needs and wants. They
use resources and their knowledge of markets and business to efficiently
produce goods and services that meet consumer needs and wants.
40 Chapter 2
Capital Investment and Job Creation
In order to start businesses, entrepreneurs need money to finance
their businesses. Sometimes they will use their own money. Other
times, they will
look to invest¬
ors and lenders
to supply them
with the money
they need to
get started.
They may use
the money to
lease a build¬
ing, buy equip¬
ment, or hire
employees. By
doing so, entre¬
preneurs are
investing in How do small businesses contribute to the local economy?
Entrepreneurs in a Market Economy
© Blend Images
greene_0538446145_ch02, 1/17/8, 14:0, page: 41
their communities by contributing to the local economy and provid¬
ing jobs.
Change Agents
Many entrepreneurs create products that change the way people live
and conduct business. When you learn about American history, you
see that many entrepreneurs have shaped the U.S. economy. As entre¬
preneurs create more goods and services, consumers have more wants
and needs. Entrepreneurs will always play an important role in the
U.S. economy.
.
Checkpoint
What are some things entrepreneurs contribute to the U.S. economy?
2.i Assessment
THINK ABOUT IT
1. What role do needs and wants play in determining what is
produced in an economy?
2. Think of something that you would describe as a "need" but
your parents would describe as a "want." Provide reasons to
support both sides of the argument.
3. How does the availability of economic resources affect decisions
that entrepreneurs make?
4. Which of the contributions to the U.S economy that entrepreneurs
make do you think is most important? Why?
MAKE ACADEMIC CONNECTIONS
5. SOCIAL STUDIES Think of a business in your area. Make a list of
the resources that the business uses for each factor of production.
6. COMMUNICATION Find information on the number of small
businesses in the United States, the number of individuals
employed by small businesses, the number of new businesses
that open each year, and the number of business failures each
year. Prepare a poster with this information and explain your
findings to your classmates.
Working in a team, make a list of the natural resources in your area.
Using the Internet, almanacs, and other information about your com¬
munity, find out the impact these resources have on your local econ¬
omy. Which businesses use these natural resources? What financial
contributions to your local economy do these businesses make?
2.1 Entrepreneurs Satisfy Needs and Wants 41
#
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Choose between alternatives
"Stephanie, weren't you thinking about buying a
new MP3 player last week?" her dad asked. "Yes,
Dad, I was," Stephanie replied, "but if I buy
the new shoes I want for the Winter Dance,
I won't have enough money to buy the MP3
player now." "You've just learned a lesson
about opportunity cost," her dad said.
"What's that?" Stephanie asked. Her dad
explained that when you choose one item
over another, the opportunity cost is the
value of the item you give up—in this case,
the MP3 player. "I understand, Dad. But if
you took this opportunity to buy the shoes
for me, then I wouldn't have any opportunity
cost, would I?"
Work as a Team Discuss choices that
you have made recently. Did you realize
that when you choose one item over
another that there is an opportunity cost
involved?
j f
You often have to choose one
option over another.
Economic Systems
Different economic systems exist throughout the world. However, all
economies must answer three basic questions.
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. What needs and wants will be satisfied with the goods and services
produced?
If all economies struggle with the same basic questions, what is it
that makes economies different? The type of economic system that a
country has will determine how these three economic questions are
answered. Economies must choose a way to allocate, or distribute, the
42
Chapter 2
Entrepreneurs in a Market Economy
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goods and services that are available to the people who need or want
them. These different allocation processes are what create different
economies. Different economies have different ways of choosing
which goods and services are produced, which needs are satisfied,
and how many resources are used to satisfy those needs.
Command Economy
In a command economy , the government determines what, how, and
for whom products and services are produced. Because the govern¬
ment is making the decisions, there is very little choice for consumers
in what is available. The government may see no reason to have more
than one type of the same item. This means individuals may not
always be able to obtain exactly what they want. There will be shirts
and pants, but there will not be many styles and colors from which to
choose.
Market Economy
Market economies are about personal choice. In a market economy ,
individuals and businesses decide what, how, and for whom goods
and services are produced. Entrepreneurship thrives in a market econ¬
omy. Decisions about production and consump¬
tion are made by mi lli ons of people, each acting
alone. Individual choice creates the market, so
there are many items available that are very simi¬
lar. If a good sells, it will remain on the market.
If not, the good will not continue to be pro¬
duced. There will be many styles of shirts and
pants to appeal to every taste, but a manufac¬
turer will not continue to produce a style that
few or no people buy.
Individual choice also exists in how items
are produced. A furniture maker will make
choices regarding the style, fabric, and durability
of products made. In addition, products and
services are always available to everyone who
has the means to pay for them.
Traditional Economy
Before complex economic systems developed, simple economies
operated according to tradition or custom. In a traditional economy ,
goods and services are produced the way they have always been
produced. The traditional economy is used in countries that are less
developed and are not yet participating in the global economy. Most
of what is produced is consumed and what is left over is sold or
traded with people who live in nearby communities. Traditional
economies lack the formal structure found in more advanced eco¬
nomic systems and usually have limited capital resources available to
improve their conditions.
What effect does the economic system have on the product
choices you have for clothing?
9
2.2
How Economic Decisions Are Made
43
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Mixed Economy
When elements of the command and market economies are com¬
bined, it is called a mixed economy. A mixed economy often results
when a country shifts away from a command economy toward a mar¬
ket economy but still has government involvement in the marketplace.
Many countries are making this shift. During the last decade, several
European nations that used a command economy have made progress
toward creating a mixed economy. Several of these countries recendy
joined the European Union.
For over 70 years, the Soviet Union operated under a command
economic system called communism. During this time, a series of
government-led plans directed resources toward economic growth.
The government control resulted in limited choices and a shortage in
supply of many consumer goods. The Soviet Union disbanded and
became 15 independent states in the early 1990s, resulting in a move
toward market economies.
China operates under a different type of communist government
that controls most of the resources and decisions. The economy of
China is adopting elements of a market system for a growing number
of economic decisions. China is fast becoming a world leader in goods
and services produced. A competitive educational system in China pro¬
duces many skilled workers who are opening businesses daily.
As many countries with traditional economies develop, they often
adopt mixed economies. The government makes many of the deci¬
sions about how the country’s resources will be used to develop
schools, hospitals, roads, and utilities. As people become educated,
they are able to obtain jobs and earn money. Then they have the
resources to purchase more goods and services. Often businesses from
other countries will begin to sell products and services in the develop¬
ing country or open a business offering jobs to the citizens.
Famous
Paul H6V6r6
Paul Revere is best remembered as
an American patriot who made a
famous midnight ride, warning
people that the British were com¬
ing. However, Paul Revere was also
a successful entrepreneur. Trained
as a silversmith, he used his
engraving skills to create political
cartoons to contribute to the
movement for independence. He
manufactured gunpowder, bullets,
and cannons during the Revolu¬
tionary War. Afterwards, he devel¬
oped new methods for his trade
and founded the Revere Copper
Company in 1801. The original
company evolved into Revere
Copper and Brass, Inc., which
today manufactures cookware
that bears his name, a sure sign
that his business lives on!
Think Critically
Paul Revere was able to use his
silversmith skills when starting his
business. How important do you
think it is to have a skill that you
can use when starting a business?
Why do you think Paul Revere was a
successful entrepreneur?
44 Chapter 2 Entrepreneurs in a Market Economy
greene_0538446145_ch02, 12/21/7, 16:43, page: 45
Checkpoint
How does the type of economy affect the way the basic economic
questions are answered?
4
The U.S. Economic System
What type of economic system do you think the United States has?
To answer this question, you must look at who makes most of the
decisions about what is produced and consumed. Since individual
businesses and consumers make most of these decisions, the U.S.
system is best described as a market economy. Capitalism, which is
the private ownership of resources by individuals rather than by the
government, is another name for the economic system in the United
States. Another term often associated with the U.S. economy is free
enterprise , due to the freedom of businesses and individuals to make
production and consumption decisions. This individual freedom is
vital to the success of the U.S. economy.
The U.S. economic system is based on four basic principles: private
property, freedom of choice, profit, and competition.
PRIVATE PROPERTY As a U.S. citizen, you can own, use, or dispose
of things of value. You are free to own anything you want, and you
can decide what to do with it as long as you operate within the law.
FREEDOM OF CHOICE You can make decisions independently and
must accept the consequences of those decisions. Business owners are
free to choose where to open a business, what to sell, and how to operate
the company. Consumers are free to choose where to shop, what to buy,
and how much they want to spend. Only when individual decisions will
bring harm to others does the government regulate freedom of choice.
PROFIT The difference between the revenues taken in by a business
and the costs of operating the business is called profit. The opportu¬
nity to earn a profit is at the heart of the free-enterprise system. One
of the main reasons entrepreneurs invest resources and take risks is to
make a profit. No business is guaranteed to make a profit, so entre¬
preneurs are challenged to work hard, invest wisely, and produce
goods and services that consumers are willing to buy.
COMPETITION The rivalry among businesses to sell their goods and
services is called competition. Consumers choose products and services
based on the value they think they will receive. Competition forces
businesses to improve products, keep costs low, provide good cus¬
tomer service, and search for new ideas so that consumers will choose
their products or services.
Checkpoint
Describe the four basic principles of the U.S. economic system.
2.2
How Economic Decisions Are Made
45
greene_0538446145_ch02, 12/21/7, 16:43, page: 46
Economic Choices
Individuals and businesses are faced with economic choices every day.
Decisions about needs and wants must be made. Economic decision
making is the process of choosing which needs and wants, among sev¬
eral, you will satisfy using the resources you have. Two factors commonly
enter into economic decision making—scarcity and opportunity cost.
did you KNOW?
According to the World
Water Council, by
2025, approximately
3 5 billion people will
, ive in places where
water is scarce or is
becoming scarce.
Scarcity
In every economy, there are limited resources to produce goods and
services. However, individuals have un li mited needs and wants. This
produces the basic economic problem of scarcity. Scarcity occurs
when people’s needs and wants are unlimited and the resources to
produce the goods and services to meet those needs and wants are
limited. For example, land is a scarce resource. Land is used for many
purposes, such as for growing crops or as a site for a business or
house. The same parcel of land cannot be used to meet all of these
needs. A decision on how to use it must be made. Land derives its
value from its scarcity.
Decisions based on scarcity affect everyone. Individuals and fami¬
lies have many wants and needs. They must decide how to spread
their income among all these wants and needs. City, state, and
national governments collect taxes from their citizens. They must
decide how to use the tax collections to provide all the services that
citizens expect. In both cases, someone must make difficult choices.
Scarcity forces you to make choices or decisions. Suppose you
work a part-time job and earn $150 a week. If you decide to purchase
a $75 concert ticket and you owe $75 for your monthly car insurance
payment, you will not have any money left over to go out for pizza
with your friends. Because you have only $150, you have limited
resources. With limited resources, you cannot afford to buy everything
you want. You may have to make a tradeoff by giving up something
so that you can have something else.
Opportunity Cost
When trying to satisfy your wants and needs, you most likely will
have many alternatives from which to choose. Economic decision
making will force you to explore all of your alternatives. The problem¬
solving process can be used to help you select the best and most
satisfying alternative from a set of choices. When examining all of
your alternatives, you should consider the opportunity cost of each
one. Opportunity cost is the value of the next-best alternative—the
one you pass up. If your grandparents give you $300 for graduation,
you have to decide what to do with it. If you decide to save the
money for college, the opportunity cost would be the new iPod that
you really wanted and could have purchased with the money.
Diane Mayfield has $2,500 in extra cash that she wants to invest
in her cake decorating business. Diane could use the money for adver¬
tising or she could purchase new equipment. If she decides to use the
money for advertising, she will not be able to purchase new equipment.
46
Chapter 2
Entrepreneurs in a Market Economy
greene_0538446145_ch02, 12/21/7, 16:43, page: 47
The opportunity cost of advertising will be the value of the new
equipment—the next best alternative. Like all entrepreneurs, Diane
will have to choose between various investment options.
Checkpoint
What factors affect economic choices?
Functions of Business
In a market economy, an entrepreneur is free to produce and offer to
consumers any legal product or service. Knowledge of business activ¬
ities will help entrepreneurs satisfy customers and make a profit. These
activities or functions of business include the following:
• production • management
• marketing • finance
Each of these functions is dependent on the others in order for
the business to be effective. Products can be produced, but if manage¬
ment is not functioning properly, if adequate financial records are not
maintained, or if marketing is not getting the word out to consumers,
the products probably will not be sold at a profit.
PRODUCTION The primary reason a business exists in a market econ¬
omy is to provide products or services to consumers and to earn a profit.
The production function creates or obtains products or services for sale.
MARKETING All businesses in a market economy need to complete
marketing activities in order to make their products and services avail¬
able to consumers. These activities make up the marketing mix ,
which includes the following:
• product • price
• distribution • promotion
The goal is to attract as many customers as possible so that the prod¬
uct succeeds in the marketplace.
MANAGEMENT It is necessary
for all businesses in a market econ¬
omy to spend a great deal of time
developing, implementing, and
evaluating plans and activities. Set¬
ting goals, determining how goals
can be met, and deciding how to
respond to the actions of competi¬
tors is the role of management.
Management also solves problems,
manages the work of employees,
and evaluates the activities of the
business.
be your own boss
You are planning to open a sandwich shop.
You begin to think about the four functions of
business—production, marketing, management,
and finance. Describe how each function will
apply to your business. Explain how the functions
will work together to ensure you run a successful
sandwich shop. Be prepared to share your ideas
with your classmates.
2.2
How Economic Decisions Are Made 47
greene_0538446145_ch02, 1/17/8, 14:1, page: 48
FINANCE One of the first responsibilities of finance is determining
the amount of capital needed for the business and how the capital will
be obtained. The finance function also involves planning and manag¬
ing the financial records of the business.
Checkpoint
What are the functions of business?
2.2 Assessment
THINK ABOUT IT
1. Prepare a chart showing how the three basic economic questions
are answered by a command, a market, and a traditional economy.
2. Explain the contributions of the four basic principles to the suc¬
cess of the U.S. economy.
3. Opportunity cost can affect you personally. Name an item you
have wanted to purchase but have not bought because you
wanted another item more.
4. Why is it important for all functions of business to work together?
*
MAKE ACADEMIC CONNECTIONS
5. MATH David Kalb started a pet-walking business in New York
City. He charges $20 to walk one dog twice a day. He walks six
dogs five days a week for four customers. He walks three dogs
seven days a week for three other customers. How much money
does David get from his customers each week? If his expenses
each week total $350, how much profit is he making weekly?
6 . ECONOMICS Research the economic system of another country.
Explain the type of economic system the country has and the effect
it has on the lives of the people in the country. Describe how the
economic system would affect entrepreneurs in the country.
7. PROBLEM SOLVING You worked for your grandmother doing
odd jobs around her house. She paid you $75 for the work you
did. You need $25 to fill your car with gasoline for the upcom¬
ing week, $10 for school lunch, $40 for prom tickets, and $30 for
a deposit on your tuxedo/dress for the prom. How much money
do you still need to cover all your expenses? Since your resources
are limited, use the problem-solving process to decide how to
spend the $75. Explain your choices.
TEAMWORK
Working in a team, choose a business with which you are familiar.
For the business you choose, make a list of the activities that would
take place involving each of the four functions of business.
48 Chapter 2 Entrepreneurs in a Market Economy
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m
What Affects Price?
S r^ic
-w-
uoais
l erms
Explain how supply and
demand interact to
determine price.
Describe how costs of
doing business affect the
price of a good or service.
Explain the effect of differ¬
ent market structures on
price.
supply
demand
equilibrium price and
quantity
fixed costs
variable costs
marginal benefit
marginal cost
Focus on Economics
Does supply match demand?
"Well, Dad, I went to the mall today to buy my new shoes and nobody
had the ones I wanted," Stephanie told her father. "Every store I went
to said it had sold out of the shoes because they
were on sale. The manufacturer is supposed to
send another shipment of the shoes next week."
"Oh," her father said, "so more people want
the shoes because the price is lower. And the
manufacturer is willing to make more shoes
even at the lower price because it is still
making a profit. This is the law of supply
and demand at work." "Dad, there you go
again—always trying to make a point!"
Work as a Team In the U.S. economy,
you have many choices, but sometimes you
might not be able to find exactly what you
want. Think of products that you have
wanted to buy but could not find. Why Manufacturers must try to keep up
do you think you could not find them? Wlth product demand.
c
o
>
16
’gi
Q
©
How Much Is Enough?
If a market economy is based on personal choice, why does there
always seem to be just enough of everything? In a market economy,
individual consumers make decisions about what to buy, and businesses
make decisions about what to produce. Consumers are motivated to
buy goods and services that they need or want. Business owners are
driven by the desire to earn profits. These two groups, consumers and
producers, together determine the quantities and prices of goods and
services produced.
Supply and Demand
To understand how this works, you need to understand two impor¬
tant forces: supply and demand. Supply is how much of a good or
service a producer is willing to produce at different prices. Imagine
2.3 What Affects Price? 49
greene_0538446145_ch02, 12/21/7, 16:43, page: 50
that you supply car detailing services. Suppose that at a rate of $40,
you are willing to spend eight hours a week providing car detailing
services. If your customers are willing to pay just $20 for a car detail,
you might decide not to bother detailing cars at all. If, however, the
rate for car detailing rose to $60, you would probably increase the
number of cars you would detail. You might even try to get some
friends to help you detail even more cars.
As the price of car detailing services rises, suppliers are willing to
provide more services. The quantity of car detailing services supplied
rises as the price for car detailing services increases, as shown on the
supply curve graph.
Now consider the demand side of the market economy.
Demand is an individual’s need or desire for a product or ser¬
vice at a given price. Suppose that you are interested in having
your car detailed. At a rate of $40, you figure it is worth hav¬
ing your car detailed once a month. If, however, the rate fell
to just $20, you might be willing to have your car detailed
twice a month.
As the price of the service or product decreases, consumers
are willing to purchase more of the product or service. Demand
rises as the price falls, as shown on the demand curve graph.
When the demand of a product is affected by its price,
this is referred to as demand elasticity. When a change in price
creates a change in demand, you have elastic demand. When a
change in price creates very little change in demand, you have
inelastic demand. Demand is usually inelastic when
• There are no acceptable substitutes for a product that con¬
sumers need
• The change in price is small in relation to the income of
the consumer, so consumers will continue to buy the prod¬
uct if they want it
• The product is a basic need for consumers, rather than just
a want
Supply Curve
20 30 40
Quantity
Suppliers are willing to supply more of a
product or service at a higher price.
Demand Curve
10 20 30 40 50
Quantity
Individuals are willing to consume more of
a product or service at a lower price.
Supply and Demand Curves
The point at which the supply and demand
curves intersect indicates the eguilibrium
price and quantity. The equilibrium price is
$30 a unit, and 30 units will be produced.
When Supply and Demand Meet
How do the forces of supply and demand work together to
determine price in a market economy? The point at which
the supply and demand curves meet is what is known as the
equilibrium price and quantity. This is the price at which
supply equals demand. Above the equilibrium price, fewer
people are interested in buying goods and services. At this
point, suppliers will not be able to sell as much of their goods
or services as they would like because they have priced them
too high. Below the equilibrium price, the price is too low.
Consumers would be very happy to purchase many of the
goods or services at these prices, but suppliers would not be
willing to produce enough to meet their demand. Only at the
equilibrium price does the amount consumers want to buy
exactly equal the amount producers want to supply.
50 Chapter 2 Entrepreneurs in a Market Economy
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Checkpoint
What effect do supply and demand have on the price of a good or
service?
Costs of Doing Business
To determine how much profit they are earning, entrepreneurs need
to know how much it costs to produce their goods or services. To do
so, they must consider all the resources that go into producing the
good or service to determine a price to charge.
The Jewel Box, a small company that produces handmade jew¬
elry, requires office space, materials, labor, and equipment. All of
these resources go into making a piece of jewelry, and all of them
must be taken into account when figuring out the price. A company
that prices its product based only on the cost of materials involved in
producing it will lose money and go out of business very quickly.
Fixed and Variable Costs
Every business has fixed costs and variable costs. Fixed costs are costs
that must be paid regardless of how much of a good or service is pro¬
duced. Fixed costs are also called sunk costs. Variable costs are costs
that go up and down depending on the quantity of the good or ser¬
vice produced.
To understand the difference between fixed and variable
costs, consider The Bread and Bagel Shop, a small business
owned by entrepreneur Michael Miller. Whether or not custom¬
ers buy his baked goods, Michael pays the same monthly rent,
the same insurance fees, and the same interest on the loans taken
out to finance his business. These are Michael’s fixed costs. He
must pay them even if The Bread and Bagel Shop makes no
sales. The store also has variable costs, including the expense of
buying flour, sugar, and coffee. These expenses rise direcdy with
the number of items sold. The more bagels, donuts, and cups of
coffee the company sells, the more resources it must buy to
make more goods. In contrast, when customers purchase fewer
loaves of bread, Michael uses less flour and other ingredients.
Understanding the difference between fixed and variable costs is
important. A business with many fixed costs is a higher risk than a
business with mostly variable costs, because fixed costs will be incurred
regardless of the level of sales. If sales turn out to be much lower than
expected, the business will be stuck with many bills to pay and little
revenue to cover them.
Marginal Benefit and Marginal Cost
Entrepreneurs make business decisions based on the concepts of
marginal benefit and marginal cost. Marginal benefit measures the
advantages of producing one additional unit of a good or service.
Marginal cost measures the disadvantages of producing one addi¬
tional unit of a good or service.
2.3 What Affects Price? 51
If bread sales increase at a bakery, how
might this affect its variable costs?
© Getty Images/PhotoDisc
Digital Vision
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Michael M il ler of The Bread and Bagel Shop wants to increase
his sales. Michael is considering keeping the store open two extra hours
every day. He estimates that during the last two hours of every day, he
will sell an additional 150 baked goods and 30 cups of coffee, bringing
in additional daily revenues of $100. This $100 represents the marginal
benefit of keeping the store open an extra two hours a day.
Should Michael stay open two extra hours each day? To figure
out if staying open later makes economic sense, Michael needs to fig¬
ure out the marginal cost of staying open later. He will need to pur¬
chase additional ingredients to produce another 150 baked goods and
30 cups of coffee. He will have to pay overtime wages to at least two
employees. He will also use more electricity. Adding up these costs,
Michael estimates that staying open two extra hours will cost him
$125 a day. Because the marginal cost of staying open ($125) exceeds
the marginal benefit ($100), Michael decides not to change the
store’s hours.
Checkpoint
How do the costs of doing business affect prices?
Market Structure and Prices
Market structure is determined by the nature and degree of competi¬
tion among businesses that operate in the same industry. The main
criteria used to distinguish between different market structures are
the number and size of sellers and buyers in the market, the type of
goods and services being traded, and the barriers to entry into the
market for sellers. There are four major market structures: perfect
competition, monopolistic competition, oligopoly, and monopoly.
Each market structure has an effect on the prices businesses can
charge for their products or services.
What kind of competition do you think a vacuum cleaner
manufacturer faces?
Perfect Competition
A market with perfect competition consists of a
very large number of businesses producing nearly
identical products and has many buyers. Buyers
are well-informed about the price, quality, and
availability of products. Because consumers have
so many choices of similar products, price is often
the deciding factor, making it difficult for a single
business to raise prices. This gives consumers
more control of the market. Businesses can easily
enter or leave this type of market. Examples of
industries in perfect competition include gasoline
suppliers and producers of agricultural products
such as wheat and corn.
52 Chapter 2 Entrepreneurs in a Market Economy
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Monopolistic Competition
A market with monopolistic competition has a large number of inde¬
pendent businesses that produce goods and services that are some¬
what different. Each business has a very small portion of the market
share. This is also called a competitive market. In a competitive mar¬
ket, many suppliers compete for business, and buyers shop around for
the best deal they can find. In this kind of market, prices are said to
be determined competitively. Products offered are not identical but
very similar, so differentiating products becomes very important.
Businesses can easily enter or leave a market that has monopolistic
competition. Businesses in monopolistic competition include retail
stores and restaurants.
Oligopoly
When a market is dominated by a small number of businesses that gain
the majority of total sales revenue, it is called an oligopoly. Businesses in
this market sell similar goods and services that are close substitutes, and
they have influence over the price charged. With the dominance of a
few businesses, it is not easy for new ones to enter the industry. Exam¬
ples of oligopolies include the automobile and airline industries.
WHAT WENT WRONG
>
Avoid personal debt
Dave McClure, a Silicon Valley entrepreneur
with no previous business experience, took on
a great amount of debt when he founded a
Web and database services company. He
founded Aslan Computing in 1995. He used
his own personal savings and took out a sec¬
ond mortgage on his home to get the money
he needed to get his business off the ground.
At first, it appeared that Dave's venture was
successful. He made $1.8 million in sales within
two years. Upon closer examination of his
financial records, however, things did not look
as good. Although Dave's business generated a
large amount of revenue, it did not generate
much profit. Aslan Computing's costs exceeded
its revenues, and it incurred a net loss of
$50,000 the second year. On the brink of col¬
lapse, no bank would lend Dave additional
funds. His credit card debt peaked at
$120,000. Friends urged him to bail out before
things got worse. He managed to sell the busi¬
ness for enough money to pay off his debts.
Think Critically
1. Do you think it is wise for a business
owner to take on a large amount of per¬
sonal debt when starting a business?
2. What other options does an entrepreneur
have if no bank is willing to loan money to
help finance the business?
When starting your business, be sure to avoid personal debt.
#
2.3 What Affects Price? 53
Digital Vision
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Monopoly
Where there is only one provider of a product or service, a monopoly
exists. A company that has a monopoly is able to charge whatever price
it wants, because consumers have nowhere else to go to find a better
price. This is the opposite of a competitive market where consumers
can simply switch to a lower-priced good or service offered by a com¬
petitor. The one provider can raise prices up to the point where con¬
sumers will choose to simply do without the product or service.
Monopolies usually exist because of barriers that make it difficult for
new businesses to enter the market. Examples of monopolies include
local water and electric utility companies.
Checkpoint
How does the market structure affect the price of a good or service?
M
2.3 Assessment
THINK ABOUT IT
1. Have you ever wanted to buy something, but you couldn't find
it? What role do you think supply and demand might have
played?
2. Name three fixed costs in your life. How do you plan to pay
them? Name three variable costs that you have. How can vari¬
able costs be like opportunity costs?
3. Think of an item you purchase often. If the price is similar at sev¬
eral stores, do you always buy at the same store? Why or why
not?
4. Describe the important features of each of the market structures.
54 Chapter 2
MAKE ACADEMIC CONNECTIONS
5. COMMUNICATION Find advertisements for two competing
products. Analyze the ads to see how the products are differen¬
tiated. Make a poster of the two ads and label the items that
are different.
6. ECONOMICS Create a table with two columns. In the first column,
list the four market structures. In the second column, list five to ten
goods or services that would be available in each of the different
market structures.
Working in a team, brainstorm a list of businesses in your state and
your local area. Discuss with your teammates the type of market
structure in which you think each business operates. Give reasons
for your choices. Share your list with your classmates.
Entrepreneurs in a Market Economy
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Sharpen Your
Entrepreneurial Skills
Effective Presentation Skills
Much of your communication as a business owner will be conducted
verbally. You may have to make a presentation to sell your business
idea to potential investors, or you may have to make a presentation
before potential customers to convince them to purchase your prod¬
uct or service. How you present yourself will have a big impact on
the people with whom you deal.
When preparing a presentation, you should be concise, but give
adequate information to cover the topic being presented. An effective
presentation has three parts.
1. Introduction You should begin your presentation with an
attention-getting opener that introduces your topic. Asking a
question or using a famous quote is a good way to get your
audience focused on the topic.
2. Body of Presentation Try to limit your presentation to three
main points. It is often helpful to provide a visual aid that lists
your key points. Do not overwhelm your audience with too
much detail. Use facts and other supporting information to rein¬
force your main points. Keep the presentation simple and avoid
using complicated language.
3. Conclusion After
presenting your main
points, summarize what
you have told your
audience in a brief
conclusion.
TRY IT OUT
To practice your presen¬
tation skills, research an
entrepreneur who you
believe has been a
change agent. Prepare
an effective presenta¬
tion for the class
explaining the impact
this entrepreneur has
had on other people’s
lives.
Sharpen Your Entrepreneurial Skills 55
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Chapter 2 Assessment
SUMMARY
2.1 Entrepreneurs Satisfy Needs and Wants
1. Economics is all about making choices and satisfying the needs
and wants of consumers. Your needs are things you must have
to survive. Your wants are things you think you must have to be
satisfied.
2. Three kinds of economic resources are used by entrepreneurs to
produce goods and services—natural resources, human resources,
and capital resources.
3. Entrepreneurs play an important role in the U.S. economy. They
supply goods and services, provide capital investment and job cre¬
ation, and serve as agents for change.
2.2 How Economic Decisions Are Made
4. There are four kinds of economic systems—command economy,
market economy, mixed economy, and traditional economy.
5. The U.S. economic system is based on the principles of private
property, freedom of choice, profit, and competition.
6. Economic choices are necessary because of our u nl imited desires
and the scarcity of resources available to satisfy them. Every eco¬
nomic decision involves an opportunity cost.
7. The functions of business are production, marketing, management,
and finance. Each function is dependent on the others.
2.3 What Affects Price?
8. Supply is how much of a good or service a producer is willing to
produce at different prices. Demand is an individual’s need or
desire for a product or service at a given price. The point at which
supply equals demand is the equilibrium point.
9. Entrepreneurs must consider all the resources that go into produc¬
ing a good or service to determine a price. Fixed costs remain the
same regardless of how much of a good or service is produced,
while variable costs go up and down depending on the level of
production.
10. Market structure is determined by the nature and degree of com¬
petition among businesses that operate in the same industry. The
four major market structures are perfect competition, monopolistic
competition, oligopoly, and monopoly.
What do you Jcnow now?
Read Ideas in Action on page 35 again. Then answer the questions a
second time. How have your responses changed?
56
Chapter 2
Entrepreneurs in a Market Economy
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. Those things that you think you must have in order to be satisfied
2. The means through which goods and services are produced
3. Occurs when people’s needs and wants are un li mited and resour¬
ces are limited
4. The process of choosing which wants you will satisfy using the
resources you have
5. The value of the next-best alternative—the one you must pass up
6. Point at which supply and demand meet
7. Measures the advantages of producing one additional unit of a
good or service
8. Private ownership of resources by individuals
9. An individual’s need or desire for a product or service at a given
price
10. Costs that go up and down depending on the quantity of the
good or service produced
J-
k.
l.
m.
n.
o.
capitalism
demand
economic decision
making
economic resources
equilibrium price
and quantity
fixed costs
marginal benefit
marginal cost
needs
opportunity cost
profit
scarcity
supply
variable costs
wants
REVIEW YOUR KNOWLEDGE
11. An example of a noneconomic want is
a. clothing c. friendship
b. housing d. cars
12. Which of the following is not an example of a service?
a. lawn care c. television
b. car wash d. cable TV installation
13. If a product has inelastic demand, a price increase will cause
a. consumers to buy more
b. competitors to enter the market
c. consumers to buy less
d. litde or no change in the demand for the item
14. What determines the type of economic system a country has?
a. the political beliefs of the country’s ruler
b. the way the basic economic questions are answered
c. the resources of the country
d. the demands of the people
15. What are the three basic economic questions countries must answer?
16. Which of the following is not a role of entrepreneurs in the U.S.
economy?
a. supply goods and services to meet consumer needs and wants
b. provide capital investment and job creation
c. determine how to allocate natural resources
d. serve as agents for change
Chapter 2
Assessment
57
greene_0538446145_ch02, 1/17/8, 19:16, page: 58
Another name for economic resources is
a. factors of production c. supply and demand
b. goods and services d. command and market
The four basic principles of the U.S. economic system are
a. private property, freedom of choice, loss, competition
b. taxed property, freedom of choice, profit, competition
c. private property, freedom of choice, profit, competition
d. private property, limited choice, profit, competition
Which of the following is not a function of business?
a. production c. legal environment
b. marketing d. finance
If you were going to start a small retail store selling gift items,
which type of market structure would you most likely be entering?
a. perfect competition c. oligopoly
b. monopolistic competition d. monopoly
The Ford Motor Company operates in which type of market
structure?
a. perfect competition c. oligopoly
b. monopolistic competition d. monopoly
APPLY WHAT YOU LEARNED
22. You plan to start a pet-sitting/dog-walking business. Analyze the
possible demand for such a service by brainstorming answers to
the following questions: Who is likely to hire a pet sitter? Who is
likely to hire a dog walker? Besides caring for the pets, what other
services could such a business perform? Discuss what other ques¬
tions you should consider before starting this type of business.
23. Susan Tran of Nails by Susan wants to increase her sales. Susan
thinks about keeping the nail salon open two extra hours every
day. She estimates that during the last two hours of every day, she
and her staff could provide nail services to five more customers,
bringing in additional revenues averaging $125 a night. Susan
estimates that providing the services to five more customers each
night would cost approximately $25 in supplies. Her operating
expenses for electricity and water will increase by approximately
$20 per night. She would also have to pay two employees to work
the extra two hours at a cost of $30 each. What is the marginal
benefit of keeping the nail salon open an extra two hours a day?
What is the marginal cost of staying open two additional hours?
Do you think Nails by Susan should stay open two extra hours
each day?
MAKE ACADEMIC CONNECTIONS
24. MATH You have a business baking and selling chocolate chip
cookies. Using the Activity CD, open the activity “How Much
Does It Cost?” Print a copy and complete the activity. What are
the costs of doing business? Are these fixed costs or variable costs?
17.
18.
19.
20 .
21 .
58
Chapter 2
Entrepreneurs in a Market Economy
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COMMUNICATION Marketing plays an important role as
one of the functions of business. Research and write a report
explaining how each of the other functions—production, manage¬
ment, and finance—depends on the marketing function. Present
your report to the class.
ECONOMICS Identify and research economies in the process of
converting from a command to market economy. What events led
to this change? What involvement, if any, do U.S. companies have
in these countries’ economies? Discuss your findings with the class.
WHAT WOULD VOU DO?
You are excited when you receive your new iPod for your birthday.
You also receive a $50 iTunes gift card. You sign onto iTunes and
download many of your favorite songs and a movie. You spend the
$50 quickly, but there are many additional songs you want. One of
your computer-savvy friends tells you about some web sites where
you can download all the music you want for free. You are anxious
to try out these new web sites, but you decide to talk to your
parents first. Your parents explain that iTunes is a legal site and that
the music artists receive royalties (payments to the copyright holder)
when you download from it. The web sites your friend told you
about do not give the artists the royalties due to them. Your friend
says the artists have already made enough money so it does not
really matter that you are getting the music for free. What will you
do? Will you continue to pay and use only iTunes or will you use the
free web sites? Why? Recording artists are entrepreneurs. If you
were an entrepreneur, how would you feel if you did not get the
money that was owed to you?
Y_ | _ )
25.
26.
BUILD YOUR
Business Plan
Using the Activity CD, open the activity "Supply and Demand Graph."
Print a copy and complete the activity for at least one good or service
your business will provide. Then use the graph to determine the price
to charge for that good or service.
Determine the fixed and variable costs for your business. Estimate
how much money you will need to cover these costs. Make a chart
showing these expenses. Do you need to adjust your original pricing
for your business to make a profit?
Consider adding another product or service to your business. What are
the marginal costs and benefits of adding this new product or service?
Is it a good or bad idea to add the item?
Chapter 2
Assessment 59
greene_0538446145_ch02, 1/17/8, 19:14, page: 60
Planning a Career in
Property Management
iness , Management
& Administration
"A
- ur softball coach threw an
end of season party for team mem¬
bers and their families at the pool
in his neighborhood. There are
about 300 houses in the neighbor¬
hood. A pool, playground, tennis
courts, and clubhouse are shared
and maintained by the community.
He said that although the commu¬
nity elected a board of residents to
plan for the community, the day-
to-day maintenance of the commu¬
nity was handled by a property
management company.”
Who changes the light bulbs
in the common areas of private
communities? How is the landscap¬
ing of common areas managed in
private communities? Who takes
care of routine maintenance at
retail sites?
Property management compa¬
nies assist a variety of businesses by
managing their daily operations.
Retail locations, office parks, and
residential communities use their
services.
EMPLOYMENT OUTLOOK
• Average job growth is expected.
• Over half of property managers
are self-employed.
• As new home developments
form neighborhood associations
to manage common areas, the
need for property managers
should increase.
JOB TITLES
• Assistant Facility Manager
• Commercial Property Assistant
• Occupancy Specialist
• Homeowners Association Field
Manager
• Community Association
Manager
• Portfolio Manager—Property
Management
NEEDED SKILLS
• A Bachelor’s degree is
recommended.
• Strong information systems,
financial, problem-solving, and
multitasking skills are required.
• A background in real estate or
facilities management is helpful.
What's it like to work in Property
Management? Ari, the owner of
a property management company,
was posting the minutes of a
neighborhood’s annual meeting
on the neighborhood’s web site.
Web site maintenance was just one
of the many services the neighbor¬
hood had hired Ari’s company to
perform.
Ari’s next task was analyzing
the bids that came in for the land¬
scaping contract for a condomin¬
ium community he was managing.
He would prepare a report on the
three most competitive bids and
present them to the condominium’s
board tomorrow evening at their
monthly meeting. In addition to
providing a financial summary of
die bids, Ari would also provide
information regarding the reliability
of the various landscaping compa¬
nies. Because he managed several
communities, Ari was able to obtain
feedback on the effectiveness of a
variety of landscaping companies.
After lunch, Ari reviewed die
time cards for the lifeguards at a
neighborhood community pool.
Because the neighborhood lacked
the resources to manage employees,
they paid Ari’s firm to handle the
contract for their community’s
lifeguards.
What about you? Would you
like to manage the day-to-day
operations of a variety of commun¬
ities to help them run smoothly?
60
Chapter 2
Entrepreneurs in a Market Economy
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li:
II 11 H *
EMEKGIWG “BUSINESS ISSUES EVEMT
V he Emerging Business Issues Event provides students with an oppor¬
tunity to research and present an emerging business issue. The event
will be completed by a team consisting of two or three members.
FBLA provides participants a topic to research. The team must
then present an affirmative or negative argument about the topic, based
upon random selection. Facts and working data should be secured
from reliable sources. After drawing an affirmative or a negative argu¬
ment, teams will have five minutes to finalize their preparations. Each
presentation will last no longer than five minutes. Following each oral
presentation, the judges have three minutes to ask questions.
TOPIC Closing the border with Mexico has become a heated
political issue for the United States. Construction, manufacturing,
agriculture, and horticulture are a few of the industries that depend
heavily on illegal immigrants to fulfill labor needs. Some citizens and
politicians want the country to shut down the border and deport ille¬
gal immigrants. Other individuals want the government to grant the
current illegal immigrants a worker’s permit and develop a strategy to
enable them to become legal citizens. One plan recommends granting
citizenship to more than 12 million illegal immigrants before tighten¬
ing up the border. Other plans call for fining businesses that hire ille¬
gal immigrants. Your team will be called upon to argue the affirmative
(granting illegal residents work permits and citizenship) or the nega¬
tive (fine employers and send illegal residents home).
PERFORMANCE INDICATORS EVALUATED
• Understand how a current issue affects the economy.
• Communicate an opinion based upon facts and figures.
• Work as a team to persuade the audience to support a certain
viewpoint.
• Manage time effectively to research, outline, and present a viewpoint.
• Demonstrate effective teamwork and align ideas into a persuasive
argument.
Go to the FBLA web site for more detailed information.
Think Critically
1. What are two advantages of allowing illegal immigrants to stay in the
United States?
2. Why are businesses concerned about the government's actions involving
illegal immigrants from Mexico?
3. Why are politicians conflicted by the illegal immigrant issue?
4. How can the United States ensure that illegal immigrants take the neces¬
sary steps to obtain legal citizenship?
www.fbla.org
Winning Edge
61
school.cengage.com/entrepreneur/ideas
J
62
3.1 Why a Business
Plan Is Important
3.2 What Goes into a
Business Plan?
3.3 How to Create an
Effective Business
Plan
greene_0538446145_ch03, 12/21/7, 16:46, page: 63
IDEAS !M ACTION!
••
tM
Jeffrey Rodriquez and John Serrano,
Latin Artist
Turning an Idea into a Business
I f you have an idea for a business, what do you
do next? How can you raise money to get
started? As Jeffrey Rodriguez and John Serrano
of Brooklyn, New York, found out, a business
plan is necessary to turn your idea into action.
Using their business plan, Jeffrey and
John turned graffiti from an act of vandalism
into an art form. John developed a love of
art from an early age working with his artist father. Jeffrey developed
leadership skills through the Boy Scouts and ASPIRA, a leadership club
encouraging students to take part in community service in Latin neigh¬
borhoods. Both John and Jeffrey experimented with graffiti art, and
Jeffrey started airbrushing designs for friends, working from a family-
owned business using equipment borrowed from a Scout leader. After
he taught John how to airbrush, Latin Artist was born.
Needing startup money, Jeffrey learned about Youth Venture, a
program that awards grants to teens who start businesses emphasizing
community service. Realizing that neighborhood youth needed a safe
place to meet, Jeffrey applied for and got the grant. He and John used
the money to fix up their store. They added a community service compo¬
nent to their airbrush designs business, offering free art lessons for
neighborhood youth. Besides teaching them art, Jeffrey stresses the
need to do something good for the community.
Four months after they opened, Jeffrey created a business plan and
entered a Fleet Bank contest. Latin Artist was named one of the top 20 youth
businesses in the New York area. Jeffrey and John continue to work on a
detailed business plan so they can apply for a bank loan and determine the
future direction of their business. A detailed business plan is a must when
talking to banks and other lending institutions.
1. Character Are you honest and dependable?
2. Capacity Can you earn enough money to pay back the loan?
3. Capital Do you have enough cash on hand to pay your bills?
4. Collateral Do you have anything of value to back up your loan?
5. Conditions Do you have the potential to continue earning money?
What do you fcnow?
What kind of plans do you think someone should make before
opening a business?
Where could you go to research a business idea?
Why is it important to have a written business plan?
greene_0538446145_ch03, 1/17/8, 14:33, page: 64
Look before you leap
Tony worked for a local automobile dealership as a tech¬
nician for over 20 years. He was the best technician at the
dealership, and he always received very high customer
service ratings. One day, Tony decided that because he
was such a good technician, he could make more
money working on his own. At a local print and
signage shop, he had business cards printed and a
sign made that read "Tony the Technician." He quit
his job at the dealer on Friday, put his sign up on
Sunday, and was open for business on Monday.
Work as a Team Tony made his decision very fast
and jumped right into owning his own business.
What do you think are Tony's chances for success?
Discuss what advice you would have given Tony
if he had talked to you about his idea first.
Planning is the key when
starting a business.
The Business Plan
Once you have settled on a business idea, it is time to start making
plans for the business. A business plan is a written document that
describes all the steps necessary for opening and operating a success¬
ful business. In this chapter, you will learn what goes into a business
plan and begin the development of a business plan for your business
idea.
A business plan does the following:
• Describes what your business will produce, how you will produce
it, and who will buy your product or service
• Explains who will run your business and who will supply it with
goods
• States how your business will win over customers from competitors
and what your business will do to keep customers
64
Chapter 3 Develop a Business Plan
greene_0538446145_ch03, 12/21/7, 16:46, page: 65
As you read this chapter,
make a list of the items
that you will need to
develop and research for
your business plan.
Why would potential investors want to see your business plan?
• Provides detailed financial information that shows how your busi¬
ness will succeed in earning a profit
Writing a business plan is one of the most difficult and important
things you will do as an entrepreneur. Writing a solid business plan is
critical because the plan can make or break your business. Some people
may tell you that you do not really need a business plan, but potential
investors will want to know in what you are asking them to invest. The
business plan will also serve as a guide for you as you get your business
started.
Purposes of a Business Plan
The business plan serves three important purposes.
1. A business plan explains the idea behind your business and
spells out how your product or service will be produced and
sold. To convince investors that your business idea is solid, you
will need a completely new product or service or one that is better
or less expensive than products or services that already exist. You
will need to identify your target customer and show how your
company will be able to obtain and keep customers.
2. A business plan sets specific objectives and describes how your
business expects to achieve them. A good business plan includes
sales projections for the short term (the first year), the medium
term (two to five years after startup), and the long term (five years
in the future). It describes what products and services will be intro¬
duced over the next five years and sets forth future business plans,
such as expansion of the business.
3. A business plan describes the backgrounds and experience
of the people who will be running the business. Banks and
investors make financing decisions based on how well they think
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a company can meet its objectives. By providing the background
and experience of the people who will be running your company,
the bank or investor will be more likely to provide funding.
Checkpoint
What are the three main purposes of a business plan?
Importance of a Business Plan
Every new business must have a business plan. The business plan is
important for several reasons.
1. A business plan makes you think about all aspects of your
business. It will help you during the development and startup
phases of the business. Stan Meyer began a graphic design business
from his home. He spent many hours thinking about the business
and thought he was ready to start it until he sat down to write
his business plan. He had not made sales and profit projections.
He had also not thought about the possibility that he might need
to hire staff if the business grew too large for him to handle alone.
Drafting a business plan helped Stan gain even more confidence in
his business idea. It showed him that building a successful business
based on his concept would be possible. Working on his business
plan also helped Stan think through business strategies, recognize
limits, and identify problems he might encounter.
2. A business plan may help you secure financing for your busi¬
ness. You may have a great idea, but very litde capital to invest
in your business. You may need to go to a bank to obtain a loan
How does creating a business plan help you see the "big picture"?
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or find other investors for your startup money. Lenders and
investors require a business plan before they will consider financ¬
ing a business. A well-written business plan shows lenders and
investors that you are serious about your business idea and have
spent sufficient time in the planning process. The loan officer at
Stan Meyer’s bank was very impressed with the work that Stan
had put into his business plan. The plan showed her that Stan
thoroughly understood all that was involved in starting his own
graphic design business. She recommended that he be approved
for a loan.
3. A business plan helps you communicate your ideas to others.
By the time you write your business plan, you will have given
much thought to the business you want to establish. You will pro¬
ceed believing that your business can succeed. If you communicate
your ideas well on paper, you will also convince the readers that
your business can succeed. It will give suppliers confidence in
Famous
Walter Elias Disney
No one has entertained families
more than the Walt Disney Corpo¬
ration. Who has not experienced
the Disney brand by seeing a
movie, visiting a theme park, stay¬
ing at a resort, buying merchan¬
dise, watching TV, or cheering on
the Mighty Ducks of ice hockey?
We have all been touched by the
magic of Disney, the preeminent
name in family entertainment.
As a young child, Walt Disney
had an interest in art. To improve
his drawing skills, he took art
courses in high school, and at
night, attended the Academy of
Fine Arts. The humble beginnings
of his colossal corporation date
back to 1923 when Walt arrived
in California to peddle one of the
cartoons he had made. Although
the cartoon was not an initial
success, Walt did not give up. He
started working with his brother,
Roy, in his uncle's garage. Success
did not come quickly to the Disney
brothers, but Walt's faith in him¬
self and others helped him to
succeed.
Mickey Mouse was
created in 1928. Mickey
made his screen debut in the
world's first fully synchronized
sound cartoon, Steamboat
Willie. In the midst of the
Great Depression of the
1930s, Disney took great
risk and invested a then-
unheard-of amount of
$1.5 million to produce the
first full-length animated
musical feature, Snow White
and the Seven Dwarfs.
Disney began television
production in 1954 and was among
the first to present full-color pro¬
gramming with his Wonderful World
of Color in 1961. Disney opened the
first of many theme parks in 1955.
The Disney Corporation continues
with innovation and success today.
Why do you think Walt Disney was a
successful entrepreneur?
Think Critically
Do you think success comes quickly
for most entrepreneurs? What do
you think Walt Disney's first busi¬
ness plan included as his vision for
the company?
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extending credit to your company. Stan presented his business plan
when he visited the local office supply company. With it, he con¬
vinced the company to sell him a computer system on credit.
4. A business plan can serve as a tool for managing your business.
Once your business is up and running, you can use the business
plan in your decision making. Stan Meyer regularly uses his busi¬
ness plan to help him manage his company, Designs for You.
Stan’s plan laid out his vision of how the company would grow
over time. By following the strategies in his plan, he has increased
sales by offering innovative designs and reaching new clients.
Checkpoint
Why is a business plan important to an entrepreneur?
31 Assessment
THINK ABOUT IT
1. Why do you think the quality of the business plan is so critical to
an entrepreneur's success?
2. Melinda Rosati wants to purchase her uncle's barber shop.
Because it is an ongoing business, Melinda doesn't think she
needs to write a business plan. Do you agree or disagree with
Melinda's opinion? Why or why not?
3. Putting your business plan in writing helps you communicate
your ideas to others. Do you think discussing your business plan
out loud in a meeting can also help get your ideas across? Why
or why not?
MAKE ACADEMIC CONNECTIONS
4. MANAGEMENT Andre Kitaevich uses the business plan he wrote
to help him run day-to-day operations in his jewelry store. On
what specific issues might Andre consult his plan?
5. COMMUNICATION You are starting a business in the home
healthcare field. Write a paragraph explaining the idea behind
the business. Be sure to spell out how you plan to market its
services.
TEAMWORK
Working in a team, choose a well-known business in operation today.
Research the history of the business. Find out who started the busi¬
ness, why the person had the idea to start the business, and when
the business was started. Prepare a presentation for your class about
the history of the business.
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r
What Goes into a
Business Plan?
List and describe the
basic elements of a
business plan.
Describe how to pull a
business plan together.
pro forma financial
statement
cover letter
statement of purpose
executive summary
V
Focus on Small Business
Create interest in your business plan
Having always had a strong interest in electronics and computers, Andy
wanted to start a business building customized computers for business
and personal use. He knew that he would need about $5,000 to get his
business started. He had $2,000 in savings that he could use, but he was
going to have to get a loan from family, friends, or the bank for the
remaining $3,000. He sat down one night and threw together a few
facts about his business and handwrote a list of items that he needed
to purchase. The cost of the items on
the list totaled $1,950. He showed the
information he had compiled to his
parents, his grandparents, his aunt and
uncle, and his friend. No one was inter¬
ested in making an investment in his
business.
Work as a Team Discuss why you
think Andy could not interest
anyone in making an investment
in his business. How do you
think a formal business plan
would improve his chances a formal business plan is the best way to share
of finding lenders? your business idea.
Basic Elements of a Business Plan
Every new business should have a business plan, but not all business
plans are alike. The content of a business plan for a small, home-
based, single-owner business will differ from a business plan for a
large corporation with offices in many cities. But regardless of the
business, all business plans serve the same basic purposes. They should
also contain the same three basic components—introductory elements,
the main body, and the appendix.
The main body of the business plan will contain the bulk of the
information about the business idea. It provides details on how the
business will succeed. A lot of time and effort will go into writing the
3.2
What Goes into
Business Plan?
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What kinds of information do you think
investors would want to know about a new
day care center?
main body of the plan, and it should be compiled before the
other components in the business plan. It should be organ¬
ized into the following sections, or elements:
1. Introduction 4. Operations
2. Marketing 5. Concluding Statement
3. Financial Management
Nora Ellis and Samantha Richards are qualified child¬
care providers who have worked together at a day care cen¬
ter for many years. Because of the high demand for quality
day care services, Nora and Samantha know they are well
positioned to meet this need. They decide to create a busi¬
ness plan for opening their own center.
Introduction
The introduction section of a business plan contains many
important details about the proposed business idea. The follow¬
ing information should be included in the introduction section.
• A detailed description of the business and its goals
• The ownership of the business and the legal structure
• The skills and experience you bring to the business
• The advantages you and your business have over your
competitors
DETAILED DESCRIPTION Something inspired the idea for your busi¬
ness. Describing how you came up with your idea can help lenders,
investors, and others understand what your business is about. Your
business plan should also ou tli ne your short-term (three months to
one year), medium-term (two to five years), and long-term (more than
five years) goals. This section describes your vision for the company’s
future. Stating goals will help provide you with direction and focus for
your business activities.
Nora and Samantha know their short- and medium-term goals.
In the first year of business, they want to get financing to lease or buy
a facility, equip the facility, and staff it. By their third year of business,
they want to invest in more equipment and expand their facility. They
have not yet thought through what their objectives are for the long
term. Writing a business plan will force them to think about future
plans.
OWNERSHIP AND LEGAL STRUCTURE In your business, you should
have a section detailing your form of ownership. Will it be a sole proprie¬
torship (one owner), a partnership (two or more owners), or a corpora¬
tion (many owners that hold shares of stock in the business)? Provide
information relevant to your form of business, such as who your partners
are or how many shareholders you have. This section of the business
plan is important because each legal form of business has an effect on
how the business works and makes profits.
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SKILLS AND EXPERIENCE A written summary of your experience is
an essential part of your business plan. This summary should empha¬
size all experience you have that relates to the business, including paid
work experience, volunteer experience, and any hobbies you have
that relate to your proposed business. The skills and experience of
any managers or professional employees who will be hired will also
be relevant.
Nora and Samantha have Master’s degrees in early childhood
education. Together, they have more than 35 years of experience in
day care, including 15 years in management. To show that they are
well qualified to run a center, they include copies of their resumes
and letters of reference from satisfied parents.
ADVANTAGES You should list your company’s advantages over the
competition. These advantages may include the following:
• Performance • Price
• Quality • Promotion
• Reliability • Public image or reputation
• Distribution
Marketing
The marketing section of your business plan should describe the
products and/or services you will offer, the market, the industry, and
your location. Developing a marketing plan will be examined in more
detail in Chapter 5.
PRODUCTS/SERVICES Describe your products and services and
explain how they differ from those already on the market. Highlight
any unique features, and explain the benefits customers will receive by
purchasing from your business.
MARKET You will explain whom your prospective customers are,
how large the market is for your product or service, and how you
plan to enter that market. You should also explain how you plan to
deal with competition.
INDUSTRY You should describe the industry in which you will oper¬
ate. To find this information, you will need to perform research.
Things you should include in this section are as follows:
• External factors affecting your business, such as high competition
or a lack of certain suppliers
• Growth potential of the industry, including growth forecasts
• Economic trends of the industry
• Technology trends that may affect the industry
LOCATION Describe the location of your business. Lenders and
investors want to know exactly where your business will be, because
the location of a business is often a critical factor to its success.
3.2
What Goes into
Business Plan?
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Writing the marketing section of the business plan is easy for
Nora and Samantha, because they have a clear idea of what they want
to do. Their prospective customers are the parents of the 1,000 to
1,500 children between the ages of two and five who live in their
area. Nora and Samantha determine that 90 percent of the fa mili es
would be able to afford their center. They will advertise in local news¬
papers and send out fliers to families in their target market. When
providing information on the industry in which they will operate, they
include population data for their area. This information shows that
demand for their service could grow over time. Nora and Samantha
describe their plan to start the business in a prime location, in the
heart of a suburb where most families have young children and both
parents work outside the home.
Financial Management
The financial section of your business plan will help determine your
financial needs. It forces you to look at financial risks and the costs
and expenses of running your business. It consists of three elements.
WHAT WENT WRONG
*
Do Market Research
While working as a salesperson for a custom
exhibit display company, Leo Hunt found a
unique product not currently being marketed in
the United States. It was a lightweight, porta¬
ble, full-color display that could be set up and
dismantled quickly. A company in Sweden was
the manufacturer of this display. Leo thought it
was ideal for trade shows and conventions. Leo
decided to become a distributor of the special
displays. He quickly prepared a business plan
focusing on the unique features of the product
and the fact that there was no competition in
the United States for the product. He estimated
that he could generate over 5,000 sales in the
first quarter of the year. He did very little
research and assumed that everyone who
exhibited at a trade show would be part of his
target market. He placed a large order with the
manufacturer and was ready to go! Within
three months, Leo had taken only 250 orders
for the product, had spent 95 percent of his
startup capital, and found that many exhibitors
had no need for his product. After six months,
Leo had bills piling up, fewer than 100 orders,
an overdrawn checking account, and some
very unhappy employees. Leo decided it was
best for him to close his business.
Think Critically
1. What mistakes did Leo make when prepar¬
ing his business plan?
2. Do you think Leo should have ordered dis¬
plays from the manufacturer before he had
orders from customers?
3. Are there steps Leo could have taken to try
to save his business?
Market research is critical to the success of a business.
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1. Identification of Risks Prospective lenders and investors will
want to know what risks your business faces and how you plan to
deal with them. Do not be afraid to list potential problems. Lend¬
ers know that every business faces risks. They will be reassured to
see that you have clearly thought through the potential problems
and have a plan for dealing with them. Risks typically faced by new
businesses include competitors cutting prices, costs exceeding
projections, and demand for your product or service declining.
2. Financial Statements A new business must include projected
financial statements in its business plan. An existing business must
include current as well as projected statements. A financial statement
based on projected revenues and expenses is called a pro forma
financial statement.
3. Funding Request and Return on Investment You must indicate
how much you need to borrow and how you plan to use the money.
You should give investors an idea of how much money they could
expect to earn on their investment in your business. You should
state how much money you are personally investing and provide a
personal financial statement.
Nora and Samantha have included pro forma financial statements
for their business, which show how much money and profit they expect
to earn. They require $140,000 to start their business. Together they
are contributing $85,000 of their own money. This means they need
a bank to loan them $55,000. They include this information in their
plan as well.
Operations
The operation of your company is critical to its success. In this section
of your business plan, you should explain how the business will be
managed on a day-to-day basis and discuss hiring and personnel pro¬
cedures. You should also include information on insurance and lease
or rental agreements. Describe the equipment that will be necessary
for production of your products or services and how the products or
services will be produced and delivered.
As part of the operations section of their business plan, Nora and
Samantha describe hiring plans to ensure their day care center is well-
staffed. They also devote a section to health and safety and outline
plans for dealing with emergencies.
Concluding Statement
In this section, you should summarize the goals and objectives you
have for your business. You should also emphasize your commitment
to the success of the business.
Checkpoint
List the elements of the main body of a business plan and explain
why each one is important.
3.2
What Goes into a Business Plan?
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Complete the Business Plan
After you have completed the main body of your business plan, you
will need to focus your efforts on the other components—the intro¬
ductory elements and the appendix. Then you must pull all the com¬
ponents together into a well-organized, attractive document.
Introductory Elements
Every business plan should begin with a cover letter, a title page, a
table of contents, a statement of purpose, and an executive summary.
These elements help set the tone for the body of your business plan.
COVER LETTER A letter that introduces and explains an accompany¬
ing document or set of documents is called a cover letter. The cover
letter for your business plan should include your name, the name of
your business, and your address and telephone number. It should
briefly describe your business and its potential for success. It also needs
to tell the reader how much capital you need. Nora and Samantha
prepare the cover letter shown below.
THE MT. W ASHINGTON
C/ h i l <§L r c ri : ’ s
CENTER
5813 NORTH AVENUE, BALTIMORE, MARYLAND 21205
(410) 555-4445
April 11, 20-
Ms. Jane Stewart
Vice President
First National Bank
E. 35th Street
Baltimore, Maryland 21212
Dear Ms. Stewart
Enclosed please find a copy of the business plan for the Mt.
Washington Children’s Center, a proposed new day care center in
northwest Baltimore that will serve approximately 50 young children.
We believe that the acute shortage of high-quality day care in this
part of the city will allow us to generate significant revenues for the
center and that we will be earning a profit within a year of opening.
To establish the kind of center we envision, we plan to put up
$85,000 of our own capital. We will need additional financing of
$55,000. As you will note from our pro forma financial statements,
we plan to repay the loan within five years.
Please let us know if there is any additional information you would
like to receive. We look forward to hearing from you.
Sincerely yours
'T'l&'Ut RicUfAV'AS
Nora Ellis Samantha Richards
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TITLE PAGE Your business plan should have a tide page that indicates
the name of your company, the date, the owner of the company, the
tide of the owner, and the address and phone number of the company.
TABLE OF CONTENTS A table of
contents is a listing of the material
included in a publication. It shows
the reader what each page covers. It
is similar to a table of contents in a
textbook. It is important that your
table of contents is accurate, so
make sure the sections are listed in
the proper order and the given page
numbers are correct.
STATEMENT OF PURPOSE A brief
explanation of why you are asking
for a loan and what you plan to do
with the money is called a statement
of purpose. It should be no more
than one or two paragraphs. Nora
and Samantha write the statement of
purpose shown here.
STATEMENT OF PURPOSE
The Mt. Washington Children’s Center will operate as a
private day care center serving approximately 50 children in
northwest Baltimore. The Center will offer excellent supervision
in a clean, safe, and intellectually stimulating environment.
The project is requesting $55,000 in financing. This money
will be used to:
• rent and remodel 4,000 square feet of indoor space
• prepare 18,000 square feet of outdoor space for use as
a playground
• purchase equipment such as swings, jungle gyms, sand¬
boxes, and supplies
• pay salaries of eight employees until sufficient cash flow
is generated to allow operating expenses to be covered
EXECUTIVE SUMMARY Before get¬
ting into the detail of the main body
of the business plan, readers will
want to read an executive summary.
An executive summary is a short
restatement of the report. It should
capture the interest of its readers and
make them want to read more. If
the executive summary is unconvinc¬
ing, a lender may decide not to read
your entire business plan. This makes
a strong executive summary critical
to the success of your business.
The executive summary should
be no longer than one or two pages,
and it should be written in a clear,
simple style. Your executive sum¬
mary should do all of the following:
• Describe your business concept
and communicate what is unique
about your idea
• Include your projections for
sales, costs, and profits
• Identify your needs (inventory,
land, building, equipment, etc.)
• State the amount you are inter¬
ested in borrowing
EXECUTIVE SUMMARY
The Mt. Washington Children’s Center (MWCC) will
be established as a partnership in Baltimore, Maryland. It will
be owned and operated by Nora Ellis and Samantha Richards,
highly respected child-care professionals with more than 35 years
of experience in the field. Three experienced teachers and three
teacher aides will supervise approximately 50 boys and girls between
the ages of 2 and 5. In addition, a receptionist/bookkeeper and a
cleaning/maintenance person will be hired.
MWCC is being established in response to the shortage of
high-quality child care in northwest Baltimore. Only two small
day care centers now serve a population of 45,000 upper-middle-
class professionals. In 75 percent of these households, both parents
work outside the home. The accessible location of the Center will
make it an extremely attractive day care option for parents in the
area. When completed, its facilities, which will include four large
outdoor play structures and eight personal computers, will repre¬
sent state-of-the-art day care. Its staff will comprise the finest day¬
care professionals in Baltimore, led by a management team that is
recognized throughout the region.
Market research indicates that the MWCC could expect to
fill 90 to 100 percent of its student positions immediately upon
opening and that the center would be profitable as early as the
third year of operation. Expansion could begin in the third year.
To finance the startup of the company, its owners are seeking
$55,000 in financing, which they would expect to repay within
five years.
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Why do you think lenders and investors read the executive summary first?
Although the executive summary appears before the body of the
business plan, it should be written after the business plan has been
completed. To write the executive summary, go through the business
plan and find the most important and persuasive points you have made.
Then draft an oudine of an executive summary based on these points.
Once you have created a draft of your executive summary, ask
people who do and do not understand your business to read the sum¬
mary. If readers do not come away with a clear sense of what you
plan to do and why you will succeed in doing it, your executive sum¬
mary needs more work. Nora and Samantha’s executive summary is
shown on the previous page.
Appendix
The appendix to the business plan includes supporting documents
that provide additional information and back up statements made in
the body of the report. To help you determine what supporting docu¬
ments to include, you should ask yourself what you would want to
know about a business before you would lend it money. Documents
that might be included in the appendix include the following:
• Tax returns of the business owner for the past three years
• Personal financial statement of the owner
• Copy of proposed lease or purchase agreement for the building
space
• Copy of licenses and other legal documents
• Copy of resume of the owner
• Letters of recommendation
• Copies of letters of intent from suppliers
• Copies of any large sales contracts you have already negotiated
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Put It All Together
Your business plan is your best opportunity to let other people know
what you want to do with your company. It gives you the chance to
convince them that your idea is sound and that you have the talent
and resources to make your idea a successful business venture. To
make the best of this opportunity, you will want to create an attrac¬
tive document that is neat, well organized, and inviting to read.
Handwritten business plans are not acceptable. All business plans
must be word processed and printed on standard-sized white paper.
In addition, your business plan should follow a standard format con¬
taining the introductory elements, the main body, and the appendix.
Checkpoint
Why should you include supporting documents in your business plan?
5.2 Assessment
THINK ABOUT IT
1. Why is it possible to write an executive summary only after you
have written the main body of your business plan? Why might
the executive summary be more important than the body of the
plan?
2. Why do you think it is important to include management and
staffing issues in the operations section of your business plan?
3. A group of investors is planning to open a new amusement
park. What supporting documents will need to be included in
their business plan?
MAKE ACADEMIC CONNECTIONS
4. MATH You plan to start a corporation. You have $67,500 in sav¬
ings, but need $165,000 total to begin your business. How much
money will you need from investors? What will be your percent¬
age of ownership? If you have four outside investors, how much
will each investor need to invest? What percentage will each
investor own?
5. COMMUNICATION Write short-, medium-, and long-term goals
for an entrepreneur starting a new ice cream parlor.
TEAMWORK
Working with team members, choose a business in your local commu¬
nity. Make a list of the items you think this business would include in
each component of its business plan—introductory elements, main
body, and appendix.
3.2 What Goes into a Business Plan? 77
#
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Where do I start?
Michelle always loved working with children. All of the
parents in her neighborhood wanted her to babysit for
them. She was always thinking up fun games to play
and creative activities for the children to do. She
wondered if she could do even more with these
activities to earn money for college. She talked
with her mother and some of the parents and
came up with an idea. She would run an ice
cream parlor where she could host parties and let
the children make their own ice cream sundaes,
play games, and watch movies. Once Michelle
came up with a business idea, she knew it was
time to make a detailed plan. However, she did
not really know how to get started on a plan.
Work as a Team What kind of information do
you think Michelle needs to gather? Where might
Michelle find this information and whom might she
talk with to learn more about starting a business?
Your interests and hobbies
can lead to a new business.
Research the Business Plan
Your business plan needs to convince readers that you have come up
with a practical business idea. To do this, you must include informa¬
tion and data from objective sources to show that your idea is
founded on solid evidence. Researching and writing a business plan
takes time. In fact, most entrepreneurs spend 50 to 100 hours devel¬
oping their business plans. The process requires patience, research,
thought, and a great deal of writing and editing.
Pulling together the information you need for your business plan
involves researching your business, from leasing space or equipment to
what you will charge for your product or service to dealing with com¬
petitors. Researching will teach you a great deal about running a busi¬
ness and may provide you with specific ideas for starting a company.
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Chapter 3 Develop a Business Plan
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Community, Government, and Professional Resources
When writing a business plan, you will likely need to seek out advice
from others. People from many organizations can help you with your
business plan. Available resources include the SBA, the SBDC,
SCORE, your local chamber of commerce, trade associations, and
professional business consultants.
THE SBA The U.S. Small Business Administration (SBA) is an
independent agency of the federal government that was created to
help Americans start, build, and grow businesses. The SBA also pro¬
vides aid, counsel, and assistance to protect the interests of small busi¬
ness concerns, to preserve free competitive enterprise, and to maintain
and strengthen the overall economy of our nation.
did you KNOW?
Since 1964, 7.5 million
entrepreneurs have been
counseled by 5 COR e or
attended SCORE
workshops.
THE SBDC The Office of Small Business Development Centers
(SBDC) provides management assistance to current and prospective
small business owners. Counselors from the SBDC provide free one-
on-one assistance in developing a business plan. They also provide inex¬
pensive workshops on topics that may help you develop your plan.
SBDCs have many resources in one place to assist individuals and small
businesses. SBDCs were formed as a cooperative effort of the private
sector, the educational community, and federal, state, and local govern¬
ments. They enhance economic development by providing small busi¬
nesses with training and technical assistance. Assistance from an SBDC
is available to anyone who cannot afford the services of a private con¬
sultant and who is interested in beginning a small business for the first
time or improving or expanding an existing small business.
SCORE Another source of valuable assistance is SCORE. The Service
Corps of Retired Executives (SCORE) is made up of more than
10,500 retired executives who volunteer their time to provide entrepre¬
neurs with real-world advice and know-how. They provide free confi¬
dential advice that could be helpful to you as you prepare your business
plan. You can set up a meeting with a SCORE volunteer, or you can
work with a SCORE volunteer over the
Internet. SCORE also offers workshops
that are a valuable way to learn more
about doing business and a way to net¬
work with other business professionals
who can help you succeed. The topics
of the workshops focus on important
small business issues, ranging from busi¬
ness planning and marketing to Web-
based retailing. The SCORE counselors
represent every business area. Some
have worked as executives at Fortune
500 companies, while others were small
business owners themselves. SCORE
can provide assistance for you for just a
few sessions or a number of years,
based on your needs.
Why is it a good idea to seek the help and advice of others when writing a
business plan?
9
3.3 How to Create an Effective Business Plan 79
Digital Vision
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CHAMBER OF COMMERCE In many
communities, the local Chamber of
Commerce offers assistance and infor¬
mation to entrepreneurs. It can provide
information on trends affecting local
businesses, local resources, and zoning
and licensing information.
TRADE ASSOCIATIONS Organizations
made up of professionals in a specific
industry are called trade associations.
They exist to provide information, edu¬
cation, and networking opportunities
to individuals in their industry. These
associations can be valuable sources of
information to entrepreneurs.
PROFESSIONAL CONSULTANTS Some
entrepreneurs hire experts to help them.
Professional business consultants can be
found in directories available in your
library or on the Internet.
FINANCIAL INSTITUTIONS Many entrepreneurs are not fa mi liar with
the financial aspect of starting and running a business. When writing
the financial section of your business plan, it may be beneficial to talk
with a banker and an accountant. They can help answer your ques¬
tions about loans and financial statements.
Be your own boss
You want to start a plant nursery. You have
taken horticulture classes in school and want to
find a way to turn your acquired knowledge and
love of plants into a profitable business. You
start working on your business plan and realize
that you need help. You decide to contact the
Service Corps of Retired Executives (SCORE) for
assistance.
Prepare for your first meeting with the
SCORE volunteer. Write a brief summary explain¬
ing your business idea, why you want to start the
business, and what you hope to accomplish by
starting the business. Compile a list of questions
you want to ask the SCORE volunteer.
Print Resources
Information for your business plan can come from many print sources.
Your public library will have many books on entrepreneurship that may
provide you with valuable information on running your own business.
In addition, books on marketing, financing, hiring and managing a
staff, purchasing a business, and operating a franchise can be helpful.
The library will also have books devoted specifically to writing a busi¬
ness plan that include sample business plans.
Magazines may also prove helpful—especially magazines devoted
to small business ownership and to the industry in which you will be
competing. Ask your librarian to help you find magazines that contain
information that may be relevant to your business plan.
Government documents, including publications issued by the Small
Business Administration (SBA) and other federal agencies, may provide
you with useful information. The SBA district office nearest you will
have many publications that can help you complete your business plan.
Online Resources
Much of the information you find in print resources is also available
on the Internet. The SBA, SBDC, and SCORE web sites contain
much of the same information that is provided in print. Many maga¬
zine articles that deal with entrepreneurial topics can be found o nl ine.
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Chapter 3
Develop a Business Plan
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In addition, there are many sites specifically
for entrepreneurs and small businesses that
may give you detailed information. Internet
search engines can help you locate resources.
Nora and Samantha, who are starting
their own day care business, began research
for their business plan by reading books
from the library. They also read information
on day care facilities that they received from
the Small Business Administration. They
found many samples of business plans on the
Internet that they were able to adapt to
meet their needs. Once they had an outline
prepared for their business plan, they met
with a counselor from their local Small Busi¬
ness Development Center to get feedback
and advice for improving their business plan.
The number of hours spent on research
helped Nora and Samantha prepare an effective
business plan.
NH i^kmark
Plenty of teenagers have started their own
businesses. The most successful teen entre¬
preneurs have prepared business plans just
like adults. Access school.cengage.com/
entrepreneur/ideas and click on the link for
Chapter 3. Read the article, "Teen Entrepre¬
neurs Vie for Seed Money." What did the teen
entrepreneurs include in their business plans?
What do you think would be the most difficult
part of a business plan to develop? Why?
school.cengage.com/entrepreneur/ideas ©
Checkpoint
What are some of the resources that are available to help you
develop your business plan?
Mistakes in Business Planning
Many entrepreneurs will not take the necessary time to carefully plan
their business and prepare their business plan. This can contribute to
difficulties in getting their business started as well as business failure.
To create an effective business plan, avoid making the following
common mistakes:
1. Unrealistic Financial Projections Many investors will go straight
to the financial section of the business plan, so it is very impor¬
tant for the projections in this section to be realistic. Projections
should be based on solid evidence for the potential growth of the
company.
2. An Undefined Target Market You must clearly define your mar¬
ket and give a clear picture of your potential customers. Clearly
explain why these customers will buy your product. Be realistic
about your market and do not assume that everyone will want to
buy your product or service.
3. Poor Research Many potential business owners are anxious to
get their business operating and do not spend the time necessary
to do good research. Use up-to-date research information, and
verily the facts and figures in your business plan.
3.3 How to Create an Effective Business Plan 81
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4. Ignored Competition Do not overlook the competition and do
not focus only on what the competition has done wrong. Investors
want to see who your competition is and how you plan to compete
in the market. Outline how you will differentiate yourself from the
competition.
5. Inconsistencies in the Business Plan It is important to review
your final business plan and be sure that your plan is well written
and formatted in an attractive style. Be sure that information pro¬
vided is consistent from section to section. It is a good idea to
have an objective person review your final business plan before
you show it to investors.
Checkpoint
List some common mistakes that are made in business planning.
3.3 Assessment
THINK ABOUT IT
1. When writing a business plan, it is important to consider all of
the resources available to help you through this process. Using
the Activity CD, open the activity "Business Plan Resources."
Print a copy and complete the activity.
2. Some elements of the business plan require outside source infor¬
mation. If your business manufactures cardboard boxes, what
specific sources might you need to consult?
3. Why is it important for financial projections to be as realistic and
as accurate as possible when writing your business plan?
MAKE ACADEMIC CONNECTIONS
4. LANGUAGE ARTS Locate an article about entrepreneurship in
the library or on the Internet. Write two paragraphs summariz¬
ing the main points of the article.
5. MATH If you intend to borrow 20 percent of the $174,500 you
need to start a business, how much of your own funds are you
investing?
Working in a team, review a business plan that you obtained from
the Internet or from a company in your community. Using the Activ¬
ity CD, open the activity "Business Plan Review." Print a copy and
complete the activity by listing the features that you think are effec¬
tive and the features that need improvement. Make suggestions for
improving the business plan.
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Sharpen Your
Entrepreneurial Skills
Using Technology Tools
There are many software programs available for entrepreneurs to use
when preparing a business plan. A recent Internet search showed
over 345,000 matches for “business plan software.” Many entrepre¬
neurs use these programs because they provide an easy-to-use tem¬
plate. By plugging your specific information into the template, you
get a professional-looking finished report. If you decide to use a
software program to create your business plan, be sure it includes all
of the essential elements. It is a good idea to evaluate several differ¬
ent programs before deciding which one to use. Your choice should
best match the information you want to include and your desired
style. And, of course, it should be one that you can use without
difficulty.
TRY IT OUT
Using the Internet and advertisements from magazines and newspa¬
pers, find the names of at least three business plan software programs.
Make a list of the features of each program and its cost. Evaluate the
programs and decide which one you would select if you wanted to
use a software program to prepare your business plan. Justify your
decision.
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Chapter 3 Assessment
SUMMARY
3.1 Why a Business Plan Is Important
1. A business plan is a written document that describes all the steps
necessary for opening and operating a successful business. It
explains the idea behind your business and spells out how your
product or service will be produced and sold. It sets specific
objectives and describes how your business will achieve them. It
describes the backgrounds and experiences of the people who
will be running the business.
2. Writing a business plan is important because it makes you think
about all aspects of your business, helps you secure financing for
your business, helps you communicate your ideas to others, and
can serve as a tool for managing your business.
3.2 What Goes into a Business Plan?
3. The main body of the business plan should include the following
sections: Introduction, Marketing, Financial Management, Opera¬
tions, and Concluding Statement.
4. To complete the business plan, you need to prepare introductory
elements consisting of the cover letter, tide page, table of con¬
tents, statement of purpose, and executive summary. The execu¬
tive summary is the most important element and should not be
written until the main body of the plan is complete. You also need
to compile an appendix, which includes supporting documents
that provide more information to the readers of the plan.
3.3 How to Create an Effective Business Plan
5. To show you have a practical business idea, you must include
information and data from objective sources. People from many
organizations—including the SBA, the SBDC, SCORE, your local
chamber of commerce, trade associations, professional business
consultants, and financial institutions—can help you with your
business plan. Print resources can be obtained at the public library
and through Government agencies. An extensive amount of infor¬
mation is also available on the Internet.
6. Common mistakes made in business planning include unrealistic
financial projections, an undefined target market, poor research,
ignored competition, and inconsistencies in the business plan.
What do you fcnow now?
Read Ideas in Action on page 63 again. Then answer the questions a
second time. How have your responses changed?
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Develop a Business Plan
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. A written document that describes all the steps necessary for open¬
ing and operating a successful business
2. A financial statement based on projected revenues and expenses
3. A letter that introduces and explains an accompanying document
or set of documents
4. A short restatement of a report
5. A brief explanation of why you are asking for a loan and what you
plan to do with the money
6. An independent agency of the federal government created to help
Americans start, build, and grow businesses
7. Organizations made up of professionals in a specific industry
8. Organization made up of more than 10,500 retired executives
who volunteer their time to provide entrepreneurs with real-world
advice and know-how
REVIEW YOUR KNOWLEDGE
business plan
cover letter
executive summary
pro forma financial
statement
Service Corps of
Retired Executives
(SCORE)
Small Business
Administration
(SBA)
Small Business
Development
Centers (SBDC)
statement of
purpose
trade associations
9. A business plan is not intended for
a. your competition c. your bank
b. potential investors d. any of the above
10. Purposes of a business plan include which of the following?
a. it explains your idea for a product or service
b. it sets specific objectives and describes how they will be achieved
c. it describes the backgrounds and experiences of the people who
will run the business
d. all of the above
11. A business plan is important for a new business for all of the fol¬
lowing reasons except
a. it makes you think about all aspects of your business
b. it can help you communicate your ideas to others
c. it guarantees you will get financing for your business
d. it can serve as a tool for managing your business
12. The main body of a business plan includes which of the following
elements?
a. executive summary c. financial management
b. statement of purpose d. supporting documents
13. Which of the following is not a true statement regarding risks?
a. Identifying the possible risks your business faces will alarm lend¬
ers and investors and cause them to withhold funds.
b. Potential investors and lenders want to know what risks your
business faces and how you plan to deal with them.
c. Lenders will appreciate the fact that you know what risks you
face and have a plan for dealing with them.
d. Lenders know that every business faces risks.
Chapter 3
Assessment
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14. The purpose of including supporting documents in a business plan
is to
a. make the plan lengthy
b. provide additional information
c. give the readers more information than they might need
d. explain your business idea
15. Writing a business plan
a. is a quick and easy process
b. is quick but difficult
c. requires patience, research, thought, and time
d. none of the above
16. Which of the following organizations can provide assistance when
writing your business plan?
a. bank
b. Chamber of Commerce
c. Small Business Development Center
d. all of the above
17. Which of the following describes why you are asking for a loan
and what you plan to do with the money?
a. cover letter c. executive summary
b. statement of purpose d. title page
18. Mistakes to avoid when preparing your business plan include all except
a. providing unrealistic financial projections
b. wasting time on research
c. ignoring the competition
d. failing to define the target market
APPLY WHAT YOU LEARNED
19. Obtain a sample business plan. Review the business plan and dis¬
cuss whether or not the five common mistakes in writing a busi¬
ness plan were avoided. Provide reasons to support your decisions.
20. You plan to open a skateboarding park. What kind of research
should you do? What sources will you consult for your research?
MAKE ACADEMIC CONNECTIONS
21. COMMUNICATION You are preparing a business plan for a
self-storage facility (U-Store-It). You are requesting a $75,000
loan to buy the property and storage lockers. Write the cover
letter to the bank loan officer and a statement of purpose.
22. RESEARCH Choose a business with which you are familiar.
Using the Activity CD, open the activity “Trade Association
Research.” Print a copy and complete the activity by using the
Internet or the library to research trade associations that could
provide useful information to the business.
23. COMMUNICATION An entrepreneur’s resume is an important
supporting document for a business plan. It tells the reader about
the entrepreneur’s qualifications for running the business. Research
resume formats and choose one that you think would be suitable for
you. Prepare a resume outlining your experience for running a business.
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You have a great idea for a business you want to start. Because you
are going to school full time and work nights and weekends, you
really do not have the necessary time to spend preparing a business
plan. However, you know you need a business plan to help you
secure a loan to get the business started. While searching the Inter¬
net, you find a business plan for a company that is very similar to
the one you want to start. It would save you time if you copied this
plan, changed the business name, and added your personal informa¬
tion. What would you do? What problems might this cause?
BUILD YOUR
Business Plan
Project
This activity will help you get started on the development of a busi¬
ness plan for your business idea.
Describe how you came up with the idea for your business project.
Explain why there is a market/need for your product or service. Inter¬
view five or more people about your product or service. How many of
them would buy it? Did any of them make suggestions? Prepare a
one-page report that fully describes your product or service and how
it differs from what is currently available.
List your short-, medium-, and long-term goals. What steps do you
need to take to achieve each of these goals? Do you foresee any
obstacles in attaining them? If so, describe them and explain how you
will overcome them?
Contact the SBA, the SBDC, or SCORE and ask for information about
your type of business. Use this information to write a paragraph
about the industry in which you will be competing. What are the eco¬
nomic, technological, or growth trends in this industry? Is the location
of your business a critical factor in its success? Why or why not?
Begin the financial section of your business plan by writing a report
that identifies the risks your business faces. Explain how you will over¬
come each risk. Provide examples from magazine articles about busi¬
nesspeople in your field who have succeeded when faced with similar
problems.
Present all of the information you have compiled to your teacher or
representatives from your local business community. Explain why you
made the choices you did. Be prepared to defend your choices.
Chapter 3
Assessment 87
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Planning a Career in
Landscape Architecture
"11/
TV e got a great deal on out¬
house. Not only was the lawn in
chaos, but there was also a prob¬
lem with storm water run-off. My
stepdad hired a Landscape Archi¬
tect to reroute the storm water to
comply with municipal regulations.
Now our yard looks warm, healthy,
and inviting.”
Who balances the environ¬
mental, regulatory, and aesthetic
outdoor needs of new develop¬
ments? Who figures out how to
make the external part of com¬
mercial properties look more
welcoming?
Landscape Architects help
municipalities, businesses, and resi¬
dential locations meet ecological,
land use, regulatory, and aesthetic
needs of outdoor areas.
EMPLOYMENT OUTLOOK
• Faster than average job growth
is anticipated.
• About one-quarter of Landscape
Architects are self-employed.
• New consu-uction and an
increasing need to meet environ¬
mental regulations when plan¬
ning exteriors will increase
demand for qualified employees.
JOB TITLES
• Landscape Consultant
• Open Space Planner
• Residential Landscape Architect
• Project Designer
• Historical Landscape Architect
NEEDED SKILLS
• A Bachelor’s degree is recom¬
mended; some positions require
a Master’s degree.
• Most states require licensing
based on the Landscape Archi¬
tect Registration Examination.
ntecture &
Construction
• Some states require state licens¬
ing, which focuses on state-
specific environmental laws.
What's it like to work in Land¬
scape Architecture? Givon, a self-
employed Landscape Architecture
Consultant, has just gotten
off the phone with a client. The
300-home community planned by
the client requires a community
park, beautified entrances, attractive
boulevards, and compliance with
city zoning regulations.
To develop a bid for this
project, Givon needs to meet with
the developer’s architects, visit the
site, and meet with city officials
regarding legal requirements. The
final bid will include a phase-by-
phase completion timeline and
sketches reflecting the anticipated
appearance of the neighborhood.
After lunch, Givon meets with
his city’s urban renewal team. The
city is renovating a blighted residen¬
tial area. Givon’s input is needed to
develop an attractive landscaping
plan that will optimize the use of a
small amount of land set aside for
landscaping.
After dinner, Givon prepares
for his morning meeting with a retail
developer. Givon’s recommenda¬
tions for the retail parking lot design
include planting many trees and
shrubs throughout the parking lot.
This greenery not only improves the
aesthetics of the parking lot, but it
also helps lessen “heat buildup” that
is a common problem during hot
summer weather.
What about you? Would you
like to help develop landscaping
plans that have a long-term beauti¬
fying effect on communities and
businesses?
88
Chapter 3
Develop a Business Plan
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iffective speaking skills are essential to success for entrepreneurs.
As an entrepreneur you will be speaking to investors, customers, and
suppliers. The Prepared Speech event lets you demonstrate your com¬
munication skills in securing, arranging, organizing, and presenting
information orally.
Contestants should select a topic related to business, entrepre¬
neurship, or Business Professionals of America and develop an oral
presentation of no less than five and no more than seven minutes.
This event emphasizes a scholarly approach to securing information
and places emphasis on content and research. Facts and working data
may be secured from any source. State and federal copyright laws
must be followed in the preparation of the speech.
Each contestant must do his or her own work in researching and
preparing the speech. The contestant should consider the purpose of
the speech, such as to inform, to educate, to motivate, or to persuade.
Contestants should also keep in mind the three basic elements of an
effective speech and presentation. These three basic elements include
the introduction, the body, and the conclusion. Refer to the Sharpen
Tour Entrepreneurial Skills feature in Chapter 2 for more detailed
information about each of these three elements. During the speech,
the contestant should be enthusiastic and use proper grammar.
The speech will be given in front of a panel of judges and a time¬
keeper. Contestants will be given one minute to set up for their speech.
A flip chart, posters, and/or props may be used during the speech.
PERFORMANCE INDICATORS EVALUATED
• Demonstrate effective communication skills.
• Demonstrate skills in developing a speech using the three basic
elements.
• Utilize non-verbal gestures as needed.
• Apply speaking techniques using appropriate tempo and pitch.
• Secure facts and data from multiple sources, emphasizing research
skills.
Go to the BPA web site for more detailed information.
Think Critically
1. How can good speaking skills benefit an entrepreneur?
2. Why is research important when preparing a speech?
3. Why should you follow copyright laws when preparing a speech?
4. How do the three elements of a speech contribute to its effectiveness?
www.bpa.org
Winning Edge
89
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Identify and Meet
a Market Need
school.cengage.com/entrepreneur/ideas
90
4.1 Identify Your
Market
4.2 Research the
Market
4.3 Know Your
Competition
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IDEAS !M ACTIOM
Brian Hendricks, founder,
Serving Customers' Needs
B rian Hendricks was 17 years old when he started
his first business. At that time, he was a student
with a knack for building and fixing computers. The
idea for his business came from his frustration with
his slow, boring computer. So, he built his own com¬
puter and then began building computers for others. StartUpPc
StartUpPC's focus is providing performance systems and quality
service. Brian developed a computer program called E-Builder. With it,
customers complete an electronic survey that is used to determine the
best computer solution for their needs. E-Builder recommends compo¬
nents, software, and accessories with an explanation for each selection.
It also provides the price and estimated building and shipping time.
Brian observed the residents of his community spending 30 to
60 minutes taking their computers into local computer stores for repairs.
They would then have to wait for days for their return along with a big
repair bill. Brian decided to give customers another option. StartUpPC
services computers in the homes and offices of the customers. No charge
is made until the computer is repaired to the customer's satisfaction. The
technicians are willing to walk customers through the repairs that they
are making so the customers might be able to fix the problems them¬
selves should they occur again. Realizing how important computers are
in the everyday lives of people, StartUpPC creates reliable and fast com¬
puters and also provides reliable and fast computer service.
Brian also saw a need for quality web sites and founded VB Solu¬
tions, Inc. to address this need. VB Solutions develops and customizes
web sites and message boards. It sets up advertising contracts and works
with web site owners to improve their sites. The business has designed
corporate ID kits, logos, and web sites for customers all over the world.
Brian learned at a young age that "working for yourself is one of
the best jobs available." He has identified a set of qualities that young
entrepreneurs should possess, based on "The Five P's of Entrepreneur-
ship." These include planning, persistence, patience, people, and profit.
Brian does not believe in setting huge goals that require large invest¬
ments of money. His advice is to "start small and to just not give up."
What do you fcnow?
What customer need did Brian identify when he started StartUpPC?
Why would StartUpPC be willing to show customers how to make
their own repairs?
What do you think about Brian's idea of starting small and not giving
up?
Freed Photography
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Who is your customer?
Roseanne and John had their own restaurant in Los
Angeles, California, when their daughter was born.
Deciding that they wanted a different lifestyle for their
family, they began to think about relocating and start¬
ing a new restaurant in a small-town setting. They
talked about the kind of restaurant they wanted to
open and what type of customer they thought would
eat at their restaurant. They decided that they would
target middle- to upper-middle-class families who
had a love for good food, were willing to drive up
to 30 miles to get it, and were willing to pay $10 to
$15 per meal.
Work as a Team Roseanne and John put a great
amount of thought into the type of customer they
wanted to attract before they began to look for a
location. Do you think this was a good idea or a
waste of time?
Think about the
type of customer
you want to attract.
Target Market
Entrepreneurs with exciting new ideas are sometimes so focused on
their products or services that they forget about the customer. Coming
up with a good idea for a business is not enough to guarantee success.
Customers are the people or organizations who buy the products and
services companies offer. Before establishing your new enterprise, you
will have to determine who your primary customers are and whether
these customers will be willing to buy your product or service. Market
research is the key to finding out this information. The customer is
your most important asset.
As an entrepreneur, you will need to estimate demand for your
products or services by identifying your target customers. The target
market includes the individuals or companies that are interested in
a particular product or service and are willing and able to pay for it.
Identifying your target market helps you reach the people who desire
92
Chapter 4 Identify and Meet a Market Need
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your products and services. Target customers are the customers you
would most like to attract. A car dealer selling moderately priced
minivans would target middle-class families with children. A car dealer
that offers expensive sports cars might target single people with higher
incomes. If you concentrate your selling efforts on a certain type of indi¬
vidual, you will be likely to give those individuals exacdy what they want.
Identify Your Target Market
To identify the target market for your product or service, you will
need to answer the following questions:
1. Who are my customers: individuals or companies?
2. If my customers are individuals, how old are they? How much
money do they earn? Where do they live? How do they spend their
time and money?
3. If my customers are companies, what industries are they in? Where
are those industries located?
4. What needs or wants will my product or service satisfy?
5. How many potential customers live in the area in which I want to
operate?
6. Where do these potential customers currently buy the products or
services I want to sell them?
7. What price are they willing to pay for my products or services?
8. What can I do for my customers that other companies are not
already doing for them?
As an entrepreneur, you should put yourself in your customers’
shoes before you start your business. Afterwards, you should think about
your customers’ needs and viewpoints everyday. By continually evaluat¬
ing your market, you will be ready to respond to changes in commun¬
ities, consumer tastes and buying habits, and competitors’ offerings.
Develop Your
Reading Skills
As you read this chapter,
develop questions for each
section that you can use as a
study guide for the chapter.
greene_0538446145_ch04, 1/15/8, 17:17, page: 94
Checkpoint
What questions should you ask when identifying your target market?
Market Segments
Groups of customers within a large market who share common char¬
acteristics are known as market segments. Market research can be
used by a business to identify market segments. Segmenting, or divid¬
ing your target market into several small groups, can help you develop
a product or service that will meet specific customer needs and wants.
The process of market segmentation is important because most
products and services appeal only to a small portion of the population.
The leisure services market is a large market that includes many seg¬
ments, such as outdoor adventurers, people who vacation frequendy,
couples who eat at restaurants, and more. Targeting the entire leisure
market would not make sense. You would never be able to meet the
needs of the entire market. Even the restaurant segment of the leisure
WHAT WENT WRONG
>
*
Price War
U-Corp was the first company in the computer
industry to offer removable hard disk drives for
personal computers. For years, U-Corp had a
unique position in the industry and had little
direct competition. Eventually, the company
was making $300 million in annual revenue.
U-Corp's first competition came from
A-Corp, which offered a product similar in
price and performance. A-Corp spent heavily
on advertising and ran frequent reduced-price
promotions. As a result, A-Corp took a large
amount of business from U-Corp. U-Corp
decided to try to take back the market it had
lost to A-Corp and launched a multimillion-
dollar marketing campaign aimed at its target
market.
The two companies went head to head,
selling disk drives at lower and lower prices.
However, consumers do not generally need to
buy multiple hard drives because of their large
storage capacity. Only one company could win,
and it was A-Corp. In less than two years,
U-Corp suffered losses, and A-Corp bought
it out.
Think Critically
1. What was U-Corp's major disadvantage in
competing with A-Corp?
2. What did each company fail to realize
about its customers?
3. How might the price war for removable
hard drives have been avoided?
td
u
©
U-Corp should have considered other strategies
before engaging in a price war.
94 Chapter 4 Identify and Meet a Market Need
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services market has subsegments. Some people eat fast food on a
regular basis, while others like a sit-down meal at a nice restaurant.
There are people who like Italian food and others who prefer seafood
or Chinese food.
Businesses can make decisions based on the information gathered
on market segments. However, if the data are not analyzed correcdy,
the product may not meet the needs of the customers or the business
might ignore a segment of the market that would be very interested
in the product.
Customer Profile
A market segment is made up of people with com¬
mon characteristics. The more you learn about them,
the better strategy you can develop for reaching
them. A very useful part of analyzing your data is the
creation of a customer profile. A customer profile is
a description of the characteristics of the person or
company that is likely to purchase a product or ser¬
vice. A customer profile can help you understand
what you need to do to meet customer demand.
Customers may be profiled based on many types of
data, including demographics, psychographics, use-
based data, and geographic data.
SAMPLE CUSTOMER PROFILE
FOR A SPORTING GOODS STORE
• Individual 23 to 52 years of age
• Participates in sports
• Wants good-quality sports equipment
• Looks for good prices
• Lives in city of Blanchester
• Average household income:
$42,000 per year
DEMOGRAPHICS Data that describe a group of people in terms of
their age, marital status, family size, ethnicity, gender, profession, edu¬
cation, and income are called demographics. Women business own¬
ers between the ages of 25-40 who earn at least $50,000 per year is
an example of a market segment based on demographic data.
PSYCHOGRAPHICS Data that describe a group of people in terms of
their tastes, opinions, personality traits, and lifestyle habits are called
psychographics. People who prefer to live in a downtown setting and
whose musical preference is jazz is an example of a market segment
based on psychographic data.
USE-BASED DATA Data that helps you determine how often poten¬
tial customers use a particular service is called use-based data. If you
were starting a travel agency, you would want to know how often
your potential customers travel.
GEOGRAPHIC DATA Data that helps you determine where your
potential customers live and how far they will travel to do business
with you is called geographic data. If you were thinking of opening
a coffee shop, it would be important for you to know that people are
not willing to drive more than one mile for coffee.
Once you have analyzed your target market, you will be able
to develop a marketing strategy. A marketing strategy identifies
those customers that you can better serve than your competitors.
It can help you determine the size of your market and how many
4.1 Identify Your Market 95
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people would be willing and able to purchase your product or
service. You can design your products and services, set prices,
and direct promotional efforts toward those customers.
1
Checkpoint
Name four types of customer data that may be analyzed in develop¬
ing a customer profile.
4.i Assessment
THINK ABOUT IT
1. Why is it so important to identify your target market?
2. How are market segments useful to an entrepreneur?
3. You are thinking about offering golf lessons in your town. What
types of data would you collect to create a customer profile?
MAKE ACADEMIC CONNECTIONS
4. MATH Marcel wants to open a car wash after graduating from
high school. For several days, he observed the cars being washed
at a local car wash and recorded the information below.
Day 1 Day 2 Day 3 Day 4 Day 5 Day 6
50 cars 45 cars 48 cars 26 cars 47 cars 55 cars
What is the average number of cars washed each day? If the
car wash were open only five days a week, how many cars might
be washed per year?
5. GEOGRAPHY Think of a business you would like to open.
Obtain a map of the area where you would like to locate the
business. Mark the areas on the map that represent the farthest
distance you believe customers would be willing to travel to do
business with you. Draw a circle that encompasses the points
where your customers live.
6. COMMUNICATION Interview a business owner. Ask the owner
the eight questions listed in the chapter for identifying a busi¬
ness's target market. Write a report based on what you find out
about the owner's target market.
Working with team members, look through magazines and news¬
papers for an advertisement of a new product. Based on the type
of publication and the material contained in the advertisement,
answer the eight questions found on page 93 about identifying a
target market. Can you determine who the target market is for the
product?
96 Chapter 4 Identify and Meet a Market Need
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market research
primary data
survey
focus group
secondary data
V
Focus on Small Business
Get to know your market
Roseanne and John decided that they would like to locate their business
in South Carolina close to the areas where they grew up. They knew
that it would be important for them to research the market in that
area to be sure there was a market for the type of restaurant
they wanted to open. They decided to interview
groups of potential customers to gather their
thoughts and opinions. They also developed
a questionnaire and hired some local high
school students to call residents in the
community to collect more data.
Work as a Team Do you think
that Roseanne and John are using
good methods to gather data?
Can you suggest any other ways
they could find out what their
potential customers thought
about the business idea?
Interviews are just one way to gather market
research.
Role of Market Research
For your business to succeed, you need to find out who your customers
are, what they want or need, and how much they are willing to pay for
your product or service. To collect this information about your cus¬
tomers, you will perform market research. Market research is a system
for collecting, recording, and analyzing information about customers,
competitors, goods, and services. Based on the findings of market
research, a business will be able to determine which marketing strat¬
egies will be most effective and most profitable. Market research has its
limits because it can be very expensive and time-consuming, but it is
definitely worth doing when major decisions are being made. You will
draw on primary data and secondary data as you gather your informa¬
tion. Both types of research will help you identify ways in which you
can meet customer needs.
4.2
Research the Market
97
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Primary Data
Most market researchers collect primary data. Information collected
for the very first time to fit a specific purpose is primary data. A
researcher collects primary data to help identify and understand the
target market. There are a few different ways to collect primary data.
SURVEY The most common type of primary market research is a
questionnaire, or survey. A survey is a list of questions to ask your
customers to find out demographic and psychographic information. A
survey can be conducted by mail, over the phone, on the Internet, or
in person.
OBSERVATION Market research can also involve observation. If you
are considering opening a juice bar in a shopping mall, you might
want to see how many customers you could attract. You could go to
the mall and count the number of people purchasing drinks at various
food oudets. An entrepreneur interested in starting a motorcycle repair
shop might count the number of motorcycles at a busy intersection.
Famous
Thomas A. Edison
Could you do your homework at night
if there was no light? Thanks to Thomas
Edison, you can do your homework late
at night! Thomas Edison is considered
to be the greatest inventor in American
history.
Edison showed entrepreneurial
characteristics at an early age. At the
age of 12, he talked his parents into
letting him go to work selling news¬
papers, snacks, and candy on the local
railroad. Then he started an entirely
separate business selling fruits and
vegetables.
When Edison was 14, the pre-
Civil War debates between Lincoln and
Douglas were taking place. He used his
access to the associated news releases
that were being teletyped into the rail¬
road station each day and published
them in his own newspaper. Focusing
on newsworthy "scoops," he quickly
had over 300 commuters subscribing to
his paper, The Weekly Herald.
Edison turned on the lights
for all of us with his invention of
the electric light in 1879. As a
young inventor with a curiosity
about everything, he learned to
invent only those things that peo¬
ple wanted. As one of the original
founders of the General Electric
Company, he tried to develop
products that would work under
ordinary conditions, would not
easily malfunction, and could be
easily repaired. Known as "The
Wizard of Menlo Park," which
was the home of Edison's research
laboratory, Thomas Edison truly
changed the world we live in!
Think Critically
Do you think it was important for
Thomas Edison to try to invent
items that people wanted? Do you
think all inventors can become suc¬
cessful entrepreneurs?
How do entrepreneurs
change the way we live?
98 Chapter 4 Identify and Meet a Market Need
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FOCUS GROUPS Another way in which you could find out about
the market is by conducting interviews with small numbers of people.
A focus group is an in-depth interview with a group of target cus¬
tomers who provide valuable ideas on products or services. You can ask
the same kinds of questions in a focus group that you would ask in a sur¬
vey, but the group setting allows for more discussion and interaction
regarding each question. Focus groups usually are led by a moderator,
who asks questions about buying habits, likes and dislikes, and interest in
particular products and services. The focus group session is recorded so
that the comments can be reviewed carefully after the session is over.
DISADVANTAGES OF PRIMARY DATA While primary data can provide
the most up-to-date and useful information, collecting it can be time-
consuming and more expensive to gather than secondary data. As an
entrepreneur, you will need to determine how much primary and sec¬
ondary market research data you need to collect.
did you KNOW?
Many retail stores
collect primary data
though the use of scan-
rs ' salesperson
uT s ‘^ e / un * eBa, p r °d~
item [ UPC) ° n ^
item purchased. The
st oreowner can then
determine the best- and
worst-selling items and
adjust inventory
accordingly.
Secondary Data
Entrepreneurs also research their target markets by using secondary
data. Secondary data are found in already-published sources. Data
on population, family size, household income, economic trends,
industry forecasts, and other information can be found in secondary
data resources. Places to find secondary data include the following:
1. Publications issued by government and community organizations,
such as the U.S. Census Bureau, the Small Business Administration,
and the Chamber of Commerce
2. Books about specific industries
3. Information on web sites for government and businesses
4. Books about other entrepreneurs who set up similar businesses
5. Trade magazines and journals
6. Newspaper articles and statistics
Kisha Nichols wanted to expand her family-owned chain of retail
shoe stores. She decided to perform some secondary data research
and visited the local Chamber of Commerce web site. The site pro¬
vided her with demographics on population for her city and county
and industry forecasts for communities in her area. This information
allowed Kisha to identify the largest markets as well as the markets
expected to grow the most over the next 10 years. She also found
information in a book on the average income of retail shoe store
owners in her state. Newspaper articles gave Kisha psychographic data
on people’s lifestyles in her area. Most worked in professional office
settings, which meant they had a need for comfortable dress shoes.
Studying secondary data gave Kisha a good idea of which community
might provide the best prospects for a new shoe store.
Checkpoint
What types of data do entrepreneurs collect through market research?
#
4.2 Research the Market 99
greene_0538446145_ch04, 12/21/7, 17:23, page: 100
Six Steps of Market
Research
Collecting primary data can be time-consuming
and expensive, but it is extremely valuable. It
will tell you exactly what you want to know and
uncover information you may not find through
secondary sources. Conducting primary market
research involves six steps as shown at the left.
1. Define the Question
In the first step in the market research process,
you need to define exactly what it is that you
need to know. Entrepreneurs have many con¬
cerns and questions about the businesses they
are planning. By determining what they need to
know, they are defining the question that will be
the focus of their research.
Maggie Blandin is thinking about starting a dog-walking service.
Before she invests in her business, Maggie needs to determine who
would be most likely to use her service (her target customers).
2. Determine the Data Needed
Once you have defined the market research question, you are ready
to determine what data you need to collect to provide the answer to
your question. Entrepreneurs need to be sure that the data they col¬
lect will be helpful.
It would not be helpful for Maggie to know how many fa mi lies
live in the area where she wants to have her dog-walking service. She
needs to know how many people living in the area are dog owners
who lack the time to walk their dogs.
3. Collect the Data
Before you begin collecting data, you need to decide how you will go
about gathering the data. Should you use a survey? Should you use an
observation method? Is a focus group appropriate? The method you
use will depend on what type of information you want to gather. For
example, you can find out people’s opinions in a survey or focus
group, but not by observation. You should perform some secondary
market research first to familiarize yourself with your market. Demo¬
graphic and psychographic data, as well as information on economic
trends and industry forecasts, will help you determine what kind of
primary data research to perform. You can then choose the best
research method for the information you want to gather.
If you choose a survey, think carefully about how long it should
be, what questions it should include, how it should be administered,
and how many people you should survey. If you use observation to
do your research, you need to determine where and when to get the
best information. If a focus group is needed, you should think about
what kinds of individuals to include and what questions to ask them.
100 Chapter 4 Identify and Meet a Market Need
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Maggie decides that a survey is the best way for her to find
answers about customer preferences for a dog-walking service.
Through her secondary data research, Maggie learned that 60 percent
of the households in her area owned one or more dogs and that aver¬
age annual household income was $75,000. Most households had
one or more adults working in a professional field. She also found
that dog ownership was on the rise in her area. Based on this informa¬
tion, Maggie put together the survey shown on the next page. The
survey asks specific questions about the lifestyles, opinions, and
choices of dog owners.
DESIGN A SURVEY Making a good questionnaire is very important.
Questionnaires should be kept to a page in length when read over
the phone or mailed to respondents. Longer questionnaires can be
used if an interview is face to face. Questions should be clear and
easy to answer, and only the most important questions should be
asked. If the response to a question serves no specific purpose,
the question should not be used.
4. Analyze the Data
Once you have collected all your primary and secondary data, you will
need to analyze and interpret the information thoroughly. The analysis
should be in a written format so you can refer to it later.
Through the secondary data she obtained, Maggie found that
2,500 dogs live in her area. From her primary data research, she found
that 30 percent of dog owners in her area would pay $20 to have
their dogs walked for 30 minutes. Many would pay to have them
walked two or three times a week. Maggie determines that she
could easily have 750 dogs to walk each week.
5. Take Action
Once you have analyzed and interpreted
your data, you will need to determine how
to use the data to make a decision. This is
when you will develop a plan of action based
on the information you found in your mar¬
ket research.
Maggie Blandin’s market research has
helped her conclude that her idea for a dog¬
walking service is profitable. From her mar¬
ket research, she has created a target cus¬
tomer profile of people aged 31 to 50, who
travel often, work long hours, and earn
$50,000 to $100,000 a year. She also knows
the amount of money her target customers
are willing to pay for her service and how
much income she can expect to make.
fiM>kmark
Groups of customers within a large market who
share common characteristics are known as
market segments. Access school.cengage.com/
entrepreneur/ideas and click on the link for
Chapter 4. The You Are Where You Live
feature describes every U.S. neighborhood
in terms of a wide variety of lifestyle types.
Choose the PRIZM NE system and enter your
own ZIP code. What results did you find? In
which lifestyle type (if any) do you think
you and your family fit? Now choose the
Connexions system and enter your ZIP code.
Do the results differ from those found under
the PRIZM NE system? Explain. Which system
do you think more accurately describes your
neighborhood?
school.cengage.com/entrepreneur/ideas d)
4.2 Research the Market 101
greene_0538446145_ch04, 12/21/7, 17:23, page: 102
Market Research Survey
Thank you for participating in this market research survey. We appreciate your
assistance in helping us identify the needs of pet owners in our community.
PLEASE CHECK THE BOX THAT BEST DESCRIBES YOUR SITUATION.
Age: under 18 □ 19-
-30 □ 31-40 □
41-50 □ 51-65 □ over 65 □
Gender: male □ female □
Number of pets: 0 □
i □ 2 □ 3a
4 OR MORE □
Kinds of pets: dog □
CAT □ FISH □
BIRD □ OTHER □ (PLEASE SPECIFY)
IF YOU OWN A DOG, PLEASE ANSWER ALL OF THE FOLLOWING QUESTIONS.
How often do you walk your dog?
EVERY DAY □ A FEW TIMES A WEEK □ ONLY ON THE WEEKENDS □ NEVER □
Would you be willing to pay someone you trusted to take your dog for walks?
YES □ POSSIBLY □ NO □
If you would be willing to pay someone to walk your dog, how many times a week would you
utilize this service?
EVERY DAY □ 2-3 TIMES A WEEK □ ONLY ON THE WEEKENDS □
How much would you be willing to pay to have your dog(s) walked for 30 minutes?
$10 □ $15 □ $20 □ $25 □ I WOULD NOT PAY TO HAVE MY DOG WALKED □
How often do you travel out of town?
ONCE A YEAR □ 2-3 TIMES A YEAR □ SEVERAL TIMES A YEAR □ NEVER □
Who takes care of your dog when you are out of town?
KENNEL □ FRIEND □ NEIGHBOR □ OTHER □
Would you be interested in having someone you trust take care of your pets while you are away?
YES □ POSSIBLY □ NO □
102 Chapter 4 Identify and Meet a Market Need
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In her first effort to get customers, Maggie plans to create a
flyer aimed at her target market, which she will distribute in neigh¬
borhoods and veterinarian offices. She also plans to distribute the
flyer downtown and in other business areas where many of her target
customers work.
6. Evaluate the Results
Evaluation is the last step in the market research process. It is not
enough just to develop a plan of action. Entrepreneurs must regularly
evaluate the actions they take as a result of the plan.
Maggie will need to evaluate the effectiveness of her flyer. If she
is getting a good response from her target market, she can assume
that her plan of action is effective. However, if she is not getting a
good response, then she will need to revise her plan of action.
Checkpoint
What are the six steps of market research?
4.2 Assessment
THINK ABOUT IT
1. Why do entrepreneurs need to conduct market research?
2. What are the limitations of market research?
3. What is the difference between primary and secondary data?
4. Why do you think short questionnaires are more effective than
long ones?
5. Why is it important to define the question you want your mar¬
ket research to answer?
MAKE ACADEMIC CONNECTIONS
6. MANAGEMENT Your family-owned business processes and sells
orange juice to food distributors. In order to grow, the business
needs to expand its product line. Apply the six market research
steps to help determine an additional product for your business.
7. COMMUNICATION It is important to evaluate the effectiveness
of a survey. Using the Activity CD, open the activity "Market
Research Evaluation." Print a copy and complete the activity.
Working with team members, come up with a new product that you
think will be very useful for students in your school. Develop a ques¬
tionnaire for potential consumers of this product to gauge their
interest. Have students from your school complete the questionnaire.
Tabulate the results and determine if the product is a good idea.
4.2 Research the Market 103
#
greene_0538446145_ch04, 1/17/8, 14:39, page: 104
Explain the importance
of understanding your
competition.
Determine types of
competition.
Prepare a competitive
analysis.
Describe strategies for
maintaining customer loyalty.
direct competition
indirect competition
competitive analysis
V
Focus on Small Business
Who is your Competition?
Roseanne and John needed to find out who their competition would be.
They drove 30 minutes in ail directions from the location they chose for
their restaurant and made a list of all
the restaurants they saw on their
trips. They also obtained menus of
the restaurants to see what type
of food they offered. They even ate
at several of the restaurants and
observed the restaurants' strengths
and weaknesses. Roseanne and John
determined that their restaurant
would offer a different type of food
than any of their competition and
that the customers in their target
market would be willing to try a
new restaurant.
Work as a Team How can Roseanne and
John differentiate their restaurant from
competing restaurants? How can /t is beneficial to check out the competition
they keep customers coming back? in person.
Impact of Competition
The U.S. economic system is based on private property, freedom of
choice, profit, and competition. Because consumers are free to buy
whatever they want from whomever they want, companies compete
for their business. Most new businesses face competitors —companies
offering similar or identical products and services to the same group
of target customers. As the owner of a new business, you will have
to persuade customers to buy from you instead of your competitors.
You must always watch the competition and be sure that you are
offering products that are of equal or better quality at the same or
lower prices.
104 Chapter 4 Identify and Meet a Market Need
Getty Images/PhotoDisc
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When personal computers first came on the market, Apple com¬
puters were the biggest sellers. Then IBM developed a personal com¬
puter, and soon there were many other manufacturers of personal
computers. Today, customers have many choices for personal com¬
puters. All of the computer manufacturers work hard to convince
customers to buy their product.
Understand the Competition
Knowing about your competition will also help you define your target
market. Businesses typically enter into areas where there is competi¬
tion. To survive, they have to identify some special customer need or
want that is not being met. Customers may be happy with the prod¬
ucts or services being offered, but they may be unhappy with the pri¬
ces being charged. Customers might be dissatisfied with the quality of
a product or service and would be willing to pay more for better qual¬
ity. In either case, a customer need is going unmet by a competitor,
indicating a possible opportunity for an entrepreneur.
Checkpoint
Why is it important for you to understand the competition your
business faces?
Types of Competition
Competitors may be categorized as either direct or indirect competi¬
tion. You will need to find ways to identify and differentiate yourself
from both types of competition.
Direct Competition
Direct competition comes from a business that makes most of its
money selling the same or similar products or services to the same
How could a small diner differentiate itself from larger restaurant chains?
4.3 Know Your Competition 105
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market as other businesses. Secondary data resources can give you
information on your direct competition. Your direct competitors may
be in the same geographic area as your business. The telephone direc¬
tory or an Internet search will help you find the number and locations
of competing businesses. Your local Chamber of Commerce will also
have information on competitors in your business field. Observation
methods can help you learn more about your direct competitors. If
you start a retail business, you can visit all of the malls, shopping
centers, and retail outlets in your area.
For some businesses, direct competitors may be located far away.
Carmen Quinterro publishes a travel newsletter about Ireland. Carmen’s
target customers live all over the United States. Her competitors
include five other newsletters about Ireland as well as several travel web
sites. Although Carmen’s competitors are located far from her home in
Chicago, they compete with her for the same target customers.
Indirect Competition
Indirect competition comes from a business that makes only a small
amount of money selling the same or similar products and services to the
same market as other businesses. Locating your indirect competition is
more difficult than finding direct competitors. You should first think of
all of the possible businesses that can compete with you indirectly. A
large department store may stock some of the most popular products
carried by a privately owned specialty shop. The department store offers
many other lines of merchandise as well. It makes only a small amount
of money on the same items that the specialty shop offers. This makes
the department store an indirect competitor to the specialty shop.
greene_0538446145_ch04, 12/21/7, 17:23, page: 107
Large Retailers
When a large retailer enters a community, it can be a source of direct
and indirect competition for many other businesses. Large retailers
like Wal-Mart bring lower prices and jobs to a community, but many
small businesses find it hard to compete with them. Some of the
smaller, locally owned retailers often are forced out of business. Some
of the reasons that it is difficult for entrepreneurs to compete with
large retailers include the following:
1. Large retailers usually are able to keep larger quantities of prod¬
ucts in stock. They can purchase inventory in bigger quantities
because they have more revenue and larger storage areas. Bigger
orders result in volume discounts, and the savings can be passed to
consumers in the form of lower prices.
2. Large retail chains do not rely on a single product line. If one
product line does poorly, a large retail store does not go out of
business because it has other successful product lines. Small busi¬
nesses have risks associated with having only one product line. If its
product falls out of favor with consumers, it has no other product
lines to make up the difference.
3. Large companies usually have more resources to devote to
advertising. A larger company makes more revenue and can hire
advertising professionals to create effective advertising to attract
more customers.
Checkpoint
What is the difference between direct and indirect competition?
Competitive Analysis
Identifying and examining the charac¬
teristics of a competing firm is called a
competitive analysis. Analyzing the
strengths and weaknesses of your com¬
petition will help you figure out what
you can do to get customers to buy
from your business. Follow these steps
to begin your competitive analysis:
1. Make a list of your competitors.
Using the Internet and The Yellow
Pages and driving through the area in
which you plan to locate your business
are good ways to identify your compe¬
tition. You can also talk to potential
customers to find out with whom
they are currently doing business.
Review trade magazines and news¬
papers to see who is advertising the
product or service you plan to offer.
Be your own boss
You opened The Sweet Shop, a candy and ice cream
store, on the grounds of a beach resort hotel. You
get a steady stream of new customers as guests
from the hotel visit your shop. However, you want
to attract local residents from the community to
your business to help grow a customer base year-
round. You decide that a frequent-buyer program is
one way to get customers to visit and return to your
business. What type of frequent-buyer program
would be good for The Sweet Shop? Design a flyer
that would introduce the program to customers.
Also, design a card that you would give customers
to identify them as frequent buyers.
4.3 Know Your Competition 1 07
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2. Summarize the products and prices offered by your competi¬
tors. Investigate the products or services your competition offers
for sale. How are they different from yours? Examine the price
ranges of your competitors and determine how they compare to
what you plan to charge. Are your prices higher or lower?
3. List each competitor’s strengths and weaknesses. What does the
competitor do that no one else does, or what does it do better
than everyone else? Where are your competitors located? Deter¬
mine if their location is better, worse, or about the same as the
planned location for your business. Compare the competitions’
facilities to the planned facility for your business. Are their facilities
better, worse, or about the same as yours? What attracts customers
into your competitors’ facilities? How will you compete with these
strengths? What are some of the weaknesses of your competition?
How can you use these weaknesses to your advantage?
4. Find out the strategies and objectives of your competitors. A
copy of your competitors’ annual report would have this information.
5. Determine the strength of the market. Is there an increase in demand
for the product or service you plan to offer? Will there be enough cus¬
tomers for everyone in the market? What are the industry forecasts?
Interjit Singh wants to start a premier car wash in an expensive
suburb of Washington, D.C. He does a competitive analysis as shown
below. He researches his direct and indirect competition. He finds that
Royal Hand Wash is able to charge twice the price of the other competi¬
tors even though its location is not the best. Royal Hand Wash guaran¬
tees nonscratch car washes and waxes done by people, not machines.
Because Interjit’s business will also offer car washes, waxes, and detailing
done by hand, Royal Hand Wash is the direct competition. All other car
wash businesses, including gas stations with automatic car wash machines,
are his indirect competition. Royal Hand Wash’s location and prices are
its biggest weaknesses, so Interjit plans to choose a prime location for his
car wash and charge lower prices.
Checkpoint
What is the purpose of a competitive analysis?
ANALYSIS OF COMPETITORS
Competitor
Price
Location
Facility
Strength
Weakness
Strategy
Standard Gas
$6.00
Excellent
Good
Excellent
location
Car wash not
easily accessible
Target a different market
Lakeland Car Wash
$5.50
Fair
Good
Low price
Location
Target a different market
Ray's Car Wash
$5.00
Good
Fair
Low price
Facility
Target a different market
Royal Hand Wash
$11.50
Fair
Excellent
Excellent
facility
Location
Offer lower prices, better
service, more convenient
location
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Maintaining Customer Loyalty
Getting customers to buy your products and services instead of com¬
petitors'’ is only one step in running a successful business. Once you
get the customers, you must make sure they remain loyal to you and
keep coming back.
Listen and Respond to Feedback
To retain customers, you will need to continually ask customers for
their opinions about your business and respond to their feedback.
Businesses that ignore customer concerns will not stay in business
long. Businesses stay in touch with their customers’ needs in different
ways. Some businesses may call customers after sales are made to
ensure they are satisfied with their purchase. Many companies have a
customer feedback box where customers can put complaints or posi¬
tive comments about the business. You can also design a survey for
your customers to complete.
Jason Rose’s business,
the Metropolitan Athletic
Club, closed because of his
failure to respond to cus¬
tomer feedback. Club
members had repeatedly
complained about the lack
of clean li ness in the locker
rooms and the lack of avail¬
able weight machines dur¬
ing peak hours. Jason
ignored his customers’
complaints, believing that
the excellent location and
low monthly fee would
ensure his success. Jason
learned from his mistake.
When he opened his next athletic club, he immediately tried to find
out what customers wanted by conducting a market research study.
His study revealed, among other things, that he should offer more
aerobics classes and put high-speed hair dryers in the locker rooms.
Due to his focus on customer satisfaction, Jason’s club is doing very
well and attracting new members all the time.
How could a fitness club maintain loyalty among its clients?
Other Strategies for Maintaining Loyalty
To maintain customer loyalty, businesses use many strategies. The
main purpose of these strategies is to keep customers happy so they
will return to the business. Some of the most basic customer loyalty
strategies businesses use include the following:
• Superior service
• More convenient hours than other businesses
4.3 Know Your Competition 109
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• Easy return policies
• Store-specific credit cards
• Personal notes or cards for birthdays or as a way to say thanks for
the business
• Frequent-buyer programs
Kathleen McGuire, the owner of Flower Markets, encourages
shoppers to buy all of their flowers from her garden store by issuing
them a frequent-buyer card, which she stamps every time a purchase
of $10 or more is made. Once the card has been stamped 10 times,
customers can redeem the card for a free bouquet of flowers.
Checkpoint
What are some strategies for maintaining customer loyalty?
4.3 Assessment
THINK ABOUT IT
1. Why should entrepreneurs analyze both direct and indirect
competitors?
2. Why is a competitive analysis important to an entrepreneur?
3. Why can customer feedback be considered a type of market
research? Is this market research more or less valuable than
other research you conduct? Explain your answer.
MAKE ACADEMIC CONNECTIONS
4. MANAGEMENT Devise a plan to maintain customer loyalty for a
hair salon. Create an advertisement to let your customers know
about this plan.
5. COMMUNICATION Shontel Washington just opened an art
gallery. He would like feedback from the people who visit the
gallery. Develop a short questionnaire that would help Shontel
learn more about his customers' feelings toward his business.
6. TECHNOLOGY Using the car wash data shown on page 108,
enter the prices into a spreadsheet. Use the spreadsheet to
create a bar graph that will help Interjit Singh analyze the
data.
Working with team members, choose a successful business in your area.
Then choose three competing businesses. Using the Activity CD, open
the activity "Competitive Analysis." Print a copy and complete the activ¬
ity by analyzing each business using the five steps listed in this lesson.
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Sharpen Your
Entrepreneurial Skills
Using Spreadsheets to Analyze Data
Spreadsheets are a powerful tool for analyzing, sharing, and managing
numerical data. Entrepreneurs can use spreadsheets to analyze market
research, prepare budgets, measure performance, and create financial
statements. One of the most valuable uses of spreadsheets is creating
charts and graphs. Charts and graphs can improve decision making
by presenting data in an easy-to-read, understandable format. Line
graphs, bar charts, and pie charts are among the most commonly
used visual aids.
Spreadsheets are especially
useful in analyzing market research
results. Gena has decided that she
wants to open a coffee shop in her
community. She wants to deter¬
mine the age of her target market.
She surveys 25 people in each of
the following age groups: 18-25;
26-30; 31-35; and 36-40. She
enters her survey results into a
spreadsheet and creates the follow¬
ing pie chart. The pie chart clearly
shows that consumers between the
ages of 18-25 are more likely to
buy coffee on their way to work.
Consumers Who Buy Coffee
on Way to Work
TRY IT OUT
Maggie Blandin conducted research for her dog-walking business by
surveying 2,500 dog owners. She asked what price owners would be
willing to pay for a dog-walking service. She collected the following
data:
Number of People
500
250
750
500
500
Price
$10
$15
$20
$25
$ 0 (not interested)
Enter this data into a spreadsheet and create a pie chart to help
Maggie determine the price she should charge for her dog-walking
service. Experiment with the different kinds of charts and graphs you
can create.
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Chapter 4 Assessment
SUMMARY
4.1 Identify Your Market
1. Before starting a new business, you must determine who your pri¬
mary customers are and whether they will be willing to buy your
product or service. Understanding your customers and their needs
and wants is one of the most important aspects of running a busi¬
ness. Market research is key to finding out this information.
2. You should develop a customer profile and decide which segment(s)
of the market to target. Markets may be segmented based on
many factors, including demographics, psychographics, use-based
data, and geographic data.
4.2 Research the Market
3. Market research is important because it helps you find out what
your customers need and want. It also helps you understand your
competition. Primary data are collected for the very first time to
fit a specific purpose. Primary data may be collected from surveys,
focus groups, and observation. Secondary data are found in already-
published sources.
4. The six steps of market research are: (1) define the question,
(2) determine the data needed, (3) collect the data, (4) analyze
the data, (5) take action, and (6) evaluate results.
4.3 Know Your Competition
5. Entrepreneurs must understand their competition to help identify
any currendy unmet customer needs and wants.
6. All businesses have both direct and indirect competition. Direct
competition comes from a business that makes most of its money
selling the same or similar products and services to the same mar¬
ket. Indirect competition comes from a business that makes only a
small amount of money selling the same or similar products to the
same market.
7. Creating a competitive analysis involves the following steps:
(1) make a list of competitors, (2) summarize products and prices
offered by competitors, (3) list each competitor’s strengths and
weaknesses, (4) find out strategies and objectives of competitors,
and (5) determine the strength of the market.
8. There are many ways to maintain customer loyalty. You should ask
for and respond to customer feedback. Offering frequent-buyer dis¬
counts and superior service also promote customer loyalty.
What do you hnow now?
Read Ideas in Action on page 91 again. Then answer the questions a
second time. How have your responses changed?
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. A description of the characteristics of the person or company that
is likely to purchase a product or service
2. Data that describe a group of people in terms of their age, marital sta¬
tus, family size, ethnicity, gender, profession, education, and income
3. An in-depth interview with a group of target customers who provide
valuable ideas on products or services
4. Information collected for the first time to fit a specific purpose
5. A system for collecting, recording, and analyzing information
about customers, competitors, goods, and services
6. Data that describe a group of people in terms of their tastes, opinions,
personality traits, and lifestyle habits
7. Data found in already published sources
8. A business that makes most of its money selling the same or simi¬
lar products or services to the same market as other businesses
J
k.
L
m.
n.
o.
competitive analysis
customer profile
demographics
direct competition
focus group
geographic data
indirect competition
market research
market segments
primary data
psychographics
secondary data
survey
target market
use-based data
REVIEW YOUR KNOWLEDGE
9. Which of the following is not a reason that entrepreneurs need to
know who their customers are?
a. customers are a business’s most important asset
b. companies cannot remain in business without customers
c. customers have no influence on product or services offered
d. knowing who your customers are can help you estimate demand
for products and services
10. To identify your target market, you need to know
a. who your customers are
b. how old your customers are
c. where your potential customers currently shop
d. all of the above
11. Data that helps you determine where your potential customers live
and how far they will travel to do business with you are
a. demographics c. use-based data
b. psychographics d. geographic data
12. Which of the following is not an example of primary research?
a. conducting a survey
b. obtaining statistics from a government web site
c. observing customer behavior
d. all of the above are examples of primary data research
13. Sources of secondary data include all of the following except
a. customer feedback from a survey
b. publications issued by government and community organizations
c. trade magazines and web sites
d. newspaper articles
Chapter 4
Assessment
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14. True or False? Two disadvantages of collecting primary data are
the costs and time involved.
15. It is difficult for small businesses to compete with large retailers
because
a. large retailers are able to order and stock products in larger
quantities
b. large retail chains don’t rely on a single product line
c. large companies have more resources to devote to advertising
d. all of the above
16. Which of the following is not a step involved when preparing a
competitive analysis?
a. list all competing businesses in your immediate area
b. create a customer profile
c. list your competitors’ strengths and weaknesses
d. summarize products and services offered by competitors
17. True or False? Businesses do not need to identify their target
market in order to succeed.
18. Which of the following is not a good way to get customer feedback?
a. check with your competition
b. call customers the day after they make a purchase
c. use a customer feedback box
d. have customers complete a survey after shopping with you
19. Which of the following is a strategy for maintaining customer loyalty?
a. keeping standard business hours
b. adhering to strict return policies
c. offering superior service
d. none of the above
20. True or False? Longer questionnaires are always better because
you can collect more information.
APPLY WHAT YOU LEARNED
21. Set up an interview with a local entrepreneur to find out how he
or she identified the target market, what kind of market research
was conducted, what kind of competition the business faces, and
how customer loyalty is maintained. Before conducting the inter¬
view, compile a list of questions to ask the owner. Present your
findings to the class.
22. You want to start a computer service company that keys and prints
professional-looking term papers and resumes for students in your
school. Design a survey that would help you determine if there is
a market for your company. Determine the best way to administer
the survey.
MAKE ACADEMIC CONNECTIONS
23. MATH You have collected primary data that indicates three-
quarters of the people in your town would switch dry cleaners if
they could save 50 percent on their dry cleaning. If the average
resident in your town spends $7 a week on dry cleaning and the
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town has 5,000 residents, how much revenue could you expect to
earn per year by opening a discount dry cleaner?
24. MANAGEMENT Maggie Blandin, who wants to open a dog¬
walking business in your town or city, has asked for your help in
collecting data. Call your local Chamber of Commerce to gather
demographics and psychographics for your community. Also ask
for statistics on dog ownership in your area.
25. RESEARCH Use the Internet to find the names of four compa¬
nies that might be able to help you conduct market research. Record
information such as how long the company has been in business and
what kinds of market research the business does. Write your findings
and compare them with the findings of other students.
WHAT WOULD YOU DO?
You are having a luncheon meeting with one of your suppliers at a
local restaurant. You see the owner of a business that is your main
competitor across the restaurant having lunch with someone you do
not recognize. They finish eating, pay their check, and leave while
you are still at your table. After they leave, you notice that a note¬
book was left in one of the chairs at their table. You go to the table
and pick up the notebook and see that it is their marketing strategy
for the upcoming year. What would you do? Would you consider it
your lucky day and read their strategy or would you turn it in to
someone at the restaurant? Why did you choose the action you did?
BUILD YOUR
Business Plan
Project
This activity will help you develop the business plan for your business
idea.
Identify the target market for your business. Use secondary data sour¬
ces to help you assess demand for your product or service.
Using the secondary research, develop a customer profile for your business.
Which market segment of your industry are you targeting? Be specific.
Conduct primary research for your business, using the steps outlined
in Lesson 4.2. Develop a questionnaire that will give you the informa¬
tion you need. Ask at least 30 people in your target market to com¬
plete the survey. Analyze your results and determine what course of
action you will take.
Determine who your competitors are, both direct and indirect. Using
the Activity CD, open the activity "Competitive Analysis." Use the
chart to prepare a competitive analysis for your business. Determine a
strategy for dealing with each competitor.
What are your strategies for maintaining customer loyalty? Describe
them and give reasons why you think each will work.
Chapter 4
Assessment
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Planning a Career in
Marketing Research
Sales & Service
Afly little sister decided to
start a babysitting service. To tailor
her business to meet client needs,
she asked neighbors with children
to complete an online survey
regarding their child care needs.
The results she compiled from the
free online survey helped her put
together a service and fee schedule.”
How do organizations deter¬
mine what services to offer? How
do manufacturers determine which
product features are the most
important to include in a product?
Marketing research helps
companies and organizations
decide how to best meet the needs
of their clients. Marketing research
surveys provide a targeted, concise
method to collect and analyze mar¬
keting data.
EMPLOYMENT OUTLOOK
• Faster than average job growth
is anticipated.
• Globalization, an increasingly
competitive marketplace, and
better educated consumers all
contribute to the increased need
for marketing research.
• Outsourcing will create opportu¬
nities at consulting and market¬
ing research firms.
JOB TITLES
• Market Research Analyst
• Mobile Video Research Manager
• Questionnaire Development
Manager
• Market Research Coordinator
• Marketing Communications
Specialist
NEEDED SKILLS
• A Bachelor’s degree is required.
Advancement may require a
Master’s degree or a Ph.D.
• To keep up with technology
changes, continuing education is
necessary.
• A blend of quantitative and
qualitative coursework is helpful.
What's it like to work in Market¬
ing Research Sales at a local gift
shop have been lagging, and the
owner has contracted with Tess, a
self-employed Electronic Marketing
Survey Writer, to create a market¬
ing research study. The store is an
independent store with a limited
budget, so Tess decides to use one
of the free online survey services to
gather data from existing custom¬
ers. The store’s mailing list will be
used to send customers an elec¬
tronic invitation to participate in
the survey. As an incentive, cus¬
tomers will be offered a 5 percent
discount on their next purchase.
During the afternoon, Tess
works on preparing a summary
report for a restaurant chain. The
restaurant wanted to obtain feed¬
back on the service, the environ¬
ment, and the food quality while
all were still fresh on customer’s
minds. So Tess used a survey ser¬
vice that collected data via cell
phones. Upon receiving their res¬
taurant bills, clients who had cell
phones were instructed how to log
on to a web site where they could
answer a brief online survey about
their dining experience. Customers
were also looking forward to
receiving a free dessert upon their
next visit as a reward for survey
participation.
What about you? Would you
like to help a variety of businesses
improve their understanding of
customer preferences by develop¬
ing marketing research surveys?
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ultimedia presentations have become a common form of marketing
for businesses and organizations. Individuals who demonstrate the ability
to effectively use presentation technologies and software to deliver a
message are in high demand for marketing positions. Each year FBLA
will select a multimedia national topic for one, two, or three students
to prepare. Multimedia presentations must be two to four minutes in
length, and teams will be allowed nine minutes to describe the project.
Five points will be deducted for any presentations over nine minutes in
length. Judges have three minutes to ask questions about multimedia
presentations. Entries for this category must include two DVDs and a
read me file (300 words or less) noting software used, sources of infor¬
mation, and instructions on running the presentations.
TOPIC Super Bowl sponsors are needed to help cover the high
costs of this sporting event. Prepare a multimedia presentation that
will act as a recruiting tool for corporate sponsors of the Super Bowl.
Prepare a customer profile that lists the characteristics of the person
likely to watch the Super Bowl. Then make a list of the companies
that sell products or services that would appeal to the Super Bowl
audience. Use this information to determine a target market for your
presentation. Because the price for Super Bowl sponsorship is high,
the presentation should emphasize the benefits to potential sponsors,
such as increased exposure in large markets.
PERFORMANCE INDICATORS EVALUATED
• Develop a convincing multimedia presentation.
• Recognize and respect copyright issues.
• Develop and support a theme with a multimedia presentation.
• Make use of and implement innovative technology in a multimedia
presentation.
• Set priorities and manage time to prepare and present an effective
multimedia presentation.
Go to the FBLA web site for more detailed information.
Think Critically
1. Why must the Super Bowl use a multimedia presentation to attract new
corporate sponsors?
2. What kind of music or visual images would be good for a Super Bowl
multimedia presentation?
3. Why must the presentation emphasize the potential return on investment
for corporate sponsors of the Super Bowl?
4. What is the value of being associated as a financier of the Super Bowl?
www.fbla-pbl.org
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Chapter 5
Market Your Business
5.1 Develop the
Marketing Plan
5.2 The Marketing
Mix—Product
5.3 The Marketing
Mix—Price
school.cengage.com/entrepreneur/ideas
118
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IDEAS IM ACTIONJ
Turning Creative Fun into Dollars
S heri and Rich Schmelzer of Boulder,
Colorado, are the founders of Jibbitz.
What's a Jibbitz, you may ask? Several years
ago, Sheri and Rich didn't know either.
Sheri was a stay-at-home mom with
three children. They always had at least
12 to 15 pairs of Crocs—a type of
colorful, sandal-like footwear with
ventilation holes—in a pile at their
back door. One day, Sheri was
having fun experimenting with %
decorating the Crocs by sticking sheri and Rich Schmelzer, founders of Jibbitz
decorative pieces in the holes of
the shoes. She used buttons, rhinestones, and other things she had lying
around the house. Showing the decorated shoes to Rich when he returned
home from work, a "light bulb" went off. Using his business experience
and knowledge, the business got its start.
After experimenting with several different versions, Sheri and Rich
found a secure way to attach the decorations so that they would fit
snugly in the holes. Looking for a domain name for a web site, they
thought about using the name Flibberty-Jibbet—a nickname Rich used
for Sheri. Sheri liked the word but thought it was too long for a domain
name, so she shortened it and Jibbitz was born.
Once the web site was up and running, the Schmelzers were fea¬
tured in a short segment on the local news. Orders began to come in
like crazy. Sheri's parents came to their house every weekend to help
by gluing decorations together and getting orders ready for shipment.
Once they realized how big the market for Jibbitz was, they needed
to find a mass manufacturer. Along with individual orders to fill, many
retailers wanted to buy their products in quantity. The Schmelzers used
a home equity loan to finance their first order from a factory in China.
A year later, the Schmelzers hit it really big when Crocs, Inc., acquired
their business for $10 million. Sheri and Rich still run the company and
now have 50 employees and over 4,000 retail outlets worldwide. They
are very proud of the company they have built and plan to stay involved.
Q
o
o
JZ
Q_
Q_
<
©
What do you fcnow?
Why do you think Jibbitz are so popular?
How important do you think the decision to market Jibbitz on the
Internet was to the success of the company?
What do you think is different for the Schmelzers since they sold
Jibbitz to Crocs, Inc.?
greene_0538446145_ch05, 1/17/8, 14:45, page: 120
Is a marketing plan always necessary?
Wanda loved jewelry and had spent much time studying the work of
famous jewelry designers. She also had taken some beading classes at
the local recreation center. She decided that she wanted to open her
own jewelry design business. She conducted market research and found
that there was an interest in custom-designed jewelry
in the target market she defined. Now she's ready to
think about how to market her business. She knows
that marketing is very important and wants to be
sure that she spends the money she has budgeted
for marketing wisely. She contacts the SBA, and it
advises her to develop a marketing plan. She is not
sure that this is a wise use of her time, but she sets
out to learn more about a marketing plan.
Work as a Team Because Wanda has already
found that there is a market for her jewelry
designs, discuss whether she would be wise to
spend time developing a marketing plan. Should
she just start making jewelry and see what hap¬
pens? Make a recommendation to Wanda and a marketing plan lays
explain your reasoning. the foundation for success.
What Is Marketing?
As defined by the American Marketing Association, “marketing is an
organizational function and a set of processes for creating, communi¬
cating, and delivering value to customers and for managing customer
relationships in ways that benefit the organization and its stakeholders.”
To simplify this definition, marketing is all of the processes—planning,
pricing, promoting, distributing, and selling—used to determine and
satisfy the needs of customers and the company. This definition demon¬
strates the importance of the customer.
It is very important to conduct market research to discover
what products or services customers want to buy. Using the primary
and secondary data that is gathered through market research helps
120 Chapter 5 Market Your Business
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entrepreneurs develop a marketing concept for the business. The
marketing concept uses the needs of customers as the primary
focus during the planning, production, distribution, and promotion
of a product or service. To use the marketing concept successfully,
businesses must be able to:
• Identify what will satisfy the customers’ needs and wants
• Develop and market products or services that customers consider
better than other choices
Develop Your
Reading Skills
As you read this chapter,
make a list of the marketing
strategy components and
the information you will
include about each one
in your marketing plan.
• Operate profitably
Marketing Mix
An important part of imple¬
menting the marketing
concept is developing a mar¬
keting mix that helps meet
customer needs and enables
the business to earn a profit.
The marketing mix is a
blending of the product,
price, distribution, and pro¬
motion used to reach a target
market. For example, once
you have determined what
product or service meets
customers’ needs, you must determine the right price for it, make it
available to the customers in the right places, and then let your target
market know about it.
How does the marketing mix for consumer
products help meet consumer needs?
C
o
>
"to
-M
'gi
Q
©
Checkpoint
Why is marketing important to a business?
The Marketing Strategy
As a business owner, you will need to outline the goals you want to
accomplish through your marketing efforts. Once you have identified
your goals, you will need to develop a marketing strategy, which is
a plan that identifies how these goals will be achieved. In your startup
marketing plan, your strategy should address:
• Product introduction or innovation
• Pricing
• Distribution
• Promotion
• Projected profitability
• Sales or market share
It is important that your marketing strategy be consistent with
the overall goals you have set for your business. Be sure that the strat¬
egy will actually work for you and is within the resources you have
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available. Your marketing goals should be written following the
SMART guidelines in Chapter 1. These goals should reflect your
short-term, medium-term, and long-term plans for your business.
What do you want your marketing efforts to achieve for your busi¬
ness? Do you want to offer additional products or services after one
year? Perhaps in five years, you want to sell your product internation¬
ally. Establishing short-, medium-, and long-term marketing goals
ensures that the marketing you do today fits in with the vision you
have for your business tomorrow.
Short-Term Goals
Short-term goals are what you want your business to achieve in the
next year. They can be stated in terms of number of customers, level
of sales, level of profits, or other measures of success.
Identifying your short-term goals will help you determine how to
target your marketing. If your goal is to build a customer base, you
may decide to keep prices low and spend more money on promotion.
If your goal is to have a positive cash flow, you may decide to price
your products or services higher.
Luisa Ramirez, a 32-year-old entrepreneur, wants to open a
gourmet food shop in her community. In the short-term, Luisa wants
to generate traffic into her store. Because of that goal, her marketing
Famous
Qcrfeey 'Brin and
Larry Page
What would the Internet be like if
there was no Google? Just what is a
Google? Thanks to Sergey Brin and
Larry Page, we have Google and an
explanation of the name. "Googol" is
the mathematical term for a 1 followed
by 100 zeros. The term was coined by
the nephew of Edward Kasner, an
American mathematician. Brin and
Page chose a variation of this term for
their company. When they started their
business, Brin and Page "set out to
organize the world's information and
make it universally accessible and
useful!"
Brin and Page developed a new
approach to online searching while
they were students at Stanford
University. Using that approach, they
launched Google in September of
1998 as a privately held company.
Today, Google is one of the world's
best-known brands. Most people
have learned about Google by word
of mouth from satisfied users.
Google generates revenue by
selling advertising space. Ads are dis¬
played on search results pages that
are relevant to the content on the
page. Google tracks customer traffic
to measure the cost-effectiveness of
the online advertising.
Today, Brin and Page share a
net worth of $16.6 billion. Google
handles over 2.5 billion search inqui¬
ries daily. That's not bad for a data
center that started in a dorm room!
Think Critically
Have you ever used Google? Why
do you think people choose
Google over other search engines?
How has the Internet provided new
opportunities for entrepreneurs?
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Why is it important to have a marketing strategy for your business?
strategy focuses on establishing a customer base. She creates a list of
short-term goals based on product, price, distribution, and promotion.
Medium-Term Goals
Medium-term goals describe what you want your business to achieve
in the next two to five years. Although your marketing strategy will
be determined largely by your short-term goals, you will need to
make sure that the strategy you are planning will make it possible for
you to achieve your medium-term goals.
Luisa wants her business to become the most successful gourmet
shop in her community by increasing her customer base and her total
sales. She hopes to expand the offerings in her store to include more
international foods as well as specialty items from local suppliers. In
addition to running her store, in five years Luisa hopes to expand her
business to include catering.
Long-Term Goals
Long-term goals show where your business will be 5, 10, and even
20 years from now. Thinking about what you want the business to
do in the long term can help you think about how to market your
business today.
Luisa eventually would like to establish a mail-order division of
her business. She does not let her long-term plans for a mail-order
division change her thinking about how to market her store today.
Knowing what she wants in the long run, however, motivates her to
work very hard to make her store a success so that she can use it as a
foundation to develop a mail-order business.
Checkpoint
Why is goal setting important when developing a marketing strategy?
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Write Your Marketing Plan
When your goals and marketing strategy have been determined, you
will be ready to write your final marketing plan. The purpose of the
marketing plan is to define your market, identify your customers
and competitors, outline a strategy for attracting and keeping customers,
and identify and anticipate change. A written marketing plan will help
you determine whether it is solid and all parts are consistent. Your writ¬
ten plan becomes a guiding document as you operate your business. You
can always review it later to determine if you need to change the way
you are marketing your business. The marketing plan becomes a part
of your business plan. Having a marketing plan as part of your business
plan is essential when you seek financing for your business. Investors will
expect your marketing plan to answer the following questions:
• What product or service will I offer?
• Who are my prospective customers?
• Is there a constant demand for this product or service?
• How many competitors are providing the same product or service?
• Can I create a demand for the product or service I want to offer?
• Can I compete effectively in price, quality, and delivery of my
product or service?
To answer these questions effectively, the marketing plan for
your business must include information on the following topics:
1. Product or Service 5. Business Location
2. Target Market 6. Pricing Strategy
3. Competition 7. Promotional Strategy
4. Marketing Budget 8. Distribution Strategy
What kinds of information do you think should be included in a marketing plan for a small,
locally owned bike shop?
124 Chapter 5 Market Your Business
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As part of your marketing plan, you should include performance
standards that will help you measure your effectiveness. Researching
industry norms and past performances will help you develop appropri¬
ate standards. After your marketing plan has been implemented, you
should compare your actual results to your performance standards. It
is helpful to examine your performance quarterly. Questions to ask
yourself include:
• Am I meeting sales forecasts?
• Is my promotional campaign reaching the target market?
• Is my company doing everything it can to meet customers’ needs?
• Is it easy for my customers to locate my product and is it competi¬
tively priced?
Checkpoint
Why is it important to put your marketing plan in writing?
f5 i Assessment
THINK ABOUT IT
1. What is the marketing mix?
2. What is the relationship between short-term goals and medium-
term goals?
3. What topics should be included in the marketing plan?
MAKE ACADEMIC CONNECTIONS
4. MATH Akeo Goto has opened a pet grooming business. He esti¬
mates the annual sales of the pet grooming market in his commu¬
nity to be about $325,000. There are two pet grooming businesses
in town already. If Akeo achieves his five-year goal of capturing
45 percent of the market, how much will he earn in his fifth year?
5. COMMUNICATION Think of a local business with which you are
familiar. Make a list of questions you would like to ask the owner
about the marketing plan for the business. Contact the business
owner and make an appointment to discuss the questions. Report
your findings to your classmates.
TEAMWORK
Working in a team, choose one of the following businesses: Mexican
restaurant, wholesaler, health-food store, or advertising agency.
Brainstorm a list of short-, medium-, and long-term goals for the busi¬
ness. Make a list of these goals and post them on the wall in your
classroom. Discuss the goals your team set with your classmates.
5.1 Develop the Marketing Plan 125
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Does location affect image?
Chase has a strong interest in men's clothing. During
high school and college, Chase worked at several
upscale men's stores in the Seattle area. When he
graduated from college with a degree in retail
marketing, he decided that he wanted to open
his own upscale clothing store for men. In deter¬
mining the startup costs for his business, he real¬
ized that the rent for the space in an upscale
mall with specialty boutiques was too expensive.
In looking for space he could afford, he found a
site in a medium-sized strip mall. The other
stores in the mall are discount stores, but he
wants to promote his business as an "upscale,
specialty store."
Work as a Team Do you think the location of
Chase's store will affect its image and ability to
attract the target customer? What do you think
Chase should do? Should he change the focus
of his business for this location?
Location can help you reach
your target customers.
The Marketing Concept
and the Product
Once you have determined what kind of business you will run, you will
need to make decisions about the products that you will sell. To select
your products, think carefully about which products and services most
appeal to your target customers. If you can convince your customers
that your products satisfy their needs better than any competitor’s prod¬
ucts, then your products become a marketing tool for your business.
The marketing concept is the belief that the wants and needs of
customers are the most important consideration when developing any
product or marketing effort. Over the past 50 years, consumers have
become more educated, and competition has increased to include the
126 Chapter 5 Market Your Business
Getty images/PhotoDisc
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global market. This has led to a change in the U.S. market, from
being a product-driven market to one that is consumer-driven. The
marketing concept can give small businesses an advantage over larger
businesses. Small businesses can get to know their customers better
than larger businesses. They can be more responsive and have more
flexibility when trying to satisfy customer needs.
In the newspaper in Luisa’s community, there was a recipe for
a pasta dish using a special type of cheese that Luisa did not carry in
her gourmet food store, and she knew none of the local grocery
stores stocked it. However, she knew that many of her customers
liked to try out the recipes from the paper, so she immediately got on
the phone with a supplier to get the cheese in stock the next day.
did you KNOW?
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market data U 5
compa„ /e! budget over
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marketing.
Product Mix
The different products and services a business sells are its product
mix . In a consumer-driven economy, entrepreneurs realize that some¬
times they must include products in their mix as a convenience for
customers even though they may not be profitable. This will give the
appearance to customers that the store has everything they need. It
has been found that often a small percentage of the product selection
makes up the majority of the sales revenue.
Luisa’s Gourmet Luxuries will sell hundreds of different packaged
goods, from imported Italian olive oil and pastas to Mexican rice. Luisa
will also offer a wide selection of fresh foods, including cheeses, fruits,
vegetables, and baked goods. To determine her product mix, Luisa lists
the various departments she plans to establish in her store. She then
lists the products that each department will carry. Luisa knows that
most people coming into her store are looking for gourmet foods, but
she decides to carry a small selection of pasta-making machines and
espresso coffee makers. Although these items will not be a large source
of revenue for her, it will show customers she can meet all their needs.
How does a business's product mix help to satisfy customers?
9
5.2
The Marketing Mix—Product *1 27
greene_0538446145_ch05, 1/15/8, 17:21, page: 128
Checkpoint
How does the marketing concept affect decisions made about the
product mix?
Development of Features, Branding,
and Positioning
Consumers buy a product because it meets their needs. However,
there is much more to a product than consumers may realize. The
many aspects of a product that a business must spend time developing
include its features, branding, packaging, labeling, and positioning.
Selecting Product Features
The total product includes its features, which are product characteris¬
tics that will satisfy customer needs. Features include such things as
color, size, quality, hours, warranties, delivery, and installation. You will
need to consider your target market when selecting product features.
WHAT WENT WRONG
*
Packaging Matters
Katharine had developed a new line of dog
grooming shampoo. She spent a large amount
of time researching what should go into the
shampoo and had the product tested to be
sure it met safety standards. Her next step was
to choose a way to package the shampoo. She
decided that instead of a bottle, she would
have the shampoo packaged in individual foil
packets. She boxed the packets six to a box
and set the price.
Her initial sales were good, but she was
not getting repeat sales. After three months,
her revenue decreased. She was unable to
keep up with the expenses of running her
business with no incoming revenue.
She decided to survey her customers to
find out why they were not ordering more
shampoo. The first ten customers she talked
to told her that while they liked the shampoo,
they found the packaging inconvenient. They
could not hold their dog in the tub while trying
to open the foil packet and squeeze the sham¬
poo out. Katharine realized she had made a
serious mistake in her choice of packaging, but
now she had spent all her money and was
128 Chapter 5 Market Your Business
stuck with a large inventory of shampoo in foil
packets. She did not know what else to do, so
she closed her business.
Think Critically
1. What could Katharine have done to avoid
her packaging mistake?
2. Is there anything Katharine could have
done to avoid closing her business after
she knew what the problem was?
Research the target market before
introducing a new product.
greene_0538446145_ch05, 12/21/7, 17:27, page: 129
Every product
has features. For
instance, Luisa has
many choices when
she is deciding what
types of olives to
stock in her store.
There are green and
black olives and
olives stuffed with
pimentos, blue
cheese, and almonds.
There are olives that
come in jars and in
cans and fresh olives that are available loose. There are olives that are
produced in the United States, in Italy, and in France. There are so
many different types of olives that there is no way Luisa can offer every
single type to her customers. She needs to decide how many types of
olives she can carry and what kinds her target customer prefers.
Why does Luisa need to offer a variety of cheeses and olives
in her gourmet food store?
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Branding, Packaging, and Labeling
Making your product stand out from all the others in the market is a
challenging task. Branding is the name, symbol, or design used to
identify your product. The package is the box, container, or wrapper
in which the product is placed. The label is where information about
the product is given on the package. The brand, package, and label
that you choose for your product will help differentiate it from others
on the market. The Nike “swoosh” has become a very recognizable
brand. When you see the Nike symbol, you know about the quality
of the product you have selected.
Position Your Products or Services
Different products and services within the
same category serve different customer
needs. For example, both Hyundai and
Jaguar sell automobiles, but these two
product lines are positioned very differently
in the marketplace. Positioning is creating
an image for a product in the customer’s
mind. Businesses position a product in a
certain market to get a desired customer
response. Product features, price, and
quality may be used for positioning.
Jaguar’s pricey cars are positioned in the
market to meet the needs of those consum¬
ers who desire high quality and status.
Hyundai positions its products to satisfy a
need for an inexpensive family automobile.
Examining the competition’s positioning
What makes a memorable brand or product
name? Access school.cengage.com/entrepreneur/
ideas and click on the link for Chapter 5.
Author Phillip Davis provides some thoughts
in his e-zine article. What does Davis consider
the most common naming mistake? Do you
agree with him that "Apple" is a better brand
name than something like "United Computer
Manufacturers" or "Quality Computer Corpo¬
ration"? Why or why not? Provide one exam¬
ple of a product or business that you think
has a great name, and another that you think
has a poor name. Explain your answers.
school.cengage.com/entrepreneur/ideas <b
The Marketing Mix—Product 129
5.2
greene_0538446145_ch05, 1/17/8, 14:46, page: 130
strategy can help you determine the best positioning strategy for your
target market.
Luisa knows that the other gourmet store in town is perceived as
snobbish because it caters to professional cooks. Because of this, Luisa
decides to position her store as the friendly gourmet store for anyone
who loves to cook. To do so, she plans to offer in-store cooking
classes and free samples of food items. She knows that being cheerful
and helpful to customers will create and maintain her desired image.
Checkpoint
I Why are product features, branding, and positioning important?
5.2 Assessment
THINK ABOUT IT
1 .
How can a small business use the marketing concept to its
advantage over a larger business?
2.
Choose one of your favorite products. Make a list of the features
of the product.
3.
In the blue jeans market, which brands are positioned to satisfy
customers' need for high quality and status? Which brands are
positioned to satisfy a need for inexpensive clothing? Describe the
type of consumer who would buy each of the brands you name.
%
MAKE ACADEMIC CONNECTIONS
4. RESEARCH Choose a business in your community. Make a list
of all the products and/or services it offers. Talk to the business
owner about which of the products or services represent the
largest revenue for the business. Find out which of the products
or services are not profitable but are offered to customers as a
convenience. Find out if the owner is thinking about adding any
new products to the product mix or dropping some of the cur¬
rent products from the product mix and why.
5. COMMUNICATION You have created a new soft drink that is
designed for students at your school. Design a label for the
drink bottle that will brand the drink. You should incorporate
your school's mascot in the design of the label.
Working with team members, make a list of products and services
you would offer if you were opening a desktop publishing business.
Make a list of the features of your products and services. Write a
positioning statement that differentiates your business from your
competitors.
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The Marketing
Mix—Price
*5
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uoais
1 erms
• Identify pricing objec¬
tives for a business.
• Calculate the price for
products using various
methods.
• Discuss factors to con¬
sider when pricing services.
• List and describe various
pricing techniques.
• return on investment
• market share
• demand-based
pricing
• cost-based pricing
• competition-based
pricing
• psychological pricing
• discount pricing
Focus on Small Business
What should I charge?
Marie was excited about her new business, "Straighten It Out," which
offered laundry services, such as washing and ironing clothes, for busy
people. She would go to the homes of her clients
once or twice a week and do all of their laundry
for them. She liked the work and looked forward
to the opportunity to make money while home
from college. But, she was not sure how much she
should charge for her services. She thought about
charging a flat hourly rate. She realized that some
of the tasks would take longer than others,
and some would require extra care, such as
having to treat stains, iron pleats, or handle
delicates. An hourly rate might not be the
fairest way to charge customers or the best
way to earn money.
Work as a Team What do you think
Marie should do? How should she decide
how much to charge? What will happen
if she charges too much? What if she Determine the best price for your
charges too little? P roduct or service -
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Set Pricing Objectives
The price is the actual amount a customer pays for a product or ser¬
vice. Prices you charge must be low enough so that customers will
buy from you, not from your competitors. To earn a profit, though,
your prices need to be high enough so revenues exceed expenses.
Before you can select a pricing strategy, you will need to establish
objectives for your pricing program. What is the most important thing
you want the price to do? Examples of pricing objectives include:
• Maximize sales • Increase profits
• Discourage competition • Attract customers
• Establish an image
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Return on Investment
When setting pricing objectives, you may want to consider your
return on investment. Investment refers to the costs of making and
marketing a product. The return on investment (ROI) is the
amount earned as a result of the investment, usually expressed as a
percentage. Entrepreneurs must identify the percentage return they
want from their investment. The target percentage in the beginning
may be lower than it will be as the business grows. If you invest
$5,000 in your smoothie stand at a local park and you want a
15 percent return, you need to price your product so that you will
earn $750, since $5,000 x 0.15 = $750.
Market Share
Market share is another consideration when setting pricing objectives.
Market share is a business’s percentage of the total sales generated
by all companies in the same market. The total market for a product
must be known in order for a market share to be determined. For
example, if people in Luisa’s community normally spend $1,750,000
a year on gourmet food products and Luisa’s store sells products
amounting to sales of $192,500, her market share will be 11 percent,
calculated as follows:
Amount of sales -L Total market size = Market share
$192,500 ^ $1,750,000 = 11%
The chart below graphically illustrates Luisa’s market share along
with the expected market shares of her competitors.
Gourmet Market Share
%
Your market share will depend on the level of competition in
your market. If you create a market for an entirely new product, your
market share will be 100 percent because you will be the only supplier,
at least for a period of time. If you enter a market with many competi¬
tors or one in which a few large companies dominate the market, your
market share will be small at first.
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How can networking contribute to a business's success?
Companies in highly competitive environments must develop a
plan to gain a higher market share. Companies can increase market
share in many ways. One way is to lower prices. Advertising and pro¬
motion campaigns that attract more customers can help too. You can
also network with potential customers. Networking involves establish¬
ing informal ties with people who can help your business grow.
Attending trade association meetings and other gatherings can give
you good opportunities to network and gain new customers.
One of Luisa’s goals is to become the most successful gourmet
shop in her community by having a market share of at least 40 percent
and a 10 percent return on investment. If Luisa wants a market share
of 40 percent, she will need to generate annual sales of at least
$700,000. Based on this, Luisa sets her pricing objectives carefully.
She decides to set her prices low to build customer traffic. Once Luisa
has increased her market share, she may raise prices slightly to increase
her return on investment.
To help increase her market share, Luisa will seek out networking
opportunities. As part of her networking efforts, Luisa will play softball in
a local women’s league in the summer. She also plans to attend Chamber
of Commerce meetings monthly. She hopes that through both settings
she will meet people who will become customers. She also hopes to meet
other business professionals, such as lawyers, financial advisers, and other
business owners, who might offer advice on ways to run her business
more efficiently, and in turn, increase her return on investment.
Checkpoint
Why is it important to determine pricing objectives before pricing
goods and services?
5.3 The Marketing Mix—Price *133
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Determine a Price for a Product
Once pricing objectives have been determined, the next step is to
determine the possible prices for products. There will usually be more
than one price that can be charged for a product. Pricing may be
based on demand, cost, or the amount of competition.
Demand-Based Pricing
Pricing that is determined by how much customers are willing to pay
for a product or service is called demand-based pricing. Potential
customers are surveyed to find out what they would be willing to pay
for the product. The highest price identified is the maximum price
that can be charged.
If the bakery at Luisa’s Gourmet Luxuries becomes widely recog¬
nized as the best in town, Luisa could begin charging higher prices
for her baked goods. People will be willing to pay a higher price for
a loaf of bread that they believe is the best available.
%
Cost-Based Pricing
Cost-based pricing is determined by using the wholesale cost of an
item as the basis for the price charged. A markup price is a price
determined by adding a percentage amount to the wholesale cost of
an item. A markdown price is a price determined by subtracting a
percentage amount from the retail price of an item.
Luisa buys artichoke hearts for $1.77 a can. To cover her operat¬
ing expenses and allow for a profit, she adds 40 percent to her whole¬
sale cost, or $0.71. The new price of $2.48 is her retail price.
Wholesale cost
X
Percentage markup
= Markup amount
$1.77
X
0.40
= $0.71
Wholesale cost
+
Markup amount
= Retail price
$1.77
+
$0.71
= $2.48
Sometimes business owners purchase too much of a particular
item and want to sell more of it quickly. To do so, they mark down
the retail price of the product. You should be careful not to mark
down an item below its cost. You do not want to lose money.
Luisa usually charges $10.50 for a large bottle of olive oil. To
sell more, she decides to mark down its retail price by 20 percent.
Retail price
$10.50
Retail price
$10.50
x
x
Percentage markdown
0.20
Markdown amount
$ 2.10
Markdown amount
$ 2.10
Markdown price
$8.40
Competition-Based Pricing
Pricing that is determined by considering what competitors charge
for the same good or service is called competition-based pricing.
Once you find out what your competition charges for an item, you
must decide whether to charge the same price, slightly more, or
slightly less.
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What things should Luisa consider when competing against another grocer that is already
well established in her community?
Luisa’s business will compete with The Gourmet Grocery, which
has been in her community for five years. She cannot charge more than
her competitor for items that customers could purchase there. She
decides initially to charge a few cents less than The Gourmet Grocery
on all packaged goods. She will keep an eye on competitors to make
sure she stays up to date on what they are charging for their products.
Checkpoint
List three methods for determining the price to charge for a product.
Price a Service
When setting the price for a service, it is important to consider not
only the cost of any items used in providing the service, but also the
amount of time and anything that is included with the service.
Time-Based Pricing
The price to charge for services can be determined by the amount of
time it takes to complete the service. A plumber may charge $100 per
hour. If the job takes IV 2 hours to complete, the labor charge would be
$100 x 1.5 = $150. A service provider must decide whether there will
be a separate charge for materials or whether the materials will be
included. A hair stylist charges a set amount to highlight someone’s hair.
The amount includes the hair stylist’s time as well as all of the supplies
used for the highlighting. Some service providers will negotiate the
price. This is often done with legal services and construction projects.
One area in which Luisa would like to expand her business is
catering. She will have to calculate prices based not only on the cost
of the food but also on the time that it takes for her to prepare and
deliver the food. If she is responsible for serving at a catered event,
5.3 The Marketing Mix—Price 135
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she will have to charge for her time and the time of any helpers she
may hire to wait on the guests at the event.
Bundling
Services can be bundled , or combined under one price, rather than
making the customer pay for each individual part of the service.
Airlines use bundling when they charge a passenger for a ticket. The
price includes not only the transportation, but also any food and
beverages served, the services of the employees who check in passen¬
gers, and baggage handling.
Checkpoint
Which method would be the best for a housepainter to use to price
services? Why?
Pricing Techniques
It is important to set the right price for your products and services. Pric¬
ing can make or break a business. When first introducing a product or
service into the market, price skimming and penetration pricing techni¬
ques may be used. Afterwards, psychological pricing and discount pricing
are two pricing techniques that you should examine and incorporate
when establishing permanent pricing for your products and services.
Introductory Pricing
As a product is introduced into the market, sales will be low, marketing
costs will be high, and litde if any profit will be made. Two pricing
techniques that are often used in the introductory stage of a product
are price skimming and penetration pricing. Price skimming is used
when a product is new and unique. A high price is charged to recover
the costs involved in developing the product. Then as more competi¬
tors enter the market with similar products, the price is dropped. Pene¬
tration pricing starts out with a low
introductory price with the goal of build¬
ing a strong customer base. The low
price also discourages competition.
Psychological Pricing
Psychological pricing is based on the
belief that certain prices have an impact
on how customers perceive a product.
This type of pricing is most often used by
retail businesses. Techniques used in psy¬
chological pricing include the following:
• Prestige pricing is selling at a high
price in order to create a feeling of
superior quality and social status.
Be your own boss
You plan to open a pizza delivery service near
the University of Florida in Gainesville. Your tar¬
get market includes students who live in dorms
and houses on and near the main campus. You
know that the price you charge is going to be
critical to the success of your business as there
are several restaurants in the area with which
you will be competing. Develop a psychological
pricing strategy for the pizza delivery service.
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How does price affect your buying behavior?
• Odd/even pricing suggests that buyers are more sensitive to certain
ending numbers. Studies have shown that prices ending in odd
numbers are perceived to be bargains while those ending in even
numbers suggest higher quality. For example, $29.99 sounds like a
bargain compared to an even $30.00.
• Price lining involves offering different levels of prices for a specific
category of product based on features and quality. A jeweler might
offer three price lines of diamond necklaces and display them in dif¬
ferent cases so that shoppers can go straight to the price level they
can afford.
• Promotional pricing is offering lower prices for a limited time to
increase sales. This type of pricing is temporary and prices will
return to normal when the promotion ends.
• Multiple-unit pricing involves pricing items in multiples, such as
10 for $10. This type of pricing suggests a bargain. People will buy
more items than they would if they were priced individually.
Discount Pricing
Discount pricing offers customers a reduced price. Discount pricing
is used to encourage customers to buy. Markdowns are a type of dis¬
count pricing. Other discount pricing strategies include the following:
• Cash discounts are offered to customers to encourage early payment
of invoices. When this is done, the terms of an invoice will include
the amount of the discount, the number of days in the discount
period, and when the invoice is due if the discount is not taken.
For example, terms of “2/10, net 30” mean that a 2 percent dis¬
count may be taken if the invoice is paid within 10 days. If no dis¬
count is taken, the net or total amount of the invoice is due within
30 days of the date of the invoice. To find the last date available
for the discount, add the number of days in the discount period to
the date of the invoice. If the invoice is dated April 1, you would
add 10, and the last day of the discount period would be April 11.
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• Quantity discounts are reductions in price based on the purchase of
a large quantity. This is also called a volume discount. Sellers offer
quantity discounts because it reduces their selling expenses.
• Trade discounts are reductions on the list price granted by a manu¬
facturer or wholesaler to buyers in the same trade.
• Seasonal discounts are used for selling seasonal merchandise out of
season. Barbeque grills are in high demand in the spring and sum¬
mer months, but not in the fall and winter. Manufacturers offer
discounts to customers who purchase grills out of season.
*
1
Checkpoint
Name two techniques used in psychological pricing and provide an
example of each.
5.3 Assessment
THINK ABOUT IT
1. What pricing objectives are most important to a new business?
2. What do you need to consider when pricing services?
3. Why is discount pricing used?
MAKE ACADEMIC CONNECTIONS
&
4. COMMUNICATION Look through advertisements in newspapers
and magazines and find examples of psychological pricing. Prepare
a poster of the advertisements and label each pricing technique.
5. MATH You have a large inventory of small appliances in your
kitchen store that have not sold during the past year. You decide
to mark them down by 30 percent each. Using the Activity CD,
open the activity "Pricing Products." Calculate the markdown
price for each item. After two weeks, you still have some of
these items, so you decide to mark them down an additional
25 percent off. Find the new markdown price.
TEAMWORK
You and your teammates are going to open a home entertainment
store. Using the Activity CD, open the activity "Home Entertainment
Store." Print a copy and complete the activity. Locate distributors,
wholesalers, and manufacturers of three products you would like to
sell. Choose at least two brands for each item. Contact the distributor to
obtain information about pricing and delivery. What is the wholesale
price of each product? Find the same product in a local store. What is
the retail price? What is the markup percentage?
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Sharpen Your
Entrepreneurial Skills
Breakeven Point
As an entrepreneur, you will have to make decisions about pricing
your products. Knowing how to calculate the breakeven price will
help you ensure you do not price products below your cost. You do
not want to lose money!
The lowest price identified in a price range is based on the costs
of the product to the seller. All production, marketing, and adminis¬
trative costs should be considered when determining the minimum
price. The minimum price can be calculated through breakeven analy¬
sis. The breakeven point is the point at which sales revenue equals the
total cost of acquiring/producing and selling a product or service. At
the breakeven point, a business has no profit and no loss—it simply
breaks even. A business can use the breakeven point in units to ana¬
lyze whether it is charging an appropriate price.
To calculate the breakeven point in units, a business must deter¬
mine the selling price, fixed costs, and variable costs for one unit.
Then, total fixed costs are divided by the selling price minus the
variable costs.
Luisa’s Gourmet Luxuries sells stainless steel pasta pots. Luisa
determines that her fixed costs are $35,000 a year and her variable
costs per unit are $9. Luisa wants to determine how many pasta pots
she would have to sell to break even if the price is set at $150. Her
breakeven point for the pasta pots would be calculated as follows:
Total fixed costs 4* (Selling price — Variable cost) = Breakeven point
$35,000 -f- ($150 - $9) = 248.2
The breakeven point in units would be approximately
249 units. Luisa must determine if she can sell 249 pasta
pots. If she can, she can set the price at $150. If she wants
to make a profit on the pasta pots, she will have to sell
more than 249 units. Luisa can make additional calcula¬
tions to determine the relationship between price and
breakeven point.
TRY IT OUT
You own AAA Audio/Video Repair. You make service
calls to customers’ homes to repair their audio/video
equipment such as television sets and home theater sys¬
tems. Your fixed costs are $10,000 a year and your vari¬
able costs for each service call are $20. If you charge $75
for each service call, how many service calls will you have
to make in order to break even?
Sharpen Your Entrepreneurial Skills 1 39
Digital Vision
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Chapter 5 Assessment
SUMMARY
5. J Develop the Marketing Plan
1. Marketing is all of the processes—planning, pricing, promoting, dis¬
tributing, and selling—used to determine and satisfy the needs of
customers and the company. Businesses that follow the marketing
concept use the needs of customers as the primary focus. You must
determine the right marketing mix—the blending of product, price,
distribution, and promotion—to use to reach your target market.
2. A marketing strategy identifies how you will achieve your market¬
ing goals. For a new business, a marketing strategy should address,
product inUoduction or innovation, pricing, distribution, promo¬
tion, sales or market share, and projected profitability.
3. A marketing plan should include information on the product or ser¬
vice, target market, competition, marketing budget, business loca¬
tion, pricing strategy, promotional suategy, and distribution suategy.
Putting it in writing helps you determine whether your marketing
plan is solid and all parts are consistent.
5.2 The Marketing Mix—Product
4. The different products and services a business offers are its product
mix. The marketing concept keeps you focused on meeting the
wants and needs of customers as you develop a product mix.
5. Product features are the characteristics of the product that will sat¬
isfy customer needs. Branding is the name, symbol, or design that
identifies your product. The brand, package, and label will differ¬
entiate your product from others. Positioning is creating an image
for a product in the customer’s mind.
5.3 The Marketing Mix—Price
6. A business may set pricing objectives aimed at maximizing sales,
increasing profits, discouraging competition, attracting customers,
or maintaining an image.
7. Pricing may be based on demand, cost, or competition.
8. Services may be priced based on time, materials used, and bundling.
9. Introductory pricing techniques include price skimming and
penetration pricing. Psychological pricing techniques include
prestige pricing, odd/even pricing, price lining, promotional
pricing, and multiple-unit pricing. Discount pricing includes cash
discounts for paying early, quantity discounts, trade discounts,
and seasonal discounts.
What do you fcnow now?
Read Ideas in Action on page 119 again. Then answer the questions a
second time. Flow have your responses changed?
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. All of the processes—planning, pricing, promoting, distributing,
and selling—used to determine and satisfy the needs of customers
and the company
2. Uses the needs of customers as the primary focus during the plan¬
ning, production, distribution, and promotion of a product or service
3. A blending of product, price, distribution, and promotion used to
reach a target market
4. Identifies how marketing goals will be achieved
5. Amount earned as a result of an investment
6. Product characteristics that satisfy customer needs
7. The name, symbol, or design used to identify your product
8. A business’s percentage of total sales generated by all companies
in the same market
9. Creating an image of a product in the customer’s mind
10. The different products and services a business sells
11. Pricing that is determined by how much customers are willing to
pay for a product or service
a.
b.
c.
d.
e.
f.
9 -
h.
i.
j-
k.
l.
m.
n.
o.
branding
competition-based
pricing
cost-based pricing
demand-based
pricing
discount pricing
features
market share
marketing
marketing concept
marketing mix
marketing plan
marketing strategy
positioning
product mix
psychological
pricing
return on
investment
12. Pricing that is determined by using the wholesale cost of an item
as the basis for the price charged
13. Pricing that is based on the belief that certain prices have an
impact on how customers perceive a product
14. Pricing that offers customers a reduced price to encourage them
to buy
REVIEW YOUR KNOWLEDGE
15. To successfully use the marketing concept, a business must do
which of the following?
a. identify what will satisfy the customers’ needs and wants
b. develop and market products or services that customers consider
better than other choices
c. operate profitably
d. all of the above
16. List six elements that should be addressed in a company’s market¬
ing strategy.
17. A marketing strategy should be consistent with the business’s_?_
18. True or False? Opening two more restaurants in other locations
around the city would be an example of a short-term goal for the
owner of a new restaurant.
19. Which of the following would be a good addition to the product
mix for a health club?
a. diamond rings c. fitness apparel
b. chocolate-chip cookies d. photo print service
Chapter 5
Assessment
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20. The branding, packaging, and labeling of your product should
accomplish all of the following except
a. identify your product
b. describe the company’s product mix
c. differentiate your product from others on the market
d. provide information about the product
21. Which of the following is not a pricing objective?
a. to maximize sales c. to attract customers
b. to increase profits d. to decrease expenses
22. A new cellular phone that lets you watch television, surf the Internet,
send and receive e-mail, take pictures, and listen to music has just been
released. There are people who want this device so badly they are will¬
ing to pay any price for it. This telephone should be priced using
a. demand-based pricing c. competition-based pricing
b. cost-based pricing d. time-based pricing
23. During late summer, Nordstrom’s Department Store offers fall and
winter clothes at a discounted price for a short period of time. After
that time, the price of this clothing goes up and is not reduced
again until the end-of-season clearance. This is an example of
a. prestige pricing c. promotional pricing
b. price lining d. multiple-unit pricing
24. You own an office supply store. You purchase desk lamps at a
wholesale cost of $14 each. You use a markup of 45 percent to
determine the retail price? At the end of season, you offer a dis¬
count price using a markdown of 20 percent of the retail price.
The discount price for desk lamps is
a. $20.30 c. $16.24
b. $17.50 d. $11.20
25. Which of the following pricing techniques is often used when
introducing a new product into the market with the goal of devel¬
oping a strong customer base while discouraging competition?
a. price skimming c. prestige pricing
b. penetration pricing d. price lining
APPLY WHAT YOU LEARNED
26. You want to open a gardening business. You plan to offer planting,
weed pulling, and watering services to busy homeowners in your
neighborhood. Write a positioning statement for your business.
27. Look for advertisements containing pricing information. Identify
the pricing strategy you think is being used in each ad and explain
why.
MAKE ACADEMIC CONNECTIONS
28. MATH The annual sales of home entertainment equipment in
your area is $23 mi llion. You want to capture 15 percent of the
market. How much will you have to sell to achieve your goal?
29. COMMUNICATION Write a paragraph describing how psy¬
chological pricing has affected one of your purchasing decisions.
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PROBLEM SOLVING Your sporting goods store sells fitness
equipment. Included in your product mix is a treadmill that is not
selling well, and you do not understand why. List some possible
causes. Outline strategies for determining the reason behind low sales.
MATH You want to download some special relaxation music
that you will play in the nail salon you are going to open. The site
that you download music from is offering a multiple-unit price on
music downloads this month. For every 3 songs you download,
you pay only $2.50. If you download only one or two songs, the
price is $0.99 per song. You download 38 songs. How much will
you have to pay for the downloads?
WHAT WOULD VOU DO?
You offer a math tutoring service for children at the elementary and
middle schools in your neighborhood. You normally charge $15 per
hour. You recently received a message from the mother of a fifth
grader inquiring about your services and pricing. She got your name
from the mother of another student you tutor. You recognize her
name as being from a family who owns a very large business in your
town. You would like to charge her more than $15 per hour because
you know the family is wealthy.
What would you do? Is it fair for you to raise your price just
because you know the family has more money? What problems do
you think you might experience if you charge customers different
prices? Under what circumstances would you be justified in charging
customers different prices?
I_ I _ J
30.
31.
build your
Business Plan
Project
This activity will help you get started on the development of a mar¬
keting plan for your business idea.
Define short-, medium-, and long-term marketing goals for your
business.
Determine the product mix for your business and the features of each
product. How do you plan on positioning your products?
Decide how you will develop brand recognition for your business.
Design any logos, symbols, and/or product labeling and packaging you
will use.
Determine your pricing objectives and how you plan to achieve them.
Develop a pricing strategy for your products and/or services. What
price will you charge? How did you decide on this price?
Calculate the breakeven point based on your selling price. Is your
breakeven point realistic? Do you need to adjust the selling price?
Chapter 5
Assessment
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Planning a Career in
E-marketing
IVIy boss gave me one hour to
surf the Web to research a poten¬
tial business he might develop. The
time limit was to encourage me to
stay focused. Each web site had
multiple links to other sites. Some
sites had movie-quality commer¬
cials, some sites offered free prod¬
ucts, and some sites distracted me
with banner ads and pop-ups.
When the hour was up, my sum¬
mary report included the assigned
topic and additional information
about related topics.”
Why do web sites contain links
to other sites? Why are some web
sites easier to navigate than others?
E-marketing is an expanding
field that helps companies reach
consumers via the Internet. Web
site designers help companies and
organizations develop web sites that
inform potential customers about
products and services offered.
EMPLOYMENT OUTLOOK
• Faster than average growth is
anticipated.
• As businesses increase their
dependence on the Internet
for the efficient distribution of
product and marketing informa¬
tion, demand for these jobs will
continue to grow.
JOB TITLES
• Online Marketing and Outreach
Coordinator
• Web Site Template Designer
• Web Page Developer
• Portal Designer
• Web Site Marketer
NEEDED SKILLS
• A Bachelor’s degree is
recommended.
• Strong problem-solving and
analytical skills are required.
• Computer science and business
courses are helpful.
• Experience in content manage¬
ment, HTML, and assorted
web-related software is required.
What's it like to work in
E-marketing? This morning Lev,
a freelance web site designer, is
meeting with a small group of
investors who want to build a
dozen windmills on property
bordering a huge lake. As part
of a public relations campaign to
encourage community support for
the project, the investors want to
develop a web site about the proj¬
ect. Lev has been contracted to
develop a web site that will list
all of the benefits of the windmill
farm. The web site needs to
include photos of the windmill
farm’s proposed design, statistics
on the amount of homes that can
be powered from wind energy, and
data reflecting flight patterns of
local birds. The site also needs to
provide links to similar small-scale
projects that have been successful.
In the afternoon, Lev will meet
with a farmer’s association that
wants to provide support via a web
site for independent farmers who
want to convert corn to ethanol.
This meeting will focus on the site’s
content and possible links to other
informational sites. In addition, the
group will be making design deci¬
sions related to color, icon graphics,
and editorial style. Navigation mod¬
els will also be considered. To help
make the project more appealing to
farmers, Lev must ensure that the
web site is easy to navigate.
What about you? Would you
like to design web sites that are
informative, easy to navigate, and
profitable for their sponsors?
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I earns will develop a written international marketing plan that identi¬
fies the customer base. The participating team must demonstrate oral
communication skills to market a new product. The written marketing
plan must not exceed ten pages. The completed written plan must
include the Tide Page; Table of Contents; Synopsis; Company Goals;
Description of Customers and Their Needs; Description of Pricing
Strategy; Competition; Marketing Mix; Economic, Social, Legal, and
Technological Trends; Human Resource Requirements; Marketing
Timeline; Methods of Measuring Success; and Supporting Documenta¬
tion. BPA selects a new topic for the Global Marketing Team Event
every year.
TOPIC You are the Marketing Director for Flower Power.
Your flower farm, located in southern Texas, raises fresh, reasonably-
priced flowers that are sold throughout the United States. Most of
your customers are wholesalers and supermarkets. Research indicates
that the global economy offers numerous markets for your fresh flow¬
ers. Your company has recently developed a revolutionary packaging
system that will ensure the delivery of fresh flowers to international
customers. The package also meets all international standards, making
it more likely to clear another country’s customs, which are restrictions
imposed on imported products.
Your presentation must explain your marketing plan for conduct¬
ing business globally.
PERFORMANCE INDICATORS EVALUATED
• Demonstrate know ledge and understanding of management and inter¬
national business concepts.
• Communicate research in a clear and concise manner, both orally and
in writing.
• Demonstrate teamwork skills needed to function in a global marketing
environment.
• Demonstrate successful price selection methods.
• Demonstrate effective persuasive and informative communication and
presentation skills.
Go to the BPA web site for more detailed information.
Think Critically
1. Why is the packaging so important for fresh-cut flowers?
2. Why is it important for the product to clear customs?
3. Why must Flower Power understand customs (cultural traditions) in other
countries?
4. Why are the packaging costs important in this case?
www.bpa.org
Winning Edge 145
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6.1 The Marketing
Mix—Distribution
6.2 The Marketing
Mix—Promotion
6.3 Selling and
Promoting
school.cengage.com/entrepreneur/ideas
146
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IDEAS !M ACTIOM
Jasmine Lawrence Eden
Body Works
Turning a Bad Experience
into a Million Dollars
C an you imagine being 15 years old and a guest
on the Oprah Winfrey Show! Being featured on
an ABC News Special ? Or being the CEO of your own
company and well on your way to your first million
dollars? That's exactly what has been going on
in Jasmine Lawrence's life lately. Jasmine, from
Mt. Laurel, New Jersey, is the CEO of Eden Body
Works—a company she was inspired to create at
11 years of age because of a bad experience with
a hair product.
Jasmine used a chemical relaxer on her hair when she was 11 that
caused her to lose much of her hair. She decided that she would never
use harsh chemicals on her hair again and began conducting research on
all-natural ingredients. She used the Internet and consulted with hair-care
specialists to find out what it takes to keep hair healthy. She conducted
multicultural focus groups made up of both men and women. Then she
began experimenting with mixing her own hair oils, shampoos, and condi¬
tioners. Soon friends and family members were asking her for products.
At the age of 12, Jasmine prepared for entrepreneurship by attend¬
ing a Biz Camp sponsored by the National Foundation for Teaching Entre¬
preneurship. During the next year, she developed a business plan, filed a
trade name certification with the state of New Jersey, and opened her
business. Jasmine's leadership has led to a tremendous amount of growth.
As Eden Body Works has grown and increased its customer base,
Jasmine's distribution channels have also changed. Initially she sold
directly to customers and promoted products through a company web
site. Gradually she began working through retailers as beauty/braiding
salons and barbershops began to both use and carry her products for
resale to their customers. Then some Whole Foods Stores began carrying
her products. Most recently, Jasmine struck a deal with Wal-Mart to
begin offering her products. Jasmine's motivation to start her own busi¬
ness was driven from her own needs. Today, she is the manufacturer,
the wholesaler, as well as a consumer of her own products.
What do you Icnow?
Do you think Jasmine's research on the needs of healthy hair con¬
tributed to the success of Eden Body Works?
Describe how using different distribution methods have helped
Jasmine's business to grow.
Do you think the publicity that Jasmine has received has contributed
to the growth of Eden Body Works?
Euan Henry
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Distribution mixup
Dustin owns a small hardware store in south Florida.
During the winter, he placed an order for swimming
pool supplies to be delivered in early spring. He
knew that pool usage and maintenance needs
would increase for his customers in the spring. He
wanted to be sure he had everything they needed.
His supplier processed the order and assured Dustin
it would be delivered in late February. Imagine
Dustin's surprise when he opened the box from
the supplier and found a product used to melt
snow on walkways and driveways!
Work as a Team What do you think happened
to Dustin's order? What is the problem here? How
do you think Dustin should handle this situation?
Distribution problems
can negatively impact
a business.
Channels of Distribution
Distribution is an important component of the marketing mix that
involves the locations and methods used to make products available
to customers. As you develop a distribution strategy for your business,
you will determine how you will get your goods and services to your
customers. You must be sure you have the right product in the right
place at the right time.
Luisa Ramirez, who is opening a gourmet food shop and catering
business in her community, knows that she must consider distribution
in the marketing of her business. She will need to consider how to
get the goods to sell, as well as how to actually get them into the
customers’ hands.
Channels of distribution are the routes that products and
services take from the time they are produced to the time they are
consumed. Choosing the right channel of distribution for a product
includes finding the most efficient way to ship it to desired locations.
Using the right distribution channels means saved time and lower
costs for both buyers and sellers.
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Direct and Indirect Channels
Channels are either direct or indirect. A direct channel moves the
product directly from the manufacturer to the consumer. An indirect
channel uses intermediaries —people or businesses that move prod¬
ucts between the manufacturer and the consumer. Agents and whole¬
salers serve as intermediaries.
Getting a product to the market in a timely manner is an impor¬
tant component of the distribution phase. If a farmer in South Georgia
grows strawberries, the value of the strawberries will be maximized if
they can be moved to northern markets quickly while they are fresh.
Because there is a lack of fresh strawberries in northern markets, they
will command a better price based on higher demand. The strawberry
farmer must determine whether to use a direct or indirect channel of
distribution to get the product to customers.
Channel Options
Entrepreneurs should examine the different options for channels of
distribution and choose the one that best meets the needs of their
business. The four basic options are illustrated and described below.
Channels of Distribution
Manufacturer-► Consumer
Manufacturer- *- Retailer-*- Consumer
Manufacturer-*- Wholesaler -► Retailer-*- Consumer
Manufacturer -► Agent -► Wholesaler -► Retailer-► Consumer
1. Manufacturer to Consumer The product can be sold by the
manufacturer directly to the consumer through the Internet, direct
mail, or television shopping channels. There are no intermediaries
involved in this option, and it is the most cost-effective. However,
sales opportunities are limited because it is more difficult for a man¬
ufacturer to reach the final consumer.
2. Manufacturer to Retailer to Consumer A sales force can sell
manufactured goods to retail stores, and the retail stores can sell to
the consumers. This is a more expensive option than selling directly
from the manufacturer to the consumer, but it offers more sales
opportunities.
3. Manufacturer to Wholesaler to Retailer to Consumer To
reach a large market, the manufacturer can sell large quantities
to a wholesaler who will then store and sell smaller quantities to
many retailers. Even though more intermediaries are involved in
this method, prices can be lower because the manufacturer is
producing mass quantities of the product, resulting in lower
production costs.
Develop Your
Reading Skills
List all of the chapter key
terms on the board. Have
students write a definition
for each key term before
reading the chapter. When
a key term is introduced in
the chapter, have students
compare the definition to
the one they wrote and
correct their definitions as
needed.
6.1
The Marketing Mix—Distribution 149
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4. Manufacturer to Agent to Wholesaler to Retailer to Consumer
With this option, the manufacturer does not get involved in selling.
Selling is handled by an agent. This option is often chosen by manu¬
facturers involved in international marketing.
Checkpoint
What are the four basic options of channels of distribution?
Distribute Goods and Services
Retail businesses, service businesses, and manufacturing businesses will
choose different channels of distribution based on the needs of their
businesses. In addition, all types of businesses must carefully plan their
distribution strategy to ensure customer satisfaction.
Retail Businesses
Retail businesses have many ways of selling products. As the owner of
a retail business, you can distribute products in various ways.
• Offer your product or service to consumers in a convenient loca¬
tion and during convenient hours.
• Use catalogs, fliers, and other advertisements to reach customers
who live outside the area. Take orders by phone or fax and ship
them directly to customers.
• Create a web site. People with access to the Internet can visit your
web site to learn about your products and services and to make
o nl ine purchases.
Luisa’s food and catering shop is a neighborhood business that
caters to local residents, so she does not think she would get much
benefit from catalogs. As a convenience for customers, Luisa decides
to stay open until 8:00 on weeknights and have hours from 10:00
until 4:00 on Saturdays and 12:00 to
4:00 on Sundays. She also creates a web
site that contains product descriptions,
menus, and order forms for customers
wanting to place catering orders.
Service Businesses
Most entrepreneurs who own service
businesses sell their services directly
to customers. These businesses have a
single, direct channel of distribution
because the production and consump¬
tion of a service happens at the same
time. For example, electricians, restau¬
rant owners, and lawyers deal directly
with the people who purchase their
services. It is important for a service
be your own boss
You plan to open a kite shop in a beach resort
town. You will sell custom-made kites as well as
kites you plan to import. You know that you will
have customers during the spring and summer
when families are visiting the beach, but you are
looking for ways to increase sales during the off¬
season when there are very few visitors to the
area. Describe ways that you could distribute
your products that would increase sales during
the off-season.
150 Chapter 6 Distribution, Promotion, and Selling
greene_0538446145_ch06, 12/21/7, 18:17, page: 151
provider to offer the service when it is needed by the customer to maxi¬
mize the value of the service. If the service cannot be provided when
needed, the customer will look for another provider. Some service busi¬
nesses, such as film developers, use retail stores to distribute their services.
Manufacturing Businesses
Manufacturers usually don’t sell direcdy to customers. Instead, they
make their products and then sell the products to other businesses,
such as retailers. The retail store then sells to the final consumer.
Some manufacturers distribute their products very broadly and
use all possible channels of distribution. Other manufacturers distrib¬
ute their products through selected outlets only. For example, high-
priced cosmetics usually are sold in exclusive department stores.
Inexpensive cosmetics are sold in discount stores and drugstores.
Checkpoint
Why are channels of distribution different for different types of
businesses?
Physical Distribution
Physical distribution includes
not only transportation but also
storage, handling, and packaging
of products within a channel of
distribution. A product may move
through several channel members
by various forms of transportation
to get it to the point where it will
ultimately be sold to consumers.
As the product is transported, it
will be stored at various points
along the channel as paperwork
is processed and it is moved to
the next channel member. It is
important for storage facilities
along the channel to be adequate
and safe to protect the product.
c
o
>
"to
Q
©
How can you determine the best method for
Transportation transporting goods?
There are many choices when transporting goods. Products can be
moved by airplane, pipeline, railroad, ship, truck, or a combination of
methods. You must determine which method is best and most cost-
efficient for your products. Factors to consider in making a transporta¬
tion decision include what you are shipping and where it is being shipped.
If you are shipping a small product to someone in your city, you would
probably choose a parcel delivery service. If you are shipping a large
item to another country, you would probably send the item by ship or
6.1
The Marketing Mix—Distribution 151
greene_0538446145_ch06, 12/21/7, 18:17, page: 152
air and use a truck to get the product to and from the shipyard or airport.
If the product is perishable, you may need to choose a carrier that provides
refrigeration or that can move the product very quickly to its destination.
Product Storage and Handling
Efficient storage allows channel members to balance supply and demand
of products. However, this adds to the cost of the products and also
adds the risk that products may be damaged or stolen while stored.
Most products are stored in warehouses at various points through the
channels of distribution. An automobile manufacturer in Japan selling
autos in the United States stores them in Japan at the factory and at the
shipyard until they are shipped. Once they arrive in the United States,
they will be stored at the port until they can be loaded onto automobile
carriers to be distributed to the dealers. Dealers have to provide storage
for the automobiles until they are sold to the consumer.
Packaging
Packaging is designed to protect the product from the time it is pro¬
duced until it is consumed. If the product is not protected during the
distribution phase, it could be damaged or destroyed, resulting in a
loss of money to channel members. Packaging requirements will vary
depending on the product, the way it is shipped, and where it is being
shipped. The auto manufacturer in Japan packages a small accessory item
being shipped to the United States differently than the autos it ships.
Receiving Goods to Sell
All types of businesses must receive goods from suppliers. Whether
or not they sell goods to customers, all businesses need paper, com¬
puters, raw materials, and more to be able to function. Retailing busi¬
nesses need to obtain goods to sell. A service business that grooms
pets needs to buy cat and dog shampoos and flea combs. A blanket
manufacturer must buy cotton.
Why does physical distribution play an important role for retail stores?
1 52 Chapter 6 Distribution, Promotion, and Selling
Lk4
greene_0538446145_ch06, 1/17/8, 14:51, page: 153
You can use various sources to locate distributors, wholesalers, and
manufacturers. Your public library and the Internet will have research
materials you can use. Some helpful sources include the following:
• The American Wholesalers and Distributors Directory, which lists
suppliers in a wide range of industries
• The Thomas Register , which lists all manufacturing companies
• Trade magazines that may include articles about or advertisements
for suppliers in your industry
Luisa needs to create relationships with wholesale distributors.
She must find companies she can trust to deliver high-quality products
quickly. Luisa will purchase products directly from companies that
produce them and through distributors. Her pastries come from a
local baker. Distributors will supply her with imported and domestic
canned goods, as well as meat, fruits, and vegetables.
Checkpoint
What factors are important to consider in the physical distribution of
products?
s i Assessment
THINK ABOUT IT
1. Which channel of distribution would be the best for a dairy farm
with limited production of a few products to be sold to a small
group of local customers?
2. How does distribution add value to goods, services, and ideas
being sold?
3. How is it possible to add intermediaries to the distribution chan¬
nel and at the same time increase profits?
MAKE ACADEMIC CONNECTIONS
4. GEOGRAPHY Think of a product that would have to be shipped
from another country to the United States. Research the route that
the product would follow while being shipped. Write a paragraph
describing the places the product would pass through and describe
the method of transportation that would be used for shipping.
5. COMMUNICATION Make a list of products that are sold directly to
consumers by the manufacturer. Share the list with your classmates.
TEAMWORK
Working in a team, choose one of the following products: apples, MP3
players, magazines, milk, motor oil, t-shirts, CDs, or DVDs. Draw flow
charts tracing all the channels of distribution possible for the product.
6.1 The Marketing Mix—Distribution 153
#
greene_0538446145_ch06, 1/17/8, 14:51, page: 154
• •
The Marketing
Mix—Promotion
List the many forms of
advertising and discuss
advantages and dis¬
advantages of each.
Define publicity and
describe ways to use
publicity as a promo¬
tional tool.
advertising
publicity
press release
public relations
V
l Focus on Small Business
The costs of promotion
From the moment she got the idea to open her own spa, al
Chachi could think about was Grand Opening Day! But she
knew that there were many things to do before she was jr '^'
ready to open. She took her time and worked through ..'
all the details, preparing her business plan and securing s ..
financing for the business. Now Chachi is ready to get TYYvtL I-.'I
the word out to her target market. She wants to be
sure that the information she shares gives customers a
reason to want to visit the spa. She considers offering
a free spa service with the purchase of a spa service
on opening day. This promotion could cost her up to
$120 per free service. Chachi has a staff of four, but | q
only two of them are certified to perform certain
spa services. So she knows she must consider any
staffing problems that could occur on opening day
as a result of the promotion.
Work as a Team Do you think Chachi's idea for an 1
opening day promotion is a good one? Why or why j^ ere are many f ac tors to
not? Can you suggest some alternative promotions consider when developing
that Chachi might use? promotions.
Promotion Strategies
No matter how wonderful your products, distribution methods, and
pricing, you will not succeed as an entrepreneur if customers do not
know about your business. You will have to promote your business to
make customers aware of the benefits of buying from you. Promotion
takes many forms, including advertising, publicity, personal selling,
and sales promotion. The strategy created by adopting a blend of
some, if not all, of these techniques is called your promotional mix.
Advertising
Service industries, manufacturers, and retailers all advertise. Advertising
is a paid form of communication sent out by a business about a product
1 54 Chapter 6 Distribution, Promotion, and Selling
greene_0538446145_ch06, 12/21/7, 18:18, page: 155
or service. It keeps your product or service in the public’s eye by creat¬
ing a sense of awareness. Advertising should help a business convey a
positive image.
Advertising can be very important for small businesses, particu¬
larly new ones. Advertising helps you communicate with potential cus¬
tomers. It lets them know what kinds of products and services your
company offers and why they should buy from you.
Large companies generally use advertising agencies to create their
advertisements. Using an advertising agency usually results in highly
creative and effective ads, but it can be very costly. As an owner of a
small business, you probably will handle your own advertising.
CHOOSE YOUR MESSAGE Your advertising should clearly communi¬
cate the message and image you want. If, for example, your marketing
strategy is to have low prices, advertisements highlighting your prices
might be appropriate. If your aim is to target customers who are will¬
ing to pay higher prices for excellent service, advertising that describes
your well-trained staff would fit your image.
Once you choose a message, you will need to decide which
advertising medium to use. To choose a medium, you will have to
consider both cost and effectiveness in reaching your target audience.
Online Advertising
did you KNOW?
In 2006 , the top W
m^r spmt ° ver
>18 bill,on combined
The top 10 spenders '
^ere as follows:
* ^cter & Gamble
General Motors
AT&T Inc.
Verizon
Time Warner Inc.
Ford Motor Co.
V/alt Disney Co.
Da/mlerChrys/er
Johnson & Johnson
News Corp.
As Internet use has increased, online advertising has become widely
used by businesses to promote their products and services. This is a
cost-effective way for businesses to get information to potential cus¬
tomers. Ongoing changes and advancements in online advertising
technology make it easier for customers to get the information they
need. Potential customers can use keyword searches and browse
through online catalogs by category to find information about avail¬
able products and services.
Online technology lets businesses interact with customers through
o nl ine chat rooms, blogs, and e-newsletters. A well-designed web site
can enhance customers’ experience by giving them easy-to-navigate
pages that contain up-to-date information on products and services.
TYPES OF ONLINE ADVERTISING O nlin e advertising combines color,
imagery, animation, and other elements to attract the reader’s atten¬
tion. Some common types of online advertising include the following:
• Banner Ad A graphic image or animation displayed within a rect¬
angular box across the top or down the side of a web page
• Floating Ad An ad which moves across the screen or floats above
the page content
• Wallpaper Ad An ad which changes the background of the page
being viewed
• Trick Banner A banner ad that looks like a dialog box with but¬
tons, often appearing like an error message or an alert
• Pop-Up Ad A new window that opens in front of the current
one, displaying an advertisement
6.2 The Marketing Mix-
Promotion
155
© Getty Images/PhotoDisc
greene_0538446145_ch06, 12/21/7, 18:18, page: 156
• Pop-Under Ad Similar to a pop-up ad except that it loads
behind the current window and does not appear until the user
closes one or more active windows
PAYING FOR ONLINE ADVERTISING Determining the effectiveness
of online advertising is more accurate than other forms of traditional
advertising. As a result, new methods of charging for online advertising
have been developed, based on the effectiveness of the ads. Three of
the most common ways online advertising is purchased are as follows:
• Cost per Mil (CPM) The charge to the advertiser is based on
the exposure of the message to a specific audience. CPM costs are
priced per thousand viewers reached with the message.
• Cost per Click (CPC) The charge to the advertiser is based on
the number of user clicks on the advertisement. This method offers
an incentive to the publisher of the ad to target the ad correctly. It
will come up when certain keywords are used in visitors’ searches
that correspond with the content of the ad. Payment to the pub¬
lisher is dependent upon viewers actually responding to the ad by
clicking on the hyperlink within the ad.
• Cost per Action (CPA) The charge to the advertiser is based on
the user completing a form, registering for a newsletter, or some
other action that will lead to a sale. The publisher assumes all the
risk in running this type of advertisement. Advertisers prefer this
type of charge for banner advertisements.
DISADVANTAGES OF ONLINE ADVERTISING Many marketers have
abused the Internet and its ease of use with excessive spamming —
sending mass mailings by e-mail to Internet users. Excessive use of
pop-ups, flashy banners, and spam has caused people to use pop-up
blockers, spam control, and spy-
ware to block promotions from
reaching their computers.
Luisa creates a web site that
provides information about her
gourmet food shop and catering
services. Because her customers are
local, Luisa decides not to use any
other forms of online advertising.
Television Advertising
Promotions on television reach
millions of people every day. It is
the best way to reach a large num¬
ber of people quickly. Television
advertising usually comes in the
form of commercials and paid
advertisements. Commercials
are usually less than a minute in
length and are run during breaks
in television programming. They
1 56 Chapter 6 Distribution, Promotion, and Selling
Why do you think television advertising often targets teenagers?
greene_0538446145_ch06, 12/21/7, 18:18, page: 157
are very short promotions about a product or business. Paid
advertisements—also known as infomercials—can last a half hour or
more and go into depth about the product being offered. Television
promotion allows businesses to communicate through both sight and
sound. It can be creative, entertaining, and informative.
Television advertising expenses include the fee you have to pay
the station to air the commercial. This fee is based on the amount of
time your advertisement or commercial plays. In addition, you must
also consider the costs of producing the commercial. If a one-minute
commercial costs $25,000 to produce, you pay the television station
$2,000 for each minute it airs, and you plan to have it aired 30 times,
the cost per minute would be [$25,000 + ($2,000 x 30)] -y 30 =
$2,833.33.
DISADVANTAGES OF TELEVISION ADVERTISING Advertising on tele¬
vision is very expensive. Producing even a low-budget commercial can
cost thousands of dollars. You will need to seek the help of video and
production professionals when developing a television ad. In addition,
you will have to pay a network or cable station to broadcast the
commercial.
Television reaches too broad an audience to be effective for most
businesses. If, for example, only one percent of the viewing audience
is interested in a particular product, advertising on television is not
likely to be cost-effective.
Because of the excessive costs and the fact that she may not reach
her target customer very effectively, Luisa decides that television adver¬
tising is not right for her business.
Radio Advertising
Radio advertising can be effective for small businesses. It is less expen¬
sive than television promotion. You can also be more certain you are
reaching your target market. Radio stations tend to attract a particular
kind of listener. Pop rock stations target teen¬
agers and people in their twenties. Classical or
talk radio stations usually attract older listen¬
ers. Selecting a station whose listeners share
the same demographics as your target market
can increase the effectiveness of your advertis¬
ing. You can contact stations and ask for a
demographic profile of their listeners to make
sure it fits your target market profile.
The costs of radio advertising are deter¬
mined in the same way as the costs of televi¬
sion advertising. You must pay for air time
and production costs.
DISADVANTAGES OF RADIO ADVERTISING
Radio is a purely audio message and can’t
visually show your product. Radio listeners
may not remember what they hear. They
... .
In 1999, Advertising Age magazine recounted
the history of the American advertising indus¬
try in the 20th century. Access school.cengage
.com/entrepreneur/ideas and click on the link
for Chapter 6. Read about some of the most
famous and effective ad campaigns, jingles,
slogans, and icons/spokespeople of the past
100 years. Then think about the current
advertising slogans and spokespeople you see
and hear every day. Do you believe any of
them could be added to Advertising Age's
"best-of" lists? Explain why or why not.
school.cengage.com/entrepreneur/ideas
6.2 The Marketing Mix—Promotion 1 57
greene_0538446145_ch06, 12/21/7, 18:18, page: 158
may tune out or even “surf the airwaves” during the commercial
spots. You may need professional help when developing a radio ad,
which can be costly.
Luisa is targeting middle-aged, upscale customers. To reach this
audience, she decides to advertise on the classical music station in her
community. She receives a demographic profile of the radio station’s
listeners and determines that her business targets a similar type of
person.
Newspaper Advertising
Newspapers have been the single largest form of advertising in the
United States. However, as more people are looking to the Internet
for news and information, newspaper circulation has dropped in many
cities. Small businesses may choose to promote their products and
services in the newspaper for the following reasons:
• It is relatively inexpensive.
• It targets a limited geographic area.
• It reaches large numbers of people.
Luisa decides to advertise in several local newspapers. She places
quarter-page ads in the morning paper serving the citywide area. She
also puts half-page ads in all of the free newspapers that serve her
community. The community papers reach a much smaller audience
than the large city newspaper, but they target the local audience Luisa
is trying to reach. Advertising in newspapers represents a cost-effective
way for Luisa to reach her target market.
DISADVANTAGES OF NEWSPAPER ADVERTISING Newspapers reach a
large audience, but much of that audience may not be interested in
your business. If, for example, you own a small gift shop that caters to
people only in your immediate area, advertising in a large city newspa¬
per with a wide circulation may not make sense. You would be paying
to reach thousands of people who are outside of your target market.
Another disadvantage of newspaper advertising is the fact that
your advertisement will compete with many others. Newspapers carry
so many advertisements that readers may overlook yours.
Telephone Directory Advertising
Telephone directories list the phone numbers of people and businesses
in a certain area. Directory ads usually appear on a page close to the
listing and phone number of the business placing the ad. Directory
ads can be similar in appearance to newspaper ads. Customers look in
telephone directories again and again, making them a good advertis¬
ing medium.
A disadvantage of directory advertising is that people look in the
directory only when they are already in search of a particular type of
business. With directory advertising, it is not easy to persuade custom¬
ers to try your business instead of a competitor’s. But, knowing how
important the phone book can be, Luisa decides to place a quarter-
page ad in the commercial directory distributed in her area.
1 58 Chapter 6 Distribution, Promotion, and Selling
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Direct-Mail Advertising
Direct-mail advertising includes fliers, catalogs, letters, and other
correspondence sent to target customers through the mail. Mailing
lists for target markets are available for purchase. If your business
sells hospital beds, you can purchase targeted mailing lists of people
who would purchase your product. You can also get lists of people
based on the geographic area. Companies that specialize in maintain¬
ing targeted mailing lists can provide almost any kind of list for any
kind of business.
Direct-mail advertising can be effective if people read it, but many
people throw out direct-mail advertising, calling it “junlc mail.” If you use
this method of advertising, you will want to come up with an attention-
grabbing design or other means of making people want to read it.
Luisa decides to use direct mail to target residents living in four
ZIP code areas near her store. She creates an attractive brochure with
a catchy slogan on the outside cover, and she mails it to residents in
the neighborhoods she is targeting.
Magazine Advertising
Magazines are an excellent way to aim products and services at spe¬
cific markets. Fitness magazines are full of advertisements for athletic
apparel and equipment. Magazines targeting teenage girls are full of
advertisements for products that appeal to them, such as cosmetics
and clothing.
Most magazines are nationally distributed. This can make them
inappropriate for businesses that sell in a limited geographic area.
Some large cities have local magazines, which would be an effective
way to target a certain area.
greene_0538446145_ch06, 12/21/7, 18:18, page: 160
The city in which Luisa
will be opening her gourmet
store has two local magazines.
One focuses heavily on restau¬
rants and entertaining. Luisa
checks the demographics of
the magazine’s readership and
finds that it targets the same
market she is trying to reach.
She decides to advertise in the
magazine every other month.
Outdoor Advertising
Outdoor advertising includes
billboards and signs. Such
advertising can be effective
in keeping the name of your
business in a place where many
people can see it. But because
people view such advertising
quickly as they drive by, it cannot include much information. Also,
outdoor advertising may not project the image you are trying to con¬
vey for your business.
When do you think outdoor advertising
is more effective than other forms of
advertising?
Transit Advertising
Transit advertising consists of signs on public transportation. Transit
advertising can provide more information than is typically seen on a
billboard. Such advertising can be effective if the market you are try¬
ing to reach includes many people who use public transportation.
Luisa’s target market lives in the suburbs and rarely uses public
transportation. For this reason, she rules out transit advertising, which
would not help her reach her target market.
Budgeting for Promotion
Once you determine your promotional mix, you must obtain the
approximate costs for all forms of advertising media that you plan to
use. Using the estimated costs, calculate a projected promotional bud¬
get. Compare this amount to your projected sales and decide what
percentage of the budget promotion represents. Determine whether
this budget is realistic for your business. Compare your percentage to
the industry average, which you can obtain from trade associations,
business publications, or business owners. Be sure your promotional
budget is in line with similar businesses.
Checkpoint
Why is promotion important to a business?
160 Chapter 6 Distribution, Promotion, and Selling
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Publicity
Publicity is a nonpaid form of communication that calls attention to
your business through media coverage. Publicity may be good or bad.
Good publicity can be as helpful as advertising. Publicity is free, but
staging an event or bringing in a celebrity to generate publicity usually
is not. While there are things you can do to attract positive media
attention, publicity is largely out of a business’s control.
Publicity can be negative if the media coverage is unfavorable.
For example, some community newspapers publish listings of restau¬
rants that have violated health code laws. Customers may see this
publicity and stop eating at those restaurants.
Luisa plans to have an open house to mark her first day in busi¬
ness. She hopes that the media will do a story on her grand opening.
To increase this chance, Luisa hires a popular local jazz band to per¬
form. She also invites her community’s leaders and personalities. She
writes and sends a press release to all of the local newspapers, maga¬
zines, and radio and television stations as well. A press release is a
written statement meant to inform the media of an event or product.
Luisa’s press release is shown on the next page.
To keep her name in the news, Luisa volunteers to write a weekly
cooking column for one of the free newspapers in her community. She
WHAT WENT WRONG
Dental Promotion Leaves
Bad Taste
Dr. George Nilsson, a periodontist, had built his
practice by using dentist referrals and word-of-
mouth promotions and by speaking at confer¬
ences. As a way to expand his business, he
decided to develop a program for dentists that
graphically tracked gum disease. It would take
the guesswork out of whether or not a patient
should go to a specialist. Dr. Nilsson designed
a step-by-step program, including a video and
printed guide. He started the PerioDent Com¬
pany, investing $150,000 in developing the
program elements, another $40,000 for initial
inventory, and $80,000 more for advertising
and public relations.
PerioDent sent out mailings to dentists,
periodontists, and schools. Dr. Nilsson took out
full-page ads in professional journals. Unfortu¬
nately, after six months, sales were not as
expected. There was a backlash of bad press
from Dr. Nilsson's peers. The majority of
dentists resented the PerioDent program
because they believed it questioned the way
they had been diagnosing gum disease. Addi¬
tionally, dentists accused it of having a negative
impact on their income because it prompted
some patients to visit periodon¬
tists instead of dentists. At the
same time, some periodontists
accused George of blatant self¬
promotion and greed.
t prompts
i
Think Critically
1. What could have
been done differ¬
ently to advertise
and promote the
program?
2. How might publicity
or public relations
activities help im¬
prove PerioDent's
image?
5
ft
i.
Plan your promotions
carefully.
#
6.2 The Marketing Mix—Promotion 161
Image Source
greene_0538446145_ch06, 12/21/7, 18:18, page: 162
FOR IMMEDIATE RELEASE
GALA OPENING OF LUISA’S GOURMET LUXURIES
Come celebrate the opening of Luisa’s Gourmet Luxuries on Friday,
September 20, at 8:00 P.M. Hors d’oeuvres, imported champagne, and French
pastries will be served at the event. Music will be provided by Glendale’s leading
jazz ensemble, Jazz Expressions.
The opening of Luisa’s Gourmet Luxuries marks the realization of a dream
by owner Luisa Ramirez. “As a specialty cook,” she says,“I could not always find
the products I needed. And I was never happy with the selection of produce and
baked goods in town.” Luisa decided to open a store that would offer the kinds
of products she could not find elsewhere in town.
Luisa’s Gourmet Luxuries offers an astounding selection of products,
including 14 different kinds of olive oil, 12 different kinds of rice, and pasta
products from several different countries. “Everyone’s taste is different,”
says Luisa, “so I offer a large selection.”
For more information contact:
Luisa Ramirez, Proprietor
Luisa’s Gourmet Luxuries
1610 Marbury Road, Glendale, CT
(275) 555-3983
likes the opportunity to educate the public about gourmet cooking and
to increase her store’s visibility as a seller of gourmet foods.
Public Relations
Public relations is the act of establishing a favorable relationship
with customers and the general public. Public awareness and positive
public relations can be generated for your business when you show
your community that you are involved and committed to it. There are
many ways to support your community, including the following:
• Sponsor a community sports team.
• Make a donation to a local charity or relief effort program.
• Get involved with the work-based program at your local high
school or community college.
• Become active in the local chapters of the Big Brothers or Big Sisters
organizations.
• Organize community programs such as cleaning up neighborhood
parks.
162 Chapter 6 Distribution, Promotion, and Selling
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Self-Promotion
A business should try to keep its name visible and in the forefront of
people’s minds. Self-promotion is a good way to do this. It’s a simple
way to generate “free” publicity. Self-promotion may include activities
such as the following:
• Giving away t-shirts and hats displaying your company name and
logo.
• Distributing pens, notepads, coffee mugs, and other useful items
printed with the name, telephone number, web site address, and
logo of your business.
Checkpoint
What are the advantages and disadvantages of publicity?
6.2 Assessment
THINK ABOUT IT
1. Why is it important for a business to consider its target market
when selecting an advertising medium?
2. Describe some public relations activities businesses in your area
have performed.
3. How would you decide which method of advertising is the best
and most cost-effective for your business?
MAKE ACADEMIC CONNECTIONS
4. PROBLEM SOLVING You are opening a new gardening service
business in your community. You will help your customers plan
their flower and vegetable gardens and shop for the plants for
them. You will also provide planting services if your customers
need them. Use the six-step problem-solving method to deter¬
mine how to advertise the grand opening of your business.
5. MATH You have produced a one-minute television commercial
for $20,000. You plan to air it on a local television station for a
cost of $1,000 per minute. You plan to air the commercial 20 times.
What is the advertising cost per minute?
TEAMWORK
Working with team members, plan the grand opening activities for
Fit For U, a fitness center that provides personal trainers for all clients
along with a personalized fitness plan. Describe all of the promo¬
tional activities that you will conduct for the business. Write a press
release to inform the local media of the opening.
6.2 The Marketing Mix—Promotion 1 63
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• •
■ r —.1,
H T ■
• Explain the role of sell-
• personal selling
ing in a business.
• rational buying
• Determine how to meet
decisions
customer needs and
• emotional buying
wants.
decisions
• Discuss other types of
• sales promotion
promotional activities.
• rebate
• telemarketing
1 Focus on Small Business
V<c-
Expanding the business
JoJo started her dance studio five years ago. Over the
years, many of her clients have expressed a desire for JoJo
to sell dance attire and shoes at her studio. She looks into
the idea of adding a clothing line and thinks that
it would be a good addition to her business. She
decides to hire Claire to run the clothing side of
the business. Claire has worked in retail sales for
over ten years and is very customer-oriented. By
adding Claire to her staff, JoJo will be able to
offer her clients another service to meet their
needs. In addition to her dance clients, JoJo
wants to make the clothing line available to
the general public.
Work as a Team Do you think that JoJo is
making a good decision in adding a retail cloth¬
ing line to her dance studio? Why or why not?
What kinds of promotions do you think JoJo
should use to try to attract new customers?
Businesses must create the
right promotional mix to
attract customers.
Selling
Good selling skills are important to an entrepreneur. You will be sell¬
ing your business ideas to potential investors in the beginning stages
of developing your business, and you will be selling products or ser¬
vices to customers once you open your business. You might need to
hire others to assist you with your business, and you will need to be
sure that they also have good selling skills.
To many customers, the salesperson is the business. This may be
the only representative of the company the customers ever come in
contact with, so it is important for the salesperson to create a positive
image of the company. Selling is the way a business makes money, so
a salesperson plays a very important role.
164 Chapter 6 Distribution, Promotion, and Selling
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Why do you think personal selling is an important component in the success of retail stores,
such as hardware stores?
Personal Selling
Personal selling is direct communication between a prospective buyer
and a sales representative in which the sales representative attempts to
influence the prospective buyer in a purchase situation. It is important
for the salesperson to uncover and identify the customer’s needs, issues,
and concerns so that they can be addressed throughout the sales process.
Product Knowledge
To be successful at selling a product or service, a salesperson must
have thorough knowledge of the features and benefits of the product
or service. Features are the physical characteristics or capabilities of
the product or service. Benefits are the advantages that could result
from those features. Customers are mainly interested in the benefits
they will receive from purchasing a product or service. Many times
a salesperson builds a sales presentation around the features alone.
However, customers who see the benefits of purchasing the product
or service will be less likely to object to the price of the item as the
sales transaction progresses.
It is important for a business to spend time training salespeople
about the product or service being sold as well as the industry in which
they are working and the market in which they are selling. They should
also be familiar with their own company as well as their company’s com¬
petition. The more salespeople know about the internal and external
environment in which they are working, the more effective they will be.
Checkpoint
Why is selling important to a business?
6.3 Selling and Promoting 165
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Determine Customer Needs and Wants
Customers purchase goods and services in order to satisfy needs. The
need may be as basic as food, water, or shelter. Or, it may be a more
complex need, like the need for esteem. A salesperson must determine
what need the customer is seeking to satisfy in order to sell a product
or service to meet the need. Lower-level needs are not usually met
through personal selling. Customers must purchase certain items to
satisfy their basic needs and do not need the assistance of a salesperson.
Selling skills become more important as customers are seeking to meet
upper-level needs.
Needs Assessment
Customer needs within a target market can be identified through mar¬
keting research. The information helps a business decide what type of
product or service to offer customers. When an individual customer
goes shopping, it is up to the salesperson to find out as much as possi¬
ble about the customer’s situation by conducting a needs assessment.
This involves interviewing the customer to determine his or her specific
needs and wants. The salesperson can then help identify the range of
options the customer has for satisfying those needs and wants.
Some customers will know exactly what they want, and the fulfill¬
ment of their needs is referred to as need satisfying. Even though the
customer knows what he or she wants, the salesperson must be flexi¬
ble and willing to commit company resources and selling time in
order to better satisfy needs. When the need is not identified, the pro¬
cess of satisfying the need is called problem resolution. Problem resolu¬
tion requires the salesperson to adopt the customer’s point of view,
ask questions to assess the nature of needs and specific requirements,
and act as a consultant to assist the customer in solving the problem.
Buying Decisions
Customers are influenced by rational and emotional buying motives.
Rational buying decisions are based on the logical reasoning of cus¬
tomers. Customers evaluate their options and make a purchase only
after careful thought. Rational buying motives include safety, simplic¬
ity, quality, reliability, economy, convenience, service, durability,
knowledge, money gain, and ease of operation. Emotional buying
decisions are based on the desire to have a specific product or service.
Feelings, beliefs, and attitudes can influence buying decisions. Often,
little thought or time is spent making an emotional decision. Some
emotional buying motives include fear, protection, appearance, recre¬
ation, improved health, comfort, recognition, pride of ownership, imi¬
tation, prestige, and popularity.
Customer Decision-Making Process
Following a problem-solving process is the best way to make a deci¬
sion. This is also true with customers when they are making a decision
to purchase a product or service. The steps are to define the problem,
gather information, identify various solutions, evaluate alternatives and
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select the best option, take action, and evaluate the action. A sales¬
person can assist customers through this process by helping them
define their need, showing them all the products or services that could
meet the need, explaining the features and benefits of the various
options, making the sale, and following up with the customer.
1
Checkpoint
Why is it important to meet customer needs and wants in the selling
process?
Other Types of Promotion
Advertising, publicity, and personal selling are not the only ways to
draw attention to your business. You can also offer sales promotions
or use telemarketing to promote your business.
Famous
Anne 'Bar^e
Playing with paper dolls as a child
led Anne Barge to her multimillion-
dollar business selling bridal gowns.
Internationally known as an expert
in the field of bridal wear, her
designs are rooted in research and
inspired by vintage culture. Anne
is involved in the development of
each gown bearing her name and
offers three distinctive brands that
can satisfy any customer's taste and
budget. Customer service is her top
concern, and she helps each cus¬
tomer have a unique style for her
special day.
Anne began her career in the
fashion field by working for others.
In 1996, Richard Branson, owner
of Virgin Records music label,
asked Anne to set up a bridal store
in London for him. As manager of
Virgin Bride, she introduced British
brides to a totally new look. Even
the British tradition of having only
children as attendants changed
when Anne introduced adult
bridesmaid gowns to the United
Kingdom.
In 1999, Anne decided to
become an entrepreneur. She
opened a bridal store in Atlanta,
Georgia, and launched the Anne
Barge Bridal Collection. Her col¬
lection combined classic designs
in the finest of silks with museum-
quality beading and embroidery,
never seen before in the world¬
wide bridal market. Now her line
is represented in over 100 of the
finest stores in the United States, I
_c
the United Kingdom, Spain, and s
Japan. The designing dreams of I
a little girl have come true in a ©
big way!
Think Critically
How important is Anne's commit¬
ment to customer service to the
success of her business? Why do
you think brides would choose one
of Anne's gowns over those of
another designer?
Do you think working for others
before becoming an entrepreneur
contributed to Anne's success?
6.3 Selling and Promoting 1 67
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A sales promotion is an incentive offered to customers in order
to increase sales. Examples of sales promotions include:
• contests
• coupons
• frequent-buyer
• free samples
• special events
reward programs
• rebates
• gift certificates
Some companies offer rebates. A rebate is a refund offered to
people who purchase a product. Customers who purchase a $12 bot¬
tle of olive oil may be entided to a $2 rebate from the manufacturer.
Telemarketing is using the phone to market your product or
service. It can be an inexpensive, effective way to let people know
about your business or about special offers. Keep in mind that some
consumers consider telemarketing to be annoying and would rather
not be contacted while they are relaxing at home.
Checkpoint
What is the purpose of sales promotions?
Assessment
THINK ABOUT IT
1. Why is personal selling used in a business?
2. What is the purpose of the needs assessment?
3. Name some sales promotions that an entrepreneur might use.
Can you think of examples in addition to the ones listed in the
lesson?
MAKE ACADEMIC CONNECTIONS
4. MARKETING Customers are more likely to purchase a product if
they clearly see its benefits. When selling products, you must
learn to sell product benefits rather than product features. Using
the Activity CD, open the activity, "Turn Features into Benefits."
Print a copy and complete the activity.
5. COMMUNICATION You plan to use telemarketing to market
your pressure-washing business to people in your local commu¬
nity. You can wash driveways, walkways, patios, decks, vinyl sid¬
ing, and lawn furniture. Write a script you will use when making
the sales calls.
TEAMWORK
Working in a team, choose a business in your community. Make a list
of all the marketing efforts that this business uses. Outline what you
think the marketing plan for this business would look like.
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Sharpen Your
Entrepreneurial Skills
Marketing and the Web
Many people believe that using the Internet for marketing a business
is essential to its success. There are many electronic tools available,
and you will need to analyze them to be sure you are using the right
tools for your business. As an entrepreneur, it will be up to you to
evaluate the best way to use the Web to market your business.
Some of the advantages of using Web technology include:
• Cost savings It is much cheaper to send an e-mail with market¬
ing information than it is to print and mail advertisements.
• New customers A web site can attract new customers from all
over the world to your business.
• Networking Opportunities You can use blogs, message boards,
and online discussion groups to network with many people.
Some of the disadvantages of Web technology include:
• Ineffective e-mails If someone does not already know about
your business, e-mail might not be the best way to reach him or
her. Many people delete mail from senders they do not know and
use spam filters to keep such mail from reaching their inbox.
• Loss of personal contact You lose the personal contact with
your customers if you rely only on the Web to communicate with
them. Many people hesitate to do business with someone that
they have not met.
TRY IT OUT
You own a print shop that prints fliers, business cards, catalogs,
and stationery for local businesses. You are considering creating
a web site for your business. Make a list of purposes for which
you might use the site. Then determine the advantages and
disadvantages of using the web site for the purposes you listed.
Evaluate whether the Web could be a valuable marketing tool
for your business.
Expense of maintaining web site Developing and maintaining
an effective web site can be very expensive and time-consuming.
Inefficient use of time Responding to numerous general
inquiries from people using your web site can be very time-
consuming. It would be more efficient to have a FAQs
(Frequently Asked Questions) page on your web site that
provides answers to commonly asked questions.
Sharpen Your Entrepreneurial Skills 1 69
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Chapter 6 Assessment
SUMMARY
6.1 The Marketing Mix—Distribution
1. The four basic options for channels of distribution are: (1) manu¬
facturer to consumer; (2) manufacturer to retailer to consumer;
(3) manufacturer to wholesaler to retailer to consumer; and
(4) manufacturer to agent to wholesaler to retailer to consumer.
2. Entrepreneurs should examine the different options for channels
of distribution and choose the one that best meets the needs of
their business and their customers.
3. Transportation, product storage and handling, and packaging
needs are all factors that play an important role when choosing
methods of physical distribution.
6.2 The Marketing Mix—Promotion
4. Advertising may be done on the Internet, on television, on radio,
in the newspaper, in a telephone directory, through direct mail¬
ings, in magazines, and on billboards and signs. Each advertising
medium has its own set of advantages and disadvantages. The best
option for a business is the one that reaches the desired target
market in the most cost-effective way.
5. Publicity is a nonpaid form of communication that calls attention
to your business through media coverage. A business may capture
media attention by submitting a press release and through public
relations activities.
6.3 Selling and Promoting
6. Selling skills are important because sales are how a business makes
money. A salesperson must identify the customer’s needs, issues,
and concerns so that they can be addressed throughout the sales
process. To be successful, a salesperson must have a thorough
knowledge of the features and benefits of the product or service.
7. Needs assessment involves interviewing the customer to determine the
customer’s specific needs and wants. Customers’ buying decisions may
be rational (based on logic) or emotional (based on desire). Customers
often use the problem-solving process to make buying decisions. The
salesperson can assist customers during each step of this process.
8. Offering an incentive to customers in order to increase sales is
called sales promotion. Examples include contests, frequent-buyer
reward programs, rebates, free samples, special events, coupons,
and gifts. Telemarketing is an effective way to let people know
about your business and special offers.
What do you hnow now?
Read Ideas in Action on page 147 again. Then answer the questions a
second time. How have your responses changed?
170 Chapter 6
Distribution, Promotion, and Selling
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. Routes that products and services take from the time they are pro¬
duced to the time they are consumed
2. Moves the product directly from the manufacturer to the consumer
3. Uses intermediaries that move products between the manufacturer
and the consumer
4. A paid form of communication sent out by a business about a
product or service
5. The act of establishing a favorable relationship with customers and
the general public
6. Direct communication between a prospective buyer and a sales
representative
7. Purchase decisions based on the logical reasoning of customers
8. An incentive offered to customers in order to increase sales
9. A nonpaid form of communication that calls attention to your
business through media coverage
10. A written statement meant to inform the media of an event or product
11. Purchase decisions based on the desire to have a specific product
or service
m.
n.
o.
advertising
channels of
distribution
direct channel
distribution
emotional buying
decisions
indirect channel
personal selling
physical distribution
press release
public relations
publicity
rational buying
decisions
rebate
sales promotion
telemarketing
12. A refund offered to people who purchase a product
REVIEW YOUR KNOWLEDGE
13. Which of the following type of business is least likely to distribute
its products or services directly to consumers?
a. retail business
b. service business
c. manufacturing business
d. none of the above directly distribute products to consumers
14. Which channel of distribution would be best for someone who
makes and sells pottery at his or her home?
a. manufacturer to consumer
b. manufacturer to retailer to consumer
c. manufacturer to wholesaler to retailer to consumer
d. manufacturer to agent to wholesaler to retailer to consumer
15. True or False: Agents and wholesalers are intermediaries that facili¬
tate the flow of goods through direct channels of distribution.
16. Goods that arrive at their destination damaged probably have a
problem with the _?_ in the physical distribution process.
17. Examples of promotion include
a. advertising c. sales promotion
b. publicity d. all of the above
18. True or False? Publicity is always good for a business.
Chapter 6
Assessment
171
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19. If you have a local business that offers a service to consumers in
your neighborhood, which of the following would be the best way
for you to advertise?
a. a commercial aired during the Super Bowl
b. an advertisement on satellite radio
c. an advertisement in the local newspaper
d. a billboard on a major interstate highway
20. An online ad that changes the background of the page being viewed is a
a. banner ad c. wallpaper ad
b. floating ad d. trick banner
21. Which of the following is the least important in the sales process?
a. customer’s needs c. customer’s concerns
b. customer’s issues d. customer’s income
22. Which of the following would be the best way for you to promote
your pressure-washing business?
a. free sample c. contest
b. discount coupon d. gift with purchase
23. A salesperson who approaches all customers the same way is leav¬
ing out which important part of the sales process?
a. needs assessment c. rational buying decisions
b. product knowledge d. none of the above
APPLY WHAT YOU LEARNED
24. You are a home improvement contractor. What role will channels
of distribution play in your business? Which form of promotion
will work best for you? Why? How can you assist your customers
in their decision-making process?
25. You are going to open a retail store that will offer gifts and acces¬
sories. Your target market is 13- to 15-year-old girls. Describe the
promotional mix you will use for your business.
MAKE ACADEMIC CONNECTIONS
26. MARKETING When creating advertisements and promotions
for your products, you must know who your target market is in
order to create a message that will be effective. Using the Activity
CD, open the activity, “Who Is the Target Audience?” Print a
copy and complete the activity.
27. COMMUNICATION You are opening a health club and spa.
Write a press release to local newspapers and radio and television
stations. You are also buying time on a local radio station. Write
the commercial that will air on the radio. List some public rela¬
tions activities that could promote your business.
28. RESEARCH Many companies have reward programs for their
customers. Research the reward program of a company with which
you are familiar. Prepare a presentation about the program, including
information on who is eligible, how customers participate, and the
rewards available to participants. How does the reward program help
build customer loyalty? Present your findings to the class.
172 Chapter 6 Distribution, Promotion, and Selling
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be charged using the CPA method at a rate of 50 cents per regis¬
tered visitor. During one week, your web site received 75,345 hits
from visitors linking from the advertisement, 12,000 of those
inquired about your product, and 7,432 of them registered their
personal information with your web site. How much will you have
to pay the publisher of your ad?
WHAT WOULD VOU DO?
You are the owner of Cookies For You. You have been selling your
cookies in gift baskets designed for adults. Recently, you decided to
start offering cookie gift baskets for children as well. You are think¬
ing about doing a promotional activity at a local day-care center in
which you will give free cookies to all of the children. However, with
all of the recent news reports and stories about childhood obesity,
you are not sure that you should be promoting cookies to children.
You are concerned that your marketing strategy will be viewed
negatively.
What would you do? Is it your responsibility to monitor the
eating habits of children, or is this something for which only their
parents should be responsible? How can you promote your cookie
gift baskets in a positive way?
V
J
build your
JL W U IV -
Business Plan
Project
This activity will help you complete the marketing plan for your busi¬
ness idea.
Determine the channels of distribution that you will use for your busi¬
ness. Include information on how you will get products from your sup¬
pliers as well as how you will distribute your products or services to
your customers.
Develop selling strategies and company policies to ensure that the inter¬
nal environment of your business promotes good customer relations.
Get advertising rates for a local radio station, television station, and
newspaper. Also obtain rates for Internet advertising. Choose the
medium that is best for your business and write an advertisement
for that medium.
To generate publicity, write a press release that you
media.
send to the
After you have completed your marketing plan, review it to be sure
that the questions listed on page 124 in Chapter 5 are answered. If
necessary, revise your marketing plan as needed to ensure that all of
these questions are addressed.
Chapter 6
Assessment
173
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Planning a Career in
Public Safety
Public Safety,
Corrections
& Security
UAI
IVIy dad’s girlfriend is excited
about starting a business with her
new partner. Although she likes
her prospective partner, she has
hired a reputable private investiga¬
tor to do a complete background
check. She wants to be sure diere’s
nothing in this person’s back¬
ground that could impede the
progress of their business.”
How do individuals check the
backgrounds of household employ¬
ees? How do corporations, widtin
the confines of the law, determine
their employees are honest?
Private investigators provide a
variety of services to individuals
and corporations including child
support investigations, employee
background checks, and corporate
asset protection.
EMPLOYMENT OUTLOOK
• Faster than average job growth
is expected.
• The need to protect confidential
and proprietary information will
drive an ongoing need for pri¬
vate investigators.
• About one-quarter of private
investigators are self-employed.
JOB TITLES
• Insurance Fraud Investigator
• Surveillance Operative
• Assets Protection Investigator
• Loss Prevention Detective
• Certified Legal Investigator
• Hotel Detective
to their investigative area of
expertise.
• A degree in criminal justice can
be helpful.
• Most states require licensing.
What's it like to work in Public
Safety Otto, a self-employed
private investigator, has spent the
early part of his day performing
hidden surveillance. His client,
an industrial manufacturing firm,
suspected fraudulent filing of a
workers’ compensation claim by
an employee. The employee
claimed that a recurring on-the-job
back injury prohibited her from
reporting to work. Otto had just
finished his final surveillance of the
employee. Today, she was playing
tennis at a local park. Otto now
had photos and video coverage of
the employee in multiple scenarios
performing physical activities that a
back injury would prevent. Otto’s
client will be able to prove fraudu¬
lent filing of workers’ compensa¬
tion claims.
Otto is looking forward to
dinner this evening as the client
is buying! The client, who is the
owner of a local restaurant chain,
hired Otto to investigate potential
employee theft. Otto has been
collecting data through hidden
video cameras. Tonight, as he
dines at the restaurant, he will
focus his observation on one of
the servers who is suspected of
undercharging friends and family
for their meals.
NEEDED SKILLS
• Many private investigators are
retired military or law enforce¬
ment professionals.
• Investigators often have prior
work experience in fields related
What about you? Would you
enjoy lawfully tracking down infor¬
mation that could help individuals
and companies do a better job of
protecting their rights?
174 Chapter 6
Distribution, Promotion, and Selling
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:
ill !!■
jr
ENTREPRENEURSHIP PROMOTION
PROJECT
*rrrA
'mmgle/M
V he Entrepreneurship Promotion Project provides students an oppor¬
tunity to demonstrate the skills needed in planning, organizing, imple¬
menting, and evaluating a campaign to educate chapter members and
other individuals about entrepreneurship opportunities. Chapter mem¬
bers will utilize their knowledge of entrepreneurship and marketing
skills to communicate the benefits of entrepreneurship to the target
audience. Participants will share the information with a selected audi¬
ence in the community (examples: middle-school students, elementary
students, civic organizations).
This project can be completed by one to three students. It
includes a written plan and oral presentation. Major sections in the
body of the written plan include the Executive Summary; Introduc¬
tion; Management of Activities to Inform Chapter Members; Manage¬
ment of Activities Targeted at Outside Audience; Evaluation and
Recommendations; Bibliography; and Appendix (optional).
PERFORMANCE INDICATORS EVALUATED
• Demonstrate knowledge and understanding of entrepreneurship.
• Engage in activities that clarify and enhance understanding of
entrepreneurship.
• Plan and implement presentation/activities to educate and promote
entrepreneurship to targeted groups.
• Derive facts from data, findings from facts, conclusions from findings,
and recommendations from conclusions.
• Demonstrate critical-thinking skills.
• Develop a concept from an idea to reality.
• Plan, organize, and conduct a group project.
• Determine priorities and set deadlines.
• Evaluate group presentations.
Go to the DECA web site for more detailed information.
Think Critically
1. What are the benefits of presenting this project to elementary or middle-
school students?
2. Why is it important to explain risks involved with entrepreneurship?
3. Who are popular examples of entrepreneurs?
4. What are three characteristics of successful entrepreneurs?
www.deca.org
Winning Edge 175
greene_0538446145_ch07, 12/21/7, 18:34, page: 176
7.1 Decide to Purchase, Join,
or Start a Business
7.2 Choose a Legal Form
of Business
7.3 Legal Issues and Business
Ownership
school.cengage.com/entrepreneur/ideas
176
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IDEAS !M ACTIOM
Tina Wells, CEO of The
Buzz Marketing Group, Inc.
Capitalize on Youth Marketing
T he corporations of today were started as small
businesses—often with single owners—at some time
in the past. Such is the case with The Buzz International
Marketing Group, Inc. Tina Wells started The Buzz,
her first business, when she was just 16-years old.
Ten years later, she found herself named as one of
Entrepreneur magazine's "Young Millionaires" and
the CEO of The Buzz Marketing Group, Inc.
Tina has been able to build a career doing
what she loves. She always had a love for fashion
and a fascination with pop culture. At 16, she began
writing reviews for New Girl Times, a newspaper for young girls, of com¬
panies and their products that targeted teens. For her work, she received
free products from more than 40 companies. After three months, she
called on ten of her friends to help her, and they started The Buzz. Tina
noticed that companies were not really connecting with the teens they
were targeting as customers, so she began submitting her reviews directly
to the companies. She was amazed by the positive response she received
from the companies. A marketing director at one company told her that
she had just paid someone $25,000 for the same type of information, but
that Tina's report was better! This was when Tina realized she could get
paid for doing what she loved. And so, the Buzz Marketing Group was
born. She got her first paying client while she was a freshman in college.
Tina went on to earn her B.A. in Communication Arts from Hood
College. She felt that her degree gave her more credibility as a business¬
woman. Today the Buzz International Marketing Group, Inc. is head¬
quartered in New York City and employs ten people. In addition to
the staff, over 9,000 teenage and young adult "buzzspotters" are out
researching what their peers are thinking and doing. The buzzspotters
help Tina stay in touch with what's happening.
Tina realizes that the profits from her business must be reinvested
in the business in order to keep it growing. Even though she loves to
shop, she invests profits into training seminars for the "buzzspotters"
and other things that will contribute to the success of her business.
Today Tina speaks regularly to professional audiences across the
country. She has been quoted and featured in numerous business publica¬
tions, including O Magazine, New York Times, Ebony, and Entrepreneur.
What do you Icnow?
What unmet need did Tina find that led to her first business?
Tina set up her business as a corporation. What is a corporation?
Name some of today's successful corporations that started out as a
small business owned by one or two people.
greene_0538446145_ch07, 1/17/8, 14:55, page: 178
Decide to Purchase,
Join, or Start
a Business
• Discuss purchasing an
existing business.
• Describe how to evaluate
a franchise opportunity.
• List advantages and dis¬
advantages of joining
a family business.
• Determine whether to
start a new business.
Focus on Small Business
• franchise
• initial franchise fee
• startup costs
• royalty fees
• advertising fees
How can we get this dough rising?
After graduating from the culinary arts institute, Midori and Crystal
wanted to realize their dream of owning a bakery. Midori found an ad
for a bakery that was for sale. "If we purchased it, we would have the
equipment and supplies needed to get started right away," she told
Crystal. "If that's the Holcombe family bakery, we'd better stay away,"
Crystal warned Midori. "I was in there last week, and Mrs. Holcombe
and her daughter were fighting about something. No one was waiting
on the customers, and everyone was getting upset. If we bought that
bakery, we would have to do something to change people's opinions
about the service."
"We could always start our own bakery 'from scratch,'" Crystal
suggested. "Very funny!" Midori replied. "But that could
be hard too. We would have to find a location, buy every¬
thing we need, and build a customer base." "Well,"
Crystal said, "maybe we should buy a franchise.
"That's a possibility, but we'd have to follow
the rules and regulations set by the franchise
company," Midori said. "Gosh, it's not easy to
get the dough rising, is it?" Crystal replied.
Work as a Team What do you think would
be some of the advantages and disadvantages
to Midori and Crystal of starting a business
from scratch, buying an existing business,
or buying a franchise?
4 > .
.V
There are many ways to
begin a business venture.
Purchase an Existing Business
When most people consider going into business for themselves, they
think about starting a new business. But purchasing an existing busi¬
ness could be a good option. Owners sell their businesses for a variety
of reasons. Reasons can include insufficient sales or profits, new com¬
petition, fear of changing economic conditions, retirement, a dispute
among partners, death or illness of a partner, and the owner’s desire
to do something different.
178 Chapter 7
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There are many ways to find businesses that are for sale. You
may find advertisements in the classified section of the local news¬
paper. You might decide to use a business broker who sells businesses
for a living. Other people in your industry might know of businesses
for sale. You might also learn about available businesses through land¬
lords and leasing agents, lawyers and bankers, management consul¬
tants, the Small Business Administration, the Chamber of Commerce,
and bankruptcy announcements.
Advantages of Buying an Existing Business
There are many advantages to buying an existing business.
1. The existing business already has the necessary equipment, sup¬
pliers, and procedures in place. It may also have built up good¬
will , or customer loyalty. You may want to change some of the
policies and procedures established by the former owner, but fine-
tuning existing systems is likely to be much easier than creating
systems from scratch.
2. The seller of a business may train a new owner. The previous
owner or experienced employees may be willing to help the new
owner learn about the company.
3. There are prior records of revenues, expenses, and profits. This
means that financial planning will be easier and more reliable than
it would be for a completely new business.
4. Financial arrangements can be easier. The seller of the business
may accept an initial partial payment and allow the rest to be paid
off in monthly installments. This can reduce or eliminate the need for
bank financing. If bank financing is needed, getting it may be easier
because banks are more likely to lend to an established business.
Develop Your
Reading Skills
Before reading the chapter,
make a list of questions you
have about the different
types of business ownership
and the legal issues facing
business owners. Try to find
answers to your questions as
you read the chapter.
Disadvantages of Buying an Existing Business
Buying an existing business sounds like an easy way to become an entre¬
preneur, but it can be risky. There are disadvantages to buying a business.
1. Many businesses are for sale because they are not making a profit.
Owners often try to sell businesses that are not financially profitable.
2. Serious problems may be inherited. Businesses can have poor
reputations with customers, have trouble with suppliers, or be
poorly located.
3. Capital is required. Many new entrepreneurs just do not have the
money to purchase a mature business. Starting small may be their
only option.
Steps in Purchasing a Business
Buying a business is a complicated process that requires serious
thought. If you are considering buying a business, you will want to
follow these steps:
1. Write specific objectives about the kind of business you want to
buy, and identify businesses for sale that meet your objectives.
This will help you find the right business for what you want to do.
7.1 Decide to Purchase, Join, or Start a Business 179
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2. Meet with business sellers or brokers to investigate specific
opportunities. Ask about the history of the business, the reason
for its sale, its financial performance, and the price the owner is
asking for it.
3. Visit during business hours to observe the business in action.
Inspect the facility closely to make sure that it meets your needs.
Observe how the business operates when it is open to customers.
4. Ask the owner to provide you with a complete financial account¬
ing of operations for at least the past three years. Analyzing
these reports will help you see how much profit you can make
and how much you will probably be paying out in expenses.
5. Ask for important information in written form. Get a list of all
assets to be transferred to the new owner, a statement about any past
or pending legal action against the business, a copy of the business
lease or mortgage, and a list of all the suppliers. Have an accountant
and a lawyer help you review all of the material. Be suspicious if the
owner refuses to provide all of the information you request.
6. Determine how you would finance the business. Contact lend¬
ing institutions, and ask the seller if he or she would be willing to
finance part or all of the purchase.
7. Get expert help to determine a price to offer for the business.
An accountant or a valuator —an expert on determining the value
of a business—can help. Present the offer in writing to the seller. If
an agreement is reached, have a lawyer draw up a sales contract.
Checkpoint
What are some of the advantages and disadvantages of buying an
existing business?
Franchise Ownership
Purchasing a franchise is another route by which you can become an
entrepreneur. A franchise is a legal agreement that gives an individual
the right to market a company’s products or services in a particular
area. A franchisee is the person who purchases a franchise agreement. A
franchisor is the person or company that offers a franchise for purchase.
More than 770,000 people in the United States own franchises,
and the number is growing. Franchising opportunities are available in
virtually every field, from motels to pet stores to video oudets. The
Franchise Opportunities Handbook , a publication of the U.S. Depart¬
ment of Commerce, lists more than 1,400 franchise opportunities by
category. It also provides information about the costs and capital
requirements. Additional sources for finding out about franchise
opportunities include the following:
• A Consumer Guide to Buying a Franchise , published by the Federal
Trade Commission
• Books on franchising available at your public library
180 Chapter 7 Select a Type of Ownership
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• The Wall Street Journal
• Magazines such as Forbes, Barron’s, Business Start-Ups, Entrepreneur,
and Inc
Operating Costs of a Franchise
If you decide to purchase a franchise, you will have to pay an initial
franchise fee, startup costs, royalty fees, and advertising fees. The
initial franchise fee is the amount the local franchise owner pays in
return for the right to run the franchise. The fee can run anywhere
from a few thousand to a few hundred thousand dollars. It is usually
nonrefundable. Startup costs are the costs associated with begin¬
ning a business. They include the costs of renting a facility, equip¬
ping the outlet, and purchasing inventory. Royalty fees are weekly
or monthly payments made by the local owner to the franchise company.
These payments usually are a percentage of your franchise’s income.
Advertising fees are paid to the franchise company to support televi¬
sion, magazine, or other advertising of the franchise as a whole.
Jim Saurbrey purchased a Subway restaurant franchise. For the
right to use the Subway name and logo, Jim paid a franchise fee of
$12,500. In addition, Jim spent $70,000 renting restaurant space,
purchasing equipment and supplies, and obtaining legal and account¬
ing services. During its first year, Jim’s franchise earned $36,000 in
profits. He paid 8 percent, or $2,880, to Subway in royalty fees.
During Jim’s second year in business, his restaurant earned $51,000,
and he paid $4,080 in royalty fees.
Investigate the Franchise Opportunity
• Names, addresses, and telephone numbers of
at least ten previous purchasers who live nearest
to you
• The fully audited financial statements of the seller
• Background and experience of the business’s key
executives
• Cost of starting and maintaining the business
• The responsibilities you and the seller will have
once you have invested in the opportunity
If the seller does not give you a disclosure docu¬
ment, you should ask why. Then verify the explana¬
tion with an attorney, a business advisor, or the FTC.
©
Why do you think cleaning service franchises are so
popular?
The Federal Trade Commission’s (FTC) Franchise and Business
Opportunity Rule requires franchise and business opportunity sellers
to give you specific information to help you make an informed deci¬
sion about your purchase. The seller must give you a detailed disclo¬
sure document at least ten business days before you pay any money
or legally commit yourself to a purchase. You can use these disclosures
to help answer your questions about the franchise or to compare it
with other opportunities you are considering. The
disclosure document should include the following:
7.1 Decide to Purchase, Join, or Start a Business 181
#
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Evaluate a Franchise
Some of the things you should do when evaluating a franchise include
the following:
1. Study the disclosure document and proposed contract carefully.
Make sure all of the information listed above is included in the dis¬
closure document. All costs and royalty fees should be provided.
2. Interview current owners listed in the disclosure document
carefully. Ask them if the information in the disclosure document
matches their experiences with the company. Be aware of shills, peo¬
ple listed in the document that are paid to give favorable reports.
3. Investigate the franchisor’s history and profitability. Deter¬
mine how long the franchisor has been in business and review its
financial performance.
4. Investigate claims about your potential
earnings. The company should provide you
with the written basis for any claims made
about potential earnings. Determine the pro¬
jected demand for the franchised product or
service in the area where you will locate. Does
the demand match the potential earnings?
5. Obtain from sellers in writing the num¬
ber and percentage of owners who have
done as well as they claim you will. Sellers
are required by law to provide this
information.
6. Listen carefully to sales presentations. Be
cautious of any sales presentation that pres¬
sures you to sign up immediately. A seller
with a good offer does not use high-
pressure sales tactics. Don’t fall for a
promise of easy money. Remember that
success usually requires hard work.
Shop around. Compare franchises with other business opportuni¬
ties. Different companies offer different benefits. Choose franchises
that interest you and request disclosure documents. Find out what
services the franchisor offers. For example, will the franchisor help
with marketing, merchandising, and site selection?
Get the seller’s promises in writing. All promises made should
be included in the written contract that you sign. Remember, the
contract is a legally binding document.
Determine what will happen if you want to cancel the franchise
agreement. Buying a franchise is a major investment, so you should
determine the financial risks of canceling the franchise agreement.
Remember that it is okay to ask for advice from professionals.
Lawyers, accountants, or business advisors can review the disclo¬
sure document and contract and give you their professional opin¬
ions about them. The money you spend for this service could save
you from making a bad decision about investing in the franchise.
182 Chapter 7 Select a Type of Ownership
Why is it important to research a franchise before you buy it?
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Advantages of Owning a Franchise
When deciding whether to buy a franchise, you should also consider
the advantages and disadvantages of it. There are four main advantages.
1. An entrepreneur is provided with an established product or
service. This allows entrepreneurs to compete with large, well-
known companies.
2. Franchisors offer management, technical, and other assistance.
This may include onsite training or classes, aid with starting the
new business and handling daily operations, and tips on crisis man¬
agement. Some franchisors even offer help on everything from site
selection and building design to equipment purchase and recipes.
Most also maintain toll-free telephone numbers that franchisees can
call for advice.
3. Equipment and supplies can be less expensive. A large franchise
may be able to purchase in huge quantities. Some of the savings
they enjoy as bulk purchasers are passed on to the franchisee.
4. A guarantee of consistency attracts customers. A franchise con¬
tract mandates a certain level of quality. Consumers know that they
can walk into a franchise anywhere in the country and receive the
same product or service. The cheeseburger sold at a Wendy’s in
Long Beach, California, will be very similar to the cheeseburger
sold in Toledo, Ohio.
Disadvantages of Owning a Franchise
Although franchising sounds like a great idea, there are some dis¬
advantages that you need to consider.
1. Franchise fees can be costly and cut down on profits. The initial
capital needed to purchase a franchise business often is high. Also,
some of the profits you earn as a franchise owner are returned to
the franchisor as royalty fees.
2. Owners of franchises have less freedom to make decisions than
other entrepreneurs. Many business decisions that entrepreneurs
generally make themselves have already
been made for franchisees. Franchisees
must offer only certain products or services,
and they must charge prices set by the fran¬
chisor. Many entrepreneurs object to this
control because it inhibits the freedom they
sought as independent business owners.
3. Franchisees are dependent on the per¬
formance of other franchisees in the
chain. A franchisee can benefit from the
successes of other franchisees. But if other
franchisees run sloppy operations, customer
opinions of the chain will decline. As a
result, customers may stop going to a fran¬
chise, even if a particular store maintains
high standards. school.cengage.com/entrepreneur/ideas
PET ?kmark
Breadsmith is a growing bakery franchise spe¬
cializing in European-style breads and rolls.
Access school.cengage.com/entrepreneur/
ideas and click on the link for Chapter 7 to
learn more about this franchise. When did
the first Breadsmith franchise store open?
What is the minimum amount a franchisee
can expect to invest to open a Breadsmith
store? How much of this is the franchise fee?
What royalty fees must be paid to the franchisor?
7.1 Decide to Purchase, Join, or Start a Business 183
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4. The franchisor can terminate the franchise agreement. If the
franchisee fails to pay royalty payments or meet other conditions, the
investment in the franchise can be lost. Similarly, when the franchise
expires, the franchisor can choose not to renew the agreement.
Checkpoint
What should you consider when evaluating a franchise opportunity?
Enter a Family Business
The U.S. economy is dominated by family businesses. According to
some estimates, as many as 90 percent of all businesses, including the
vast majority of small- and medium-sized companies, are owned by
families. Many large companies, such as Wal-Mart and the Ford Motor
Company, continue to be owned largely by people who are related to
the company founder.
Advantages of a Family Business
did you KNOW?
According to the Uni¬
versity of Southern
Maine's Institute of
Family-Owned Busi¬
nesses, 35 percent of
Fortune 500 compan.es
are family controlled.
Family businesses
account for 50 percent
of U.s. gross domestic
product. They generate
60 percent of U.S _
employment and /»
percent of all new job
Entrepreneurs who work for their family businesses enjoy the pride
and sense of mission that comes with being part of a family enterprise.
They also enjoy the fact that their businesses remain in the family for
at least one more generation. Some enjoy working with relatives and
knowing that their efforts are benefiting others whom they care about.
Josh Morgan runs Morgan’s, a restaurant that has been in his
family for three generations. In his grandfather’s time, Morgan’s was
a simple coffee shop, catering to people in the neighborhood. Thanks
to changes made by Josh’s mother, Mary, Morgan’s became a fash¬
ionable lunch spot for people from all over town. When Josh took
over, he carried on some Morgan traditions and implemented some
new ideas, such as a gourmet take-out department. Josh takes great
pride in seeing how the restaurant has evolved. He enjoys the thought
that one day his grandchildren may hang pictures of him on the walls
of the restaurant that will then belong to them.
Disadvantages of a Family Business
Family businesses have several drawbacks. Family members, regardless
of their ability, often hold senior management positions. This some¬
times means that poor business decisions are made. It also makes it
difficult to retain good employees who are not members of the family.
Family politics often enter into business decision making. Also, the
distinction between business life and private life is blurred in family-
owned businesses. As a result, business problems end up affecting
family life as well.
Entrepreneurs who do join their family business must be prepared
to make compromises. Unlike individuals who start or buy their own
companies, people who work for their families cannot make all decisions
themselves. They may also be unable to set policies and procedures as
they like.
184 Chapter 7 Select a Type of Ownership
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Another challenge for a family-owned business is what to do
when there is no family member to take over the business. This leaves
the family with a decision to make regarding continuing the business
or selling it to a nonfamily member.
Checkpoint
What are some of the advantages and disadvantages of entering a
family business?
Starting Your Own Business
For one reason or another, joining a family business or operating a
franchise may not be possible for you, or you might not be able to
find a business to purchase. This means that to be an entrepreneur
you will have to establish a business of your own. You need to consider
the many advantages and disadvantages of starting your own business.
Advantages of Starting Your Own Business
Entrepreneurs who start their own business get to make decisions
about everything from where to locate the business to how many
employees to hire to what prices to charge. They are completely inde¬
pendent and create their own destinies. Many entrepreneurs find great
satisfaction in starting their own businesses. Many are attracted to the
challenge of creating something entirely new. They also get a feeling
of triumph when their business turns a profit.
Disadvantages of Starting Your Own Business
There are many risks to consider when you start your
own business. You must estimate demand for your
product or service. There is no certainty that customers
will purchase what you offer. Entrepreneurs who join
family businesses, buy an existing business, or buy into
franchises do not have this uncertainty because it is
already known that customers will buy the product
or service.
Entrepreneurs who start their own business must
also make decisions that other types of entrepreneurs
need not make. These decisions include what product
or service to offer, the location, what employees to hire,
and so forth. What may seem to be good decisions at
the time may not always have positive results.
Lucy Donnelly realized how difficult it is to
start a new business when she opened a kitchen
accessories store. Lucy had considered purchasing
a store franchise but had ruled it out because of
the high franchise fee. Lucy’s problems began when
she realized that her customers did not consider her
location to be convenient. As a result, fewer custom¬
ers shopped in the store than Lucy had projected.
What things should you take into consideration
before you start a business?
1 Decide to Purchase, Join, or Start a Business 185
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Contacting suppliers was more difficult than Lucy anticipated, and many
of them proved unreliable. The high-priced items Lucy purchased in the
hope of increasing profits did not sell well.
Checkpoint
Why is it more difficult to start a new business than to take over an
existing business or purchase a franchise?
71 Assessment
THINK ABOUT IT
1. When you purchase an existing business, why is it important to
know the owner's reason for selling?
2. What extra expenses could you expect to pay when operating a
franchise as compared to operating a nonfranchised company?
Could you save money in expenses by operating a franchise? If
so, how?
3. Your family owns a successful business that distributes flowers
from around the world to local florists. Both of your parents
work full time in the business. They have offered you a position
in the company after you graduate from college. Will you accept
their offer? Explain.
4. What would be the greatest advantage of starting a new busi¬
ness from scratch? What would be its greatest disadvantage? Do
you think the advantages outweigh the disadvantages? Why or
why not?
186 Chapter 7
MAKE ACADEMIC CONNECTIONS
5. COMMUNICATION Interview an owner of a family business.
Find out how long the business has been in operation and
how many family members are employed in the business. Ask
the owner what the advantages and disadvantages are of own¬
ing a family business. Compare this list to the advantages and
disadvantages discussed in the text. Write a report on your
findings.
6. RESEARCH Identify a franchise that interests you. Research the
franchise and evaluate it using the ten points given in this les¬
son. Write a short report on your findings and conclude with
your opinion on whether this franchise is a good opportunity.
Form teams. Brainstorm a list of reasons business owners may decide
to sell their businesses. Put a check mark next to the reasons that
could negatively affect the buyer's chance for success.
Select a Type of Ownership
greene_0538446145_ch07, 12/21/7, 18:35, page: 187
Choose a Legal
Form of Business
S r
-i-
uoais
l erms
List advantages and dis¬
advantages of a sole
proprietorship.
List advantages and
disadvantages of a
partnership.
List advantages and
disadvantages of a
corporation.
sole proprietorship
partnership
corporation
share of stock
board of directors
dividends
\l Focus on Small Business
Establishing ownership
Cheryl and Grayson are going to open a camp for dirt bike riders. It will
be a place where people can come and ride their dirt bikes and camp
out overnight. Their long-range plan includes building cabins on the
property that can be rented to the bikers.
Grayson asks Cheryl, "Do you think we should operate our business
as a partnership or a corporation since we can't be a sole proprietorship?"
Cheryl thought about it awhile and said, "You know, Grayson, there is a
chance that someone could get hurt and we would be responsible if the
accident was on our property. Let's choose the
form of ownership that would help protect us
and others too!"
"Good idea, Cheryl. Let's start
investigating and see what we can find!"
Work as a Team Why do you think
the possibility of someone getting
hurt would be a big concern for
Cheryl and Grayson? What other
considerations do you think business
owners should have when choosing
a legal form for their business?
There are several forms of business owner¬
ship to consider.
Sole Proprietorship
Once you decide to start your own business, you must decide what
type of ownership the business will have. A business that is owned
exclusively by one person is a sole proprietorship. Sole proprietor¬
ships enable one person to be in control of all business aspects. Sole
proprietorships may be very small businesses with just a few employees,
or they may be large businesses with hundreds of employees.
Advantages of a Sole Proprietorship
The government exercises very litde control over sole proprietorships,
so such businesses can be established and run very simply. Accurate
7.2
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What might be some of the disadvantages of operating
a restaurant as a sole proprietorship?
tax records and certain employment laws must be
met, but these are usually the only forms of govern¬
ment regulation for a sole proprietorship. For this rea¬
son, the sole proprietorship is the most common form
of ownership in the United States.
Disadvantages of a Sole Proprietorship
It can be difficult to raise money for a sole proprie¬
torship. You are the only person investing money.
You also bear the burden of all of the risks. If a sole
proprietorship fails and debts remain, the entrepre¬
neur’s personal assets may be taken to pay what is
owed.
Rachel Gibson learned this lesson the hard way.
Last year, her clothing store went out of business,
leaving $42,000 in debt. Because Rachel had set up
the business as a sole proprietorship, she had to sell
some of her personal assets, including her car, to pay
off the debt of the business.
Checkpoint
Why are sole proprietorships the most common form of business
ownership?
Partnership
A business owned by two or more people is a partnership. Many entre¬
preneurs prefer to go into business with one or more partners so that
they have someone with whom to share decision making and manage¬
ment responsibilities, as well as the risks involved with entrepreneurship.
Advantages of a Partnership
Running a business as a partnership means that you will not have to
come up with all of the capital alone. It also means that any losses the
business incurs will be shared by all of the partners. Like sole proprie¬
torships, partnerships face very litde government regulation.
Disadvantages of a Partnership
Some entrepreneurs do not like partnerships because they do not
want to share responsibilities and profits with other people. They fear
being held legally liable for the errors of their partners. Partnerships
can also lead to disagreements and can end bitterly.
Partnership Agreement
When two or more entrepreneurs go into business together, they gener¬
ally sign a partnership agreement. The purpose of the partnership agree¬
ment is to set down in writing the rights and responsibilities of each of
the owners. A sample partnership agreement is shown on the next page.
188 Chapter 7 Select a Type of Ownership
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GENERAL PARTNERSHIP AGREEMENT FORMING
“SUNNY SIDE UP”
By agreement made this 21st day of September, 20—, we, Ana Ortiz, Keesha Gentry, and Thomas Chase,
the undersigned, all of Palm Harbor, Florida, hereby join in general partnership to conduct a food service
business and mutually agree to the following terms:
1. That the partnership shall be called “Sunny Side Up” and have its principal place of business at
2013 Sand Drive, Palm Harbor, Florida, at which address books containing the full and accurate records
of partnership transactions shall be kept and be accessible to any partner at any reasonable time.
2. That the partnership shall continue in operation for an indefinite time until terminated by 90 days’
notice, provided by one or more of the partners indicating his, her, or their desire to withdraw. Upon such
notice, an accounting shall be conducted and a division of the partnership assets made unless a partner
wishes to acquire the whole business by paying a price determined by an arbitrator whose selection shall
be agreed to by all three partners. Said price shall include goodwill, and the paying of same shall entitle
the payor to continue the partnership business under the same name.
3. That each partner shall contribute to the partnership: $22,000 for initial working capital and the
supplies and equipment.
4 . That in return for the capital contribution in item 3, each partner shall receive an undivided one-third
interest in the partnership and its properties.
5 . That a fund of $75,000 be set up and retained from the profits of the partnership business as a
reserve fund, it being agreed that this fund shall be constituted on not less than 15 percent of the monthly
profits until said amount has been accumulated.
6. That the profits of the business shall be divided equally between the partners, that the losses shall
be attributed according to the subsequent agreement, and that a determination of said profits and losses shall
be made and profit shares paid to each partner on a monthly basis.
7 . That the partnership account shall be kept in the First Florida Bank and that all withdrawals from
same shall be by check bearing the signature of at least one of the partners.
8. That each partner shall devote his or her full efforts to the partnership business and shall not engage
in another business without the other partners’ permission.
9 . That no partner shall cause to issue any commercial paper or shall enter into any agreements
representing the partnership outside the normal conduct of the food service business without notice to the
remaining partners and the consent of at least one other partner, and further that all managerial and person¬
nel decisions not covered by another section of this agreement shall be made with the assent of at least two
of the partners.
IN AGREEMENT HERETO, WE ARE
Ana Ortiz Keesha Gentry Thomas Chase
■And tfettt'ut. _ Chaise;
7.2
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The sample partnership agreement identifies the following:
1. Name of the business or partnership
2. Names of the partners
3. Type and value of the investment each partner contributes
4. Managerial responsibilities to be handled by each partner
5. Accounting methods to be used
6. Rights of each partner to review and/or audit accounting documents
7. Division of profits and losses among the partners
8. Salaries to be withdrawn by the partners
9. Duration of the partnership
10. Conditions under which the partnership can be dissolved
11. Distribution of assets upon dissolution of the partnership
Checkpoint
Name some of the advantages and disadvantages of a partnership.
WHAT WENT WRONG
>
*
Partnership Woes
Stan and Peter met while working at a video
production company. Stan was in charge of
editorial and production. Peter ran the sales
force. Stan decided to begin his own company
and invited Peter to join him. SP Communica¬
tions seemed like a perfect partnership. Peter
would handle sales and administration, while
Stan managed clients and directed production.
Things seemed to be going well until
Peter decided he wanted to be a part of the
creative process. He spent most of his time
producing videos rather than looking for new
business. Because of their friendship, Stan
trusted that Peter was taking care of his side
of the business.
As it turned out, Peter wasn't very good
at the creative tasks he took on. He made mis¬
takes that reduced expected profits. In addi¬
tion, he wasn't making new sales contacts,
which was supposed to be his main job.
By the time Stan realized what was hap¬
pening to the business, it was too late. There
weren't any new sales. What Stan thought
were profits were the result of
Peter not paying their bills.
Stan was left with more
than $150,000 in unpaid
bills and other debts.
Peter left the business.
It took Stan three
years to dig out of
the financial mess
and get his new
company up and
running successfully.
Think Critically
1 How might Choose your partners wisely.
Stan and Peter
have avoided the problems that led to the
end of their partnership?
2. Why is this situation a good example of
the difficulty in maintaining partnerships
between friends?
3. What types of things should be spelled out
completely between partners at the begin¬
ning of the partnership?
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Corporation
A corporation is a business that has the legal rights of a person but
is independent of its owners. A share of stock is a unit of ownership
in a corporation. There may be many owners, who are called share¬
holders or stockholders. The corporation, not the owners, pays taxes,
enters into contracts, and may be held liable for negligence.
Jim Munroe set up his company, Munroe Office Supply, as a
corporation. He created 100 shares of stock worth $1,000 each. Jim
then issued 15 shares to each of three outside investors, which means
they gave $45,000 total to be shareholders in his company. Jim kept
the remaining 55 shares himself. This means that Jim owns 55 percent
of his company, while outside investors own a total of 45 percent of
the company. The individual or group that owns the most shares
maintains control of the company.
Every corporation has a board of directors, which is a group
of people who meet several times a year to make important decisions
affecting the company. The board of directors is responsible for elect¬
ing the corporation’s officers, determining their salaries, and setting
the corporation’s rules for conducting business. The board of direc¬
tors also decides how much the corporation should pay in dividends.
Dividends are distributions of corporate profits to the shareholders.
The company’s officers, not the board of directors, are responsible
for the day-to-day management of the corporation.
Disadvantages of a Corporation
Setting up a corporation is more complicated than setting up a sole pro¬
prietorship or a partnership. To incorporate, you will need the assistance
of a lawyer, who will help you file articles of incorporation with the state
official responsible for chartering, or registering, corporations. Because
of this, establishing a corporation can be costly. A business must be care¬
ful when it decides to incorporate. Articles of incorporation must be
What role does the board of directors play in a corporation?
7.2
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written that hilly detail the purpose of the business. If the articles are not
written well, the corporation’s activities can be limited.
Corporations are subject to much more government regulation
than are sole proprietorships or partnerships. Another drawback of
incorporation is that income is taxed twice. A corporation pays taxes
on its income, and shareholders pay taxes on the dividends they receive
from the corporation. This means that the corporation’s profits are
taxed as corporate income and again as individual income.
Advantages of Incorporation
If the corporate form of ownership is complicated and cosdy, why do
entrepreneurs set up corporations? Liability is the main reason. Liabil¬
ity is the amount owed to others. The shareholders’ risk is limited
to the amount of money each shareholder invested in the company
when he or she purchased stock. The personal assets of shareholders
may not be taken to pay the debts of the corporation.
Munroe’s Office Supply has gone bankrupt, leaving $150,000 in
debt. Each shareholder can lose only the amount he or she invested in
the corporation, so the outside people who invested $45,000 would
lose their investment. Jim would also lose his investment of $55,000.
If Jim had set up his business as a sole proprietorship, he would have
been liable for the $150,000. If the business had been set up as a part¬
nership among Jim and his friends, all four partners would have been
liable for the $150,000 debt.
Incorporation allows businesses to raise money by selling stock.
Lenders are more willing to lend money to corporations than to sole
proprietorships or partnerships. Because shareholders do not directly
affect the management of a corporation, the main shareholder of the
company can change through the buying and selling of stock without
disrupting the day-to-day business operations.
S Corporation
A small corporation can elect to be treated as an S corporation. An
S corporation is a corporation organized under Subchapter S of the
Internal Revenue Code. Unlike regular corporations, an S corporation
is not taxed as a business. The individual shareholders are taxed on the
profits they earn, as they would be in a
partnership. Many companies establish
themselves as S corporations because they
lose money in their early years. The owners
can use any losses suffered from the S cor¬
poration to offset other sources of personal
income, and thus receive a tax break.
Chanda Patel works full time at a
large company where she earns $38,000 a
year. She also runs Forever Yours, a wed¬
ding consultant business. Like many new
businesses, Forever Yours lost money in its
first year when its expenses exceeded its
revenues by $12,000. Since Chanda had
be your own boss
You have decided that you are going to start a
new business giving horseback riding lessons.
You need to decide which legal form you will
use for your business. Choose a sole proprietor¬
ship, partnership, or corporation. Write a para¬
graph explaining why you chose the legal form
you did and the advantages and disadvantages
of your choice.
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set up her company as an S corporation, she was able to reduce her tax¬
able income by $12,000. Her taxable income for the year was thus
$26,000 (the $38,000 salary less the $12,000 she lost on her business).
Limited Liability Company
A limited liability company (LLC) is a legal form of business that
offers the limited liability protection of a corporation to its owners.
The LLC is not subject to the rules for an S corporation and goes
further than an S corporation in providing the benefits of partnership
taxation and limited personal liability for all the owners of the busi¬
ness. The disadvantages of an LLC are that the type of businesses
may be limited by state law, a single owner cannot establish an LLC,
and many states limit the life of an LLC to 30 years.
Checkpoint
What is the main benefit of setting up your business as a corporation?
Yt.-i Assessment
THINK ABOUT IT
1. Which do you think is more risky: a sole proprietorship or a part¬
nership? Why?
2. What would be the advantages and disadvantages of forming a
partnership with a friend? Would you consider forming a busi¬
ness this way? Why or why not?
3. Why do you think the government regulates corporations more
closely than it does sole proprietorships or partnerships?
MAKE ACADEMIC CONNECTIONS
4. MANAGEMENT You and a friend plan to open a business.
Negotiate the terms of a partnership agreement. Using the
Activity CD, open the activity "Partnership Agreement." Print
a copy and complete the activity.
5. MATH Caren McHugh opened Best Foot Forward, a shoe store
catering to women. To raise money, she organized her business
as a corporation. She created 500 shares of stock, each worth
$75. Caren held 260 of the shares for herself. She sold the rest
in equal amounts to six investors. How many shares does each
investor own? If Best Foot Forward fails and leaves $65,000 in
debt, for how much would each investor be liable?
TEAMWORK
Working with teammates, create a chart listing all the forms of busi¬
ness ownership and the advantages and disadvantages of each one.
7.2 Choose a Legal Form of Business 193
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Focus on Small Business
Why are there regulations?
James and Katie were starting an apparel company specializing
in sportswear. They were trying to decide whal
their company logo to look like. "Let's put a's^
logo like the one Nike uses," James suggested.
"James, we can't use that logo. It's a Nike
mark," Katie responded. "See the ™ symbol n«
it. That means it's protected by a trademark an
one else can use it."
"Well, I guess we'd better keep thinking a
what we want our trademark to be," answerec
James. "That's a good idea," Katie said. "And
while we're at it, we'd better look into all the
rules and regulations we need to follow. We
don't want to start off on the wrong foot by
doing something illegal."
Work as a Team Did you realize that
businesses have to follow rules and regula¬
tions? Do you think it's fair for government Business owners must follow
to regulate business? certain laws and regulations.
Regulations That Promote Competition
As an entrepreneur, there are laws that affect almost every aspect of
your business. Even the competition that businesses face is regulated
by the government. To make sure that competition is fair, the gov¬
ernment has enacted various laws to help protect businesses.
Antitrust Legislation
Beginning in 1890, laws were created that made monopolies in cer¬
tain industries illegal. A monopoly is also called a trust, so these laws
were called antitrust laws. Antitrust laws also ban other types of busi¬
ness activities that do not promote competition. You should become
familiar with these laws to determine how they affect your business.
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SHERMAN ACT This law makes it illegal for
competitors to get together and set prices on
the products or services they sell. This means
that you and your competitors cannot together
decide to keep prices at a certain level. Discus¬
sing prices with competitors is illegal.
Pete Williams and Jose Pulido used to
work together at Johnson Fencing, a business
that installed residential fences. Each now owns
his own fencing company. Last month Pete
called Jose to see if he would raise his prices by
the same amount Pete was planning to raise his
prices. Jose told Pete he could not because fix¬
ing prices with a competitor is against the law.
CLAYTON ACT This law states that it is illegal for a business to
require a customer to buy exclusively from it or to purchase one good
in order to be able to purchase another good. A distributor of com¬
puters, for example, cannot make customers purchase software when
they purchase a computer. Customers must be free to buy only the
products or services they want from whom they want.
ROBINSON-PATMAN ACT This law protects small businesses from
unfair pricing practices. It makes it illegal to discriminate by charging
different prices to customers. A manufacturer, for example, may not
sell its products at different prices to similar customers in similar situa¬
tions when the effect of such sales will reduce competition. Differ¬
ences in price may only be justified based on differences in quantities
purchased (volume discounts), special distribution or legal requirements
in different locations, or other economically sound reasons. If your
business sells to other businesses, you must offer the same terms to
all of those businesses. The law does not apply to retail stores where
certain groups may be targeted by special promotions, such as giving
discounts to senior citizens.
WHEELER-LEA ACT This law bans unfair or deceptive actions or prac¬
tices by businesses that may cause an unfair competitive advantage.
False advertising is an example. Under this act, businesses are also
required to warn consumers about possible negative features of their
products. Drug companies, for example, must let people know of any
side effects they may experience from using a medication.
Government Agencies that Protect Competition
The Antitrust Division of the Justice Department and the Federal
Trade Commission are two government agencies that work to make
sure competition remains fair. Other agencies, such as the Federal
Aviation Administration and the Food and Drug Administration,
oversee business practices in particular industries.
JUSTICE DEPARTMENT The Justice Department’s Antitrust Division
takes legal action against any business it believes has tried to monopolize
7.3 Legal Issues and Business Ownership 195
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an industry. It also prosecutes businesses that violate antitrust laws,
which can lead to large fines and jail sentences.
FEDERAL TRADE COMMISSION The Federal Trade Commission (FTC)
deals with issues that touch the economic life of every American. The FTC
administers most of the laws dealing with fair competition and pursues
vigorous and effective law enforcement. Some of the kinds of activities
the FTC monitors include false or misleading advertising, price setting
by competitors, price discrimination, and misrepresentation about the
quality, composition, or place of origin of a product. It is the only federal
agency with both consumer protection and competition jurisdiction in
broad sectors of the economy. In addition, the FTC does the following:
• Advances consumers’ interests by sharing its expertise with federal and
state legislatures and U.S. and international government agencies
• Develops policy and research tools through hearings, workshops,
and conferences
• Creates practical and plain-language educational programs for con¬
sumers and businesses in a global marketplace with constantly
changing technologies
Checkpoint
How do laws promote competition?
Intellectual Property
Intellectual property is the original, creative work of an artist or
inventor and may include such things as songs, novels, artistic designs,
and inventions. Such works may be registered for special government
protections—including patents, trademarks, trade names, and
copyrights—that provide business owners with the exclusive use of
the intellectual property in the United States and many foreign
countries. Registration gives businesses or individuals the exclusive
right to profit from what they have created. No one else can use their
creations to make money. If you violate another person’s patent,
copyright, or trademark, you could be sued.
Patents
A patent is the grant of a property right to an inventor to exclude
others from making, using, or selling his or her invention. The intent
of a patent is to give the developer of a new product time to recover
the development costs without having to worry about competition.
Patents are issued by the U.S. Patent and Trademark Office and last
for 20 years. During this period, no business or individual can copy or
use the patented invention without the patent holder’s permission. A
provisional patent application allows an inventor one year to investi¬
gate the feasibility, marketability, and potential license interest of an
invention before deciding to file a formal patent application. This
gives the inventor the right to use the term patent pending and a
head start on other inventors who may file for the same invention.
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Copyrights
A copyright is a form of intellectual property law that protects original
works of authorship, including literary, dramatic, musical, and artistic
works. Copyright law does not protect facts, ideas, systems, or methods
of operation. All books must have a copyright. A copyright lists the
publisher of the work and the year in which the work was published.
Copyrights remain in effect for 70 years after the death of the author.
Jessie Castille is a graphic artist who owns her own business.
Jessie’s copyrighted designs appear on T-shirts and posters. Last year,
she found that a T-shirt manufacturer in another city was illegally using
her designs. She sued the manufacturer for violating her copyright.
Trademarks
A trademark is a name, symbol, or special mark used to identify a busi¬
ness or brand of product. Products that are trademarked are identified
by the 1M or ® symbol. Examples include Band-Aid® and Kleenex®.
You could not invent a new bandage and use the term Band-Aid in the
product name. Nor could you use the “swoosh” mark that is trade-
marked by Nike in any product or business promotion you conduct.
Checkpoint
How can entrepreneurs protect intellectual property rights?
Famous
Eli Whitney
Eli Whitney is best known as the
inventor of the cotton gin, but a
problem with intellectual property
rights kept him from making his
fortune from this invention.
Whitney obtained a patent for his
invention but decided not to sell
the machine to farmers. Instead,
Whitney decided to install cotton
gins throughout the south and
charge farmers a hefty fee for
processing the cotton himself.
Resentful farmers made their own
versions of the cotton gin and
claimed they were "new" inven¬
tions. Due to a loophole in the
1793 patent act, Whitney was
unable to win any lawsuits against
the other cotton gin owners.
Without exclusive rights to the
cotton gin, Whitney built another
factory and began to make muskets
(guns) in a new way. Whitney
invented tools and machines so
that any worker could turn out
uniform parts. The government
was waiting for guns, and
Whitney amazed everyone when
he assembled guns from random
piles of parts. Whitney had
become the father of mass pro¬
duction in America! Eventually
the arms factory made him rich,
completing a success story for
the boy who had shown mechan¬
ical aptitude by making a violin
when he was 12 and selling
handmade nails in his teens!
What led to Eli Whitney's
success as an entrepreneur?
Think Critically
What do you think would have
happened if Eli Whitney had
obtained a patent for the cotton gin
before others copied his machine?
7.3 Legal Issues and Business Ownership 197
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Laws that Protect Consumers
The government also has regulations that protect consumers. Business
owners should be aware of these laws.
Licenses
State and local governments require some businesses to have licenses.
Beauty salons, restaurants, and health and fitness centers are just some
of the companies that must carry licenses. If you own a business that
requires a license, you and your employees may need to complete
training requirements. You may also need to have regular inspections
by state and local authorities. Failure to meet certain standards could
mean the loss of your license and the closing of your business.
What problems might occur if an office park is built in a
residential area?
Zoning Laws
Local governments often establish zoning regu¬
lations that control what types of buildings can
be built in what areas. In many communities,
certain areas are zoned for residential use only.
This means that business buildings may not be
built in those areas. Other areas may be zoned
as commercial for retail businesses, as industrial,
as agricultural, as multipurpose, and so on.
All businesses must obey zoning regulations.
Before you choose a location for your business,
you will have to make sure that the area you
have selected allows your type of business to
operate there. Zoning laws help keep neighbor¬
hoods safe for its residents.
Consumer Protection Laws
A variety of laws and government agencies protect the public against
harmful products. You will have to make sure that the products you
manufacture or sell meet all consumer protection standards.
THE FEDERAL FOOD, DRUG, AND COSMETIC ACT OF 1938 This law
bans the sale of impure, improperly labeled, falsely guaranteed, and
unhealthful foods, drugs, and cosmetics. The Food and Drug Admin¬
istration (FDA) enforces this law. The FDA has the power to force
producers to stop manufacturing products that are unsafe.
THE CONSUMER PRODUCT SAFETY ACT OF 1972 This law sets
safety standards for products other than food and drugs. When the
Consumer Product Safety Commission determines that a product is
unsafe, it can force businesses to recall the product and stop selling it.
THE TRUTH-IN-LENDING ACT OF 1968 This law requires all banks to
calculate credit costs in the same way. When a consumer gets a loan,
the lender must provide two types of information about the loan’s
cost—the finance charge and the annual percentage rate. The finance
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charge is the total cost a borrower must pay for a loan, including all
interest and fees. The annual percentage rate is the finance charge
calculated as a percentage of the amount borrowed. These numbers
help consumers evaluate alternatives and determine the best option.
THE FAIR CREDIT BILLING ACT OF 1974 This law is part of the
Truth-in-Lending Act and helps consumers correct credit card billing
errors. Consumers who feel they have been incorrectly charged must
write to the credit card issuer and explain why they think the charge
is wrong. The company must reply within 30 days and resolve the
dispute within 90 days. While the disputed charge is being investi¬
gated, it cannot accrue interest.
This law also gives the consumer a method for resolving problems
relating to product quality. The first step in dealing with a product of
inferior quality bought with a credit card is to try to resolve the problem
with the merchant. If it cannot be resolved, the consumer can withhold
payment to the credit card company until the matter is setded.
Checkpoint
What laws protect the public?
When to Get Legal Advice
It is helpful to learn some basics about the laws affecting businesses so
that you can handle minor legal issues yourself. Books and the Internet
are good sources of information, or you could take a course in business
law. However, there will be times when you will need to hire a lawyer for
assistance. As an entrepreneur, you will need to decide when you should
seek advice and when you can handle the situations on your own.
Hire a Lawyer
At some point, you probably will need to hire a lawyer. Your Chamber
of Commerce may have a list of lawyers who specialize in small busi¬
nesses. Other community business owners may also be able to suggest
a lawyer. Lawyers can help you with a variety of legal issues.
HOW LAWYERS CAN HELP YOU
Assist you in choosing a legal
structure for your business
Create documents such as leases,
purchase agreements, and contracts
Develop partnership agreements
Inform you of regulations and licenses
Give advice on insurance coverage
Advise you on taxes
Prepare and file patent applications
Help you plan for your future (a will,
retirement plans)
Defend you in a lawsuit or file
one on your behalf
Contracts
One of the most common reasons that a business hires a lawyer is to
assist with contracts. A contract is a legally binding agreement between
two or more persons or parties. As an entrepreneur, you will enter into
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contracts as you start and operate your business. Contracts can be with
suppliers, landlords, clients, and government agencies.
For a contract to be considered legally binding, certain elements
must be included when the contract is created. These elements are
agreement, consideration, capacity, and legality.
Agreement occurs when one party offers or agrees to do some¬
thing and the other party accepts. Joni’s Jellies has offered to sell
Andy’s Eatery two cases of homemade jelly each month for $100 for
a one-year period. Andy’s Eatery responds by signing the offer and
returning it to Joni’s Jellies. Agreement is reached.
Consideration is what is exchanged for the promise. The $100
check Andy’s Eatery sends Joni’s Jellies is consideration and causes
the contract to be binding.
Capacity means the parties are legally able to enter into a binding
agreement. Minors, intoxicated persons, and insane persons cannot enter
into a binding contract.
Legality means that a contract cannot have anything in it that is
illegal or that would result in illegal activities.
Checkpoint
What kinds of services can lawyers provide?
Assessment
THINK ABOUT IT
1. Think of three examples of how a business might misrepresent a
product it sells. Explain each example.
2. Besides Band-Aid, Kleenex, and Nike, name at least three other
products that are trademarked.
3. Explain the elements of the Fair Credit Billing Act.
Chapter 7
MAKE ACADEMIC CONNECTIONS
4. RESEARCH Use the Internet, the newspaper, or your local
library to find information on the process for applying for a
patent. Also, find out how much a patent costs, how many
patents have been issued to date, and what the criteria are for
obtaining a patent. Prepare a short report on your findings.
5. COMMUNICATION Create an advertisement for a product that
demonstrates a violation of the Wheeler-Lea Act.
TEAMWORK
Gather in teams. Make up several business scenarios that involve
violation of antitrust laws. Role play scenarios for the rest of the
class and let them tell which antitrust law is being violated.
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Effective Telephone Conversations
As you research business opportunities, you will need to make tele
phone calls to gather information. Once you become a business
owner, you will conduct business over the telephone.
The way you present yourself over the telephone will
have a big impact on the people with whom you deal.
It is also important to use good listening skills when
talking on the telephone. Use the following tips to
make the most of your telephone conversations.
1. Speak clearly and talk directly into the
receiver. If you are using a headset, be sure
that the microphone is in the correct position
so that the person you are talking to will not
have difficulty hearing you.
2. Be cheerful. Everyone prefers to deal with
a happy person rather than someone who is
sad or angry.
3. Always speak politely. Do not use foul or unprofessional
language. Be respectful.
4. Think about what you are going to say before you make a
call. Write down the questions you want to ask or the points you
want to make. Consult your notes as you are talking to make
sure you cover everything.
5. Focus your attention on the person with whom you are talk¬
ing. Concentrate exclusively on what the person is saying. Ask
questions to confirm you correctly interpreted what is being said.
6. Eliminate all distractions. Background noises, such as the radio
and other people talking, should be held to a minimum.
7. Take notes to summarize what you are hearing. You may for¬
get important details unless you write them down.
TRY IT OUT
You found an advertisement for a candy store business in a local mall
that is for sale. You want to call the real estate broker to find out
more information about the business. Make a list of all the questions
that you want to ask the broker. Role play the phone call with a class¬
mate and make an appointment to visit the business and meet with
the owner. Follow the tips listed above to ensure your telephone
conversation is effective.
Sharpen Your Entrepreneurial Skills 201
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Chapter 7 Assessment
SUMMARY
7.1 Decide to Purchase, Join, or Start a Business
1. Aii existing business has an established customer base and relation¬
ships with suppliers. The seller may train you, and prior records can
make financial planning easier.
2. When evaluating a franchise opportunity, study the disclosure doc¬
ument, interview current owners, investigate the franchisor’s his¬
tory, investigate potential earnings claims, compare opportunities,
get promises in writing, learn the risks of canceling the franchise,
and seek advice from professionals.
3. Joining a family business has advantages, such as pride in the busi¬
ness and enjoyment of working with relatives. However, family
politics can negatively affect the business.
4. Entrepreneurs who start entirely new businesses are completely
independent and create their own destinies. However, there is
increased risk because there is no established demand for the
product or service and you must make all the decisions.
7.2 Choose a Legal Form of Business
5. A sole proprietorship is the easiest form of business ownership, but
the owner may have trouble raising money for the business. Per¬
sonal assets are at risk if the business fails.
6. A partnership is easy to start, faces little government regulation,
and shares the risk with others. But a partner can be held legally
liable for the actions of the other partner(s).
7. A corporation is more difficult to start, but it is easier to raise capital
by issuing shares of stock. Owners’ personal assets are not at risk.
7.3 Legal Issues and Business Ownership
8. Antitrust laws were developed to promote fair competition in busi¬
ness. The Antitrust Division of the U.S. Justice Department and
the Federal Trade Commission are government agencies that work
to ensure fair competition.
9. Entrepreneurs can protect intellectual property by registering for
patents, copyrights, and trademarks.
10. Laws that protect consumers include licensing, zoning, and con¬
sumer protection laws.
11. You should learn about laws and regulations that affect your busi¬
ness. Lawyers can help with a variety of legal issues.
What do you fcnow now?
Read Ideas in Action on page 177 again. Then answer the questions a
second time. How have your responses changed?
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. The original, creative work of an artist or inventor
2. Paid to the franchise company to support television, magazine, or
other advertising of the franchise as a whole
3. The grant of a property right to an inventor to exclude others
from making, using, or selling his or her invention
4. A business that has the legal rights of a person but is independent
of its owners
5. Distributions of corporate profits to shareholders
6. A legal agreement that gives an individual the right to market a
company’s products or services in a particular area
7. The amount the local franchise owner pays in return for the right
to run the franchise
8. A unit of ownership in a corporation
9. Weekly or monthly payments made by the local owner to the fran¬
chise company
advertising fees
board of directors
contract
copyright
corporation
dividends
franchise
initial franchise fee
intellectual property
partnership
patent
royalty fees
share of stock
sole proprietorship
startup costs
trademark
J
k
I
m
n,
o,
10. A form of intellectual property law that protects original works
of authorship, including literary, musical, and artistic works
11. A business that is owned exclusively by one person
12. A business owned by two or more people
13. A name, symbol, or special mark used to identify a business or
brand of product
14. The costs associated with beginning a business
15. A legally binding agreement between two or more persons
REVIEW YOUR KNOWLEDGE
16. Which of the following is not an advantage of buying an existing
business?
a. existing customer base c. seller can provide training
b. prior records are available d. capital is required
17. True or False? A franchise is an inexpensive way to get into
business quickly.
18. The legal form of business that is the simplest to establish is the
a. sole proprietorship c. S corporation
b. partnership d. limited liability company
19. True or False? The board of directors of a corporation is
responsible for the day-to-day management of the corporation.
20. You and several other business owners in your area agree to raise
the price of the paint you sell. You are in violation of the
a. Sherman Act c. Robinson-Patman Act
b. Clayton Act d. Wheeler-Lea Act
Chapter 7
Assessment
203
greene_0538446145_ch07, 1/17/8, 19:24, page: 204
21. You want to advertise a special price on a product that you do not
have just to get customer traffic into your store. If you do so, you
will be in violation of the
a. Sherman Act
b. Clayton Act
c. Robinson-Patman Act
d. Wheeler-Lea Act
22. For a contract to be legally binding, it must have which of the fol¬
lowing elements when it is created?
a. agreement, cooperation, capacity, legality
b. agreement, consideration, capacity, legality
c. agreement, consideration, cooperation, and legality
d. amendment, consideration, capacity, and legality
23. True or False? The U.S. Justice Department administers all of
the laws dealing with fair competition.
24. True or False? A patent grants property rights to an inventor
for 70 years.
25. Intellectual property rights can be protected by all of the following
except a
a. copyright c. patent
b. license d. trademark
APPLY WHAT YOU LEARNED
26. You are meeting with the owner of an ice cream shop you would
like to purchase. What specific questions are you going to ask her?
What documents do you want to see? How will you evaluate
whether or not to purchase this business?
27. You decide to start a business selling a new video game you have
developed. You plan to sell the game over the Internet. What
intellectual property right issues should you consider?
28. You want to purchase a cleaning service franchise. The franchise
fee is $19,500 and startup costs are $15,200. Advertising fees are
$1,500. The royalty fee is 8 percent. If your estimated sales for
the first year of operation are $56,500, how much is your profit
after paying all costs and the royalty fee?
MAKE ACADEMIC CONNECTIONS
29. MATH Marta Vasquez is one of three partners in a car dealership.
The division of profits and losses as specified in the partnership agree¬
ment is 60 percent for Marta, 25 percent for the second partner, and
15 percent for the third partner. The dealership has recently lost a
lawsuit and must pay damages of $1,200,000. What is Marta’s
liability? What is the liability of each of the other two partners?
30. COMMUNICATION You are the owner of a coffee shop fran¬
chise. The franchise agreement specifies that the franchisee must sub¬
mit all advertising plans for approval. Write a memo to the franchisor
outlining your plan to market the franchise’s new bagels.
31. RESEARCH Use the Internet, newspaper, magazines, and other
materials to research business opportunities. Find two businesses
for sale that interest you. Using the Activity CD, open the activity
“Businesses for Sale.” Print a copy and complete the activity.
204 Chapter 7
Select a Type of Ownership
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Which business would be the better investment? Write a paragraph
to explain your decision.
HISTORY Research one of the antitrust laws listed in Lesson 7.3.
Write a brief history of what led to the passage of the law. Describe any
amendments that have been made to the law since its original passage.
GEOGRAPHY China is a major source of intellectual property
theft. Many counterfeit products are produced in China. Research
the extent of this problem and learn how U.S. businesses can bet¬
ter protect themselves. Write a two-page report on your findings.
lA/HAT WOULD VOU DO?
You have purchased a copy of the newest version of the Windows
operating systems for the computers in your office. It was expensive
for you to update your systems, but you felt it was important to
keep your equipment up to date. Your friend, Jeff, who is a sole
proprietor and is struggling to get his business going, really needs
the new version of Windows, but he does not have the cash to pay
for it. He asks you if you would mind sharing your software license
with him. What would you do?
V_ I _ w
32.
33.
BUILD YOUR
Business Plan
Project
This activity will help you continue with the development of a busi¬
ness plan for your business idea.
Contact your state and local governments and obtain information
about licensing and zoning regulations. How will these regulations
affect your business?
To expand your business, you have decided to purchase similar businesses
in your area. List the businesses in your area that compete with you. Write
the reasons you would or would not consider buying each business.
Find franchise opportunities available in your business field. Investi¬
gate one of these opportunities and gather information about it, such
as franchise fees, royalties, projected earnings, and operating costs.
You have a friend who is interested in being your business partner.
Write the partnership agreement for the two of you.
Make a list of all the advantages and disadvantages of organizing your
business as a corporation. Determine how much stock to sell and the
value of each share.
How will you become an entrepreneur? Will you buy an existing busi¬
ness, enter a family business, purchase a franchise, or start your busi¬
ness from scratch? Determine which form of business organization you
will use—sole proprietorship, partnership, corporation, S corporation,
or limited liability company. Write the ownership and legal structure
section of your business plan as described in Chapter 3.
Chapter 7
Assessment
205
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Planning a Career in
Franchising
iness , Management
& Administration
U T
I his weekend my family was
really startled when we walked into
a new restaurant to order sub sand¬
wiches for lunch. Our former baby¬
sitter was behind the counter. She
had bought the restaurant from a
franchisor. The franchisor taught
her how to run the restaurant. They
provided the training and support
materials she needed to successfully
run her business. She said that,
although the hours were long, the
work was gratifying and profitable.”
Why do people decide to
purchase a franchise? How do they
decide which type of franchise is
best for them?
By helping individuals evalu¬
ate their personal and professional
goals, franchise coaches help
potential franchisees determine
which franchise will best meet
their needs. Coaches are usually
compensated by the franchisors
after a franchise is purchased by
one of the coach’s clients.
EMPLOYMENT OUTLOOK
• Faster than average growth is
expected.
• Career changes, as a result of an
evolving business environment
and downsizing, will increase the
need for business counselors.
JOB TITLES
• Franchise Business Coach
• New Business Sales Leader
• Franchise Business Consultant
• Franchise Performance Coach
NEEDED SKILLS
• A Bachelor’s degree is
recommended.
• Strong interpersonal and prob¬
lem solving skills are needed.
• Prior management experience
in training or sales is helpful.
• A desire to help others and an
ability to gain their trust is
important.
What's it like to work in Franchis¬
ing? Jasmine, a Franchise Consul¬
tant, was speaking with a prospective
new client who was eager to pur¬
chase a franchise. Jasmine was
explaining the coaching process
to her. By collecting data through
informational interviews, assess¬
ments, and coaching sessions,
Jasmine could help the client
match her business objectives
to an appropriate franchise.
Jasmine’s next two phone
calls were to two different wind¬
shield repair franchisors. Jasmine
had a client whose testing results
revealed that a windshield repair
franchise was a strong match for
his interests and business objec¬
tives. Jasmine was setting up a
meeting between the franchisors
and her client. After her client
talked with both franchisors,
Jasmine would coach him through
the decision-making process.
Jasmine would receive compensa¬
tion from the franchisor her client
selected.
On the way home from work.
Jasmine stopped by a tutoring fran¬
chise that she helped one of her
clients establish. She had a brief
chat with the franchise owner to
see if there were any business issues
she could help resolve. By staying
in touch with clients, Jasmine
could help ensure the ongoing
success of their franchise.
What about you? Would you
like to provide structured testing
and coaching to clients to help
them match their interests, goals,
and resources with an appropriate
franchising opportunity?
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Select a Type of Ownership
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II flH *
HBUSIMESS LAW AMD ETHICS
MAMAGEMEMT TEAM DECISION!
MAKIMG EVEMT
# OECA_
1 he Team Decision Making Event requires participants to analyze
one or a combination of elements essential to the effective operation
of a business. This event will require students to understand copyright
laws, trademarks, and royalties paid to protected entities.
Your team has decided to open a sporting goods/gift shop in a
popular university city. You want to sell merchandise that bears the
emblem, logo, mascot, and name of the university. You have sched¬
uled a meeting with the university’s attorney (judge) to present your
proposal for selling the merchandise. Your team must explain the pric¬
ing strategy for merchandise and demonstrate an understanding of
royalties from merchandise sales to the university, college conference,
and the National Collegiate Athletic Association (NCAA). You must
also explain how your merchandise is different from university mer¬
chandise sold by competitors. You must convince the attorney that
your business offers competitive advantages that will result in strong
sales and good royalties for the university.
PERFORMANCE INDICATORS EVALUATED
• Explain the nature of business law.
• Describe legal issues affecting businesses.
• Describe strategies used to protect a business’s copyrights.
• Explain legal strategies used to protect trademarks.
• Make an effective oral presentation.
• Explain legal considerations for pricing.
• Explain business ethics in product/service management.
Go to the DECA web site for more detailed information.
Think Critically
1. Why is it important to consider copyright and trademark laws when sell¬
ing merchandise?
2. Why are copyright and trademark laws hard to enforce in other
countries?
3. How can you determine the royalty percentage to be paid to a university
for use of its emblem, logo, or mascot?
4. Why does a university need an attorney who specializes in copyright
laws?
www.deca.org
Winning Edge 207
Locate and Set Up
Your Business
8.1 Choose a Location
8.2 Obtain Space and Design
the Physical Layout
8.3 Purchase Equipment,
Supplies, and Inventory
school.cengage.com/entre
‘preneur/ideas
208
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IDEAS IM ACTION!
A Neighborhood Business
C hoosing where to locate is an important step
in opening a business. Often the best place is
in your own neighborhood. When Ryan Williams
was a 15-year-old student at Ossining High School
in New York, he noticed that many neighbors
wore headbands and wristbands with well-
known logos. Ryan conducted an informal
survey of his friends and found that many
were interested in these products with a
personal touch. He turned that idea into
Rapappy, Inc., Personalized Headbands
and Wristbands.
Ryan Williams, Rapappy, Inc.
Because of his outstanding business plan and excellent communica¬
tion skills, Ryan received a first-place award in the Entrepreneurship
Business Plan Competition at the National Foundation of Teaching
Entrepreneurship's (NFTE's) 2003 Summer BizCamp at the Fashion Insti¬
tute of Technology. He also won the overall award for best technology
use from the Goldman Sachs Foundation. Its Youth Entrepreneurship
Expo is open to select students from around the country who excel in
student entrepreneurship programs. At the Expo, students present their
business plans and ventures to an audience of business professionals,
parents, teachers, and judges. Ryan credits his EXPO participation with
increasing his confidence and improving his speaking skills. The events
helped Ryan realize that with planning and hard work, anyone can
start and run a business.
Ryan appreciates the efforts of all the volunteers who gave of their
time throughout his journey. Now a student at Harvard, Ryan realizes
that these individuals helped nourish the entrepreneur within him. Ryan
advises other young people who want to start a business to choose an
area in which they are interested. He stresses the importance of taking
risks, keeping good records, and persevering no matter how hard things
seem.
What do you hnow?
Can you think of a good business opportunity for your neighbor¬
hood? Explain your ideas.
How did Ryan's participation in events help improve his entrepre¬
neurial skills?
Why is the ability to persevere an important quality for an
entrepreneur?
209
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Good locations come at a price
Gail worked very hard to get just the right product mix for her company,
Fitness For You, which offers creative branding strategies
and products to the fitness industry. Business was good,
but profits were still not at the level she wanted. She
examined her expenses and realized that a large portion
of her monthly expenses was for rental of her office
space. She was located in an upscale office
complex in Palm Beach, Florida. When she
started looking at her customer base,
she realized that most of her cus¬
tomer interaction was by phone or
e-mail and at trade shows and busi¬
ness meetings held away from her
office. Many of her customers were
located in other states.
Work as a Team Flow important
do you think Gail's location is to
the success of her business? What
would you advise her to do about
her location? Carefully consider your location needs.
Locating a Retail Business
Making your product available in the right location to reach your target
customer is very important. If you want to open a retail business, choos¬
ing the location for it will be one of the most important decisions you
will make as an entrepreneur. The wrong location could spell disaster,
but the right location will help your business succeed from the start. The
right location for your business depends on the kind of business you
plan to operate and the type of customer you want to reach.
Downtown Areas
In some communities, the downtown area represents an easily accessi¬
ble, central location. Workers from downtown offices and professional
210 Chapter 8 Locate and Set Up Your Business
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What are the advantages and disadvantages of locating a business downtown?
Develop Your
Reading Skills
As you read, make a chart
showing the advantages and
disadvantages of each type
of location for retail, ser¬
vice, and home-based
businesses.
businesses may shop at your business on their breaks or on their way
to and from work. Rents vary widely from city to city, so you will
want to do some research if you are thinking of using a downtown
location.
Some downtown areas have lost business to neighborhood, com¬
munity, and regional shopping centers. But many cities are revitalizing
their downtown shopping districts and are offering incentives to attract
businesses back into the area. Issues faced in many downtown areas
include a higher crime rate, traffic jams, lack of free or convenient
parking, and a lack of customers in the evening.
Neighborhood Shopping Centers
Neighborhood shopping centers are small shopping centers that serve
a certain neighborhood. They are often called strip malls and consist
of 3 to 15 stores. They are typically anchored by a supermarket, which
is supported by other stores offering convenience goods (food, pharma¬
ceuticals, and sundries) and personal services. Examples of supporting
stores include drugstores, dollar stores, and dry cleaners.
Neighborhood centers represent good locations for stores selling
goods or services that people need to purchase frequently. Rent is
usually low in these centers, making them ideal for small businesses.
Customers of neighborhood shopping centers are mainly residents of
the surrounding area who shop at these centers because of their con¬
venience. However, it could be a disadvantage for your business if the
only customers you have come from the immediate area.
Community Shopping Centers
Community shopping centers have more square footage than neighbor¬
hood centers and are designed to serve residents from many neighbor¬
hoods. Apparel, furniture, toy, sporting goods, and electronic stores are
often located in community shopping centers. Community centers
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usually have one or two major anchor stores. Anchor stores can include
the following:
• small department stores (Kohl’s, JC Penney)
• discount department stores (Wal-Mart, Kmart, Target)
• large supermarkets (Kroger, Food Lion, Safeway, PublLx)
• super drugstores (Walgreens, Rite Aid, CVS)
• home improvement stores (Home Depot, Lowes)
Although rent in community shopping centers is generally higher
than in neighborhood shopping centers, it is usually still affordable. And
stores in community shopping centers can earn higher profits. Anchor
stores advertise heavily and attract customers from throughout the com¬
munity. Other businesses in the shopping center typically benefit from
the advertising. Customers shop at the anchor store and then may browse
and buy at the smaller stores located in the shopping center as well.
Regional Shopping Centers
Regional shopping centers are designed to attract customers from an
entire region. These large shopping areas usually have 40 to 100 stores
and are anchored by one or more large department stores, such as
Macy’s and Nordstrom’s. The majority of the stores sell apparel. Many
regional shopping centers are malls. Regional shopping centers offer
depth and variety of products and services.
If your business requires a large amount of wallt-in traffic to be
successful, you may want to locate in a regional shopping center.
Rents at these centers are high, however, making it more difficult to
earn profits. Also, the distance to the shop may be too great for some
consumers. For convenience, they may decide to patronize businesses
closer to their homes.
Super-Regional Shopping Centers
Super-regional shopping centers are the largest classification of shop¬
ping centers. They house more than 100 stores that offer an extensive
variety of merchandise and services. They are typically anchored by
three or more large department stores. They serve a larger population
base than the other types of shopping centers. Two of the largest super-
regional centers are the West Edmonton Mall in Edmonton, Canada
(with over 800 stores), and the Mall of America in Bloomington,
Minnesota (with over 500 stores).
Most tenants in these centers are large chain stores that can afford the
very high rents charged. If convenience is a factor for your target market,
customers may not be willing to travel a great distance to come to your
store. Such centers usually are not recommended for new business owners
because of the competition that exists among many similar businesses.
Stand-Alone Stores
Stand-alone stores can be located just outside of shopping centers or
far away from other businesses. These stores often depend on drive-by
traffic. They must have plenty of parking, good signs, and effective
lighting if they are to be successful.
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Businesses locate in stand-alone locations
because rent is often less expensive than it is
elsewhere. Also, a competing business is less
likely to be right next door. Advertising is often
necessary to earn a profit because people must
have a reason to come specifically to your busi¬
ness. Large jewelers, auto parts stores, and
flower and garden centers are often operated as
stand-alone stores. A recent trend shows that
department stores and large drugstores are
opening up stand-alone stores.
Warehouses
Some retail stores, such as appliance dealers or
furniture sellers, operate in warehouses. Ware¬
houses are generally one of the cheapest rental
facilities because they are of basic construction
with few frills inside or out. Locating your busi¬
ness in a low-rent warehouse may allow you to
charge lower prices than your competitors. However, locating away
from other retailers can also mean that potential customers will not
notice or be aware of you. For this reason, businesses that operate out
of warehouses generally advertise heavily.
Why might an appliance store locate in a warehouse?
Checkpoint
What are the main options for locating a retail business?
Locating a Nonretail Business
Location can be very important for nonretail businesses, which
include service, wholesale, and manufacturing businesses. Owners
of these types of businesses face different considerations when
choosing a location.
Service Businesses
For some service businesses, such as restaurants and hair salons, loca¬
tion considerations are the same as for many retail businesses. Owners
of these types of businesses have to be very careful when choosing a
location. Convenience can be an important factor for the business’s
customers.
Location is much less important for other types of service busi¬
nesses. Customers never actually visit some service businesses, such as
plumbing or carpet-cleaning companies. Locating these kinds of busi¬
nesses in expensive areas does not make sense. Being close to custom¬
ers may be important, however, because customers are more likely to
call a company located nearby.
8.1 Choose a Location 213
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Eileen Whitman runs a small computer-repair service. Because
most of her customers are businesses, Eileen chose a downtown loca¬
tion for her company. Being close to her customers means that she
can quickly respond to emergencies and have clients’ computers back
in service the same day.
Industrial Businesses
Industrial businesses, such as manufacturing and wholesale companies,
ship their products direcdy to their customers. This means customers
rarely see their facilities. Operating in an upscale location that attracts
lots of consumer traffic is not necessary for an industrial business.
Availability of good employees and low cost are the key factors in
determining where an industrial business locates.
Nonretail businesses sometimes locate in industrial parks. An
industrial park is a section of land that is zoned for industrial busi¬
nesses only. They are usually located where space is less expensive,
away from housing developments and downtown areas. Communities
sometimes subsidize rents in industrial parks in order to attract indus¬
trial businesses.
Tim Morrison’s company specializes in preparing bulk mailings for
large companies. Tim’s corporate customers have their freshly printed
catalogs and direct-mail advertisements sent directly to him from the
printing companies. Using mailing lists provided by the customers, he
prepares and ships the bulk mailings from his shop. All of Tim’s contact
with his customers takes place over the phone or via e-mail. There is no
reason for him to locate his business in a prestigious part of town.
Home-Based Businesses
In recent years, there has been an
increase in the number of home-
based businesses. Some of the rea¬
sons that entrepreneurs decide to
locate their business in their home
include the following:
• Cost savings Separate rent,
utility costs, and maintenance fees
for the business are eliminated, so
there is more capital available for
promotional activities and the
purchase of inventory.
ENTERPRISE ZONES Industrial businesses may locate in enterprise
zones. Enterprise zones are areas that suffer from lack of employ¬
ment opportunities. Entrepreneurs who set up businesses in these
areas may be eligible for favorable tax treatment based on the number
of jobs their businesses create.
Some businesses may find the tax benefits offered by enterprise
zones attractive. Others, however, may find that these benefits do not
make up for the lack of an appropriate customer base or the increased
risk of crime in those areas.
Why do you think the number of home-based businesses is growing?
214 Chapter 8 Locate and Set Up Your Business
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• More freedom Home-based business owners do not have to sign
a lease agreement for the business, so they are not subject to the
restrictions and obligations of a lease.
• Convenience The owner can work more flexible hours and does
not have to commute to and from another location.
Locating their business at home is how many entrepreneurs get
started. It is a great way to save money when starting a business. If
the business outgrows its space, the owner can begin to look for an
appropriate location outside the home.
Although it is cheaper to operate a business from home, there
are some disadvantages to operating a home-based business. Lack of
space can limit the expansion of the business. It may also be hard to
keep your business and family life separate. Many home business own¬
ers feel isolated from the business community and miss opportunities
to interact and network with colleagues.
Janet Lawson of The Healing Center began her therapeutic mas¬
sage business in the basement of her home. As demand for her services
increased, she needed more space for new equipment and employees.
She leased space in her community and moved her business.
Checkpoint
What are some of the factors to consider when selecting a location
for a nonretail business?
WHAT WENT WRONG *
Right Space, Wrong Place
Jim Teal opened Jimmy T's Rib House, and within
the first ten months, he was making profits. One
day a commercial realtor advised Jim that a res¬
taurant four times the size of his current space
was on the market. The realtor said he could get
Jim a good deal on the lease if he liked it.
Jim knew that the city where the building
was located had no other barbecue rib restau¬
rant. He researched and verified the population
numbers and demographics for the geographi¬
cal area. It was in a good neighborhood, on a
main road, just off the freeway. He even did a
traffic-flow study, and the numbers were terrific.
The grand opening week went well, but then
business began to drop off.
Although there was plenty of traffic, Jimmy
T's was on the wrong side of the street. Custom¬
ers coming west from the freeway exit could not
cross the center island, and there was a "No
U-Turn" sign at the corner. When Jim tried to
improve his visibility and signs to attract more
freeway traffic, he found that city regulations
prevented it. After six months, Jim took his loss
and closed the new restaurant.
Think Critically
1. What questions about location should Jim
have asked the realtor before assuming the
lease?
Consider the pros and cons of a location.
8.1 Choose a Location 215
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Select Your Site
Given all of the possible types of locations for different types of busi¬
nesses, how do you decide where to locate? One way of identifying
your options is to buy a map of your area and mark the trade area.
The trade area is the area from which you expect to attract custom¬
ers. Indicate on the map all of the locations that might be appropriate
for your business. Also indicate the location of all of your competitors.
Using a different color marker or symbol, mark the locations of busi¬
nesses that do not directly compete with your business but may
attract the same land of customer. For example, if you want to open
a poster store that will attract mostly teens, mark the locations of
other stores that also appeal to this target market, such as trendy
clothing stores and music stores.
Location Type and Availability
The next step is to identify which type of location is right for your
business. Do you want to locate in a community shopping center? A
stand-alone store? Downtown? At home? Determining which type of
location you want will help narrow your search.
After deciding on the type of location, you must determine what
spaces of this type are available in your trade area. The classified sec¬
tion of your local paper will list available sites. You can also find loca¬
tions simply by driving around your trade area. Signs advertising an
available building will often be hung in the front window or placed
on the front lawn of the property. Web sites and search engines may
also be helpful in determining what options are open to you. Mark
each possible location you find on your trade area map.
Evaluate the Location
After getting a list of possible locations, inspect each location to assess
its appeal. Is the location safe? Is it attractive? Does it seem to attract
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the kind of customers your business will be targeting? Is it easy to
reach? Is parking adequate? Do businesses in the vicinity seem to be
thriving? After answering these questions you should be able to nar¬
row down your choices to only one or two viable business locations.
Michele Kim is planning to open a fabric store. Convinced that
there is a market for her product, Michele proceeds to identify the best
location for her store. She rules out a downtown location because of
the lack of parking and the fact that many shoppers are not willing to
go downtown in the evenings. After thorough research, she setdes on a
community shopping center because of the low rent, the good parking,
and the relative safety of the area.
Checkpoint
What are some of the factors you should consider when selecting a
site for your business?
8.i Assessment
THINK ABOUT IT
1. Why do you think rents are lower in neighborhood shopping
centers than in community and regional centers?
2. Do you think advances in technology have played a part in some
new business owners' decision to operate from their homes?
Why or why not?
3. When marking the trade area for your business, why should you
indicate the locations of your competitors?
MAKE ACADEMIC CONNECTIONS
4. PROBLEM SOLVING Using a map of your area, mark the poten¬
tial trade area for a new furniture superstore. Then use the
six-step problem-solving model to help determine at least two
appropriate locations.
5. COMMUNICATION As a downtown business owner, you actively
work to recruit other businesses to the area. Write a letter to
the editor of your local newspaper about the advantages of
locating a business downtown.
TEAMWORK
Gather in teams. Brainstorm a list of rules a home-based entrepreneur
might make in order to be as effective and productive as possible
while working at home. When sharing your rules with the class, ask
one person from your group to write your rules on the board.
8.1 Choose a Location 217
#
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• •
• Compare purchase and
• tenant
lease options.
• landlord
• Describe layout consid-
• gross lease
erations for different
• net lease
types of businesses.
• percentage lease
1 Focus on Small Business
Walking inventory
Trying to create a fun, relaxing atmosphere in his clothing
and accessories store, Justin decided to move the cash reg¬
ister into the far back corner of his store. That gave him
more space for displays and merchandise up front. He
was really excited about all he could do with the space.
Due to slow traffic in the store at times, there
was often only one employee on duty. The next
thing Justin knew, his inventory was "walking right
out the door," and it wasn't with paying customers.
Justin had created a perfect layout for shoplifters.
He knew he had to make some changes.
Work as a Team What did Justin do wrong in
changing the layout of his store? If Justin wants to
keep the same layout, what suggestions can you
make that would cut down on shoplifting?
The layout should meet
the needs of the business
and its customers.
Lease or Buy Space
Unless you operate your business out of your home, you will have to
lease or buy business property. There are advantages to buying space.
Owning property offers a bigger tax advantage than leasing. Owning
the building that houses your business allows you a tax deduction on
the interest you pay on your loan. And a loan payment on the build¬
ing may be no more than a lease payment.
However, most entrepreneurs lack the money to purchase property
for their businesses. Even entrepreneurs who can afford to purchase
property generally prefer not to be locked into a particular location.
Some leases require the owner of the building, not the owner of the
business, to pay certain expenses, such as upkeep and maintenance of
the building’s exterior. For these reasons, most businesses lease space.
Commercial Leases
When leasing property, a contract is needed. In a lease contract, there is a
tenant and a landlord. The tenant is the person who pays rent to occupy
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space owned by someone else. The landlord is the person who owns and
rents out buildings or space. There are three kinds of commercial leases.
1. In a gross lease, the tenant pays rent each month for
the space occupied, and the landlord covers all property
expenses for that space. Expenses such as property taxes,
insurance on the building, and building maintenance are
paid by the landlord.
2. A net lease occurs when the landlord pays building insur¬
ance, and the tenant pays rent, taxes, and any other expenses.
3. With a percentage lease, the tenant pays a base rent each
month, and the landlord also receives a percentage of the
tenant’s revenue each month. The percentage lease is
most common for prime retail locations. This type of
lease can be beneficial for both the landlord and tenant.
The landlord shares in the business’s profits, and the ten¬
ant has the advantage of a lower base rent, which can why is ,f im P° rtant t0 have a contract when
make rent more affordable during slow sales periods. leasing property.
Commercial lease agreements are usually long and complex. You
should never sign one without consulting an attorney. Your attorney
will review your lease to make sure that it covers all conditions and
costs, including the basic rent, maintenance fees, utility costs, insur¬
ance costs, and other items.
Compare Costs of Doing Business
Once you have selected some possible locations for your business, you
need to compare the costs and benefits of leasing property at each
location. To do so, you need to calculate how much rent you will be
paying per customer.
Juan Martinez plans to open a music store. He looks for a location
that is convenient, far from other music stores, and safe for customers.
He finds two locations that meet his needs—one in a neighborhood
shopping center and the other in the downtown area.
CALCULATING RENT PER CUSTOMER To decide which location he
should select, Juan determines the amount of rent he would pay and
the number of projected customers for each location. Juan divides the
amount of rent by the number of projected customers to determine
the rent per customer.
Downtown Shopping Center
Rent per month $ 925 $ 1,100
Projected customer traffic per month -^8,500 -M2,000
Rent per customer $ 0.11 $ 0.09
From his calculations, Juan determines that, although the total
rent will be liigher, he will be paying a lower rent per customer at the
shopping center. Juan leases space at the shopping center.
Checkpoint
Name three kinds of commercial leases.
#
8.2 Obtain Space and Design the Physical Layout 219
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did you KNOW?
According to a recent
report by IGD, a con
sumer and shopper
research company, 3!>/o
of shoppers visit only
t he aisles which they
believe have the items
they need. This indi¬
cates the importance
of placing new prod¬
ucts or promoted items
in key locations to
ensure good product
exposure.
Design the Layout of Your Business
After you have leased or purchased a facility, you will need to design
your layout, or floor plan. Your layout must include enough space for
employees, customers, merchandise, and equipment. It must also have
space for restrooms, stockrooms, storage, and offices.
Create the Floor Plan
You will need to prepare a scale drawing of the layout. Graph paper
will help you draw your layout to scale. To create a scale drawing,
let 1 inch represent 1 foot of actual space. For example, a 4-foot-by-
3-foot closet would be represented by a 4-inch-by-3-inch rectangle.
Indicate the planned use of each area. Also indicate the location of
furniture, display cabinets, shelves, fixtures, and equipment. Your
drawing will help you identify potential problems in your layout. It
will also help you communicate with the people who may be helping
you organize your space.
Sample Floor Plan
Supplies Dressing rooms
and
Inventory
Decide on a layout, an outside sign, and window displays that
match your image. If you sell expensive jewelry, you will probably
decide on a sophisticated outside sign and an elegant inside design
that will appeal to your target customer. If you sell outdoor equip¬
ment, you will select a very different design for your store.
Layout of a Retail Business
For a retail business, appearance is very important. A store with inviting
window displays and creatively displayed merchandise sends a positive
message. A store with crowded aisles and piles of sale items does not.
The goal of your layout should be twofold. It should attract customers
to your store and keep them coming back, and it should meet the needs
of your business.
220 Chapter 8 Locate and Set Up Your Business
Window display Window display
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Here are some ways you can send a positive message about your
store.
1. Choose lighting that is appropriate for the kind of merchandise
you sell. Good lighting is important for any business where cus¬
tomers inspect merchandise closely. Avoid fluorescent lighting,
which creates an unattractive glare.
2. Think carefully about window displays. Use them as a way to display
new merchandise or seasonal items.
3. Make the entrance inviting. An entrance that is welcoming will
draw customers into the store.
4. Use common sense when organizing the merchandise in your store.
Customers should always easily find what they want. Inventory and
supplies should also be well organized so that you can find things
faster and serve your customers better.
5. Leave at least four feet of aisle space. This makes it easy to move
around in your store.
6. Create attractive in-store displays. Customers are drawn to dis¬
played merchandise.
Famous
Rachael Hay
Sometimes success comes from
being in the right place at the right
time. And it always helps to be
prepared! Just ask Rachael Ray,
who says her life has been "a
very happy, wonderful accident
that I didn't and couldn't have
planned."
The truth behind that state¬
ment is that Ray had extensive
training in the food service industry
before she became a TV star. Start¬
ing at the candy counter of Macy's,
she was promoted to manager of
the Fresh Foods Department. She
then helped to open and was store
manager and buyer for Agata &
Valentina, the prestigious New York
gourmet marketplace.
She was discovered by the
local CBS station while working for
Cowan & Lobel, a large gourmet
market in Albany, NY. She had
begun a series of cooking classes
to increase sales dur¬
ing the holidays. The
classes were so popu¬
lar, the station signed
her on to do a weekly
"30 Minute Meals"
segment for the
evening news. She
sold 10,000 copies
locally of a compan¬
ion book.
The Food Net¬
work soon came call¬
ing and the Rachael
Ray Show began in
September 2006. FHer personality and
quick, tasty recipes fit modern lifestyles.
How did Rachael Ray build upon
her early success?
Think Critically
Even though Rachael Ray says the
way her life has turned out has
been accidental, what steps did
she take in her life that prepared
her for her current position?
8.2 Obtain Space and Design the Physical Layout 221
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;33kmark
Appearance is very important for a retail
business. Effective store layouts maximize the
available space and create a natural flow of
traffic through the store to encourage addi¬
tional spending. Access school.cengage.com/
entrepreneur/ideas and click on the link for
Chapter 8. Read the article on types of store
layouts. According to the article, what three
factors must a retailer consider when devel¬
oping a floor plan/store layout? Name the
five types of store layouts described in the
article. Then think of a retail store you visit
frequently. Which type of layout design does
the store use?
school.cengage.com/entrepreneur/ideas
7. Use wall space wisely. Wall space may be
too high for customers to reach, but it can
be used to display merchandise.
8. Place the cash register in a central loca¬
tion. Customers should not have to search
for a cashier.
Layout of a Service Business
Service businesses can be divided into two
categories.
• Service businesses where people come to
the business location to receive a service
(restaurants, hair salons, automobile repair
services)
• Service businesses that travel to the cus¬
tomer’s location and perform the service
on-site (exterminators, plumbers, cleaning
services)
The layout of the first type of service business should be consid¬
ered just as carefully as that of a retail business. However, on-site
service businesses are never visited by their customers, so an attrac¬
tive layout is not important. Organization should be a major consid¬
eration of on-site service businesses so that supplies and other items
are easy to find.
Layout of a Wholesale Business
Customers of wholesale businesses are concerned with price and quality,
not physical appearance. For this reason, a wholesale business needs only
to be well organized. Wholesalers are constandy receiving and shipping
large volumes of products. Wholesale businesses can do the following to
facilitate shipping and receiving:
1. Locate in a one-story warehouse.
2. Keep merchandise close to the shipping dock. This minimizes the
distance it will have to be moved when it is brought into and taken
out of the warehouse.
3. Store the most popular items in the most accessible locations.
4. Have areas that can accommodate merchandise of all sizes.
5. Keep walkways free of merchandise so that employees can exit the
building quickly in the event of an emergency.
6. Store items safely. For instance, do not stack too many boxes on
top of one another because they may fall if they become unsteady.
Layout of a Manufacturing Business
For manufacturing businesses, efficiency, not attractiveness, is what
counts. Other important considerations include the following:
1. Work teams should be situated close together.
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2. Supervisors should be able to easily observe the people they super¬
vise. Their office should be located near the employees.
3. Exits should be clearly marked and easily accessible so that employees
can quickly leave in the event of an emergency.
4. Any hazardous materials should be stored safely.
5. Equipment and machinery should be positioned in a way that
reduces the chance of an accident.
1
Checkpoint
What are the major considerations for choosing a layout for a
business?
rs.2 Assessment
THINK ABOUT IT
1. What are the differences between a gross lease, a net lease, and
a percentage lease? Which type of lease would you prefer?
Explain why.
2. Why do you think it is important to draw a floor plan of your
business before you begin setting up shop?
3. For a service business that serves customers at the place of busi¬
ness, why are layout considerations similar to those for a retail
store?
MAKE ACADEMIC CONNECTIONS
4. RESEARCH You are thinking about opening a bicycle sales and
repair shop. Research layouts of other bicycle shops and deter¬
mine what type of equipment and supplies would be included in
the layout for this shop.
5. MATH Determine the rent per customer for the following:
Rent per
Location Month
Downtown $1,200
Community shopping $2,800
center
Stand-alone store $1,050
Projected Customer Rent per
Traffic per Month Customer
9,500 ?
18,000 ?
7,400 ?
Working with a team, choose a business with which you are familiar.
Using the Activity CD, open the activity "Evaluate the Layout of a
Business." Print a copy and complete the activity to rate the effective¬
ness of the business's layout.
8.2 Obtain Space and Design the Physical Layout 223
#
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Setting up shop
Karen had operated Bear Creek Embroidery and Altera¬
tions as a home-based business for several years. Her
business had grown to the point that she needed more
space for equipment and new employees. She shopped
around for space and found a good location near her
neighborhood.
While planning the move, Karen realized that in
addition to rent, she would have many other expenses
now that she would no longer be operating out of
her home. As she began to add up the cost of all the
furnishings, equipment, supplies, and other expenses
that she would incur by moving out of her home and
expanding her business, she began to wonder if she
could afford the move.
Work as a Team What additional expenses will
Karen be paying if she moves her business out of
her home? Before deciding to move her business,
what should Karen have done to be sure she could
afford the move?
Consider all of the
expenses involved in
Obtain Equipment and Supplies
Every business needs equipment and supplies. Many businesses also
need inventory. Machinery, computers, cash registers, and furniture
are types of equipment. Supplies include things like paper, pens, and
pencils. Inventory is the merchandise a business sells to its customers.
Without these things, a business cannot function properly. If there is
no inventory, what will you sell? If there is no paper, how will you
send a letter? Suppliers or vendors can provide your business with
everything you need to function.
To determine the equipment and supplies you need to start your
business, make a list of what you think you will need. All businesses
need standard items such as furniture, lamps, and office supplies. Busi¬
nesses also need special items specific to the type of business. For
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example, lawn-care companies and landscaping firms would need lawn
fertilizer as part of their supplies and lawn mowers as part of their
equipment. Your list should include standard items needed by all
businesses as shown in the table below. It should also include items
specific to your particular business.
Once you have listed all of the items you need, indicate how
much of each item you require. Be sure to list the minimum quantity
you need right now, not the amount you might need if your business
succeeds. Being overly optimistic could leave you with many bills that
will be difficult to pay if your sales fall short of your projections.
STANDARD EQUIPMENT AND SUPPLY
NEEDS FOR MOST BUSINESSES
Type
Items
Furniture
Desks, chairs, bookcases, filing cabinets, tables,
computer stands
Fixtures
Lamps, overhead lights
Office Equipment
Computers, routers, modems, fax machines, telephones,
printers, copiers
Office Supplies
Stationery, pens and pencils, scissors, tape, staplers,
paper clips, binder clips, folders, calendars
Maintenance Supplies
Toilet paper, paper towels, hand soap, cleaning supplies
Kitchen Supplies
Coffee maker, small refrigerator, soft drinks, coffee, tea
Identify Suppliers
To fill the standard and special needs of your business, you will need
to research vendors. Vendors are companies that sell products and
services to businesses. Vendors are also called suppliers. Valuable sources
of vendor information include the following:
• Telephone directory advertising section
• Trade magazines (specialized magazines devoted to a particular
industry), which carry vendor advertising
• Trade associations
• The Internet
• Other companies in your industry
Shira Silberg wants to open an assisted-living center for senior
citizens. To find suppliers of furniture, linens, and many other items,
Shira looks through copies of trade magazines for advertisements from
companies that target the nursing-home industry. Shira also locates
vendor web sites for additional information. Finally, she contacts other
assisted-living centers to find out which vendors they use.
Evaluate Proposals
Most of the items you will need to start your business will be available
from a variety of vendors. How will you decide among them? Before
you make a purchase, contact several vendors and ask them to quote you
8.3 Purchase Equipment, Supplies, and Inventory 225
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Why is it important to have a reliable vendor?
a price for the merchandise you are interested in purchasing. A quote is
an estimate for how much you will pay for the merchandise or service.
Also ask vendors about the quality of their merchandise, their financing
terms, quantity discounts, and shipping and handling charges. Once
you have all the information you need, compare the various proposals.
Choose the vendor that provides the best combination of products at a
cost that fits your budget.
Shira selects her suppliers by asking for proposals from the ven¬
dors that appeal to her the most. She then compares price quotes, ser¬
vice, quality of merchandise, and discount options. Shira knows that
the lowest price is not always the best option if paying a litde more
means receiving better quality and service. She decides on a higher-
priced linen business because it offers additional services that meet the
needs of her business the best.
Checkpoint
What should you consider when selecting vendors for your business?
Purchase Inventory
Retailing, wholesaling, and manufacturing businesses must purchase
inventory before they can open for business. For retail and wholesale
businesses, inventory is merchandise purchased with the intent of
reselling it to customers. For manufacturing businesses, inventory also
consists of the parts that will go into producing the business’s product
as well as its finished goods.
Purchase Inventory for a Startup Business
Determining the amount of inventory to keep in stock is difficult for
all business owners. It is particularly difficult for owners of new busi¬
nesses, who do not yet know what their level of sales will be.
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Chris Keating wants to open an
art supplies store. He wants to have
enough inventory that his shelves look
hill. He also wants to be able to offer
his customers a hill line of art supplies.
Not knowing how high or low his
sales will be at first, Chris doesn’t
want to purchase too much inventory.
He doesn’t want to tie up his cash in
inventory if he can’t sell it quickly.
Chris is also worried about finding
space to store the inventory. Because
of these concerns, Chris purchases
just enough stock to fill his shelves.
Purchase Inventory for
an Ongoing Business
Once your business is up and run¬
ning, you will have a better idea of how much inventory you need.
To make sure that you do not run out of stock unexpectedly, you can
establish reorder points for each product you sell. The reorder point
is a predetermined level of inventory that signals when new stock
should be ordered. How low you set the reorder point depends on
how long it takes your supplier to get merchandise to you, how many
units of the item you sell each month, and how important it is for
you not to be out of stock.
Chris sells 150 erasers a month. Because he never wants to be out of
stock, he sets his reorder point at 30. Every time his inventory of erasers
falls at or below 30 units, he places an order to renew his stock of this item.
Be your own boss
You own a toy store. You specialize in collectible
dolls and stuffed animals. Some of the stuffed
animals that you carry have become very popular
with children, and you cannot keep them in
stock. In the past, your reorder point was three
and you never ran out of the animals, but now
you are losing sales because of empty shelves.
You know you could sell more stuffed animals if
you had them. Outline a plan that will meet your
business's inventory needs as well as your cus¬
tomers' needs.
Checkpoint
How do you determine the amount of inventory to keep in stock?
Why should you keep track of your inventory?
#
8.3 Purchase Equipment, Supplies, and Inventory 227
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8.3 Assessment
THINK ABOUT IT
1. Why should you make a list of all the equipment and supplies
you need to start your business?
2. Why is it important to obtain price quotes from several different
vendors before selecting a vendor? What questions should you
ask potential vendors?
3. What issues should a business owner consider when purchasing
inventory for the business? Explain the relationship between
inventory and customer service.
MAKE ACADEMIC CONNECTIONS
4. COMMUNICATION You are a wholesale distributor of party
supplies. A new store. Party Express, has asked you to submit
a proposal for supplying its paper goods inventory. In order
to prepare for a meeting with the Party Express management,
make a list of questions you will ask them in order to get
enough information for your proposal. Role play the meeting
with a classmate.
5. MATH Using the Activity CD, open the activity "Equip Your
Business." Print a copy and complete the activity to calculate
the cost of the equipment and supplies you would need to start
your own fitness training business.
6. RESEARCH Use the Internet, trade magazines, newspapers, and
other sources to search for suppliers of house paint for profes¬
sional painters. Report your research in a short document which
could be used by a painter to help select a vendor.
TEAMWORK
Lee Torres is opening a retail pet store. The store will carry high-quality
pet foods, leashes, collars, coats, carriers, beds, toys, treats, grooming
supplies, and flea products for both dogs and cats. Lee does not plan
to sell puppies or kittens but will have a large assortment of birds,
tropical fish, and small animals (hamsters, guinea pigs, etc.) and the
foods and accessories needed for them. The store will carry an assort¬
ment of books about selecting, training, breeding, and caring for pets.
In addition, Lee will also offer grooming services for pets.
Working with teammates, make a list of all of the equipment
and supplies Lee will need for his business. Use the Internet to com¬
pile a list of several vendors that sell pet products and supplies. Cre¬
ate a list of questions that Lee should ask the vendors to help him
select the best vendor. Finally, consider Lee's inventory needs. Decide
which products Lee should order in large or small quantities and
explain why. Compile a report with all of the information you have
gathered to present to Lee.
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E-Mail Etiquette
As you deal with vendors and suppliers, you will have the opportunity
to communicate using e-mail on a regular basis. Today, many business
deals are made by e-mail without the parties ever meeting or talking
over the telephone. E-mail is preferred over regular mail, fax machines,
and telephones as being quicker and less intrusive than a phone call.
With e-mail, you can key your message into the computer, and with
one stroke, your message is delivered instandy.
Although it may not be as formal, the same care should be given
to e-mail as to the preparation of a business fetter. You should always
proofread your e-mail for spelling and grammar before sending it.
Other guidelines to remember when sending e-mails include the
following:
1. Cover only one topic per e-mail. If you have several topics
to discuss, send them in separate e-mails.
2. Use an appropriate subject line. The subject line should
appropriately describe the message. Also, because people
receive numerous e-mails, try to use a subject line that will
catch their attention.
3. Your message should be brief. Use short sentences and para¬
graphs. Long e-mails often go unread.
4. Be courteous and professional in your message. Remember,
once the e-mail is sent, you cannot get it back.
5. Remember that business e-mail is not private. E-mail is subject
to being monitored in many companies. Also, any e-mail you
send can easily be forwarded to someone else. Do not send any¬
thing that you would not want to be made public.
6. Limit the number and size of attachments. Large files can take
too much time to open and can fill up the recipient’s mailbox.
When it comes to e-mail, the best habit to have is to use e-mail
etiquette that will display your professionalism to others. Be sure your
e-mail is worthy of a response.
TRY IT OUT
You want to send an e-mail to a potential vendor asking for a quote
for office supplies that you need for your new business. Compose the
e-mail that you would send, using the guidelines given above.
Sharpen Your Entrepreneurial Skills 229
' etty lmag es
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Chapter 8 Assessment
SUMMARY
8.1 Choose a Location
1. Options for locating retail businesses include downtown areas,
neighborhood shopping centers, community shopping centers,
regional shopping centers, super-regional shopping centers, stand¬
alone stores, and warehouses.
2. Location factors to consider include parking, traffic, convenience,
cost, demographics, draw of nearby stores, and competition.
3. When choosing a location for service businesses that customers visit,
the same factors must be considered as for retail businesses. For ser¬
vice businesses where the service is performed at the customer’s
home or business, the business location is not as important.
4. For industrial businesses, availability of good employees and low
cost are key factors in choosing a location.
5. Operating a small business out of the home can save on costs, but
it may make it difficult to separate personal and business life.
6. Mapping your trade area with possible locations, the locations of
competitors, and the locations of businesses that draw the same
target customers can help you narrow your location options.
8.2 Obtain Space and Design the Physical Layout
7. To evaluate leases, compare the costs and expected benefits of var¬
ious locations and the types of leases—gross, net, or percentage—
offered. Calculating the rent per customer can help you determine
which location is most cost effective.
8. The layout of a business depends on the type of business. For
retail businesses, the aim of a layout is to attract and keep custom¬
ers. For wholesale businesses, the aim of a layout is to store inven¬
tory in the most efficient manner. For manufacturing businesses,
the aim of a layout is to facilitate the production process.
8.3 Purchase Equipment, Supplies, and Inventory
9. Once you determine your equipment and supply needs, you will
need to identify and evaluate a number of vendors by obtaining
quotes and asking about quality, financing terms, quantity dis¬
counts, and shipping and handling charges.
10. To determine the amount of inventory to keep in stock and the
reorder point, consider the amount of expected sales, the time it
takes your supplier to get merchandise to you, and how important
it is for you not to be out of stock for the item.
What do you fcnow now?
Read Ideas in Action on page 209 again. Then answer the questions a
second time. Flow have your responses changed?
230 Chapter 8
Locate and Set Up Your Business
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. A section of land that is zoned for industrial businesses only
2. Companies that sell products and services to businesses
3. The area from which a business expects to attract customers
4. An estimate for how much you will pay for merchandise or services
5. The person who owns and rents out buildings or space
6. A lease in which the tenant pays rent each month for the space occu¬
pied, and the landlord covers all property expenses for that space
7. A lease in which the landlord pays building insurance, and the tenant
pays rent, taxes, and any other expenses
8. Areas that suffer from lack of employment opportunities
9. The person who pays rent to occupy space owned by someone else
10. A predetermined level of inventory that signals when new stock
should be ordered
a.
b.
c.
d.
e.
f.
g
h.
enterprise zones
gross lease
industrial park
inventory
landlord
net lease
percentage lease
quote
reorder point
tenant
trade area
vendors
REVIEW YOUR KNOWLEDGE
11. Which of the following is not a location option for a retail business?
a. downtown area
b. industrial park
c. community shopping center
d. warehouse
12. Which of the following service businesses would consider the same
location factors as a retail business?
a. exterminating company
b. lawn service
c. hair salon
d. on-site computer repair service
13. Which of the following is not a good reason to locate a business in
the home?
a. cost savings c. limited space
b. more freedom d. convenience
14. True or False? Availability of parking would be an important
consideration for the location of a coffee shop.
15. True or False? Most entrepreneurs start out by purchasing the
site where their business will be located.
16. In which type of lease does a landlord receive a portion of the ten¬
ant’s revenue each month in addition to a base rent?
a. gross lease
b. net lease
c. percentage lease
d. tenant-landlord lease
Chapter 8
Assessment
231
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17. Which of the following is the least important consideration when
organizing the layout of a retail business?
a. lighting c. aisle space
b. window displays d. organization of supplies
18. Which of the following is the least important consideration for the
layout of a manufacturing business?
a. organization c. safety
b. efficiency of workflow d. attractiveness
19. True or False? When purchasing supplies, equipment, and inven¬
tory, it is always best to purchase from the lowest-cost vendor.
20. Which of the following is not considered inventory?
a. dolls for a toy store
b. component parts of a product
c. vacuum cleaners owned by a maid service
d. all of the above are considered inventory
21. Which of the following is the least important factor in determining
the reorder point for a sale item in your store?
a. the size of the item
b. the time it takes to receive merchandise from your supplier
c. how many units you sell each month
d. how important it is to you to not run out of stock
APPLY WHAT YOU LEARNED
22. You are planning to open a card and gift shop. Identify the trade
area. What types of locations are available in your community? List
the advantages and disadvantages of each. Are there competing
card and/or gift shops in any of these locations? Are there other
businesses that do not compete directly but attract the same kind
of customer? What are these businesses? Why do you think these
businesses chose this particular location?
23. You are going to open a gift shop that offers photo gifts such as
photo keychains and mugs. You will take the photos yourself and
assemble the products. Consider all of the location options for
your business: downtown, shopping centers, stand-alone store,
or a warehouse. Where would you locate your business and why?
MAKE ACADEMIC CONNECTIONS
24. RESEARCH Interview the owners or managers of three to five local
businesses. What does each of these business owners see as advantages
and disadvantages of their locations? Are these businesses successful?
25. COMMUNICATION Design the layout of a fitness club. Cre¬
ate a scale drawing of the space and show the placement of all of
the equipment. You may want to use pictures from catalogs or
magazines to show the type of equipment you have selected. Pres¬
ent your plan to the class and explain why you think your layout
will make your business successful.
26. MATH You are choosing between a neighborhood shopping
center and a stand-alone store for your shoe store. The monthly
232 Chapter 8
Locate and Set Up Your Business
greene_0538446145_ch08, 12/21/7, 18:49, page: 233
stand-alone location is $2,500. The projected monthly customer
traffic at the shopping center is 6,500 and the projected monthly
traffic at the stand-alone location is 5,100. Which location will you
choose and why? What other factors might you consider before
choosing a location?
WHAT WOULD YOU DO?
You are looking for a vendor to supply your new business with a
computer, a printer, and a copy machine. You have contacted sev¬
eral vendors for quotes. One of the vendors recently contacted you
to offer you a "special" deal, but you had to agree to it before the
end of the day. In addition to a competitive price for the equip¬
ment, he is offering you tickets to an NFL game in a private stadium
suite. He wants you to agree to the deal without signing a contract
and has asked that you pay him in cash. What would you do?
BUILD YOUR
,-,1
Business Plan
Project
This activity will help you choose a location and vendors for your
business idea.
Choose the location area that is best for your business. Why is it the
best choice? Record your reasons on paper.
Using a local map, mark the trade area for your business. Mark the
possible locations for your business and the locations of your competi¬
tors. Are there any businesses in the trade area that do not directly
compete but attract a similar type of customer? If so, mark those on
the map. For each area, write an evaluation that outlines why this
would or would not be a good location for your business.
Determine if it will be more cost-effective for you to buy or lease
space or to run your business from home. Consider rent-per-customer
projections. Write a short paper justifying your decision.
Design the physical layout of your business. Create a scale drawing of
the space and show the placement of all of the furniture, fixtures, and
equipment. Indicate the planned use of each area. How does this lay¬
out meet your goals? Calculate the square footage requirements for
the entire layout.
Make a list of the equipment and supplies you will need to start your
business. Using the telephone book, trade magazines, the Internet,
and other sources, locate five vendors. Contact the vendors to obtain
information about their products, pricing, financial terms, and quantity
discounts. Using the prices from each vendor, calculate the total cost
of all equipment and supplies you will need. How do the vendors
compare? Which one will you select? Why?
Chapter 8
Assessment
233
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Planning a Career in
Architecture and Construction
utecture &
Construction
Hli
IVIy uncle is visiting from out
West. He is excited about the
solar panels he recentiy installed
at his home. His city provided
a $1,000 rebate for solar panel
installation. To obtain the rebate,
the panels need to annually dis¬
place 1,500 kilowatt hours of grid-
based power. My uncle’s utility
bills have gone down. He also
feels good about doing his part
to improve the environment by
decreasing his dependence on the
grid.”
How do individuals and
organizations transition their
energy resources from traditional
sources to environmentally friendly,
renewable sources?
Solar power is a renewable
energy source that is rapidly
increasing in popularity. Many
companies are available to guide
individuals and corporations in
utilizing solar energy and to assist
in solar panel installation.
EMPLOYMENT OUTLOOK
• Solar energy consumption is
expected to grow as part of the
overall growth of U.S. energy
consumption.
• Workers who are trained to
participate in alternative energy
sources may experience good
job prospects.
• Individuals with college course-
work in high-end technology
will have the best opportunities
in the utilities industry.
JOB TITLES
• Solar Installer
• Consultant, Solar Energy
• Solar Energy Project Manager
• Photovoltaic Lighting Designer
• Solar System Design Engineer
NEEDED SKILLS
• A Bachelor’s Degree in Science,
with an engineering major, is
required for higher-level design,
production, and management
jobs.
• Expertise in a variety of areas
including journeyman-level elec¬
trical knowledge, plumbing, and
mount racking systems is needed
for solar panel installers.
What's it like to work in Architec¬
ture and Construction Paige, a
solar panel installation contractor,
has obtained installation contracts
from a variety of companies. The
companies that contracted for
Paige’s services provide their clients
with on-site consulting, ranging
from determining the optimal loca¬
tion of solar panels, to the filing of
paperwork for government-based
rebate and tax credit programs, to
providing a six-month follow-up
visit to ensure proper functioning
of panels.
As Paige has been installing
panels for many years, her experi¬
ence is broad-based. Given the
breadth of her experience, she can
install panels at residential, com¬
mercial, or industrial sites.
Paige is planning to attend a
conference that will focus on state
and federal solar energy incentive
programs. Becoming more knowl¬
edgeable about these issues is part
of Paige’s continuing education
plan to prepare her to start her
own solar energy consulting
business.
What about you? Would you
like to help clean up the environ¬
ment by' actively converting energy
consumers to renewable, “green”
energy sources?
234 Chapter 8 Locate and Set Up Your Business
greene_0538446145_ch08, 12/21/7, 18:49, page: 235
I
ill i!5 *
'BUV1MG ANJD MEECHAMDISIMG
MAMAGEMENJT TEAM DECISION!
MAKINJG EVENJT
# DECA_
_ our team is in charge of buying merchandise and clothing bearing
the university’s name, logo, and trademark for a large university book¬
store on a campus that has 54,000 students. The university has a
highly successful football and baseball team, attracting numerous fans
to the campus on game days. Your team must understand product
mix, product life cycles, seasonal markdown schedules, pricing strat¬
egies, target markets, and special promotional events. You will meet
with the bookstore managers to explain your proposed product mix,
markdown schedule for seasonal merchandise, and special sales events
to sell merchandise. Your merchandising strategy must consider the
fluctuating student population during the year. You must also explain
a strategy to increase Internet merchandise sales.
Your team has 30 minutes to study a business situation and
organize your analysis, using a management decision-making format.
Participants have ten minutes to describe the team’s analysis of the
situation. The judge has five minutes to ask questions about the
presentation.
PERFORMANCE INDICATORS EVALUATED
• Identify product opportunities.
• Describe the use of technology in the selling function.
• Explain the nature and scope of the product/service management
function.
• Identify the impact of product life cycles on marketing decisions.
• Develop strategies to position the product/business.
• Identify products to fill customer needs.
• Explain the nature of sales management.
Go to the DECA web site for more detailed information.
Think Critically
1. Why must the clothing at the bookstore be unique from clothing carried
in department stores and other retail outlets?
2. Why are scheduled merchandise markdowns important for retailers?
3. What types of special promotions could increase sales from fans and
alumni attending football and baseball games?
4. Why should the bookstore consider Internet merchandise sales?
www.deca.org
Winning Edge 235
greene_0538446145_ch09, 12/21/7, 18:50, page: 236
Chapter °\
r
Plan and Track
Your Finances
9.1 Finance Your
Business
9.2 Pro Forma Financial
Statements
Recordkeeping for
businesses
school.cengage.com/entrepreneur/ideas
236
greene_0538446145_ch09, 12/21/7, 18:50, page: 237
IDEAS IM ACTION!
Katelin Shea, Owner/Founder of
GadgetSleeves
Electronic Safekeeping
M embers of Generation Y, more so than
previous generations, are increasingly
reliant on the daily use of portable electronics.
When Katelin Shea began her freshman year
at New York University, she had her new lap¬
top in tow. She needed a carrying case that
would both fit her personal style and protect
her expensive gadget from drops, bumps, and
scratches. After an extensive search, she came
up empty handed and decided to create a
custom carrying case of her own. Using her
mother's sewing machine and materials from
a local craft store, she made her first colorful,
custom-sized, protective sleeve. Before long, friends and family were
offering to pay for cases of their own. From this, GadgetSleeves was
born! Today, GadgetSleeves designs and produces functional, stylish, and
fun protective sleeves for laptops, iPods, cell phones, cameras, and more.
Katelin did not start out with a formal business plan, but she wrote
one out a few months later when taking an Entrepreneurship course.
She entered her plan in the 2006 DollarDiva Business Plan Competition
hosted by Independent Means, Inc., and she won! She has found that
the research, statistics, and ideas she put into the plan have been
extremely helpful to her as she runs GadgetSleeves.
Working from home, Katelin started GadgetSleeves with $750 from
her own savings. She used $150 to buy a new sewing machine, $200 for
her first order of materials, and $50 for promotional items. Later, she
paid a tech-savvy classmate $350 to create her web site.
Katelin encourages other aspiring entrepreneurs to use the Internet
to its full advantage. Researching competitors, negotiating with suppliers,
and even shipping products is much easier with the use of the Internet.
Katelin also advises others not to go into business just to make money.
"Although financial rewards are nice, you should go into business to solve
a problem, fill a gap in the market, or expand on a hobby. If you do what
you love and you do it well, the money will follow."
What do you fcnow?
Can you think of a need that you have that is not being met? What
could you do to meet that need?
If Katelin had not had the money she needed to start her business,
what do you think she could have done?
Why do you think a web site opens up options for a business?
Katelin Shea
greene_0538446145_ch09, 1/17/8, 15:4, page: 238
Line up your financing
Monty was excited about starting his own meeting planning
business. He had learned much about meeting planning when
serving as a state officer for his state's Future Business Leaders
of America chapter. He couldn't wait to get started.
Monty started a list of all the things that he would
need to buy for his business. He realized that he was
going to need some financial assistance as he did not have
enough money saved to purchase everything he needed.
He called his friend Sarah for some advice.
"Sarah, I need some help financing my new business.
Who do you think I should ask?" Sarah had taken some
business courses in school and remembered that there were
many different avenues for funding a business. "Why don't
you start with your friends and family and see if any of
them are interested in investing in your business," Sarah
suggested. "If not, I've got lots more ideas!"
Work as a Team Do you think your friends and
family members would be willing to loan money or
invest in your business? If not, who else could you
approach for funding?
Determine if you need
financial assistance.
Assess Your Financial Needs
As you start a business, you will have many decisions to make regard¬
ing its financing. Your financial needs will vary depending on the size
and type of business you start. If you are starting a very small busi¬
ness, you may be able to provide all the startup money you will need.
If your business will be large or require special equipment, you may
need to look to others for help raising the startup money.
Before you can approach a lender or investor about financing
your business, you will have to prepare some financial documents. To
begin, you should estimate your startup costs and create a personal
financial statement. Then you will prepare pro forma financial state¬
ments of the cash flow statement, income statement, and balance sheet.
238 Chapter 9 Plan and Track Your Finances
PhotoDisc/Getty Images
greene_0538446145_ch09, 12/21/7, 18:50, page: 239
Financial statements based on projections are known as pro forma
financial statements. You will learn more about pro forma financial
statements in the next lesson. These items allow potential lenders and
investors to determine if your business is viable. They also help lend¬
ers decide whether the financing you are requesting is reasonable.
Startup Costs
Itemizing your startup costs is an important part of determining how
much money you need to start your business. You will want to be
sure you have accounted for all of the items you
will need. Common startup items to be purchased
include the following:
• Equipment and supplies, such as computers,
telephones, and fax machines
• Furniture and fixtures, such as desks and chairs
• Vehicles, such as delivery trucks
• Remodeling, such as electrical and plumbing
expenses
• Legal and accounting fees
• Licensing fees
Felicia Walters plans to start a lighting fixture
store. To help her determine how much money
she will need to borrow, she calculates her startup
costs. She must include her estimate of startup
costs with the other documents she provides to
lenders.
Personal Financial Statement
In order to determine if you have the resources
you need to finance your business, begin by assess¬
ing your net worth. Net worth is the difference
in what you own, called assets, and what you owe,
called liabilities. Net worth is also referred to as
equity. To calculate your net worth, you should
prepare a personal financial statement. On the left
side, list all of your assets with their value. Include
cash, investments, and any property. Total the worth of these items.
On the right side, list your liabilities and total the amount that you
owe. Then subtract your total liabilities from your total assets to
determine your net worth.
Felicia Walters prepares a personal financial statement to help her
determine whether she is able to finance her new business. She finds
that her net worth is $27,800 as shown on the next page. After com¬
paring her startup costs to her net worth, Felicia determines that she
will need to seek additional financial resources for her business. Felicia
will share her personal financial statement and startup cost estimates
with potential lenders and investors when she seeks financing for her
business.
Develop Your
Reading Skills
As you read this chapter, list
all of the key terms. Then
write a sentence using the
key term to demonstrate
comprehension of the term.
STARTUP COSTS
Walters Electric
Estimated
Item
Cost
Equipment and supplies
Computers (3 @ $1,500)
$ 4,500
Scanner
175
Cash registers (2 @ $1,800)
3,600
Fax machine
400
Supplies
300
Subtotal
$ 8,975
Furniture and fixtures
Desks (4 @ $400)
$ 1,600
Chairs (8 @ $75)
600
Subtotal
$ 2,200
Vehicles
Delivery truck
$10,000
Automobile
8,000
Subtotal
$18,000
Remodeling
Drywall replacement
$ 1,000
Electrical work
2,500
Paint
1,000
Carpet
3,000
Subtotal
$ 7,500
Legal and accounting fees
$ 3,000
Total
$39,675
9.1 Finance Your Business 239
greene_0538446145_ch09, 12/21/7, 18:50, page: 240
PERSONAL FINANCIAL STATEMENT
Felicia Walters
Assets
Liabilities
Cash
$ 5,000
Car loan
$ 6,900
Checking account
13,500
College loan
4,000
Certificate of Deposit
6,000
Credit cards
1,300
Stock
10,000
Computer equipment
3,000
Coin collection
2,500
Total assets
$40,000
Total liabilities
$12,200
Total assets - Total liabilities = Net worth
$40,000 - $12,200 = $27,800
Checkpoint
Why is the net worth of an entrepreneur important to potential
investors in the business?
Equity Capital
There are two types of financing available for your business—equity and
debt financing. You must consider your company’s debt-to-equity
ratio, or the relation between the dollars you have borrowed and the
dollars you have invested in your business. Lenders and investors look
at this ratio to assess risk. The higher percentage of your own money
that you have invested, the easier it will be for you to get others to
invest.
If your company has a low ratio of debt to equity, you should
probably look for debt financing. If your company has a high ratio of
debt to equity, you should work to increase equity in your business.
Having the right mix of debt and equity will help ensure your busi¬
ness’s sound financial future.
Equity capital is money invested in a business in return for a
share in the profits of the business. Entrepreneurs may seek equity
capital when they do not qualify for other types of financing and are not
able to fully finance their businesses out of their own savings. Equity cap¬
ital can also supplement other money that is borrowed. You may provide
much of the equity for your business yourself. You may also obtain
equity through people you know or through venture capitalists.
Personal Contributions
Many entrepreneurs use their personal savings to finance the start of
their businesses. Investing personal finances can help you get a loan
from a bank. By investing your own money, you demonstrate to the
bank that you have faith that your business will succeed.
240 Chapter 9 Plan and Track Your Finances
greene_0538446145_ch09, 12/21/7, 18:50, page: 241
Friends and Relatives
Friends and relatives
can be a good source
of equity capital. They
will already be familiar
with your business idea
and know whether you
are trustworthy and a
good risk. They may
be willing to invest
more money in your
business than other
sources in return for a
share of the business
profits.
What are the pros and cons of borrowing money from family
and friends?
Venture Capitalists
Some privately owned companies get financing through venture capital¬
ists. Venture capitalists are individuals or companies that make a living
investing in startup companies. They carefully research opportunities that
they believe will make above-average profits. They are usually interested
in companies that have the potential of earning hundreds of millions of
dollars within a few years. The prospect of a company going public by
publicly offering shares of stock for sale also attracts venture capitalists.
Because of the desired criteria, many small businesses would have trouble
attracting the interest of venture capitalists.
Checkpoint
What are some of the ways entrepreneurs can get equity capital?
Debt Capital
Debt capital is money loaned to a business with the understanding
that the money will be repaid, usually with interest. You can borrow
money from friends, relatives, and banks. Bank loans may be secured
or unsecured.
Friends and Relatives
If friends and relatives are not interested in investing in your business
with equity capital, they may be willing to loan you money. Before
borrowing from friends or relatives, consider how the loan may affect
your relationship with them. Those who loan you money might also
feel that they can give you advice along with their money. Since you
are using their money, they might not understand if you do not take
their advice. You may decide that the risk of losing a friend if you are
unable to pay back the borrowed funds is not worth taking.
If you take a loan from friends or relatives, you should prepare a for¬
mal agreement that spells out the terms of the loan. You and everyone
9.1
Finance Your Business 241
greene_0538446145_ch09, 12/21/7, 18:50, page: 242
involved in the loan should sign
the agreement. Be sure both
you and the individuals loaning
the money understand exacdy
how much interest and principal
you will pay each month. Also
specify what your obligations
are to pay back the loan if your
business is not successful.
Commercial Bank Loans
Most businesses take out loans
from banks. Entrepreneurs
usually have an established
relationship with a bank and
begin looking for funds there.
When a loan is taken out, it
must be repaid with interest in
a certain time period. There
are different types of loans that
banks offer their customers.
SECURED LOANS Loans that are backed by collateral are called
secured loans. Collateral is property that the borrower forfeits if he
or she defaults on the loan. Banks demand collateral so that they have
some recourse if the borrower fails to repay the loan.
Suppose you take out a $25,000 business loan and use your
home as collateral. If you fail to repay the loan, the bank has the right
to take ownership of your home and sell it to collect the money you
owe. Banks accept different forms of collateral, including real estate,
savings accounts, life insurance policies, stocks, and bonds.
Types of secured loans include the following:
1. Line of credit An agreement by a bank to lend up to a certain
amount of money whenever the borrower needs it is called a line of
credit. Banks will charge a fee for this program whether or not money
is actually borrowed. In addition, they will charge interest on the bor¬
rowed funds. Most businesses establish lines of credit so that funds
are readily available to help them make purchases when necessary.
2. Long-term loan A loan payable over a period longer than a year
is a lon£i-term loan. Long-term loans are generally made to help a
business make improvements that will boost profits. Nicole Brenner,
owner of a small neighborhood coffee shop, took out a $50,000,
five-year loan so that she could increase the size of her shop. She
will repay the loan with the extra money she will earn by serving
more customers in her expanded dining room.
3. Accounts receivable financing Many businesses allow their cus¬
tomers to charge merchandise and services and pay later. The cus¬
tomers’ owed balances are called the business’s accounts receivable.
A bank will loan a business up to 85 percent of the total value of
its accounts receivable if it feels that the business’s customers are
What kinds of information might be requested
on a loan application?
242 Chapter 9
Plan and Track Your Finances
greene_0538446145_ch09, 1/15/8, 17:37, page: 243
good credit risks. As the receivables are paid, the payments are
forwarded to the bank. The interest rate for accounts receivable
financing is often higher than for other types of loans.
4. Inventory financing When banks use the inventory held by a
business as collateral for a loan, it is called inventory financing.
Banks usually require that the value of the inventory be at least
double the amount of the loan, and the business must have already
paid its vendors for the inventory in full. Banks are often not eager
to make this kind of loan. If the business defaults, the bank ends
up with inventory it may have trouble reselling.
UNSECURED LOANS Loans that are not guaranteed with collateral
are unsecured loans. These loans are made only to the bank’s most
creditworthy customers. Unsecured loans are usually made for very spe¬
cific purposes. They are usually short-term loans that have to be repaid
within a year. A business may obtain a short-term loan to help with
temporary cash flow problems during slow or seasonal periods. Un¬
secured lines of credit are also available for those who have good credit.
REASONS A BANK MAY NOT LEND MONEY Banks use various
guidelines to determine whether borrowers are a good risk. They
reject applications that do not meet their criteria. Some of the main
reasons banks turn down loan applicants include the following:
1. The business is a startup. Banks are often reluctant to lend money
to startup businesses because new businesses have no record of
Famous
The Wright 'Brothers
When you think of the Wright
Brothers, you probably think of
them as the first men to fly. But
before they were flying a plane at
Kitty Hawk, they were entrepre¬
neurs in Dayton, Ohio. As children,
Wilbur and Orville loved fixing and
experimenting with machines. They
sold kites to other children in their
neighborhood for extra money.
Wilbur invented a machine to fold
papers for mailing when he was a
teenager. Orville and a friend set up
a small printing firm when Orville
was 14 years old. Orville and Wilbur
went on to publish their own news¬
paper, West Side News, in 1889.
Cycling was a growing sport at that
time. Because of their ability to
repair things, people were always
asking the Wrights to
repair their bicycles. So in
their early twenties, Wilbur
and Orville opened the |
Wright Cycle Company. 1
Using the profits from f
their bicycle shop, they |
began to study flight £
and experiment with s
gliders and kites. These -o
experiments led them ©
to the powered flying
machine they flew success¬
fully on December 17, 1903.
Why do entrepreneurs often have
more than one business venture?
Think Critically
Do you think Wilbur and Orville would
have been able to finance their flight
experiments if they had not had
income from their own business?
9.1
Finance Your Business 243
greene_0538446145_ch09, 12/21/7, 18:51, page: 244
repaying loans. They are more likely to default on their loans than
established companies.
2. Lack of a solid business plan. Banks evaluate businesses based on
their business plans. A company with a poorly written or poorly con¬
ceived business plan will not be able to obtain financing from a bank.
3. Lack of adequate experience. Banks want to be sure that the
people setting up or running a business know what they are doing.
You will have to show that you are familiar with the industry and
have the management experience to run your own business.
4. Lack of confidence in the borrower. Even if your business plan
looks solid and you have adequate experience, you may fail to qualify
for financing if you make a bad impression on your banker. Make
sure you dress and behave professionally. Show up on time for
appointments, and provide all information your banker requests.
5. Inadequate investment in the business. Banks are suspicious of
entrepreneurs who do not invest their own money in their busi¬
nesses. You will have to commit a significant amount of your own
money if you are to receive financing from a bank.
Obtaining bank financing for a startup business is difficult but not
impossible if you can show that you are confident, well prepared, and
able to repay the loan. Being aware of banks’ most common objections
can help you prepare for the application process. For instance, you can
properly prepare your business plan, wear a business suit to bank
appointments, and arrive on time to make a good impression.
Other Sources of Loans
In addition to commercial banks, there are many government agencies
that can assist you with debt capital loans.
1. Small Business Administration The SBA aids about 1 m il lion
entrepreneurs every year, most often by guaranteeing loans made
by commercial banks. This means if you default on the loan, the
SBA will pay a certain percentage of the loan to the bank. This
helps banks feel more comfortable about lending money. The SBA
also makes funds available to non-profit
organizations that, in turn, make loans to
eligible borrowers.
PET frOTkmark
The Small Business Administration (SBA)
offers many loan programs to assist small
businesses. Its programs offer many benefits,
such as longer payment terms and larger loan
amounts than might be available through a
conventional commercial bank loan. Access
school.cengage.com/entrepreneur/ideas and
click on the link for Chapter 9. Read about
the various SBA loan programs and describe
three of them.
school.cengage.com/entrepreneur/ideas <b
2. Small Business Investment Companies
SBICs are licensed by the SBA to make loans
to and invest capital with entrepreneurs.
3. Minority Enterprise Small Business
Investment Companies MESBICs are
special kinds of SBICs that lend money to
small businesses owned by members of
ethnic minorities.
4. Department of Housing and Urban
Development HUD provides grants to
cities to help improve impoverished areas.
Cities use these grants to make loans to
244 Chapter 9 Plan and Track Your Finances
greene_0538446145_ch09, 1/17/8, 15:4, page: 245
private developers who must use the loans to finance projects in
needy areas.
5. The Economic Development Administration The EDA is a
division of the U.S. Department of Commerce that lends money to
businesses that operate in and benefit economically distressed parts
of the country. Borrowing from the EDA is similar to borrowing
from the SBA, but the application is more complicated and the
restrictions are tighter.
6. State Govermnents Government assistance may also be available at
the state level. Almost all states have economic development agencies
and finance authorities that make or guarantee loans to small businesses.
7. Local and Municipal Governments City, county, or municipal
governments sometimes make loans to local businesses. The loans
are usually small—$10,000 or less.
did you KNOW?
The , SBA b the largest
* ,n g'e financial backer
^ the nation's small
businesses. It has a port-
olio of business loans
'° an & uara ntees, and '
disaster loans worth more
D Z $45 billion, in add/!
1 ° a ver >ture capital
portfolio of $13 billion.
Checkpoint
Where can entrepreneurs look for debt financing?
9.i Assessment
THINK ABOUT IT
1. What are some of the challenges you might encounter if you
get equity financing from friends and/or family members?
2. Why is a secured loan easier to get than an unsecured loan?
3. Why would a bank be more willing to grant an SBA-guaranteed
loan to a new business owner?
MAKE ACADEMIC CONNECTIONS
4. MATH Tisha Appleton obtained an SBA-guaranteed loan from
her bank for $45,000 for her new business. The SBA guaranteed
75 percent of the loan. How much has the bank risked losing if
Tisha's business fails?
5. COMMUNICATION When applying for a loan, most lenders will
want to see a personal financial statement. Using the Activity CD,
open the activity "Personal Financial Statement." Print a copy and
complete the personal financial statement required by the SBA.
TEAMWORK
Work in small groups. You want to start a home remodeling business.
You need money to purchase remodeling equipment and a new truck.
Identify sources of financing for the business. Role play a scenario in
which you are meeting with a potential investor. Explain your business
idea and your need for funds, and make a request for funding.
9.1 Finance Your Business 245
#
greene_0538446145_ch09, 1/17/8, 15:4, page: 246
cash flow statement
income statement
balance sheet
Prepare pro forma
balance sheet.
V
Focus on Small Business
Show me the money!
"So, Monty," asked Sarah, "how much money do you think your business
will make?" "And I'm supposed to know that how?" Monty replied. "Well,
take a look at your pro forma financial statements," Sarah answered.
"Well, Sarah, once again you are showing me how much I don't know!"
"Boy, you'd be in a mess if I wasn't your friend," Sarah responded.
"There are financial statements you should prepare to help you estimate the
finances of your business. The pro forma income statement estimates how
much money will come in, how much you will spend, and the amount of any
projected profit or loss. Some people even call it a profit/loss statement."
"Wow, it sounds like a pro forma income statement would be help¬
ful in trying to obtain a loan," Monty replied. "What other financial
statements do I need?"
"Come on, Monty, we've got work to do. There's also a pro forma
cash flow statement and balance sheet. Let's
get started!"
Work as a Team Discuss the reasons
you think it is important to prepare pro
forma financial statements. What
types of information do you think
that a business owner can get from
these financial statements? Why
do you think pro forma financial
statements should be included Financial statements show how well your
as part of a business plan? business is doing.
Cash Flow Statement
Financial statements are important when you are trying to raise capital
for your business. The financial statements you prepare for your busi¬
ness plan are pro forma financial statements and are based on projec¬
tions. The cash flow statement, income statement, and balance sheet
all tell you something different about the condition of your business.
For many, the cash flow statement is the most important financial
statement. A cash flow statement is an accounting report that describes
246 Chapter 9
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the way cash flows into and out of your business over a period of time.
Because it deals with actual cash coming in and going out of a busi¬
ness, it shows how much money you have available to pay your bills.
Forecast Receipts and Disbursements
To create a pro forma cash flow statement, you will need to estimate
your monthly cash receipts and monthly cash disbursements. Cash
receipts include cash sales, collected account receivables, tax refunds,
and funds from bank loans and investors. When you forecast the
amount of your cash receipts, you need to analyze the demand for
each of your products and services. You also need to know the price
you will charge for each item.
Felicia Walters estimates her total cash sales by multiplying the
quantity of each type of product she expects to sell by the price she
has set for each item. In addition, Felicia estimates her other monthly
cash receipts as shown below.
FORECASTED RECEIPTS
Walters Electric
January 20 —
Cash sales
Quantity
Sold
Price
Total
CFL bulbs
20
$ 15
$ 300
Indoor light fixtures
10
155
1,550
Outdoor lights
6
175
1,050
Subtotal
$2,900
Accounts receivable
$ 300
Bank loan
$1,000
Total
$ 4,200
Cash disbursements may include payments for cost of goods (what
you pay manufacturers or wholesalers to get products and services to
sell), accounts payable (credit accounts with suppliers), rent, salaries,
taxes, office supplies, utilities, insurance, advertising, loans,
and other expenses. Felicia’s estimated monthly cash
disbursements are shown in the table to the right.
Prepare the Cash Flow Statement
After making projections of cash receipts and cash dis¬
bursements, you are ready to prepare your cash flow
statement. You should create monthly pro forma cash
flow statements for the first year of operation and annual
statements for the second and third years to give your
lender an accurate picture of your cash flow over time.
Net cash flow is the difference between cash receipts
and disbursements.
Cash receipts — Cash disbursements = Net cash flow
FORECASTED DISBURSEMENTS
Walters Electric
January 20 —
Disbursement
Amount
Cost of goods
$2,400
Rent
900
Utilities
100
Salaries
2,000
Advertising
700
Supplies
100
Insurance
75
Payroll taxes
175
Other
50
Total
$6,500
9.2
Pro Forma Financial Statements 247
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PRO FORMA CASH FLOW STATEMENT
Walters Electric
January-June 20—
Jan
Feb
Mar
Apr
May
June
Cash receipts
Cash
disbursements
$4,200
$5,410
$5,750
$6,320
$7,375
$8,130
Cost of goods
$2,400
$2,520
2,520
2,640
3,300
3,480
Rent
900
900
900
900
900
900
Utilities
100
100
100
100
100
100
Salaries
2,000
2,000
2,000
2,000
2,000
2,000
Advertising
700
700
700
700
700
700
Supplies
100
115
130
150
150
150
Insurance
75
75
75
75
75
75
Payroll taxes
175
175
175
175
175
175
Other
50
50
50
50
50
50
Total disbursements
$6,500
$6,635
$6,650
$6,790
$7,450
$7,630
Cash Flow
-$2,300
-$1,225
-$ 900
-$ 470
-$ 75
$ 500
If cash receipts total more than disbursements, your business has a
positive cash flow. You can put this money in the bank, pay down
debt, or use it to expand your business. If disbursements total more
than cash receipts, your business has a negative cash flow. You may
have to borrow money or ask your creditors to give you more time
to pay. Preparing pro forma statements helps you to anticipate when
negative cash flows will occur, so you can plan for how you will han¬
dle or avoid them. Felicia Walter’s pro forma cash flow statement is
shown above.
Many entrepreneurs create two types of cash flow statements
based on a worst-case scenario and a best-case scenario. For a worst-
case scenario, you should project lower cash receipts and higher cash
disbursements than you think you will have. For a best-case scenario,
you should project the highest cash receipts and lowest cash disburse¬
ments your business is likely to have.
Economic Effects on Cash Flow
Changes in the economy can have a dramatic effect on the cash flow
of a business. During the good economic times of the 1990s, many
businesses saw large amounts of cash flowing into their companies
and experienced positive cash flows. However, the economic slow¬
down that resulted after September 11, 2001, caused many businesses
to experience unexpected negative cash flows. When making projec¬
tions, business owners should look at economic forecasts and make
conservative estimates. Remembering that changing economic condi¬
tions can affect cash flows, it is best to err on the side of caution.
Checkpoint
What does a cash flow statement show?
248 Chapter 9 Plan and Track Your Finances
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Income Statement
An income statement shows the business’s revenues and expenses
incurred over a period of time and the resulting profit or loss. For this
reason, it is sometimes called the profit/loss statement. An income
statement can help you do the following:
1. Examine how sales, expenses, and income are changing over time.
2. Forecast how well your business can expect to perform in the future.
3. Analyze your costs to determine where you may need to cut back.
4. Identify categories of expenditures you may want to increase or
decrease, such as advertising.
While the cash flow statement deals with actual cash coming in
and going out, the income statement shows revenues that you have
not yet received and expenses that you have not yet paid.
Suppose Walters Electric sells $5,000 worth of lighting in June. The
company’s monthly income statement would show income of $5,000.
Felicia may not actually have received $5,000, because some customers
may have paid on credit. They will not make payments until July or
August. Further, some credit customers may fail to ever pay their bills.
Customers are not the only people who defer payments. Felicia
may purchase $1,500 worth of merchandise to sell but wait 30 days
to pay the invoice. Because no cash has been paid for this purchase, it
will not appear on the cash flow statement. In contrast, the income
statement will show that Felicia incurred an expense of $1,500.
Prepare a Pro Forma Income Statement
Preparing a pro forma income statement for a number of years will
help lenders see the long-term growth of your business. The pro
forma income statement consists of the following parts:
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Why should a business estimate the amount of revenue it expects to earn?
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9.2
Pro Forma Financial Statements 249
greene_0538446145_ch09, 12/21/7, 21:4, page: 250
• Revenue The dollar value of the
goods or services a business sells to
customers is called revenue.
• Cost of goods sold The cost of
the inventory a business sells during
a particular period is called cost of
goods sold. Only businesses that have
inventory will have this item on their
income statements. It is listed sepa¬
rately from the other expenses.
• Gross profit The difference between
revenue and cost of goods sold is the
gross profit.
• Operating expenses The expenses
necessary to operate a business are
the operating expenses. They include
salaries, rent, utilities, advertising, insur¬
ance, supplies, and other expenses. All
businesses pay operating expenses.
• Net income before taxes Net
income before taxes is the amount
remaining after cost of goods sold and operating expenses are sub¬
tracted from revenue. It shows how much you earned before taxes.
• Taxes Taxes are usually listed separately from other expenses.
• Net income/loss after taxes After taxes are subtracted, the result
is the net income or loss for the period.
PRO FORMA INCOME STATEMENT
Walters Electric, 20—
Year 2
Year 3
Revenue
$115,000
$125,000
Cost of goods sold
55,400
60,000
Gross profit
$ 59,600
$ 65,000
Operating expenses
Salaries
$ 26,705
$ 27,315
Rent
10,800
10,800
Utilities
1,230
1,260
Advertising
1,200
1,200
Insurance
900
900
Supplies
600
615
Other
615
615
Total operating expenses
$ 42,050
$ 42,705
Net income before taxes
$ 17,550
$ 22,295
Taxes
7,020
8,918
Net income/loss after taxes
$ 10,530
$ 13,377
Checkpoint
What does an income statement show?
Balance Sheet
A balance sheet is a financial statement that lists what a business
owns, what it owes, and how much it is worth at a particular point in
time. It does so by identifying the assets, liabilities, and owner’s equity
of the business. It is based on the accounting equation:
Assets = Liabilities + Owner’s Equity
Assets are items of value owned by a business. They include items
such as cash, equipment, and inventory. Liabilities are amounts that a
business owes to others. They include loans and outstanding invoices.
Owner’s equity is the amount remaining after the value of all liabilities
is subtracted from the value of all assets. A business that has more
assets than liabilities has positive net worth. A business that has more
liabilities than assets has negative net worth.
250 Chapter 9 Plan and Track Your Finances
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Prepare a Pro Forma Balance Sheet
You must estimate the amount of assets, liabilities, uncollectible
accounts, and asset depreciation when preparing a pro forma balance
sheet for your business. Felicia Walters’ pro forma balance sheet for
her business is shown below.
TYPES OF ASSETS Businesses usually separate assets into fixed assets
and current assets. Fixed assets are those that will be used for many
years. They include buildings, furniture, and computers. Current assets
are cash, other assets that can be converted into cash, and items that
are used up in normal business operations. One asset that can be con¬
verted into cash is inventory. Assets that are used up in business oper¬
ations are supplies. Another special type of current asset is accounts
receivable. Accounts receivable are the amounts owed to a business by
its credit customers. When they are collected, they are converted into
cash.
TYPES OF LIABILITIES Businesses usually separate liabilities into long¬
term liabilities and current liabilities. Long-term liabilities are debts
that are payable over a year or longer. A mortgage is a type of long¬
term liability. Current liabilities are debts that are due to be paid in
full in less than a year. A special kind of current liability is accounts
payable. Accounts payable are amounts owed to vendors for merchan¬
dise purchased on credit. Businesses can usually choose to pay later
for merchandise they receive now. Because a business generally pays
invoices from vendors within 30 to 90 days, accounts payable is a
current liability.
ASSET REDUCTIONS Some customers will fail to pay for the merchan¬
dise they purchased on credit. The amount a company estimates it will
PRO FORMA BALANCE SHEET
Walters Electric
December 31, 20—
Assets
Liabilities
Current assets
Current liabilities
Cash
$ 1,000
Accounts payable
$12,000
Accounts receivable
8,000
Less allowance for
uncollectible accts.
-500
Long-term liabilities
Inventory
14,000
Loans payable
$17,900
Total current assets
$22,500
Total liabilities
$29,900
Fixed assets
Equipment
$ 8,975
Less depreciation
-1,795
Furniture
2,200
Less depreciation
-220
Vehicles
18,000
Owner's Equity
Less depreciation
-3,600
Felicia Walters
$16,160
Total fixed assets
$23,560
Total liabilities and
Total assets
$46,060
owner's equity
$46,060
9.2
Pro Forma Financial Statements
251
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not receive from customers is known as the allowance for uncollectible
accounts. This amount should be subtracted from the assets.
Business equipment will lose value over time just as a car loses
value as it gets older. The lowering of an asset’s value to reflect its
current worth is called depreciation. Estimates for uncollectible accounts
and depreciation should be included to ensure that the balance sheet
provides an accurate picture of the business’s net worth.
Checkpoint
Name one example each of a current liability, a long-term liability,
a current asset, and a fixed asset.
9.2 Assessment
THINK ABOUT IT
1. Why would you prepare both a best-case and a worst-case pro
forma cash flow statement?
2. Green Golf Course has a positive cash flow only six months of
the year. What should the owner do with the extra cash during
these months?
3. When making financial projections, why must a business owner
consider economic conditions?
MAKE ACADEMIC CONNECTIONS
4. PROBLEM SOLVING Create a pro forma cash flow statement
to project your cash receipts and disbursements over the next
six-month period. Do you project a positive cash flow? If not,
how can you improve your cash flow?
5. MATH In May, Yoder's Bookstore had sales of $5,000, cost of
goods sold of $3,000, operating expenses of $800, and taxes of
$400. Calculate Yoder's gross profit and final net income or loss.
6. MATH At the end of its first year of operations, Berganstein
Sportswear had current assets of $13,000, fixed assets of $25,000,
current liabilities of $7,000, and long-term liabilities of $14,000.
What is the amount of owner's equity?
Working in a small group, research the state of the U.S. economy
today and future forecasts of the economy. Prepare a brief presenta¬
tion to share what you have learned. Based on your findings, predict
how today's economy could affect the cash flow of a new business.
Then, based on future forecasts, predict how the economy will affect
the cash flow of a business in coming years.
252 Chapter 9 Plan and Track Your Finances
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Recordkeeping
for Businesses
Describe the use of jour
nals and ledgers in a
recordkeeping system.
Explain the importance
of keeping accurate and
up-to-date bank, payroll
and tax records.
• transaction
• journals
• account
• check register
• payroll
Focus on Small Business
Keeping it all straight
After securing financing for his business, Monty was ready to get started.
He purchased all of his equipment and supplies, sent out some advertising
fliers, and set up meetings with potential clients. Two months into his busi¬
ness, he was very surprised to find a notice from his bank informing him
that he had written checks from a bank account that had no funds. "How
did this happen?" he asked Sarah. "Did you reconcile your bank statement
last month?" Sarah responded. "Reconcile what?" Monty replied.
"Oh, Monty, don't tell me you don't know how to reconcile your
bank statement! But you do know how to journalize your transactions
don't you?"
"Well, Sarah, I guess I wasn't as prepared as I thought. I have no
idea what you are talking about!"
Sarah realized that Monty needed some
serious help if he was going to make a go of his
business. "Monty, financial recordkeeping is one
of the most important things you do as a
business owner. We need to get you some
help from an accountant. In the mean¬
time, I'll give you a few lessons in basic
recordkeeping!"
Work as a Team Why do you think
financial recordkeeping is essential to
the success of a business? What
types of records do you think
business owners need to keep?
What types of trouble could Good recordkeeping keeps everything in
result from poor recordkeeping? balance.
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Recording Transactions
A transaction is any business activity that changes assets, liabilities, or
net worth. Accurate recordkeeping of your business transactions will
help you keep track of how much money you have earned, how much
you have spent, how much money you owe, and how much customers
9-3 Recordkeeping for Businesses 253
greene_0538446145_ch09, 12/21/7, 18:51, page: 254
Why is it important to keep track of business transactions?
owe you. It will also help you create financial statements to determine
your business’s net worth and how much profit you have made.
Journals
Journals are accounting records of the transactions you make. There
are five different journals that businesses use to record their transactions.
1. Sales journal This is used to record only sales of merchandise
on account. Merchandise sold on account means that customers
receive goods or services now that they will pay for later.
2. Cash payments journal This is used to record only cash payment
transactions. Any cash, check, or electronic payment a business makes
is recorded in this journal.
3. Cash receipts journal This is used to record only cash receipt
transactions. Cash sales and cash payments received from customers
on their credit accounts are recorded in this journal.
4. Purchases journal This is used to record only purchases of mer¬
chandise on account. If you receive merchandise today but pay for
it later, you should record this in the purchases journal.
5. General journal This is used to record any kind of transaction.
Some businesses use only a general journal. Businesses that use the
four special journals described above record transactions that do
not fit in the other four journals in the general journal.
Ledgers
Businesses also use a general ledger that is made up of accounts. An
account is an accounting record that provides financial detail for a
particular business item, such as for cash, sales, rent, and utilities. The
general ledger will have an account for every type of asset, liability,
revenue, expense, and so forth. Transactions entered into the journals
are posted, or transferred, to the general ledger accounts affected by
the transactions. Posting is generally done every one to two days to
254 Chapter 9 Plan and Track Your Finances
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keep the ledger current. The
balances in the accounts will
help you in the preparation
of the financial statements you
will need to run your business
effectively.
SUBSIDIARY LEDGERS Some
businesses choose to keep a more
detailed record of certain general
ledger accounts in a separate, sup¬
porting subsidiary ledger. A sub¬
sidiary ledger is commonly used
for accounts payable to show in
detail the transactions with each
vendor from whom merchandise
is purchased on account. Each
vendor will have its own account
showing transaction history and the current balance owed. A subsidiary
ledger is also commonly used for accounts receivable with separate
accounts showing each customer’s transaction history and current
balance due.
Kim Smith is the owner of Photo Memories. She wants to use
subsidiary ledgers for accounts payable and accounts receivable to
keep detailed records of transactions with her suppliers and custom¬
ers. The detailed information in these subsidiary ledgers will be
summarized and transferred to the accounts payable and accounts
receivable accounts in the general ledger. The subsidiary ledgers
make it easy for Kim to see at a glance her transactions with suppli¬
ers and customers.
AGING TABLES An aging table is a recordkeeping tool for tracking
accounts receivable. It shows a business how long it is taking customers
to pay their bills. Kim can see by her aging table that one customer is
more than 61 days past due on a bill. She decides that she should not
ship this customer any more merchandise until he has paid the out¬
standing bill.
Customer
Amount
0-30 days
31-60 days
over 61 days
E. Kwon
$175.23
$175.23
P. Mossett
$106.20
$106.20
M. Stern
$82.34
$82.34
Totals
$363.77
$175.23
$106.20
$82.34
Percent of total
100%
48%
29%
23%
Checkpoint
What is the difference between a journal and a ledger?
9-3 Recordkeeping for Businesses 255
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Business Records
Good recordkeeping can help you make smart business decisions.
Incomplete or inaccurate records can cause you to mismanage your
business or can cause serious legal problems. You will need to keep
accurate banking, payroll, and tax records. These records may be kept
manually or electronically.
Banking Records
You will need to open a checking account for your business. You will
use your business account for all deposits and withdrawals related to
your business. If you already have a personal checking account, you
will still need a separate one for your business.
When you open your checking account, you will receive a set of
checks and a check register. A check register is a booklet in which
you record the dates and amounts of the checks as well as the names
of people or businesses to whom you have written the checks. You can
also maintain a check register electronically using computer software.
WHAT WENT WRONG
>
ALL Your Eggs in One Basket
After working for six years at a Toyota dealer¬
ship, Billy Wong borrowed money from his
family and started Japanese Car Parts Distribu¬
tors (JCP). The business grew, and in ten years
it had 12 employees, thousands of parts in
inventory, and hundreds of customers across
the country.
Billy kept handwritten records for the busi¬
ness. Before long, his 18-year-old, computer-
whiz son, Tommy, wouldn't let him ignore
the advantages of computerizing his record¬
keeping. So Billy gave Tommy the task of set¬
ting up a computer system and transferring the
accounts, inventory, and financial information
from his paper records to the new electronic
format. Within a year, Billy stopped keeping
handwritten records in favor of Tommy's com¬
puterized system, and in the next year, the
business ran more smoothly than ever.
Tragedy struck the business one December
night when Tommy found robbers in the busi¬
ness office. Tommy was badly injured by the
thieves and was rushed to the hospital. Sadly,
he died on the way. If this wasn't enough for
Billy to handle, the thieves also stole the office
computer.
Billy had left all the electronic recordkeep¬
ing to his son, and he had no idea whether
Tommy had made backup copies of all the files
that had been stored on the stolen computer.
Billy found that it would take months and a
large amount of money to set up a new com¬
puterized recordkeeping system.
Think Critically
1. Was Billy wrong to trust his young son
with so much responsibility?
2. Would JCP's problems have been solved if
they had found the computer?
Backing up computer files can prevent problems.
256 Chapter 9 Plan and Track Your Finances
greene_0538446145_ch09, 12/21/7, 18:51, page: 257
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How can you balance your checking account?
BALANCE YOUR ACCOUNT Every time you write a check or make
a deposit, you should balance your check register. Balancing your
check register is very important because it will prevent you from
accidentally writing checks when you do not have enough money in
your account to cover them. Writing bad checks is illegal! If your
checks do not clear, your suppliers may stop shipping merchandise
to you. Businesses and banks will charge you fees for having to deal
with the bad checks.
RECONCILE YOUR ACCOUNT Every month you will receive a bank
statement that shows all of your deposits, checks paid, and bank fees.
When you receive your bank statement, you should reconcile the bank
statement with your check register. The bank statement balance will
not be the same as your check register balance because of checks that
you have written that have not cleared the bank and deposits that you
made after the bank statement was prepared.
The steps in reconciling your account are as follows:
1. Compare the bank statement with your check register. Place a
checkmark in your check register by the checks that you have writ¬
ten that have cleared the bank. Also checkmark the deposits that
you have made that have cleared the bank. Any remaining checks
or deposits that are not listed on the bank statement are classified
as outstanding.
2. Using the account reconciliation form on the back of your bank
statement, enter the amount of your bank statement balance.
3. List outstanding deposits and add them to the bank statement
balance.
4. List outstanding checks and deduct them from the bank statement
balance.
5. Record the checkbook balance in the space provided.
9-3 Recordkeeping for Businesses 257
greene_0538446145_ch09, 12/21/7, 18:51, page: 258
6. If there were any deposits on your statement that you forgot to
write in your check register, list them and add them to the check¬
book balance.
7. Record any fees that the bank has charged your account and sub¬
tract them from the checkbook balance.
8. If your account earns interest from the bank, record the amount of
interest earned and add it to the checkbook balance.
9. The bank statement balance and the checkbook balance should
now be equal. Be sure to record any fees charged or interest earned
in your checkbook. If your balances do not match, double check
your math first. Then review your records to see if all checks and
deposits have been recorded in your checkbook and processed by
the bank correctly.
BANK RECONCILIATION
Bank statement balance
$2,151.00
Balance from checkbook
$2,501.15
Add outstanding deposits
660.00
Add deposit not recorded
0.00
Subtotal
$2,811.00
Subtotal
$2,501.15
Deduct outstanding checks:
Deduct bank fees
12.00
#345 $ 60.00
#366 105.60
Balance less fees
$2,489.15
#369 150.00
Total outstanding checks
315.60
Add interest earned
6.25
Adjusted bank balance
$2,495.40
Adjusted checkbook balance
$2,495.40
Payroll Records
If you have employees working for you, you will have to maintain
payroll records. A payroll is a list of people who receive salary or
wage payments from a business. The payroll records will show how
much your employees have earned during each pay period. They will
also show deductions that may have been made from those earnings
for taxes and benefits. There are many computer software packages
that can help you maintain these records. There are also many payroll
service companies that you can contract with to handle payroll process¬
ing for you.
You will need to complete a payroll register for every pay period.
The register will include the following information for each employee:
• Employee name
• Number of hours worked
• Regular and overtime earnings
• Federal, state, and local taxes deducted
• Social security and Medicare contributions deducted
• Deductions for benefits, such as health insurance, life insurance,
and retirement savings plans
258 Chapter 9 Plan and Track Your Finances
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O)
CD
ns
E
S'
QJ
o
o
o
-C
Q_
Why is it important for a business to carefully estimate its income taxes?
After you create the payroll register, you will prepare payroll
checks. Most businesses use voucher checks for their payrolls. Voucher
checks have a statement of earnings and deductions attached to them.
The statement shows employees how their pay was calculated.
Tax Records
You will have to make several d ifferent kinds of tax payments as a busi¬
ness owner. These include income taxes, payroll taxes, and sales taxes.
INCOME TAX Businesses that earn profits must pay income tax.
These taxes are paid quarterly, or every three months. Income tax
must be prepaid at the beginning of a quarter, so you will need to
estimate your income taxes. If you fail to make these payments or you
underestimate how much tax is due, you may have to pay a penalty.
You could also be subject to criminal penalties for tax fraud.
PAYROLL TAXES AND DEDUCTIONS
deduct taxes from your employees’
paychecks and submit these taxes
to the government. As an
employer, you are also required to
pay unemployment insurance taxes
and a portion of Social Security
taxes based on the earnings of your
employees. Your employees may
ask you to take voluntary deduc¬
tions from their earnings to cover
health or dental insurance. If you
deduct this money from employees’
earnings, you are required to send
it to the companies that are provid¬
ing the insurance coverage.
By law, you are required to
be your own boss
You own a home remodeling business in your
community. You have one full-time employee
working for you. Research the types of federal,
state, and local taxes you will need to withhold
from your employee's paycheck. Create a table
listing the types of taxes to withhold. For each
one, describe how you would determine the
amount of taxes to withhold.
9.3
Recordkeeping for Businesses 259
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SALES TAX Retail businesses are required to charge sales taxes on
goods or services. If you own a business that collects sales tax, every
month you will have to deposit the tax you collect into a special bank
account that belongs to the government. Sales taxes are based on a
percentage of sales. The actual percentage charged varies from state
to state and can vary within a state if the local county or city also
assesses a sales tax.
Checkpoint
What kinds of bank, payroll, and tax records do you have to keep?
9.3 Assessment
THINK ABOUT IT
1. Eliza Conner owns a small clothing boutique. Eliza uses her per¬
sonal checking account for both business and personal needs.
How would you convince Eliza that she should open a separate
bank account for her business?
2. Why is it important to keep accurate and up-to-date bank, pay¬
roll, and tax records?
MAKE ACADEMIC CONNECTIONS
MATH As a business owner, you should reconcile your bank
statement each month when you receive it. Using the Activity
CD, open the activity "Bank Reconciliation." Print a copy and
complete the activity.
MATH Scott Belville, owner of Flowers on Main, completed an
aging table for his accounts receivable. The column totals are
shown below. Complete the percent of total row for Scott.
Customer Amount 0-30 Days 31-60 Days Over 60 Days
Totals $6,500 $2,300 $3,100 $1,100
Percent of total _? _? _? _?
COMMUNICATION Assume you are Kim Smith, the owner of
Photo Memories. Look at the aging table on page 255. You have
decided that no more orders will be filled for Mark Stern until
his account balance is paid in full. Write a letter to Mr. Stern to
inform him of your decision. Provide payment options to help
Mr. Stern pay off his account balance.
TEAMWORK
Working with team members, discuss the pros and cons of maintain¬
ing electronic records versus manual records for your business. What
are some ways to resolve the cons of maintaining electronic records?
Which way do you think is best? Why?
260 Chapter 9 Plan and Track Your Finances
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Prepare a Resume
Along with your personal financial statement, a resume should be part of
your business plan’s appendix of supporting documents. Potential lend¬
ers and investors will want to know about you, the entrepreneur. Know¬
ing about your skills, experience, and character will help them M ,
decide whether or not investing in your business is a good _
idea. A personal resume describes your skills and experience to
help prove you have the ability to own and manage a business.
Your resume should demonstrate that your background is suit¬
able for the business you wish to start and should convey to
readers your career goal, self-image, communication skills,
ability to achieve results, and personal character.
A well-written resume includes the following
information:
1. Name, address, telephone number, and e-mail address.
2. A statement describing your career objective and
why you are qualified to reach the objective.
3. A list of your work experience arranged by date with the
most recent work experience listed first. Include a brief descrip¬
tion of responsibilities and accomplishments for each position.
4. A description of your education and any other training programs
in which you have participated.
5. A list of personal activities that demonstrate that you are reliable
and ambitious. Include community service activities, any hobbies
you have that relate to your business, and any awards or honors
you have received.
6. The names and contact information of three references who can
verily the information on your resume.
When preparing your resume, try to keep it to one page in length.
Be sure that it is well organized and includes only significant informa¬
tion that gives evidence of your abilities. Proofread your resume care¬
fully to ensure that your spelling and grammar are 100 percent correct.
TRY IT OUT
Using the Activity CD, open the activity “Prepare a Resume.” Print a
copy of the sample resume and review it. Then complete the question¬
naire to help you compile your own resume for the business idea you
have been working on in the Build Tour Business Plan Project. Your
resume should communicate your ability to start, run, and manage the
business. Include your resume in the appendix of your business plan.
Sharpen Your Entrepreneurial Skills 261
’ n/Ge tty ima,
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Chapter 9 Assessment
SUMMARY
9.1 Finance Your Business
1. As an entrepreneur, you must prepare a list of startup costs to
determine how much money you will need to start your business.
You should also prepare a personal financial statement based on
the formula: Total assets — Total liabilities = Net worth.
2. Equity capital is money invested in a business in return for a share
in the profits of the business. Sources of equity capital include per¬
sonal contributions, friends and relatives, and venture capitalists.
3. Debt capital is money loaned to a business with the understanding
that the money will be repaid. Sources of debt capital include
friends and relatives, commercial banks, and government agencies
such as the SBA.
9.2 Pro Forma Financial Statements
4. The cash flow statement describes the way that cash flows in and
out of your business and uses the following basic formula: Cash
receipts - Cash disbursements = Net cash flow.
5. The income statement shows the business’s revenues and expenses
incurred over a period of time and the resulting profit or loss. It
can help you forecast how well your business can expect to per¬
form in the future.
6. The balance sheet is a financial statement that lists what a business
owns, what it owes, and how much it is worth, using the account¬
ing equation: Assets = Liabilities + Owner’s Equity.
9.3 Recordkeeping for Businesses
7. Businesses initially record transactions in journals. The transactions
are then posted to accounts in the general ledger. More detailed
records of certain general ledger accounts, such as accounts receiv¬
able, are kept in a subsidiary ledger.
8. You will need to keep accurate and up-to-date bank, payroll, and
tax records. You must keep your bank records balanced and pre¬
pare a bank reconciliation each month. If you have employees,
you will need to prepare a payroll register for every pay period.
You will also have to track and pay income, payroll, and sales
taxes at regular intervals.
What do you fcnow now?
Read Ideas in Action on page 237 again. Then answer the questions a
second time. How have your responses changed?
262 Chapter 9
Plan and Track Your Finances
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. The difference in what you own and what you owe
2. A financial statement that shows a business’s revenues and
expenses incurred over a period of time
3. Money invested in a business in return for a share in the profits of
the business
4. A list of people who receive salary or wage payments from a
business
5. A financial statement that describes the way that cash flows into
and out of your business
6. Any business activity that changes assets, liabilities, or net worth
7. Property that the borrower forfeits if he or she defaults on a loan
8. Accounting records of the business transactions you make
9. Money loaned to a business with the understanding that the money
will be repaid
a.
b.
c.
d.
e.
f.
g-
h.
J
k.
l.
m.
n.
account
balance sheet
cash flow
statement
check register
collateral
debt capital
debt-to-equity ratio
equity capital
income statement
journals
net worth
payroll
transaction
venture capitalists
10. The relation between the dollars you have borrowed and the dollars
you have invested in your business
11. Individuals or companies that make a living investing in startup
companies
12. A financial statement that lists what a business owns, what it owes,
and how much it is worth at a particular point in time
REVIEW YOUR KNOWLEDGE
13. Which of the following would be a startup cost?
a. computer for the business c. monthly rent expense
b. monthly utility bill d. weekly payroll
14. Loans that are guaranteed with property are called_?_.
15. You have decided to try to finance your business with equity
financing. Who should you approach to invest in your business?
a. local bank
b. Small Business Administration
c. friends and family
d. Department of Housing and Urban Development
16. Which of the following would most likely be accepted as collateral
for a secured loan for $25,000?
a. $32,000 automobile that is paid in full
b. $12,000 of home equity
c. $2,500 computer system
d. apartment that you rent
17. Which of the following is not a reason that a bank may reject your
loan application?
a. business is a startup c. business plan is sloppy
b. owner invested $30,000 d. owner has no experience
Chapter 9
Assessment
263
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18. True or False? The Small Business Administration offers loans
to businesses in the same way that a commercial bank does.
19. Which of the following would not be included on a cash flow
statement?
a. Sale to customer on account
b. Payment received from a customer on account
c. Payment made to a vendor for new equipment
d. Funds of $4,000 received from bank loan
20. You are using five separate journals to record your business trans¬
actions. In which journal would you record a sale of merchandise
if the customer pays you cash at the time of the sale?
a. sales journal c. cash receipts journal
b. cash payments journal d. purchases journal
21. True or False? Taxes that you withhold from employees’ pay-
checks are deposited into your bank account until the employee
files an income tax return.
22. True or False? If your cash receipts are less than your cash dis¬
bursements, your business has a negative cash flow.
23. A potential investor or bank would want to see all of the following
financial documents except
a. cash flow statement c. personal financial statement
b. startup costs d. journal
APPLY WHAT YOU LEARNED
24. You plan to open a retail sportswear store. You will hire several
employees to help run the store. What types of journals do you
need to keep for such a business? Why? What kinds of bank, pay¬
roll, and tax records will you have to maintain? How could you
use a computer to help you keep and manage your records?
25. You plan on opening Rashida’s Beauty Salon. You have listed your
projected monthly revenues, expenses, and taxes below. Prepare a
pro forma income statement based on this information.
Revenues
$15,000
Insurance
$ 750
Cost of goods
2,550
Rent
1,000
Supplies
1,100
Utilities
650
Salaries
4,800
Taxes
1050
MAKE ACADEMIC CONNECTIONS
26. MATH You own a store that sells video games. You owe $25,000
to video game vendors; you have a ten-year bank loan of $50,000;
your bank account balance is $13,000; you own inventory worth
$57,000; you have $2,000 in account receivables; and fixed assets are
$22,000. What are your total assets, liabilities, and owner’s equity?
27. COMMUNICATION Conduct a phone interview with the
manager of a local bank to find out what kinds of loans they offer
to small businesses. Specifically, ask them about their secured
loans, unsecured loans, and SBA-backed loans. Write a one-page
report on your findings.
264 Chapter 9
Plan and Track Your Finances
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You are working on your resume for your business plan. After listing
your experience, you think it might appear as if you do not have the
adequate experience and skills to successfully start and run your
business. You consider enhancing your resume by adding some addi¬
tional job experiences that you haven't had in order to make it look
better for potential investors and lenders. Do you think it will mat¬
ter? Do you think anyone will ever actually check your experiences
or references? What might be the result if they do check? What
would you do?
_ J
build your
Business Plan
Project
This activity will help you continue with the development of a busi¬
ness plan for your business idea.
Estimate your startup costs for your business and prepare a personal
financial statement to determine your net worth.
Determine how much money you need to begin your business. Decide
if you will obtain equity and/or debt financing. Will you use personal
contributions or borrow from friends and relatives, venture capitalists,
a commercial bank, the SBA or other government agency, or a combi¬
nation of these resources? Write why you think one or more of these
financing methods will work for your business.
Determine your projected cash receipts and cash disbursements for the
first year of your business. Prepare a pro forma cash flow statement.
After doing so, prepare pro forma cash flow statements based on
worst-case and best-case scenarios.
Determine your projected revenue and operating expenses for the first
year of your business. Estimate the amount of income taxes you will
have to pay. Prepare a pro forma income statement.
Make a list of your assets and liabilities. Prepare a pro forma balance
sheet.
Determine what types of journals you will keep for your business. For
each type, give an example of a transaction that will be recorded in
that journal. What accounts will your business have?
Contact two local banks and obtain information about commercial
checking accounts. What are the rates? What types of special services
or products are offered to small business owners?
Create a payroll register for your business. Contact your state and/or
local government to find out what taxes must be deducted from
employees' pay. Find out how the taxes are calculated. Are there
any other deductions that will be made? If your business collects
sales tax, find out what the rate is in your state or county.
Chapter 9
Assessment
265
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Planning a
Finance
Career in
hai
IVIy brother Boyd, an accoun¬
tant, got tired of the demanding
hours required while working at a
large accounting firm. Tax season
was particularly demanding on his
family. His wife is an attorney with
her own strenuous workload. They
decided he should stay home with
the kids and start a part-time busi¬
ness as an accountant for small
businesses.”
How do small businesses
manage their finances to comply
with legal requirements? How can
a small business understand how
changes in financial reporting laws
affect them?
Accountants help individuals
and corporations prudently manage
their finances. Asset management,
design of accounting information
management systems, and tax
preparation are some of the serv¬
ices provided by accountants.
EMPLOYMENT OUTLOOK
• Faster than average job growth
is anticipated.
• Changes in accounting-related
legislation will fuel demand for
accountants to help corporations
meet regulatory requirements.
• Accountants will be needed to
help prevent and circumvent
financial fraud.
JOB TITLES
• Accounting Manager
• Controller
• Financial Auditor
• Certified Public Accountant
(CPA)
• Cost Accountant
• Financial Reporting Accountant
NEEDED SKILLS
• A Bachelor’s Degree with a
major in accounting, finance, or
business administration is
required.
• Advancement may require a
Master’s Degree in accounting
or an MBA.
• Professional certifications in vari¬
ous accounting specialties for
certain positions.
• Continuing education is
required in most states.
What's it like to work in Finance
Boyd, an independent Certified
Public Accountant, had a variety of
clients. Today, he was in a monthly
meeting with the owner of a home
decor boutique store. Evaluating
the financial components of the
business, including inventory levels,
expenditures, payroll, accounts
receivable, and taxes was a critical
part of the meeting.
Boyd also helped his client
assess the value of various promo¬
tions the store ran periodically
throughout the year. Analyzing the
success of promotions by compar¬
ing promotional costs to incremen¬
tal revenue increases helped the
boutique owner understand which
promotions were profitable.
At the conclusion of the
meeting, the client asked Boyd
to look into whether it would be
financially wise to buy a building
to house the boutique or whether
the store should remain in its cur¬
rent rented location.
What about you? Would you
like to help businesses improve
their financial performance by help¬
ing them manage the financial side
of their business?
266 Chapter 9
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J-k financial plan is essential to the success of any business enterprise.
You and your teammates are challenged to establish and develop a
complete financial plan for a successful business that wants to expand
into two surrounding communities. The financial plan must be eco¬
nomically and financially sound within a realistic time frame.
You will prepare a synopsis of 500 words or less that summarizes
the loan needed to expand a successful local business into two sur¬
rounding communities. Plans must not exceed 15 pages and will
include the following content: Synopsis; Company Description (legal
form of business, company mission, company governance, company
locations, long- and short-term goals); Operations and Management
(business facilities, management personnel, workforce); Target Market
(current target market and future sales potential); Financial Institution
(name of financial institution and rationale for choosing the financial
institution); Loan Request (purpose, amount, planned expenditures,
planned repayment for the loan and projected future stability of the
company); and Supporting Documents.
You will have seven minutes to present your plan, and the judge(s)
will have three minutes to ask questions.
PERFORMANCE INDICATORS EVALUATED
• Explain the opportunity for business expansion.
• Present convincing rationale for expanding a business into two sur¬
rounding communities.
• Develop a complete financial plan for a business venture.
• Request a business loan from a financial institution.
• Present financial information to obtain a loan from a financial
institution.
• Organize a financial proposal for a growing business.
• Manage time and information for an effective presentation.
Go to the FBLA web site for more detailed information.
Think Critically
1. Why does a financial institution want to know the future sales potential
of the business's target market?
2. What does a business's workforce have to do with a business loan?
3. Why should the business project how quickly a loan will be repaid?
4. Why must the team describe the target market demographics for the two
new proposed locations for the business?
www.fbla.org
Winning Edge 267
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10.1 Operating
Procedures
school.cengage.com/entrepreneur/ideas
268
10.2 Inventory
Management
0.3 Financial
Management
greene_0538446145_chlO, 12/21/7, 19:24, page: 269
n -i
IDEAS !M ACTION!
Andrew Jensen, President &
CEO, Jx2 Productions
Entertaining and Planning
T win brothers, Erik and Andrew Jensen, wanted
some special entertainment for their parent's
twenty-fifth wedding anniversary party. They
were not able to find anyone to provide what
they wanted, so they decided to DJ the party
themselves, using a mix of equipment they had
both purchased and rented. Soon guests from
the party started requesting their services, and
Twin Spin DJ and Entertainment was started!
To accommodate changes in the business over the next year, they
changed the name to Jx2 Productions. As the business continued to
grow and change from a hobby to a career, the brothers found a need
to develop a formal business plan. Eventually, Andrew bought out his
brother's share of the business and changed the form of ownership to
a limited liability corporation. The business expanded to offer video ser¬
vices, event planning, and bookings for hypnotists, comedians, jugglers,
and other live entertainers.
As the services offered expanded, Andrew found a need for a better
way of presenting the business on paper and on the Web. So, he hired a pro¬
fessional graphic design company to create a company logo to display in
advertisements and on the company web site. The logo presents a consistent,
professional look and has been important to the image of Jx2 Productions.
Andrew uses the teamwork approach in running his business. He
serves as the team leader and holds monthly and sometimes weekly
meetings with his staff of three to keep everyone informed and on the
same page. They work together to come up with new marketing ideas.
He feels that this is important because his DJ's are also his salespeople.
It is very important for them to have the right information to communi¬
cate to potential clients when they are out on assignments.
Jx2 Productions has been located in the Student Business Incubator (SBI)
at Springfield Technical Community College for the past two years. This loca¬
tion has offered Andrew opportunities to grow the business. In addition to
offering space and a convenient location, the SBI offers networking and
training sessions on finances, advertising, teamwork, and time management.
Andrew encourages other students to start their own business if
they feel it is right for them. His advice is to follow your dreams, your
heart, and whatever drives you to get up every day.
What do you Icnow?
What is the advantage to Andrew of forming Jx2 Productions as a
limited liability corporation?
Do you think the image of a company is important?
What do you think of Andrew's teamwork approach to running his
business?
269
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From entrepreneur to manager
Avery had been running her alterations business alone
for almost six months. The business grew, and Avery
hired three employees. With others to help operate the
business, Avery decided to take a vacation.
Two days into her vacation, her cell phone began
ringing nonstop. The three employees were fighting
among themselves about who was supposed to do
what. No one wanted to answer the phone, and
customers were becoming frustrated trying to
find out when their clothing alterations would be
completed. Avery had to return home to get her
business under control!
Work as a Team Discuss with your teammates
the shift that must be made from entrepreneur to
manager when the business hires employees. Do
you think all entrepreneurs make good managers?
What skills do you think good managers should Managers are responsible
have? for business operations.
Management Functions
Once you open your business and have people working for you, you
become a manager. A manager is the person responsible for plan¬
ning, organizing, staffing, implementing, and controlling the opera¬
tions of a business. These are functions that all managers must
perform, no matter the size or type of business that they manage.
Management is the process of achieving goals by establishing operat¬
ing procedures that make effective use of people and other resources.
All functions of management work together and are continuous.
Planning
Planning involves analyzing information, setting goals, and making
decisions about what needs to be done to move the business forward.
270 Chapter 10 Operations Management
PhotoDisc/Getty Images
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The planning activities must be performed in a timely manner. In busi¬
ness you often hear the saying, “time is money.” If you waste time in
the planning process, you can lose money for your business. There are
three types of planning that should take place in any organization.
• Strategic planning Setting broad, long-range objectives to
achieve the long-term goals of your business is called strategic plan¬
ning. You should think three to five years ahead when doing strate¬
gic planning. Envision where you want your business to be at that
time and what it will take to get you there.
• Intermediate-range planning Preparing detailed plans and strat¬
egies for achieving goals within a one-year period is intermediate-
range planning. You should include target dates for the completion
of the tasks that will lead to the accomplishment of your goals.
• Short-term planning Planning for the day-to-day operations of
the business to achieve the goals and objectives set in intermediate-
range planning is called short-term planning. Rules, policies, proce¬
dures, and budgets are important components of short-term planning.
Develop Your
Reading Skills
Before you begin reading,
skim the chapter and note
the headings and boldface
words. Think about what
you will be learning as you
read the chapter.
Planning is an ongoing process. Entrepreneurs frequently refer
back to their business plan for guidance. Likewise, the planning that
you do once your business is up and running will help you maintain
focus and keep your business on track. Once plans are in place, it
does not mean they must be followed exactly. Plans can be revised
as needs change.
Organizing
Organizing is identifying and arranging the work and resources needed
to achieve the goals that have been set for your business. Included in
the organizing function are the following:
• Assignment of tasks You will need to decide which employee
will be responsible for which tasks in the business. As you start
your business, you will have to determine how many employees
you will need and what their duties will be.
• Grouping of tasks into departments As your business grows,
you will need to organize departments. You will have to decide
which tasks are closely related and group them accordingly. Some
of the department titles that businesses use include Accounting,
Marketing, and Human Resources.
• Organizational structure As your company grows, you will need
an organizational structure. An organizational structure is a plan
that shows how the various jobs in a company relate to one another.
It is often represented in a chart and indicates the working relation¬
ships within the business.
• Allocation of resources across the organization There will
never be enough resources for all the needs and wants of everyone
in your business. There must be a plan for distributing the available
resources for their most efficient use across the company. This is
done by creating budgets based on requests from the departments
within the company.
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Staffing
Staffing includes all of the activities involved in obtaining, training,
and compensating the employees of a business. Because a company is
only as good as the people who work for it, the staffing function is
critical to the success of a business.
Implementing
Implementing involves directing and leading people to accomplish
the goals of the organization. Implementing is accomplished through
communicating directions, assignments, and instructions to your
employees. In order to effectively implement the work of the organi¬
zation, managers must develop a management style that will motivate
employees to perform at a high level. Management style is the way a
manager behaves toward and works with employees. Managers use
different styles based on the characteristics of the employees being
managed, the type of work assignment, and the importance of the
work being performed. An experienced and effective manager can
change the style as needed.
AUTHORITATIVE MANAGEMENT A management style in which the
manager is directive and controlling is called authoritative management.
This style is also called directing or autocratic management. The manager
makes the major decisions and closely monitors the work of the employees
to be sure the work is done correctly. This management style is often used
in a crisis situation when there is not enough time to let the group partici¬
pate in the decision-making process. It is also appropriate when working
with a new group of employees who do not have previous experience in
the type of work being performed.
DEMOCRATIC MANAGEMENT A manage¬
ment style in which employees are involved
in decision making and the manager pro¬
vides less direction is called democratic
management. This style is also called partic¬
ipatory management. A manager of a group
of experienced employees who work well
together does not have to be directive and
controlling. Employees like to be involved
in the planning and decision making that
affects their work.
MIXED MANAGEMENT Combining author¬
itative and democratic management styles
is called mixed management. Different
employees prefer different management
styles. Some employees prefer to be told
what to do and want someone else to do
the day-to-day decision making. Others feel
that if they are not involved in the decision¬
making process, the manager does not trust
NH ^okmark
There are many other categories of manage¬
ment styles besides the traditional ones
described in your textbook. Corporate perfor¬
mance expert Dr. Ichak Adizes has identified
four different managerial styles: producer,
administrator, entrepreneur, and integrator.
Access school.cengage.com/entrepreneur/
ideas and click on the link for Chapter 10.
Take the test on the Management Vitality
web site to determine your personal style. Do
the results seem accurate? Why or why not?
Which of Adizes' styles would fall under the
category of authoritative management? Dem¬
ocratic management? Do any of Adizes' styles
seem to incorporate elements of mixed
management?
school.cengage.com/entrepreneur/ideas
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them. An effective manager should be prepared to use mixed manage¬
ment in order to meet the needs of the business and its employees.
Controlling
Controlling is the process of setting standards for the operation of a
business and ensuring those standards are met. Some of the ways that
you can determine if standards are being met are as follows:
• Compare actual revenues and expenses with what was projected
• Observe business operations and determine if they are running
effectively
• Inspect products and services to ensure they are meeting perfor¬
mance standards
If standards are not being met, it will be necessary for managers
to make changes. Changes may include hiring new employees,
upgrading to higher-quality production materials, or increasing the
budget for a specific area. You may also decide to change operating
procedures such as work processes and work flow. As part of the
control function, you will routinely review your plans and make
adjustments.
Checkpoint
What are the functions of management?
Operations Manual
As your business grows, you will find that a detailed operations manual
is an essential tool for operating your business effectively and efficiently.
An operations manual contains all of the rules, policies, and procedures
that a business should follow in order to function effectively. You can
also have a separate company or employee handbook that details the
rules, policies, and procedures that apply to employees. Just as you
spent time developing your business plan, it is important to spend time
detailing the operations of your business.
Your operations manual should include the
rules, policies, and procedures that guide your
business practices. Rules outline the appropriate
behavior and actions of those that work for
you. All employees should be treated the same
way when it comes to rules. Policies serve as a
guideline for daily operations. They are estab¬
lished to make the business run efficiently and
may apply to both employees and customers.
Procedures are a series of steps and actions that
employees must follow to complete an activity.
They are instructions on how to perform a job
task correctly. Procedures are more specific
than rules.
Why does a business need a company handbook?
10.1
Operating Procedures 273
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Rules, policies, and procedures
are established to make the busi¬
ness run efficiendy. As a business
owner, it is important for you to
remember that sometimes you have
to make exceptions to rules, poli¬
cies, and procedures because not all
situations are the same.
Operating Policies
Policies related to hours of opera¬
tion should be established. You
should set daily operating hours
that are convenient for your cus¬
tomers. For many years, banks
were open Monday through Friday
from 9 a.m. to 4 p.m. when most
people were working. In order to
meet the needs of their working customers, many banks have extended
hours to 6 p.m. or 7 p.m. and are open on Saturdays.
Customer Service Policies
Customer satisfaction is one of the main goals of any business. It
is important to have a policy for customers who need to return a
product or have a follow-up service. Products do not always meet
the expectations of customers, and a service might not be per¬
formed to the customer’s satisfaction the first time. A policy for
replacements, refunds, or repairs will help maintain goodwill. Other
customer service policies can include payment options regarding cash,
check, and credit cards.
Rich’s Department Store, a long-time Atlanta business, operated
under the philosophy that all people are inherently honest and that
going the extra mile for customers would benefit the company in the
long run. Rich’s was known to provide refunds on merchandise not
carried by its stores and to provide full refunds on noticeably used
items—no questions asked.
Why is it important for a business to establish customer service policies?
Delivery Policies
Some businesses provide delivery services along with the sale of their
products. Delivery may be required because of product size or out of
convenience for the customer. A customer might be more likely to
purchase a large appliance from a company that offers delivery, since
most people cannot put a refrigerator or washing machine in their
vehicles. Many restaurants offer delivery service for food as a conve¬
nience to their customers. You will need to determine whether you
will offer delivery services for the products you sell, whether you will
charge a delivery fee, and whether you will guarantee delivery within
a certain timeframe.
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Safety Policies
It is important that you have policies in place that provide for a safe
environment for your customers and employees. Instruction in safety
procedures should be part of employee training. Employees should
know how to operate equipment safely and be required to wear the
necessary protection gear. Employees should also be briefed on emer¬
gency plans for fires, tornadoes, and other disasters. Signs should be
placed in strategic locations reminding employees of safety procedures
in the workplace. You should also provide warnings to customers so
that they do not enter employee-only areas. Caution cones can be
placed where unsafe conditions exist.
Checkpoint
What type of information should be included in an operations
manual?
io.i Assessment
THINK ABOUT IT
1. Why do you think it might be difficult for some entrepreneurs
to become managers?
2. Why do you think it is important to develop an operations man¬
ual for a business?
MAKE ACADEMIC CONNECTIONS
3. PROBLEM SOLVING You have been named manager of the
children's department of a retail clothing store. Sales are down
in the department. You have five employees in your department.
Two have been working in the department for three years. The
other three are new to the store and have no retail experience.
Describe the management style you will use to lead the depart¬
ment and increase sales.
4. COMMUNICATION Good customer service policies are essential
to the success of a business. Think about the customer service
provided by businesses in your area. Choose a business and write
a paragraph describing what is good about the customer service
provided and another paragraph with suggestions for improving
customer service.
TEAMWORK
Working in a small group, describe the traits of the perfect manager.
Explain why each trait is important.
10.1 Operating Procedures 275
#
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Prepare a purchasing
plan for inventory.
Describe the perpetual
and periodic inventory
methods.
Determine how much
inventory to keep in
stock.
perpetual inventory
method
stock card
point-of-sale (POS)
software system
periodic inventory
method
stock turnover rate
V
Focus on Small Business
How much to buy?
Matthew was starting his own frame store, Matt's Frames. He had previ¬
ously worked part time in a framing store and had learned a great deal
about the business. Matthew considered how much inventory he would
need initially. He knew from his previous experience that the first few
months of the year would be slow but that business would pick up as
Mother's Day and graduations approached. Because people purchase
frames as wedding gifts, Matthew knew his business would pick up in
the summer during the height of the wedding season. Another sales
peak would occur during the holiday season.
Because he was opening his
store in February, Matthew decided
he would start out with a small
inventory of basic framing supplies
and focus on specialty frames for
Valentine's Day. Then he would
increase his inventory for the
spring and summer seasons.
Work as a Team Do you think
that Matthew is doing the right
thing by starting out with only basic
framing supplies? Why do you think
he intends to increase his supplies
as spring and summer approach?
Business owners must carefully
plan to meet inventory needs.
Meet Inventory Needs
Inventory is the stock of goods a business has for sale. Successful inven¬
tory management involves balancing the costs of inventory with the ben¬
efits of having inventory in stock. Maintaining inventory is cosdy to a
business, and it must be well managed if you are going to make a profit.
Direct costs of inventory include storage, insurance, and taxes, in addi¬
tion to the purchase price of the inventory. Some of the concerns about
inventory that managers must address include the following:
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• Maintaining a wide assortment
of stock, but keeping adequate
quantities of fast-moving items
• Increasing inventory turnover, but
maintaining a high level of service
• Keeping stock levels as low as
possible without sacrificing service
or performance as a result of
stockouts
• Obtaining lower prices by making
bulk purchases, but not ending up
with slow-moving inventory
• Having adequate inventory on
hand, but not ending up with
out-of-date items
How can a store meet both its inventory needs and its customers' needs?
Purchasing Plan
The most important aspect of inventory management is having
items in stock when they are needed. This involves planning ahead
to determine inventory needs, placing purchase orders for the items
in advance, and scheduling deliveries to arrive at the point in time
when you need the items. Inventory management also involves
determining when you need the most inventory in stock, when
reorders should be placed, and when you should discontinue stock¬
ing an item.
The amount of inventory you need to purchase can be calculated
from the sales forecast. You must look at how many units you need
to add to the inventory you already have in stock to reach your sales
objective. The formula for calculating inventory needs is:
Beginning inventory + Purchases - Sales = Ending inventory
Alan has a beginning inventory worth $40,000 in his automobile
parts store and expects to sell $80,000 over a period of six months.
He wants to have $25,000 of inventory at the end of the six-month
period. Alan uses the formula to calculate his purchases.
Beginning inventory + Purchases - Sales
$40,000 + ? -$80,000
? - $40,000
?
?
Ending inventory
$25,000
$25,000
$25,000 + $40,000
$65,000
Alan must purchase $65,000 in inventory during the six-month
period. He now needs to plan for the purchase and delivery of the
inventory. He does not want to purchase the entire inventory and
have it delivered at the same time because he does not have the
cash to pay for it all at once, nor does he have the storage space.
Alan decides to make his major purchases in the spring when people
are beginning to get their cars ready for vacations and summer
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travel. He knows from past experience that he will sell more from
March through June and that January and February are slower
months. Based on this information, Alan prepares a detailed pur¬
chase plan to show how much inventory he will purchase each
month during the six-month period.
PURCHASE PLAN FOR AUTOMOBILE PARTS
January
February
March
April
May
June
Total
Beginning inventory
$40,000
$33,500
$29,500
$25,300
$25,600
$25,050
+ Purchases
4,500
4,500
10,800
16,800
14,200
14,200
$65,000
- Sales
(11,000)
(8,500)
(15,000)
(16,500)
(14,750)
(14,250)
$80,000
= Ending inventory
$33,500
$29,500
$25,300
$25,600
$25,050
$25,000
Checkpoint
What are some of the concerns managers have regarding inventory?
Track Your Inventory
Most businesses have to keep the products they sell in stock as a con¬
venience to their customers. To avoid running out of items your cus¬
tomers want, you will need to keep track of your inventory levels.
You will also need to determine how much you can afford to keep in
stock at any given time.
Tracking your inventory can be done in two different ways. You
can use the perpetual inventory method or the periodic inventory
method. Regardless of the inventory
method you use, you will need to take
a physical inventory at least once or
twice a year.
Be your own boss
You own a small hardware store located on the
Gulf Coast. Weather forecasters are predicting
higher-than-average hurricane activity in your
region for the upcoming season. You know that
if a hurricane comes to your area, there will be a
high demand for plywood, generators, batteries,
and other hurricane preparedness supplies. You
have limited storage space and limited funds to
invest in inventory, but you realize the chance
to increase sales and profits. Outline a plan for
managing your inventory needs. Explain your
decisions.
Perpetual Inventory Method
The perpetual inventory method
keeps track of inventory levels on a
daily basis. This method can make your
business more efficient. It can also
ensure that you never run out of stock.
This method uses stock cards or a com¬
puter to keep track of the inventory
you have. A stock card is a paper
inventory record for a single item.
Regardless of whether you use stock
cards or maintain electronic inventory
records, you should record the
following items:
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• A description of the item
• A stock number for identification purposes
• Any receipt of inventory, the number of units received, and the
date of the transaction
• Any sale of inventory, the number of units sold, and the date of
the transaction
• The amount of inventory you currently have
• The minimum amount you want to keep in inventory, often
referred to as the reorder point because it indicates when you
should place an order to receive more units
• The maximum amount you want in inventory at any time
Lei Woo owns a toy store. Lei uses her
computer to track inventory levels on a
daily basis. She creates a low stock report,
which shows the items she needs to reorder.
It also shows how many units of each item
Lei needs to order so that she can restock
to the maximum level.
USE A COMPUTER Businesses that sell
hundreds of items usually track inventory electronically. Inventory soft¬
ware programs let you track usage, monitor changes in unit dollar costs,
calculate when you need to reorder, and analyze inventory levels on an
item-by-item basis.
Many retail businesses use cash registers with a point-of-sale
(POS) software system that updates inventory records as each sale
happens. Bar-code scanners and credit card authorization systems can
be integrated into the POS system. With the POS system, you will
always have an up-to-date inventory balance. You will also get detailed
information on sales that will assist you in the decision-making process
for inventory management. You can analyze the sales data, determine
how well each item you have in stock is selling, and adjust your pur¬
chasing accordingly.
LOW STOCK REPORT
ITEM
STOCK
NUMBER
MAXIMUM
REORDER
POINT
NEED TO
ORDER
Building blocks
Q323
IS
7
8
Doll houses
K393
4
2
2
Playing cards
S222
25
12
13
Stickers
S494
50
20
30
Periodic Inventory Method
Some businesses use the periodic inventory method, which involves
taking a physical count of your merchandise at regular intervals, such
as weekly or monthly. This method will tell you how many units of
each item remain in stock. You can then compare your inventory
counts to your established reorder points to determine which items
need to be restocked. This method is commonly used by small busi¬
nesses with limited inventory.
Take a Physical Inventory
Even with the perpetual inventory method, you will need to take a
physical inventory at least once or twice a year. Your actual inventory
may differ from that listed in your perpetual inventory system. The
10.2 Inventory Management
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Why should businesses take a physical inventory periodically?
t
■
difference can be caused by many things,
such as theft, damage to merchandise, or fail¬
ure to record sales. Taking a physical inven¬
tory means counting the number of items you
have in stock. You will need to record the
date on which you are taking the inventory,
the stock number of each item, a description
of each item, and the actual number of units
in stock.
At least two people should be involved in
taking a physical inventory. One person should
count the items on hand while the other
records the information found. This informa¬
tion can later be entered into a spreadsheet for
easy use.
Checkpoint
How does the perpetual inventory method differ from the periodic
inventory method?
Manage Your Inventory
The level of inventory you keep in stock depends on three factors:
• The costs of carrying inventory
• The costs of lost sales due to stockouts
• Your stock turnover rate
Costs of Carrying Inventory
Holding inventory can be very cosdy. These costs are known as carry¬
ing costs. A business with inventory will always have carrying costs.
Carrying costs can become too high if you have too much inventory.
Costs can increase for many reasons.
• Obsolescence Inventory can be held too long and become old
and outdated. People do not want to buy a computer made two
years ago. You may be stuck with merchandise you cannot sell.
• Deterioration Inventory can deteriorate, forcing you to throw it
away or sell it at a discount. If you own a garden store, some plants
will need to be sold within a few weeks because they will begin to die.
• Interest fees Vendors charge interest on money due to them. If
you cannot pay your vendors until you sell your inventory, you will
incur an extra expense.
• Insurance You will need to carry insurance against theft, fire, and
other disasters. Insurance premiums increase as the value of the
inventory insured increases.
• Storage Inventory takes up space—space that you may be leasing
on a square-footage basis. If you run out of room, you will need to
lease additional space.
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Costs of Being Out of Stock
Being out of stock can cost you money. If you are out of the items
your customers want, you will lose sales. If customers repeatedly fail
to find what they are seeking at your business, you could also lose
customer loyalty. You must weigh the costs of being out of stock
against the costs of carrying more inventory.
Stock Turnover Rate
A supermarket might sell hundreds of cans of soft drinks every day
but only 12 jars of marmalade. The stock turnover rate is the rate at
which the inventory of a product is sold and replaced with new inven¬
tory. It shows how many times a year you sell all of your merchandise.
A store that purchases inventory four times a year and sells all of its
inventory in that same year has a stock turnover rate of 4.
Famous
Ganz Family
What do a stuffed animal toy and
the Internet have in common?
Plenty, if you are in the Ganz family
business. They have taken the
stuffed animals children play with
and made them a portal to the
Internet and the Webkinz World.
Shortly after World War II,
Samuel Ganz came to the United
States from Romania and settled in
New York. At about the same time, his
sons Sam and Jack settled in Toronto,
Canada. In 1950, Samuel went to visit
his sons and took along a prototype
for a doll. Sam and Jack asked some
local toy stores if they would be willing
to sell the dolls. After making a few
contacts and holding family discus¬
sions, Ganz Toys began business!
In the 1980s, Ganz Toys began
to focus on gift retailers and added
a line of plush gift toys. Under the
direction of Howard Ganz, Samuel's
grandson, the privately held family
company became the top toy com¬
pany in Canada. Today, the company
is known simply as Ganz.
In 2005, Ganz introduced the
Webkinz, which quickly became a
big hit. The lovable plush pets come
with a unique secret code on the
label. The code allows entrance into
Why do you think Webkinz are so successful?
the Webkinz World on the Internet.
There, an electronic version of the
pet can be adopted for virtual inter¬
action. More than two million units
have been sold and one million
users have registered on the Web¬
kinz web site. The Ganz family busi¬
ness is committed to a future filled
with excitement and innovation.
Think Critically
What inventory challenges do you
think the success of Webkinz
brought to Ganz?
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Stock turnover rates vary from industry to industry. You should
contact the trade association for your industry or talk to other entrepre¬
neurs in your field to find out the turnover rate for the items you carry.
Turnover rates can help you determine how much inventory to
keep in stock. To find out how many months of inventory you should
keep in stock, divide 12 (the number of months in a year) by the
stock turnover rate.
Brad Wilson owns a retail store. The stock turnover rate in his
industry is 6. This means that he needs to keep two months worth of
inventory in stock at all times.
Months in year -r Stock turnover rate = Months of inventory to stock
12 -r 6 2
1
Checkpoint
What three factors determine the amount of inventory you keep in
stock?
io.2 Assessment
THINK ABOUT IT
1. Why do you think a purchasing plan is essential to good inven¬
tory management?
2. What do you think are the benefits of using the periodic inven¬
tory method? The perpetual method?
3. Do you think you could still manage your inventory well if you
did not know the turnover rate for a product? Why or why not?
MAKE ACADEMIC CONNECTIONS
4. COMMUNICATION Using the perpetual inventory method, cre¬
ate an inventory tracking report on the computer for at least
five inventory items a grocery store would carry.
5. MATH Using the Activity CD, open the activity "Inventory Man¬
agement." Print a copy and complete the activity to help evalu¬
ate the inventory needs of Elizabeth's Kitchen Warehouse.
TEAMWORK
Working with teammates, make a list of items that you would sell in a
hobby store that caters to teenagers. This is a new business with no
inventory on hand. Decide how many of each item you think you could
sell in a six-month period. Based on this information, make a purchasing
plan for the hobby store showing how much inventory you would pur¬
chase each month.
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cash budget
gross sales
net sales
V
Focus on Small Business
Cash flows in and out
Lars is an independent contractor in the construction business. He
has recently completed two big contracts and is eagerly
awaiting his next. Lars realizes that demand for his ser¬
vices will be less in the winter months and could also
decrease as a result of changes in the economy.
Realizing that there could be months when
he does not have money coming in, Lars begins
to think about his finances. Although he has
cash in the bank today, he knows he has to
plan for tomorrow. He needs to manage his
cash flow to ensure he can cover his expenses
during slower months. Lars understands that
he needs to set aside money for a time when
he doesn't have any contracts lined up.
Work as a Team Why do you think cash flow is
important to a business owner? List the kinds of
businesses that you think might have cash _ ...
„ ... , . , . Seasonal businesses must plan
flow issues similar to those in Lars business. their cash flow
Manage Your Cash Flow
As the owner of your own business, you will need to make sure that
you have enough cash to make purchases and pay expenses. To do so,
you will have to create a cash budget. You will also have to learn how
to manage your cash flow.
Create a Cash Budget
A cash budget should show the projections of your cash coming in
and going out. To ensure accuracy, it should be based on actual past
revenues and operating expenses. A cash budget looks very similar to
a cash flow statement, but it has slight differences. Three columns are
used to show the estimated cash flow, the actual cash flow, and the
difference between the two. This information can help you budget
your financial resources. If your cash budget shows you will be short
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did you KNOW?
According to the
National Federation of
oSgrt******
: 1 foe of the ton
ten concerns o f small-
coTT 5 7 ners re,ate to
osts. Leading the list is
the cost of health insur-
ap ce, followed by the
cost and availability of
^b'hfy durance work¬
ers compensation costs
energy costs (natural ga ;
gasoline, propane, diesel
and fuel oil), and elec- '
tnc/ty rates.
of cash in six months, you can begin arranging financing or generat¬
ing capital now. If your cash budget shows you will have a surplus of
cash two years from now, you might use that information in planning
how to expand your business.
Many companies use spreadsheets to prepare their cash budgets.
The spreadsheet will automatically perform calculations on the
amounts you provide. This allows you to instandy see the outcomes
of changes in your cash flow.
Mark Matson owns a snow removal business that he runs from
his home. He uses a spreadsheet to create a budget for the first three
months of the coming year, which is shown below. In his first month,
Mark’s receipts were higher than he anticipated, but so were his
expenses. Even so, Mark came out ahead in his overall net cash
amount.
CASH BUDGET MARK'S SNOW REMOVAL SERVICE Month One, 20—
A
B
C
D
Estimated
Actual
Difference
1
Cash receipts
2
Cash sales
$2,000
$4,000
$2,000
3
Accounts receivable payments
$11,150
$13,150
$2,000
4
Tax refund
$850
$850
$0
5
Total cash receipts
$14,000
$18,000
$4,000
6
Cash disbursements
7
Salaries
$4,500
$5,500
-$1,000
8
Gasoline
$2,500
$3,125
-$625
9
Vehicle maintenance
$350
$400
— $50
10
Utilities
$50
$50
$0
11
Advertising
$150
$300
-$150
12
Insurance
$500
$500
$0
13
Other
$250
$250
$0
14
Total cash disbursements
$8,300
$10,125
-$1,825
15
Net cash increase/decrease
$5,700
$7,875
$2,175
Improve Your Cash Flow
Two businesses with the same level of sales and expenses may have
very different cash flows. One business may have a positive cash flow
while the other may have a negative cash flow and be unable to cover
its expenses. The difference may reflect a different pattern of cash
receipts and disbursements.
If your cash receipts will not cover required cash disbursements,
you will need to take action to improve your cash flow. You can
increase cash receipts, decrease cash disbursements, or perform both
actions.
INCREASE CASH RECEIPTS One way to improve your cash receipts is
to decrease your accounts receivable by getting customers who owe
you money to pay more quickly. To encourage faster payment, you
can do the following:
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• Offer discounts on bills paid right away.
• Establish tighter credit policies (decrease the amount of time your
customers have to pay their bills from 60 days to 30 days).
• Establish a follow-up system for collecting unpaid accounts receiv¬
able. Consider hiring a collection agency to track down customers
who are considerably late with their payments.
• Hold shipments to customers with large unpaid bills or insist that
such orders be paid in advance.
Businesses can have cash flow problems if they start off with too
little capital. If your cash flow is inadequate, you may want to increase
cash receipts by obtaining more capital. This means securing a loan,
investing more of your own money in the business, or finding invest¬
ors who will provide you with capital in return for a share of your
future profits.
WHAT WENT WRONG
Too Big, Too Fast
Webvan was founded in the late 1990s by
Louis Borders. Webvan was an online grocery
ordering and delivery service. It promised cus¬
tomers delivery in a 30-minute window of
time. Initially, customers were excited about
this service that was offered in nine U.S. mar¬
kets: San Francisco Bay Area, San Diego, Los
Angeles, Chicago, Seattle, Portland, Atlanta,
Sacramento, and Orange County, CA. The
company's long-range plans included expansion
into 26 cities. The company started with hun¬
dreds of millions of dollars from private invest¬
ors and then raised $375 million in its initial
public offering of stock. At one time, Webvan
was worth $1.2 billion.
But all was not good in the Webvan
world. Customers did not sign up as founders
hoped they would. But the biggest problem
Webvan faced was rapidly disappearing cash
reserves. It placed a $1-billion order with engi¬
neering company Bechtel to build high-tech
warehouses, bought a fleet of delivery trucks,
and purchased state-of-the-art computer sys¬
tems. The management team of Webvan did
not have anyone with any experience in the
grocery market, and it tried to get too big, too
fast. Even though customers were not happy
with long lines and the quality of products in
traditional supermarkets, they did not flock to
the online grocery store. In less than two years
after its successful initial public offering,
Webvan announced it was closing.
Think Critically
1. What are some of the problems Webvan
faced during its short-lived operation?
2. Webvan started with a large amount of
cash reserves. What caused Webvan to
end up with cash flow problems?
3. What changes in operations do you think
Webvan could have made that might have
helped it be successful?
Too many cash disbursements can lead to
business failure.
#
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DECREASE CASH DISBURSEMENTS Another way of improving the
cash flow of your business is to reduce your disbursements. This can
be done by gaining better control over your inventory and payroll,
slowing the rate at which you pay your bills, or reducing your expenses.
Inventory is a large business expense over which you have some
control. Reducing this expense will improve your cash flow. You
know that carrying inventory is cosdy. If your business has cash flow
problems, check to make sure that you are not holding too much
inventory. Reducing your inventory will reduce your accounts payable
because you will not be purchasing as much.
Payroll is another large category of expense for businesses.
Reducing your payroll can improve your cash flow. Payroll expenses
can be decreased by reducing the size of your workforce or reducing
the number of hours employees work. It is important to determine
your workforce needs before making reductions in this area.
Most of your suppliers will offer credit terms and accept payment
at a later date if you pay interest charges. Depending on your cash
flow needs, you may want to take advantage of the longest possible
credit terms or use a credit card for purchases.
Mark Matson usually pays cash for gasoline and oil for his snow¬
plow trucks. At the beginning of the winter season in December, his
expenses are particularly high and cash receipts low, so he charges his
expenses to his credit card. By delaying payment until the following
month, Mark improves his cash flow in December. When the credit
card bill comes in January, he will have received payment from his
customers for the work he did in December and will not have a prob¬
lem paying the bill.
Other expenses, such as rent, are fixed, so you cannot reduce
them. But you can reduce variable expenses, such as advertising, to
help improve your cash flow.
Checkpoint
I What are some ways you can improve your cash flow?
Prepare and Analyze Financial
Statements
To run your own business, you have to be able to understand and
analyze financial statements to determine how well your business is
performing. Businesses keep many kinds of records and create differ¬
ent kinds of financial statements. Your records and statements can
help you analyze your profits as well as set and meet profit goals.
Prepare Financial Statements
When you are starting a business you will prepare pro forma financial
statements based on projections. Once your business is up and run¬
ning, you will prepare financial statements that show actual financial
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performance. These financial statements will contain
more detailed financial information than the pro
forma statements because the business’s finances
will change as the business grows.
The three most important elements of a com¬
pany’s financial strength are its assets, liabilities, and
owner’s equity. The value of assets, liabilities, and
owner’s equity on a specific date are reported on the
balance sheet. The balance sheet is usually prepared
monthly and at year-end.
The income statement reports revenues,
expenses, and the net income or loss over a specific
period of time, such as a month, a quarter, or a
year. Many businesses will prepare an income state¬
ment monthly in order to closely monitor revenues
and expenses.
The cash flow statement shows the cash inflows
(receipts) and cash outflows (disbursements) for a
business during a specific period of time. This statement shows the
actual cash a business receives and how that cash is used. Unlike
the income statement, which reports revenues not yet received and
expenses not yet paid, the cash flow statement reports actual amounts,
making it the most valuable financial statement for many business
owners.
Would you categorize office equipment as assets,
liabilities, or owner's equity? Why?
Analyze Sales
You must know how to use the information in your financial state¬
ments to determine the level of sales you need to achieve to earn a
profit. Your sales records show sales trends and patterns. You can
use these records to forecast future sales and make good business
decisions.
ANALYZE SALES BY PRODUCT Analyzing your sales by product can
help you make decisions about the kind of inventory to stock. It
can help you increase sales and profits.
Emily Lee
owns a garden and
patio store. Her
store has four
departments: out¬
door furniture, out¬
door grills, plants,
and garden tools.
Emily’s sales figures
show that almost
57 percent of her annual sales come from the outdoor furniture depart¬
ment, as calculated below.
Sales of outdoor furniture -r Total sales = Percent of sales
$110,000 -r $194,000 = 56.7%
DEPARTMENTAL SALES • LEE GARDEN AND PATIO
Department
Sales
Percent of total*
Outdoor furniture
$110,000
56.7
Outdoor grills
37,000
19.0
Plants
24,000
12.4
Garden tools
23,000
11.9
Total
$194,000
100.0
*Rounded
10.3 Financial Management 287
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The plants department accounts for only a litde over 12 percent
of sales. Based on these data, Emily decides to reduce the size of the
plants department and increase her inventory of outdoor furniture.
Analyze Net Profit on Sales
Your income statement shows whether or not your business is earning
a profit. It also tells you how profitable your business is. This informa¬
tion can be very useful in helping you set and meet profit goals. The
rate of profit a business earns is often shown as the ratio of its net
profit to its sales. This ratio is calculated by dividing net income after
taxes by net sales.
Net income after taxes -r Net sales = Net profit on sales
In order to calculate net profit on sales, a business must first per¬
form math calculations to determine net income after taxes and net
sales. All of these calculations are found on the income statement.
CALCULATE NET SALES Jack Hendrick owns a retail store that sells
automotive supplies. He wants to find out his net-profit-on-sales. First
he must determine his gross sales and net sales. Gross sales is the
dollar amount of all sales. Net sales is the dollar amount of all sales
with any returns subtracted. Jack sold $235,000 worth of merchan¬
dise and had $3,200 worth of merchandise returned. Therefore, his
net sales amount is $231,800.
Gross sales - Returns = Net sales
$235,000 - $3,200 = $231,800
CALCULATE NET INCOME AFTER TAXES Three calculations must be
performed to determine your net income after taxes. You must calcu¬
late the following:
• Gross profit
• Net income from operations
• Net income before taxes
Gross profit is profit before operating expenses are deducted. Last
year, Jack spent $150,000 for merchandise that he sold. This amount
represents his cost of goods sold. Jack subtracts his cost of goods sold
from his net sales to find his gross profit.
Net sales - Cost of goods sold = Gross profit
$231,800 - $150,000 = $81,800
Jack’s operating expenses include rent, salaries, and similar business
expenses. Last year his operating costs were $39,900. Gross profit
minus operating expenses equals net income from operations.
Gross Operating Net income
profit - expenses = from operations
$81,800 - $39,900 = $41,900
To calculate net income before taxes, Jack has to subtract one more
expense that has not yet been taken into account: interest on loans he
has obtained. Last year, Jack paid $2,400 in interest. He subtracts this
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from his net income from operations to get his net
income before taxes. If a company has no addi¬
tional expenses, such as interest expense, the net
income from operations equals the net income
before taxes.
Net income from Interest Net income
operations - expense = before taxes
$41,900 - $2,400 = $39,500
To compute his after-tax income, Jack subtracts the
amount he paid in income tax last year, $12,245,
from his net income before taxes. This gives him
his net income after taxes for his automotive supply
business.
Net income Income Net income
before taxes - tax paid = after taxes
$39,500 - $12,245 = $27,255
WHY NET PROFIT ON SALES IS IMPORTANT After
all of the above calculations have been performed,
the net-profit-on-sales ratio can be calculated. This
calculation helps determine how profitable your
business is. Jack determines that his profits repre¬
sent 11.8 percent of his net sales.
Net income Net Net profit
after taxes sales = on sales
$27,255 -r $231,800 = 11.8%
Jack can use this figure to assess his profits in two ways. First,
he can compare his profit ratio this year with his profit ratio in previ¬
ous years. If his profit ratio has declined, his business has become
less profitable. If the ratio has increased, his business has become
more profitable. Jack can also compare his profit ratio with aver¬
age profit ratios in his industry. If his ratio is lower than the industry
average, he may want to figure out what he can do to improve his
profitability.
Set and Meet Profit Goals
To run your business effectively, you will need to set profit goals.
These goals will reflect the amount of profit you hope to earn from
your business during a particular year.
Jack Hendrick would like to increase his profit ratio to 15 per¬
cent. He decides to try to increase his sales and reduce his expenses
He begins a frequent-buyer program and offers discounts on bulk
purchases. Jack will talk to suppliers with the hope of reducing his
cost of goods sold.
Jack would like to increase his profits even more by opening
several more stores. He hopes that purchasing his inventory in large
quantities will lower his costs significantly.
INCOME STATEMENT
Hendrick's Auto Supplies, 20—
Revenue from sales
Gross sales
$235,000
Returns
3,200
Net sales
$231,800
Cost of goods sold
150,000
Gross profit
$ 81,800
Operating expenses
Salaries
$ 26,200
Rent
8,400
Utilities
1,500
Advertising
1,100
Insurance
1,000
Supplies
700
Other
1,000
Total operating expenses
$ 39,900
Net income from operations
$ 41,900
Interest expense
2,400
Net income before taxes
$ 39,500
Taxes
12,245
Net income/loss after taxes
$ 27,255
10.3 Financial Management 289
Total Costs and Revenues
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Units Sold
Breakeven Analysis
As you learned in Chapter 5, breakeven analysis is
a useful tool for determining how increases in sales
will affect your profits. The breakeven point is the
volume of sales that must be made to cover all of the
expenses of a business. Below the breakeven point,
your expenses will exceed your revenues and you will
be losing money. Once you reach the breakeven
point, your sales will equal all of your expenses. This
means that at this level of sales, you will neither make
nor lose money. Once you exceed the breakeven
point, you will begin to earn profits as shown in the
graph.
Checkpoint
Why is it important for an entrepreneur to analyze the financial
statements of the business?
io.3 Assessment
THINK ABOUT IT
1. How will constructing a cash budget using an electronic spread¬
sheet make this financial report more helpful?
2. What would be the benefit of preparing an income statement
monthly instead of once a year?
3. Which goals do you think are more important to meet: sales
goals or profit goals? Explain your answer.
MAKE ACADEMIC CONNECTIONS
4. PROBLEM SOLVING If your business were experiencing a nega¬
tive cash flow, how might you use the six-step problem-solving
model to help you?
5. MATH Using the Activity CD, open the activity "Cash Budget."
Print a copy and complete the activity by preparing a cash bud¬
get for your school store and determining ways to increase cash
flow.
Working in a small group, use the Internet or library to locate a copy
of an annual report for a business. Review all of the financial state¬
ments that are included in the annual report. Write a paragraph
describing the financial statements you have reviewed and include
an analysis of the financial condition of the business.
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Leadership Skills
As an entrepreneur and a manager, you need to demonstrate good
leadership skills. If you want your business to grow, you must be able
to lead and influence others to help you carry out your business
vision. A manager who can get individual employees and groups to
work well together to accomplish objectives is considered to be an
effective leader.
Being a good leader is more than just being nice
to people. Characteristics of effective leaders include
the following:
1. Understanding Respect the feelings and needs
of fellow workers.
2. Initiative Have the ambition and motivation to
see a project through to the end.
3. Dependability Follow through on commit¬
ments made to employees.
4. Judgment Make decisions carefully, objectively,
and fairly.
5. Objectivity Look at all sides of an issue before
making a decision.
6. Confidence Make decisions and take responsi¬
bility for the results.
7. Consistency Do not be too emotional or
unpredictable.
8. Cooperation Work well with others.
9. Honesty Behave ethically and be truthful.
10. Courage Be willing to take reasonable risks and make unpopu¬
lar decisions.
11. Communication Listen, speak, and write effectively.
12. Intelligence Have the knowledge, understanding, and skills
needed to perform well.
TRY IT OUT
Leadership styles vary from person to person. Choose two individuals
who have played leadership roles in history and research their leader¬
ship styles. Prepare a report that illustrates how they exhibited each of
the characteristics described above.
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Chapter 10 Assessment
SUMMARY
10.1 Operating Procedures
1. When entrepreneurs become managers, they must utilize a different
set of skills. Managers are responsible for planning, organizing,
staffing, implementing, and controlling the operations of a business.
2. A detailed operations manual is essential for a business’s success. It
should include rules, policies, and procedures. Policies may include
operating policies, customer service policies, delivery policies, and
safety policies.
10.2 Inventory Management
3. A purchasing plan will assist with inventory management by ensur¬
ing you have items in stock when they are needed. It helps you
calculate ending inventory needs based on beginning inventory,
purchases, and sales.
4. You can track inventory using the perpetual or periodic inventory
methods. The perpetual inventory method tracks inventory levels
on a daily basis. The periodic inventory method involves taking a
physical count of merchandise at weekly or monthly intervals.
5. The level of inventory you keep in stock depends on three factors:
the costs of carrying inventory, the costs of losing sales due to
stockouts, and your stock turnover rate.
10.3 Financial Management
6. To manage cash flow, begin by creating a cash budget. If cash receipts
are less than cash disbursements, you will need to improve your cash
flow. You can increase cash receipts by offering credit customers dis¬
counts for prompt payment, establishing tighter credit policies, estab¬
lishing a follow-up system for collecting unpaid accounts receivable, and
obtaining additional capital for your business. You can decrease cash dis¬
bursements by gaining better control over inventory and payroll, slow¬
ing the rate at which you pay your bills, and reducing your expenses.
7. When starting a business, you prepare pro forma statements based
on projections. Once your business is operating, you will prepare
financial statements based on actual performance. The three finan¬
cial statements most commonly prepared by businesses are the bal¬
ance sheet, income statement, and cash flows statement.
8. Analyzing financial statements can help you understand how well
your business is doing. You can examine your finances by analyz¬
ing your sales by product, calculating your net profit on sales, and
performing a breakeven analysis.
What do you hnow now?
Read Ideas in Action on page 269 again. Then answer the questions a
second time. How have your responses changed?
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. The process of achieving goals by establishing operating proce¬
dures that make effective use of people and other resources
2. The rate at which inventory of a product is sold and replaced with
new inventory
3. A management style in which the manager is directive and
controlling
4. The dollar amount of all sales with any returns subtracted
5. A plan that shows how the various jobs in a company relate to
one another
6. Keeps track of inventory levels on a daily basis
7. Involves taking a physical count of your merchandise at regular
intervals, such as weekly or monthly
8. A management style in which employees are involved in decision
making
9. Shows the projections of your cash coming in and going out
10. Contains all of the rules, policies, and procedures that a business
should follow in order to function effectively
11. A system that updates inventory records as each sale happens
12. The person responsible for planning, organizing, staffing, imple¬
menting, and controlling the operations of a business
REVIEW YOUR KNOWLEDGE
13. Which of the following functions of management would apply
when grouping tasks into departments?
a. planning
b. organizing
c. implementing
d. controlling
14. Jorge is supervising new employees with no experience in food
service at a concession stand in an amusement park. Which man¬
agement style should he use?
a. authoritative management
b. democratic management
c. mixed management
d. participatory management
15. True or False? The organizational structure outlines all of the
rules, policies, and procedures that a business must follow.
16. Preparing detailed plans that will provide strategies for achieving
goals and objectives in a one-year period is
a. strategic planning
b. intermediate-range planning
c. short-term planning
d. none of the above
authoritative
management
cash budget
democratic
management
gross sales
management
manager
net sales
operations manual
organizational
structure
periodic inventory
method
perpetual inventory
method
point-of-sale (POS)
software system
stock card
stock turnover rate
Chapter 10
Assessment
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17. A small specialty store that has a very limited inventory is more
likely to use the_?_inventory method.
18. The level of inventory you keep in stock depends on all except
a. the costs of carrying inventory
b. the costs of lost sales due to stockouts
c. your stock turnover rate
d. your net-profit-on-sales ratio
19. True or False? A point-of-sale inventory system makes it easier
to analyze your inventory records at the end of the day.
20. True or False? Generally, employees do not like to be involved
in the planning and decision-making process.
21. If you want to improve your cash flow by increasing cash receipts,
which of the following strategies could you try?
a. offer discounts on bills paid right away
b. establish tighter credit policies
c. hold shipments to customers with large unpaid bills
d. all of the above
APPLY WHAT YOU LEARNED
22. You received a $500 payment from one of your customers in the
form of a check. You deposited the check into your bank account.
Several days later, you received a notice from your bank that the
check was returned because your customer’s checking account did
not have the funds to cover it. You were counting on that money
to help you cover your monthly rent. What will you do?
23. You want to analyze your sales by product for your hardware
store. Your total sales are $140,750. The sales of each department
in your store are given below. What percent of sales does each
department generate for your store?
Seasonal merchandise $25,525
Lumber 40,211
Tools 38,524
Lighting 15,235
Kitchen cabinets 21,255
MAKE ACADEMIC CONNECTIONS
24. MATH You own a bookstore. The stock turnover rate in the
bookstore business is four. How many months worth of inventory
must you keep on hand?
25. COMMUNICATION You and a partner own a kitchen equip¬
ment store. You would like to implement a point-of-sale inventory
system using a computerized cash register, but your partner is not
convinced this is the best method for your business. Write a letter
to persuade your partner to implement a new POS inventory system.
Identify advantages of using a POS system.
26. MATH You own a pet-supply business. Last year, you sold
$42,000 in dog food and $53,000 in cat food. Returns totaled
$5,000. The cost of goods sold on the dog food was $13,000,
and the cost of goods sold on the cat food was $14,000.
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$4,500 for rent, $1,200 for insurance, $1,000 for utilities, $900
for advertising, and $600 for other. Taxes were $10,500. What is
your net income after taxes? What is your net-profit-on-sales ratio?
27. PROBLEM SOLVING Managers are faced with decisions to
be made in all areas of business operation. Using the Activity CD,
open the activity “Management Problem Solving.” Print a copy
and work with a partner to come up with solutions for Katrina’s
management issues.
WHAT WOULD VOU DO?
You asked two of your employees to work extra hours over the week¬
end to perform a physical inventory. You are certain that there were
three plasma television sets in stock prior to having the employees
take inventory. However, when the inventory was completed, the list
showed only two plasma television sets in stock. You checked the
stockroom, and you found only two. You have always trusted your
employees. What would you do? Will you confront the employees? If
so, how will you approach them? Working with a partner, role play
the conversations you will have with the employees.
v_ I _ I _ w
build your
Business Plan
Project
This activity will help you plan the operations management of your
business.
Describe the management style you will use for managing your business.
Will you always use the same style? How will you determine when to
use a different style?
Locate and contact two professionals in your area who specialize in
strategic planning. What are their credentials? What are their fees? Do
you think it would be helpful to utilize the services of a strategic plan¬
ner? Why or why not?
Develop an operating procedures manual for your business. Include
the rules, policies, and procedures that your business will follow to
run effectively.
If your business has an inventory, list all of the items you will have in
inventory and your cost for each. Create a purchasing plan for your
inventory.
Set up inventory records for your business using either a paper system
or an electronic system. Be sure to list all of the items discussed in
Lesson 10.2. How did you determine your reorder point? What inven¬
tory carrying costs are relevant to your business? How can you reduce
your carrying costs?
Analyze your sales by creating a table that lists each of your products
and the total sales (or estimated sales) for each. What is the percent¬
age of total sales for each product? Based on this information, will
you make any changes to your inventory?
Chapter 10 Assessment 295
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Planning a Career in
Information Technology
rmatwn
Technology
uw
IVIy stepsister, who is a high
school senior this year, has become
our household computer expert.
She recendy attended a summer
technology camp sponsored by a
national computer retailer that pro¬
vides a variety of computer support
services. The camp was established
as a way to help f u l fill future labor
needs. After completing camp,
she’s become the household ‘go
to’ person for any high-tech gadget
issues.”
How do individuals and small
businesses solve computer-related
technology problems?
Computer service specialists,
who make on-site visits to homes
and businesses, help resolve a vari¬
ety of complex technological issues
that affect computer efficiency and
reliability. As computers and per¬
sonal gadgets have become more
complex, the need for these service
specialists has increased.
EMPLOYMENT OUTLOOK
• Faster than average growth is
anticipated.
• The continued expansion of
highly sophisticated mobile devi¬
ces will help fuel demand.
• Growing demand for computer
specialists will be somewhat off¬
set by the trend to outsource
computer support to foreign
countries with lower labor costs.
JOB TITLES
• Software Support Specialist
• Help Desk Analyst
• Application Specialist
• Technical Support Associate
• MIS Support Technician
NEEDED SKILLS
• Degree requirements vary
between an Associates Degree
and a Bachelor’s Degree in
computer-related areas.
• Sometimes relevant computer
experience or professional certifi¬
cation can serve in lieu of a
degree.
• Strong analytical, problem¬
solving and interpersonal skills
are needed to resolve technical
issues among a wide user group.
What's it like to work in Informa¬
tion Technology Milo is a self-
employed PC service specialist who
helps his customers solve their
computer problems.
Today, Milo is updating the
rates on his company web site.
These rates include the trip charge
to arrive at a client’s home or place
of business, the one-hour mini¬
mum labor charge, and the addi¬
tional fees for a partial hour
beyond the one-hour minimum.
After receiving a call from a
frantic client, Milo dashes off to the
client’s home. The client, who has a
home-based consulting business, has
a hard drive that is failing. Because
the client had accidentally dropped
his flash drive in a cup of coffee, he
had no backup for his files. Conse¬
quently, he needed help retrieving
critical files from his hard drive.
After saving the files to a new
flash drive, Milo suggests to his cli¬
ent that he consider investing in an
automated data backup service. For
a monthly fee, designated data
would be automatically saved to a
personalized web site that would
be password accessible for security
purposes.
What about you? Would you
like to help a variety of individuals
and businesses solve their com¬
puter technology problems?
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The Partnership with Business Project is based upon developing and
implementing the most innovative, creative, and effective partnerships
between the FBLA chapter and businesses. The purpose of this proj¬
ect is to learn about a business through communication and interac¬
tion with the business community. This project can be completed by
one to three students.
A report will be prepared that describes activities designed to bring
business leaders and FBLA members together in a positive working rela¬
tionship through innovative programs. The event should not involve
fundraising for the FBLA chapter. The report should include the fol¬
lowing sections: Development (description of the partnership goals,
description of planning activities used to build a partnership, roles of
business leaders and chapter members in developing the partnership);
Implementation (description of activities, level of involvement from
business leaders, roles of business leaders and chapter members); Results
(description of concepts learned from the project and the impact of the
project); Degree of Involvement (hours spent and contacts made); and
Evidence of Publicity (description of the recognition received as a result
of the partnership). Participating teams will be given seven minutes for
oral presentations to describe the project and the results. The judge has
three minutes to ask questions about the presentation.
PERFORMANCE INDICATORS EVALUATED
• Develop a partnership with business by describing partnership goals,
planning activities, and roles of business and FBLA leaders.
• Implement the project by describing activities, defining roles of partic¬
ipants, and encouraging involvement from business leaders.
• Describe the results from the business partnership project.
• Acquire knowledge of business operation by implementing an active
business partnership.
• Develop a stronger understanding and relationship between school
and the business community.
Go to the FBLA web site for more detailed information.
Think Critically
1. How can a business benefit from participating in the partnership?
2. How can the FBLA chapter benefit from the partnership?
3. Why is publicity so important for this project?
4. What is one strategy that could be used to increase involvement of more
businesses in this project?
www.fbla.org
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Chapter 11
11.1 Identify Your
Staffing Needs
11.2 Staff Your
Business
11.3 Direct and Control
Human Resources
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298
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IDEAS IM ACTIONJ
Working for What You Believe In
I n 1997, when Omar Faruk was 9 years old, he
emigrated with his family from Bangladesh to
the United States. He started working after school
to earn money for clothes and school trips. At age
14, he started his first business as a web site offer¬
ing one product for sale. The business did not turn
out to be very successful for Omar, but he gained
experience in setting up the web site. Omar knew
that there were many potential customers who
could use his web skills.
While a senior at Independence High School
in New York City, Omar started building web sites
for nonprofit organizations, and his business, Blue-
Stream, was born. Omar won several awards for his business, including
the National Foundation for Teaching Entrepreneurship's 2006 Entrepre¬
neur of the Year, Bank of America's Young Entrepreneur of the Year,
and Ernst & Young's Entrepreneur of the Year, of which he became the
youngest recipient.
Omar has a strong interest in social causes and now operates his busi¬
ness under the name LogicLotus. LogicLotus is focused on providing services
for nonprofits, social causes, and small businesses. He began with a business
plan but today manages his business through experiences and trying out
new ideas.
Today, Omar employs two individuals to assist him. He has found
some challenges in managing younger workers but feels that they are
willing to help carry out his vision for the business. He uses profit sharing
as the method of paying the employees, so the harder they work, the
more they earn.
Omar realizes that the key to growth is selling. Dreams are important,
but you have to take a good look at what you do and sell it to others.
Omar's "top tips" for aspiring entrepreneurs are as follows:
Omar Faruk, LogicLotus
• Failure is part of the process. Take life as an opportunity.
• Don't be afraid to ask for help. There are many people and organiza¬
tions willing to help you.
• Always carry paper and pen—ideas don't just come one at a time!
What do you hnow?
Although Omar started with a business plan, he does not use one now.
Do you think it would help Omar to have a current business plan?
Do you think paying employees with a profit sharing plan is an effec¬
tive payment method?
What do you think of Omar's top tips?
%
• •
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• •
Goals
HI
mi.i Identify Your
Staffing Needs
Explain how to deter¬
mine staffing needs for
a business.
Describe options for
recruiting employees.
Identify alternatives
to hiring permanent
employees.
staffing
job description
job analysis
chain of command
recruit
freelancers
interns
V
Focus on Small Business
Help wanted
Emanuelle started his contracting business six months ago. He specialized
in bobcat work and had more business than he could handle. He decided
he needed help and posted a "Help Wanted" sign along with his phone
number in front of his business. People began calling and stopping by, con¬
tinually interrupting his work. They wanted to know what type of work he
had and how much it would pay. Emanuelle didn't really know what to tell
them. He had not thought through the details of the posted position.
In his business, Emanuelle had a large amount of paperwork to do
and more bobcat work than he could keep up with. He realized that if
he had help with the administrative tasks, he would have more time to
devote to the bobcat work. But he could also use some¬
one else with bobcat experience to help out
as well. Emanuelle took down his
sign to determine exactly what
type of help he needed.
Work as a Team What do you
think Emanuelle should have
done before posting the "Help
Wanted" sign? What types of
positions could Emanuelle add?
Do you think using a sign in
front of his business is the best
way for Emanuelle to attract Think through your staffing needs before
qualified job applicants? posting a help wanted sign.
Staffing
The management functions of staffing, implementing, and controlling
can be directly applied to the people who work for your business. The
people who work for your business are your human resources. You may
not need to hire employees when you first start your business. But as
your business grows, you will find the need for employees. Good
employees and a well-run human resource management program are
as important to your business as are capital, equipment, and inventory.
300
Chapter 11
Human Resource Management
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Staffing involves deter¬
mining the number of employ¬
ees you need and defining a
process for hiring them. To
find out your staffing needs,
ask yourself these questions:
• What kind of employees do
I need?
• What skills am I missing?
• What skills do I need daily?
• What skills do I need
occasionally?
To answer these ques¬
tions, list all the duties in your
business. Then try to identify
how much time is needed to
perform each of these duties.
Your list should help you iden¬
tify whether you need part-time, full-time, or temporary workers. You
can also determine whether you need managers or assistants and how
many employees you need.
CD
CD
ro
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Q
O
O
-C
Q.
©
Develop Your
Reading Skills
Make an interactive note¬
book for this chapter.
Before you read, divide your
paper into two columns. In
the left-hand column re¬
cord notes about what you
are reading. In the right-
hand column, write notes
that will help you relate
what you are reading to
your everyday life.
Job Descriptions
A job is a collection of tasks and duties that an employee is responsible
for completing. A task is a specific work activity that is performed, such
as answering the telephone or answering e-mail. Many positions include
a variety of tasks that are sometimes referred to as functions. A job
description is a written statement listing the tasks and responsibilities of
a position. Job descriptions also include to whom the position reports,
educational and professional experience required, and salary range.
Job descriptions are written after conducting a job analysis, which
is the process of determining the tasks and sequence of tasks necessary to
SAMPLE JOB DESCRIPTION
Title: Account Executive
Tasks and Responsibilities: Plans, coordinates, and directs advertising
campaigns for clients of advertising agency. Works with client to
determine advertising requirements and budgetary limitations.
Coordinates activities of workers engaged in marketing research,
writing copy, laying out artwork, purchasing media time and space,
developing special displays and promotional items, and performing
other media-production activities.
Qualifications: College degree with courses in marketing, leadership,
communication, business, and advertising; sales experience;
interpersonal and written communication skills; neat professional
appearance; characteristics of self-motivation, organization,
persistence, and independence
Reports to: Marketing Manager
Salary Range: $30,000 to $50,000, depending on experience
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perform a job. You will need to understand exacdy what every job
involves so that you can determine how much money to offer job appli¬
cants. A detailed job description will make clear the job responsibilities. If
a sales assistant objects to answering phones, you can refer that employee
to the job description that lists this task as part of the job. Job descrip¬
tions also can be used to measure how well an employee performs a job.
Organizational Structure
Once your company has several employees, you will need an organiza¬
tional structure. An organizational structure is a plan that shows how
the various jobs in a company relate to one another. Many businesses
use a chart to represent the organizational structure. The organizational
chart can also help you analyze your stalling needs. Using the chart dur¬
ing planning can help you identify the number and types of employees
you need. When planning, you can list positions and primary responsibil¬
ities of each. Then as employees are hired, you can fill in the names.
The organizational chart shows who reports to whom in the
company, or the chain of command. In a small business, all employ¬
ees may report directly to the company owner. In large companies,
lower-level employees usually report to a supervisor. This kind of
organizational structure ensures that the owner is not called upon to
deal with relatively unimportant issues that could be handled more
efficiently by a lower-level manager.
Sandra Wilson owns Northcliffe Publishing. Sandra has an organi¬
zational structure where the heads of the four departments report to
NORTHCLIFFE PUBLISHING, ORGANIZATIONAL CHART
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Do you think a want ad in a newspaper is a good way to find job candidates?
Why or why not?
the vice president, Robert Gotting. Robert in turn reports direcdy to
Sandra. This structure helps Sandra devote her time to long-term
issues, such as expanding the company into new areas or increasing
sales and market share.
Checkpoint
How do you determine staffing needs
Recruiting
To recruit is to look for people to hire and attract them to the business.
As the owner of a small business, it may be difficult for you to attract
experienced employees to work for your business. They may have oppor¬
tunities to work for larger, established businesses that can offer them
higher pay and better benefits. You can use a variety of resources for
recruiting, including classified advertisements, online career and employ¬
ment sites, employment agencies, college placement centers, in-store
advertising, and referrals.
Classified Advertisements
Using the local newspaper for advertising is a good way to attract a
large number of applicants. The advertisement that you place in the
newspaper is called a want ad. It should briefly describe the position
and the education and experience requirements. It should also identify
any special job requirements, such as willingness to travel or to work
evenings. You should request resumes and cover letters from appli¬
cants interested in the position. Sometimes employers ask for specific
information in the cover letter, such as salary requirements, date of
availability, or other useful information. If you do not want to give
the name of your business in the ad, newspapers have PO boxes to
which applications can be sent. You should screen the resumes to
determine which applicants you want to interview.
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Why are online career web sites becoming a popular way to recruit employees ?
Online Career and Employment Sites
Many people now use the Internet to look for a job, so many employ¬
ers are advertising with online career and employment sites. Most
online employment services allow you to post a job and then search
the resumes that are sent in response to the posting. Some on li ne
employment services have a database of resumes that you can review
when you are looking for someone to fill a specific job. According to
Monster.com, job seekers post over 27,000 new resumes and conduct
3.9 mil lion job searches on its site every day. O nli ne recruiting can be
very expensive, so you should compare alternatives and be sure that
this is the best method for your business.
bookmark
Manpower, Inc., provides workforce manage¬
ment services to customers through 4,400 offices
in 73 countries. The firm annually provides
employment to more than 4 million people.
Access school.cengage.com/entrepreneur/
ideas and click on the link for Chapter 11
to learn more about Manpower's services.
Why might a small business owner turn to
companies like Manpower to recruit employ¬
ees? Name one possible drawback a small
entrepreneur might face when using an
employment agency for recruiting.
school.cengage.com/entrepreneur/ideas
Employment Agencies
Employment agencies find employees for businesses and other institu¬
tions. These firms try to match people looking for jobs with businesses
looking for employees. They charge businesses and/or the job seekers
a fee when they are successful in making a
match. Seeking applicants through an employ¬
ment agency saves time for the employer in
screening applicants, but the cost is higher than
a classified advertisement.
College Placement Centers
Most colleges and universities operate job place¬
ment centers. These offices collect information
on career and employment opportunities, which
they make available to their students and gradu¬
ates. Generally, they do not charge a fee for
their services. If college students or graduate
sUidents might be suitable for your business,
contact local colleges and universities and ask
them what you need to do to have your busi¬
ness listed with their placement center.
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In-Store Advertising
Have you ever walked into a store and seen a sign that says “Help
Wanted” or “Now Hiring”? This is another method of recruiting that
businesses use. When you post a sign, interested applicants will come
into your business and fill out an application form. Before placing a
sign in the window, be sure you will have time to deal with the many
people who may stop to inquire about the position. You can interview
them at that time or set up an interview at another time. If you inter¬
view everyone who comes in, you need to realize that this will be very
time-consuming.
Referrals
One of the best ways entrepreneurs find employees is by acting on
referrals from friends, acquaintances, or employees. If you consider
the person making the recommendation reliable, a referral may require
very little screening. However, many business owners do not like to
hire friends or relatives of current employees because it can sometimes
create other problems.
Checkpoint
What resources can you use for recruiting employees?
Alternatives to Adding Staff
Adding employees to your payroll is costly. It takes time and money
to recruit staff and to track, report, and pay their salaries, benefits,
and tax withholdings. In many cases, you may need help but not have
sufficient work to keep a permanent, full-time employee busy. For
these reasons, you may want to consider alternatives to permanent
employees, such as hiring freelancers, interns, and temporary workers.
Freelancers
Freelancers are people who provide specialty services to businesses
on an hourly basis or by the job. Examples of freelancers include
bookkeepers, accountants, lawyers, graphic designers, window display
artists, and advertising copywriters. Business owners use freelancers
when they need to have a job done but do not have enough of the
required type of work to warrant hiring a permanent employee.
Interns
Interns are students who will work for little or no pay in order to
gain experience in a particular field. To find out whether interns are
available in your community, contact local colleges and high schools.
If you hire an intern, you will most likely have to work with a college
or high school intern coordinator to ensure certain program require¬
ments are fulfilled. It is your responsibility to provide a valuable learn¬
ing experience for the intern.
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Temporary Workers
Businesses that need additional
help often use temporary work¬
ers. Some temporary workers are
seasonal employees. Other tem¬
porary workers are substitutes
for employees who are sick or
on a leave of absence. Tempo¬
rary employment agencies pro¬
vide trained workers for various
kinds of businesses. A business
that uses a temporary employee
pays a fee to the agency. The
agency in turn manages the
worker’s salary and benefits.
Why would a business hire a temporary worker?
Checkpoint
What are some alternatives to hiring permanent employees?
Ti.i Assessment
THINK ABOUT IT
1. Why is it important for a company to have an organizational
structure that allows the owner to focus on long-term issues?
2. List some advantages of using an employment agency.
3. What would be some disadvantages of hiring freelancers and
temporary workers?
306 Chapter 11
MAKE ACADEMIC CONNECTIONS
4. PROBLEM SOLVING Create an organizational structure for a
30-person local package delivery service. First, determine all the
types of employees the business would have. Then create the
chart based on your decisions.
5. RESEARCH Create a resource guide containing online career
and employment web sites, employment agencies, and college
placement centers that could be used to help meet staffing
needs. Include contact information for each resource.
Form teams. Choose a business in your community. Decide what the
best method would be for it to recruit new employees. Design an
advertisement that could be used for the method you select. If you
select referrals as the best method, design a referral request form
that could be sent to friends, acquaintances, and current employees.
Human Resource Management
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wages
salary
bonus
profit sharing
commission
benefits
V
Focus on Small Business
Whom to hire?
Emanuelle took a good look at his business needs and decided that he
would hire an administrative assistant to help him. If he had someone in
the office to answer the phone, schedule work, and handle the billing, it
would allow him to spend more time at job sites. He put an ad in the
local newspaper and had several candidates contact him. Now he had to
decide who to interview.
Emanuelle's sister, JoAnna, had run her own business
for several years, so he went to her for advice. JoAnna
recommended that he have candidates complete an
application form. He could review the provided infor¬
mation and check with their references to determine
who is really qualified for the job. Then he could set
up interviews with the best candidates.
"So, JoAnna," Emanuelle asked, "do you have
an application form lying around here anywhere?"
Work as a Team Do you think that JoAnna
gave Emanuelle good advice about selecting
candidates to interview? Why do you think it
is important to review and verify the informa- consider the skills needed to
tion that applicants provide? improve your business.
The Hiring Process
Hiring employees is often difficult because it requires making very
important decisions based on fairly limited information. How should
you decide whom to hire? The four-step hiring process involves
(1) screening candidates, (2) reviewing and verifying job applications,
(3) interviewing the best candidates, and (4) making a job offer.
Screen Candidates
The first step in the hiring process is to screen candidates to remove people
who are not right for the job. This allows you to focus on the most quali¬
fied candidates. The job description identifies the specific requirements
needed to perform a particular job. You need to match the job candidate’s
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Staff Your Business
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experience and skills with the job description. You should also look for
personal characteristics that would make a person a desirable employee.
Michael Johnson, owner of Johnson’s Medical Supply, ran a
want ad in the local newspaper. He was looking for a person with at
least five years of experience selling medical equipment. He received
more than 150 responses to his ad. However, 120 of the resumes he
received were from people with no experience in the field. Michael
immediately removed those from the stack of possibilities. Next, he
carefully examined each resume and cover letter and selected ten can¬
didates to interview based on their experience.
Review and Verify Job Applications
You will need to have potential candidates complete an application. There
are standard application forms that you can use, or you can design one
that will meet your specific needs. The application allows you to gather
information that might not be included on a resume. If you decide to
design your own application, you can use the job description as a guide
to gather the information you need about the candidate’s experience.
Once you have applications and resumes from candidates, you
need to verify that the information provided is correct. The first thing
you should do is check references. Call previous employers to make
sure the applicant held the positions listed on the resume. Ask what
they can tell you about the person. Describe the job opening, and ask
the previous employers if the candidate would perform well in such a
position. Other questions can revolve around the personal qualities of
the candidate, such as interpersonal skills and punctuality. Request
that the candidate provide an official transcript from schools they
attended to verify education and training.
Interview the Best Candidates
The job interview provides you with the opportunity to determine
whether a prospective employee would improve your ability to meet
customer needs. It is also your chance to make your small business
appealing to a prospective employee. Making the most of the job
interview is as important for you as it is for the job candidate.
SELL YOUR BUSINESS During the interview, make your small busi¬
ness appear inviting and appealing to prospective employees.
Share your values and plans for the business. Help the applicant
understand your vision for the business.
Talk about the significance of working in a new business. Empha¬
size the importance of the contributions the applicant would make
in the development and growth of a new business.
Explain the atmosphere in which the candidate would work.
Make sure the applicant understands that a small business can foster an
environment of flexibility and caring. Some people would rather work
in a small business that is not as structured as a large corporation.
Describe your bonus system. With a small startup business, you
may not be able to pay a large salary, but you can offer an attractive
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bonus or benefits package. Explain
that if the business does well, you
will share some of the profits with
those who help you succeed.
MAKE THE INTERVIEW EFFECTIVE
To ensure that you use your time
during the interview effectively,
follow these basic rules:
1. Be prepared. Make a list of
open-ended questions you
want to ask. Review the job
candidate’s resume and applica¬
tion again just before the inter¬
view begins.
2. Be courteous. Do not be late for the interview. Avoid taking
phone calls during the interview. Try to put job candidates at ease
by offering them something to drink. Make them feel welcome in
your office.
3. Avoid dominating the interview. Remember that the interview is
your opportunity to get to know the job candidate. To do so, be
sure to allow the applicant plenty of time to speak.
4. Take notes. Throughout the interview, jot down your impressions
of the candidate as well as any interesting information he or she
reveals.
5. Look for warning signs. Signs that a person may not be a good
worker include frequent job changes, unexplained gaps in employ¬
ment, and critical comments about previous employers.
6. Don’t make snap judgments. Don’t rule out a candidate until the
interview is over.
7. Remain pleasant and positive throughout the interview. At the
end of the interview, thank the candidate for coming and let him
or her know when you plan to make a decision.
8. Write a summary of your impressions of the candidate. Write
your summary immediately after the interview while your thoughts
are still fresh. Put this document in the candidate’s file.
SAMPLE INTERVIEW QUESTIONS
1. What interests you about the job?
2. How can your skills and experience benefit the company?
3. What are your career plans? How does this job fit in with
those plans?
4. What other positions have you held? What did you like
and dislike about those positions?
5. What were your achievements at your previous jobs?
6. Why did you leave your last job?
7. How do you think your education has prepared you for
this job?
8. What kind of work do you enjoy most? What makes a
job enjoyable for you?
9. Describe a situation where you had to manage conflicting
priorities.
Make a Job Offer
When you have decided to make a job offer, contact the person by
phone. Let the person know you were impressed with his or her cre¬
dentials. Be sure to emphasize how much you would like the appli¬
cant to join your company. Clearly state the starting salary, benefits,
and terms of employment. If the first applicant declines your offer,
extend the offer to your second choice and then to your third choice,
if necessary.
Once a candidate accepts your offer, contact the remaining candi¬
dates. Thank them for interviewing with your business, and politely
let them know that you have given the job to another applicant.
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Checkpoint
What are the four steps in the hiring process?
Compensation Package
As an entrepreneur with paid employees, you will need to create a
compensation package. The package will include some type of pay
and may also provide a variety of benefits. The benefits package can
influence a candidate’s decision on whether or not to take a position
with a company.
Types of Pay
There are many ways you can choose to pay
your employees. The terms “wages” and “salary”
are often used interchangeably, but there is a
difference. Wages are payments for labor or
services that are made on an hourly, daily, or
per-unit basis. The paycheck for a person earn¬
ing a wage will vary depending on how many
hours are worked or how many units are manu¬
factured. A salary is an amount paid for a job
position stated on an annual basis. Regardless
of the number of hours the person filling the
position works, the amount of money the
salaried employee is paid does not vary. Wages
and salaries can be paid weekly, biweekly, or
monthly. Employees may also receive a bonus,
which is a financial reward made in addition to
a regular wage or salary. Bonuses usually hinge
on reaching an established goal. Profit sharing
is another compensation arrangement in which employees are paid a
portion of the company’s profits.
Some employees are on commission-based salary plans. A
commission is a percentage of a sale paid to a salesperson. A
commission-based salary varies from month to month depending
on sales. Those receiving this type of salary may be paid using a
commission-only plan or a combination plan.
Why are many salespeople paid using a commission plan?
COMMISSION-ONLY PLAN Some employees, especially those in sales,
receive all of their salaries in commission. Commission-only plans are
good for employers, because commissions are paid only when sales are
made. Some employees may not want to accept a commission-only
position, because they are not comfortable with the uncertainty of not
knowing what their actual pay will be from pay period to pay period.
Lyn Kovacs works entirely on commission. Last year, Lyn sold
$490,000 worth of electronic devices. She received ten percent of her
sales as commission. Her annual salary was $49,000, as calculated below.
Amount sold x Percent of commission = Amount of commission
$490,000 x 0.10 = $49,000
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COMBINATION PLAN An employee may be paid based on a combi¬
nation plan. A combination plan includes a base salary plus commis¬
sion. Employees may feel more comfortable accepting a position that
offers this type of payment plan.
Hector Marquez sells men’s clothing at a local department store.
He earns $6.75 an hour, plus ten percent of whatever he sells. Last
month, Hector worked 158 hours and sold $11,500 worth of clothing
His total monthly compensation was $2,216.50, calculated as follows:
Base Pay
(Hours x Hourly wage)
(158 x $6.75)
$1,066.50
+ Commission
+ (10% x Sales)
+ (0.10 x $11,500)
+ $1,150.00
Total Pay
Total Pay
Total Pay
$2,216.50
did you KNOW?
c minimum
W 3 S e law was first
enacted i n 1933 the
established minimum
»*ge was just 25 cents
Per hour.
PAY COMPETITIVELY In most markets, wages and salaries are com¬
petitively determined. This means that an employer who offers much
less than the going wage or salary rate is not likely to find qualified
workers. To offer competitive wages or salaries, you will have to find
out how much similar businesses in your area are paying their employ¬
ees. You should also find out what people are earning in jobs with
similar qualifications. Once you know the going wage or salary rate,
you will have to decide whether you want to offer more than, less
than, or about the same as other businesses. Offering more than other
businesses will attract the best employees.
Bob Aylward owns a limousine service. He knows that finding
and keeping good drivers is difficult. To make sure his compensation
package is attractive, he regularly finds out what other limousine com¬
panies are offering. He then sets a starting salary that is three percent
higher. He also offers a few more days of paid vacation than his com¬
petitors. Bob hopes that these things will attract drivers that will stay
with his company for many years.
Benefits
Benefits are employment rewards for service in addition to salary.
They may include paid leave, insurance, and a pension plan.
PAID LEAVE Almost all employers offer paid vacation and sick time. Both
kinds of leave represent costs to employers, because employees are paid
while they are not working. Be aware that some employees may abuse paid
leave. You or someone in your business should keep a record of the paid
leave employees take and watch for patterns that might indicate abuse.
Businesses handle vacation in various ways. Many offer one or two
weeks of paid vacation a year to new employees. Employees usually gain
more vacation time the longer they work at a business. Some businesses
let employees carry over unused vacation days from year to year while
others require employees to use their vacation time each year.
Sometimes your employees will not be able to work because of
illness. The number of days of sick leave provided varies from business to
business. Some businesses offer only five sick days a year. Others allow
employees unlimited sick leave. You will have to develop a sick leave
policy that is fair to your employees but not excessively costly to you.
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INSURANCE Many businesses offer health insurance as a benefit to
full-time employees. The cost to small businesses to provide insurance
coverage can be quite high. Large businesses receive discounted group
rates but may still require employees who opt for this benefit to pay a
portion of the cost. Businesses may also offer other kinds of insurance
such as dental insurance, life insurance, and accident insurance.
RETIREMENT PLANS Some businesses help employees save for retire¬
ment by offering 401(k) plans. Employees that participate in 401(k)
plans have a percentage of their earned income withheld by the
employer to be deposited into a professionally managed investment
account. Some employers will match employee’s 401(k) contributions
as much as 50 cents per dollar invested. The funds will continue to
grow tax-free until they are withdrawn by the retiree upon reaching
retirement age. Pension plans are another type of employer-sponsored
retirement savings plan, but they are not as common because they are
more costly to a company.
Checkpoint
What may be included in a compensation package for employees?
Famous
J. K. 'Rowling
Ask successful people how to succeed,
and they will always tell you to do
what you love. For a fortunate few,
that formula works. Such is the case
with J. K. Rowling, creator of Harry
Potter and one of the most successful
writers in the world today.
Rowling always wanted to be
a writer and eventually became one,
but before Harry and success came a
young adulthood full of indecision.
Her favorite subject in school was
English, and she liked studying lan¬
guages too. Rowling went to Exeter
University and studied French. Her
parents thought languages would lead
to a career as a bilingual secretary.
She discovered that she liked nothing
about being a secretary and spent
time working on stories at the com¬
puter when she thought no one was
looking. Such misbehavior eventually
got her fired, so Rowling went abroad
to teach English as a foreign lan¬
guage in Portugal. With her morn¬
ings free, she began work on her
third novel after giving up on two
others when she realized how bad
they were.
When she left Portugal, her
suitcase was filled with stories
about Harry Potter. She settled in
Edinburgh and decided to finish
the novel and try to get it pub¬
lished before starting work as a
French teacher. A publisher bought
the book one year after it was
finished. The road to success for
J. K. Rowling had begun!
Think Criticallv What can you learn about
, „ _ .. r y . entrepreneurship from
J. K. Rowling found great success as j K Rowling's experiences?
a writer, but her experience as an
employee was not very successful.
Why do you think this is often the
case with entrepreneurs?
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Regulations that Protect Employees
There are many laws designed to prevent discrimination and promote
health and safety in relation to employment. It is important to con¬
sider these regulations as you develop your staffing plan.
Fair Labor Standards Act (FLSA) of 1938
The FLSA establishes the maximum number of hours employees can
work. It includes rules for children under the age of 16 who work
and pay rates for overtime work. The act also outlines the national
minimum wage.
Civil Rights Act of 1964
Title VII of the Civil Rights Act prohibits discrimination on the basis
of race, color, religion, sex, or national origin in hiring, promotion,
discharge, pay, fringe benefits, job training, classification, referral, and
other aspects of employment. This law is enforced by the Equal
Employment Opportunity Commission (EEOC), a government
agency established by Congress in 1972 to regulate labor laws.
Age Discrimination in Employment Act of 1967
The purpose of this act is to promote employment of older persons (40
and over) based on their ability rather than their age. It prohibits arbitrary
age discrimination in employment and helps employers and workers find
ways of resolving issues that arise from the impact of age on employment.
Occupational Safety and Health Act (OSH Act) of 1970
The OSH Act requires that employers maintain safe working conditions
for their employees. To comply with the act’s regulations, you must
keep records that show the steps you have taken to protect the welfare
of your workers and to keep your workplace safe. If employees have to
work with dangerous equipment or substances, you must provide them
with special training. If the Occupational Safety and Health Administra¬
tion (OSHA) suspects that your business has unsafe practices, its inspec¬
tors will examine your facility and may require you to make changes.
Immigration Reform and Control Act of 1986
This act requires that employers check the identification of employees
hired after 1986 to ensure that they are legal citizens of the United
States. It also established the Office of Special Counsel for Immigration-
Related Unfair Employment Practices to enforce antidiscrimination
provisions.
Americans with Disabilities Act (ADA) of 1990
The ADA bans discrimination against employees based on disabilities.
It requires businesses with 15 or more employees to accommodate
the needs of employees with disabilities, even if the firms currently
do not have disabled employees. The intent of the ADA is to protect
job applicants and employees who are legally disabled but are qualified
for a specific job. An employee is qualified if he or she can carry out
11.2
Staff Your Business
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the necessary functions of the job with some type of reasonable
accommodation.
Family Medical Leave Act of 1993
This act requires businesses with more than 50 employees to provide
employees up to three months of unpaid leave if a serious health con¬
dition affects the employee, the employee’s child, or the employee’s
parent or spouse. This act also makes it possible for male and female
employees to take leave in the event of a birth or adoption of a child.
Checkpoint
Why do we need laws to help protect the rights of employees?
ii.2 Assessment
THINK ABOUT IT
1. Why is it important for an employer to check the information
and references provided by a job applicant?
2. Why is the compensation package important to potential
employees?
3. Why is it important for small business owners to have an under¬
standing of the laws designed to protect employees?
MAKE ACADEMIC CONNECTIONS
4. RESEARCH Find and compare three advertisements for the
same type of job. Are the qualifications requested the same?
How are they different? Is any mention of compensation made?
If so, how is it structured? Research the going wage for this posi¬
tion. What do you think is a fair wage for this job?
5. MATH You have an open sales position in your company that
pays a salary of $21,000 per year. You discover that another
company with a similar sales position offers a combination plan
of $12,000 per year plus a commission of 15 percent of sales.
Average sales are $90,000. Which job has the potential for higher
earnings? Do you need to adjust your salary? Why or why not?
TEAMWORK
When interviewing job candidates, there are questions you cannot
legally ask. Using the Activity CD, open the activity "What Can You
Ask in an Interview?" and print a copy. Working with a partner,
review the list of interview question guidelines. Then, think of a posi¬
tion in a company and make a list of interview questions adhering to
the guidelines. Role play an interview for the position.
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■
Goals
•'1
m
Direct and Control
Human Resources
Explain what should be
included in the imple¬
mentation of your staff¬
ing plan.
Discuss ways to moti¬
vate your employees.
Describe the control
function of management
as it applies to human
resources.
I
Terms
delegate
performance
evaluation
\l Focus on Small Business
You've hired someone, now what?
Emanuelle carefully screened the applicants for administrative assistant,
interviewed a couple of candidates, and offered the position to Vivian.
Vivian reported to work bright and early on a Monday morning.
Emanuelle reviewed her job description
with her, showed her how the phone
system worked, and then headed out
to do some bobcat work.
He hadn't been gone 20 minutes
when his cell phone started ringing. It
was Vivian. She was in a panic because
she had received several calls about
bobcat services. Customers wanted to
know the costs and when they could be
scheduled for service. Vivian didn't know
what to tell them, and some customers
became impatient and demanding.
Emanuelle quickly turned his truck around
and headed back to his shop. On the way
there, he tried to figure out what to do.
Work as a Team What mistakes do
you think Emanuelle made after hiring
Vivian? What does he need to do now?
Well-trained employees help a business
succeed.
0 »
CD
03
E
a>
§
a
o
o
-C
a_
©
Implement Your Staffing Plan
Once you have people working for you, you become a manager. This
means that you will no longer focus all of your efforts on doing your
own job. You will be implementing , which involves directing and lead¬
ing people to accomplish the goals of the organization. As a manager,
you will have to exhibit leadership and motivate your employees.
To manage your staff effectively, you need to understand the
levels of management and develop good leadership qualities. This will
help you create a workforce that is dedicated to meeting customer
needs and increasing sales.
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Understand the Levels of Management
There are three basic levels of management: supervisory level, middle
level, and top-management level. The amount of responsibility varies
with the level of management. As the manager moves up, the amount
of responsibility increases. The number of managers at each level will
vary depending on the size of the company. In a new business venture,
the entrepreneur may serve in all levels of management. A large corpo¬
ration may have many individuals working as middle and supervisory-
level managers.
Supervisory-level managers work directly with the workers on the
job and are responsible for implementing the plans of middle manage¬
ment. Middle managers serve as a liaison between the supervisory-level
and the top-level managers. They are responsible for implementing the
goals of top management. Top management has the highest level of
responsibility and is responsible for establishing the vision for the company.
Apply Leadership Styles
As you learned in Chapter 10, managers will develop a style or way of
working with those whom they supervise. Leadership styles have changed
over the years as the workplace has changed. Successful managers today
often empower their employees and give them the authority to make
decisions without supervisory approval. Empowerment gives employees a
sense of responsibility and pride in accomplishment. It also reduces delays
in the flow of work and reduces the workload of the manager.
However, not all managers use this style. There are many differ¬
ent leadership styles. Some managers use fear and intimidation and
manage their employees as if they are lazy and cannot be trusted.
They are called Theory X managers and
use the authoritative management style.
Other managers trust and respect their
employees and value their contributions.
They are called Theory T managers and
use the democratic management style.
Some managers reward employees for
good work. In your working career, you
will encounter many different leadership
styles. When you become a manager,
incorporate the qualities you like in other
leaders into your leadership style.
Enforce
As the owner of your own business, you
will establish policies concerning vacations,
holidays, hours, acceptable dress, and
other issues affecting your workers. You
will need to make sure that all of your
employees are familiar with these policies.
You may need to gently remind employ¬
ees of policies if they fail to follow them.
Employee Policies
be your own boss
You own a floral design studio. Last year, you
promoted Philip, one of your designers, to man¬
ager of the studio. Philip had shown excellent
design skills and was eager to take on new
responsibilities. Recently, Philip has become
increasingly possessive of information about what
is going on in the day-to-day management of the
floral shop. Several major problems with important
customers have surfaced that Philip knew about
but had not shared with you. Business from two
of these customers has decreased during the last
quarter. Also, several staff members have come
to you privately with complaints about Philip's
management practices. Tina, who has worked for
you for over ten years, is threatening to quit. Use
the six-step problem-solving method to deter¬
mine how you will handle the issues with Philip.
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Many companies communicate policies to staff by creating an
employee handbook. These handbooks can be just a few pages long
or they can fill a small binder, depending on the size of the company
and the number of policies.
Train Your Employees
You will need to develop a training program for your new employees.
This program should begin as soon as they are hired. Training should
not end when the employee learns how things are done. Continuous
training ensures that employees are always knowledgeable and up to
date on changes affecting the business.
There are many ways to provide training to employees. You may
use different techniques for different job responsibilities. You will need
to decide which is best for you, your business, and the employee.
• On-the-job training Employees learn new responsibilities by
actually performing them at their place of business.
• Coaching Employees receive feedback and instruction from their
manager on a constant basis.
• Mentoring One employee teams up with another more experi¬
enced employee to learn a job.
• Conferences and seminars Employees attend conferences and
seminars to learn about new techniques and trends from an expert
in the field. These are usually held off-site.
After training, you need to make sure employees are using that
training and that the training was effective. Justin Reynolds needs to
train his employees on the new computerized inventory system he
wants to use. He brings in a representative from the software company
to provide a training session. Justin will know the training was effective
if employees understand the software and are able to use it.
Why are conferences and seminars valuable training methods?
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Checkpoint
What should be included in the implementation of a staffing plan?
Motivate Your Employees
To get the most out of your employees, you will have to motivate
them. You can do so in several ways.
1. Pay employees well. When employees feel they are compensated
well, they will be happier. They will perform to the best of their ability.
2. Treat employees fairly. Everyone wants to be treated well. Be
sure to treat everyone the same.
3. Recognize employees for the work they do. Offer public recog¬
nition for a job well done. Praise employees frequently.
4. Give employees adequate responsibility. Employees who are
allowed to make decisions on their own often work harder. They
take pride in the fact that their input makes a difference.
WHAT WENT WRONG
*
Whom Do You Trust?
Sandy Warren formed Motiva International,
a sales motivation and consulting company.
Sandy felt it was very important to involve
her employees in all business operations. At
weekly meetings, she shared and discussed
confidential company details with the com¬
pany's 18 employees. Sandy soon learned that
there were some things that should not be
shared.
The company was experiencing some cash
flow problems, and Sandy discussed this with
the employees. Employees became concerned
that they would not get paid, which distracted
them from their job duties. Because work
wasn't getting done, customer relations suf¬
fered. At another meeting, Sandy told her
employees about a deal she was about to close
with a new client. One excited employee told
someone outside the company about the new
client. This leak of information enabled a com¬
petitor to develop a stronger proposal and steal
away the new client. Losing that deal forced
Sandy to lay off employees, go deeper into
debt, and finally dissolve the company.
Think Critically
1. How do you determine what company
information should be reserved for man¬
agement and withheld from employees?
2. Would you have fired the employee who
leaked the information regarding the
potential new client? Why or why not?
Carefully consider what information to
share with employees.
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Why should a manager encourage employees to share their opinions and ideas?
Delegate Responsibility
Many entrepreneurs have difficulty delegating responsibility. To
delegate is to let other people share workloads and responsibilities.
Employees who are given more responsibility are better motivated and
contribute more to the company. Delegating responsibility to them
allows you to make the most of their experience, talents, and skills.
As a business owner, delegating allows you to focus on important
items, such as expanding into new markets or offering new products.
Assigning paperwork and other duties that can be performed by some¬
one else will free up your time.
Finally, delegating responsibility is essential if a company is to grow.
When your business is small, you may be able to handle all areas of its
management. If the company is to expand, you will have to let managers
take on more and more responsibility.
Listen to Employees
Some entrepreneurs fail to listen to their employees. In doing so, they
miss out on an opportunity to take advantage of valuable ideas and
resources that can help them increase profits.
The people who work for you are very familiar with your busi¬
ness and may be able to offer fresh ideas. Listening to new points of
view may help you come up with new, creative solutions. If you value
the opinions of your employees, they will feel they are a valuable asset
to your company. This feeling of importance will keep them moti¬
vated to do a good job for you.
Checkpoint
How can you motivate employees?
11.3 Direct and Control Human Resources 319
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Control Human Resources
The controlling function of management involves setting standards
for the operation of a business and ensuring those standards are met.
In the area of human resources, it is necessary to establish perfor¬
mance standards for employees and then evaluate employees periodi¬
cally to be sure they are meeting the performance standards. This
process can help you identify outstanding employees who should be
promoted and problem employees who should be dismissed.
Evaluate Employees
Most businesses perform an employee review
once or twice a year in which they analyze each
employee’s performance and determine the
increase in the employee’s salary. The job
description should be used when evaluating
how well an employee has fulfilled all of his or
her job responsibilities. Some of the items that
are usually evaluated include dependability, punc¬
tuality, attitude toward job and coworkers, and
success in achieving predetermined objectives.
A performance evaluation serves as a
management control tool that helps determine
whether the objectives for a particular job are
being met. The evaluation process is also useful
to the employee. It helps the employee recog¬
nize strengths and see where there is room for
improvement. As part of the process, plans for
mentoring, training, and practice should be put
in place to help improve the employee’s perfor¬
mance in areas where needed.
During the performance review, the reviewer should focus on the
positive aspects of the employee’s performance. Productivity should
be reviewed, and the employee and reviewer should work together to
set new objectives for the upcoming period. The review should be
recorded on an appraisal form. The form should include the employee’s
name and job title, as well as the manager’s name, the date range the
review covers, job responsibilities and attributes, places for comments,
goals for the next year, and a section outlining plans for employee
development. A ranking method can be used to easily mark how well
the employee has performed.
Performance reviews should be conducted face to face. A written
summary of the review should be kept in the employee’s file.
Promote Employees
Promoting good employees will help ensure that they remain inter¬
ested in working for your business. Employees often compete with
one another, so promoting one over the other may cause problems.
Be sure you make all decisions fairly. Base your decisions on solid
reasons, such as volume of sales and quality of customer service.
Why are performance evaluations important to both the
employer and employee ?
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PERFORMANCE APPRAISAL
DATE: January 21, 20-
NAME: Daniel Tisdale Reports To: Laureen Stiles
JOB TITLE: Marketing Director Review Period: 1/1 to 12/31
Attribute
Well Above
Standard
Above
Standard
Standard
Below
Standard
Far Below
Standard
Quantity of work
/
Knowledge of work
/
Ability to organize
/
Ability to meet deadlines
/
Dependability
/
Judgment
/
Initiative
/
Communication
/
Management of others
/
Teamwork
/
Comments
You have done an outstanding job of increasing sales. Your hard work, dependability, and initiative are very
much appreciated.
Areas for Improvement:
1. Increase technical knowledge to improve the quality and quantity of work.
2. Improve written communication skills by enrolling in a business writing course.
3. Improve management skills, in particular by delegating more responsibility to your marketing assistants.
4. Increase ability to participate as part of team.
Goals for Coming Year:
1. Increase store sales 12 percent.
2. Oversee completion of company web site.
3. Generate online sales of $75,000.
Employee: Daniel Tisdale Manager: Laureen Stiles
Dgwgl TIsA<70e _ ‘rfllg'Z _
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Dismiss Employees
Some employees may not work out. In fact, they may end up hurting
your business. How will you handle such situations? As soon as you
notice an employee not performing well or causing problems, discuss
the situation with him or her. If performance does not improve, issue
a written warning. If there is still no improvement, you will need to
dismiss that employee. Record the reasons for the dismissal.
Checkpoint
Why is it important to conduct employee performance evaluations at
regular intervals?
ii.3 Assessment
THINK ABOUT IT
1. What is the difference in a Theory X and a Theory Y manager?
Which leadership style do you think is more effective? Why?
2. Why do many entrepreneurs find it difficult to delegate?
3. Why do you think it is important to keep a written summary of
a performance evaluation?
MAKE ACADEMIC CONNECTIONS
4. COMMUNICATION Barry Sandler, owner of Sandler's Custom
Computers, has decided to change the way sales associates are
paid. Salaries are by commission only—hourly wages are not
paid. Barry wants to get suggestions from his sales team. Your
teacher will role play Barry Sandler. You and other students will
role play the sales associates. As a class, decide on a new com¬
pensation method.
5. COMMUNICATION Using the Activity CD, open the activity "Per¬
formance Evaluation." Print a copy. With a partner, role play an
employee and employer participating in a performance review.
Assume the employee is a good worker who deserves a promo¬
tion. Make up the employer and job. Complete the performance
evaluation form.
TEAMWORK
You manage a department in a business that is in the midst of
change. Your employees have heard many rumors about job changes,
possible layoffs, and pay reductions. Morale in the department is at
an all-time low. Working with teammates, develop a plan to moti¬
vate your employees to achieve high performance standards and
keep a good attitude in the midst of all the changes. Share your
motivational plan with the rest of the class.
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Sharpen Your
Entrepreneurial Skills
Promoting Teamwork
In many activities, the ability to work together as a team determines
whether or not a group’s efforts will be successful. A sports team can¬
not win if its players do not work well together. Astronauts working
on the space station cannot complete their mission if crew members
do not cooperate.
Teamwork is important in many businesses. Employees who work
as a team are usually very committed. They are more likely to work
harder and to come up with cre¬
ative ideas for increasing profits.
You will want your business
to have an environment in which
employees feel part of a team
and work toward common goals.
Respecting, communicating with,
and getting along with coworkers
are all important team behaviors.
Creating this type of atmosphere
can be a challenge.
As the owner of the business,
it will be up to you to provide the
leadership that will allow your
employees to work together as a
team. To be an effective team
leader, you will need to do the
following.
• Establish trust among team
members and gain their trust.
• Make sure that all team members understand the goals you have
set for the business.
• Encourage team members to be creative and innovative.
• Make team members feel like partners in your business.
• Help team members learn from their mistakes.
• Build the team’s commitment to achieving the goals you have set.
TRY IT OUT
Effective teams not only need good leadership but also require com¬
mitted team members. Working in teams, brainstorm a list of personal
qualities that effective team members should possess. Provide exam¬
ples of teamwork that you have observed and how the team used
these qualities to achieve a common goal.
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Chapter 11 Assessment
SUMMARY
11.1 Identify Your Staffing Needs
1. To determine staffing needs, list all the duties in your business,
identify how much time is needed to perform each one, determine
the skills and qualifications employees need, and write job descrip¬
tions that list the specific responsibilities of each position. You
should also create an organizational structure to show the relation¬
ships between the various jobs in the company.
2. To recruit new employees, you may use classified advertisements,
online career and employment sites, employment agencies, college
placement centers, in-store advertising, and referrals.
3. In addition to hiring permanent employees, you can also hire free¬
lancers, interns, or temporary workers.
11.2 Staff Your Business
4. The four steps in the hiring process include (1) screen candidates,
(2) review and verify job applications, (3) interview the best candi¬
dates, and (4) make a job offer.
5. A compensation package should include a method of pay and may
provide a variety of benefits. Methods of pay include wages, salary,
commission only, or a combination of salary plus commission.
Bonuses and profit sharing are other compensation methods.
Benefits may include paid leave for vacation and sickness; medical,
dental, life, and accident insurance; and retirement plans.
6. Employers must follow all laws and regulations that are created to
protect employees from unfair labor practices.
11.3 Direct and Control Human Resources
7. Implementing your staffing plan effectively requires that you have
good management and leadership qualities. By enforcing policies
and offering training, you will help your employees perform
better.
8. There are several ways to motivate employees, including paying
them well, treating them fairly, recognizing them for good work,
and giving them adequate responsibility.
9. You should create a procedure for evaluating employees. Out¬
standing employees should be promoted when opportunities
become available, and problem employees should be dismissed.
What do you fcnow now?
Read Ideas in Action on page 299 again. Then answer the questions a
second time. How have your responses changed?
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Human Resource Management
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. A written statement listing the tasks and responsibilities of a position
2. The process of determining the tasks and sequence of tasks neces¬
sary to perform a job
3. A management control tool that determines whether objectives for
a job are being met
4. To look for people to hire and attract them to the business
5. People who provide specialty services to businesses on an hourly
basis or by the job
6. Payments for labor or services that are made on an hourly, daily,
or per-unit basis
7. An amount paid for a job position stated on an annual basis
8. A percentage of a sale paid to a salesperson
9. Financial reward for employment service in addition to salary
10. To let other people share workloads and responsibilities
benefits
bonus
chain of command
commission
delegate
freelancers
interns
job analysis
job description
performance
evaluation
profit sharing
recruit
salary
staffing
o. wages
g-
h.
j-
i.
REVIEW YOUR KNOWLEDGE
11. True or False? Good employees and a well-run human resource
management program are as important to your business as are
capital, equipment, and inventory.
12. A collection of tasks and responsibilities that an employee is
responsible to conduct is a
a. job c. job analysis
b. job description d. duties and task list
13. Which of the following is not a way to motivate employees?
a. pay them well
b. treat them fairly
c. recognize them for good work
d. make all decisions for them
14. True or False? The job analysis helps people in a company
understand who reports to whom.
15. Which of the following would not be included in a job offer?
a. job analysis c. terms of employment
b. starting salary d. benefits package
16. True or False? During the screening process, you determine which
candidates are most qualified for the position you are trying to fill.
17. If you live in a very small community with a limited pool of avail¬
able workers, what would be the best way to recruit employees
from nearby communities?
a. online advertisement
b. in-store advertising
c. classified ad in the local paper
d. college placement center for a university 300 miles away
Chapter 11
Assessment
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18. You interviewed a candidate for a sales position you have in your
swimming pool sales and installation business. Sales are usually
high in the spring and summer and then drop off in the fall and
winter. The candidate has a family and needs a steady income but
likes the idea of earning more pay if he makes a large number of
sales. Which payment method do you think he would prefer?
a. wage c. commission only
b. salary d. combination plan
19. Offering an employee the opportunity to participate in your group
health insurance plan is an example of a
a. wage c. bonus
b. salary d. benefit
20. True or False? The Occupational Safety and Health Act estab¬
lishes the maximum number of hours employees can work.
21. True or False? The Family Medical Leave Act makes it possible
for both men and women to take leave in the event of a birth or
adoption of a child.
22. A_?._manager works directly with the workers on the job and
is responsible for implementing the plans of middle management.
23. True or False? As long as a job candidate has the appropriate
skills needed, it is not necessary to check his or her references.
24. Which of the following would be the most effective training
method to use for an employee who needs to learn about the
latest technology trends for today’s modern office?
a. on-the-job training
b. coaching
c. mentoring
d. conference or seminar
APPLY WHAT YOU LEARNED
25. You have decided to hire three people to help in your custom
drapery business: an administrative assistant, an interior designer/
salesperson, and a sewer. What qualifications and skills must each
of these employees possess? Write a job description for each posi¬
tion. Also, establish a compensation package for each position
describing the type of pay and the benefits included.
26. For each of the positions you have established in your custom drap¬
ery business above, describe how you will recruit these employees.
Create a want ad and prepare a list of interview questions for each
position.
MAKE ACADEMIC CONNECTIONS
27. MATH Jayne Smith sells vacuum cleaners and is compensated
under a combination plan. She earns $9.25 per hour plus 15 percent
of whatever she sells. Last month, Jayne worked 160 hours and sold
9 vacuum cleaners. Five of the vacuum cleaners were top-of-the-line
models with a price of $1,100 each. The remaining vacuum cleaners
were $450 each. What is Jayne’s compensation for last month?
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28. PROBLEM SOLVING One of your employees is upset that
another employee received a promotion. She thinks she should
have gotten the job because she has been there longer and has
always had good performance evaluations. What are some reasons
that a newer employee would receive the promotion? How will
you handle the situation?
WHAT WOULD YOU DO?
You want to hire a new sales assistant for your company. You checked
with the local college placement office, and it sent several qualified
applicants for an interview. You are really impressed with one of the
candidates, and you want to hire him for the position. Before making
the job offer, you decide to check the Internet to see if the candidate
has a personal web page that might provide you with more informa¬
tion regarding his background and interests. By performing an Internet
search, you quickly find his personal web page. You are shocked at
some of the pictures he has posted and at some of the activities in
which he has participated. What would you do? Would you hire him
anyway or would this change your impression of him?
This activity will help you determine staffing needs for your business.
This information will help you develop the Operations section of your
business plan.
Assume your business will grow over the next year and you will need
to add employees. Make a list of at least five jobs that need to be
filled. Is each job a full-time job, part-time job, or temporary work?
For each job, write a detailed job description. Create an organizational
chart for your business based on these new positions.
Write a classified advertisement for each of the jobs you will need to
fill. What employee characteristics and qualifications are you seeking?
Write the interview questions that you will ask the candidates for
each position. Write a list of questions you will ask their references.
For each position, create a complete compensation package that out¬
lines wages or salary and any nonsalary benefits. Explain why you
have structured the compensation package as such.
Add policies concerning vacation, holidays, hours, acceptable dress,
and any other issues that affect your employees to the operating
procedures manual you previously created in Chapter 10.
Create a sample performance appraisal form for your employees. Will
you use the same form for each position? Why or why not?
Determine the ways you plan to motivate your employees. Create at
least one method of publicly acknowledging employees for good
work. Record your ideas.
In what ways will you train new and existing employees for your business?
What aspects of your business require training, and what type of training
is the best for each aspect? Write a short report about your decisions.
greene_0538446145_chl 1, 1/18/8, 10:53, page: 328
Planning a Career in
Audio-Video Technology
A/V Technology
& Communications
UW
IVIy aunt got married last
weekend and the wedding was a
blast. Both a photographer and a
videographer were at the wedding.
During the reception, the photo¬
grapher set up a laptop on a table
that had photos of the ceremony
streaming on screen. It was really
fun to see pictures of the ceremony
while we were still celebrating the
wedding.”
How do people determine
the best way to record significant
events in their lives? How do com¬
panies develop portfolios of their
products for use in printed catalogs
or on web sites?
Photographers take pictures
of people, events, and products.
Photographers often specialize by
topic. Areas of specialization include
news, commercial, fine arts, por¬
trait, or special event photography'.
EMPLOYMENT OUTLOOK
• Average growth is anticipated.
• Competition for positions is
fierce as many people find diis
field appealing.
• Individuals who keep current
with technological changes in
equipment and processing will
have the most opportunities.
JOB TITLES
• News Photographer
• Children’s Photographer
• Soft Goods Photographer
• Online Photographer
• Event Photographer
• Strong interpersonal skills are
required—especially for portrait
photographers who work with a
diverse client base.
• Independent photographers
should be Internet savvy to facil¬
itate direct marketing to clients.
• Strong computer skills are
needed for digital photo
manipulation.
What's it like to work in Audio-
Video Technology On Sunday
afternoon, Keisha, a self-employed
freelance photographer, went to
a local park to take a combination
of candid and posed pictures for
a family reunion. Sunday evening
Keisha loaded the family reunion
photos on her web site. Although
Keisha charged a fee for taking
photos at the reunion, she was
able to generate additional revenue
when family members purchased
either individual photos or custom¬
ized albums.
Monday morning Keisha met
with a newly engaged couple who
were potential clients. After discus¬
sing the logistical details of the
wedding, Keisha showed the cou¬
ple a few albums from prior wed¬
dings. She then walked the couple
through her web site. By providing
digital copies of the photos online,
categorized by various stages of
the wedding, it was easy for cou¬
ples to review photos. Album view¬
ers could simply click a tab like
“Ceremony” or “Reception” to
view the photos of most interest.
• Portrait Photographer
NEEDED SKILLS
• Creativity and a solid under¬
standing of the photographic
process are essential.
What about you? Would you
like to help a variety of individuals
record special events through the
use of photography?
328 Chapter 11 Human Resource Management
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Business plans are an effective tool for evaluating, organizing, and
selling a new business concept. A well-developed business plan can be
a key component for a successful business startup. Participants must
demonstrate an understanding and mastery of the process required in
developing and implementing a new business venture. The project
may be completed by teams of two to three members. The business
plan must include the following sections: Executive Summary, Com¬
pany Description, Industry Analysis, Target Market, Competitive
Analysis, Marketing Plan and Sales Strategy, Operations, Management
and Organization, Long-Term Development, and Financials. Many
business plans also include copies of key supporting documents, such
as certifications, licenses, tax requirements, and codes, in an appendix.
Proposals may describe a proposed business venture or a current
business operation. The business idea must be currently viable and
realistic. The Build Tour Business Plan Project that you have been
working on could be used in this competitive event. Teams have seven
minutes to present their business plan and to describe the project and
results obtained. Visual aids and samples specifically related to the proj¬
ect may be used in the presentation. Judges have three minutes to ask
questions following the presentation.
PERFORMANCE INDICATORS EVALUATED
• Design and conduct a marketing research study.
• Prepare a written proposal for a new business based on the research.
• Request financing for the proposal from a venture capitalist.
• Demonstrate effective communication skills.
• Derive facts from data, findings from facts, conclusions from findings,
and recommendations from conclusions.
• Demonstrate critical thinking/problem-solving skills.
• Prioritize time and meet deadlines.
• Identify the target market and the competition within the market area.
• Demonstrate die ability to be an effective team participant.
• Develop a concept from an idea to an actual proposal.
Go to the FBLA web site for more detailed information.
Think Critically
1. Why must the business proposal cover possible risks?
2. What target market demographics are important to research?
3. Why must the team present a strong work ethic?
4. Why should the team conduct marketing research before making the
presentation?
www.fbla.org
Winning Edge 329
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12.1 Business Risks
school.cengage.com/entre
‘preneur/i'deas
330
12.2 Insure Against
Risks
greene_0538446145_ch 12, 12/21/7, 20:10, page: 331
IDEAS IM ACTIONJ
Growth Is Risky
S cott Alterman earned money at an early age by
starting several small businesses in high school.
After college, Scott joined his brother, Greg, who was
running Gagwear, a small company in Atlanta that
served the corporate market with customized apparel.
The Alterman brothers began manufacturing
edgier and higher-quality apparel than what was
typically offered in their target market. They started Scott Alterman, The Icebox
with caps that included their own label with a phone number on them.
They took a risk by importing thousands of caps before they had sold
one. Their customers took notice. Ironically, they had many inquiries
from competitors wanting to buy the blank hats, so they decided to
start a "blanks" division. This was the beginning of Alternative Apparel,
the wholesale division. Scott concentrated his efforts on Gagwear, while
Greg developed Alternative Apparel.
Gagwear's customer base was small to medium-sized corporate cus¬
tomers. Scott wanted to grow Gagwear by calling on retailers and larger
customers. So another company, The Icebox, a full-service advertising-
specialty company serving small to medium-sized companies, was born.
The Alterman brothers brought in a partner, Jordy Gamson, to run The
Icebox. Later, Scott and Jordy decided to merge Gagwear and The Icebox
divisions and operate both under The Icebox name. Greg is now running
Alternative Apparel while Scott and Jordy run The Icebox.
Meanwhile, Alternative Apparel had begun to experience serious
growth. The decision was made to completely separate Alternative
Apparel and The Icebox to let them grow properly. The businesses quit
sharing employees, and each got financing to evolve on their own.
The growth of The Icebox did not come without risks. With a $2
million note for his new building along with a $1.2 million line of credit,
Scott faces financial risk. He also faces risks by extending credit to cus¬
tomers. Because he wants to be customer-friendly, Scott sometimes
extends credit to customers other businesses would consider too risky.
On the other hand, now that The Icebox is a separate company, Scott
has eliminated some of the risks associated with the production side of
his business. Rather than incur the financial risks of buying and repairing
equipment and hiring production employees, The Icebox uses contract
companies for screenprinting and embroidery.
What do you hnow?
What unmet need did the Alterman brothers uncover?
How is Scott taking a risk by extending credit to customers?
Why is contracted work less risky for The Icebox?
Scott Alterman
greene_0538446145_ch 12, 1/17/8, 15:20, page: 332
What if disaster strikes?
"Kristin," Ty asked his partner, "what do you think would happen to our
web hosting business if our computers or computer data were stolen or
hacked into?"
"Wow, Ty, we've never really thought about that. We just come in
every day and do our work. We do back up our work periodically, but
we just put the CDs in our file cabinet."
"I know," Ty responded, "I started thinking about it after I read about
a business that had all of its computers stolen one night. And I realized we
have no emergency plan in place."
"We sure don't, but I bet we will have
something figured out by tomorrow!"
Kristin said.
Work as a Team What risks do you
think Ty and Kristin would face if all their
computers were destroyed or computer
data were compromised? What steps do _
you think they should take to be prepared Businesses must address computer
in case this should happen? security risks.
Dealing with Business Risks
As an independent businessperson, you will face many risks. Risk is the
possibility of some kind of loss. Risks can be categorized as human risk,
natural risk, and economic risk. Risk management is taking action to
prevent or reduce the possibility of loss to your business. You can avoid
risk, assume risk, or transfer risk.
Identifying Risks
Human risks are those caused by the actions of individuals, such as
employees or customers. Examples include shoplifting, employee theft,
robbery, credit card fraud, and bounced checks. Natural risks are caused
by acts of nature. Examples are storms, fires, floods, and earthquakes.
The occurrence of any of these could bring about tremendous loss to a
business. Economic risks occur because of changes in business conditions.
332 Chapter 12 Risk Management
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Preparing to Face Risks
As an entrepreneur, you must be prepared to face all kinds of risks.
You will need to decide the best strategy for dealing with risks. You
may decide to avoid the risk. For example, if you think a product you
are developing will not meet market needs, you may decide to avoid
financial risks caused by low sales by halting production of the product.
You may decide to assume the risk if you determine the risk is
low. If your market research indicates the product you are developing
will be successful with your target market, you will most likely pro¬
duce and sell the product even though there is still a chance of lower
sales than expected.
Transferring the risk is another option. You will be able to protect
yourself against the financial losses from some risks by purchasing insur¬
ance. Insurance transfers the risk of financial loss to the insurance company.
You never know when a loss may occur, but you should have a
plan of action in place when it does. When Hurricane Katrina struck
New Orleans in 2005, many business owners were not prepared for the
loss of property and income that occurred. You need a plan in place so
that if something does happen, you can recover and restart business
operations quickly. To prepare for risks, you should do the following:
1. Determine what can go wrong.
2. Develop a plan.
3. Communicate your plan.
Develop Your
Reading Skills
As you read, use the SQ3R
method:
• Survey the chapter to
get an idea of what you
will be reading.
• Make a list of Questions
about the chapter that
come to mind as you
survey.
• Read the chapter.
• Recall what you have
read.
• Review the material by
discussing it with a
classmate.
DETERMINE WHAT CAN GO WRONG As a business owner, the first
thing you need to do is conduct a risk assessment. A risk assessment
involves looking at all aspects of your business and determining the
risks you face. During this assessment, you should:
• Learn the risks your business faces.
• Decide how the risks would affect your business.
• Prioritize the risks by the impact they will have on your business.
DEVELOP A PLAN Once you have identified the risks that could affect
your business, you should develop a written plan for dealing with them.
When developing a risk management plan, you may have to comply with
certain laws. For example, OSHA (Occupational Safety and Health
Administration) requires businesses to have an evacuation plan for emer¬
gencies. There are many good sources available to help you establish an
effective risk management plan. If you are developing an emergency
action plan, the National Safety Council, a nongovernmental organiza¬
tion that promotes safety, is a good source. It recommends that the
following items be included in your emergency action plan.
• Chain of command information including names and job titles of
the people responsible for making decisions, monitoring response
actions, and recovering back-to-normal operations
• The names of individuals responsible for assessing the degree of
risk to life and property and who should be notified for different
types of emergencies
12.1
Business Risks 333
greene_0538446145_ch 12, 12/21/7, 20:10, page: 334
Why is it important to have a plan for handling risks?
%
• Preferred method for reporting fires and other emergencies
• Specific instructions for shutting down equipment and other busi¬
ness activities and procedures for employees who must shut down
equipment before they evacuate the facility
• Facility evacuation procedures including maps showing the best
and alternate exit routes
• Specific training for those responsible for responding to emergencies
Be sure to have a recovery plan in place if you suffer a setback.
A recovery plan will enable you to get back to business as quickly as
possible. If you suffer a loss due to a fire, have a plan for temporarily
relocating, getting replacement equipment, and retrieving lost data.
If one of your suppliers is out of stock of a component needed in the
production of your product, have another supplier lined up. A recov¬
ery plan will help you continue to meet your customers’ needs.
COMMUNICATE YOUR PLAN Let your managers and employees
know about your plan for handling risks. To ensure your plan is
carried out properly, assign activities and responsibilities to the
appropriate people. For example, to protect against the risk of a
faulty product, assign the production manager the task of checking
the quality of the finished product. If you plan to run an advertise¬
ment for an upcoming sale, make sure someone is responsible for
placing the ad in the appropriate media at the appropriate time to
avoid the risk of lost sales. If you want to protect your computer
system from the risks of viruses and computer hackers, you can work
with a computer security expert. To address the risks related to emer¬
gencies, provide training for all employees to show them what to do
in the event of any type of emergency. Work with your managers and
employees to be sure all risks are addressed.
334 Chapter 12 Risk Management
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Checkpoint
What should you do to prepare for business risks?
Types of Theft
One of the biggest risks that businesses face is theft. Shoplifters and
employees may steal your merchandise. Burglars may break into your
business and steal your equipment. Customers may use stolen credit
cards or write checks when they don’t have money in their account.
Once you have identified the theft risks you face, you can determine
what security precautions you need to take.
Shoplifting
Shoplifting is the act of knowingly taking items from a business with¬
out paying. Customers shoplift millions of dollars in merchandise every
year. The problem exists in virtually every type of retail business.
If you own a retail business, you will have to take steps to prevent or
reduce shoplifting. Some of the things you can do include the following:
1. Instruct your employees to watch for customers who appear suspicious.
2. Hire security guards or off-duty police officers to patrol your store.
3. Post signs indicating that you prosecute shoplifters.
4. Ask incoming customers to leave their bags behind the counter.
5. Install electronic devices, such as mounted video cameras, electronic
merchandise tags, and point-of-exit sensors, to detect shoplifters.
Employee Theft
Most employees are hard working and hon¬
est, but there are a few who will take things
from your business, such as office supplies,
equipment, merchandise, and even money.
These employees can negatively impact your
business financially.
As an entrepreneur, you need to be
aware of the possibility of employee theft.
You need to take steps to prevent the prob¬
lem from occurring. You also need to know
how to detect the problem and to handle it
once it is detected.
Some businesses, such as restaurants
and retail stores, are more vulnerable to
employee theft than others. If you own
such a business, you may need to adopt
the following procedures:
1. Prevent dishonest employees from join¬
ing your company. Screen job applicants
very carefully. Consider using a company
that specializes in verifying job applicants’
PET ^)kmark
More than 135,000 convenience stores oper¬
ate in the United States. About 6 percent of
all U.S. robberies occur at convenience stores.
The Association for Convenience and Petro¬
leum Retailing is a trade association for
convenience store operators. The group has
created some robbery awareness/deterrence
tips for members to use in their stores.
Access school.cengage.com/entrepreneur/
ideas and click on the link for Chapter 12 to
learn more about these tips. Which of the
tips do you think would be most effective in
deterring robbers? Explain. Why do you think
greeting and paying attention to every cus¬
tomer who enters the store is an effective
deterrent to crime? Do you think stores that
stay open 24 hours a day are at greater risk
for robbery? Why or why not?
school.cengage.com/entrepreneur/ideas
<b
12.1
Business Risks 335
greene_0538446145_ch 12, 12/21/7, 20:10, page: 336
2 .
3.
4.
educational backgrounds and search¬
ing their criminal records, driver’s
license reports, civil court records,
and credit reports.
Install surveillance systems. Often
the mere knowledge that they are
being monitored by a video camera
deters employees from stealing.
Establish a tough company policy
regarding employee theft. Your
company policy should detail the
consequences of employee theft.
Make sure that all employees are
aware of the policy.
How can a business owner prevent
shoplifting?
Be on the lookout. Watch for cash
discrepancies, missing merchandise
or supplies, vehicles parked close to
loading areas, and other signs that
something may be wrong. Keep an eye on employees who seem to
work at odd hours, perform their jobs poorly, or complain unrea¬
sonably. Make inquiries if an employee has an unexplained close
relationship with a supplier or customer or has a personal lifestyle
that seems inconsistent with his or her salary.
Robbery
Almost all businesses are vulnerable to robberies. You can choose what
is considered a safe area of town to locate your business to guard
against being robbed. You can also install dead-bolt locks and burglar
alarms. To limit losses in the event of a robbery, many businesses keep
a minimum amount of cash in the cash register. Once more than a cer¬
tain amount is received, the cash is transferred to a safe. Some busi¬
nesses also use surveillance cameras, which deter prospective robbers
from entering the business in the first place. Be aware that you may be
_ robbed regardless of the number of pre¬
ventative measures you take. It is simply
a risk of being open for business.
Be your own boss
You are the owner and manager of a diner
located along a busy interstate highway. You do
a good business with travelers passing through
as well as locals who eat with you regularly.
Recently, there have been several robberies dur¬
ing operating hours in nearby businesses. Your
local customers are beginning to get a little
nervous about coming to your business. Outline
a plan to minimize your risk of robbery. Include
ways to make your customers feel safe.
Credit Card Fraud
Business owners lose m ill ions of dollars
every year because of stolen credit cards. If
a purchase is made on a stolen credit card,
a business may not be able to collect the
money. To prevent stolen credit cards
from being used to purchase goods, you
can install an electronic credit authorizer.
This machine checks to see if a credit card
is valid. If the card has been reported stolen
or if the cardholder has exceeded the credit
limit, authorization will not be granted.
336 Chapter 12 Risk Management
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Bounced Checks
A bounced check is a check that is returned to you by the bank
because the customer’s checking account has insufficient funds to
cover the check amount. Bounced checks are also called bad checks.
Preventing losses from bad checks is difficult. To minimize losses,
you can establish a policy of accepting checks drawn on in-state banks
only. You can also charge a fee if a customer writes a bad check to
your business. Asking for identification, such as a driver’s license, can
help you track down a person who writes you a bad check so that
you can collect the money due. If bad checks are a serious problem
in your area, you may decide not to accept checks at all.
Checkpoint
How can you protect your business from theft?
p2.i Assessment
THINK ABOUT IT
1. What are the categories of business risk? Provide three examples
of each.
2. What are some steps that you can take to minimize employee
theft?
3. You own a pizza shop. You suspect that one of your delivery peo¬
ple is charging customers more than what they actually owe and
keeping the difference. How would you handle this situation?
MAKE ACADEMIC CONNECTIONS
4. MATH At closing, the Old World Cafe's cash register receipts
totaled $884. The cash in the register equaled $534, and the
credit card slips equaled $237. How much of the proceeds are
not accounted for? What might explain the difference?
5. COMMUNICATION Think about your school as if it were a busi¬
ness. How can your school identify and deal with the risks it
faces? Using the Activity CD, open the activity "Risk Manage¬
ment Plan." Print a copy and complete the activity. Share your
plan with the class.
TEAMWORK
Last year, the holiday season profits at Ray's Sporting Goods were
reduced significantly because of shoplifting. Form teams and brain¬
storm ways to approach the problem this year. Put together a
proposal containing your recommendations for Ray. Share your
recommendations with the rest of the class.
12.1 Business Risks 337
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A river runs through it
Carlos thought he had found the perfect location for his new restaurant.
He wanted to have a large outdoor patio with a great view, and this
location had exactly what he wanted. The patio looked out over a river,
and there were many beautiful shade trees. Carlos decided to talk
to the former owner of the previous restaurant that had
occupied the site. He told Carlos that the restaurant
had flourished until the river flooded and
caused extensive water damage. The pre¬
vious owner made the repairs but was
never able to recover financially, so he
went out of business. This concerned
Carlos and made him wonder if this
was really the ideal spot.
Work as a Team What do you think
Carlos should do? If he decides to locate
here, what can he do to protect his Without taking precautions, some
investment? businesses may be forced to close.
Classification of Risk
As a business owner, you are at risk from more than just criminal
activity. A fire could destroy your building. An accident could injure an
employee. A broken water pipe could ruin your inventory. A precaution
you can take to protect against financial loss is to purchase insurance. A
payment made to an insurance company to cover the cost of insurance
is a premium. It is the price paid to cover a specified risk for a specific
period of time.
Business owners face many types of risk. The classifications of
risk are based on the result of the risk, controllability of the risk, and
insurability of the risk.
Result of the Risk
A pure risk presents the chance of loss but no opportunity for gain.
If you have a vehicle that is used in your business, every time it goes
338 Chapter 12 Risk Management
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did you KNOW?
What are some ways that a jewelry store could control the risks it faces ?
out on the road there is the risk of an accident. If there is an accident,
loss will likely be suffered. However, if an accident is avoided, there is
no opportunity for gain.
A speculative risk offers you the chance to gain as well as lose
from the event or activity. Investing in the stock market is a good
example of a speculative risk. When you invest money, you have the
chance to make money if the stock price rises. However, if the stock
price falls, you risk the chance of losing money.
Controllability of the Risk
A controllable risk is one that can be reduced or possibly even avoided
by actions you take. Installing a security system in your business could
lessen the risk of your business being robbed.
An uncontrollable risk is one on which actions have no effect.
The weather cannot be controlled, but it can have a tremendous effect
on some businesses. If a hurricane hits a resort town, a dramatic decrease
in business and loss of profit will result. But if the weather is sunny and
warm, tourism will flourish and business owners may make a profit.
Insurability of the Risk
A risk is an insurable risk if it is a pure risk faced by a large number
of people and the amount of the loss can be predicted. Buildings that
house businesses are susceptible to fire. Nearly all businesses face this
risk, and past statistics can help insurance companies predict the amount
of loss and percentage of businesses that will suffer fire losses annually.
Insurance companies can sell fire insurance to help cover losses. The
premiums of all those insured are pooled and used to help those who
incur losses.
If there is a risk that a loss will occur and the amount of the loss
cannot be predicted, the risk is uninsumble. An insurance company
would have no way of determining the premiums to charge or the
amount of funds to pool to cover unpredictable losses. A business may
12.2
Insure Against Risks 339
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move to a new location, and customers may not follow. The loss of
income that could result cannot be predicted and, thus, is not insurable.
Checkpoint
What is the difference between a pure risk and a speculative risk?
Uninsurable Risks
Sometimes things happen in the business world that are not covered
by insurance, which can be very cosdy to a business. Insurance does
not cover risks that cannot be reasonably predicted or for which the
financial loss to the business cannot be calculated. These risks are tied
to economic conditions, consumer demand, competitors’ actions,
technology changes, local factors, and business operations.
Economic Conditions
Managers must constandy study economic conditions. Changes in
economic conditions can result from an increase or decrease in com¬
petition, shifts in population, inflation or recession, and government
regulations. World events can also result in economic changes. The
events of September 11, 2001, caused a dramatic downturn in the
U.S. economy, resulting in major cutbacks and layoffs by businesses.
This decreased the amount of disposable income for many Americans,
which resulted in many entrepreneurs losing their businesses. When
the economy takes a downward turn, a business must respond quickly
by cutting production and expenses.
Consumer Demand
Competitors' Actions
Business is competitive. As a business
owner, you must be aware of your
competitors and their actions. A
major advertising campaign or a
drop in price by your competitors
may result in a change in your
volume of sales. You must be
ready to respond to actions by
your competitors to minimize
the risk to your business.
©
How might the actions of one computer
manufacturer pose a risk to another
computer manufacturer?
Businesses produce products and services that they think consumers
want to buy. Before going into business, business owners must research
consumer needs and wants. If they can predict a change in demand,
they may be able to profit by produc¬
ing and selling a new product or ser¬
vice. However, if consumer demands
change suddenly, the company may
end up with products in their inven¬
tory that they cannot sell for a profit.
340 Chapter 12 Risk Management
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Technology Changes
Changes in technology bring about changes in business. As a business
owner, you need to stay up to date on technology trends. Evaluate
new technology and see if it can help your business. Updates to tech¬
nology can be a major expense but can alternatively provide efficiencies
and help you serve customers better. If customers view your business as
outdated, you may lose customer loyalty and sales to your competition.
Local Factors
Businesses can suffer due to activities that occur in their local commu¬
nity. If there is an increase in local taxes or a change in local business
regulations, it can affect your business. If a local government makes
an improvement to the infrastructure, such as a road or utility improve¬
ment, it can help your business in the long term. In the short term,
it may result in a loss of business because ongoing construction could
cause customers to detour around your business.
Business Operations
The management of a business contributes directly to the success or
failure of the business. A business that is poorly managed can have
high employee turnover, poor customer service, higher expenses, and
other problems. Poorly trained employees can also cause operational
problems. Managers and employees must work together to ensure the
success of the business.
Checkpoint
Why are some risks uninsurable?
Types of Insurance
Purchasing insurance is one of the best ways you can prepare for the
unexpected. There are many options for insurance. You will have to
examine the risks you identify and their potential impact on your busi¬
ness to determine if you need to insure against the risk.
Business Insurance
Insurance companies selling business insurance offer policies that com¬
bine protection against all major property and liability risks in one pack¬
age. These coverages are also sold separately. Package policies are created
for businesses that generally face the same kind and degree of risk. Large
companies might purchase a commercial package policy or customize
their policies to meet the special risks they face. Many small and mid¬
sized businesses purchase a package known as a business owner’s policy
(BOP). Business owner’s policies typically include the following:
• Property insurance This type of insurance provides coverage for
damage to buildings and the contents inside the buildings, such as
furniture, fixtures, equipment, and merchandise owned by the business.
12.2 Insure Against Risks 341
greene_0538446145_ch 12, 1/15/8, 17:42, page: 342
*
• Business interruption insurance This type of insurance covers
the loss of income resulting from a fire or other catastrophe that
disrupts the operation of the business. It can also cover the extra
expense of operating out of a temporary location.
• Liability protection This type of insurance covers your company’s
legal responsibility for the harm it may cause to others as a result of
what you and your employees do or fail to do in your business opera¬
tions. Harm may involve bodily injury or property damage due to
defective products, faulty installations, and enors in services provided.
BOP’s do not cover auto insurance, workers’ compensation, or
health and disability insurance. They also do not cover professional
liability, which involves claims of negligent actions by business profes¬
sionals such as doctors. You will need separate insurance policies to
cover these items.
Life Insurance
Life insurance is paid in the event of the death of the insured. It is
intended to provide financial support for families should the income
earner die. A business owner may buy life insurance so that his or her
heirs have enough money to continue the business.
Other Kinds of Insurance
Other types of insurance that you may want to purchase include flood,
crime, and renter’s insurance. Flood protection is not standard with
property insurance, so you may have to purchase it separately. Crime
WHAT WENT WRONG *
Goodbye, Gorgeous!
Edie opened her beauty salon "Hello, Gorgeous!"
by taking out a $40,000 loan to help pay for the
renovations and equipment she needed to pur¬
chase. She had two hair stylists working in the
salon as contract employees. They paid her
monthly rent to use space in the salon. The com¬
bined rent they were paying helped cover about
50 percent of the monthly operating expenses.
Edie took out a business owner's insurance
policy for $20,000 worth of coverage. Edie was
making enough money to pay her monthly
expenses, but not enough to save at this point.
After six months of being in business, there was
a fire in the salon. Hello, Gorgeous! was com¬
pletely destroyed. The cause of the fire was a
curling iron that Edie left on over the weekend.
Edie still owed over $35,000 on the business
loan she obtained. Her contracted employees
immediately moved to another salon. Suddenly,
Edie was all alone without any income or sav¬
ings and not enough insurance to cover her
loan. She was forced to close Hello, Gorgeous!
and take a job working at another salon to pay
off her debt.
Think Critically
1. Do you think Edie was
prepared to deal with
business risks?
2. What mistake did
Edie make when
purchasing
insurance?
Don't trim costs by buying less insurance
coverage than you need.
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insurance protects against losses resulting from crime, such as robbery,
computer fraud, or employee theft. Renter’s insurance covers the con¬
tents owned by the renter inside the leased space. The actual owner of
the building would purchase insurance for the building. Depending on
your business and its location, you may or may not decide to purchase
these additional kinds of protection.
Checkpoint
What types of insurance can you purchase for your business?
Buy Insurance
Buying insurance can be complicated. Is it pos¬
sible to have too much or too little insurance?
A good insurance agent can help you make
decisions about insurance coverage.
Choose an Insurance Agent
Insurance is sold by agents. An agent can be
independent and represent many different insur¬
ance companies or work for a single insurance
company. Before selecting an insurance provider,
talk to an agent who represents more than one
insurer or ask representatives of several different
companies to talk with you about their policies.
The market for insurance is competitive, so
many agents will be eager to sell you insurance.
To get the best price, contact a few agents and
compare prices and policies. Then consider how
you feel about the agents. Remember that the person who sells you
the policy will be involved in processing your claim should you ever
need to collect on your policy. It is therefore important to choose
someone whom you trust. You may already have an agent you trust
with your car insurance or other types of insurance. That agent can
be a good starting point in your research.
Why is it important to "shop around" for an insurance agent?
Determine How Much Coverage You Need
To determine the kinds and amounts of coverage you need, start by mak¬
ing a list of the property you own. Include equipment, inventory, vehicles,
and other significant assets, and put a value next to each. Then think
about the kinds of risk you would like to insure against. If, for example,
your business is located near a river that could flood, you may want to
purchase flood insurance. If you live in a low-crime area, you may decide
against purchasing insurance that covers break-ins. Understand, however,
the implications of not having insurance if something should happen.
The next step is determining how much coverage you need. Be
sure you have enough insurance to cover any and all debts you may have
incurred while starting your business. Li-Li Tang, owner of Computer
Systems, has a $50,000 bank loan on her business, as well as two small
12.2 Insure Against Risks 343
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loans for $5,000 each. She wants to get at least $60,000 worth of prop¬
erty insurance to cover these outstanding debts in the event of a problem.
Insurance agents earn commissions on the amount of coverage
they sell. To make sure you need all the coverage your agent suggests,
talk to other business owners in your area or counselors from SCORE
or the SBA.
Checkpoint
How can you determine how much insurance you need?
THINK ABOUT IT
1. What factors determine the classifications of risk?
2. Provide three examples of risks that are uninsurable?
3. Tim Stanton has just opened a surf shop on the beach in South
Florida. He has purchased property insurance to cover possible
losses against his building, fixtures, equipment, merchandise,
and other assets. Against what additional risks should he con¬
sider insuring his business?
4. What factors should you consider when choosing an insurance
agent?
MAKE ACADEMIC CONNECTIONS
5. MATH You have taken out a loan for $50,000 to start your busi¬
ness. As a condition of the loan, your bank requires you to carry
property insurance for at least the amount of the loan. Your
property is valued at a total of $100,000. Your agent recommends
you carry property insurance covering at least 80 percent of your
property's value. If annual insurance premiums are $15 per $1,000
of coverage, how much will you pay for insurance to satisfy your
bank loan requirement? How much will you pay if you follow
your agent's recommendation?
6. COMMUNICATION You have just opened an insurance agency
that specializes in insuring businesses. Write a sales letter to
prospective customers introducing yourself and your services.
Choose a partner. One partner should assume the role of an entrepre¬
neur who just took out a loan to open a roller skating rink. The other
should play the role of an insurance agent who must educate the new
owner about the types of insurance available. Working together, use
the Internet and other resources to research information about the
types of insurance a skating rink should carry. Then role play the con¬
versation between the insurance agent and the business owner.
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Focus on Small Business
• Identify risks associated • trade credit
with credit. • consumer credit
• Explain how to manage • Federal Employees'
risks at work. Compensation Act
• Describe strategies to (FECA)
reduce the risks of
doing business
internationally.
Risks are everywhere!
Dale realized that there were many risks he would face as a business
owner. He wanted to learn as much as he could about risks before he
opened his new sporting goods business. So, he called his friend Monica
for some advice. Monica had been in business for almost two years and
had gained valuable business experience.
"Dale, it's good that you came to me," Monica replied. "I've got
lots of information for you. I know you have - ,
learned about insurable and uninsurable
risks, but there are some hidden risks you
might not think about. I thought I could increase
sales and provide customers a convenient service
by offering them a store credit account, but you
wouldn't believe how many people never paid the
first bill! Then, my maintenance employee fell off of
a ladder while painting. He had to spend two weeks
in the hospital. I could go on and on."
"Yes, Monica, I think you have given me plenty
to think about. There are many more risks to con¬
sider than I was aware of!" Dale replied.
Work as a Team What do you think Dale
can learn from Monica's experiences? What
should Dale do to minimize the risks Monica
mentioned? Beware of hidden risks.
Risks of Credit
As a business begins operation, there will be costs that will be too
expensive for the entrepreneur to pay all at once. Credit makes it
possible for the entrepreneur to make these costly purchases. The
business owner will also have to make decisions about extending
credit to customers. Extending credit can help increase sales. How¬
ever, a business will need to decide if extending credit will result in
an overall increase in income. Although credit is useful to a business
when buying or selling, there are risks involved. It is important for
you as an entrepreneur to understand these risks.
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Other Risks 345
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Why would a business offer a credit card if it risks not getting paid?
Types of Credit
Credit can be categorized according to whom the credit is offered.
Like bank loans, the credit a business offers its customers can be
secured or unsecured.
TRADE CREDIT When one business allows another business to buy
now and pay later, it is offering trade credit. Many purchases a busi¬
ness owner will make from other businesses will be made with trade
credit. The negotiated price of products purchased on trade credit will
often be higher than the cash price. This is necessary because there is
a lapse of time that occurs from when the sale is negotiated to when
the products are actually delivered. Because of this delay in receiving
payment, the supplier charges a higher price. As the business owner,
you will need to be sure that you have the money to cover your
expenses when they are due in order to protect your credit record.
On March 29, Raul Gomez places an order with Bear Creek
Embroidery for three-dozen golf shirts with his company logo embroi¬
dered on them. On April 1, Bear Creek Embroidery negotiates the pur¬
chase of three-dozen shirts from Alternative Apparel on credit. The shirts
are delivered to Bear Creek on April 15. Two weeks later, Bear Creek
ships the shirts with the logos to Raul. It takes one week for the shirts to
arrive and one week for Raul to process and pay Bear Creek’s invoice.
The trade credit that Alternative Apparel extends to Bear Creek
allows 60 days for payment. This enables Bear Creek to receive the
shirts, add the logo, ship the shirts, and receive payment from Raul
in time to send payment to Alternative Apparel.
CONSUMER CREDIT When a retail business allows its customers to
buy merchandise now and pay for it later, it is offering consumer credit.
Consumer credit is offered in two basic forms: loans and credit cards. A
loan gives the individual a lump sum of money to spend and pay back
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over time with interest. If a loan is secured, it is backed by something of
value that can be taken and sold if the loan is not repaid. One type of
secured loan offered by retail establishments is an installment loan that is
paid back with interest in monthly equal amounts over a specified period
of time. Many cars and home appliances are financed with installment
loans with the financed item serving as the collateral.
An unsecured loan is granted based on the credit history of the
individual. This type of loan is not backed by collateral. Most credit
cards are considered unsecured loans. When a business offers its own
credit card to customers, it will not receive payment for a month or
more after the sale is made. Therefore, the business will need to make
other arrangements to ensure it has money to cover expenses associ¬
ated with the sale of the merchandise. If the customer does not pay,
then the business owner can attempt to collect the money or take
back the goods that were purchased.
Collection difficulties are one reason a business chooses to accept
credit cards that are issued by banks or credit card companies, such as
Visa, Discover, or MasterCard. The credit card company will pay the
business for the amount of the purchase. The business is charged a
fee by the credit card company that is a percentage of total credit
sales. The credit card company is then responsible for collecting the
amount charged from the customer.
If Raul Gomez offers a credit card to his customers, then Raul is
responsible for collecting payment from the customer. However, if
the customer pays with a Discover card, Mark gets his money from
Discover, and Discover bears the burden of collecting payment from
the customer.
Credit Policies
Once an entrepreneur decides to offer credit, policies must be estab¬
lished to help reduce risks. Policies should specify to whom credit will
be extended, what products may be purchased on credit, and what
the terms of the credit will be. The terms include the amount of
credit, the rate of interest charged, and the length of time before
payment is required.
It will be very important for the entrepreneur to determine what
type of customer will be approved for credit. Most businesses offering
credit cards have customers complete a credit application to determine
whether they are creditworthy , or able to pay. If credit is extended to
individuals who are not able to pay, the business loses all the money
invested in the product. If the product is recovered, money will still
be lost because used merchandise cannot be resold at the original sell¬
ing price. Some things to consider in determining who is creditworthy
include the following:
• Previous credit history
• Employment record
• Assets owned
• Money available for making payments (checking and savings accounts)
• Financial references
12.3
Other Risks 347
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Collection procedures must be established and followed carefully.
This will ensure that customers are billed on time. Procedures should
state how to handle customers who do not pay on time or do not pay
at all.
UNCOLLECTIBLE ACCOUNTS Businesses and credit card companies
usually charge the customer interest on the balance due to cover the
cost of the credit service. When accounts are paid on time, the inter¬
est is income for the business. However, even though a business is
careful about deciding which customers are creditworthy, there is still
the risk that some customers will not pay their account balances.
These uncollectible accounts are an expense to the business and
decrease net income.
Checkpoint
How can a business owner reduce the risks of offering credit?
Risks in the Workplace
Different occupations have different risks associated with them. Due
to the nature of the work that is performed, some workplaces are con¬
sidered to be dangerous. Some of the most dangerous occupations in
America include timber cutters and loggers, commercial pilots, con¬
struction and iron workers, refuse collectors, farmers and ranchers,
roofers, electrical power line installers, and cab drivers. Other occupa¬
tions, although not classified as dangerous, do have risks associated
with them. Individuals who work in hospitals can be exposed to viruses
and bacteria that can cause disease or infection. Night clerks can be a
target for a robbery. Even using a computer for long stretches of time
can cause injury. Repetitive stress injuries result from performing the
same activity repeatedly for long periods of time. They can be very
painful and cause disabling injuries. With some exceptions, any harm
suffered by employees at the workplace is considered to be a work-
related injury.
Why are employers responsible for carrying insurance on their
employees?
Federal Employees' Compensation Act
The Federal Employees’ Compensation Act
(FECA) is a law that provides benefits to
employees who have suffered work-related
injuries or occupational diseases. These benefits
include payment of medical expenses and com¬
pensation for lost wages. The FECA also pro¬
vides for payment of benefits to dependents of
employees who die from work-related injuries
or diseases.
Employers are required by law to carry
insurance to protect against these risks. This
insurance is called workers’ compensation. The
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expense for this insurance is entirely the employer’s responsibility. No
part of this insurance expense is paid by an employee.
Workers' Compensation
Workers’ compensation laws vary from state to state but generally
provide for the payment of medical bills, a percentage of lost wages,
and vocational retraining if an employee is unable to resume his or
her former job. Workers’ compensation will also pay a death benefit
to compensate survivors if an on-the-job injury results in the death
of a worker.
Once employees accept workers’ compensation benefits, they
cannot sue their employer unless there is proof that the employer
knew about the unsafe condition causing the accident and did not
do anything to fix it.
In some states, small businesses are exempt from workers’ com¬
pensation requirements, and employees working for them are not
covered. Also, business owners, independent contractors, occasional
workers, domestic workers in private homes, agricultural workers, and
unpaid volunteers are not covered by workers’ compensation in some
states.
Employers must notify employees of their right to compensation
for work-related injuries and diseases. Employees must also be notified
that they cannot be fired for filing a claim and that workers’ compen¬
sation premiums cannot be deducted from their pay. Most employers
display a poster in the workplace containing this information.
COVERAGE PROVIDED BY WORKERS' COMPENSATION Medical
expenses for employees injured on the job should be covered by
workers’ compensation. If an employee is out of work for more
than a few days, a percentage of lost wages may also be covered.
Lost wage payments are usually about two-thirds of the employee’s
income, not to exceed state limits. If an employee is left permanendy
disabled from a work-related injury, the employee may be eligible for
a lump-sum payment or long-term benefits. This depends on whether
the employee can perform other work that pays as well as the former
position. If a worker cannot earn as much as before, the worker may
be eligible for a long-term payment. If the worker is completely and
permanendy disabled, the worker may be eligible for Social Security
benefits.
INJURIES NOT COVERED Although laws vary from state to state,
generally, the following injuries would not be covered by workers’
compensation insurance:
• Injuries individuals afflict on themselves
• Injuries suffered under the influence of alcohol or illegal drugs
• Injuries suffered during a fight that the injured employee started
• Injuries suffered while disobeying orders or violating employer policy
• Injuries suffered while committing a crime
• Injuries suffered while not on the job
12.3
Other Risks 349
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FILING A CLAIM There are certain steps that must be followed in
the event of an injury or illness at the workplace. Be sure that you
are fam il iar with these steps so that you know what you and your
employee should do in the event of an accident at your business.
1. The injured employee must notify the employer. The employer
must be notified immediately after the accident. Check your state
law to determine the time limit that employees have for reporting
an accident or illness.
2. The employee must follow doctor’s orders. If the employee does
not follow the doctor’s orders, it could be grounds for denying work¬
ers’ compensation coverage. The doctor should put any special require¬
ments for the employee in writing. Be sure the employee goes to the
doctor that handles the workers’ compensation cases for your business.
3. The employee must file the claim. The employer must provide
the employee with the proper forms, but it is the employee’s
responsibility to file the claim.
Checkpoint
What is the purpose of workers' compensation insurance?
Risks in International Business
When you start working with businesses and customers in other coun¬
tries, there are other risks that you face. If you ship an order without
receiving payment first, you risk never being paid for the order. It will
be much more difficult for you to collect the payment from a business
in another country. Businesses in other countries may want to pay
you with their country’s currency. You will have to consider the sta¬
bility of the value of their currency against the American dollar before
agreeing to payment terms.
Doing business in a foreign country can be difficult. You will
encounter problems that you probably have not run into in the
United States. These new challenges will arise for several reasons.
1. You may not speak the language of the countries you are tar¬
geting. If you cannot communicate with buyers or consumers,
how can you sell your service or product? Misunderstandings are
likely to occur.
2. You may not be familiar with the laws, customs, and cultures
of foreign countries. In the United States, looking direcdy at
people while speaking to them is a sign of respect. In some other
countries, it is a sign of disrespect. If you fail to recognize these
differences, you risk offending those with whom you are trying to
do business.
3. You may have to change your products or services to meet the
needs of new markets. Consumers abroad have different needs
and wants than do consumers in the United States. What sells in this
country will not necessarily appeal to foreign customers. You will need
to consider this when you sell products or services in other countries.
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4. Your travel and shipping expenses may be high. International
flights can be very expensive. Sending or receiving packages over¬
seas can also be cosdy.
Strategies for Dealing with Global Risks
If you decide to conduct business globally, you should develop a plan
that oudines your goals and identifies your risks. Analyze the foreign
target market and perform research to learn more about the risks of
doing business abroad. Strategies recommended for dealing with the
risks of international business include the following:
1. Seek government assistance to answer your questions about
international business. Government agencies such as the Small
Business Administration and the International Trade Administration
can provide counseling, locate buyers overseas, and promote U.S.
products and services.
2. Conduct business in many different countries. If you are doing
business in only one country and something happens in that coun¬
try, such as political upheaval, you run the risk of losing all sales
and profits.
Famous
M cr\/ Griffin
A legend in his own time, the late,
great Mervyn Edward Griffin Jr. has
left his mark on the world. Griffin
was not afraid to take risks during
his career. He built a very success¬
ful empire because of the chances
he took. Wheel of Fortune and
Jeopardy are the creations of Merv
Griffin. He even wrote the Jeopardy
theme song.
Griffin was multitalented as a
singer, musician, actor, and televi¬
sion talk-show host. His game-
show empire landed him on the
Forbes list of the richest Americans.
When he sold the rights to his
shows to Columbia Pictures Televi¬
sion for $250 million, he was not
interested in retiring. He went into
real estate and other ventures to
escape boredom.
Griffin's talents were evident
early in his life. His Aunt Claudia
taught him to play piano at age 4.
Soon he was staging shows on the
back porch of the family home.
He had a show every Saturday,
recruiting the neighborhood kids
to join him. He thought of him¬
self as a producer even then,
assigning them to be stage¬
hands, actors, the audience,
or all three!
He quit college and got a
$100-per-week job as a singer
on the radio. His career in the
entertainment field began there.
He was introduced to game
shows in New York and hosted
several.
Merv continued working
until he died in August 2007. His
son Tony summed up his life by
saying, "He loved business and
continued his many projects and
holdings even while hospitalized."
Why do you think creativity
is an important attribute for
entrepreneurs?
Think Critically
What moves in Griffin's career do
you think were risky for him?
12.3 Other Risks 351
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3. Work with local business partners. If you partner with a company
that is located in the country you are targeting, your company will
be better received by locals in that country.
4. Employ local management. If you hire managers from the country
you are targeting, they will have a better understanding of the cul¬
tural and political scene of the country. They will be able to assist
you in any product modifications or changes in business practices
you need to make to work with the foreign market.
5. Learn about the other country’s culture. Research the country’s
cultural customs and beliefs. Develop cultural sensitivity.
Checkpoint
I What are some of the challenges of competing internationally?
i2.3 Assessment
THINK ABOUT IT
1. What are the risks involved in using and extending credit?
2. Why are some workplace injuries not covered by workers'
compensation insurance?
3. What are some strategies you can use to reduce the risks
involved with international business?
352 Chapter 12
MAKE ACADEMIC CONNECTIONS
4. COMMUNICATION You witnessed a serious accident at your
business. You need a detailed description of the accident for
your insurance company. Write an account of the accident using
clear, concise language. You must be objective about the accident
and should not include your opinion about what happened.
5. MANAGEMENT You are planning to open a retail store that
will sell home appliances and furnishings. Decide what type
of consumer credit you will offer and develop a credit policy.
Present your decisions to the class.
Discuss the following. Many employers think workers abuse workers'
compensation insurance. They may hire people to investigate workers
who are on medical leave to determine if they are conducting them¬
selves in any way that is not consistent with the injuries they have
claimed. Suppose a worker claims he has hurt his back and cannot
work. If he is seen lifting heavy objects or climbing a ladder at his
home, then the employer may have a case for discontinuing the
employee's workers' compensation claim. Do you think it is ethical
for employers to spy on employees? What can be done to keep
workers from abusing workers' compensation insurance?
Risk Management
greene_0538446145_ch 12, 1/17/8, 15:20, page: 353
i
(
Respect Cultural Diversity
In today’s global economy, you will come in contact with all kinds
of people. Many of these people will be from cultures different from
your own. You may work with people of different cultures. You may
also buy from and sell to people of different cultures. As an entrepre¬
neur, you need to appreciate different cultures for the
following reasons:
• You need to be comfortable with your customers.
If you are open to other cultures, you can attract
more customers.
• People from different cultures may have differ¬
ent needs and wants. Understanding these can
help you market your business more effectively.
How can you develop good relationships with
everyone you do business with? There are at least
five things you can do to enhance these relationships:
1. Avoid stereotyping people. Don’t assume that
all people from a particular ethnic or cultural group hold the
same values and opinions, behave the same way, or like the same
things.
2. Focus on similarities rather than differences. Most people,
regardless of their culture, want the same things in life.
3. Learn about different cultures. Learning about a different
culture will make you more comfortable around people from that
culture. Learn how people in a different culture live and work.
4. Make friends with someone from a different culture. The
friendship will help you begin to appreciate other cultures.
5. Try to understand and identify with other people’s feelings.
Try to see the world through the eyes of people from different
cultures. Try to understand cultural views that are different from
your own.
TRY IT OUT
Before conducting business in another country, you will have to answer
many questions to address the risks. Will your product sell well in
another country or will you have to make modifications to it? What
aspects of the country’s culture could affect your business? How can
you learn about another country’s culture? Using the Activity CD,
open the activity “Competing in the Global Economy.” Print a copy
and complete the activity.
Sharpen Your Entrepreneurial Skills 353
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Chapter 12 Assessment
SUMMARY
12.1 Business Risk
1. To prepare for risks, you should (1) determine what can go wrong,
(2) develop a plan, and (3) communicate your plan to employees
and first responders.
2. Theft is one of the biggest risks faced by business owners. Types
of theft include shoplifting, employee theft, robbery, credit card
fraud, and bounced checks. Business owners can take precautions
to prevent these risks.
12.2 Insure Against Risks
3. Classifications of risk faced by businesses are based on the result
of the risk (pure or speculative), controllability of the risk (control¬
lable or uncontrollable), and the insurability of the risk (insurable
or uninsurable).
4. Insurance does not cover risks that cannot be reasonably predicted
or if the financial loss cannot be calculated. Uninsurable risks are
tied to economic conditions, consumer demand, competitors’
actions, technology changes, local factors, and business operations.
5. You will have to analyze the risks your business faces to determine
the types of insurance you should purchase. A typical business own¬
er’s policy (BOP) covers property damage, business interruption,
and liability. Depending on your situation, you may also want to
purchase life, flood, crime, or renter’s insurance.
6. Before committing to an insurance purchase, compare prices and
policies and seek advice from experienced business owners.
12.3 Other Risks
7. Although useful to you as a business owner and your customers,
credit has risks associated with its use. You must analyze the
potential risks of credit to determine if it is wise for you to use
and/or accept it.
8. Workers’ compensation insurance covers employees’ medical
expenses and lost wages incurred as a result of workplace injuries
and occupational illnesses.
9. To reduce international business risks, companies should seek
government assistance, conduct business in many countries,
involve local business partners, employ local management, and
learn about the culture.
What do you hnow now?
Read Ideas in Action on page 331 again. Then answer the questions a
second time. How have your responses changed?
354 Chapter 12
Risk Management
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. The possibility of some kind of loss
2. Taking action to prevent or reduce the possibility of loss to your
business
3. Looking at all aspects of your business and determining the risks
you face
4. The act of knowingly taking items from a business without paying
5. A payment to cover the cost of insurance
6. A risk that presents the chance of loss but no opportunity for gain
7. A risk on which actions have no effect
8. A pure risk faced by a large number of people and for which the
amount of loss can be predicted
9. When one business allows another business to buy now and pay
later
10. A law that provides for benefits to employees who have suffered
work-related injuries or occupational diseases
11. A risk that can be reduced or possibly even avoided by actions you
take
12. A risk that presents the chance to gain as well as lose from an
event or activity
bounced check
consumer credit
controllable risk
Federal Employees'
Compensation Act
(FECA)
insurable risk
premium
pure risk
risk
risk assessment
risk management
shoplifting
speculative risk
trade credit
uncontrollable risk
REVIEW YOUR KNOWLEDGE
13. True or False? Businesses can avoid all possible risks by purchas¬
ing insurance.
14. Conducting a risk assessment involves all the following actions except
a. learn the risks your business faces
b. decide how risks will affect your business
c. prioritize the risks by the impact they will have on your business
d. communicate your plan
15. True or False? Credit card fraud is an example of an economic risk.
16. If there is a risk that a loss will occur and the amount of the loss
cannot be predicted, the risk is_?._.
17. True or False? A credit card offered by a home furnishings cen¬
ter is an example of an installment loan.
18. Which of the following is not a risk associated with doing business
in another country?
a. language barriers
b. different laws, customs, and cultures
c. high travel and shipping costs
d. all of the above are risks
19. A_?_plan will enable you to get back to business as quickly as
possible after a disaster and help you continue to meet customer
needs.
Chapter 12
Assessment
355
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20. Which of the following types of insurance would cover the cost to
repair your office building if it were damaged by fire?
a. property insurance
b. business interruption insurance
c. liability protection
d. life insurance
21. A change in the way web sites are accessed that requires new,
expensive computer equipment is an example of a risk related to
a. economic conditions c. competitors’ actions
b. consumer demand d. technology changes
22. Which of the following types of insurance would cover losses your
business incurred as a result of selling a faulty product that injured
someone?
a. property insurance
b. business interruption insurance
c. liability protection
d. life insurance
23. True or False? A speculative risk is classified as uninsurable.
24. True or False? The credit that a retail business extends to custom¬
ers is called trade credit because they are trading money for goods.
25. True or False? When you extend credit to a customer, you are
guaranteed that you will receive payment for the goods or services
sold.
26. True or False? All injuries that occur at work are covered by
workers’ compensation insurance.
27. Which of the following is not a strategy for dealing with a global risk?
a. conduct business in only one country to minimize the risk
b. seek government assistance
c. work with local business partners
d. employ local management
28. True or False? If you are leasing a building for your business,
you do not need to carry renter’s insurance because the owner of
the building is required to carry insurance.
APPLY WHAT YOU LEARNED
29. You plan to open a horseback riding training center with a horse
boarding facility. Make a chart and list the types of risk you will
face. Categorize the risks as human, natural, or economic. Classify
risks as controllable or uncontrollable and insurable or uninsurable.
If the risk is insurable, list the type of insurance that you could
purchase to protect against the risk.
30. Make a list of accidents and injuries that workers in a hospital
could experience. Write “yes” next to the accidents and injuries
that will be covered by workers’ compensation insurance. Write
“no” next to those that would not be covered.
31. You own a clothing boutique and have recendy expanded into
catalog sales. Many of your products will be sold abroad. What
cultural issues are relevant to your business?
356 Chapter 12
Risk Management
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MAKE ACADEMIC CONNECTIONS
32. MATH You are trying to decide whether to purchase security
equipment for your business or hire a security guard. You research
the cost of the security equipment you will need and find that it
will cost $15,000 and has a useful fife of 3 years. You have looked
into hiring a security guard through an agency and find that it will
cost you $50 per hour to hire a guard for 3 hours per day. Calcu¬
late and compare the annual cost of each and decide which will be
the most cost-effective for your business.
33. COMMUNICATION Interview a business owner in your com¬
munity to find out what type of controls the owner has in place
for handling cash to minimize losses due to theft. Prepare a pre¬
sentation and share your findings with the class.
WHAT WOULD VOU DO?
Your business is growing and you recently hired five new employees.
Your business has been exempt from paying workers' compensation
insurance premiums, but with the addition of new employees, you
will no longer be exempt. You do not agree with the workers' com¬
pensation program because of the added expense to your business.
1^. You are thinking about not paying the premiums. Would this be fair
to your employees? What would happen if one of your employees
had a serious injury on the job and you did not have workers' com¬
pensation insurance?
V_ w
build your
Business Plan
Project
This activity will help you continue with the development of a busi¬
ness plan by outlining your risk management plan.
Identify risks faced by your business and establish a plan for dealing
with them. Describe how the business will prevent shoplifting, employee
theft, robberies, credit card fraud, and bad checks. Research how much
it will cost to buy special security equipment or hire a guard. Present
your proposal to the class. Prepare to defend your strategies.
Contact an insurance agent to obtain information on insuring your
business. What types of insurance do you need? How much coverage
should you buy?
Research workers' compensation laws for your state. Explain how you
will meet your responsibilities for these laws.
What are some other cultures you will be exposed to in your busi¬
ness? Research one of these cultures and find out information about
the lifestyle and business practices associated with this culture. What
cultural issues will affect your business? How will you market your
product or service to this and other cultures?
Chapter 12
Assessment
357
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Planning a
Insurance
Career in
"A
#nifter returning from the
grocery, our neighbor came home
to a big mess. The laundry he had
tossed into the machine prior to
leaving the house had been off-
balance. During the spin cycle
the water hose became loose
and caused a huge water leak.
Although he did his best to dry
out the floors, he ultimately had to
replace the hardwood flooring in
the rooms bordering the laundry
room. Fortunately his homeowners
insurance covered the costs.”
How do individuals and busi¬
nesses protect their assets from
unexpected mishaps that result in
financial expenses? How is insur¬
ance coverage matched to particu¬
lar levels of need?
Insurance agents sell and ser¬
vice insurance policies. The agent
is an intermediary between the
insurance provider and the insur¬
ance buyer. Agents are responsible
for explaining policies to clients
and helping them obtain appropri¬
ate coverage for specific situations.
EMPLOYMENT OUTLOOK
• Slower than average growth is
anticipated.
• As insurance is a basic societal
requirement, there will be a
steady need for agents.
• Agents who utilize both Internet
efficiencies and automated claims
processing should be able to
expand their client base.
JOB TITLES
• Career Agent
• Financial Services Agent
• Licensed Sales Professional
• Agency Specialist
• Property & Casualty Underwriter
• Strategy Director, Protection
Business
NEEDED SKILLS
• As insurance policies are complex,
a Bachelor’s degree, with a busi¬
ness or mathematics focus, is
often required.
• A state license is required to sell
insurance.
• Professional certification is avail¬
able to demonstrate competency
in specialized areas.
• Continuing education is often
mandatory.
What's it like to work in Insurance
Narelle, an independent insurance
agent, is comparing automotive
insurance policies from a variety
of policy providers for her new
client—a young driver. As an inde¬
pendent agent, Narelle matches the
needs of her clients to the policies
that provide the best combination
of rates and coverage. Narelle
knows that by providing her young
client with economical, effective
coverage as well as courteous ser¬
vice, she can probably secure him
as a new long-term client.
After lunch, Narelle finishes
the handouts she is preparing for
tomorrow’s lunch seminar at a
local Small Business Administration
meeting. She is planning to discuss
the appropriate types of coverage
for each stage of business develop¬
ment. Narelle has learned that par¬
ticipation in professional meetings
often results in valuable sales leads.
As an independent agent, develop¬
ing new clients is essential to her
ongoing success.
What about you? Would you like
to help individuals and businesses
identify their risks and help them
obtain the appropriate insurance
coverage to protect their assets?
35B Chapter 12 Risk Management
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:
ill !!■
jr
RUSIMESS SERVICES MARKET1MG
*OECA
'mmgle/M
SERIES EVEMT
Lincoln is a national award winning city that takes great pride in its
landscaping. Beautiful Spaces is a landscaping company owned by one
of the Lincoln city council members (Chris). Beautiful Spaces has con¬
tracted with Lincoln for the past several years to plant, mow, water,
and maintain the medians. The company has a $400,000 annual con¬
tract for its landscaping services.
Lincoln residents have not been happy with the work performed
by Beautiful Spaces. The medians are not maintained, and many proj¬
ects are incomplete. Beautiful Spaces has blamed its delays on bad
weather, a low supply of water, and a shortage of flowering plants.
You are the city manager for Lincoln. You must meet with Chris
to let him know that the city will not honor the contract with Beauti¬
ful Spaces because the company has not fulfilled its commitment. You
must also work out an acceptable financial agreement that takes into
account the inadequate and incomplete work. Based on the schedule
outlined in the contract, Beautiful Spaces should have completed the
project 60 days ago. The contract states that a $100 fine will be
charged for each day of incompletion. Beautiful Spaces has been
paid $150,000 for completion of one-fourth of the total project.
You will meet with Chris to discuss an acceptable agreement for
ending the contract and paying the city fines for incomplete work.
You have ten minutes to determine your plan of action and ten
minutes to explain your plan to the owner of Beautiful Spaces. Chris
(the judge) can ask questions about your plan of action following
your presentation.
PERFORMANCE INDICATORS EVALUATED
• Describe legal issues affecting businesses.
• Describe the nature of legally binding contracts.
• Demonstrate responsible behavior.
• Demonstrate honesty and integrity.
• Explain business ethics in product/service management.
Go to the DECA web site for more detailed information.
Think Critically
1. What is the conflict of interest in this case?
2. Why should Beautiful Spaces pay the city of Lincoln?
3. What compromise could the city propose to reduce the fines?
4. How can the city avoid this situation in the future?
www.deca.org
Winning Edge 359
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for the Future
13.1 Growth Strategies
school.cengage.com/entrepreneur/ideas
360
13.2 Ethical and Social
Issues
13.3 Global Trends and
Opportunities
greene_0538446145_chl3, 12/21/7, 20:13, page: 361
n i
IDEAS IM ACTION!
Joseph Pascaretta, Alps Techno¬
logy and Alps Lawn Company
Starting Young and Moving Up
J oseph Pascaretta is a motivational speaker, private
pilot, college student, and successful entrepreneur.
He started his first business at the age of 11. Because of
his young age, he faced many obstacles in establishing
professional relationships. Members of the business
community did not want to take him seriously.
His first business was a web design company
that he started with his friend, Aaron Dowen,
who was the web designer. Joseph sold the
web services to local businesses, including a car
dealership, and Aaron built the web sites. The business grew steadily until
2003, when the market for web design services changed. So, Joseph
changed the business and began to offer database integration services.
His company, Alps Technology, purchased 3-million gigabytes of database
service space and began offering its clients full-service database integra¬
tion, including IT support, database space, software consulting, and hard¬
ware integration. Today, Alps Technology employs 44 people, and most
of these are college students who work from home. Joseph learned at an
early age that success is about what you do differently.
In 2002, Joseph was looking for a way to invest revenue from Alps
Technology into another profitable business. He purchased a commercial
lawnmower and began to offer landscaping services. Today, Alps Lawn
Company has a client base of 60 residents and 21 businesses and has
plans to expand into three other states. To visually show clients what
their landscape project will look like, Joseph uses computer-aided design
landscape software. He integrates his interest in flying into the business
by offering aerial photography of the landscaping projects.
Joseph attends the University of Michigan while continuing to run
his two businesses. With two successful businesses already up and run¬
ning, Joseph could have decided to skip college, but he realized that a
college degree is a valuable asset in today's business world. After college
graduation, he plans to evaluate his options and see what opportunities
are available. As an entrepreneur, he is always looking for new, innova¬
tive ways to reestablish himself in the business world.
What do you fcnow?
How do you think Joseph knew when to add new services to his web
design business?
Why is it important for Joseph to continue to offer new services to
his customers?
Why do you think business owners need to be aware of what is going
on in the business world and be willing to change when necessary?
361
greene_0538446145_ch 13, 1/17/8, 15:26, page: 362
• market penetration
• market development
• product life cycle
• prototype
Know when to grow
Mary Ardapple, owner of Apple's Bakery in Peoria, Illinois, has moved
her business three times since she opened it in 1989. Her menu has
expanded and now has three times its original offerings. She even
makes her baked goods available to those outside the Peoria area
through an online store.
Mary is not content to conduct business as usual and is always
looking for new opportunities. Currently, she is planning to add a
health-conscious line of baked goods to her offerings. Throughout
all the moves and expansions, Mary and her team have not
forgotten the company's original motto, "Where smiles are made
from scratch!"
Work as a Team How
do you think Mary has
known when her
business was ready to
expand? Do you think
it is important for Mary
and her team to always
remember their original
motto?
Determine When to Expand
Sooner or later, you will consider expanding your business. Some
businesses have difficulty growing. Others expand too quickly. To
expand successfully, you will need to determine both when and how
to expand. You will also need to control your growth.
Before deciding to grow your business, be sure that all of your
operations are functioning well. Unresolved operational issues will
only get bigger and cause more problems when the business gets
larger. You also need to be sure that you take care of your current
customers when you begin growing your business. Remember, they
helped you get where you are. You want them to feel comfortable
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with the changes, knowing that their needs will continue to be
met.
Determining when to expand depends on two main factors: the
condition of your business and the economic conditions in the market
in which your business competes.
Consider the Condition of Your Business
How do you determine when it is time to expand your business?
Some of the signs you should look for include the following:
• Your business is recognized by your community and industry.
• Your sales are rising.
• You have a customer base that regularly buys from you.
• You are hiring more employees and now have managers.
• You need more space.
Develop Your
Reading Skills
While reading, write notes
highlighting the main ideas.
At the end of each section,
review what you have writ¬
ten and fill in any gaps.
Focus on the important
points, and support them
with relevant details.
Assess Economic Conditions
If the condition of your business shows that you should expand, you
should next analyze the economic climate that controls the business.
You should ask the following questions:
1. How is the national economy doing? Are people worried about
spending money, or are they spending freely?
2. What are the economic conditions in your industry or region?
3. Have the demographics of your market changed?
4. Is demand for your product or service expected to remain strong?
5. Does your business face new competition?
Checkpoint
What factors should you consider before deciding to expand your
business?
4
Control Your Growth
Growing rapidly may sound like a great thing for a business, but
uncontrolled growth may be just as bad as no growth at all. Busi¬
nesses that grow too quickly often find that they don’t have the
resources to support their growth. They can lack money, employees,
supplies, and more. As a result, they often overextend themselves.
Sometimes they are even forced to go out of business.
Joshua King owned a successful bookshop, Pegasus Books. Excited
over his success, Joshua opened a second shop, but he underestimated
the costs involved in running a second store. The stress of managing
two stores was overwhelming, and Joshua found he could no longer
provide the personal service his customers wanted. After nine months,
Joshua had to close his second bookstore.
13.1
Growth Strategies 363
greene_0538446145_ch 13, 1/15/8, 17:48, page: 364
Create a Plan for Growth
To make sure that your business expands successfully, you will have
to control its growth. This means you will need to come up with a
plan for expansion that should include strategies for the following:
• attaining measurable objectives and goals (examples are reaching sales
goals, increasing your customer base, and opening another store)
• hiring managers and supervisors
• financing expansion
• obtaining resources for expansion (capital, equipment, inventory,
materials, and supplies)
Checkpoint
Why is it important to control the growth of your business?
Choose a Growth Strategy
You can expand your business in various ways. You can get more people
to buy your products or services. You can expand into other geographic
areas. You can also find new products and services to sell.
WHAT WENT WRONG
*
Makeup Test
Sarah-Jane Stevens founded Charisma Cosmet¬
ics. Her company targeted professional cosmet¬
ics dealers serving makeup artists in the film,
TV, and theater industries. Charisma Cosmetics
had an excellent reputation as a high-quality
manufacturer, a loyal customer base, and a
major share of the market. However, competi¬
tors were slowly chipping away at Charisma's
customer base. To remain competitive, Sarah-
Jane rolled out a new brand, Picture-Perfect by
Charisma, in the fall of 1999. This brand was
specifically designed to be sold in department
stores.
The new strategy angered the professional
cosmetics dealers who were the core customers
of Charisma Cosmetics. Their competitive advan¬
tage had been to provide better products that
were not available elsewhere. With Charisma's
Picture-Perfect brand on the market, they no
longer had the same competitive edge.
"We were determined to grow, and we
strayed from our root value of 'don't be bigger,
be better,'" Sarah-Jane said. Just eight months
after getting into the department store market,
Sarah-Jane got out. The company ended up los¬
ing hundreds of thousands of dollars in develop¬
ing and marketing the Picture-Perfect brand.
Think Critically
1. What problems were
created by the
"Picture-
Perfect by
Charisma"
brand?
2. How might
Sarah-Jane
have expanded
without anger¬
ing her dealers?
0)
cn
to
E
a>
§
O
o
o
-C
Q_
©
Consider the risks when growing your
business.
364 Chapter 13 Management for the Future
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Penetrate the Market
Market penetration is increasing market share for a product or ser¬
vice within a given market in a given area. If total sales for your target
market are $500,000 and your business attracts 5 percent of that
market, your sales will be $25,000. If you raise your market share
to 15 percent, your sales will be $75,000.
You can increase your market share by doing the following:
• Increase your advertising.
• Offer customers special deals, such as frequent-buyer cards, incentives
to purchase, and discounts.
• Offer superior customer service.
Taking these actions will cost you money. You may spend more on
advertising or incur the cost of giveaway items. But spending money
now can pay off with larger profits in the future.
Expand Geographically
Geographic expansion occurs when you decide to market your service
or product in another town, city, county, state, or country. Sheila
Velez owns a business that builds sunrooms in the northern part of
her state. To increase sales, Sheila recently began advertising through¬
out the entire state. She has already received calls from consumers
100 miles away who are interested in her product.
Diversify with New Products or Services
Market development is a strategy for expanding the target market of
a business. A business expands its target market by diversifying, which
means selling new products or services in addition to what it already
offers.
Sue Ann Rader owns a musical instrument store. Three years
ago, she added a sheet music department. She reduced the inventory
of instruments to make room for the inventory for the new depart¬
ment. Sheet music now contributes 25 percent of her annual profits.
Businesses can fail if they diversify into the wrong areas. Use the fol¬
lowing guidelines to make sure that your business diversifies successfully.
• Do not go into areas that you know nothing about.
• Choose a product or service that complements what you already sell.
• Avoid investing too much capital in new areas before you know if
they will be profitable.
• Don’t neglect your original product or service line.
Sue Ann would like to open a cafe in her store. She would have
to make room in her store to do so. Her lack of experience in run¬
ning a cafe and her concern about the effect on her main business
convince her not to open it.
.
Checkpoint
What are some ways you can expand your business?
13.1 Growth Strategies 365
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Product Life Cycle and Development
A business must constantly monitor the sales of products and develop
new products. Consumer interest in most products will decline over
time. A business must keep developing new products in order to
maintain a presence in the market.
Stages of a Product Life Cycle
The stages a product goes through from the time it is introduced to
when it is no longer sold is called its product life cycle. A product
goes through four stages in its life cycle: introduction, growth, matu¬
rity, and decline. The stage of the life cycle can be determined by the
type of competition the product is facing.
INTRODUCTION The first stage of the product life cycle is the intro¬
duction of a new product into the market. At this stage, the product
is quite different from existing products, so customers are not aware
of it or how it can satisfy their needs. The price may be high during
this stage as the company tries to cover the expenses of developing
the product. The competition, if any, for the product at this stage
consists of older, established products.
GROWTH If a product is successful in the introductory phase, it will
attract more customers and enter the growth stage as sales begin to
increase. The product will be distributed more widely as more con¬
sumers start to buy it. Competitors will see the opportunity for sales
and introduce their own product. A competitor’s product needs to
have different features and options so that it can be positioned in the
market as a better product. There will be a wider range of prices for
the product during this stage due to competition.
MATURITY During the maturity stage of the life cycle, sales peak and
profits begin to decline. The product is in high demand and many
companies offer it, so competition is very intense. Pricing becomes an
important factor at this stage, since customers view products on the
market as being similar. Businesses will offer discounts or sale prices
to encourage customers to buy their brand. Companies make sure
their product is easy for customers to find. During the maturity stage,
a great deal of money will be spent on promotion, because companies
want to keep their brand of the product on the minds of customers.
DECLINE The decline stage occurs when consumers decide that a
product is no longer meeting their needs or when they discover
new and better products. Sales will begin to drop rapidly, and profits
will drop. During this stage, there is little opportunity for product
improvement. Since the product is not contributing a profit, no
more money will be invested in it. Distribution is cut to only areas
where the product is still profitable. Many times the price is cut dur¬
ing the decline stage. Promotion is decreased and targeted specifi¬
cally to loyal customers in an effort to keep them as long as possible.
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New Product Development
In order to stay competitive in the market, a business must develop new
products or services to offer to customers. When a business decides to
develop a new product, it takes steps to be sure that it develops a product
that is likely to be successful. The business wants to find out early in the
development process whether the product is likely to be successful before
investing too much money in it. It is also important for the business to
determine that the product meets an important market need, can be pro¬
duced well and at a reasonable cost, and will be competitive with other
products in the market. Soft drink companies introduced more new prod¬
ucts during 2000-2002 than were introduced during the entire decade of
the 1990s. New soft drink products continue to be introduced each year.
SOFT DRINKS INTRODUCED SINCE 2000
Drink
Company
Drink
Company
Introduced in 2007
Introduced in 2002
Diet Pepsi Max
Pepsi Cola
Vanilla Coke
Coca-Cola
Diet Vanilla Coke
Coca-Cola
Introduced in 2006
Dr Pepper Red Fusion
Dr Pepper/7 UP
Coca-Cola BlaK
Coca-Cola
dnL
Dr Pepper/7 UP
Pepsi Blue
Pepsi-Cola
Introduced in 2005
Diet Mountain Dew Code Red
Pepsi-Cola
Coca-Cola Zero
Coca-Cola
Sobe Mr. Green
Pepsi-Cola
Coca-Cola with Lime
Coca-Cola
Mountain Dew MDX
Pepsi-Cola
Introduced in 2001
Pepsi Lime
Pepsi-Cola
Diet Coke with Lemon
Coca-Cola
Fanta (reintroduced in U.S.)
Coca-Cola
Introduced in 2004
Diet Sierra Mist
Pepsi-Cola
Diet Coke with Lime
Coca-Cola
Mountain Dew Code Red
Pepsi-Cola
Coca-Cola C2
Coca-Cola
Mountain Dew AMP
Pepsi-Cola
Introduced in 2003
Introduced in 2000
Mountain Dew Livewire
Pepsi Cola
Pepsi Twist
Pepsi-Cola
Diet Pepsi Twist
Pepsi-Cola
Sierra Mist
Pepsi-Cola
Red Flash
Coca-Cola
Product development involves the following steps: (1) idea develop¬
ment, (2) idea screening, (3) strategy development, (4) financial analysis,
(5) product development and testing, and (6) product marketing.
IDEA DEVELOPMENT The first, and often the most difficult, step in
product development is finding ideas for new products. Employees or
customers can generate ideas. Many times salespeople will hear wishes
and complaints from customers about what they would like to see and
not see in products. If the salesperson shares this information with the
development department, this can help with ideas for new products.
IDEA SCREENING Once ideas have been developed, they are screened
to select the ones that have the greatest chance of being successful. Ques¬
tions to be answered during the screening process include the following:
• Has a market been identified for the product?
• Is the competition in the market reasonable?
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• Are resources available to produce the product?
• Is the product legal and safe?
• Can a quality product be produced at a reasonable cost?
STRATEGY DEVELOPMENT Once an idea has been determined to be
reasonable, the business will create and test a sample marketing strat¬
egy. The business performs research to identify the appropriate target
market and to be sure that there are customers with adequate income
who are looking to satisfy a need that the product meets. Questions
asked during this stage include:
• What is the likely demand for the product?
• How would the introduction of the product affect existing products?
Would the new product take away market share from existing prod¬
ucts the company produces?
• Would current customers benefit from the product?
• Would the product enhance the image of the company’s overall
product mix?
FINANCIAL ANALYSIS If a new product idea is determined to meet a
market need and can be developed, the company will perform a finan¬
cial analysis. Spreadsheet programs
are often used in this step. Costs
of production and marketing, sales
projections for the target market,
and resulting profits are calculated.
Questions to be answered at this
stage include the following:
• What impact could the new
product have on total sales,
profits, market share, and
return on investment?
• Would the new product affect
current employees in any way?
For example, would it require
people with different skills, the hiring of more people, or a reduction
in the size of the workforce?
• What new facilities, if any, would be needed?
• How might competitors respond?
• What is the risk of failure? Is the company willing to take the risk?
PRODUCT DEVELOPMENT AND TESTING When a manufacturer sees
a market opportunity and decides to develop a new product, it makes a
prototype, which is a full-scale model of a new product. After testing the
prototype in the laboratory and making final adjustments, the company
designs the production process, obtains needed equipment and materials,
and trains production personnel. The product is then test-marketed in
selected areas. If it receives a positive response, the manufacturer places
the product into full production. If not, the manufacturer drops it.
Why is it necessary to perform a financial
analysis when developing a new product?
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PRODUCT MARKETING Introduction of the product into the target
market is the last step in the product development cycle and the first
step of the product’s life cycle. Before this takes place, many other
things must be done. The marketing mix elements must be carefully
planned, and there must be an adequate supply of the product on
hand to meet the needs of the target market.
Once the product has been introduced into the market, the com¬
pany will have to monitor its life cycle. Many new products fail even
though the product development steps have been followed carefully.
Products may not match the needs of customers, or customers may
not see what differentiates the product from other products on the
market. The product may be priced too high or too low, poorly dis¬
tributed, or improperly promoted.
Checkpoint
Why must a business be concerned with the life cycle of a product
and with new product development?
4
i3.i Assessment
THINK ABOUT IT
1. What are the negative consequences, if any, of not allowing
your business to grow?
2. What are some ways you can control the growth of your business?
3. Your friend owns a successful hair salon. She wants to expand and
asks for your advice on a growth strategy. What will your advice be?
4. List the stages of the product life cycle, and provide an example
of a product in each stage.
MAKE ACADEMIC CONNECTIONS
5. MATH Tony Balducci owns a deli and sandwich shop. Total sales
for his target market are $1.75 million per year. If he attracts
12 percent of the market, what will his sales be? What will
sales be if he increases market share to 18 percent?
6. MATH Luis Zapata owns a sports center with an indoor track,
driving range, and basketball courts. He has recently installed
two batting cages at the facility. Last year, his total sales were
$325,500. If the batting cages take up 5 percent of the space
and add 4 percent to total sales, how much will each batting
cage contribute to total sales?
Form teams. List examples of business growth that you have seen.
Classify the examples as market penetration, geographic expansion,
or market development.
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Focus on Small Business
Making a difference
Perhaps you own a "Life is Good" shirt or some other item with Jake's
smiley-face stick figure on it. Bert and John Jacobs, founders of the casual
clothing company Life is Good, have found the slogan to be true and want
to share that feeling with others. As they started the business and it began
to grow, they had to make decisions about how to grow their company
while staying true to their belief in the simple pleasures of life.
When it came time to decide on an advertising campaign for the
company, Bert and John decided to forego the traditional advertising route
and instead invest the money to help those in need. Today the company
works with a number of charitable organizations and holds a series of
festivals each year in the New England
area. Although it started out as a differ¬
ent way to spend marketing dollars,
today, charitable work has become a
major focus for the company.
Work as a Team What do you think
about Bert and John's decision to
spend their advertising dollars doing
good for the community? Do you think
this decision has helped their company
to grow more than it would have with
a conventional advertising campaign? Businesses have a social responsibility.
What is Ethics?
Ethics is the study of moral choices and values. It involves choosing
between right and wrong. Behaving ethically means behaving in an honest
and fair manner. As the owner of a business, you will have to make ethical
decisions about the way you want to run your business. Thinking about
ethical issues in advance will help you handle conflicts when they arise.
Culture and Ethics
Different cultures define ethical behavior differendy. In some countries,
it is considered unethical to take bribes. In other countries, paying bribes
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Why is it important for a business owner to be aware of culture and ethics when
conducting business internationally?
may be an accepted business practice. In some countries, employers may
treat employees badly. In other countries, employees have established
rights that employers are expected to respect.
Codes of Ethics
Even within the same culture, individuals develop different standards,
or codes, of ethics. A code of ethics is a set of standards or rules that
outlines the ethical behavior demanded by an individual, a business,
or a culture. Some individuals have very high standards of ethics and
do what is right in every situation. Other individuals do not develop a
standard of ethics at all. They act without thinking whether their
actions are right or wrong.
Jan Sommers has a high personal code of ethics. Last week, she
received a duplicate refund check from one of her suppliers. Jan knew
that the check had been sent to her by mistake. She immediately
called the supplier to report the error.
Checkpoint
What does it mean to have a high code of ethics?
Ethics and Business
Ethical questions arise in every type of business. Large corporations,
small companies, and home-based businesses all deal with ethical dilem¬
mas at one time or another. Business ethics is the application of the
principles of right and wrong to issues that come up in the workplace.
Set High Standards
Business and ethics used to be considered unrelated to each other.
Over the past hundred years, this view has changed dramatically. Busi¬
nesses today recognize that they must behave in an ethical manner.
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MYTHS ABOUT BUSINESS AND ETHICS Some people believe that
entrepreneurs need not concern themselves with ethical issues. They
believe that their only goal should be increasing profits. They may
treat someone or another business unfairly and use the excuse that “it
is just business.” They might think that acting ethically can hurt their
profits. But in fact, using ethics in business can help you avoid disas¬
ters. It can also make customers and suppliers more willing to do
business with you.
CONSUMER AWARENESS
Both consumers and business
owners are sensitive to business
ethics. Because consumers are so
aware of ethical issues, businesses
find ways to show customers that
they practice ethics in their daily
operations. Manufacturers of
some shampoos and cosmetics
print on their packaging that they
do not test their products on
animals. Consumers who have
strong opinions about animal
rights may be more willing to
purchase such products.
Establish an Ethical
Workplace
As the owner of your business, it will be up to you to inspire your
employees to behave ethically. You will want to establish an ethical
workplace for several reasons.
1. You want to do the right thing.
2. You want to serve as a role model to others.
3. You want to be proud of the way you conduct yourself, and you
want others to be proud of you.
4. Ethical behavior is good for business because it gains the trust of
customers.
5. Employees are more likely to act ethically if they see the business
owner acting in an ethical manner.
6. Acting ethically reduces the possibility of being sued.
CREATE A WRITTEN CODE OF ETHICS One way that you can com¬
municate your ethical beliefs to the people who work for you is by
creating a written code of ethics. Such guidelines will help you and
your employees make ethical decisions.
You should create a code of ethics as soon as you begin your
business. Even if you are your business’s only employee, you should
create a written code of ethics. You should also establish company
policies and procedures to let you and your employees know how to
behave in certain situations.
Would you be more likely to buy products
that are less harmful to the environment?
Why or why not?
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To create an ethical code for your business, think about ethical
dilemmas that may arise and come up with solutions for dealing with
them. Talk to other business owners to see what kinds of ethical
problems they have encountered.
Jackie Rand owns a large discount store. Every month, sales¬
people from various manufacturing companies come to his company
to sell their services or products. They meet with the head of the
purchasing department, Ellen Chao. Last month, a manufacturing
representative offered Ellen a free vacation. Not sure whether she
should accept the gift, Ellen checked the code of ethics outlined in
the company handbook. It clearly stated that gifts worth more than
$100 should never be accepted from manufacturing representatives.
Accepting large gifts from a vendor may make an employee feel
obligated to purchase from that vendor when it may not be the
best choice to meet the business’s needs. The guidelines helped
Ellen solve an ethical dilemma.
Checkpoint
Why is it important for entrepreneurs to establish and write a code
of ethics?
Social Responsibilities
As an individual, you have personal responsibilities to yourself, to
your family, and to your friends. Entrepreneurs also have personal
responsibilities to the people they work and deal with, to the com¬
munities in which they are located, and even to the environment.
What are these responsibilities, and how can you meet them?
Why do businesses have a responsibility to their communities?
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Responsibilities to
Customers
Your customers are your most
important asset. You will need
to treat them properly, or they
will no longer use your services
or buy your products. When
dealing with customers, you
should do the following:
1. Treat all customers with
respect. No one likes to be
treated badly.
2. Be honest. Never take unfair
advantage of customers who
do not know everything
about the product or service
they want to buy. Help your
customers make good pur¬
chasing decisions.
How does a business benefit from treating
customers fairly?
3. Avoid exaggerating the merits of your products or services.
Remember that customers who are not happy with what they pur¬
chase will not do business with you again.
4. Inform customers of possible dangers of the products you sell.
Remember that this is also a legal requirement.
5. Handle all disputes fairly. Try to see the customer’s side of an
issue when there is a disagreement.
Responsibilities to Suppliers
You depend on your suppliers to provide you with the goods you
need to manufacture or sell your products. To make sure that you
maintain good relationships with them, you will need to:
bookmark
Target Corporation is an example of a com¬
pany that places a high value on meeting its
social responsibilities. Access school.cengage
.com/entrepreneur/ideas and click on the
link for Chapter 13. Browse through Target's
Community pages and answer the following:
What is the 5% Giving program? How much
money does Target give to community organ¬
izations every week? Identify two environ¬
mentally friendly measures Target has taken
recently.
school.cengage.com/entrepreneur/ideas <b
374 Chapter 13 Management for the Future
1. Treat all suppliers with respect. If you
respect them, they will respect you.
2. Avoid spreading rumors or incorrect
information about suppliers. Do not
discuss information that is not factual
with others. Rumors can damage a busi¬
ness’s reputation.
3. Give suppliers time to fill your order.
Try not to wait until the last minute to
ask for merchandise.
4. Handle all disputes fairly. Try to see
both sides of the issue and work out a
solution that is fair to both you and the
supplier.
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Why does a business have a responsibility to its suppliers?
5. Let your current supplier know the reason for your decision if
you change suppliers. This is a courtesy to the supplier as well as
a good business practice. The supplier will appreciate the feedback
to use in developing future competitive strategies.
Responsibilities to Creditors and Investors
Creditors and investors have shown faith in your ability to succeed. To
repay them for their confidence in you, you should rim your business as
effectively as possible. You should also let creditors and investors know
when things are not going well. Never conceal risks you are facing.
did you KNOW?
According to the
National Philanthropic
Trust, in 2006 the five
y, eSt borate grant-
makers were:
Wal-Mart F oun -
dati on, $154.5 million
Aventis Pharma¬
ceutical Health
Foundation,
$114.7 million
of America
Foundation,
$80.7 million
Ford Motor
Company Fund
$77.9 million
The Wells-Fargo
Foundation,
$65.0 million
Responsibilities to Your Community
Business owners have a special responsibility to contribute to their
communities. They can do so in various ways, including donating
money, products, and services. They can also get involved in commu¬
nity issues or activities.
CONTRIBUTE MONEY Business owners should donate money to
charities, cultural institutions, and causes in which they believe. It is
their responsibility to give something back to the community. Not all
business owners can make large contributions, but any donation is
welcomed.
DONATE PRODUCTS OR SERVICES Some businesses donate the
products or services their business sells. Used clothing stores donate
unsold clothes to charities. Computer companies sometimes send
technicians to community agencies to help the staffs learn about
computers.
Carrie Rios owns a restaurant. She used to discard all the leftover
food every evening. But now, Carrie donates this food to the local
soup kitchen. Food that Carrie would have thrown away is enjoyed by
dozens of people who otherwise might not have eaten a good meal.
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GET INVOLVED You can contribute to your community in other
ways as well. Some entrepreneurs get involved in issues affecting their
local governments, such as changes in zoning laws and the establish¬
ment of local parks. Others get involved by sponsoring local events
or organizations, such as a school sports team.
Checkpoint
What are some responsibilities entrepreneurs have to suppliers,
customers, and the community?
Respect the Environment
Damage to the environment comes from many different sources. The
burning of coal and oil for energy pollutes the air. Release of toxic
chemicals pollutes the ground, air, and water. Disposal of bi ll ions of
tons of garbage every year also creates environmental problems.
Businesses have a major impact on the environment. As an entre¬
preneur, you will have an obligation to do as little harm as possible to
your surroundings. To meet your environmental responsibilities, you
should do the following:
1. Protect the environment from pollutants. Don’t knowingly
dump hazardous material on the ground or in lakes and rivers.
2. Conserve nonrenewable resources, such as coal and oil, by using
them efficiently. Nonrenewable resources are not easily replaced
once they are gone. It takes hundreds of years to regenerate a
nonrenewable resource. Use alternative resources when available.
3. Reduce waste and dispose of waste responsibly. Recycle materials
such as paper, plastic, aluminum, glass, and steel.
4. Use environmentally safe and sustainable energy sources to meet
your business needs. Electricity is a good example. It can be
replaced quickly and is not a major source of pollution.
Would you be more likely to shop at a store that Is environmentally responsible?
Why or why not?
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5. Sell products that cause as little damage to the environment as
possible. For example, don’t sell a car-wash solution that harms
plant life.
LAWS GOVERNING THE ENVIRONMENT In 1970, the federal gov¬
ernment created an agency to enforce the laws governing the environ¬
ment. The Environmental Protection Agency (EPA) enforces federal
laws concerning clean air and water. If your business handles hazard¬
ous materials, you will need to become familiar with these laws.
4
Checkpoint
As a business owner, what are some things you can do to protect the
environment?
M3.2 Assessment
THINK ABOUT IT
1. All employees should practice ethical behavior. Think of some
ethical dilemmas that a convenience store clerk might encounter.
Then, describe how the clerk could handle these situations.
2. Is it important for entrepreneurs to always act in an ethical man¬
ner? Why or why not?
3. Explain the concept of personal responsibility.
4. At what point do you think a business owner should tell cred¬
itors and investors of a new risk the business is facing? Why?
MAKE ACADEMIC CONNECTIONS
5. COMMUNICATION Using the Activity CD, open the activity
"Business Ethics." Print out the case studies and work with a
partner to decide the best way to handle each situation.
6. MATH Jade Yorida will donate 12 percent of her company's net
income to the community if she makes her profit projections of
a 5 percent increase over the previous year's net income of
$235,000. Assuming Jade's income does increase by 5 percent,
how much will she donate?
7. RESEARCH There have been many cases in recent years of busi¬
nesses and individuals who have not practiced ethical behavior.
Research a business or individual who has been caught practicing
unethical behavior and prepare a report on your findings.
Working with teammates, brainstorm five ethical dilemmas that entre¬
preneurs might face. Then, determine what decisions you would make if
you were faced with these problems. Share your thoughts with the class.
13-2 Ethical and Social Issues 377
#
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International markets
Monika had worked and grown her candy business for three years. She
sold chocolate and mint candies that were very popular
in her store and with her Internet customers. She
recently visited friends in Vienna, Austria, and
took them some of her candy as a gift. They
loved her candy as did their friends. Monika
began to wonder if there would be a market
for her candy in other countries. She went
to her friend Lazio for advice because he
has experience selling antiques in the
United States and other countries.
Work as a Team What advice do you
think Lazio might give Monika? What
things should Monika research before
deciding to sell her candy outside of Selling globally can be a way to grow your
the United States? business.
Exports and Imports
The global marketplace has dramatically changed the way businesses
operate. It has made business more competitive, and it has opened
new opportunities for companies, including small entrepreneurial busi¬
nesses. As the global marketplace continues to expand, entrepreneurs
can take advantage of even more opportunities.
International trade is one way you can become part of the global
marketplace. This means you would export or import the products or
services you sell or use in your business.
Exporting
Products and services that are produced in one country and sent to
another country to be sold are exports. The United States exports
agricultural products, automobiles, machinery, computers, and more.
These products are shipped to countries all over the world.
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DIRECT EXPORTING You can find
buyers or distributors in foreign
markets and ship your products to
them. This is called direct exporting.
For direct exporting, you may need
to hire salespeople who live in or
travel to the foreign countries.
Tiffany Wilson owns a mid¬
sized printing company. Last year,
Tiffany decided to expand her busi¬
ness internationally. She hired a
Dutch sales representative, Mieta
Van Praag, to market her business in
Europe. Mieta calls on customers in
the Netherlands and France.
Why might direct exporting be more difficult than indirect exporting?
INDIRECT EXPORTING It can be
difficult to make contacts with
buyers in other countries. Some
businesses use commissioned agents who act as brokers to find foreign
buyers for products and services. Exporting through commissioned
agents is indirect exporting.
©
SELLING WORLDWIDE THROUGH THE WEB Another way to get
involved in exporting is through the World Wide Web. Businesses
translate and modify their web sites to appeal to foreign customers.
They fill individual orders and ship them directly to the foreign cus¬
tomer’s address.
Shahid Mahmoud’s business manufactures puzzles. He recently
began promoting his products abroad over the World Wide Web
because research showed that Japanese buyers like puzzles. To target
that market, he created an e-commerce web site written in Japanese.
Importing
Products and services that are brought in from another country to be
sold are imports. The United States imports many products such as
automobiles from Europe, Japan, and Korea and oil from the Middle
East.
Entrepreneurs may decide to import products to sell or to use in the
production of their product. Price and quality are usually factors in their
decision to import. Consumers like low prices and demand high quality.
James Sutton owns a business that makes African-style clothing.
He imports all of his fabrics from West Africa because of their unique
colors, designs, and textures. James’s customers appreciate his atten¬
tion to detail in creating authentic African clothing.
Checkpoint
Why do entrepreneurs choose to participate in the global market¬
place by exporting and importing products and services?
#
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Is International Business Right for You?
Not every business can succeed internationally. You need to consider
the pros and cons of competing globally. Then, you must determine
whether there is a market for your business in other countries and
write an international business plan.
Reasons for Competing Globally
As discussed in Chapter 12, there are many risks associated with compet¬
ing in the global marketplace. There are also many benefits that interna¬
tional business can provide, including increased profits. There are at least
three good reasons to expand into other countries:
1. Increased sales You will attract new buyers and broaden your
customer base. You may also import unique products that local
customers can buy.
2. Reduced costs Manufacturers in other countries can produce
goods less expensively because of low labor costs or availability
of raw materials. This can mean a savings for you in the form of a
lower price.
3. Decreased dependence on current markets and suppliers If
economic conditions in the United States suddenly worsen, foreign
markets and suppliers might help keep your profits high. Selling
products and services abroad can also help you stabilize seasonal
market fluctuations.
Analyze the Market
Analyzing whether there is an international market for your product
will be very similar to how you analyzed your current target market
and target customers. But in addition to the land of analysis you
learned about in Chapter 4, you will need to consider other factors,
including political, economic, social, and cultural issues. Additional
taxes and regulations are also things to research and consider.
Various resources are available
that can help you learn about doing
business abroad.
Be your own boss
You manufacture toys for small children. You
have found a manufacturer overseas who will
make your toys for less than half of what you
pay to have them manufactured in the United
States. You are considering using the overseas
manufacturer, but you want to be sure it uses
quality materials, provides safe working condi¬
tions, and does not use child labor. Use the six-
step problem-solving model to determine if you
will use the overseas manufacturer.
Trade fairs and seminars sponsored
by the U.S. Department of
Commerce
Dun and Bradstreet’s Exporter’s
Encyclopedia
Trade statistics from the Bureau of
the Census and the Small Business
Administration
Federal or state government market
studies on your industry’s potential
abroad
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Why should business owners analyze the foreign markets in which they want to do business?
Mark Milowski owns a business that processes payroll records.
He recently met with several Hong Kong business owners who
wanted Mark’s company to handle their payrolls. Mark liked the idea
of expanding globally, but he had many questions. He contacted the
Department of Commerce to get information on doing business in
Hong Kong. In addition, he referenced the Exporter’s Encyclopedia to
learn about the regulations he would face.
Write an International Business Plan
An international business plan is an extension of your business plan. It
sets forth your goals for international expansion and defines the strat¬
egies for achieving those goals. Your plan should indicate the following:
• Why you want to expand your business into the global marketplace
• Which foreign markets you plan to enter and why
• What revenues your venture is expected to earn
• How you plan to finance your global expansion
• What costs (travel, shipping, marketing) you expect to have
• How you plan to market and sell your products or services abroad
• How you plan to deliver your products or services to foreign
markets
• What legal requirements you will need to meet to sell your prod¬
ucts or services abroad
Checkpoint
What are some sources of information that can help you learn about
doing business abroad?
#
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Government Regulation of
International Trade
Some governments establish trade barriers, which are methods for keep¬
ing foreign businesses from competing with domestic producers. Quotas,
tariffs, and qualitative restrictions are trade barriers. You will need to
research the existing trade barriers that may affect your global expansion.
Quotas
A quota is a limit on the amount of a product that can be imported
into a country over a particular period of time. Japan places quotas
on the number of foreign automobiles that can be imported. These
quotas protect Japanese car makers from losing business to foreign
competitors.
Tariffs
A tariff is a tax on imports. Governments use tariffs to protect
domestic manufacturers of products that compete with imports. The
United States places a tariff on imported sugar. Foreign companies
that sell their sugar in the United States must pay a tax. This makes
their product more expensive and less competitive with sugar produced
in the United States.
Qualitative Restrictions
A qualitative restriction is a standard of quality an imported product
must meet before it can be sold. A qualitative restriction can keep for¬
eign businesses from competing with domestic producers. It is also
used to protect consumers. For example, the United States insists that
all meat sold in this country meet certain sanitary regulations and that
imported toys meet U.S. safety requirements.
What problems might occur if imported products did not have to meet qualitative restrictions?
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The North American Free Trade Agreement
Implementation of the North American Free Trade Agreement
(NAFTA) began January 1, 1994. This agreement removed most
barriers to trade and investment among the United States, Mexico,
and Canada. This means that U.S. businesses can sell their products
and services in Canada and Mexico just as they would in the United
States. It also means that the United States imposes no quotas or tariffs
on imports from Canada and Mexico. NAFTA makes it much easier to
export and import products and services within North America.
Government Assistance to Companies Operating Abroad
Dozens of different government agencies are available to answer your
questions about doing business overseas. They include the following:
• The Office of International Trade of the Small Business
Administration The mission of this agency is to enhance the
ability of small businesses to compete in the global marketplace. It
works to facilitate access to capital to support international trade
and to ensure that the interests of small businesses are considered
and reflected in trade negotiations.
Famous
Johnny Vag
The Johnny Pag Company manu¬
factures a motorcycle line in China
that is affordable for the average
American. Johnny Pag has designed
and built custom motorcycles for
the past 30 years in Corona,
California. He is well respected
among his peers and has a keen
eye for quality and style. He was
commissioned by his son JR, the
owner of Johnny Pag, to head up
the design and building of the com¬
plete JohnnyPag.com line of motor¬
cycles. He went overseas, taking his
own designs, molds, and tools. He
then guided the Wenzhou, Chinese
welders and assemblers on how to
build the Spyder bike line on their
equipment and machines. The
Chinese have built top-quality motor¬
cycles for the European market for
the past 25 years. By manufacturing
the bikes in China, the retail cost is
one-third the cost of motorcycles
manufactured in the United States
due to labor rates and regulations.
Think Critically
Manufacturing costs are lower in
Asian countries than in the United
States. Some people view this as
taking jobs away from Americans.
Others see it as a way of making a
better product that is more afford¬
able for Americans. What do you
think about outsourcing manufac¬
turing overseas?
In 2006, Johnny Pag <
entered into a joint partner- \
ship with his Chinese con- {
tacts. State-of-the-art 1
t
equipment was installed in °
the new Chinese production J
facility. Quality standards )
were established to create a j
bike that gives the customer ;
personal pride as well as «
safety assurance. With the
Johnny Pag name on each
motorcycle, the company
stands by its product and places
an emphasis on customer service.
How did the Johnny Pag Company
grow its business?
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• The International Trade Administration This bureau of the
U.S. Department of Commerce promotes trading and investing,
strengthens industry competitiveness, and ensures fair trade.
• Bureau of Industry and Security The Bureau of Industry and
Security is another bureau of the U.S. Department of Commerce.
Its mission is to advance U.S. national security, foreign policy, and
economic objectives. It works to ensure an effective export control
and treaty compliance system and promotes continued U.S. strategic
technology leadership.
In addition to these agencies, the federal government offers many
programs that help U.S. businesses operate in foreign markets. The pro¬
grams include export counseling, export financing, and technical assistance.
%
Checkpoint
Name three methods that governments use to regulate international
trade.
i3.3 Assessment
THINK ABOUT IT
1. As an entrepreneur, what do you think are the pros of competing
globally? What do you think are the cons of competing globally?
2. Do you think it is in our country's best interest to have U.S. com¬
panies engage in international trade? Why or why not?
3. What do you think would happen to the U.S. economy if there
were no quotas on imported goods?
MAKE ACADEMIC CONNECTIONS
4. MATH A government in an Asian country applies a 20 percent
tariff to all electronic goods imported to the country. If it collects
$24 million in tariffs for these goods, what was their total value?
5. RESEARCH Research the North American Free Trade Agreement
(NAFTA) and write a one-page report on what you learn. State
your opinion on whether or not NAFTA is beneficial to the
United States.
You own a clothing boutique and have recently expanded into cata¬
log sales to sell your products abroad. Select a country in which you
want to sell. Working with team members, determine what method
of exporting you will use. Discuss some of the government regula¬
tions that will affect your business. Think about how you might
obtain further information about these regulations. Share your
team's ideas with the rest of the class.
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Sharpen Your
Entrepreneurial Skills
Time Management
You have learned that an entre¬
preneur has many responsibilities.
You are probably wondering how
you can fit everything into one
day! Good time management
skills are essential to the success
of your business.
In learning to manage your
time, the first thing you should
do is establish a plan. A plan forces
you to think ahead, which helps
you manage your time more
effectively. A plan should list all
of the routine tasks of your busi¬
ness as well as those tasks related
to growing your business.
After creating a plan, you
should prepare a “to do” list
containing all of the tasks out¬
lined in your plan. Prioritize the
tasks from high priority to low
priority. Assign due dates to each task. Review your list at the begin¬
ning of each day and again at the end of the day. Cross off tasks that
have been completed, add new tasks that have come up, and repriori¬
tize your list of tasks as necessary. Do not be afraid to ask for help as
you grow your business. You may get to the point where you will not
be able to do it all. There may also be tasks that you do not have the
expertise to complete. To make effective use of your time, look for
others who you can contract with or hire to perform these tasks. For
example, you may contract with an accountant to do your financial
recordkeeping and reporting.
Remember to allow for personal time. Take breaks occasionally.
If you are working too much and overly stressed, you will not be an
effective leader. Take time out for physical activities and to spend
time with friends and family.
TRY IT OUT
Before you can schedule your time, you need to understand how you
use your time. Using the Activity CD, open the activity “Time Log.”
Print out a copy and complete the activity log by keeping track of
your daily activities over a certain period of time.
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Chapter 13 Assessment
SUMMARY
13.1 Growth Strategies
1. Determining when to expand your business depends on two main
factors: the condition of your business and the economic condi¬
tions in the market in which your business competes.
2. Businesses that experience uncontrolled growth may find them¬
selves overextended with inadequate resources to support the new
level of business. You will want to create a plan for growth.
3. Growth strategies include market penetration, geographic expan¬
sion, and market development.
4. The stages of the product life cycle include introduction, growth,
maturity, and decline. Steps in new product development include
idea development, idea screening, strategy development, financial
analysis, product development and testing, and product marketing.
13.2 Ethical and Social Issues
5. Ethics is the study of moral choices and values.
6. Entrepreneurs should create a code of ethics to establish appropri¬
ate behavior in the workplace.
7. An entrepreneur has social responsibilities involving customers,
suppliers, creditors and investors, and the community.
8. Ways to meet your business’s environmental responsibilities
include to conserve resources, reduce waste by recycling, dispose
of waste responsibly, and sell environmentally friendly products
and services.
13.3 Global Trends and Opportunities
9. Entrepreneurs participate in the global marketplace through direct
and indirect exporting, importing, and selling through the Web.
10. To determine if international business is right for you, consider
the pros and cons of competing globally and write an international
business plan.
11. Trade regulations that will affect your international business include
quotas, tariffs, and qualitative restrictions established by the coun¬
tries in which you will be doing business.
What do you fcnow now?
Read Ideas in Action on page 361 again. Then answer the questions a
second time. How have your responses changed?
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VOCABULARY BUILDER
Match each statement with the term that best defines it. Some terms
may not be used.
1. The application of the principles of right and wrong to issues that
come up in the workplace
2. A strategy for expanding the target market of a business
3. A limit on the amount of a product that can be imported into a
country over a particular period of time
4. Products and services that are brought in from another country to
be sold
5. The study of moral choices and values
6. Increasing market share for a product or service within a given
market in a given area
7. Products and services that are produced in one country and sent
to another country to be sold
8. A set of standards or rules that outlines the ethical behavior
demanded by an individual, a business, or a culture
9. Methods for keeping foreign businesses from competing with
domestic producers
10. The stages a product goes through from the time it is introduced
to when it is no longer sold
11. A tax on imports
12. A standard of quality an imported product must meet before it
can be sold
a.
b.
c.
d.
e.
f.
!.
m.
business ethics
code of ethics
ethics
exports
imports
market
development
market penetration
product life cycle
prototype
qualitative
restriction
quota
tariff
trade barriers
REVIEW YOUR KNOWLEDGE
13. True or False? The condition of your business and the eco¬
nomic conditions of the market in which you compete help deter¬
mine when you should expand your business.
14. Which of the following is not a factor to consider when analyzing
the economic climate that controls your business?
a. condition of national economy c. demographic changes
b. new competition d. prices you charge
15. A prototype of a product is created during which stage of new
product development?
a. idea screening c. product development and testing
b. strategy development d. product marketing
16. True or False? During the introduction stage of a product’s life
cycle, people are familiar with the product and what it can do for them.
17. Increasing your advertising and improving your customer service
are examples of growing your business through
a. market penetration c. market development
b. geographic expansion d. none of the above
Chapter 13
Assessment
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18. True or False? Culture has no effect on the ethics of an individual.
19. True or False? Ethical behavior is good for business because it
gains the trust of customers.
20. True or False? For a business to successfully diversify, it needs to
develop products that are unrelated to the products it already sells.
21. The North American Free Trade Agreement (NAFTA) removed
most barriers to trade and investment among the United States and
a. China and Japan c. Mexico and Canada
b. Mexico and Cuba d. Canada and Korea
22. Which of the following is not an example of fulfilling environmen¬
tal responsibilities?
a. using solar energy to power your heating and cooling systems
b. disposing of paper used by your business in the dumpster
c. selling a laundry detergent with stain-removing enzymes that
do not harm water ecosystems
d. following federal guidelines for disposing of hazardous waste
23. True or False? Global competition has had no impact on the
way businesses operate.
24. Selling in foreign markets through commissioned agents is known
as_?_.
25. True or False? Any business can have success competing
internationally.
26. As an entrepreneur, you have a personal responsibility to all of the
following except
a. your community c. your creditors and investors
b. your customers d. your competitors
APPLY WHAT YOU LEARNED
27. You publish a cooking magazine that is circulated in your local
metro area. How can you expand your business? What growth
strategy will you employ? Write a plan for growth that includes
setting and achieving measurable objectives, hiring managers,
financing the expansion, and obtaining resources for expansion.
28. You have opened a delicatessen in your town. What are some of
the responsibilities you have to your customers? In what ways can
your business benefit the community? How do you think fulfilling
these responsibilities will help your business?
MAKE ACADEMIC CONNECTIONS
29. COMMUNICATION Use the Internet, newspapers, and maga¬
zines to find examples of two companies that are environmentally
responsible and one company that has violated environmental
laws. Give a presentation to the class that details the companies’
actions and their impact on society.
30. MATH You have a business selling concrete to contractors. One
of your suppliers in South America has quoted a price of $4.00 per
50-pound bag. Your U.S. supplier is charging $4.50 per 50-pound
bag. Both suppliers have agreed to cover shipping costs, but the foreign
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Management for the Future
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pass that cost on to you. Which supplier will you buy from and why?
31. RESEARCH Choose a business that has recendy introduced a
new product to the market. Research the company and find out
what other products it had on the market before the introduction
of the new product. Was the new product introduced to replace
an existing product or to capture a new market?
WHAT WOULD VOU DO?
You are an independent contractor hired by the state to inspect pav¬
ing work done on a highway. The paving company had to complete
the job on time or pay a fine to the state. In order to meet the
deadline, the paving company did not follow all of the specifications
in the contract. The president of the company has asked you to
approve the job in exchange for a large sum of money. What are
the ethical issues you face? What do you think would be the best
way to resolve the issue? Who will be affected by your decisions?
V
J
BUILD YOUR
Business Plan
Project
This activity will help you think about growing your business, con¬
ducting business ethically, and expanding your business globally. You
will also finalize the business plan that you have been working on
throughout the book.
What will indicate that you are ready to expand your business? Give
specific examples, such as your sales growing by 20 percent or your
business outgrowing its current location.
What effect can the present economy have on your business? Write a
growth plan that includes strategies for attaining measurable objectives, hir¬
ing managers, financing expansion, and obtaining resources for expansion.
Write a code of ethics for your business that includes company policies
and procedures for dealing with particular situations. What are some
situations that are specific to your type of business that may pose an
ethical dilemma?
Write an environmental policy for your business. What are some of
the actions your business will take to protect the environment? Are
these actions required by law? If not, why will you incorporate them
into your policy?
What global opportunities exist for your business? Determine the best
country in which your business could expand. List the specific benefits
and risks of global expansion for your business.
Put it all together! Now that you have researched the different aspects
of starting your own business, you are ready to use the information
you have gathered in the Build Your Business Plan Project to compile
your business plan. Using the Activity CD, open the activity "Business
Plan Template" to help you complete your final business plan.
Chapter 13
Assessment
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Planning a Career in
Transportation
nsportation ,
Distribution
& Logistics
HW
IVIy mom’s husband has a job
that requires travel to a lot of big
cities. He often arranges to have a
limousine pick him up at the airport
and take him to his destination. It
saves him a great deal of time to
have the limo driver waiting for him
when he arrives. At his level in the
organization, it makes sense finan¬
cially to pay a bit more for his trans¬
portation and get him to his
meetings as quickly as possible.”
How do people traveling to
various cities get from the airport
to their destination easily? How do
people who have a physical disabil¬
ity that prohibits them from driv¬
ing get to their appointments?
Chauffeurs are individuals who
provide transportation to clients
on a prearranged basis. Chauffeurs
may be employed by an individual,
family or business. Some chauffeurs
may have multiple duties for an
employer. Additional duties might
include personal security, household
help, or administrative assistance.
EMPLOYMENT OUTLOOK
• Faster than average growth is
anticipated.
• About a quarter of chauffeurs
are self-employed.
• Large, thriving cities will offer
the best opportunities.
JOB TITLES
• Luxury Vehicle Chauffeur
• Driver/ Chauffeur
• Chauffeur/Houseman
• Chauffeur/Professional Driver
• Chauffeur/Executive Protection
• Personal Chauffeur
NEEDED SKILLS
• A high school diploma is
preferred.
• A good driving record is
necessary.
• In addition to a regular driver’s
license, a chauffeur’s license is
required. Licensing requirements
vary by state.
• Good interpersonal skills to han¬
dle a variety of customer person¬
alities are important.
• Familiarity with the local terrain
and good map-reading skills are
helpful.
• The minimum age requirement
is often 21.
What's it like to work in Transpor¬
tation? Pedro has been leasing
his limousine for two years. Paying
a monthly fee to the limousine
company entitles Pedro to full use
of the vehicle, even when he isn’t
working. His monthly payment
also covers routine vehicle mainte¬
nance and insurance fees. Pedro is
saving money for a down payment
on his own limousine.
Tonight Pedro is scheduled to
drive a bride and groom from their
wedding ceremony to their recep¬
tion. After the reception, he will
drive them to their hotel.
For the first three days of next
week, Pedro is scheduled to provide
transportation for a repeat client.
The client, an executive who visits
Pedro’s city each month, often
books Pedro’s time for a series of
days. When Pedro isn’t driving the
client to a destination, he often
runs errands for the client. At the
end of next week, Pedro is sched¬
uled to drive a visually impaired
client on a variety of errands.
What about you? Would you
enjoy driving an array of clients on
a variety of trips throughout your
city?
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TEAM EVENJT
V he Small Business Management Team Event requires participants
to provide advice to a startup business.
Three early-retiree teachers want to start their own business,
Head of the Class, that will provide training to new teachers. They
have noticed that the number of teacher education programs has
declined, and many new teachers are not fully equipped to successfully
handle classroom management. The business will work directly with
school districts and universities that have reduced teacher-training pro¬
grams. The three retired teachers have set up an appointment to meet
with the Small Business Forum to seek assistance and financing in open¬
ing this business operation. The three entrepreneurs have $10,000 each
in savings that they plan to use for their startup business.
Your team of two to four members will serve as consultants to
the three entrepreneurs. You will provide them with information that
they need for their presentation to the Small Business Forum. You
must be aware of the location, competition, and the budget needed
to successfully operate this business. You will help the entrepreneurs
determine what makes their business unique and give them ideas to
convince the Small Business Forum to provide financial assistance.
You must also suggest ideas for growing the business.
Prepare an oral presentation that addresses the questions that
follow. You will have ten minutes to make your presentation and an
additional ten minutes to answer the judge’s questions.
PERFORMANCE INDICATORS EVALUATED
• Evaluate and delegate responsibilities needed to perform required tasks.
• Demonstrate teamwork skills needed to function in a business setting.
• Demonstrate self-esteem, self- and team-management, and integrity.
• Demonstrate a working knowledge of business management concepts.
• Demonstrate critical thinking skills to make decisions and solve problems.
• Demonstrate a working knowledge of entrepreneurial concepts.
Go to the BPA web site for more detailed information.
Think Critically
1. How can the proposed business save school districts money?
2. What statistics can be used to prove the need for this business?
3. What is the potential growth for this business?
4. Why should school districts use the services offered by this business?
www.bpa.org
Winning Edge 391
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Account An accounting record
that provides financial detail for a
particular business item, such as
for cash, sales, rent, and utilities
Advertising A paid form of com¬
munication sent out by a business
about a product or service; it
keeps a product or service in the
public’s eye by creating a sense of
awareness and helps convey a posi¬
tive image
Advertising fees Fees paid to a
franchise company to support tele¬
vision, magazine, or other adver¬
tising of the franchise as a whole
Aptitude The ability to learn a
particular kind of job
Authoritative management
Management style in which the
manager is directive and
controlling
B
Balance sheet A financial state¬
ment that lists what a business
owns, what it owes, and how
much it is worth at a particular
point in time
Benefits Employment rewards for
service in addition to salary;
rewards may include paid leave,
insurance, and a pension plan
Board of directors Group of
people who meet several times a
year to make important decisions
affecting the company
Bonus Financial rewards made in
addition to a regular wage or sal¬
ary that usually hinge on reaching
an established goal
Bounced check Check that is
returned to a business by the bank
because the customer’s checking
account has insufficient funds to
cover the check amount
Brainstorming A creative prob¬
lem-solving technique that
involves generating a large number
of fresh ideas
Branding The name, symbol, or
design used to identify a product
Business ethics Application of
the principles of right and wrong
to issues that come up in the
workplace
Business plan A written docu¬
ment that describes all the steps
necessary for opening and operat¬
ing a successful business
Capitalism The private ownership
of resources by individuals rather
than by the government
Cash budget Show the projec¬
tions of cash coming in and going
out of a business
Cash flow statement An
accounting report that describes
the way cash flows into and out of
a business over a period of time
Channels of distribution Routes
that products and services take
from the time they are produced
to the time they are consumed
Check register Booklet in which
an account holder records the
dates and amounts of the checks
as well as the names of people or
businesses to whom he or she has
written the checks
Code of ethics A set of standards
or rules that outline the ethical
behavior demanded by an individ¬
ual, business, or culture
Collateral Property that a bor¬
rower forfeits to the bank provid¬
ing the loan if he or she defaults
on the loan
Commission A percentage of a
sale paid to a salesperson
Competition-based pricing Pric¬
ing that is determined by consid¬
ering what competitors charge
Competitive analysis Identifying
and examining the characteristics
of a competing firm
Consumer credit Offered when a
retail business allows its customers
to buy merchandise now and pay
for it later
Contract Legally binding agree¬
ment between two or more per¬
sons or parties
Controllable risk Risk that can
be reduced or possibly even
avoided by actions the insured
takes
Copyright Form of intellectual
property law that protects original
works of authorship, including lit¬
erary, dramatic, musical, and artis¬
tic works
Corporation Business that has the
legal rights of a person but is inde¬
pendent of its owners
Cost-based pricing Pricing deter¬
mined by using the wholesale cost
of an item as the basis for the
price charged
Cover letter Letter that introdu¬
ces and explains an accompanying
document or set of documents
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Customer profile Description of
the characteristics of the person or
company that is likely to purchase
a product or service
D
Debt capital Money loaned to a
business with the understanding
that the money will be repaid,
usually with interest
Debt-to-equity ratio The relation
between the dollars borrowed and
the dollars invested in a business
Delegate To allow other people
to share workloads and
responsibilities
Demand Individual’s need or
desire for a product or service at a
given price
Demand-based pricing Pricing
that is determined by how much
customers are willing to pay for a
product or service
Democratic management Man¬
agement style in which employees
are involved in decision making
and the manager provides less
direction
Demographics Data that describe
a group of people in terms of
their age, marital status, family
size, ethnicity, gender, profession,
education, and income
Direct channel Moves the prod¬
uct directly from the manufacturer
to the consumer
Direct competition Comes from
a business that makes most of its
market as other businesses
Discount pricing Offers custom¬
ers a reduced price encouraging
them to buy
Distribution An important com¬
ponent of the marketing mix that
involves the locations and meth¬
ods used to make products avail¬
able to customers
Dividends distributions of corpo¬
rate profits to the shareholders
E
Economic decision making The
process of choosing which needs
and wants, among several, will be
satisfied using the resources on
hand
Economic resources Means
through which goods and services
are produced
Emotional buying decisions
Based on the desire to have a
specific product or service; feel¬
ings, beliefs, and attitudes influ¬
ence a consumer’s buying
decisions, who often spends little
thought or time in making the
decision
Employees People who work for
someone else
Enterprise zones Areas that suf¬
fer from lack of employment
opportunities
Entrepreneurs People who own,
operate, and take the risk of a
business venture
Entrepreneurship Process of
running a business of one’s own
Equilibrium price and quantity
Point at which the supply and
demand curves meet
Equity capital Money invested in
a business in return for a share in
the profits of the business
Ethics The study of moral choices
and values; involves choosing
between tight and wrong
Executive summary A short
restatement of the report portion
of a business plan
Exports Products and services
that are produced in one country
and sent to another country to be
sold
F
Federal Employees’ Compensa¬
tion Act (FECA) Law that pro¬
vides benefits to employees who
have suffered work-related injuries
or occupational diseases; benefits
include payment of medical
expenses, compensation for lost
wages, and payment of benefits to
dependents of employees who die
from work-related injuries or
diseases
Fixed costs Costs that must be
paid regardless of how much of a
good or service is produced
Focus group In-depth interview
with a group of target customers
who provide valuable ideas on
products or services for the same
good or service
Franchise Legal agreement that
gives an individual the right to
market a company’s products or
services in a particular area
Freelancers People who provide
specialty services to businesses on
an hourly basis or by the job
G
Geographic data Data that helps
a business determine where its
potential customers live and how
far they will travel to visit the
business
Gross lease Occurs when the
tenant pays rent each month for
the space occupied, and the land¬
lord covers all property expenses
for that space
Gross sales The dollar amount of
all sales
I
Ideas Thoughts or concepts that
come from creative thinking
Imports Products and services
that are brought from one country
into another country to be sold
Income statement Shows the
business’s revenues and expenses
incurred over a period of time and
the resulting profit or loss
Indirect channel Distribution
channel that uses intermediaries to
move products between the man¬
ufacturer and the consumer, such
as agents and wholesalers
Indirect competition Comes
from a business that makes only a
small amount of money selling the
same or similar products and serv¬
ices to the same market as other
businesses
Industrial park Section of land
that is zoned for industrial busi¬
nesses only; usually located where
space is less expensive, away from
housing developments and down¬
town areas
Glossary 393
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Initial franchise fee Amount the
local franchise owner pays in
return for the right to run the
franchise; fee can run anywhere
from a few thousand to a few
hundred thousand dollars It is
usually nonrefundable
Intellectual property The origi¬
nal, creative work of an artist or
inventor and may include such
things as songs, novels, artistic
designs, and inventions
Interns Students who will work
for little or no pay in order to
gain experience in a particular field
Inventory The merchandise a
business sells to its customers
J
Job analysis Process of determin¬
ing the tasks and sequence of tasks
necessary to perform a job
Job description Written state¬
ment listing the tasks and respon¬
sibilities of a position; also covers
to whom the position reports,
educational and professional expe¬
rience required, and salary range
Journals Accounting records of
the transactions you make; there
are five different journals that
businesses use to record their
transactions
L
Landlord Person who owns and
rents out buildings or space
M
Management Process of achieving
goals by establishing operating
procedures that make effective use
of people and other resources
Manager Person responsible for
planning, organizing, staffing,
implementing, and controlling the
operations of a business
Marginal benefit Measures the
advantages of producing one addi¬
tional unit of a good or service
Marginal cost Measures the dis¬
advantages of producing one addi¬
tional unit of a good or service
Market development Strategy
for expanding the target market of
a business
Marketing All of the processes
used to determine and satisfy the
needs of customers and the
company
Marketing concept Uses the
needs of customers as the primary
focus during the planning, pro¬
duction, distribution, and promo¬
tion of a product or service
Marketing mix Blending of the
product, price, distribution, and
promotion used to reach a target
market
Marketing plan Defines market,
identifies customers and competi¬
tors, outlines a strategy for attract¬
ing and keeping customers, and
identifies and anticipates change
Marketing strategy Plan that
identifies how marketing goals will
be achieved; a startup marketing
plan should address: product
introduction or innovation, pric¬
ing, distribution, promotion, pro¬
jected profitability, and sales or
market share
Market penetration Increasing
market share for a product or ser¬
vice within a given market in a
given area
Market research System for col¬
lecting, recording, and analyzing
information about customers,
competitors, goods, and services
Market segments Groups of cus¬
tomers within a large market who
share common characteristics
Market share Business’s percent¬
age of the total sales generated
by all companies in the same
market
N
Needs Those things that a person
must have in order to survive
Net lease Occurs when the land¬
lord pays building insurance, and
the tenant pays rent, taxes, and
any other expenses
Net sales The dollar amount of
all sales with any returns
subtracted
Net worth Difference in what is
owned, called assets, and what is
owed, called liabilities
o
Operations manual Contains all
of the rules, policies, and proce¬
dures that a business should follow
in order to function effectively
Opportunities Possibilities that
arise from existing conditions
Opportunity cost Value of the
next-best alternative
Organizational chart Shows who
reports to whom in the company,
or the chain of command
Organizational structure Plan
that shows how the various jobs in
a company relate to one another;
often represented in a chart and
indicates the working relationships
within the business
P
Partnership Business owned by
two or more people
Patent The grant of a property
right to an inventor to exclude
others from making, using, or sell¬
ing his or her invention; intent of
a patent is to give the developer of
a new product time to recover the
development costs without having
to worry about competition
Payroll List of people who receive
salary or wage payments from a
business
Percentage lease Tenant pays a
base rent each month, and the
landlord also receives a percentage
of the tenant’s revenue each
month
Performance evaluation Man¬
agement control tool that helps
determine whether the objectives
for a particular job are being met
Periodic inventory method
Involves taking a physical count of
your merchandise at regular inter¬
vals, such as weekly or monthly
Perpetual inventory Method
keeps track of inventory levels on
a daily basis; can make a business
more efficient and ensure that it
never runs out of stock
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Personal selling Direct commu¬
nication between a prospective
buyer and a sales representative in
which the sales representative
attempts to influence the prospec¬
tive buyer in a purchase situation
Physical distribution Includes
transportation, storage, handling,
and packaging of products within
a channel of distribution
Point-of-sale system Cash regis¬
ters with a software system that
updates inventory records as each
sale happens; bar-code scanners
and credit card authorization sys¬
tems can be integrated into the
POS system
Positioning Creating an image
for a product in the customer’s
mind
Premium Payment that is made
to an insurance company to cover
the cost of insurance; price paid to
cover a specified risk for a specific
period of time
Press release Written statement
meant to inform the media of an
event or product
Primary data Information col¬
lected or the very first time to fit a
specific purpose
Pro forma financial statement
Financial statement based on pro¬
jected revenues and expenses
Product life cycle Stages a prod¬
uct goes through from the time it
is introduced to when it is no lon¬
ger sold; a product goes through
four stages in its life cycle: intro¬
duction, growth, maturity, and
decline
Product mix Different products
and services a business sells
Profit sharing Compensation
arrangement in which employees
are paid a portion of the com¬
pany’s profits
Profit Difference between the rev¬
enues taken in by a business and
the costs of operating the business
Prototype full-scale model of a
new product
Psychographics Data that
describe a group of people in
terms of their tastes, opinions, per¬
sonality traits, and lifestyle habits
Psychological pricing Pricing
method based on the belief that
certain prices have an impact on
how customers perceive a product
Public relations Act of establish¬
ing a favorable relationship with
customers and the general public
Publicity Nonpaid form of com¬
munication that calls attention to
a business or event through media
coverage
Pure risk Insurable risk that is
faced by a large number of people
and the amount of the loss can be
predicted; presents the chance of
loss but no opportunity for gain
Q
Qualitative restriction Standard
of quality an imported product
must meet before it can be sold;
it can keep foreign businesses
from competing with domestic
producers and protect consumers
from dangerous foreign
products
Quota Limit on the amount of a
product that can be imported into
a country over a particular period
of time
Quote An estimate for how much
will paid for merchandise or
service
R
Rational buying decisions
Based on the logical reasoning of
customers
Rebate Refund offered to people
who purchase a product
Recruit To look for people to
hire and attract them to the
business
Reorder point Predetermined
level of inventory that signals
when new stock should be
ordered
Return on investment (ROI)
Amount earned as a result of the
investment, usually expressed as a
percentage
Risk assessment Involves looldng
at all aspects of a business and
determining the risks it faces
Risk management Involves tak¬
ing action to prevent or reduce
the possibility of loss to a business
Risk Possibility of some kind of
loss; categorized as human risk,
natural risk, and economic risk
Royalty fees Weekly or monthly
payments made by the local owner
to the franchise company; these
payments usually are a percentage
of a franchise’s income
s
Salary Amount paid for a job
position stated on an annual basis
Sales promotion Incentive
offered to customers in order to
increase sales; examples include
contests, free samples, rebates,
coupons, special events, gift certifi¬
cates, and frequent-buyer reward
programs
Scarcity Occurs when people’s
needs and wants are unlimited and
the resources to produce the
goods and services to meet those
needs and wants are limited
Secondary data Data found in
already-published sources
Self-assessment Evaluation of
your strengths and weaknesses
Service Corps of Retired Execu¬
tives (SCORE!) Group made up of
more than 10,500 retired execu¬
tives who volunteer their time to
provide entrepreneurs with real-
world advice and know-how
Share of stock Unit of ownership
in a corporation
Shoplifting Act of knowingly tak¬
ing items from a business without
paying
Small Business Administration
(SBA) Independent agency of the
federal government that was cre¬
ated to help Americans start,
build, and grow businesses
Small Business Development
Centers (SBDC) Provides man¬
agement assistance to current and
prospective small business owners
Sole proprietorship Business
that is owned exclusively by one
person; enables one person to be in
control of all aspects of the business
Glossary 395
greene_0538446145_Glossary, 1/15/8, 20:52, page: 396
Speculative risk Risk which
offers the insured the chance to
gain as well as lose from the event
or activity
Staffing Involves determining the
number of employees a company
needs and defining a process for
hiring them
Startup costs Costs associated
with beginning a business includ¬
ing the costs of renting a facility,
equipping the outlet, and purchas¬
ing inventory
Statement of purpose Brief
explanation of why the writer of a
business plan is asking for a loan
and an explanation of what he or
she plans to do with the money
Stock card Paper inventory rec¬
ord for a single item
Stock turnover rate Rate at which
the inventory of a product is sold
and replaced with new inventory
Supply How much of a good or
service a producer is willing to
produce at different prices
Survey List of questions to ask
customers to find out demo¬
graphic and psychographic infor¬
mation; can be conducted by mail,
over the phone, on the Internet,
or in person
T
Target market Includes the indi¬
viduals or companies that are
interested in a particular product
or service and are willing and able
to pay for it
Tariff Tax on imports that gov¬
ernments use to protect domestic
manufacturers of products that
compete with imports
Tenant Person who pays rent to
occupy space owned by someone
else
Total product Product character¬
istics that will satisfy customer
needs, including such things as
color, size, quality, hours, warran¬
ties, delivery, and installation
Trade area Area from which a
business expects to attract
customers
Trade associations Organiza¬
tions made up of professionals in a
specific industry
Trade barriers Methods for
keeping foreign businesses from
competing with domestic
producers
Trade credit Offered when one
business allows another business
to buy now and pay later
Trademark Name, symbol, or
special mark used to identify a
business or brand of product
Trade shows Special meetings
where companies of the same or
related industry display their prod¬
ucts, can also be beneficial
Transaction Any business activity
that changes assets, liabilities, or
net worth
u
Uncontrollable risk Risk on
which actions have no effect, such
as the weather
Use-based data Data that helps a
business determine how often
potential customers use a particu¬
lar service
V
Variable costs Costs that go up
and down depending on the quan¬
tity of the good or service
produced
Vendors Companies that sell
products and services to businesses
Venture capitalists Individuals or
companies that make a profit
investing in startup companies
w
Wages Payments for labor or
services that are made on an
hourly, daily, or per-unit basis
Wants Those things that a person
thinks he or she must have in
order to be satisfied
396 Glossary
greene_0538446145_Index, 1/15/8, 21:20, page: 397
A
Accident insurance, 312
Account, 254-255
Accountant, 180
Accounting. See Financial statements
Accounting equation, 250
Accounts payable
as current liabilities, 251
defined, 251
ledger, 255
Accounts receivable
as current assets, 251
defined, 251
ledger, 255
Accounts receivable financing, 242-243
A-Corp, 94
ADA. See Americans with Disabilities Act (ADA)
Adizes, Ichak, 272
Advertising
classified, 303
defined, 154-155
direct-mail, 159
dollars spent on, 155
fees (franchise), 181
in-store, 305
magazine, 159-160
message choice, 155
newspaper, 158
online, 155-156
outdoor, 160
promotion budget, 160
radio, 157-158
telephone directory, 158, 225
television, 156-157
transit, 160
want ads, 303
See also Promotion; Publicity
Advertising Age, 157
Age Discrimination in Employment Act, 313
Agents, as intermediaries, 149
Aging tables, 255
Agreement, 200
Agricultural businesses, 5
Allowance for uncollectible accounts, 252
Alps Lawn Company, 361
Alps Technology, 361
Alterman, Scott and Greg, 331
Alternative Apparel, 331
Americans with Disabilities Act (ADA), 313-314
American Wholesalers and Distributors
Directory, The, 153
Annual percentage rate, 198-199
Antidiscrimination laws, 313-314
Antitrust legislation, 194-195
Appearance, of business plan, 77
Appendix, of business plan, 76
Apple Computers, 105
Apply What You Learned, 30, 58, 86, 114, 142,
172, 204, 232, 264, 294, 326,356,388
Aptitude, 14
Architecture, careers in, 234
Articles of incorporation, 191-192
Aslan Computing, 53
ASPIRA, 63
Assessment. See Self-assessment, for entrepreneurship
Assets
current, 251
defined, 250
fixed, 251
Assignment of tasks, in organizing, 271
Association for Convenience and Petroleum
Retailing, 335
AT&T, 155
Attorneys. See Lawyers
Audio-video technology, careers in, 328
Authoritative management style, 272
Autocratic management style, 272
Aventis Pharmaceutical Health Care Foundation, 375
Index 397
greene_0538446145_Index, 1/15/8, 21:20, page: 398
i
B
Balance, between work and play, 35
Balance sheet, 250-252
Banking records, 256-258
Bank loans, 242-244
Bank of America Foundation, 375
Bank reconciliation, 257-258
Bank statement, 257-258
Banner ad, 155
Bar-code scanners, 279
Barron’s magazine, 181
Beech, Olive Ann, 3
Benefits
employee, 311-312
of products, in selling, 165
Bentley Entrepreneur Society, 35
Be Your Own Boss
competitive analysis, 107
distribution, 150
employee taxes, 259
functions of business, 47
interests, as business idea, 19
inventory, 227, 278
legal form of business, 192
management practices, 316
overseas manufacturing, 380
psychological pricing, 136
robbery, 336
SCORE counseling, 80
Biz Camp, 147, 209
Blank, Arthur, 7
BlueStream, 299
Blue Valley School District (Kansas City,
Missouri), 3
Board of directors, 191
Bonus, 310
Borders, Louis, 285
Borrowing, discussed in business plan, 73
Bounced checks, 337
Brainstorming, 24
Branding, 129
Breadsmith, 183
Breakeven analysis, 290
Breakeven point, 139, 290
Brin, Sergey, 122
Budgeting, for promotion, 160
Build Your Business Plan Project, 31, 59, 87,
115, 143, 173, 205, 233, 265, 295, 327,
357, 389
Bundling, 136
Bureau of Industry and Security, 384
Bureau of the Census, 380
Business activities in a market economy, 47-48
Business broker, 179, 180
Businesses
agricultural, 5
competition, regulatory promotion of,
194-196
consumer-protection laws, 198-199
family, 184-185
financing for, 240-245
franchises, 180-184
functions of, 47-48
intellectual property and, 196-197
legal advice for, 199-200
manufacturing, 5, 6
mining and extracting, 5
number of, in 2005, 6
purchasing existing, 178-180
purchasing, steps in, 179-180
retailing, 5, 6
service, 5, 6
starting your own, 185-186
success or failure, 8-9
wholesaling, 5, 6
women-owned, 11
See also Competition; International business;
Legal forms of business
Business ethics
defined, 371
establishing in the workplace, 372-373
setting standards, 371-372
written code, 372-373
See also Social responsibilities
Business insurance, 341-342
Business interruption insurance, 342
Business letters, 26-27
Business model, 3
Business operations, as uninsurable risk, 341
Business owner’s policy (BOP), 341-342
Business plans
advantages over competition, 71
appearance of, 77
appendix, 76
backgrounds and experience of people, 65-66
completing, 74-77
concluding statement, 73
cover letter, 74
defined, 64-65
description, detailed, 70
elements, 69-73
executive summary, 75-76
financial management information, 72-73
ideas turned into, 63, 65, 70
importance of, 66-68
inconsistencies in, 82
international, 381
introduction, 70-71
398 Index
greene_0538446145_Index, 1/15/8, 21:20, page: 399
introductory elements, 74-76
lack of, as reason for loan refusal, 244
main body, 69-70
marketing information, 71-72
mistakes in, 81-82
objectives of, 65
operations information, 73
ownership and legal structure, 70
parts of, 69-76
purposes of, 65-66
research for, 78-81
skills and experience, 71
software for, 83
statement of purpose, 75
table of contents, 75
title page, 75
See also Build Your Business Plan Project
Business Professionals of America (BPA).
See WinningEdge
Business records. See Records
Business risks. See Risk
Business Start-Ups magazine, 181
Buying decisions
about business space, 218-219
rational and emotional, 166
Buying space, 218-219
Buzz International Marketing Group, Inc., 177
C
Canada, NAFTA and, 383
Capacity
in a contract, 200
in Five Cs of Credit, 63
Capital, in Five Cs of Credit, 63
Capital investment, by entrepreneurs, 40-41
Capitalism, 45
Capitalization, 35
Capital resources, 39
Carrying costs, 280
Cash budget, 283-284
Cash disbursements, decreasing, 285
Cash discounts, 137
Cash flow
cash budget, creating, 283-284
cash disbursements, decreasing, 285
economic effects on, 248
improving, 284-286
increasing cash receipts, 284-285
managing, 283-286
positive or negative, 248
Cash flow statement, 287
defined, 246-247
economic effects on cash flow, 248
forecasting receipts and disbursements, 247
income statement vs., 249
preparing, 247-248
Cash payments journal, 254
Cash receipts, increasing, 284-285
Cash receipts journal, 254
Center for Women’s Business Research, 11
Cham of command, 302, 333
Chamber of Commerce, 79, 80, 99, 106, 199
Change agents, 41
Channels of distribution
defined, 148
direct, 149
indirect, 149
options, 149-150
See also Distribution
Character, in Five Cs of Credit, 63
Charisma Cosmetics, 364
Check, bounced, 337
Check register, 256
Child labor laws, 313
China, economy of, 44
Choice, 45
Civil Rights Act of 1964, 313
Classified advertisements, for job openings, 303
Clayton Act, 195
Coaching, of employees, 317
Codes of ethics
defined, 371
written, 372-373
Collateral
defined, 242
in Five Cs of Credit, 63
unsecured loans and, 347
Collection, of debt, 347, 348
College placement centers, 304
Combination pay plan, 311
Command economy, 43
Commercial bank loans, 242-244
Commercial leases, 218-219
Commercials, 156-157
Commission, 310
Commission-based salary, 310
Commissioned agents, in exporting, 379
Commission-only pay plan, 310
Commitment, 12
Communication, 12, 35
Communication skills, in problem-solving, 24
Communism, 44
Community, responsibilities to, 375-376
Community shopping centers, 211-212
Compensation package
benefits, 311-312
types of pay, 310-311
Competency, 12
Index 399
I
greene_0538446145_Index, 1/15/8, 21:20, page: 400
Competition
antitrust legislation and, 194-195
customer loyalty and, 109-110
defined, 45, 104
direct, 105-106
global, 350-352, 380
ignoring, 82
impact of, 104-105
increasing market share and, 132-133
indirect, 106
large retailers as, 107
positioning and, 129-130
protection of, by government agencies, 195-196
regulations that promote, 194-196
understanding, 105
Competition-based pricing, 134-135
Competitive analysis, 107-108
Competitive market, 53
Competitive wages, 311
Competitor’s actions, as uninsurable risk, 340
Computers, for tracking inventory, 279.
See also Technology
Concluding statement, of business plan, 73
Conditions, in Five Cs of Credit, 63
Conferences, as employee training, 317
Consideration, 200
Construction, careers in, 234
Consumer credit, 346-347
Consumer demand, as uninsurable risk, 340
Consumer Guide to Buying a Franchise, A, 180
Consumer Product Safety Act of 1972, 198
Consumer Product Safety Commission, 198
Consumers
awareness of business ethics, 372
channels of distribution and, 149-150
laws protecting, 198-199
See also Customers
Contracts
defined, 199
elements, 200
franchise agreements and, 182
See also Partnership agreement
Controllable risk, 339
Controlling, in organizing, 273
Cooperation, 12
Copyrights, 197
Corporation
advantages, 192
defined, 70, 191
disadvantages, 191-192
limited liability company (LLC), 193
reasons for becoming, 192
S corporation, 192-193
terms used in, 191
Cost-based pricing, 134
Cost of goods sold, 250
Cost per Action (CPA), 156
Cost per Click (CPC), 156
Cost per Mil (CPM), 156
Costs
breakeven point and, 139, 290
of carrying inventory, 280
of doing business, 51-52
fixed, 51
franchise operating, 181
marginal, 51-52
marginal benefit and, 51-52
opportunity, 46-48
startup, 181, 239
of stock outages, 281
variable, 51
County Business Patterns, 18
Cover letter, for business plan, 74
Creativity, 11, 12
Credit
consumer, 346-347
creditworthiness, 347
loans vs., 346-347
policies, 347-348
risks of, 345-348
terms, 347
trade, 346
types of, 346-347
uncollectible accounts, 348
Credit card authorization systems, 279
Credit card fraud, 336
Creditors, responsibilities to, 375
Credit terms, 286
Creditworthiness, 347
Crime insurance, 342-343
Crocs, Inc., 119
Cultural diversity, 353
Culture, ethics and, 370-371
Current assets, 251
Current liabilities, 251
Customer loyalty, 109-110
Customer profile, 95-96
Customers
calculating rent per, 219
decision-making by, 166-167
defined, 92
determining needs and wants of, 166-167
of existing business, 179
location and, 210-213, 216-217
maintaining loyalty of, 109-110
responsibilities to, 374
See also Consumers; Needs; Wants
Customer service policies, 274
400 Index
greene_0538446145_Index, 1/15/8, 21:20, page: 401
D
DaimlerChrysler, 155
Data analysis
in market research, 101
with spreadsheets, 111
Data collection, 100-101
Davis, Phillip, 129
Debt, personal, avoiding, 53
Debt capital, 241-245
Debt-to-equity ratio, 240
DECA (Delta Epsilon Chi). See WinningEdgc
Decision making
by customers, 166-167
in different economic systems, 42-44
See also Economic decision making;
Problem solving
Decline stage, of product life cycle, 366
Delegation of responsibility, 319
Delivery policies, 274
Demand
curve, 50
defined, 50
See also Supply and demand
Demand-based pricing, 134
Demand elasticity, 50
Democratic management style, 272
Demographics, 95
Dental insurance, 312
Department of Housing and Urban
Development (HUD), 244-245
Department stores, 212
Depreciation, 252
Deterioration, of inventory, 280
Determination, 11
Develop Your Reading Skills, 5, 37, 65, 93, 121,
149, 179, 211, 239, 271, 301, 333, 363
Did You Know?
advertising dollars, 155
annual marketing budget, 127
cost concerns of businesses, 284
cost of Hurricane Katrina, 339
family-controlled businesses, 184
grant-making corporations, 375
layout design, 220
minimum wage law, 311
primary data collection, 99
scarcity, 46
SCORE counseling, 79
Small Business Ad mini stration (SBA)
loans, 245
women-owned businesses, 11
Direct channel of distribution, 149
Direct competition, 105-106
Direct exporting, 379
Directing management style, 272
Direct-mail advertising, 159
Disabled people, protection for, 313-314
Disaster planning, 333-334
Disbursements, 247
Disclosure statement, for franchises, 181-182
Discount pricing, 137-138
Discount stores, 212
Discoveries, 17
Discrimination, workplace, 313-314
Dismissal, of employees, 322
Disney, Walter Elias, 67
Distribution
defined, 148
of goods and services, 150-151
manufacturing businesses, 151
retail businesses, 150
service businesses, 150-151
Web sites and, 150
See also Channels of distribution; Physical
distribution
Diversification, of products and services, 365
Diversity, cultural, 353
Dividends (stock), 191
DollarDiva Business Plan Competition, 237
Dowen, Aaron, 361
Downtown location, 210-211
Drugstores, 212
Dun and Bradstreet, Exporter’s Encyclopedia ,
380, 381
E
E-Builder, 91
Economic conditions, as uninsurable risk, 340
Economic decision making
in different economic systems, 42-44
functions of business and, 47-48
opportunity cost and, 46-47
scarcity and, 46
U.S. economic system and, 45
Economic Development Administration
(EDA), 245
Economic resources
defined, 38
factors of production, 39
goods and services, 38-39
limited resources, 39-40
Economic risks, 332
Economic systems, 42
command economy, 43
market economy, 43
mixed economy, 44
traditional economy, 43
U.S., 45, 104
Index 401
greene_0538446145_Index, 1/15/8, 21:20, page: 402
Economy
assessing conditions for growth strategy, 363
needs and wants, 36-38
scarcity in, 46
See also U.S. economy
EDA. See Economic Development
Administration (EDA)
Eden Body Works, 147
Edison, Thomas A., 98
EEOC. See Equal Employment Opportunity
Commission (EEOC)
Elastic demand, 50
E-mail etiquette, 229
E-marketing, careers in, 144
Emergency planning, 333-334
Emotional buying decisions, 166
Employee compensation
benefits, 311-312
wages and salary, 310-311
Employees
alternatives to adding, 305-306
compensation package, 310-312
defined, 5
dishonest, 335-336
dismissal of, 322
entrepreneurs vs., 5
evaluating, 320, 321
hiring, 307-309
listening to, 319
managing, 315-322
motivation of, 318-319
need for, 300-301
performance evaluation, 320, 321
policy enforcement for, 316-317
promotion of, 320
recruiting, 303-305
regulations that protect, 313-314
training, 317-318
Employee theft, 335-336
Employment agencies, 304
Employment outlook, 32, 60, 88, 116,
144, 173, 206, 234, 266, 296,
328, 358, 390
Empowerment management style, 316
Enterprise zones, 214
Entrepreneur magazine, 181
Entrepreneurs, 2
as change agents, 41
defined, 5
employees vs., 5
present and past, 6-8
problem-solving process for, 21-23
reasons for becoming, 5
role of, in the U.S. economy, 40-41
successful, characteristics of, 10-12
tips for, 299
See also Planning a Career; What Went Wrong?
Entrepreneurship
advantages, 14
aptitude, assessing, 14
are you right for?, 13-15
defined, 5
disadvantages, 14-15
goal setting, 19-20
ideas, looking for, 16-17
interests, assessing, 13-14
investigate opportunities, 18
real-life lessons learned, 35
self-assessment for, 13-15
U.S. economy and, 3, 4
See also Businesses
Entrepreneurship Business Plan Competition, 209
Environment
laws governing, 377
respecting, 376-377
Environmental Protection Agency (EPA), 377
EPA. See Environmental Protection Agency
(EPA)
Equal Employment Opportunity Commission
(EEOC), 313
Equilibrium price and quantity, 50
Equipment, obtaining, 224-226
Equity, 239
Equity capital, 240-241
Esteem needs, 37
Ethics
codes of, 371, 372-373
culture and, 370-371
defined, 370
See also Business ethics
Exclusive Concepts, 35
Executive summary, of business plan, 75-76
Existing business
family business, 184-185
purchasing, 178-180
See also Franchise
Expansion. See Growth strategies
Experience
lack of, as reason for loan refusal, 244
as source of business ideas, 17
summarized in business plan, 71
Exporter’s Encyclopedia (Dunn and Bradstreet),
380, 381
Exporting, 378-379
F
Factors of production, 39
Failure, factors in, 9
402 Index
greene_0538446145_Index, 1/15/8, 21:20, page: 403
Fair Credit Billing Act, 199
Fair Labor Standards Act (FLSA), 313
Family business, 184-185
Family Medical Leave Act (FMLA), 314
Famous Entrepreneur
Barge, Anne, 167
Brin, Sergey, 122
Disney, Walter Elias, 67
Edison, Thomas A., 98
Ganz Family, 281
Griffin, Merv, 351
Pag, Johnny, 383
Page, Larry, 122
Ray, Rachel, 221
Revere, Paul, 44
Rowling, J.K., 312
Walker, Madam C.J., 7
Whitney, Eli, 197
Wright Brothers, 243
Faruk, Omar, 299
FBLA. See Future Business Leaders of America
(FBLA)
FDA. See Food and Drug Administration (FDA)
Features. See Product features
Federal Food, Drug, and Cosmetic Act, 198
Federal Trade Commission (FTC)
Franchise and Business Opportunity Rule, 181
protection of competition by, 195-196
Feedback, customer loyalty and, 109
Finance
careers in, 266
function of business, 48
Finance charge, 198-199
Financial analysis, in new product
development, 368
Financial goals, 19
Financial institutions, 80
Financial management, information in business
plan, 72-73. See also Financial statements
Financial projections, 81
Financial statements
analyzing, 286-290
breakeven analysis, 290
in business plan, 73
cash flow, 287
income, 287
net profit on sales analysis, 288-289
preparing, 286-287
profit goals, 289
sales analysis, 287-288
See also Pro forma financial statement
Financing
assess your financial needs, 238-240
business plan as aid in, 66-67, 73
commercial bank loans, 242-244
debt capital, 241-245
equity capital, 240-241
friends and relatives, 241-242
government agency loans, 244-245
personal contributions, 240
personal financial statement, 239-240
startup costs, 239
venture capitalists, 241
Five Cs of Credit (character, capacity, capital,
collateral, conditions), 63
Five P’s of entrepreneurship (planning,
persistence, patience, people, profit), 91
Fixed assets, 251
Fixed costs, 51
Floating ad, 155
Flood insurance, 341
Floor plan, 220
FLSA. See Fair Labor Standards Act (FLSA)
FMLA. See Family Medical Leave Act (FMLA)
Focus groups, market research through, 99
Focus on Economics, 36, 42, 49
Focus on Small Business, 4, 10, 16, 21, 64, 69,
78, 92, 97, 104, 120, 126, 131, 148,
154, 164, 178, 187, 194, 210, 218, 224,
238, 246, 253, 270, 276, 283, 300, 307,
315, 332, 338, 345, 362, 370, 378
Food and Drug Administration (FDA), 198
Forbes magazine, 181
Ford Motor Co., 155, 184
Ford Motor Company Fund, 375
Forecasted receipts and disbursements, 247
401(k) plans, 312
4Teens Network, LLC, 3
Franchise
advantages, 183
advertising fees, 181
careers in, 206
defined, 180
disadvantages, 183-184
disclosure documents, 181-182
evaluating, 182
initial fee, 181
investigating, 181
operating costs, 181
ownership of, 180-184
royalty fees, 181
start-up costs, 181
Franchisee, 180
Franchise Opportunities Handbook, The, 180
Franchisor, 180, 182, 183, 184
Fraud, credit card, 336
Freedom of choice, 45
Free enterprise, 45
Index 403
greene_0538446145_Index, 1/15/8, 21:20, page: 404
Freelancers, 305
Friends, as source of business financing,
241-242
FTC. See Federal Trade Commission (FTC)
Functions, job tasks, 301
Functions of business, 47-48
Funding, discussed in business plan, 73
Future Business Leaders of America (FBLA).
See WinningEdge
G
GadgetSleeves, 237
Gagwear, 331
Gamson, Jordy, 331
Ganz, Samuel, 281
Ganz Toys, 281
GasBuddy.com, 38
Gates, Bill, 3, 17
General journal, 254
General Motors, 155
Geographic data, 95
Geographic expansion, 365
Global trends and opportunities. See
International business
Goals, 11
in business plan, 70
financial, 19
long-term, 123
marketing strategy and, 121-123
medium-term, 123
nonfinancial, 19-20
profit, setting and meeting, 289
setting, 19-20
short-term, 122-123
SMART (specific, measurable, attainable,
realistic, timely), 19
Goods
defined, 38-39
receiving, to sell, 152-153
retail channels of distribution, 150
transportation of, 151-152
See also Products
Goodwill, 179
Google, 122
Government agencies
loans from, 244-245
protection of competition by, 195-196
Government regulation/protections
of competition, 195-196
of employees, 313-314
of environment, 377
of intellectual property, 196-197
of international trade, 382-384
Grants, from corporations, 375
Griffin, Merv, 351
Gross lease, 219
Gross profit, 250
Gross sales, 288
Growth stage, of product life cycle, 366
Growth strategies
choosing a strategy, 364-365
controlling your growth, 363-364
determining when to expand, 362-363
product life cycle and development,
366-369
H
Handling (of products), 152
Harpo Productions, Inc., 8
Health insurance, 312
Hendricks, Brian, 91
Hierarchy of needs (Maslow), 37
Hiring
interviewing candidates, 308-309
making a job offer, 309
reviewing and verifying job applications, 308
screening candidates, 307-308
See also Compensation package
Hobbies, 16-17
Home-based businesses, 214-215
Home Depot, The, 7-8
HUD. See Department of Housing and Urban
Development (HUD) grants
Human resources
alternatives to adding staff, 305-306
applying leadership styles, 316
compensation package, 310-312
controlling, 320-322
defined, 39, 300
delegating responsibility, 319
directing, 315-318
dismissing employees, 322
enforcing employee policies, 316-317
evaluating employees, 320, 321
hiring, 307-309
implementing your staffing plan, 315-318
listening to employees, 319
motivating employees, 318-319
promoting employees, 320
recruiting, 303-305
regulations that protect employees, 313-314
staffing, 300-303
training employees, 317-318
understanding management levels, 316
Human risks, 332
Human services careers, 32
Hunt, Leo, 72
Hurricane Katrina, 333, 339
404 Index
greene_0538446145_Index, 1/15/8, 21:20, page: 405
I
IBM, 105
Icebox, The, 331
Ideas
businesses bom from, 63, 65, 70
defined, 16
development of, 367
screening of, 367-368
where to find, 16-17
Ideas in Action
Capitalize on Youth Marketing, 177
Electronic Safekeeping, 237
Entertaining and Planning, 269
Growth is Risky, 331
Making Job Connections, 3
A Neighborhood Business, 209
Serving Customers’ Needs, 91
Starting Young and Moving Up, 361
Turning a Bad Experience into a M illi on
Dollars, 147
Turning an Idea into a Business, 63
Turning Creative Fun into Dollars, 119
Web Site Design, 35
Working for What You Believe In, 299
IGD company, 220
Immigration Reform and Control Act, 313
Implementing, in organizing, 272-273
Importing, 379
Inc. magazine, 181
Income, irregular, 14
Income statement, 249-250, 287, 289
Income tax, 259
Incorporate, 191-192
Independence, 11
Indirect channel of distribution, 149
Indirect competition, 106
Indirect exporting, 379
Industrial businesses, location of, 214
Industrial park, 214
Industry, description in business plan, 71
Inelastic demand, 50
Infomercials, 157
Information gathering, 22
Information technology, careers in, 296
Initial franchise fee, 181
Installment loan, 347
In-store advertising, 305
Insurable risk, 339
Insurance
accident, 312
business, 341-342
business interruption, 342
business owner’s policy (BOP), 341-342
buying, 343-344
careers in, 358
choosing an agent, 343
coverage, 343-344
crime, 342-343
dental, 312
as employee benefit, 312
flood, 342
health, 312
on inventory, 280
as job benefit, 312
liability protection, 342
life, 312, 342
property, 341
renter’s, 343
workers’ compensation, 349-350
Intellectual property, 196-197
Interest, on unsold inventory, 280
Interests
assessing, 13-14
as source of business ideas, 16-17
Intermediaries, 149
Intermediate-range planning, 271
Internal Revenue Code, S corporation
organization under, 192
International business
business plan for, 381
cultural diversity and, 353
exporting, 378-379
government assistance for, 383-384
government regulation for, 382-384
importing, 379
market analysis, 380-381
pros and cons, 350-352, 380
risks in, 350-352
selling worldwide through the Web, 379
International Trade Administration, 384
Internet
business plan information on, 80-81
distribution through, 150
for investigation of opportunities, 18
marketing though, 169
selling worldwide through the Web, 379
supplier identification through, 225
See also World Wide Web
Interns, 305
Interviews
of job candidates, 308-309
rules for, 309
sample questions, 309
Introduction, to business plan, 70-71
Introduction stage, of product life cycle, 366
Introductory elements, of business plan, 74-76
Introductory pricing, 136
Inventions, 17
Index 405
greene_0538446145_Index, 1/15/8, 21:20, page: 406
Inventory
carrying costs, 280
costs of being out of stock, 281
defined, 224, 276
determining, 282
interest on, 280
management concerns, 276-277
managing, 280-282
for ongoing businesses, 227
periodic method, 279
perpetual method, 278-279
physical, 279-280
purchasing, 226-227
purchasing plan, 277-278
for startup business, 226-227
stock turnover rate, 281-282
tracking, 278-280
Inventory financing, 243
J
Jensen, Erik and Andrew, 269
Jibbitz, 119
Job, 301
Job analysis, 301-302
Job applicants
interviewing, 308-309
offering job to, 309
screening, 307-308
Job attributes checklist, 14
Job creation, by entrepreneurs, 40-41
Job description, 301-302
Job interview, 308-309
Job offer, 309
Johnson & Johnson, 155
Journals, 254
Justice Department, 195-196
Jx2 Productions, 269
K
Kasner, Edward, 122
KFC, 25
L
Labeling, 129
Landlord, 219
Landscape architecture, careers in, 88
Latin Artist, 63
Lawrence, Jasmine, 147
Lawyers, 199-200
Layout
floor plan, 220
manufacturing business, 222-223
retail business, 220-222
406
service business, 222
wholesale business, 222
Leadership skills, 291
Leadership styles, 316
Lease
of business space, 218-219
commercial, 218-219
costs and benefits of, 219
gross, 219
net, 219
percentage, 219
Ledgers, 254-255
Legal forms of business
corporation, 191-193
limited liability company (LLC), 193
partnership, 188-190
S corporation, 192-193
sole proprietorship, 187-188
Legality, of a contract, 200
Legal structure, in business plan, 70
Lelia College, 7
Letters
business, 26-27
cover letter for business plan, 74
Liabilities/liability
current, 251
defined, 239, 250
long-term, 251
Liability insurance, 342
Library, for investigation of opportunities, 18
Licenses, 198
Life insurance, 312, 342
Lighting, retail business, 221
Limited liability company (LLC), 193
Line of credit, 242
Listening
to employees, 319
for maintaining customer loyalty, 109
during telephone conversation, 201
Loans
commercial bank, 242-244
from friends and relatives, 241-242
government agency, 244-245
installment, 347
long-term, 242
reasons for refusal of, 243-244
secured, 242-243, 347
Small Business Administration (SBA), 244, 245
unsecured, 243, 347
Local factors, as uninsurable risk, 341
Local governments, loans from, 245
Location
community shopping centers, 211-212
description in business plan, 71
Index
greene_0538446145_Index, 1/15/8, 21:20, page: 407
downtown, 210-211
evaluation of, 216-217
home-based businesses, 214-215
industrial businesses, 214
neighborhood shopping centers, 211
nonretail business, 213-215
regional shopping centers, 212
retail business, 210-213
service businesses, 213-214
site selection, 216-217
stand-alone stores, 212-213
super-regional shopping centers, 212
warehouses, 213
LogicLotus, 299
Long-term goals, 123
Long-term liabilities, 251
Long-term loan, 242
M
Magazine advertising, 159-160
Make Academic Connections
Career Success, 15
Communication, 9, 20, 30, 41, 54, 59, 68,
77, 86, 96, 103, 110, 125, 130, 138,
142, 153, 168, 172, 186, 200, 204, 217,
228, 232, 245, 260, 264, 275, 282, 294,
322, 337, 344, 352, 357, 377, 388
Economics, 48, 54, 59
Geography, 96, 153, 205
History, 30, 205
Language Arts, 82
Management, 68, 103, 110, 115, 193, 352
Marketing, 168, 172
Math, 9, 15, 20, 25, 30, 48, 58, 77, 82,
96, 114-115, 125, 138, 142, 143,
163, 173, 193, 204, 223, 228, 232-233,
245, 252, 260, 264, 282, 290, 294-295,
314, 326, 337, 344, 357, 369, 377, 384,
388-389
Problem Solving, 25, 48, 143, 163, 217, 252,
275, 290, 295, 306, 327
Research, 86, 115, 130, 172, 186, 200,
204-205, 223, 228, 232, 306, 314,
377, 384, 389
Social Studies, 9, 20, 41
Technology, 110
Mall of America, 212
Management
defined, 270
as function of business, 47
levels of, 316
Management styles, 272-273
Manager, 270
Manpower, Inc., 304
Manufacturing businesses, 5, 6
channels of distribution for, 149-151
defined, 5
layout design, 222-223
types of, 6
Marcus, Bernie, 7
Marginal benefit, 51-52
Marginal cost, 51-52
Markdown price, 134, 137
Market
competitive, 53
customer profile and, 95-96
identifying, 92-96
prices and structure of, 52-54
researching, 97-103
target, 81, 92-93
See also Competition
Market analysis, international, 380-381
Market development, 365
Market economy
defined, 43
functions of business in, 47-48
Marketing
defined, 120
as function of business, 47
information in business plan, 71-72
of new products, 369
real-life lesson about, 35
Marketing concept
defined, 121, 126
product and, 126-127
Marketing goals
long-term, 123
marketing plan and, 124-125
medium-term, 123
short-term, 122-123
Marketing mix
defined, 47, 121
distribution, 148-153
price, 131-138
product, 126-130
promotion, 154-163
Marketing plan, 124-125
Marketing strategy
defined, 121
dollars spent annually, 127
long-term goals, 123
medium-term goals, 123
requirements of, 121-122
short-term goals, 122-123
Market penetration, 365
Market research
careers in, 116
defined, 97
greene_0538446145_Index, 1/15/8, 21:20, page: 408
/
Market research ( Continued )
disadvantages of primary data, 99
focus groups in, 99
observation in, 98
primary data in, 97-99
secondary data, 99
steps in, 100-103
surveys in, 98
Market segments
customer profile and, 95-96
defined, 94
importance of, 94-95
Market share
defined, 132
as pricing objective, 132-133
Market structure
defined, 52
monopolistic competition, 53
monopoly, 54
oligopoly, 53
perfect competition, 52
prices and, 52-54
Markup price, 134
Maslow, Abraham, 37
Maslow’s Hierarchy of Needs Pyramid, 37
Mass production, 197
Maturity stage, of product life cycle, 366
McClure, Dave, 53
Medical insurance. See Health insurance
Medium-term goals, 123
Mentoring, 317
Mentorship, 35
MESBICs. See Minority Enterprise Small Business
Investment Companies (MESBICs)
Mexico, NAFTA and, 383
Microsoft, 17
Middle-management level, 316
Minimum wage, 311, 313
Mining and extracting businesses, 5
Minority Enterprise Small Business Investment
Companies (MESBICs), 244
Mistakes, learning from, 24-25
Mixed economy, 44
Mixed management style, 272-273
Monopolistic competition, 53
Monopoly, 54
Monster.com, 304
Motiva International, 318
Motivation
of employees, 318-319
of entrepreneurs, 11
Multimedia presentations, 117
Multiple-unit pricing, 137
Municipal governments, loans from, 245
N
NAFTA. See North American Free Trade
Agreement (NAFTA)
National Federation of Independent Businesses
(NFIB), 284
National Foundation for Teaching
Entrepreneurship (NFTE), 147, 209, 299
National Philanthropic Trust, 375
National Safety Council, 333
Natural resources, 39
Natural risks, 332
Needs
about, 36-38
of customers, serving, 91
determining, in selling, 166-167
Needs assessment, 166
Need satisfying, 166
Neighborhood shopping centers, 211
NET Bookmark
advertising history, 157
brand or product name, 129
franchises, 183
gasoline prices, Web sites for, 38
management styles, 272
Manpower, Inc., employment agency, 304
market segmentation, 101
recognizing opportunity, 17
robbery awareness, 335
Small Business Administration (SBA)
loans, 244
social responsibilities, 374
store layouts, 222
teen entrepreneurs, 81
Net cash flow, 247
Net income after taxes, 288-289
Net income before taxes, 250
Net income from operations, 288-289
Net income/loss after taxes, 250
Net lease, 219
Net profit on sales
analyzing, 288-289
importance of, 289
Net sales, 288
Networking, 133
Net worth, 239, 250, 252
New product development. See Product
development
News Corp., 155
Newspaper advertising, 158
NFIB. See National Federation of Independent
Businesses (NFIB)
408 Index
greene_0538446145_Index, 1/15/8, 21:20, page: 409
NFTE. See National Foundation for Teaching
Entrepreneurship (NFTE)
Nike, 129
Nilsson, George, 161
No nfin ancial goals, 19-20
Nonretail businesses, location of, 213-215
North American Free Trade Agreement
(NAFTA), 383
O
Objectives, of business plan, 65
Observation, market research through, 98
Obsolescence, 280
Occupational Safety and Health Act
(OSH Act) of 1970, 313
Occupational Safety and Health Administration
(OSHA), 313, 333
Odd/even pricing, 137
Office of International Trade of the Small
Business Administration, 383-384
Office of Special Counsel for Immigration-
Related Unfair Employment
Practices, 313
Oligopoly, 53
Online advertising
disadvantages of, 156
paying for, 156
types of, 155-156
Online career and employment sites, 304
O nl ine resources, for research, 80-81
On-the-job training, 317
Operating costs, franchise, 181. See also
Operating expenses
Operating expenses, 250
Operating policies, 274
Operating procedures
controlling, 273
customer service policies, 274
delivery policies, 274
implementing, 272-273
management functions, 270-273
operating policies, 274
operations manual, 273-275
organizing, 271
planning, 270-271
safety policies, 275
staffing, 272
Operations, information in business
plan, 73
Operations management
financial management, 283-290
inventory management, 276-282
operating procedures, 270-275
See also individual topics
Operations manual
customer service policies, 274
defined, 273
delivery policies, 274
operating policies, 274
rules, policies, and procedures, 273
safety policies, 275
Opportunities
comparing, 18
defined, 16
investigating, 18
recognizing, 6-8
Opportunity cost, 46-47
Organizational chart, 271, 302
Organizational structure, 271, 302-303
Organizing, 271
OSHA. See Occupational Safety and Health
Administration (OSHA)
Outdoor advertising, 160
Outstanding checks, 257-258
Overtime work, 313
Owner’s equity, 250
Ownership style, in business plan, 70. See also
Legal forms of business
P
Packaging, 128, 129, 152
Pag, Johnny, 383
Page, Larry, 122
Paid advertisements, 157
Paid leave, 311
Participatory management, 272
Partnership, 70
advantages, 188
defined, 188
disadvantages, 188
Partnership agreement, 188-190
Pascaretta, Joseph, 361
Patent pending, 196
Patents, 196
Pay, types of, 310-311
Payroll
defined, 258
records for, 258-259
reducing, 286
register, 258-259
Payroll, as business expense, 286
Payroll deductions, 259
Payroll taxes, 259
Penetration pricing, 136
Pension plans, 312
Percentage lease, 219
Perfect competition, 52
Performance evaluation, 320, 321
Index 409
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■
H
PerioDent Company, 161
Periodic inventory method, 279
Perpetual inventory method, 278-279
Perseverance, 11, 35
Personal contributions, in business
financing, 240
Personal debt, avoiding, 53
Personal financial statement, 239-240
Personal selling
defined, 165
product knowledge, 165
Physical distribution
defined, 151
packaging, 152
product storage and handling, 152
receiving goods to sell, 152-153
transportation, 151-152
Physical inventory, 279-280
Physiological needs, 37
Picture-Perfect cosmetics, 364
Planning, 270-271
Planning a Career
architecture and construction, 234
audio-video technology, 328
e-marketing, 144
finance, 266
franchising, 206
human services, 32
information technology, 296
insurance, 358
landscape architecture, 88
marketing researcher, 116
property management, 60
public safety, 174
transportation, 390
Point-of-sale (POS) software system, 279
Policies, 273
Pop-under ad, 156
Pop-up ad, 155
Positioning, 129-130
Posting, 254-255
Premium, insurance, 338
Presentation skills, 55
Press release, 161
Prestige pricing, 136
Price lining, 137
Prices
■ defined, 131
determining, for a product, 134-135
determining, for a service, 135-136
equilibrium, quantity and, 50
markdown, 134, 137
market structure and, 52-54
markup, 134
410 Index
■
price wars, 94
See also Pricing
Price skimming, 136
Pricing
breakeven point, 139
bundling of services and, 136
competition-based, 134-135
cost-based, 134
demand-based, 134
discount, 137-138
introductory, 136
market share and, 132-133
objectives, setting, 131-133
psychological, 136
return on investment (ROI) and, 132
time-based, 135-136
See also Price
Primary data
defined, 97
disadvantages of, 99
types, 98-99
Print resources, for research, 80
Private property, 45
Problem resolution, in selling, 166
Problem solving
process for, 21-23
skills for, 24-25
Procedures, 273
Procter & Gamble, 155
Product development
financial analysis, 368
idea development, 367
idea screening, 367-368
marketing, 369
prototype and testing, 368
strategy development, 368
See also Product life cycle and development
Product features, 128-129, 165
Production
factors of, 39
as function of business, 47
Product knowledge, 165
Product life cycle and development
decline stage, 366
growth stage, 366
introduction stage, 366
maturity stage, 366
new product development, 367-369
See also Product development
Product mix, 127
Products
analyzing sales by, 287-288
description in business plan, 71
diversification and, 365
greene_0538446145_Index, 1/15/8, 21:20, page: 411
knowledge of, 165
marketing concept and, 126-127
marketing mix and, 126-130
positioning and, 129-130
selecting features of, 128-129
Product storage, 152
Professional consultants, 80
Profit, 45
Profit/loss statement. See Income statement
Profit sharing, 310
Pro forma financial statements, 73
balance sheet, 250-252
cash flow statement, 246-248
defined, 239
income statement, 249-250
See also Financial statements
Promotional mix, 154
Promotional pricing, 137
Promotion, of employees, 320
Promotion, of products and services
advertising, 154-160
consumer needs and wants, 166-167
personal selling, 165
publicity, 161-163
rebate, 168
sales promotion, 168
telemarketing, 168
See also individual topics
Property insurance, 341
Property management, careers in, 60
Proposals, from vendors, 225-226
Prototype, 368
Provisional patent application, 196
Psychographics, 95
Psychological pricing, 136
Publicity
defined, 161
press release, 161
public relations, 162
self-promotion, 163
Public relations, 162
Public safety, careers in, 174
Purchases journal, 254
Purchasing
equipment and supplies, 224-226
inventory, 226-227
Purchasing plan, inventory and,
277-278
Pure risk, 338-339
Q
Qualitative restriction, 382
Quantity, 50
Quantity discounts, 138
Quota, 382
Quote, as purchase estimate, 226
R
Radio advertising, 157-158
Rapappy, Inc., Personalized Headbands and
Wristbands, 209
Rational buying decisions, 166
Ray, Rachel, 221
Rebate, 168
Receipts, 247
Receiving goods to sell, 152-153
Reconciling a bank statement, 257-258
Recordkeeping, 253-260. See also Records
Records
aging tables, 255
banking, 256-258
journals, 254
ledgers, 254-255
payroll, 258-259
subsidiary ledgers, 255
tax, 259-260
Recovery plan, 333
Recruiting, for job positions
classified advertisements, 303
college placement centers, 304
defined, 303
employment agencies, 304
in-store advertising, 305
online career and employment sites, 304
referrals, 305
Referrals, for jobs, 305
Regional shopping centers, 212
Regulation, government. See Government
regulation /protections
Relatives, as source of business financing,
241-242
Rent, calculating, per customer, 219
Renter’s insurance, 343
Reorder point, 227, 279
Repetitive stress injuries, 348
Research
for business plan, 72, 78-81
insufficient, 81
of international market, 380-381
Resource allocation, 271
Resources
capital, 39
economic, 38-40
limited, 39-40
natural, 39
See also Human resources
Resume, 261
Index 411
greene_0538446145_Index, 1/15/8, 21:20, page: 412
Retailing businesses
channels of distribution for, 149-150
competition and, 107
defined, 5
layout design, 220-222
location of, 210-213
types of, 6
Retail price, 134-135
Retirement plans, 312
Return on investment (ROI)
defined, 132
discussed in business plan, 73
as pricing objective, 132
Revenue, 249
Revere, Paul, 44
Revere Copper and Brass, Inc., 44
Review Your Knowledge, 29-30, 57-58,
85-86, 113-114, 141-142,
171-172, 203-204, 231-232,
263-264, 293-294, 325-326,
355-356, 387-388
Risk
classification of, 338-340
controllable, 339
of credit, 345-348
defined, 332
discussed in business plan, 73
economic, 332
on entrepreneurship, 14
human, 332
identifying, 332
insurable, 339-340
in international business, 350-352
natural, 332
preparing to face, 333-334
pure, 338-339
speculative, 339
theft as, 335-337
uncontrollable, 339
uninsurable, 339-341
at work, 348-350
Risk assessment, 333
Risk management, 332. See also Insurance; Theft
Robbery, 335, 336
Robinson-Patman Act, 195
Rodriguez, Jeffrey, 63
Rowling, J.K., 312
Royalty fees, for a franchise, 181
Rules, 273
S
Safety policies, 275
Safe working conditions, 313
Salary, 310. See also Wages
Sales
analyzing, 287-288
breakeven analysis and, 290
gross, 288
net, 288
net profit on, 288-289
Sales journal, 254
Sales promotion, 168
Sales tax, 260
Sanders, Colonel, 25
SBA. See Small Business Administration (SBA)
SBDCs. See Small Business Development
Centers (SBDCs)
Scanners, 99
Scarcity, 46
Schmelzer, Sheri and Rich, 119
Schultz, Howard, 7
SCORE. See Service Corps of Retired
Executives (SCORE)
S corporation, 192-193
Screening, of job candidates, 307-308
Seasonal discounts, 138
Secondary data, 99, 106
Secured loans, 242-243, 347
Security needs, 37
Self-actualization needs, 37
Self-assessment, for entrepreneurship, 13-15
Self-confidence, 11
Self-promotion, 163
Selling, 164-165. See also Personal selling
Seminars, as employee training, 317
September 11, 2001, 340
Serrano, John, 63
Service businesses
channels of distribution for, 150-151
defined, 5
layout design, 222
location of, 213-214
types of, 6
Service Corps of Retired Executives (SCORE),
79, 80
Service, customer loyalty and, 109-110
Services
bundling, 136
defined, 38-39
description in business plan, 71
diversification and, 365
positioning, 129-130
pricing, 135-136
Shareholders, 191, 192
Share of stock, 191
Sharpen Your Entrepreneurial Skills
breakeven point, 139
business letters, 26-27
412 Index
greene_0538446145_Index, 1/15/8, 21:20, page: 413
cultural diversity, 353
data analysis with spreadsheets. 111
e-mail etiquette, 229
leadership skills, 291
marketing and the Web, 169
presentation skills, 55
resume, 261
teamwork, 323
telephone conversations, 201
time management, 385
using technology tools, 83
Shea, Ivatelin, 237
Sherman Act, 195
Shills, 182
Shoplifting, 335
Shopping centers
community, 211-212
neighborhood, 211
regional, 212
super-regional, 212
Short-term goals, 122-123
Short-term planning, 271
Sick leave, 311
Site selection, 216-217
Skills
leadership, 291
presentation, 55
problem-solving, 24-25
speaking, 89
summarized in business plan, 71
See also Sharpen Your Entrepreneurial Skills
Small Business Administration (SBA)
as business research source, 79
entrepreneurial business chart, 6
information published by, 80
international trade statistics from, 380
for investigation of opportunities, 18
loans from, 244, 245
Office of Advocacy, 6, 8
Office of International Trade, 383-384
secondary data from, 99
Small Business Development Centers
(SBDCs), 79
Small Business Investment Companies
(SBICs), 244
SMART (specific, measurable, attainable,
realistic, timely) goals, 19, 122
Smigler, Scott, 35
Social needs, 37
Social responsibilities
to community, 375-376
to creditors, 375
to customers, 374
to investors, 375
personal, 373
to suppliers, 374-375
Software
for business plan, 83
point-of-sale, 279
Sole proprietorship, 70
advantages, 187-188
defined, 187
disadvantages, 188
Solutions, identifying, 22-23
Soviet Union, 44
Space, lease or buy, 218-219
Spamming, 156
Speaking skills, 89
Speculative risk, 339
Spreadsheets, 111, 284
SQ3R (survey, question, read, recall, review)
method, 333
Staff. See Employees
Staffing
alternatives to adding staff, 305-306
defined, 272, 301
implementing your plan, 315-318
job descriptions, 301-302
organizational structure, 302-303
recruiting, 303-305
See also Hiring
Stahl, Mike, 3
Stand-alone stores, 212-213
Starbucks Coffee Company, 7
Startup businesses
inventory for, 226-227
loans declined for, 243-244
Startup costs, 181, 239
StartUpPC, 91
State governments, loans from, 245
Statement of purpose, in business plan, 75
Stereotyping, 353
Stevens, Sarah-Jane, 364
Stock, corporate, 191
Stock card, 278-279
Stockholders, 191, 192
Stock turnover rate, 281-282
Storage of inventory, 280
Strategic planning, 271
Strauss, Levi, 3
Subsidiary ledgers, 255
Success
entrepreneurial characteristics for,
10-12
factors in, 8-9
Supermarkets, 212
Super-regional shopping centers, 212
Supervisory management level, 316
Index 413
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Suppliers
credit terms, 286
of existing business, 179
identifying, 225
responsibilities to, 374-375
See also Vendors
Supplies, obtaining, 224-226
Supply
curve, 50
defined, 49-50
Supply and demand, 40
curves, 50
demand, defined, 50
equilibrium price, quantity, and, 50
supply, defined, 49-50
Survey
design of, 101
for market research, 98
sample, 102
T
Table of contents, of business plan, 75
Target Corporation, 374
Target markets
competition and, 105
customer profile and, 95-96
defined, 92
defining, 81
identifying, 93
Tariff, 382
Task assignment, 271
Taxes
net income after, 288-289
net income before, 250
net income/loss after, 250
sales, 260
Tax records, 259-260
Taylor, Ephren, Jr., 3
Teams, member characteristics, 12
Teamwork, 323
Technology
for business plan, 83
changes in, as uninsurable risk, 341
e-mail etiquette, 229
for inventory tracking, 279
keeping up with, 11
marketing and the Web, 169
o nli ne career and employment sites, 304
selling worldwide through the Web, 379
spreadsheets. 111, 284
See also Internet; Web sites; World Wide Web
Teen entrepreneurs, 81, 91
Telemarketing, 168
Telephone conversations, effective, 201
Telephone directory advertising, 158, 225
Television advertising, 156-157
Temporary workers, 306
Tenant, 218-219
Theft
bounced checks, 337
credit card fraud, 336
by employees, 335-336
robbery, 336
shoplifting, 335
Theory X managers, 316
Theory Y managers, 316
Think About It, 9, 15, 20, 25, 41, 48, 54,
68, 77, 82, 96, 103, 110, 125, 130,
138, 153, 163, 168, 186, 193, 200,
217, 223, 228, 245, 252, 260, 275,
282, 290, 306, 314, 322, 337, 344,
352, 369, 377, 384
Thomas Register, The, 153
Time-based pricing, 135-136
Time management, 385
Time Warner Inc., 155
Title page, of business plan, 75
Top-management level, 316
Trade area, 216
Trade associations, 80, 225
Trade barrier, 382
Trade credit, 346
Trade discounts, 138
Trade fairs, 380
Trade magazines, 153, 225
Trademarks, 197
Tradeoff, 46
Trade shows, 18
Traditional economy, 43
Training, 317-318
Transaction, financial, 253-254
Transit advertising, 160
Transportation
careers in, 390
in channel of distribution, 151-152
Trick banner, 155
Trust, 194
Truth-in-Lending Act of 1968, 198-199
Turnover rates, of inventory, 281
Twin Spin DJ and Entertainment, 269
U
U-Corp, 94
Uncollectible accounts, 251-252, 348
Uncontrollable risk, 339
Uninsurable risk, 339-341
414 Index
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Universal product code (UPC), 99
Unsecured loans, 243, 347
U.S. Census
secondary data from, 99
trade statistics from, 380
U.S. Department of Commerce, 380, 384
Bureau of Industry and Security, 384
Economic Development Administration
(EDA) of, 245
Franchise Opportunities Handbook, The, 180
International Trade Administration, 384
trade fairs and seminars, 380
U.S. Department of Housing and Urban
Development (HUD), 244-245
Use-based data, 95
U.S. economic system, 45, 104
U.S. economy
entrepreneurship and, 3, 4
entrepreneurs’ role in, 40-41
family businesses in, 184
U.S. Justice Department Antitrust Division,
195-196
U.S. Occupational Health and Safety
Administration. See Occupational Safety
and Health Administration (OSHA)
U.S. Patent and Trademark Office, 196
U.S. Small Business Administration. See Small
Business Administration (SBA)
V
Vacations, employee, 311
Valuator, 180
Variable costs, 51
Vendors, 225-226. See also Suppliers
Venture capitalists, 241
Verizon, 155
Vocabulary Builder, 29, 57, 85, 113, 141, 171,
203, 231, 263, 293, 325, 355, 387
W
Wages
competitive, 311
defined, 310
laws governing, 313
types of pay, 310-311
Walker, Charles Joseph, 7
Walker, Madam C.J., 7
Wallpaper ad, 155
Wall Street Journal, 181
Wal-Mart, 107, 147, 184
Wal-Mart Foundation, 375
Walt Disney Corporation, 67, 155
Want ad, 303
Wants
about, 36-38
determining, in selling, 166-167
Warehouses
retail store, 213
wholesale business in, 222
Warren, Sandy, 318
Web marketing, 169
Web site design, 35
Web sites
gasoline prices on, 38
for research, 80-81
Webvan, 285
Wells, Tina, 177
Wells-Fargo Foundation, 375
West Edmonton Mall, 212
What Went Wrong?
All Your Eggs in One Basket, 256
Avoid Personal Debt, 53
Dental Promotion Leaves Bad Taste, 161
Do Market Research, 72
Experience Needed, 13
Goodbye, Gorgeous!, 342
Makeup Test, 364
Packaging Matters, 128
Partnership Woes, 190
Price War, 94
Right Space, Wrong Place, 215
Too Big, Too Fast, 285
Whom Do You Trust?, 318
What Would You Do?, 30, 59, 87, 115, 143,
173, 205, 233, 265, 295, 327, 357, 389
Wheeler-Lea Act, 195
Whitney, Eli, 197
Whole Foods, 147
Wholesalers, as intermediaries, 149
Wholesaling businesses
defined, 5
layout design, 222
types of, 6
Williams, Ryan, 209
Window displays, 221
Winfrey, Oprah, 3, 8
WinningEdge
Business Professionals of America (BPA)
Global Marketing Team Event, 145
Prepared Speech Event, 89
Presentation Management Team Event, 33
Small Business Management Team
Event, 391
DECA (Delta Epsilon Chi)
Business Law and Ethics Management
Team Decision Making Event, 207
Index 415
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WinningEdge (C ontinued )
Business Services Marketing Series
Event, 359
Buying and Merchandising Management
Team Decision Making Event, 235
Entrepreneurship Promotion Project, 175
Future Business Leaders of America
(FBLA)
Business Financial Plan, 267
Business Plan, 329
Emerging Business Issues Event, 61
Multimedia Presentation, 117
Partnership with Business, 297
Women, as business owners, 11
Workers’ compensation, 349-350
Workplace
antidiscrimination laws, 313-314
ethical, 372-373
Workplace safety, 313
Work risks
Federal Employee’s Compensation Act
(FECA), 348-349
types of, 348
workers’ compensation, 349-350
World Water Council, 46
World Wide Web
distribution and, 150
exporting through, 379
recruiting employees with, 304
See also Internet
Wright, Wilbur and Orville, 243
Y
Youth Entrepreneurship Expo, 209
Youth Venture, 63
Z
Zoning laws, 198
416
Index
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