Name: Sannita S. Lam
AMM 101.3704 (Prof. Barry Smith)
HW: 11-12
April 8, 2005
REVIEW QUESTIONS:
1. What information would you need to determine whether a particular business is small
according to SBA guidelines?
Information that we would need to determine whether a particular business is small according
to SBA guidelines are listed below:
Industries
1. Manufacturing
No. of employees
Annual sales receipts
Max. 500 – 1,500
2. Wholesaling
Max. 100
3. Retailing
4. Mining
$6 million - $24.5 million
Max. 500
5. General construction
$12 million - $28.5 million
6. Special trace construction
Up to $12 million
7. Agriculture
$0.75 million - $5 million
8. Services
$6 million - $29 million
2. Which two areas of business generally attract the most small-businesses? Why are these
areas attractive to small business?
Two areas of business that generally attract the most small businesses and the reasons why
these areas attract the small businesses are

Distribution Industries: This category includes retailing, wholesaling, transportation and
communications. These industries concerned with the movement of goods from
producers to consumers. Of these, almost ¾ are involved in retailing (sale the goods
directly to consumers). For example: Clothing, jewelry stores, pet shops, bookstores and
grocery stores.

Service Industries: This category attractive the small businesses for over 48%. Of these,
about ¾ provide such non-financial services as medical and dental care; watch, shoe
repairs, restaurants, dry cleaning. Only 8% of the small service firms offer financial
services, such as accounting, insurance, real estate, and investment counseling.
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4. What kinds of factors encourage certain people to start new business?
In some people, the motivation to start a business develops slowly as they gain the
knowledge and ability required for success as a business owner. Knowledge and ability –
especially management ability – are probably the most important factors involved.
5. What are the major causes of small-business failure? Do these causes also apply to larger
business?

The major causes of small-business failure are lack of capital, management and
planning. Businesses can experience a number of money related problems.
Entrepreneurs not only need the capital to open a business but also the money to
operate it. One cash-flow obstacle often leads to others. And a series of cash-flow
predicaments usually ends in a business failure.

The major causes the small-business failure does not apply to larger business. The major
causes the larger business failure are the overexpansion. Many entrepreneurs with
successful small businesses make the mistake of overexpansion. Fast growth often
results in dramatic changes in a business. Thus the entrepreneurs must plan carefully
and adjust competently to new and potentially disruptive situations.
6. Briefly describe four contributions of small business to the American economy.
The contribution of small business to the American economy is listed below:

Providing the technical innovation  many of inventions sparked major new U.S.
industries or contributed to an established industry by adding some valuable service.
Ex: Air conditioning, helicopter, airplane, jet engine, penicillin, personal computer, etc.

Providing employment  small businesses provide 67% of workers with their first jobs
and initial on-the-job training in basic skills.
Small businesses thus contribute significantly to solving unemployment problems.

Providing competition ( small businesses challenge larger, established firms in many
ways, causing them to become more efficient and more responsive to consumer needs.

Filling needs of society and other businesses ( small firms also provide a variety of goods
and services to each other and to much larger firms.
7. What are the major advantages and disadvantages of smallness in business?

The advantages of smallness in business are:
-
Personal relationships with customers and employees
The owners of retail shops get to know their customers by name and deal with them
on a personal basis. Through such relationships, small-business owners often
become involved in the social, cultural, and political life of the community.
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-
Ability to adapt to change
Through personal relationships with customers, the owners of small businesses
quickly become aware of changes in people’s needs and interests, as well as in the
activities of competing firms.
-
Simplified recordkeeping
Many small firms need only a simple set of records. Recordkeeping might consist of a
checkbook, a cash-receipt journal, and a cash-reimbursement journal.
-
Independence
Small business owners are the masters of their own destinies – at least with regard to
employment. For many people, this is the prime advantage of owning a small
business.

-
Keep all profits
-
Ease and low-cost of going into business
-
Able to keep business information in secret
The disadvantages of small businesses are:
-
Risk of failure
New small businesses run a heavy-risk of going out of business – about two out of
three close their business in the first sic years. The well-established small firms can
be hit hard by a business recessions, mainly because the do not have the financial
resources to weather an extended difficult period.
-
Limited potential
Many small business owners have a purpose, simply to make a living for his/her
family. The owner may have some technical skills (hair stylist or lumber) to starting
their work but such business is unlikely to grow into big business.
-
Limited ability to raise capital
Small businesses typically have a limited ability to obtain capital. Most small-business
financing comes out of the owner’s pocket.
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8. What are the major components of a business plan? Why should an individual develop a
business plan?
The major components of a business plan are shown in the tabular below:
Components
Introduction
Information of
Name, address, phone number, date the plan issued, statement
of confidentiality
Executive summary
Overview the business plan
Benefits to community
Business impact in the community
Company & Industry
Background of the company, products/services to be offered
Management team
Discussion of skills, talents and job description of management
team
Manufacturing & Operations
Facilities, space, capital, labor, and purchasing requirement
Labor force
Quality of skilled workers
Marketing plan
Markets, pricing, distribution, and promotion needed
Financial plan
Investment, sales and cash-flow forecast needed
Exit strategy
Succession plan or going public
Critical risk
Weakness of the business
Appendix
Résumés of owners
Individual should develop a business plan to guide themselves to starting a business. It also
serves as a concise document that potential investors can examine to see if they would like
to invest or assist in financing a new venture.
9. Identify five ways in which the SBA provides management assistance to small business.

Management courses and workshop  a governmental agency that assists, counsels,
and protects the interest of small businesses in the USA.

SCORE (Service Corps of Retired Executives)  a group of retired people who volunteer
their services to a small business through SBA. SCORE help the minority-owned small
businesses.

Small Businesses Institutes (SBI)  a group of senior and graduate students in business
administration who provide management counseling to small businesses

Small Business Development Centers (SBDC)  a university-based group that provides
individual counseling and practical training to owners of small businesses.

SBA publications  The SBA issues management, marketing and technical publications
dealing with hundreds of topics of interest to present and prospective managers of small
firms.
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10. Identify two ways in which the SBA provides financial assistance to small business

Regular business loans  most of the SBA’s business loans are actually made by private
lenders such as banks, but repayments is partially guaranteed by the agency. SBA
guaranteed that it will repay the lender up to 90% of the loans if the borrowing firm cannot
repay it.

Small Business Investment Companies (SBIC)  is a privately owned firm that provides
venture capital to small enterprises that meet its investment standards.
12. What is venture capital? How does the SBA help small businesses obtain it?

Ventures capital is money that is invested in small firms that have potential to become
very successful. The people who invest n such firms expect their investment will grow
with the firms and become quit profitable.

The aid SBA offers allows them to invest in small businesses that otherwise would not
attract venture capital
13. Explain the relationships among a franchise, the franchisor, and the franchisee.

Franchise ( a license to operate an individually owned business as though it were part of
a chain of outlets or stores

Franchisor ( an individual or organization granting a franchise

Franchisee ( a person or organization purchasing a franchise
14. What does the franchisor receive in a franchising agreement? What does the franchisee
receive? What does each provide?

The franchisor supplies a known and advertised business name, management skills, the
required training and materials, and a method of doing business. The franchisee supplies
labor and capital, operates the franchised business, and agrees to abide by the
provisions of the franchisee agreement.
Franchisor provides:
Franchisee supplies:
1. Recognize trademarks
1.
Investment and franchise fee
2. Designs and color schemes for restaurant
2.
25-40% cash requirement from investment
3. Specifications for certain food products
3.
additional $499,000-$740,000 if building is
purchased
4. Proven methods of inventory and operation
4.
4% of gross sales annually
5. Bookkeeping, accounting, policies manuals
5.
4% of service fees monthly
6. A franchise term up to 20 years
6.
Payment of a variable rent percent of
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monthly gross sales
7. Completed formal training program
7.
Equipment, décor signs in conformity
8. Class room training
8.
Taxes, insurance and maintenance cost
9.
9.
Commitment
Ongoing regional support service and field
service staff
to
ensuring
high-quality
standards
10. Research & development of labor-saving
11. Monthly bulletins
12. Site selection and development
15. Cite one major benefit of franchising for the franchisor. Cite one major benefit of franchising
for the franchisee.

The advantages of franchising to the franchisor:
The franchisor gain fast and well-controlled distribution of its products without incurring
the high cost of constructing and operating its own outlets. The success of the franchise
means more sales, which translate into higher royalties for the franchisor.

The advantages of franchising to the franchisee:
The franchisee gets the opportunity to start a business with limited capital and make use
of the business experience of others. Franchisee also may be able to minimize the cost
of advertising, supplies, and various business necessities by purchasing them in
cooperation with other franchisees.
DISCUSSION QUESTIONS:
1. Most people who start small businesses are aware of the high failure rate and the reasons for
it. Why, then, do some take no steps to protect their firms from failure? What step should they
take?
For most people who take no step to protect their firms from failure is because they think they
will be able to manage their business by their self. If a small business owner is aware of the
risk of high failure, the business owner should have prepared their business intelligently. The
small business owner might consider about the money needed to operate the business 9not
only capital to open the business). The small business owner should have considered their
cash-flow obstacle so it will not lead to business failure. The small business owner should
have also considered about their management skills required to run their business. If the
small business owner well-prepared about every obstacle that might happens, it will reduce
their business failure.
4. Would you rather own your own business independently or become franchisee? Why?
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I would rather to open up a business independently than become a franchisee. I love to do
everything by my own. I’d love to create a different idea than other person. A franchisee, what
I thought, basically, had been set up the way it is and we could not change it. For example: I
believe, a franchisee can not change the franchising business motto. But, if I open up my own
business, I can find the right motto or slogan for my own business with my own ideas. I can
also make changes to my business if I think it is time the business needs some lift.
Being independently is always become my spirit. I know that I am able and I am gifted to lead
someday.
LEARNING OBJECTIVES:
1. Judge the advantages and disadvantages of operating a small business
For me, it is important to know the advantages and disadvantages of operating a small
business. By educating ourselves about this information we can avoid failures for our
business. For example, we knew that operating small businesses has a high risk of
failure. To avoid the risk of failure we have to operate the business in well management.
2. Identify the people who start small businesses and the reasons why some succeed and
many fail.
Smart people are people who learnt from someone’s mistakes and not to do it. That is
why so important to know someone’s experience in their businesses. What are the
obstacles they facing through and how they came out with the solutions then apply it to
our business.
HOME DÉCOR EMPIRE
There are two things I can learn from Chris Madden who build Home Décor Empire. First thing is
to get customers interest. Chris knew how to get women’s interest. Chris not publishing book
about how to make a room on our own with high prices that most people may be couldn’t afford it.
But Chris made it as an affordable, durable and stylish home furnishing that available to make
homes a haven. The second thing is to start licensing our own brand. Chris braved herself ask to
the Basset furniture to license her brand for several lines of furniture. And after doing that, sales
of the Madden-branded furniture doubled within two years.
It is always good to braved ourselves into new world. We can experience it and we will not forget
the lesson from it.
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