WE WRITE CUSTOM ACADEMIC PAPERS

100% Original, Plagiarism Free, Tailored to your instructions

Order Now!

Small Business Management

Small Business Management
Order Description
Please answer 5 questions. Please note the layout of your answers should be in paragraph style.
1. What are the primary points of emphasis in a start-up business plan? How might this plan evolve as it changes from a start-up plan to an ongoing business plan that
will be used by the company?
2. What steps can small companies take to scan the market and the threats it maypresent to avoid becoming obsolete?
3. How can technology-based companies keep up with rapidly changing markets, products, and competitors? Which is more important to success: strategy or resources?
4. What are the ramifications of competing with a larger, more powerful competitor? What opportunities might exist?
5. Discuss the entrepreneurial traits.
6. What role does the company’s public relations efforts play in the company’s success? What steps can the entrepreneurs take to generate PR for their companies?
7. Discuss the benefits and the risks of outsourcing the manufacturing of products to foreign countries.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 1
CHAPTER 8: BUILDING A POWERFUL
MARKETING PLAN
CHAPTER SYNOPSIS
Creating  a  solid  business  plan  improves  an  entrepreneur’s  odds  of  building  a
successful company. The business plan captures many of the topics discussed, and in
addition,  it  includes  a  concise  statement  of  how  an  entrepreneur  plans  to  achieve
success in the marketplace. This section focuses on building the marketing plan.
CHAPTER OBJECTIVES
1.  Describe  the  principles  of  building  a  guerrilla  marketing  plan  and  explain  the
benefits of preparing one.
2.  Explain how small businesses can pinpoint their target markets.
3.  Discuss  the  role  of  market  research  in  building  a  guerrilla  marketing  plan  and
outline the market research process.
4.  Describe  how  a  small  business  can  build  a  competitive  edge  in  the  marketplace
using  guerrilla  marketing  strategies:  customer  focus,  quality,  convenience,
innovation, service, and speed.
5.  Discuss  the  marketing  opportunities  the  Internet  offers  entrepreneurs  and  how  to
best take advantage of them.
6.  Discuss  the  “four  Ps”  of  marketing—product,  place, price,  and  promotion—and
their role in building a successful marketing strategy.
ISSUES FOR REVIEW AND DISCUSSION
I.  Building a Guerrilla Marketing Plan
Marketing is the process of creating  and delivering desired goods and services
to  customers  and  involves  all  of  the  activities  associated  with  winning  loyal
customers.
Guerilla  marketing  strategies  are  unconventional,  low-cost,  creative
techniques – small companies can get more “bang” from their marketing bucks.
The  required  marketing  investment  is  scaled  to  fit the  often  limited  marketing
resources of the organization.
A guerilla marketing plan should accomplish four objectives:
1.  It should determine customer needs and wants through market research.
2.  It should pinpoint the specific target markets the company will serve.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 2
3.  It  should  analyze  the  firm’s  competitive  advantages  and  build  a  marketing
strategy around them.
4.  It should help create a marketing mix that meets customer needs and wants.
II.  Pinpointing the Target Market
Target markets are the specific groups of customers at whom the company aims
its goods or services.
Pinpointing  the  target  market  offers  greater  marketing  efficiency.  Mass
marketing  techniques  of  the  past  are  expensive  and risky.  The  marketing
strategy  can  then  be  built  to  reach  that  specific  targeted  group  that  has  the
highest propensity to buy and be an ongoing customer.
Target  customers  must  permeate  the  entire  business—merchandise,  music,
layout, décor, Web site, and the total experience.
Market  research  can  be  invaluable  to  better  understand,  segment,  and  identify
target markets.
III.  Determining Customer Needs and Wants Through Market Research
Market research serves as the foundation for the marketing plan. Its objective is
to  learn  how  to  improve  the  level  of  satisfaction  for  existing  customers  and  to
find ways to attract new customers. By performing some basic market research,
small  business  owners  can  detect  key  demographic  and  market  trends.  Market
research  does  not  have  to  be  time  consuming,  complex,  or  expensive  to  be
useful.
Demographics  are  the  characteristics  and  trends  of  a  population  including  age,
income,  gender  (composition),  education,  household size,  race,  and  ethnicity.
For example, we can quickly gain information regarding the growth rate of U.S.
populations by many criteria, such as race.
Market  research  is  the  vehicle  for  gathering  this  information  and can  avoid
basing your marketing plan on assumptions rather than facts.
Tracking trends can be a valuable and affordable way to get a pulse on markets.
Faith  Popcorn,  a  marketing  consultant  and  author,  offers  tips  to  help  spot
significant trends:
•  Read as many current publications as possible
•  Watch the top ten TV shows
•  See the top ten movies
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 3
•  Talk to at least 150 customers a year about what they’re buying and why
•  Talk with the 10 smartest people you know
•  Listen to your children—What trends are they tracking?
Market research begins with defining the objective and collecting the data.
This is based on successful one-to-one marketing that:
•  Collects information on your existing customers
•  Identifies your best customers
•  Enhances your products and services
•  Welcomes customer complaints
•  Offers exceptional quality
•  Understands your customers’ buying cycle
•  Calculates the long-term value of customers
Conducting market research involves four steps:
Step 1:  Define the objective
Step 2:  Collect the data
Step 3:  Analyze and interpret data
Step 4:  Draw conclusions and act
IV.  Plotting a Guerrilla Marketing Strategy: How to Build a Competitive Edge
A competitive edge is attained when customers perceive that one organization’s
products  or  services  are  superior  to  those  of  its  competitors.  Successful
entrepreneurs  often  use  the  special  advantages  that  flow  from  their  companies’
small size to build a competitive advantage over their larger rivals.
One  way  these  companies  can  do  this  is  through  relationship  marketing,  or
customer relationship management, referred to as CRM.
Relationship marketing involves the following five steps:
1.  Collect meaningful customer information and compile it as a database
2.  Mine the database to identify “best” customers
3.  Use the information to develop lasing relationships with “best” customers
4.  Attract more customers who fit the “best” customer profile
5.  Stay in contact with customers between sales
There  are four  levels  of  customer  sensitivity,  beginning  at  the  base  of  the
“steps” in the illustration:
•  Level 1: Customer Awareness
•  Level 2: Customer Sensitivity
•  Level 3: Customer Alignment
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 4
•  Level 4: Customer Partnership
Guerrilla marketing strategies complement this and propose that a company:
1.  Find a niche and fill it
2.  Don’t just sell, entertain
3.  Strive to be unique; create an identity for your business
4.  Connect with customers on an emotional level
The unique  selling  proposition  offers  a  key  customer  benefit  of  a  product  that
sets it apart from its competition. It answers the question: “What’s in it for me?”
The unique selling proposition should be communicated consistently and often!
Guerilla  marketing  strategies  can  be  instrumental  in  building  a  brand  for  your
business in a number of ways as long as you always focus on the customer.
We  can  think  about  this  process  in  five  steps  and  apply  guerilla  marketing
strategies to each:
1.  Focus on the customer
2.  Devotion to quality
3.  Concentration on innovation
4.  Dedication to service
5.  Emphasis on speed
Focus on the customer allows you to optimize your marketing and profitability
potential.
Every business depends on customer satisfaction. If  you can’t take care of your
customers, someone else will.
The Principles of Customer Experience Management (CEM) address the need
to establish:
•  An intimate understanding of each customer’s needs, want preferences, and
peculiarities
•  A  personal,  customer-specific  message  in  marketing,  sales,  service,  and
advertising
•  A consistent, courteous, and professional treatment by everyone
•  A  responsive,  rapid  handing  of  requests,  questions,  problems,  and
complaints
•  Helpful information and advice delivered proactively
•  The involvement of caring, well-trained people
•  Long-term view of the company/customer relationship with an emphasis on
sustaining an ongoing relationship
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 5
•  Frequent  and  visible  demonstrations  of  commitment  to  nurturing  this
relationship
A focus on the customer can directly correlate to higher customer retention rates
and is based on the response to these four questions:
1.  What are we doing right?
2.  How can we do that even better?
3.  What have we done wrong?
4.  What can we do in the future?
Guerrilla  marketing  strategies  help  to  attain  customer  focus  in  a  direct  and
economical manner.
PPT 8.27
Devotion  to  quality is  another  point  of  differentiation.  Quality  goods  and
services are a prerequisite for survival. Today quality is more than just a slogan.
Businesses buy into operational strategies like total quality management (TQM)
where  quality  is  in  the  product  or  service  and  in  every  other  aspect  and
component of the business as well. It is important to understand how customers
(American  customers  and  others)  define  quality  in  the  products  and  services
they purchase.
Attention  to  convenience  is  an  important  part  of  this  relationship  experience.
Customers want convenience. Studies show that customers rank convenience at
the  top  of  their  purchasing  criteria.  Successful  companies  must  show  that  it  is
easy for customers to do business with them.
Areas of customer convenience include:
•  Location
•  Hours
•  Delivery services
•  Payment options
•  Transaction efficiency
•  Additional “extra” experiences
•  Product bundling
•  Product adaptation
•  Communication efficiency
Concentration on innovation is a key to future success. In order to keep up with
changing  markets,  small  businesses  must  be  innovative.  Small  businesses  are
frequently leaders in innovation even though they may lack resources compared
to larger businesses.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 6
Dedication  to  service and  to  consistent  customer  satisfaction  is  one  way to
achieve  the  goal  of  “customer  astonishment.”  Dedication  to  service  deals  with
these twelve attributes:
•  Listening
•  Defining a “superior space”
•  Setting standards and measurements for performance
•  Examining your service cycle
•  Hiring the right employees
•  Training those employees to deliver superior service—every time!
•  Empowering employees
•  Treating employees with respect and value
•  Using technology to provide improved service
•  Rewarding superior service
•  Getting top managers’ support
•  Viewing  developing  stellar  customer  service  as  an  investment,  not  an
expense
Emphasis on speed enables companies to be competitive and reduce the time it
takes to develop, design, manufacture, and distribute a product, which results in
reduced costs, increased quality, and increased market share.
V.  Marketing on the World Wide Web
The  Internet  is  a  vast  network  that  links  computers  around  the  globe  via  the
World  Wide  Web.  A  small  business  Web  site  can  enable  it  to  sell  its  products
around  the  world.  It  is  a  phenomenal  commercial  opportunity  that  offers
businesses  a  worldwide  marketing  and  distribution  system.  The  Internet  is  the
“Great  Equalizer”  for  entrepreneurs  in  a  world  of  larger  and  more  powerful
competitors.
Today’s  business  students  and  entrepreneurs  are  on the  frontier  of  an  industry
and  market  that  will  likely  see  tremendous  growth  in  the  next  few  years.  The
opportunity is now. We  will talk more about the  power of the Web throughout
the course and how it is continuing to change the face of business.
VI.  The Marketing Mix
The “four Ps” of the marketing mix are essential elements in developing a solid
marketing strategy and an executable marketing plan.
1.  Product
2.  Place—or distribution
3.  Price
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 7
4.  Promotion
Establishing  a  sound  marketing  strategy—that  fits  the  resources  and  objectives
of the organization—is a critical aspect of the plan and future for the business.
The product  life  cycle  plays  an  important  role  in  the  marketing  mix.  It  is
important  to  realize  that  the  five  stages  of  the  PLC  impact  marketing  strategy.
The five stages of the product life cycle are:
1.  Introductory
2.  Growth and acceptance
3.  Maturity and competition
4.  Market saturation
5.  Product decline
Channels of distribution for consumer goods, or the “place” aspect of the four
Ps,  may  be  direct—manufacturer  to  consumer—or  through  a  more  complex
channel delivery system that involves wholesalers, distributors, and/or retailers.
Channels  of  distribution  for  industrial  goods,  or  the  “place”  for  business-to-business dealings, may be direct or simply through a single wholesaler.
CHAPTER DISCUSSION QUESTIONS
1.  Define the marketing plan.  What lies at its center?
The  marketing  plan  focuses  the  company’s  attention on  the customer  and
recognizes  that  satisfying  the  customer  is  the  foundation  of  every  business.  Its
purpose is to build a strategy for success with a focus on the customer.
2.  What objectives should a marketing plan accomplish?
The marketing plan has four objectives:
1)  Determining customer needs and wants through market research
2)  Pinpointing specific target markets the small company will serve
3)  Analyzing the firm’s competitive advantages and building a marketing strategy
around them
4)  Helping to create a marketing mix that meets customer needs and wants
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 8
3.  How can market research benefit a small business owner? List some possible
sources of market information.
Market  research  provides  the  foundation  for  the  marketing  plan.  By  performing
basic  market  research,  small  business  owners  can  identify  key  demographic  and
market trends. Possible sources of market information include:
1)  Current publications
2)  Top ten shows
3)  Top ten movies
4)  Customers
5)  Smart people you know
6)  Children
4.  Does market research have to be expensive and sophisticated to be valuable?
Explain.
No,  market  research  does  not  have  to  be  expensive  and  sophisticated  to  be
valuable.  For  example,  for  most  business  owners,  information  is  often floating
around. It is a matter of collecting and organizing the data to make it valuable.
5.  Describe several market trends and their impact on small business.
Six market trends that affect small business include:
1.  Increasing population diversity offers special challenges to business owners.
2.  Changing family patterns will force marketers to rethink their strategies.
3.  Greater  environmental  and  health  concerns  have  consumers  more  focused
on the environmental impact of the products and services they buy.
4.  Emergence of “premium” and “discount” niches as an increasing number of
lower income households force more buyers to become bargain shoppers.
5.  Surge in “baby boomers” and the elderly results in changing needs for those
consumers.
6.  Greater  emphasis  on  social  responsibility  has  a  growing  number  of
consumers buying products associated with a cause they care about.
7.  Slower growing markets and shorter product life cycles require businesses to
focus on narrow niches, understand customer needs and wants, and give them
value.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 9
6.  Why is it important for small business owners to define their target markets
as part of their marketing strategies?
Small  businesses  must  be  more  focused  on  the  types  of  customers  they  want  to
target.  Small  firms  are  ideally  suited  to  reach  market  segments  that  their  larger
rivals  overlook  or  consider  too  small  to  be  profitable.  A  clear,  concise  target
market  allows  a  small  business  to  increase  its  marketing  efficiency  and  be
profitable.
7.  What  is  a  competitive  advantage?  Why  is  it  important  for  a  small  business
owner to create a plan for establishing one?
A  competitive  advantage  is  an  aggregation  of  factors  that  sets  a  company  apart
from  its  competitors.  Developing  a  strategic  plan  allows  a  small  business  to
differentiate  itself  from  other  companies.  Developing  a  strategic  plan  allows  the
small  company  to  meet  the  customers’  needs  of  today,  while  looking  one  step
ahead to what they will need tomorrow.
8.  Describe  how  a  small  business  owner  could  use  the  following  sources  of  a
competitive advantage:
•  Focusing  on  a  niche:  Target  a  specific  segment  of  the  population  that  your
business can efficiently serve—senior citizens.
•  Entertaining:  Offer  a  service  that  customers  enjoy  and  actively seek  out—
gambling.
•  Striving to be unique: The latest look in body piercing and tattoos.
•  Creating  an  identity  for  the  business:  A  name  or  a  song  that  everyone
associates with your product.
•  Connecting  with  customers  on  an  emotional  level:  Environmentally  safe
products.
•  Focusing  on  the  customer:  Specialized  exercise  equipment  for  disabled
people.
•  Focusing on the customer: Health and beauty aids—hair coloring.
•  Devotion to quality: Specialty food products.
•  Attention to convenience: Business location.
•  Concentration on innovation: Battery powered blenders.
•  Dedication to service: Installation and maintenance of product lines.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 10
9.  One  manager  says,  “When  a  company  provides  great  service,  its  reputation
benefits  from  a  stronger  emotional  connection  with its  customers,  as  well  as
from  increased  confidence  that  it  will  stand  behind  its  products.”  Do  you
agree?  Explain.  If  so,  describe  a  positive  service experience  you  have  had
with  a  company  and  your  impressions  of  that  business.  What  are  the
implications  of  a  company  providing  poor  customer  service?  Describe  a
negative  service  experience  you  have  had  with  a  company  and  your
impressions  of  that  business.  How  likely  are  you  to  do  business  with  that
company again?
It is true in most cases that a great service experience creates a bond, confidence
in  the  product  or  service,  and  the  desire  to  be  a  repeat  customer.  Students  will
share their positive and negative service experiences and comment on the business
implications of each.
10. Consumer  behavior  expert  and  retail  consultant  Paco  Underhill  says,  “A
[retail]  store  is  a  3-D  brand.    Everything  that’s  there  has  to  be  there  for  a
reason.”  Do you agree?  Explain.
Yes,  the  most  successful  retail  stores  create  a  complete  3-D  retail  and
entertainment-like experience. From their merchandise, the store layout, the music,
the atmosphere, their complementary Web site—it all is tailored to communicate a
consistent  look,  feel,  and  message  that  appeals  most  to  their  target  market.
Ultimately,  the  total  “entertailing”  experience  catches  the  attention  of  customers
and encourages them to  shop longer and buy more  goods  and services. This 3-D
brand approach further differentiates the business, enhances customer loyalty, and
impacts profitability.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 11
CHAPTER 9: E-COMMERCE AND THE
ENTREPRENEUR
CHAPTER SYNOPSIS
We are fortunate to be witness to the early stages of e-business. It is important for us
to incorporate e-business in order to remain current in the marketplace. E-commerce
has removed the obstacle of size for many small business entrepreneurs, replacing that
with speed, and the Internet has changed the face of business.
CHAPTER OBJECTIVES
1.  Describe the benefits of selling on the World Wide Web.
2.  Understand  the  factors  an  entrepreneur  should  consider  before  launching  into  e-commerce.
3.  Explain the twelve myths of e-commerce and how to avoid falling victim to them.
4.  Discuss the five basic approaches available to entrepreneurs wanting to launch an
e-commerce effort.
5.  Explain the basic strategies entrepreneurs should follow to achieve success in their
e-commerce efforts.
6.  Learn the techniques of designing a killer Web site.
7.  Explain how companies track the results from their Web sites.
8.  Describe how e-businesses ensure the privacy and security of the information they
collect and store from the Web.
9.  Learn how to evaluate the effectiveness of a company’s Web site.
ISSUES FOR REVIEW AND DISCUSSION
I.  Benefits of Selling on the Web
The  Internet  has  brought  new  customers  and  offered an  improved  competitive
position for many businesses that have an online presence.
Some  of  the  primary  benefits  of  having  a  market  presence  on  the  Internet
include:
•  The opportunity to increase revenues
•  The ability to expand their reach into global markets
•  The ability to remain open 24/7
•  The capacity to use the Web’s interactive nature
•  The power to educate and inform
•  The ability to lower the cost of doing business
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 12
•  The ability to spot and capitalize on new business opportunities
•  The ability to grow faster
•  The power to track sales results
Today,  a  majority  of  small  businesses—70  percent  and  growing—have  a
presence on the Internet.
II.  Factors to Consider before Launching into E-Commerce
As  with  any  proposed  change  or  new  venture,  business  owners  must  consider
the variables and challenges facing them:
•  Is the product or service conducive to e-business?
•  Can the business afford not to add e-business to its mix?
•  Will customers use the Web to buy?
•  How and where to best start a Web site?
•  What are the specific goals and objectives of the Web site?
•  What  effects  would  a  Web  site  have  on  customer  relations,  channels  of
distribution, financial condition of the business, and so on?
III.  Twelve Myths of E-Commerce
E-commerce already has many stories of success and failure. Make sure that you
do not fall victim to one of the following e-commerce myths:
Myth 1: Setting up a business on the Web is easy and inexpensive.
A  Web  site  can  result  in  additional  costs  for  site redesign,  hardware
requirements, and other implication to the infrastructure of the business.
Myth 2: If I launch a site, customers will flock to it.
Promoting  the  site  is  important  and  needs  to  become  an  integral  part  of  the
overall promotional strategy.
Myth 3: Making money on the Web is easy.
Web  retailers  invest  65  percent  of  revenue  in  marketing  and  advertising,
compared to just 4 percent for their off-line counterparts.
Myth 4: Privacy is not an important issue on the Web.
Internet  users  value  their  privacy  and  this  concern  has  a  negative  impact  on
online sales.
Myth 5: The most important part of any e-commerce effort is technology.
Other factors influence online buyer behavior more than technology alone.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 13
Myth  6:  “Strategy?  I  don’t  need  a  strategy  to  sell  on  the Web!  Just  give  me  a
Web site, and the rest will take care of itself.”
Having  a  plan  for  the  role  your  site  will  play  in  your  business  is  critical  to
ensure  it  is  a  solid  investment  and  that  it  complements  and  supports  all  other
aspects of your business.
Myth 7: On the Web, customer service is not as important as it is in a traditional
retail store. The customer service experience on the Web is vitally important and
directly impacts buyer behavior.
Myth 8: Flash makes a Web site better.
A simple, easy to navigate and intuitive Web site wins every time!
Myth 9: It’s what’s up front that counts.
The site must offer value throughout.
Myth 10: E-commerce will cause brick-and-mortar retail stores to disappear.
A well-designed Web site can provide synergy to the physical retail store.
Myth 11: The greatest opportunities for e-commerce lie in the retail sector.
Internet  technology  offers  tremendous  value  to  many  areas  of  business.  The
business-to-business  environment  is  just  one  other example  where  the  Internet
has had a tremendous influence.
Myth 12: It’s too late to get on the Web.
It  is  never  too  late  and,  as  the  Internet  continues  to  evolve,  additional  features
and technologies will make it even more attractive.
Approaches to e-commerce need to consider the short- and long-term goals of a
company along with its target markets, and budgetary constraints help to define
the  best  approach  to  an  e-business  venture.  Entrepreneurs  have  five  basic
choices:
1.  Online shopping malls
2.  Storefront-building services
3.  Internet service providers and application service providers
4.  Hiring a professional to design a custom site
5.  Building a Web site in-house
A well-designed plan for your online presence may benefit from these tactics:
•  Consider focusing on a niche in the market.
•  Develop a community and potentially leverage Web 2.0 strategies.
•  Attract visitors by giving away “freebies.”
•  Make creative use of e-mail, but avoid becoming a “spammer.”
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 14
Tracking e-mail read and click-through rates is one method to assess activity on
a day and weekly basis.
In addition, you can increase your online effectiveness when you:
•  Make sure your Web site says “credibility.”
•  Consider forming strategic alliances.
•  Make the most of the Web’s global reach.
•  Promote your Web site online and off-line.
Search engine strategies enable your site to be found as visitors use a variety of
search techniques through:
•  Natural listings — organic
•  Paid listings — sponsored
•  Paid inclusions
IV.  Designing a Killer Web Site
Web users demand fast and reliable sites, have little patience, and currently buy
from a relatively low number of the e-businesses that they visit. While there are
no  guarantees,  the  following  suggestions  may  increase  the  chances  for  online
success.
•  Understand your target customer.
•  Select  a  domain  name  that  is  consistent  with  the  image  you  want  to  create
for  your  company  and  register  it.  Selecting  a  domain  name  that  is  short,
memorable,  intuitive  with  the  company  name,  and  easy  to  spell  will  help
visitors find it.
•  Design your Web site with ease of navigation in mind.
•  Give customers what they want.
•  Build loyalty by giving online customers a reason to return to your Web site.
•  Establish hyperlinks with other businesses, preferably those selling products
or services that complement yours.
•  Include an e-mail option and a telephone number in your site.
•  Give shoppers the ability to track their orders online.
•  Offer Web shoppers a special all their own.
•  Assure customers that their online transactions are secure.
•  Post shipping and handling charges up front.
•  Keep your site updated.
•  Consider hiring a professional to design your site.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 15
V.  Tracking Web Results
Firms using Web sites must closely track the benefits of increased sales against
increased costs. Web analytics are software tools that measure a site’s ability to
attract  customers,  generate  sales,  and  keep  customers  coming  back.  Other
tracking  methods  include:  clustering,  collaborative  filtering,  profiling  systems,
and artificial intelligence.
The  art  and  science  of  quantifying  the  return  on  investment  from  e-commerce
activities continues to develop.
•  Recency – length  of time between customers’ visits
•  Click-through rate (CTR) – proportion of people who click on a company’s
online ad
•  Cost  per  acquisition  CPA  –  the  amount  it  costs  to  generate  a  customer
purchase
•  Conversion  (browse-to-buy)  ratio  –  the  proportion  of  visitors  to  a  site  who
make a purchase
VI.  Ensuring Web Privacy and Security
The  Web’s  ability  to  track  the  behavior  of  its  customers  raises  concerns  and
issues  over  the  privacy  of  that  information.  Companies  are  encouraged  to  take
the following steps to ensure that the information they collect is being used in a
legal and ethical manner:
•  Take an inventory of the customer data collected.
•  Develop a company privacy policy for the information you collect.
•  Post your company’s privacy policy prominently on your site and follow it!
Security is another unresolved and developing Web site issue. Hackers, viruses,
credit card fraud, and unauthorized users continue to adversely affect companies,
customers,  and  the  growth  of  e-commerce.  Virus  and  intrusion  detection
software and firewalls may help to ward off attacks from hackers.
CHAPTER DISCUSSION QUESTIONS
1.  In what ways have the Internet and e-commerce changed the ways companies
do business?
The Internet and e-commerce continue to revolutionize the business world. Small
businesses now have markets that span the globe that include both customers and
competitor companies who may cooperate as subcontractors.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 16
2.  Explain the benefits a company earns by selling on the Web.
Selling  on  the  Web  can provide  relatively  low-cost access  to  increased  sales  and
profits.  A  Web  business  can  be  run  from  a  student’s  dorm  room  or  from  an
entrepreneur’s home.
3.  Discuss  the  factors  entrepreneurs  should  consider  before  launching  an  e-commerce site.
Entrepreneurs  should  consider  the  following  factors  before  launching  their  Web
site:
•  How  to  exploit  the  Web’s  interconnectivity  and  relationship  building
opportunities with customers
•  How to develop a plan that fits within the company’s overall strategy
•  How to generate the highest percentage of repeat business
•  How to create and maintain a meaningful and exciting Web presence
•  How to measure success
4.  What  are  the  12  myths  of  e-commerce?    What  can  an  entrepreneur  do  to
avoid them?
The 12 myths of e-commerce are:
1.  Setting up a business on the Web is easy and inexpensive – careful planning,
execution, and follow-up analysis is essential.
2.  If I launch a site, customers will flock to it – assuming that the entrepreneur
has a clear and attractive site positioned within the right search engine.
3.  Making money on the Web is easy – making money is almost never easy.
4.  Privacy is not an important issue on the Web – the worldwide access of the
Web  has  also  created  worldwide  access  to  hackers  and  other  unwanted
intruders.
5.  The  most  important  part  of  any  e-commerce  effort  is  technology  –
technology represents just one of the components required for success.
6.  A strategy is not necessary, just develop a site and the rest will take care of
itself – a  strategy  will  result  in  an  action  plan  that  can  help  a  company
achieve its goals.
7.  Customer  service  on  the  Web  is  not  as  important  as it  is  in  a  traditional
retail store – customer service is a major key to repeat business and referrals.
8.  Flash makes a Web site better – only if that flash is part of a well-thought-out
marketing plan.
9.  It’s what up front that counts – what is up front counts in part, but the rest of
the system must be solidly in place as well.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 17
10. E-commerce  will  cause  brick-and-mortar  retail  stores  to  disappear  –
e-commerce  represents  just  one  component  of  the  marketplace  and  just  one
part of a firm’s target market mix.
11. The  greatest  opportunities  lie  in  the  retail  sector  –  manufacturing  and
service-based companies will continue to be prominent worldwide players.
12. It’s too late to get on the Web – e-commerce is currently in the early growth
stages of the product life cycle.
5.  Explain the five basic approaches available to entrepreneurs for launching an
e-commerce effort. What are the advantages, the disadvantages, and the costs
associated with each one?
The five basic entrepreneurial approaches for launching an e-commerce effort and
the associated advantages, disadvantages, and costs are as follows:
1.  Online Shopping Malls (for products)
2.  Advantages: Offers the easiest and least expensive entry.
3.  Disadvantages: Lack of prominence and control are limitations of this option.
4.  Storefront-building Services
5.  Advantages: Offers easy and low-cost entry.
6.  Disadvantages: It may be difficult to distinguish one company from the next.
7.  Internet Service Providers and Application Service Providers
Advantages:     Offers a low-cost means to create an online store.
Disadvantages: Fees are often tied to volume that provides a correlation cost
(to volume) structure.
8.  Hiring Professionals to Design a Custom Site
Advantages:      May provide greatest returns.
Disadvantages: Costs are higher and this may not be a financially feasible
option for a start-up venture.
9.  Building a Web Site In-House
Advantages:    Provides the owner with complete control.
Disadvantages:  Costs are higher with what may be an unpredictable learning
curve.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 18
6.  What  strategic  advice  would  you  offer  an  entrepreneur  about  to  start  an  e-company?
An entrepreneur should use the same approach as starting any business venture—a
business  plan.  Special  emphasis  must  be  placed  on  both  the  nonpersonal  and
“personal” marketing efforts.
7.  What design characteristics make for a successful Web page?
Successful design characteristics are very customer-connected and may include: a
strong connection to the target customer, the proper and desired company image,
be  easy  to  find,  be  easy  to  use,  provide  access  to the  firm’s  staff,  provide  the
ability to track orders, and offer security, privacy, and reliability.
8.  Explain the characteristics of an ideal domain name.
The  ideal  domain  name  will  clearly  depict  and  communicate  the  nature  of
products and services offered.
9.  Describe the techniques that are available to e-companies for tracking results
from their Web sites. What advantages does each offer?
A variety of software exists and is being further developed that allows a company
to count and track inquiries in great detail to monitor customer behavior, analyze
correlations  from  those  behaviors,  and  calculate  the  return  on  investment.  These
and other upcoming features will allow a business to quantify and improve on the
effectiveness of e-business ventures.
10. What steps should e-businesses take to ensure the privacy of the information
they collect and store from the Web?
E-businesses should establish, post, and follow a privacy policy in order  for it to
be meaningful and effective.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 19
CHAPTER 10: PRICING STRATEGIES
CHAPTER SYNOPSIS
Setting  prices  is  a  business  decision  that  is  both an  art  and  a  science.  The  process
requires entrepreneurs to balance a multitude of complex forces to determine the prices
for their goods and services that will draw customers and produce a profit.
CHAPTER OBJECTIVES
1.  Discuss the relationships among pricing, image, competition, and value.
2.  Describe effective pricing techniques for both introducing new products or services
and for existing ones.
3.  Explain  the  pricing  methods  and  strategies  for  retailers,  manufacturers,  and
service firms.
4.  Describe the impact of credit on pricing.
ISSUES FOR REVIEW AND DISCUSSION
I.  Three Potent Forces:  Image, Competition, and Value
Setting  prices  for  products  and  services  is  complex  and  difficult.  A  number  of
factors  are  important  to  carefully  consider.  Price conveys  an  image  that  must
match the company’s target markets. It is an art and a science.
Pricing communicates a powerful message about the organization’s image.
The  firm  must  also  consider  its  place  among  the  competition  and  that  does  not
mean they have to match or beat competitor’s prices—it is about value.
This focus  on  value  will  set  the  “right”  price  based  upon  objective  value  and
perceived value.
Costs  impact  pricing  and  it  is  important  that  costs  are  based  on  communication
and the continued value you offer.
When all is taken into consideration, the factors that small business owners must
consider when determining price for goods and services includes:
•  Product/service costs
•  Market factors – supply and demand
•  Sales volume
•  Competitors’ prices
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 20
•  The company’s competitive advantage
•  Economic conditions
•  Business location
•  Seasonal fluctuations
•  Psychological factors
•  Credit terms and purchase discounts
•  Customers’ price sensitivity
•  Desired image
Customized or dynamic pricing is a technique that sets different prices based on
the  customer  and  their  characteristics.  For  example,  Dell  Computer  uses  this
technique as people order systems online and more is learned about who they are
and what they are willing to pay.
II.  Pricing Strategies and Tactics
When introducing a new product, the owner should try to satisfy three objectives:
1.  Getting the product accepted
2.  Maintaining market share as competition grows
3.  Earning a profit
When introducing a new product, firms may choose from three basic strategies:
1.  Market penetration: set prices below competitors to gain market entry.
2.  Skimming: set higher prices for new products and for markets with little or no
competition.
3.  Sliding-down-the-demand-curve: set higher prices initially and slide down as
technology improves and/or one step ahead of competitors.
Pricing established goods and services offers the following techniques:
•  Odd pricing
•  Price lining
•  Leader pricing
•  Geographical pricing
•  Opportunistic pricing
•  Discounts
•  Multiple unit pricing
•  Suggested retail prices
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 21
III.  Pricing Strategies and Methods for Retailers
Retailers have changed their pricing strategies to emphasize the value they offer.
This value/price relationship allows for  a wide variety  of highly  creative pricing
and marketing practices.
Four of those value/price relationship practices are:
1.  Markup
2.  Follow-the-leader pricing
3.  Below-market pricing
4.  Adjustable or dynamic pricing
IV.  Pricing Concepts for Manufacturers
Cost-plus pricing is the most commonly used pricing technique for manufactures.
The  breakeven  point  is  calculated  on  the  basis  of  the  variable  costs  and  the
quantity produced as it compares to the total fixed costs.
Direct costing and price formulation is based upon:
Absorption  costing: All  manufacturing  and overhead  costs are absorbed into the
finished product’s total cost.
Variable  (direct)  costing: The  costs  of  the  product  include  only  those  costs  that
vary directly with the quantity produced.
V.  Pricing Strategies and Methods for Service Firms
Most  service  firms  set  prices  based  on  hourly  rates  and  materials  that  include  a
margin for both overhead and profit.
VI.  The Impact of Credit on Pricing
Consumer credit has a dramatic impact on pricing and on the attractiveness of the
business. This includes:
•  Credit cards
•  Installment credit
•  Trade credit
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 22
CHAPTER DISCUSSION QUESTIONS
1.  How does pricing affect a small firm’s image?
A  company’s  pricing  policy  offers  important  information  about  its  overall  image.
Thus, when developing a marketing approach to pricing, a small business manager
must  establish  prices  that  are  compatible  with  what  its  customers  expect  and  are
willing to pay. Understanding the firm’s target market allows the small business to
set prices properly.
2.  What  competitive  factors  must  the  small  firm  consider  when  establishing
prices?
Factors  that  small  business  owners  must  consider  when  determining  final  price
include:
•  Product/service costs
•  Market factors – supply and demand
•  Sales volume
•  Competitors’ prices
•  The company’s competitive advantage
•  Economic conditions
•  Business location
•  Seasonal fluctuations
•  Psychological factors
•  Credit terms and purchase discounts
•  Customers’ price sensitivity
•  Desired image
3.  Describe the strategies a small business could use in setting the price of a new
product.  What objectives should the strategy seek to achieve?
When introducing a new product, the owner should try to satisfy three objectives:
1.  Getting the product accepted
2.  Maintaining market share as competition grows
3.  Earning a profit
Three basic strategies to choose from in establishing the new product’s price include:
1.  Penetration: Set prices below competitors to establish a market and achieve
sales volume.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 23
2.  Skimming: Set a higher-than-normal price for a unique market with little or no
competition.
3.  Sliding-down-the-demand-curve: Set high prices initially and then lower based
on competitor behavior and/or technological advancement.
4.  Define the following pricing techniques:
1.  Odd  pricing:  Establish  prices  that  end  in  odd  numbers  with  the  belief  that
merchandise  selling  with  an  odd  ending  number  ($12.95)  is  cheaper  than  an
item evenly priced ($13.00).
2.  Price lining:   Manager stocks merchandise in several different price ranges, or
price  lines.  Each  category  of  merchandise  contains items  that  are  similar  in
appearance, quality, cost, performance, or other features.
3.  Leader  pricing:  Small  retailer  marks  down  the  customary  price  of  a  popular
item in an attempt to attract more customers.
4.  Geographical pricing:  Small company sells merchandise at different prices to
customers located in different territories.
5.  Discounts: Reduction in the price of stale, outdated, damaged, or slow-moving
merchandise.
5.  Why do so many small businesses use the manufacturer’s suggested retail price?
What are the disadvantages of this technique?
Small business owners frequently use suggested retail prices because this eliminates
the need for a pricing decision. Suggested retail prices are easy to use.
6.  What is a markup?  How is it used to determine individual price?
Markup is the difference between the cost of a good or service and its selling price.
It can also be expressed as a percentage of either cost or selling price.
7.  What is a standard markup?  A flexible markup?
A  standard  markup is a  technique that is usually  used in retail stores.  It  applies a
standard percentage markup to all merchandise.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 24
A flexible markup is usually more practical, and involves assigning various markup
percentages to different types of products.
8.  What is cost-plus pricing?  Why do so many manufacturers use it?  What are
the disadvantages of using it?
Cost-plus  pricing  establishes  prices  using  the  costs  of  the  direct  materials,  direct
labor,  factory  overhead,  selling,  and  administrative  costs  required  to  produce  a
product plus a reasonable profit margin. Cost-plus pricing is very popular, primarily
because of its simplicity. In addition, since a profit is added onto the firm’s cost, the
manufacturer is guaranteed a profit. However, cost-plus pricing does not encourage
the  manufacturer  to  focus  on  efficient  use  of  his  resources  since  a  profit  is  added
onto  costs.  Also,  manufacturers’  cost  structures  vary  significantly  and  cost-plus
pricing may not be competitive.
9.  Explain the difference between full-absorption costing and direct costing.  How
does absorption costing help a manufacturer determine a reasonable price?
Full  absorption  costing  is  the  traditional  method  of  product  costing.  It  “absorbs”
the cost of direct materials, direct labor, plus a portion of fixed and variable factory
overhead into each unit manufactured. It is not very helpful in setting prices because
it confuses the true relationships among price, volume, and costs by including fixed
expenses in unit-cost computations.
Direct  costing  includes  only  those  costs  of  production  that  vary directly  with  the
volume  of  production.  Fixed  overhead  expenses  are  considered  expenses  of  the
period. The result is a clear picture of the price-costs-volume relationship.
10. Explain the technique for a small service firm setting an hourly price.
Most  service  firms  base  their  fees  on  the  actual  numbers  of  hours  required  to
perform  the  service.  The  first  step  is  to  estimate the  actual  number  of  hours  of
producing  the  service  and  the  total  costs  incurred.  Then,  the  owner  must  compute
the  total  cost  per  productive  hour.  Next,  the  owner  should  determine  his  desired
profit to compute the final price.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 25
CHAPTER 11: CREATING A SUCCESSFUL
FINANCIAL PLAN
CHAPTER SYNOPSIS
A  well-designed  and  logical  financial  plan  is  one  of  the  most  important  steps  to
launching  a  new  business  venture  and  therefore  a  critical  aspect  of  a  comprehensive
business  plan.  This  chapter  focuses  on  practical  tools  that  will  help  entrepreneurs
develop  a  workable  financial  plan  and  enable  them  to  plan  to  be  profitable.  We  will
discuss the techniques involved in preparing projected (pro forma) financial statements,
conducting ratio analysis, and performing breakeven analysis.
CHAPTER OBJECTIVES
1.  Understand the importance of preparing a financial plan.
2.  Describe  how  to  prepare  the  basic  financial  statements  and  use  them  to  manage  a
small business.
3.  Create projected (pro forma) financial statements.
4.  Understand the basic financial statements through ratio analysis.
5.  Explain how to interpret financial ratios.
6.  Conduct a breakeven analysis for a small company.
ISSUES FOR REVIEW AND DISCUSSION
I.  Basic Financial Statements
There are four common financial challenges facing entrepreneurs:
1.  Failing to collect and analyze basic financial data
2.  Lack of any kind of financial plan
3.  Ongoing analysis of financial statements
4.  Financial planning is essential!
Three important financial statements assist entrepreneurs to better understand the
financial status of their business:
1.  The balance sheet takes a “snapshot” of a business at a given date, providing
owners with an estimate of its value in terms of assets, liabilities, and equity.
2.  The  income  statement  is  also  called  a  profit  and  loss  (P&L)  statement  and
compares  expenses  against  revenues  for  a  certain  period  of  time  to  indicate
profits or losses.
3.  The statement of  cash flows shows the actual flow of cash into and out of a
business for a certain time period.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 26
II.  Creating Projected Financial Statements
Entrepreneurs  must  determine  the  funds  needed  for  starting  and  sustaining  a
business  for  the  initial  growth  period.  Typically, the  entrepreneur  relies  on  data
collection through extensive market and field research and on published statistics
summarizing the performance of similar companies.
By  developing  pro  forma  statements,  statements  projecting  future  financial
activity, the owner transforms goals into reality by estimating the profitability and
overall financial condition of the business for the initial one- to three-year period.
A general guideline to assist with this process of developing pro forma statements
is to start with the sales forecast and work down.
•  The pro forma income statement begins with the sales forecast and estimates
the  corresponding  expenses  required  to  generate  those  sales  dollars.  Banks
typically require two- to three-year projections.
•  The  pro  forma  balance  sheet  starts  with  the  beginning  balances  of  cash,
inventories, assets, and liabilities. Banks typically require a year-one and year-two balance sheet projection.
•  The proforma cash flow statement charts cash flow, typically by month, for
the first two years of operation. It is often one of the major criteria for lending
decisions by creditors.
III.  Ratio analysis
Ratio  Analysis  expresses  the  relationship  between  two  selected  accounting
elements and is one technique used in conducting a financial analysis.
The 12 key ratios include:
Liquidity  ratios indicate whether the business will be able to meet its short-term
financial obligations as they come due.
1.  Current  ratio –  measures  solvency  through  the  relationship  between  current
assets and current liabilities.
2.  Quick  ratio –  focuses  even  more  on  liquidity  by  removing  inventory  from
the current ratio calculation.
Leverage  ratios  measure  the  relationships  between  financing  supplied  by  a
firm’s owners and by its creditors.
3.  Debt  ratio  –  measures  total  debt  against  total  assets  –  the  extent  or
percentage of total assets owned by creditors
4.  Debt-to-net-worth  ratio –  indicates  the  degree  of  leveraging  by  measuring
capital  contributions  from  creditors  against  those by  the  owners  (debt  to
equity).
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 27
5. Times  interest  earned  ratio –  a  measure  of  the  firm’s  ability  to  make  the
interest payments on its debt.
6. Average  inventory-turnover  ratio –  measures  the  average  number  of  times
inventory is “turned over” during the year.
7. Average  collection  period  ratio –  measures  the  average  number  of  days  it
takes to collect receivables.
8.  Average payable period ratio – indicates the average number of days it takes
a company to pay its accounts payable.
9.  Net  sales  to  total  assets  ratio –  the  measure  of  a  firm’s  ability  to  generate
sales in relation to its assets.
10. Net  sales  to  working  capital  ratio –  measures  the  sales  that  a  business
generates for every dollar of working capital.
11. Net profit on sales ratio – measures a firm’s profit per dollar of sales.
12. Net profit to equity ratio – measures an owner’s rate of return on investment.
IV.  Interpreting Business Ratios
Ratios are useful yardsticks when measuring a small firm’s performance and can
point out potential problems before they develop into a crisis.
Comparison of a firm’s ratios to businesses within the same industry is a useful
tool.  A  firm  can  also  develop  ratios  unique  to  its  operation.  Several
organizations compile and publish operating statistics including key ratios. This
information may be found in the following sources:
1.  Robert Morris Associates
2.  Dun & Bradstreet, Inc.
3.  Vest Pocket Guide to Financial Ratios
4.  Industry Spotlight
5.  Bank of America
6.  Trade associations
7.  Government agencies
V.  Breakeven Analysis
The breakeven  point  is  the  level  of  production  and  sales  volume  at  which  a
company’s revenues equal its expenses, resulting in a net income of zero.
First, determine the variable and fixed expenses.
1.  Fixed expenses–costs that do not vary with changes in the volume of sales or
production.
2.  Variable  expenses–costs  that  vary  directly  with  changes  in  the  volume  of
sales or production.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 28
Next, follow these steps to calculate the breakeven point:
Step 1: Determine the expenses a business can expect to incur.
Step 2: Categorize those expenses as fixed or variable.
Step 3: Calculate the percentage of variable expenses to net sales.
Determine the percentage of contribution margin to sales.
Step 4: Compute the breakeven point.
Include desired net income into the breakeven analysis calculations.
Calculate the breakeven point and desired profit in both units and dollars.
The breakeven chart illustrates the correlation with fixed and variable costs.
CHAPTER DISCUSSION QUESTIONS
1.  Why is developing a financial plan so important to an entrepreneur about to
launch a business?
Developing a financial plan is one of the most important steps in launching a new
business  venture.  Prospective  investors  will  demand  such  a  plan  before  putting
their  money  into  a  start-up  company.  A  financial  plan  is  a  tool  that  helps
entrepreneurs manage their businesses more effectively, steering their way around
the pitfalls that cause failures.
2.  How should a small business use the 12 ratios discussed in this chapter?
Ratios  help  measure  a  firm’s  performance  and  can  point  out  potential  problems
before they become more serious. One way to use ratios is to compare a business
to others in the same industry. It is also helpful for the owner to analyze the firm’s
financial ratios and trends over time.
3.  Outline the key points of the 12 ratios discussed in this chapter. What signals
does each give the manager?
1.  Current ratio – the firm’s ability to pay current liabilities using current assets.
2.  Quick  ratio –  extent  to  which  firm’s  most  liquid  assets  cover  its  current
liabilities.
3.  Debt ratio – measure the financing supplied by business owners and creditors.
4.  Debt-to-net-worth ratio – compares what the business owes to what it owns.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 29
5.  Times  interest  earned –  a  measure  of  the  firm’s  ability  to  make  interest
payments.
6.  Average inventory turnover ratio – measures the number of times inventory is
“turned over” per year.
7.  Average  collection  period –  the  average  number  of  days  to  collect  accounts
receivables.
8.  Average payable period – the average number of days it takes to pay accounts
payables.
9.  Net  sales  to  total  assets  ratio –  measures  a  firm’s  ability  to  generate  sales  in
relation to its assets.
10. Net  sales  to  working  capital –  measures  sales  generated  for  every  dollar  of
working capital.
11. Net profit on sales ratio – measures a firm’s profit per dollar of sales.
12. Net profit to equity ratio – measures an owner’s rate of return on investment
(ROI).
4.  Describe  the  method  for  building  a  projected  income  statement  and  a
projected balance sheet for a new business.
A  projected  income  statement  starts  with  a  sales  forecast  that  should  be  based
primarily on market research about the firm’s competition and customer base. The
sales forecast allows the income statement and balance sheet to be completed.
5.  Why are pro forma financial statements important to the financial planning
process?
No entrepreneur should launch a business without first creating a sound financial
plan  and  attracting  the  capital  to  operate  it.  Pro forma  statements  are  a  vital
element in such a plan, as they estimate the firm’s future profitability and overall
financial  condition.  These  statements  help  the  owner  determine  what  funds  are
required to launch the business and sustain it through its initial growth period.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 30
6.  How can breakeven analysis help an entrepreneur launch a business?
Break-even analysis first lets an entrepreneur know the sales volume that must be
generated  to  “break-even.”  It  also  serves  as  a  “reality  check”  in  relation  to  the
competition,  the  customer  base,  and  the  sales  volume  that  must  be  generated  in
order to earn the desired profit.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 31
CHAPTER 12:  MANAGING CASH FLOW
CHAPTER SYNOPSIS
“Everything  is  about  cash,”  says  entrepreneur  and  venture  capitalist  Guy  Kawasaki,
“raising  it,  conserving  it,  collecting  it.”  The  phrase  “cash  is  king”  is  familiar  to
entrepreneurs and, once a business is launched, managing cash flow becomes a central
focus.
CHAPTER OBJECTIVES
1.  Explain the importance of cash management to a small company’s success.
2.  Differentiate between cash and profits.
3.  Understand  the  five  steps  in  creating  a  cash  budget  and  use  them  to  create  a  cash
budget.
4.  Describe  fundamental  principles  involved  in  managing  the  “Big  Three”  of  cash
management: accounts receivable, accounts payable, and inventory.
5.  Explain the techniques for avoiding a cash crunch in a small company.
ISSUES FOR REVIEW AND DISCUSSION
I.  Cash Management
Cash is the most important yet least productive asset that a small business owns.
Businesses  must  have  enough  cash  to  meet  their  obligations  or  run  the  risk  of
declaring bankruptcy. It is entirely possible for a business to earn a profit and still
go out of business by running out of cash. Small and growing companies are like
“sponges,” soaking up every available dollar to fund growth and sales.
The first step in managing cash more effectively is to understand the company’s
cash flow cycle.
Cash  flow  cycle is  the  time  lag  between  paying  suppliers  for  merchandise  or
materials  and  receiving  payment  from  customers  for the  product  or  service.
Business  owners  should  calculate  their  cash  conversion  cycle  whenever  they
prepare  their  financial  statements.  On  a  daily  basis,  business  owners  should
generate  reports  showing  the  following:  total  cash on  hand,  bank  balances,
“summary of day” sales, “summary of the day” cash receipts, and a summary of
accounts receivables collections.
The entrepreneur has five roles they take on to manage cash flow:
1.  The role of the cash “Finder”
2.  The role of the cash “Planner”
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 32
3.  The role of the cash “Distributor”
4.  The role of the cash “Collector”
5.  The role of the cash “Conserver”
The  next  step  in  effective  cash  management  is  to  shorten  the  length  of  the  cash
flow cycle. Receiving your cash sooner—rather than later—has a positive impact
on your cash flow.
As an essential business resource, cash is used, or depleted, to purchase goods and
materials and pay for labor to create products for inventory. When these products
are sold, this is turned back into cash or accounting receivables and the inventory
can be replaced as profits are generated.
Profit  (or  net  income)  is  the  difference  between  a  company’s  total  revenues  and
total expenses. It measures how efficiently the business is operating.
Cash flow measures a company’s liquidity and its ability to pay its bill and other
financial  obligations  on  time  by  tracking  the  flow of  cash  into  and  out  of  the
business over a period of time. Profitability does not guarantee liquidity. Cash is
the money that flows through a business in a continuous cycle without being tied
up in any other asset.
II.  The Cash Budget
The need for a cash budget arises because the uneven flow of cash in a business
cycle creates surpluses and shortages. A cash budget is based on the cash method
of  accounting.  Credit  sales  to  customers  are  not  recorded  until  the  customer
actually pays, and purchases made on credit are not recorded until the owner pays
them. Depreciation, bad debt expense, and other noncash items that do not involve
cash transfers are omitted entirely from the cash budget. A cash budget is nothing
more than a  “cash map.” The cash budget shows  the amount and timing of cash
receipts  and  cash disbursements day by  day, week by week, or month by  month
and is used to predict the amount of cash the firm will need to operate smoothly
over a specific period of time.
III.  Preparing a Cash Budget
Five basic steps to preparing a cash budget include:
1.  Determining an adequate minimum cash balance – the most reliable method
is based on past experience. For example, past operating records may indicate
that it is desirable to maintain a cash balance equal to five days’ sales.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 33
2.  Forecasting  sales  –  sales  forecasts  are  the  heart  of  the  cash  budget  and  are
based  partially  on  past  patterns.  Financial  analysts  suggest  creating  three
estimates—optimistic, pessimistic, and most likely.
3.  Forecasting  cash  receipts  –  the  budget  must  account  for  the  delay  between
the  sale  and  the  actual  collection  of  the  proceeds.  It  is  vital  to  act  promptly
once an account becomes past due.
4.  Forecasting  cash  disbursements  –  many  cash  payments  are  fixed  amounts
due  on  specified  dates.  Others  are  standard  like  the  purchase  of  inventory,
salary  and  wages,  overhead,  selling  expenses,  and  so  on.  Financial  analysts
suggest  that  new  owners  add  an  additional  10  to  25 percent  to  estimate
disbursement totals as a cushion.
5.  Determining the end-of-month cash balance – the cash balance at the end of
the month becomes the beginning balance for the following month. Anticipate
cash shortages and surpluses; this can reduce lending expenses and time.
Determining a minimum cash balance is also important. A range of cash balances
gives you an insight to know the amount of cash that is acceptable, enough to get
you  through  time  of  need,  but  not  too  much  to  have “lazy  cash”  that  is  not
effectively working for your business.
Forecasting  sales  is  at  the  heart  of  the  cash  budget  and  will  be  an  important
predictor for cash flow projections.
Common causes of cash flow problem within small businesses include:
•  Difficulty collecting accounts receivables
•  Seasonal sales patterns
•  Unexpected variations in sales
•  Weak sales
Collecting delinquent accounts is critical to keep cash flow moving in a positive
direction and can be a challenging task for the entrepreneur.
Forecasting cash disbursements can become more meaningful through:
•  Recording disbursements
•  Noting their due dates
•  Reviewing the checkbook and expenses
•  Adding a cushion to those estimates
•  Making a daily list of items that generate and consume cash
Estimating  the  end-of-the-month  balance  will  give  you  insight  and  may  help  to
avoid a shortage or identify a cash surplus.
The most significant benefits of effective cash management include:
•  Increasing the amount of cash and the speed of cash flow into the company
•  Reducing the amount of cash flow leaving the company
•  Making the most efficient use of available cash
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 34
•  Taking advantage of money-saving opportunities such as cash discounts
•  Efficiently financing seasonal business needs
•  Developing a sound borrowing and repayment program
•  Impressing lenders and investors
•  Reducing borrowing costs by only doing when needed
•  Providing funds for expenses
•  Planning for investing surplus cash
IV.  The “Big Three” of Cash Management
There are three essential factors for the effective management of cash flow:
1.  Accounts  receivable  –  extending  credit  to  customers.  A  firm  should  always
try to accelerate the collection of its receivables. If possible, a firm should also
work to reduce or even eliminate credit sales.
2.  Accounts payable – suppliers and others extend credit to you. Take advantage
of and never abuse those opportunities.
3.  Inventory  –  is  the  number  one  expense  for  all  retail  and  manufacturing
businesses.  Product-based  businesses  need  to  monitor,  manage,  and  control
their inventory on a continual basis.
Accounts receivable is a critical area for the entrepreneur to address. Establishing
a credit and collection policy and process is essential. This will provide clear and
consistent direction for you, your employees, and your customers.
The steps to establishing a credit and collection policy include:
•  Screen customers carefully by developing a detailed credit application. Know
when to walk away from an order—why make the sale if you won’t get paid?
•  Establish a written credit policy  and let  every  customer know the  company’s
credit terms in advance.
•  Send invoices promptly (cycle billing).
•  Take immediate actions when an account becomes overdue.
Steps to accelerate the collection of accounts receivable through encouraging the
prompt payment of invoices include:
•  Ensure that invoices are clear, accurate, and timely.
•  Make sure that invoice prices agree with the quotations on purchase orders or
contracts.
•  Highlight the terms of the sale (2/10/net30, net 30).
•  Include  a  telephone  number  and  contact  person  in  your  organization  in  case
the customer has a question or concern.
•  Work with company owners or representatives in a positive and collaborative
fashion to reduce and eliminate their overdue accounts.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 35
•  As a last resort, consult  with  your  attorney  and/or turn the account  over to  a
collection attorney.
Few owners use  any  formal method  for managing inventory. Entrepreneurs may
find that they have either too much inventory, or the wrong type of inventory that
has become outdated or obsolete. This inventory ties up cash and is expensive to
the firm. A typical manufacturing company pays 25-30 percent of the value of its
inventory  in  handling  and  finance  costs;  however,  retailers  that  carry  too  little
inventory experience stockouts and lost sales.
Entrepreneurs  can  avoid  a  cash  crisis  through  an  effective  management  of
accounts receivable. Tips to accomplish this include:
•  Stretching out payment times without jeopardizing credit
•  Verify all invoices before payment
•  Take advantage of cash discounts
•  Negotiate terms with suppliers
•  Communicate with creditors about your status
•  Schedule and stagger cash disbursements
•  Use credit cards wisely
Inventory management also plays an important role through:
•  Monitoring it regularly
•  Not buying more than needed
•  Scheduling deliveries at the latest possible date
•  Negotiating quantity discounts
V.  Avoiding the Cash Crunch
Tools that allow small business managers to get the maximum benefit from their
companies’ pool of cash include:
Bartering:
the  exchange  of  goods  and  services  for  other  goods and  services  rather  than  for
cash is an effective way to conserve cash.
Trimming overhead costs:
high  overhead  expenses  can  strain  a  small  firm’s  cash  supply.  Ways  to  trim
overhead costs include:
1.  Periodically evaluate expenses
2.  When practical, lease instead of buy
3.  Avoid nonessential outlays
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 36
4.  Negotiate  fixed  loan  payments  to  coincide  with  your  company’s  cash  flow
cycle
5.  Buy  used  or  reconditioned  equipment,  especially  if it  is  “behind-the-scenes”
machinery
6.  Hire part-time employees and freelance specialists whenever possible
7.  Control employee advances and loans
8.  Establish an internal security and control system
9.  Develop a system to battle check fraud
10. Change your shipping terms
11. Switch to zero-based budgeting
Additional ways to control cash flow include making efforts to:
•  Be on the lookout for employee theft.
•  Keep your business plan current.
•  Invest surplus cash to generate revenue.
CHAPTER DISCUSSION QUESTIONS
1.  Why must entrepreneurs concentrate on effective cash management?
Cash is the lifeblood  of  any business.  It is the most important  yet least productive
asset  a  business  owns.  Proper  cash  management  enables  the  owner  to  meet  cash
demands, to avoid keeping unnecessary cash balances, and to maximize the profit-generating power of each sales dollar. More businesses fail for lack of cash than for
lack of profit.
2.  Explain the difference between cash and profit.
Profit and cash are not the same. Profit is the net increase over a period of time in
capital  cycled  through  the  business,  indicating  how  effectively  the  firm  is  being
managed. Cash is the money that flows through the business in a continuous cycle.
A business cannot spend profits—only the cash it possesses.
3.  Outline the steps involved in developing a cash budget.
There are five basic steps to preparing a cash budget:
1.  Determining an appropriate minimum cash balance
2.  Forecast sales
3.  Forecast cash receipts
4.  Forecast cash disbursements
5.  Determine end-of-month cash balances and needs
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 37
4.  How can an entrepreneur launching a new business forecast sales?
For  an  established  business,  a  sales  forecast  can  be  derived  from  past  experience
and past sales data. The founder of a new business must rely on published statistics,
market surveys, the opinions of outside experts, and his/her own judgment to create
a sales forecast.
5.  What are the “big three” of cash management? What effect do they have on a
company’s cash flow?
The “big three” of cash management are:
1.  Accounts receivables:
Extending credit to customers. Cash flow is greatly affected due to the time lag
between the sale and the actual collection of cash. It affects cash flow through
the speed in which invoices are paid and cash is received.
2.  Accounts payable:
suppliers and others extend credit to you.
This can have a very favorable effect on a firm’s cash flow as inventory may be
purchased  using  the  supplier  and/or  bank  funds.  The  basic  principles  of
management  revolve  around  ordering  merchandise  that  will  turn  over  and  be
paid for in a timely fashion.
3.  Inventory:
the  number  one  expense  for  all  retail  and  manufacturing  businesses.  Inventory
affects  cash  flow  because  the  cash  is  locked  in  place  until  sold.  The  major
principle of management is maximizing inventory turnover.
6.  Outline  the basic principles of  managing  a small firm’s  receivables, payables,
and inventory.
The  basic  principles  of  managing  receivables,  payables,  and  inventory  include  the
following and are based on the “big three” of cash management:
Accounts receivable:
•  Screen  customers  carefully  by  establishing  a  detailed  credit  application.  Know
when to walk away from an order.
•  Establish  a  firm  written  credit  policy  and  let  every  customer  know  the
company’s credit terms in advance.
•  Send invoices promptly.
•  Take immediate action when an account becomes overdue.
•  Ensure that all invoices are clear, accurate, and timely.
Small Business Management – Chapters 3-7                                                                     BUS560(2011E)
Page 38
•  State  clearly  a  description  of  the  goods  or  services  purchased  and  an  account
number, if possible.
•  Make  sure  that  prices  on  invoices  agree  with  the  price  quotations  on  purchase
orders or contracts.
•  Highlight the terms of sale (e.g., “net 30”) on all invoices and reinforce them, if
necessary.
•  Include  a  telephone  number  and  a  contact  person  in your  organization  in  case
the customer has a question or a dispute.
Accounts payable:
Managing accounts payable can have a very favorable effect on a firm’s cash flow
as  inventory  may  be  purchased  using  the  supplier  and/or  bank  funds.  The  basic
principles of management revolve around ordering merchandise that will turn over
and  be  paid  for  in  a  timely  fashion.  For  example,  extending  accounts  payable
whenever  possible,  and  without  jeopardizing  your  credit  status,  can  have  a  very
positive impact on cash flow.
Inventory:
Inventory affects cash flow because the cash is locked in place until sold. The major
principle of management is maximizing inventory turnover.
7.  How can bartering improve a company’s cash position?
Bartering is the exchange of goods and services for other goods and services and
can  be  an  effective  method  of  conserving  cash.  The owner  receives  goods  and
services  without  having  to  spend  cash.  In  addition,  the  owner  may  be  able  to
collect uncollectable accounts.
8.  What steps can entrepreneurs take to conserve cash within their companies?
Tools  that  allow  small  business  managers  to  get  maximum  benefit  from  their
companies’ pools of cash include:
1.  Bartering
2.  Trimming overhead costs
3.  Keeping your business plan current
4.  Investing surplus cash
9.  What  should  be  a  small  business  owner’s  primary  concern  when  investing
surplus cash?
The primary concerns for investing surplus cash should be safety and liquidity.
PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET AN AMAZING DISCOUNT ?

Our Service Charter

  1. Excellent Quality / 100% Plagiarism-Free

    We employ a number of measures to ensure top quality essays. The papers go through a system of quality control prior to delivery. We run plagiarism checks on each paper to ensure that they will be 100% plagiarism-free. So, only clean copies hit customers’ emails. We also never resell the papers completed by our writers. So, once it is checked using a plagiarism checker, the paper will be unique. Speaking of the academic writing standards, we will stick to the assignment brief given by the customer and assign the perfect writer. By saying “the perfect writer” we mean the one having an academic degree in the customer’s study field and positive feedback from other customers.
  2. Free Revisions

    We keep the quality bar of all papers high. But in case you need some extra brilliance to the paper, here’s what to do. First of all, you can choose a top writer. It means that we will assign an expert with a degree in your subject. And secondly, you can rely on our editing services. Our editors will revise your papers, checking whether or not they comply with high standards of academic writing. In addition, editing entails adjusting content if it’s off the topic, adding more sources, refining the language style, and making sure the referencing style is followed.
  3. Confidentiality / 100% No Disclosure

    We make sure that clients’ personal data remains confidential and is not exploited for any purposes beyond those related to our services. We only ask you to provide us with the information that is required to produce the paper according to your writing needs. Please note that the payment info is protected as well. Feel free to refer to the support team for more information about our payment methods. The fact that you used our service is kept secret due to the advanced security standards. So, you can be sure that no one will find out that you got a paper from our writing service.
  4. Money Back Guarantee

    If the writer doesn’t address all the questions on your assignment brief or the delivered paper appears to be off the topic, you can ask for a refund. Or, if it is applicable, you can opt in for free revision within 14-30 days, depending on your paper’s length. The revision or refund request should be sent within 14 days after delivery. The customer gets 100% money-back in case they haven't downloaded the paper. All approved refunds will be returned to the customer’s credit card or Bonus Balance in a form of store credit. Take a note that we will send an extra compensation if the customers goes with a store credit.
  5. 24/7 Customer Support

    We have a support team working 24/7 ready to give your issue concerning the order their immediate attention. If you have any questions about the ordering process, communication with the writer, payment options, feel free to join live chat. Be sure to get a fast response. They can also give you the exact price quote, taking into account the timing, desired academic level of the paper, and the number of pages.

Excellent Quality
Zero Plagiarism
Expert Writers

Instant Quote

Subject:
Type:
Pages/Words:
Single spaced
approx 275 words per page
Urgency (Less urgent, less costly):
Level:
Currency:
Total Cost: NaN

Get 10% Off on your 1st order!