Chapter 6-4

Managing a Small Business

Learning Objective 6-4

  • Objective: Analyze what it takes to start and run a small business.

Causes of Small Business Failures

  • According to the Small Business Administration (SBA), a major cause of small-business failures is poor management.
  • Poor Management encompasses a range of faults, including:
      - Poor planning
      - Cash flow management
      - Recordkeeping
      - Inventory control
      - Promotion
      - Employee relations
      - Poor capitalization

Functions of Business in Small-Business Setting

  • Successful operation as a business owner requires attention to the following functions:
      1. Planning your business
      2. Financing your business
      3. Knowing your customers (marketing)
      4. Managing your employees (human resource development)
      5. Keeping records (accounting)
      6. Looking for help

Initial Concerns for New Business Owners

  • The first two functions—planning and financing—are primary concerns when starting a business.
  • The other functions are crucial for ongoing operations once the business has commenced.

Planning Your Business

Importance of a Business Plan

  • Definition: A business plan is a detailed written statement that:
      - Describes the nature of the business
      - Identifies the target market
      - Outlines the advantages over competition
      - Discusses the resources and qualifications of the owner(s)
  • A business plan helps entrepreneurs to:
      - Be specific about products or services
      - Analyze competition
      - Calculate startup costs
      - Cover operational details
  • Mandatory for Financing: A business plan is essential when approaching banks or investors.

Preparing for Lending

  • When seeking loans, consider the following steps:
      1. Choose a bank that serves businesses of your size.
      2. Hire a competent accountant to prepare financial statements and a personal balance sheet.
      3. Schedule an appointment with the bank and bring necessary financial documentation.
      4. Demonstrate personal integrity—be perceived as a respected community member.
      5. Be specific about the amount of money needed and be prepared to personally guarantee the loan.

Outline of a Comprehensive Business Plan

Length and Timeframe

  • A quality business plan typically spans 25 to 50 pages and takes a minimum of six months to complete.

Sections of the Business Plan

  1. Cover Letter:
       - Summarize impactful points of the project succinctly.
       - Address potential investors by name.

  2. Executive Summary:
       - Provide a two- to three-page summary of the business, major goals, and objectives.

  3. Company Background:
       - Overview of company operations, legal considerations, risks, opportunities, and financial condition.
       - Include balance sheets, income statements, cash flow statements, and insurance coverage details.

  4. Management Team:
       - Provide an organization chart, job descriptions, and detailed résumés of team members.
       - Highlight the importance of a skilled management team for securing funding.

  5. Financial Plan:
       - Project income, expenses, and funding sources for five years.
       - Adjust for unpredictable growth and provide reasonable assumptions based on industry trends.
       - Share best-case, expected, and worst-case financial projections.

  6. Capital Required:
       - State the capital needed to start or sustain operations, detailing how funds will be used.

  7. Marketing Plan:
       - Analyze competition and market trends; assess product strengths and weaknesses.
       - Provide sales forecasts in dollars and units, and outline marketing strategies.

  8. Location Analysis:
       - Assess the importance of location for the business, including demographic analysis and traffic patterns.

  9. Manufacturing Plan:
       - Describe operational needs including plant size, machinery, and quality control measures.

  10. Appendix:
       - Include marketing research, information about the product concept, and bibliographical references.

Writing a Business Plan

Process Overview

  • Crafting a business plan is a time-intensive process, crucial for standing out among potential funders.
  • A strong executive summary must capture attention within five minutes to be memorable.

Resources for Assistance

  • There are many software programs available, such as Wrike and Bizplan.
  • For a simplified approach, consider resources like Jim Horan's The One Page Business Plan.
  • Access successful business plans on websites like bplan.com/sample_business_plans.
  • The SBA website also offers comprehensive templates and guides.

Financing Your Small Business

Sources of Capital

  1. Personal Savings

  2. Family and Business Associates:
       - Common funding source, but start with advice before requesting financial help.
       - Example: Ray Kroc soliciting suppliers during McDonald's early challenges.

  3. Banks and Finance Institutions:
       - Community banks are more flexible compared to larger banks and understand local businesses better.
       - Community Development Financial Institutions (CDFIs) play a role in lending to lower-income areas with high repayment success.

  4. Angel Investors
       - Individuals investing personal funds in promising new business ventures.
       - Crowdfunding platforms provide quick funding with less rigorous requirements than banks.
       - The JOBS Act of 2012 allows raising up to $1 million from private investors.

  5. Venture Capitalists:
       - Provide significant funding for a share in the company (often 60% stake), risking entrepreneurial control.
       - Recommendations: Consult multiple firms and utilize platforms like AngelList for connections.

  6. Small Business Administration (SBA):
       - Offers various loan programs and support services.
       - The microloan program provides loans up to $50,000 based on business ideas rather than credit scores.

Types of SBA Financial Assistance:
  • Standard 7(a) loans: Up to $5 million, guaranteed repayment if borrower fails.
  • Microloans: Ranging from $100 to $50,000.
  • SBA Express loans: Up to $350,000, response time within 36 hours.
  • Export Express loans: Up to $500,000 for businesses wishing to export.
  • 504 CDC loans: For purchasing major assets, maximum $5 million, requiring job creation.
  • CAPLine loans: Up to $5 million for short-term working capital needs.
SBA Adjustments
  • SBA simplified its application to one page for loans under $50,000.
  • Small Business Development Centers (SBDCs) offer free evaluations and assistance in writing plans and applications.

Impact of COVID-19

  • The SBA provided support during the pandemic through several initiatives to support small businesses, such as the Paycheck Protection Program (PPP) and COVID-19 EIDL loans.

Knowing Your Customers

Importance of Market Understanding

  • Understanding the target market is essential—comprised of consumers with unsatisfied wants who have resources to buy.
  • Example: While many may want a luxury car, few may have the financial ability—therefore not a viable market segment.

Strategies for Customer Engagement

  • Successful businesses must not only acquire customers but also retain them.
  • Signs of customer satisfaction can be observed in various operational data and media.
  • Utilizing AI and machine learning can provide insights into customer sentiments in real-time.

Leveraging Small Business Advantages

  • Small businesses can rapidly adapt to changing customer needs due to their size.
  • Essential to listen to customer feedback to inform product or service modifications.

Managing Your Employees

Employee Management Challenges

  • As a business expands, the entrepreneur needs to hire, train, and motivate employees effectively.
  • Competitive compensation is challenging; thus, maintaining good employee relations is vital.

Benefits of Good Employee Relations

  • Employees in small businesses often report higher job satisfaction due to manageable workloads and involvement in decision-making.
  • Importance of delegating authority and recognizing qualified management recruits or external consultants to maintain growth.

Keeping Records

Importance of Recordkeeping

  • An effective accounting system is crucial for tracking sales, expenses, and profits effectively.
  • Good financial practices can prevent costly mistakes and help in strategic decision-making regarding assets and expenses.

Looking for Help

Need for External Guidance

  • Entrepreneurs should seek outside consulting for legal, financial, and marketing assistance early on.
  • Key external resources include:
      - A competent lawyer for legal documentation and advice on liability.
      - Marketing consultants for strategies and target market assessments.
      - Commercial loan officers for financial planning and strategy.
      - Service Corps of Retired Executives (SCORE): Offers free counseling through experienced volunteers.

Additional Resources

  • Universities and MBA programs often provide consulting services for budding entrepreneurs.
  • Websites and forums, local chambers of commerce, and trade associations can yield valuable insights and support.