This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it.
For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Small Business Management Entrepreneurship and Beyond FIFTH EDITION TIMOTHY S. HATTEN Mesa State College Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Small Business Management: © 2012, 2009 South-Western, Cengage Learning Entrepreneurship and Beyond, Fifth Edition ALL RIGHTS RESERVED. No part of this work covered by the copyright Timothy S.
Hatten herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not Vice President of Editorial, Business: Jack limited to photocopying, recording, scanning, digitizing, taping, web W. Calhoun distribution, information networks, or information storage and retrieval Editor-in-Chief: Melissa Acuña systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of Senior Acquisitions Editor: Michele the publisher. Rhoades Developmental Editor: Joanne Dauksewicz For product information and technology assistance, contact us at Senior Editorial Assistant: Ruth Belanger Cengage Learning Customer & Sales Support, 1-800-354-9706 Marketing Director: Keri L. Witman For permission to use material from this text or product, submit all requests online at www.com/permissions Senior Marketing Communications Further permissions questions can be emailed to Manager: Jim Overly permissionrequest@cengage.com Director, Content and Media Production: Barbara Fuller Jacobsen Cengage Learning WebTutorTM is a trademark of Cengage Learning.
Content Project Manager: Emily Nesheim Associate Media Editor: Danny Bolan Library of Congress Control Number: 2010940544 ISBN-13: 978-0-538-45314-1 Frontlist Buyer, Manufacturing: Miranda Klapper ISBN-10: 0-538-45314-1 Production Service: Knowledgeworks Global Limited South-Western Cengage Learning Senior Art Director: Tippy McIntosh 5191 Natorp Boulevard Cover and Internal Designer: c miller Mason, OH 45040 design USA Cover Image: ©David Stoecklein, ©Henry Georgi/All Canada Photos, Cengage Learning products are represented in Canada by ©Joe McBride: Corbis Nelson Education, Ltd. Rights Acquisitions Director: Audrey Pettengill For your course and learning solutions, visit www.com Rights Acquisitions Specialist: John Hill Purchase any of our products at your local college store or at our preferred online store www.com Printed in Canada 1 2 3 4 5 6 7 14 13 12 11 10 To: Jill, Paige, Brittany, and Taylor Brief Contents Preface xvii P A R T 1: The Challenge 1 Chapter 1: Small Business: An Overview 2 Chapter 2: Small Business Management, Entrepreneurship, and Ownership 23 P A R T 2: Planning in Small Business 51 Chapter 3: Social Responsibility, Ethics, and Strategic Planning 52 Chapter 4: The Business Plan 80 P A R T 3: Early Decisions 107 Chapter 5: Franchising 108 Chapter 6: Taking Over an Existing Business 131 Chapter 7: Starting a New Business 156 P A R T 4: Financial and Legal Management 179 Chapter 8: Accounting Records and Financial Statements 180 Chapter 9: Small Business Finance 213 Chapter 10: The Legal Environment 239 P A R T 5: Marketing the Product or Service 263 Chapter 11: Small Business Marketing: Strategy and Research 264 Chapter 12: Small Business Marketing: Product 284 Chapter 13: Small Business Marketing: Place 308 Chapter 14: Small Business Marketing: Price and Promotion 337 P A R T 6: Managing Small Business 369 © Carlos Hernandez/STOCK4B, Getty Images Chapter 15: International Small Business 370 Chapter 16: Professional Small Business Management 399 Chapter 17: Human Resource Management 426 Chapter 18: Operations Management 459 Notes 480 Index 491 iv Contents Preface xvii PA RT 1 The Challenge 1 CHAPTER 1 Small Business: An Overview. 2 What Is Small Business? 3 Size Definitions 4 Types of Industries 6 Small Businesses in the U. Economy 7 Workforce Diversity and Small Business Ownership 9 The Value of Diversity to Business 11 Secrets of Small Business Success 11 Competitive Advantage 11 Getting Started on the Right Foot 13 Understanding the Risks of Small Business Ownership 14 What Is Business Failure? 14 Causes of Business Failure 16 Business Termination versus Failure 17 Mistakes Leading to Business Failure 17 Failure Rate Controversy 18 Is Government Intervention the Answer? 19 E NTREPRENEURIAL S NAPSHOT : Beer Entrepreneur 15 MANAGER ’S NOTES : Straight from the Source 12 Summary 20 Questions for Review and Discussion 20 Questions for Critical Thinking 21 What Would You Do? 21 Chapter Closing Case 21 CHAPTER 2 Small Business Management, Entrepreneurship, and Ownership.
23 The Entrepreneur-Manager Relationship 24 What Is an Entrepreneur? 24 © Carlos Hernandez/STOCK4B, Getty Images Entrepreneurship and the Small Business Manager 25 A Model of the Start-Up Process 26 Your Decision for Self-Employment 30 Pros and Cons of Self-Employment 30 Traits of Successful Entrepreneurs 32 Preparing Yourself for Business Ownership 34 Forms of Business Organization 35 Sole Proprietorship 37 Partnership 38 v vi Contents Corporation 42 Specialized Forms of Corporations 45 MANAGER ’ S NOTES: Are You Ready? 25 REALITY C HECK : Small Biz on Campus 32 Summary 46 Questions for Review and Discussion 47 Questions for Critical Thinking 47 What Would You Do? 47 Chapter Closing Case 48 PA RT 2 Planning in Small Business 51 CHAPTER 3 Social Responsibility, Ethics, and Strategic Planning. 52 Relationship between Social Responsibility, Ethics, and Strategic Planning 53 Social Responsibilities of Small Business 53 Economic Responsibility 54 Legal Obligations 55 Ethical Responsibility 56 Philanthropic Goodwill 57 Ethics and Business Strategy 58 Codes of Ethics 58 Ethics under Pressure 60 Strategic Planning 62 Mission Statement 63 Environmental Analysis 64 Competitive Analysis 66 Strategic Alternatives 73 Goal Setting and Strategies 73 Control Systems 75 Strategic Planning in Action 76 MANAGER ’ S NOTES: Playing Hardball 73 C OMPETITIVE A DVANTAGE: Competitive Intelligence 60 REALITY C HECK : Green Can Be Gold 62 Summary 77 Questions for Review and Discussion 77 Questions for Critical Thinking 78 What Would You Do? 78 Chapter Closing Case 78 CHAPTER 4 The Business Plan. 80 Every Business Needs a Plan 81 The Purpose 81 The Practice: Guidelines for Writing a Business Plan 82 Business Plan Contents 86 Cover Page 86 Table of Contents 86 Executive Summary 86 Company Information 87 Environmental and Industry Analysis 87 Contents vii Products or Services 89 Marketing Research and Evaluation 89 Manufacturing and Operations Plan 91 Management Team 92 Timeline 93 Critical Risks and Assumptions 93 Benefits to the Community 93 Exit Strategy 94 Financial Plan 94 Appendix 99 Review Process 99 Business Plan Mistakes 99 MANAGER ’S NOTES : Good, Bad, and Ugly Business Plans 83 MANAGER ’S NOTES : How Does Your Plan Rate? 101 C OMPETITIVE A DVANTAGE: Bring It On 94 REALITY C HECK : Feasible, Viable, Good Idea? 98 Summary 103 Questions for Review and Discussion 103 Questions for Critical Thinking 103 What Would You Do? 103 Chapter Closing Case 104 PA RT 3 Early Decisions 107 CHAPTER 5 Franchising. 108 About Franchising 109 Background 109 Franchising Today 110 Franchising Systems 110 Product-Distribution Franchising 111 Business-Format Franchising 111 Why Open a Franchise? 111 Advantages to Franchisee 112 Disadvantages to Franchisee 113 Advantages to Franchisor 115 Disadvantages to Franchisor 116 Selecting a Franchise 117 Evaluate Your Needs 117 Do Your Research 117 Analyze the Market 121 Disclosure Statements 121 The Franchise Agreement 124 Get Professional Advice 126 International Franchising 126 MANAGER ’S NOTES : Just the Facts … 110 C OMPETITIVE A DVANTAGE: Franchise—Failed! 125 REALITY C HECK : Go to the Source 120 Summary 127 Questions for Review and Discussion 128 Questions for Critical Thinking 128 viii Contents What Would You Do? 128 Chapter Closing Case 129 CHAPTER 6 Taking Over an Existing Business.
131 Business-Buyout Alternative 132 Advantages of Buying a Business 133 Disadvantages of Buying a Business 134 How Do You Find a Business for Sale? 135 What Do You Look for in a Business? 136 Due Diligence 137 General Considerations 138 Why Is the Business Being Sold? 138 Financial Condition 139 What Are You Buying? 141 Tangible Assets 141 Intangible Assets 143 Personnel 144 The Seller’s Personal Plans 144 How Much Should You Pay? 145 What Are the Tangible Assets Worth? 146 What Are the Intangible Assets Worth? 146 Buying the Business 148 Terms of Sale 148 Closing the Deal 148 Taking Over a Family Business 149 What Is Different about Family Businesses? 150 Complex Interrelationships 150 Planning Succession 150 General Family Business Policies 151 E NTREPRENEURIAL SNAPSHOT : Their Family Business Tree Is a Sequoia 149 MANAGER ’ S NOTES: Show and Don’t Tell 140 MANAGER ’ S NOTES: What’s It Really Worth? 143 C OMPETITIVE A DVANTAGE: In the Box—Negotiating Strategies 133 Summary 152 Questions for Review and Discussion 153 Questions for Critical Thinking 153 What Would You Do? 153 Chapter Closing Case 154 CHAPTER 7 Starting a New Business. 156 About Start-ups 157 Advantages of Starting from Scratch 158 Disadvantages of Starting from Scratch 158 Types of New Businesses 158 E-Businesses 159 Home-Based Businesses 160 Starting a Business on the Side 161 Fast-Growth Start-ups 162 Contents ix Evaluating Potential Start-ups 162 Business Ideas 162 Where Business Ideas Come From 166 Getting Started 168 What Do You Do First? 168 Importance of Planning to a Start-up 169 How Will You Compete? 171 Customer Service 173 Licenses, Permits, and Regulations 173 Taxes 173 E NTREPRENEURIAL S NAPSHOT : Über Inventor—Old School 172 C OMPETITIVE A DVANTAGE: Creative Release 168 REALITY C HECK : Quotable Quotes 164 REALITY C HECK : Urban Survival Shoes 169 Summary 174 Questions for Review and Discussion 175 Questions for Critical Thinking 175 What Would You Do? 175 Chapter Closing Case 176 PA RT 4 Financial and Legal Management 179 CHAPTER 8 Accounting Records and Financial Statements. 180 Small Business Accounting 182 How Important Are Financial Records? 183 Accurate Information for Management 183 Banking and Tax Requirements 184 Small Business Accounting Basics 184 Double- and Single-Entry Systems 184 Accounting Equations 187 Cash and Accrual Methods of Accounting 188 What Accounting Records Do You Need? 188 Using Financial Statements to Run Your Small Business 193 Analyzing Financial Statements 193 Ratio Analysis 194 Using Financial Ratios 194 Liquidity Ratios 196 Activity Ratios 196 Leverage Ratios 198 Profitability Ratios 199 Managing Cash Flow 201 Cash Flow Defined 201 Cash Flow Fundamentals 201 Cash Flow Management Tools 203 Strategies for Cash Flow Management 205 MANAGER ’S NOTES : Ask … 184 MANAGER ’S NOTES : Small Business Dashboard 185 C OMPETITIVE A DVANTAGE: Open-Book Management 203 REALITY C HECK : Do You Have a Business or a Hobby? 194 Summary 208 Questions for Review and Discussion 209 x Contents Questions for Critical Thinking 209 What Would You Do? 209 Chapter Closing Case 211 CHAPTER 9 Small Business Finance. 213 Small Business Finance 214 Initial Capital Requirements 215 Defining Required Assets 215 The Five “Cs” of Credit 216 Additional Considerations 219 Basic Financial Vocabulary 219 Forms of Capital: Debt and Equity 219 Other Loan Terminology 223 How Can You Find Capital? 223 Loan Application Process 223 Sources of Debt Financing 223 What if a Lender Says “No”? 229 Sources of Equity Financing 229 Choosing a Lender or Investor 234 E NTREPRENEURIAL SNAPSHOT : Brodsky Says … 234 MANAGER ’ S NOTES: Banker Talk 225 REALITY C HECK : Recession Proof Your Small Business 218 REALITY C HECK : Credit Card Start-up Funding—Really?? 230 Summary 236 Questions for Review and Discussion 236 Questions for Critical Thinking 236 What Would You Do? 236 Chapter Closing Case 237 CHAPTER 10 The Legal Environment .