Mors 200 Arts Final - Klicker Chapter 19- Starting a Business Part 1
A small business is an independently owned and operated enterprise that does not dominate its market. It typically serves a local community or niche and has a smaller scale compared to larger corporations.
A business that is independently owned and operated and not dominant in its field.
Small Business
Key Terms
A business that is independently owned and operated and not dominant in its field.
Small Business
One who organizes, manages, and assumes the risk of the business firm.
Entrepreneur
Manufacturing: 500-1500
Wholesale trade: 500
Retail trade: 20-100 (except for a limit of 500 employees in department and variety stores)
Services: 25-300
Number of Employees
Actively managed by owners
Highly personalized
Largely local in its area of operations
Largely dependent on internal sources of capital to finance its growth
Not dominant in the industry
Qualitative Sales Criteria
Manufacturing
Merchandising
Services
Types of Activity
Business that makes finished goods from raw materials by hand or machinery
Manufacturing
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| Term | Definition |
|---|---|
A business that is independently owned and operated and not dominant in its field. | Small Business |
One who organizes, manages, and assumes the risk of the business firm. | Entrepreneur |
Manufacturing: 500-1500 Wholesale trade: 500 Retail trade: 20-100 (except for a limit of 500 employees in department and variety stores) Services: 25-300 | Number of Employees |
Actively managed by owners Highly personalized Largely local in its area of operations Largely dependent on internal sources of capital to finance its growth Not dominant in the industry | Qualitative Sales Criteria |
Manufacturing Merchandising Services | Types of Activity |
Business that makes finished goods from raw materials by hand or machinery | Manufacturing |
Business that purchases goods for resale. | Merchandising |
Business that provides a service as opposed to a product. | Services |
Interdependence of business Stimulating economic competition Innovation | Economic Contributions of Small Business in the United States |
Decide on the legal form of operation that will be the most advantageous to you. Do not make these decisions alone. Your financial advisor and lawyer should help you make the decision. Sole Proprietorship Partnership Corporations Limited Liability Company | Steps for Start-Ups |
An individual conducting a business as an individual and sole owner. A funeral director operating a funeral home in this way will be held personally liable for all of his or her actions and those of his or her staff. | Sole Proprietorship |
Ease of starting Low cost or organization Freedom to manage Profit incentive | Advantages of Sole Proprietorship |
Unlimited risk Limited size Limited life Limited management ability | Disadvantages of Sole Proprietorship |
General Limited | Partnership |
An association of two or more persons who conduct business as co-owners. General partners are personally liable for the obligations of the business (i.e. being sued) | General Partnership |
Where there are general partners and parterners who have limited interest. Limited partners are usually investors who put up the capital, have a limited interest in the profits, and their liability is limited to the amount in their capital. | Limited Partnership |
Combined management, talent, and capital Easy to form Efficiency of labor | Advanages of Partnership |
Lack of continuity Decisions binding Frozen investments | Disadvantages of Partnership |
Legal entities established under state law. Usually the preferred manner for owning and operating a funeral home. | Corporation |
Have shareholders Usually established under the state’s Business Corporation Act Shareholders- rarely personally liable for the actions of a funeral home corporation Directors and officers of a funeral home corporation- probably not be personally liable for their actions if they were acting within the scope of their employment. | Profit Corporations |
Continuity in existence Ease of ownership Limited liability Large financial capability | Advantages of Corporations |
Legal restrictions on activities Separation of ownership/control Lack of personal interest Double taxation of earnings | Disadvantages of Corporations |
A legal entity that has the option of being taxed like a partnership, but shields assets from business debt like a corporation. | Limited Liability Company |
Corporate-like limited liability and asset protection Flexibility of partnership No significant requirements Tax status of partnership | Advantages of Limited Liability Company |
If not properly structured, can be taxed as a "C" corporation Must have limited life, usually 30 years. Due to newness there is no well developed body of case law or IRS ruling. | Disadvantages of Limited Liability Company |
Sales Tax I.D. Number State required permits and licenses Local licenses and permits Federal taxes and federal employer identification number (EIN) | Before you Start your Business, Obtain: |
Contact State Department of Taxation and Finance to obtain this. | Sales Tax I.D. Number |
Contact the office of Business Permits and Regulatory Assistance (OBPRA) to obtain a permit assistance kit. | State Required Permits and Licenses |
Contact the city/town hall and the county office for local requirements. | Local Licenses and Permits |
Corporation or partnership or planning to hire employees- you must file for this Sole proprietorship with no employees- you may use your own social security number on federal tax forms Contact local IRS office to obtain appropriate paperwork. | Federal Taxes and Federal Employer Identification Number (EIN) (IRS Form SS-4) |
Obtain EIN by contacting IRS. Once you return the completed form, you will receive the forms that you will be required to submit to the federal government. Contact your state Department of Labor to determine your obligation to state unemployment. Contact your State Department of Taxation and Finance regarding forms for state withholdings, if relevant. Check on obtaining Workers Compensation and disability insurance coverage for your employees. | If you Plan to Hire Employees |
Certified public accountants- advise on tax strategies and record keeping Lawyer- review and produce legal documents and general advice Commercial Insurance person- for liability coverage and any other forms of insurance your business may require. | Build a Team of Advisors to Help You |
Maintain this account separte from your personal account. Bank requires a stamped and certified DBA certificate and a copy of your incorporation papers with your corporate seal affixed. | Open a Business Checking Account |
By doing this, you will be entitled to a business listing. Consider an answering service for calls that come in during your absence. | Arrange for a business phone line to be installed |
A summary of how a business owner, manager, or entrepreneur intends to organize the business endeavor and implement activities necessary for the venture to succeed. Encourages loans Promotes growth Provide a road map to follow | Business Plan |
Executive summary Markey analysis Company description Organization and management Advisors Marketing strategies Service product line Funding request Financial data Appendix | What is in a Business Plan? |
A concise overview of the entire plan, together with a history of the company if it is an existing company. | Executive Summary |
Illustrates your knowledge of the business you are in. It should include: Target market information Market test results Evaluation of competition Regulatory restrictions | Market Analysis |
Include information abotu the nature of your business and a list of primary factors you believe will make your business successful. | Company Description |
Includes: your company's organizational structure details about the ownership profiles of the management team. | Organization and Management |
Include a list of any successful people in the business who are acting as advisors to you. | Advisors |
How do you plan to market your business? Goals for advertising Public relations Communications | Marketing Strategies |
Describes your services and products. Not just a description: How are you better than your competition? Why people will want to come to you for these services and merchandise instead of your competitor. | Service Product Line |
You request the amount of money you will need to start or expand your business. | Funding Request |
Most creditors wil want to see historical data for an existing business for the last three to five years, including income statements, balance sheets, and cash flow statements. Start-ups or growing businesses- creditors will want financial projections including forecasting income and expenditures for at least the first year and usually from three to five years. | Financial Data |
This may not have to be included in the plan, but should be available on request and should include: Credit history Letters of reference Details of marketing studies Licenses and permit copies Legal documents Leases Contracts Names of your attorneys and accountants | Appendix |
Keep a cash cushion on hand for emergencies- enough for 3-6 months of expenses Announcements- send announcements of your business start-up to the media, potential customers, and friends Contact the US Small Business Administration for Information Utilize free counseling services with: SCORE (service corps of retired executives) SBDC (Small business development centers) | Other Factors to Consider: Business Plan |
Working Capital, Circulating capital Fixed capital | Types of Capital Needed |
Difference between current assets and current liabilities. | Working Capital (Circulating Capital) |
Long-term capital invested in the business. | Fixed Capital |
Personal, equity capital Debt equity Trade credit Venture capitalist | Sources of Funds |
Capital invested in the business by the owner(s). | Personal Equity Capital |
Borrowed or loaned capital invested in the business that must be repaid to creditors: Loans from friends Mortgage loans Commercial loans Small business administration (SBA) State and regional development companies Taking in partner(s) Issue capital stock | Debt Equity |
Credit extended by one business to another to help finance distribution of a producer's goods. | Trade Credit |
Private individuals or groups who loan money for business. | Venture Capitalist |
Leasing vs. buying Selling off excess inventory Factoring | Ways to make financing more affordable |
Reason(s) the owner is selling Profit potential Tangible assets Intangible assets Competition Human resource forecast Number and type of funerals the firm does each year | Buying a Funeral Home Factors to Consider |
The physical asset that possesses genuine value. | Tangible Assets |
A type of asset that is not able to be physically touched but is retained by a small business because its genuine value appeal. | Intangible Asset |
The practice of trying to obtain something that is being sought by others under similar circumstances at the same time. | Competition |
Determining personnel needs in terms of numbers of individuals and their required skills. | Human Resource Forecast |
Who are the potential buyers for the funeral home? Are there growth oopportunities in the market? Have you considered what you quality of life will be like? Is your decision a sound financial one or is it based on emotion? Do you have experienced advisors to assist you? | Paul Kuper's Suggested Questions |
Value of tangible assets Book value Replacement value approach Liquidation value (Market Value) approach | Considerations in Determining Price |
The cost of a fixed asset less accumulated depreciation. | Book Value |
The fair market price to purchase similar assets. | Replacement Value Approach |
The anticipated value of an asset that would be realized in case of liquidation of the business. | Liquidation Value Approach (Market Value Approach) |
Name Goodwill Copyrights Patents Trademark | Value of Intangible Assets |
An intangible asset such as the name of a funeral home; also, an intangible asset which enables a business to earn a profit in excess of the normal rate of profit earned by other businesses of the same kind. | Goodwill |
The registered right of a creator to reproduce, publish, and sell the work that is the product of the intelligence and skill of that person. | Copyrights |
The registered right of an inventor to make, use, and sell an invention. | Patents |
A name, symbol, or characteristic identifying a product offically registered and legally restricted to the use of the owner or manufacturer. | Trademark |
Cash Owner financing Third party financing | The Terms of Sale |
Prior work experience Personal experience Hobbies Accidental discoveries | Sources of New Venture Ideas |
SBA uses much the same criteria as any private lender. The tree primary tests of credit worthiness: Cash flow Management Equity | Applying for a Loan- General Credit Requirements |
Applicants must show that they can meet business expenses, owner's draw, and all payments from the earnings of the business. Usually demonstrated with a cash flow projection | Cash Flow |
Applicants must show ability to operate the business successfully. For a new business, applicants must have significant management experience as well as experience in the type of business they propose to enter. New business (or buying a business)- applicants should have approximately one dollar of cash or business assets for each two dollars of the loan. Established firm- the proforma (after the loan) ratio of total debt to net worth should be approximately 4:1 or better. | Management |
Human resource planning Capital shortages- lack of available money securing funds, goods rates maintaining reserves securing equity capital Tax burdens Government regulations Consumerism | Causes of Failure External Probelms |
Lack of expertise (mismanagement) Financial shortages Human resource management | Causes of Failure Internal Problems |
Will the size of the building meet your needs? Is it accessible to the public? What impression does the internal and external appreances give? Is there room for expansion? Are parking facilities adequate? What is the external traffic pattern? What is the internal traffic pattern? What state of repair is it? Will fixtures and equipment be purchased or leased? What are the physical surroundings? | Building Requirements | (constructing new or purchasing) |
Fixed expenses Variable expenses Cost control | Cost Analysis |
A cost that, for a given period of time and range of activity called the "relevant range," does not change in total but becomes progressively smaller on the per-unit basis as volume increases. Do not increase with increased business, not do they decrease with declining business activity. Rent Supervisory Salaries Depreciation Insurance Debt | Fixed Expenses |
A cost which is uniform per unit but fluctuates intotal in direct proportion to change in the related activity or volume. Supplies Repairs Taxes Hourly wage expenses Utilities | Variable Expenses |
Any cost not specifically associated with production of identifiable products and services and can include variable expenses or fixed expenses. | Overhead |
The point at which total sales revenue equals total costs. | Break-Even Point (Break-Even Analysis) |
Expense classifications- based on the industry Ratio examples- Comparison to industry standard. | Cost Control |
Profit and each item of expense in the income statement as expressed as a percentage of sales income. Total operating expense ratio Net profit Rent expense ratio Employee wage ratio Proprietor's wage Advertising expense | Cost Control Ratio |
30 years ago- FD agreed to wait until estate was settled before he was paid. Many FDs advanced third-party costs (church and cemetery fees) and waited for that money. Offered credit and loned money. Today- Almost all funeral homes require families to pay up front (either cash advances or entire funeral bill) Others will extend credit for 30, 60, oro 90 days, but do charge interest. | Extending Credit |
Sales increased A more personal relationship can be maintained Customers are likely to be more regular than cash customers who go where the bargain is. More like to be interested in quality of service than price. Goodwill is built and maintained more easily Goods can be exchanged and adjustments made with greater ease. (also sent out on approval). Credit applications and charge files contain consumer information that is useful in planning inventories and special sales promotions. | Advantages of Extending Credit |
Capital is tied up in merchandise bought If firm has borrowed extra money required when credit is granted, interest must be added to the cost of goods sold. Some losses from bad debts, and customers with fraudent intentions are bound to occur. Some customers pay slowly because they overestimate their ability to pay in the future. Customers are more likely to abuse privileges of returning goods and having goods sent out on approval. Credit increases operating and overhead costs by adding the expenses of investigation and bookkeeping entailed in keeping accounts, sending out statements, and collecting payments. | Disadvantages of Extending Credit |
Charge accounts Installment credit Open-end credit- revolving accounts Credit card services | Types of Consumer Credit |
2/10, n/30 - 2% discount if paid in 10 days; net bill is due in 30 days MOM (middle of month) EOM (end of month) CWO (cash with order) CBD (cash before delivery) COD (cash on delivery) | Common Business Credit/Sales Terms |
The older the account, the harder to collect Attempting to collect money due takes time away from other duties. Former customers avoid the firm because it is embarrassing to meet one to whom they owe money. Collection ties up funds needed to operate other aspects of the business. | Collection Policy- Problems with Collection |
A general procedure for outstanding bill: A friendly reminder A reminder letter Personal contact Collection agency Lawsuit-last resort | Credit Collections |
Obtaining cash before payments are received from customers by selling off one's accounts receivable to a third party. | Factoring |
All efforts designed to preserve assets and earning power associated with a business. Eliminate risks- remove the cause Minimize risks- good mangement Shift risks- purchase outside insurance Absorb risks- self-insure | Risk Management |
Protection for the small business or small business owner with regard to monetary compensation in the event that a business and/or personal peril is experienced. | Insurance |
Based on actuarial and mathematical principals, guarantees a speicified sum of money upon the death of the person who is insured. | Life Insurance |
Evolved from scientific principals to provide funds for medical expenses due to sickness or injury and to cover loss of income during a disability. | Health Insurance |
Provide a stream of income by making a series of payments to the annuitant for a specific period of time or for his or her lifetime. | Annuities |
Loss of damaged property, including supplies, fixtures, and buildings Loss of income resulting from the interruption of business due to fire, etc. Liability to employees Liability to the public Death of key employees Extensive loss from bad debts Faulty title to real estate Riots or civil disobedience Shoplifting Loss through dishonest employees Financial hardships Vehicles Burglary/robbery | Types of Losses |