STARTING A SMALL BUSINESS.   Term Paper ID:25234 Click to get this paper

Essay Subject: Generating capital, organization, market analysis, advertising, costs & pricing, credit, causes of failure, site, staffing, taxes.... More...

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Paper Abstract: Generating capital, organization, market analysis, advertising, costs & pricing, credit, causes of failure, site, staffing, taxes. Paper Introduction: SMALL BUSINESS PLANNING Introduction This research examines issues relevant to the establishment of a new small business enterprise. The issues examined are generally applicable to all small businesses. The following topics are covered: generating capital, organizational form, market analysis, advertising and promotion, fixed costs, pricing issues, credit sources, major causes of business failure, site selection, variable costs, staffing the business, and taxation issues. Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. These goal typesneed not necessarily be mutually exclusive. What should the advertising message be? Trade credit is extended to a business firm by such a firm's materialsuppliers. With respect to the cost of money, it isdifficult to project advantages and disadvantages between borrowing fromrelatives and friends, on the one hand, and banks, on the other hand. The two principal sources of short-term financing available to smallbusiness firms are (1) trade credit and (2) commercial bank loans. Market Analysis A market analysis is required to justify the establishment of a newsmall business enterprise. Trade credit is asource of short-term financing for business firms. Cambridge, Massachusetts:M. In some instances, short-term capital generatedthrough the use of secured loans may, if effect, be long-term in character,because such loans are often continuously in force. Such credit sources, however, typicallyare less certain sources of additional capital as a business enterprisegrows. T., & Melicher, R. The small business engaged in selling pre-owned automobiles would fall between these two extremes. (6th ed.). Therefore, to avoidlosses through obsolescence, it is desirable to have inventory managementand control procedures which insure that stocks are turned prior to thedevelopment of obsolescence. Advertising and Promotion The major decisions related to advertising in marketing are concernedwith money, message, media, motion, and measurement. It costs money to maintain inventories. If,however, a firm generates short-term working capital by delaying payment ofaccounts payable beyond generally acceptable limits, the action may have anadverse impact on the firm's credit rating. Where should the message be publicized? The problem facing afirm in this context is to obtain the capital required, in the amountrequired, and under conditions which enable the firm to continue to fulfillits objectives. The third type of profit goal is seeking to earn a satisfactorylevel profits. There are two reasons for such a seemingly contrary situation.First, there are significant costs for the lender associated with theestablishment of value, the establishment of conditions, and the monitoringof such loans, when compared to unsecured loans. Bank loans, however, are a good source of capital for the smallbusiness entrepreneur with a strong credit rating and a sound businessplan. W. Gitman, L. On a small business level, a jewelerdealing in fine jewels would require a high level of working capital inrelation to total capital, because of the relatively low turnover of highpriced inventory. Therefore, target profit goals and satisfactory profit goals aresimilar in character. One of the mosteffective approaches to human resource management is the development ofties between performance and reward-PRP, or performance-related pay(Gibson, 1995). The essentialquestions involved are as follows: 1. Thus,sources which a firm intends to use for short-term borrowing should bequeried ahead of the time short-term capital is required, to assure thatfunds will be available when required. These factors are (1) cost to the firm, (2) impact on thefirm's credit rating, (3) reliability of the financing source, (4)restrictions imposed by the financing source on the financial activities ofthe firm, and (5) flexibility in the extension of credit by the financingsource (Gitman, Joehnk, & Pinches, 1995). Restrictions placed the use of assets, and on the operations of a firmby lenders are the fourth consideration in source selection. Whether sales levels are high or low, site rental and equipmentrental or loan payment will remain steady (fixed). Variable Costs Variable costs are those costs that change as elements of the businessoperation change. Thus, inthis context, it is desirable to maintain inventories at levels sufficientto support demand. The new employee reward system.Management Review, 84(2), 13-18. 6. Considered within this context, the cost to a firm of waiting tofull 3 days to remit payment is two-percent of the value of the shipment.On an annualized basis, thus, trade credit costs a firm 36.73 percent perannum if the discount for prompt payment is not taken.( In actualpractice, many suppliers permit firms to whom trade credit has beenextended to take a two-percent discount if payment is made by the 1 th ofthe month following the month in which shipment was received. In such instances, satisfactory profits may not beconsistent with profit maximization. 2. The attraction of the Subchapter S Corporation lies in potentialfederal income tax benefits. The transportation networksurrounding the selected site must enable prospective customers to enterand exit the location with minimal delay and driving frustration. A shopper driving at a speed of 35 miles perhour can easily overshoot a site entrance if he or she has not seen thesite from the road (Lynch, 1995). Pledging accounts receivable by a firm differs from factoring in thatthe firm receives a short-term loan from a financing source by pledging theaccounts receivable as security for the loan. Thus,sources of financing providing the lowest interest rate are preferred, whenall other factors remain equal. Borrowing start-up capital from relatives and friends also fails toestablish a business credit rating for the enterprise in the way thatsuccessfully repaid bank loans can contribute to the value of one'srecognized credit worthiness. 4. 2 X 1 -. New York: Harper & Row, Publishers. Secured lending. M. 4. Thisimpact is the result of differences in income tax liabilities for differenttypes of business forms, and differences in the abilities of the differenttypes of business to generate capital (Brigham, 1994). Magee, J. Credit Sources When a firm must generate capital through short-term financing thereare specific factors that must be considered when selecting the source ofsuch financing. The center should be level and fairly compact inshape, with no surrounding development that is ugly, competing, or ofnuisance character. The need for effective cash control, and the need foreffective procedures for the monitoring and controlling receivables arerecognized by most small business managers. A great variety of capital sources exist, along with anequally great variety of methods by which these sources may be tapped by anenterprise. There are many factors providingsignificance to the inventory management and control function. Secured loans are used to acquire both long-term andshort-term capital. When the commercial characteristics of an industry are considered,different factors influence the level of required working capital. Several different types of assets-marketable stocksand bonds, land and buildings, equipment, inventory, and accountsreceivable, among others-may be used to secure a capital loan (Brigham,1994). In this context,an inadequate inventory results in an opportunity cost to a firm. L. Effective inventory management and control procedureswill reduce inventory losses due to theft. Additionally, inventory(sales stock) will function in the manner of a fixed cost at the smallbusiness level, even though the interest payments or opportunity costsassociated with inventory value technically are variable costs, as theychange with inventory levels. Similarly, if a firm is out of an item required in itsproduction process, the firm may lose a sale, or it may a sufferperformance penalty, incurred, as a result of the inefficiencies introducedby the inadequate inventory. For the small business, however, the rate ofsuch sales in most instances will cause these costs to behave as fixedcosts over time, as inventories will be maintained at relatively stablelevels. Hinsdale,Illinois: The Dryden Press. Cost of capital refers to the cost to the corporation of investmentcapital (Bolten & Conn, 1995). (1994). Lott, K. It is a quitelegitimate source of short-term financing, and is widely used. (Eds.). Thus, the risk forthe unsecured loan may actually be lower than that for a securitized loan(Lott & Myers, 1995). The necessarybusiness-related skills may be acquired through consultants, seminars orevern friends with successful small businesses. Among the more important of these taxes arethe following: 1. Inventory management and control is concerned with the planning,organization, and control of materials management, production, stocking,and distribution (Magee & Boodman, 1995). Business licensing and operations taxes. I. *The implicit cost of not paying within 3 days is determined byapplying the following formula in this example: (. Even the best business idea will notbe sufficient to ensure the success of the business. It is surprising how oftenthese same managers overlook the need for effective procedures andpractices for inventory management and control. Another advantage for a firmin pledging its accounts receivable is that the firm's customers nominallycontinue to deal directly with the firm, although the mailing address forpayment on their accounts may actually be that the bank or other financialinstitution extending the secured loan. The only real difference between the two is thattarget profits are measured against invested capital, while satisfactoryprofits are measured against the costs of production. (1995, February). Further, at each renewal data, the lender has the option ofnot renewing the loan. H.,& Walker, C. Such personnel should be soughtfrom among persons with sales experience. Thus, commissions for sales people vary according to thelevel and rate of sales in a business, as do product preparation andadministrative processing charges. Production planning andinventory control. This fact is aseemingly simple and obvious one; however, it is one which is oftenoverlooked by small business managements. The initial stepwhich must be taken by a marketing organization in the development of apricing strategy is the establishing of pricing objectives. Tradecredit is translated into accounts payable for a business firm. (1995). In a price level environment characterized by steadyinflation, the effects are not serious, and they may even be beneficial.In a price level environment in which prices may fall, however, seriousconsequences may result. Most goods, however, are, to some extent,subject to theft. Factoring actually is not a form of short-term finance for a businessfirm because the process involves the selling of a firm's accountsreceivable to a third party-a factor. Essentials of managerial finance:Principles and practice. If a firm relies on a smalllocal bank for short-term financing needs, it is possible, and evenprobable, that, at times, the bank itself will not possess the capitalnecessary to provide the short-term loan to the company. Ofcritical significance in this context are (1) the relationship between theamount of output sold for cash and that sold on credit, and (2) the termsof credit extended. As opposed to a corporate form of organization, small businessentrepreneurs may organize their enterprises as either sole proprietorshipsor partnerships. (1995). Trees and other obstructions should not bar driversand passengers in vehicles on an adjacent interstate freeway or on localstreets from seeing the site. The cost of equity capital is a combination of floatcharges, dividend payments, and dilution of existing equity. Four forms of profit goals have been identified. 3. If a firmreceived shipments throughout a month, neither the firm nor its suppliergains or loses to any substantial extent by such an arrangement. Boston: Houghton Mifflin Co. Other lenders may place a freeze orother limits on managerial salaries, dividends, or capital expenditures.Yet other lenders may require a borrowing firm to maintain compensatingbalances. G. The first of these goal typesis profit maximization. Staffing the Business The major staffing considerations for a small business will be thoseassociated with acquiring sales personnel. E. A third factor which must be considered is the reliability ofpotential sources of short-term financing. Some individuals, however, may be reluctantto commit all of their personal savings to a new business venture. If afirm is out of an item desired by a customer at the time the item isdesired by the customer, the firm may well lose a sale. Lynch, K. Small Business Planning Introduction This research examines issues relevant to the establishment of a newsmall business enterprise. (1995). E. Short-term secured loans most often are securitized through thepledging of receivables or inventory. 3. 732-769. An importantbusiness organizational form for small businesses is the Subchapter SCorporation. (7th ed.). For example,some lenders may require a borrowing firm to place its inventory, or itsaccounts receivable as collateral. 5. While to cost to a firm (in theform of the discount) to factor its accounts receivable may be high, thefirm rids itself of any "bad debt" problems associated with the accountsbecause the factor assumes such responsibility. Inventories often represent a major proportion of a small businessorganization's current assets, along with the organization's cash andreceivables. One of those other factors is the effectof short-term financing on the credit rating of a firm. Brigham, E. Compensation will be the mostimportant factor in attracting prospective sales persons. E., & Conn, R. F., & Boodman, D. Insome instances, relatives and friends loan money at less than prevailingrates, while in other instances, higher than prevailing rates are demanded. In such asituation, a firm using trade credit in this manner, in addition topossibly damaging its credit rating, is incurring interest charges at anannualized rate of 63.12 percent.* Thus, when a firm does not takeadvantage of the discounts associated with trade credit, or when a firmuses trade credit in such a way that it incurs additional interest charges,trade credit becomes some of the most expensive credit a firm is likely toever use. The use of trade credit has another potential down side for a firm.Most suppliers charge additional interest when payment extends beyond 3 days. Inventories are subject price deterioration. (7th ed.). A typical late payment charge is five-percent per month. Even in a period of general inflation, pricereductions often occur. Since the site should be visible to the prospectivecustomer, the selected site should not be built too high on a hill or in anextremely low place. New York: McGraw-Hill. Site planning. Inventories are subject to physical deterioration.Depending upon the characteristics of the goods, physical decay ordeterioration may occur, while goods are being held in inventory. Therefore, the use of the concept must beconsidered within the context of federal income tax laws. In many instances, however, targetprofits on invested capital will not be consistent with profit maximizationeither. In many instances, the interest costof such loans is higher than that associated with unsecured short-termloans. Pricing Issues Pricing strategy is the overall task of defining the price range andprice movement through the time period required to support theorganizational sales and profit objectives and to support productpositioning decisions. Legally, however, suchloans are short-term, because they mature frequently, and must, therefore,be renewed. If,however, a firm received all of its shipments early in a month, it gainsthrough an extended use of "no interest" credit, while if the firm receivedall of its shipment late in a month, it loses some of the advantage of theuse of trade credit. Asset securitization is a term used in capital generation that refersto secured loans. Taxation Issues With respect to taxation, the enterprise must be prepared to deal withand pay a variety of taxes. Subchapter S corporations are permitted to make an election wherebyshareholders will be taxed (for federal income tax purposes) asindividuals, as opposed to taxing the business organization as acorporation, and then taxing individual shareholders on income derived fromthe corporation. How much money should be spent on advertising? 2. T. Welshans, M. Another aspect of site selection in relation to the transportationnetwork is visibility. Theaccomplishment of this objective depends on both sufficient initial capitaland effective working capital management. Theroads leading to the proposed site must have extra capacity to handleperiods of high traffic volumes (Lynch, 1995). In the instance of either sole proprietorships orpartnerships, principals are directly liable for the debts of the businessenterprise, where under a corporate form of organization, personal assetsare shielded from the obligations of the business enterprise. Eachfinancial instrument has a separate cost of capital determination. Goods held ininventory may either gain or lose financial value, as a result of pricelevel changes. Generating Capital The generation of capital is one of the most pressing problems facingany enterprise. From such a commitment will flow thedesire to remain in and perform well in an organization. J., Joehnk, M. Sales or transaction tax collection and remittance. A sub-type ofthe Subchapter S corporation is the Subchapter C Corporation. Financing cost is typically expressed as an interest rate. For many small business firms, however, access to both capitalsources and methods by which capital may be obtained from these sources isoften restricted by a variety of diverse factors. In theory, firms to which trade credit is extended are expected topay for goods with 1 days of receipt in order to obtain the two-percentdiscount. (The implicit cost of not taking advantage of a trade credit discountis determined by applying the following formula in this example: (. References Bolten, S. Thus, toavoid losses through physical deterioration, it is desirable to haveinventory management and control procedures which insure that stocks areturned prior to the occurrence of such deterioration. (2nd ed.). F. 5. A significant price change may cause a firmholding high cost goods in inventory to incur a price disadvantage inrelation to its competitors. Inventories are subject to obsolescence. (3rd ed.). Finance. The generally accepted contention is that profitsshould be maximized over the long-term, as a means of maximizing a firm'svalue to its owners. Obtaining a secured loan also may impose restrictions on the borrowerwith respect to the raising of additional capital. As an example, an assetsecuritization agreement may prohibit the borrower from issuing other debtinstruments, obtaining unsecured loans, or floating new stock issues(Welshans & Melicher, 1994). Homewood,Illinois: Dow Jones-Irwin, pp. (1994). Taxes on inventory value. It costs money to maintain inadequate inventories. The amount of working capital required by a business enterprise tendsto vary according to the type of industry and the commercialcharacteristics of the industry. Inventory costs, however, are highlyrelevant. D., & Pinches, G. TheSubchapter S corporate form of organization remains preferable for manysmall business entrepreneurs, however, because of the ability to elect howfederal tax liability will apply-as an individual, as a partnership, or asa corporation. State and federal income taxes. Depending upon the policies of the source, and theconditions of the financing, it may be either quite difficult, orrelatively simple to alter the amount of short-term funds provided, and toalter the terms on such financing. The following topics are covered: generatingcapital, organizational form, market analysis, advertising and promotion,fixed costs, pricing issues, credit sources, major causes of businessfailure, site selection, variable costs, staffing the business, andtaxation issues. Gibson, V. Fixed Costs The primary fixed costs will be associated with site and equipmentcosts. M. 2)(36 /2 ) = implicit cost of trade credit. Personal savings remain the preferred source of start-up capital forsmall business entrepreneurs. In other words, thecollections from the accounts receivable pledged cannot be used by the firmfor any purpose other than retiring the loan for which they are security.While such an arrangement limits the flexibility of a firm to conduct itsfinancial activities, firms typically benefit from such an arrangementthrough the lower interest rates that typically are associated with asecured loan as opposed to an unsecured loan. The extent to which theftoccurs of goods held in inventory depends, to a great extent, on thecharacteristics of the goods. The second type of profit goal concerns targetprofits. Products andmaterials maintained in inventory may become obsolete. (4th ed.).Cincinnati: South-Western Publishing Co. Press. Start-up capital obtained from relatives and friends typically isless dependent upon one's credit rating than are bank loans, and is, thus,typically more easily obtained. This factor is highly relevant to the sale ofused cars. Commercialbanks extend short-term unsecured and secured loans to business firms.Other sources of short-term capital for a small business firm are (1)factoring, which amounts to the sale of a firm's accounts receivable, (2)floor planning, and (3) the bonded warehousing of inventory. In Baughn, W. In dynamic economic andindustrial environments, inventory management and control practices andprocedures must be capable of supporting effective decision-making.Inventory management and control is an important managerial function forthe small business enterprise. L., & Myers, R. Major Causes of Business Failure The factors which influence the ultimate success of any businessenterprise-large, medium, or small-are both numerous and varied.Ineffective financial management, however, is implicated in an unusuallyhigh proportion of small business failures. (1995). As an example, if a firm's costof capital is 15 percent, the annual capital cost of carrying an inventoryvalued at $1 , is $15, , while it could cost $15 , in interestcharges per annum to carry an inventory valued at $1, , .Additionally, it costs money to store, handle, and maintain an inventory. For small business entrepreneurs just beginning, the safest and leastexpensive sources of capital often are family, friends, and personalsavings. Site Selection One of the key elements in site selection for is the relation of aproposed site to the transportation network. A target profit goal seeks to earn a planned return on investedcapital. (1995). The level of this discount is, in part, a function of the creditworthiness of the firm's customers represented in the accounts receivableto be sold, and is, in part, a function of how badly the firm needs fundsto address a current liquidity problem. The key to motivating an individual to remain in andperform well in an organization lies not in urging an individual to remainor perform, but, rather, in the developing within that individual a strongcommitment to the organization. When accounts receivable arefactored by a firm, the firm sells the accounts at a discount of their bookvalue. This market analysis must consider (1) demandfor the product or service, (2) size of the market, and (3) competition inthe market area. Managerialfinance. 3. The cost for borrowed money is the relevantinterest rate. A typical trade credit arrangement is 2 percent 1 days, net 3 days. On a broadlevel, the Subchapter S Corporation is limited to 1 shareholders, while arequirement for the Subchapter C Corporation is that at least 5 percent ofthe stock must be held by no more than five shareholders. The most critical issue for small businessenterprises, however, is to maintain financial liquidity. (4th ed.). Financial management. Employment taxes. 2. 5)(36 /3 ) =implicit cost of trade credit. Inventories are subject to theft. The final consideration in the selection of a short-term financingsource is flexibility. Conclusion As the many issues discussed here make clear, starting a smallbusiness requires extensive planning. Among themore significant of these factors are the following: 1. Organizational Form The organizational form of business organization has a direct impacton the financial structure and financial performance of a firm. 5 X 1 - . The issues examined are generally applicable toall small businesses. Pricing tactics, on the other hand, involve thesetting the specific price levels, together with the conditions foraltering the specific prices, for specific products. Second, a firm requiringan secured short-term loan typically will not have a credit standing ashigh as a firm which qualifies for an unsecured loan. By contrast, a gasoline station owner would require amuch lower level of working capital in relation to total capital, becauseof the high product turnover. The banker's handbook. A major problem for a firmthat factors its accounts receivable may develop, however, if the firm'scustomers resent dealing with the factor. While thisadvantage of the corporate form of business organization over the soleproprietorship and partnership forms of business organization might betempting to small business entrepreneurs, in actual practice, it is likelyto be more of a theoretical advantage than an actual advantage, as lendersand creditors may demand an acceptance of personal liability by the smallbusiness entrepreneur as a price of doing business with them. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.