Unit 1 Test PowerPoints

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Chapter One
Exploring the World of Business and Economics

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The Organized Effort of Individuals
Combining Resources

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The Relationship Between Sales Revenue and Profit
Profit is what remains after all business expenses have been deducted from sales revenue. A loss (negative profit) results when a firm’s expenses are greater than its revenues.

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Business Profit
The purposes of profit
To reward business owners for producing goods and services consumers want
As payment for business owners assuming the risks of ownership
Stakeholders
All of the different people or groups or people who are affected by the policies and decisions made by an organization

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Economic Systems (cont’d)
Factors of production
Land and natural resources
Labor
Capital
Entrepreneurship
Entrepreneur
A person who risks time, effort, and money to start and operate a business

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Economic Systems (cont’d)
Differences in economic systems
How they answer the four basic economic questions
What goods and services will be produced?
How will they be produced?
For whom will they be produced?
Who owns and controls the major factors of production?

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Types of Economic Systems
Capitalism
An economic system in which individuals own and operate the majority of businesses that provide goods and services
Derived from Adam Smith’s laissez-faire capitalism in which a society’s best interests are served by individuals pursuing their own self-interest
Creation of wealth is the concern of private individuals
Resources used to create wealth must be privately owned
Economic freedom ensures the existence of a free market economy
Businesses and individuals decide what to produce and buy; the market determines quantities sold and prices
Limited role of government

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Types of Economic Systems (cont’d)
Capitalism in the United States
Mixed economy with elements of capitalism and socialism
Households
Consumers of goods and services
Resource owners of some factors of production
Businesses
Produce goods and services to exchange for revenues (money)
Use revenues to purchase factors of production
Governments
In exchange for taxes, governments provide public services that would not be provided by business or would be produced only for those who could afford them

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The Circular Flow in Our Mixed Economy

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Types of Economies (cont’d)
Command economies
Economic systems in which the government decides what will be produced, how it will be produced, who gets what is produced, and who owns and controls the major factors of production
Socialism
Key industries (e.g., transportation, utilities, and banking) are owned and controlled by the government
Small-scale private businesses may be permitted and workers may choose their own occupations
Production is based on national goals, and distribution is controlled by the state
Intent is the equitable distribution of income, elimination of poverty, social services to all who need them, elimination of the economic waste of capitalistic competition

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Types of Economies (cont’d)
Command economies (cont’d)
Communism
All factors of production are owned and controlled by the government as proxy for ownership by all citizens
Production is based on centralized state planning to meet the needs of the state and not necessarily the needs of its citizens
The state dictates occupational choices and sets prices and wages
Intent is to create Karl Marx’s concept of a classless society where all contribute according to their ability and receive benefits according to their needs.

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Measuring Economic Performance
Productivity
The average level of output per worker per hour
Economic indicators
Gross domestic product (GDP)
The total value of all goods and services produced by all people within the boundaries of a country during a one-year period
Inflation
A general rise in the level of prices

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The Business Cycle
The recurrence of periods of growth and recession in a nation’s economic activity
Recession
Two consecutive three-month periods of decline in a country’s gross domestic product
Depression
A severe recession that lasts longer than a recession
Monetary policies
Federal Reserve decisions that determine the size of the supply of money in the nation and the level of interest rates

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The Business Cycle (cont’d)
Fiscal policy
Government influence on the amount of savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending
Federal deficit
A shortfall created when the federal government spends more in a fiscal year than it receives
National debt
The total of all federal deficits

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Types of Competition
Rivalry among businesses for sales to potential customers
Perfect (or pure) competition
The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product
Supply: The quantity of a product that producers are willing to sell at each of various prices
Demand: The quantity of a product that buyers are willing to purchase at each of various prices
Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied

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Types of Competition (cont’d)
Monopolistic competition
A market situation where there are many buyers along with a relatively larger number of sellers who differentiate their products from the products of competitors
Product differentiation
The process of developing and promoting differences between one’s products and all similar products

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Oligopoly
A market situation (or industry) in which there are few sellers
E.g., automobile manufacturers, car rental agencies, and farm implement industries
Sizable investments are required to enter into the market
Each seller has considerable control over price
The market actions of one seller can have a strong effect on competitors

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Monopoly
A market (or industry) with only one seller
Natural monopoly
An industry requiring huge investments in capital and within which duplication of facilities would be wasteful and thus not in the public interest
Legal monopoly (limited monopoly)
A monopoly created when the federal government issues a copyright, patent, or trademark protecting the owners of written materials, ideas, or product brands from unauthorized use by competitors

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Chapter Two
Being Ethical and Socially Responsible

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Business Ethics Defined
Ethics
The study of right and wrong and of the morality of the choices individuals make
An ethical decision is one that is “right” according to some standard of behavior
Business ethics
The application of moral standards to business situations

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Ethical Issues
Fairness and honesty
Businesspeople are expected to refrain from knowingly deceiving, misrepresenting, or intimidating others
Organizational relationships
A businessperson should put the welfare of others and that of the organization above their own personal welfare
Conflict of interest
Issues arise when a businessperson takes advantage of a situation for personal gain rather than for the employer’s interest
Communications
Business communications that are false, misleading, or deceptive are both illegal and unethical

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Factors Affecting Ethical Behavior
Three general sets of factors appear to influence the standards of behavior in an organization
Individual factors
Individual knowledge of an issue
Personal values
Personal goals
Social factors
Cultural norms
Coworkers
Significant others
Use of the Internet
Opportunity
Presence of opportunity
Ethical codes
Enforcement

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Guidelines for Making Ethical Decisions

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Social Responsibility
The recognition that business activities have an impact on society and the consideration of that impact in business decision making
Social responsibility costs money but is also good business
How socially responsible a firm acts may affect the decisions of customers to do or continue to do business with the firm.

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Two Views of Social Responsibility
Economic model
The view that society will benefit most when business is left alone to produce and market profitable products that society needs
Managerial attitude: social responsibility is someone else’s job; the firm’s primary responsibility is to make a profit for its shareholders
Firms are assumed to fulfill their social responsibility indirectly by paying the taxes that are used to meet the needs of society
Social responsibility is the problem of government, environmental groups, and charitable foundations

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Two Views of Social Responsibility (cont’d)
Socioeconomic model
The concept that business should emphasize not only profits but also the impact of its decisions on society
The corporation is a creation of society and it must act as any responsible citizen would
Firms take pride in their social responsibility obligations
It is in the best interest of firms to take the initiative in social responsibility matters

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The Pros and Cons of Social Responsibility
Arguments for increased social responsibility:
Because business is part of our society, it cannot ignore social issues.
Business has the technical, financial, and managerial resources needed to tackle today’s complex social issues.
By helping resolve social issues, business can create a more stable environment for long-term profitability.
Socially responsible decision making by firms can prevent increased government intervention, which would force businesses to do what they fail to do voluntarily.

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The Pros and Cons of Social Responsibility (cont’d)
Arguments against increased social responsibility
Business managers are primarily responsible to stockholders, so management must be concerned with providing a return on owners’ investments.
Corporate time, money, and talent should be used to maximize profits, not to solve society’s problems.
Social problems affect society in general, so individual businesses should not be expected to solve these problems.
Social issues are the responsibility of government officials who are elected for that purpose and who are accountable to the voters for their decisions.

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Consumerism (cont’d)
The Six Basic Rights of Consumers

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Concern for the Environment
Pollution
The contamination of water, air, or land through the actions of people in an industrialized society
Environmental Protection Agency (EPA)
The federal agency charged with enforcing laws affecting the environment
Safeguarding the environment requires
Environmental legislation
Voluntary compliance
EPA enforcement actions

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Concern for the Environment (cont’d)
Water pollution
Water quality has improved in recent years, but high levels of toxic pollutants are still found in some waters
Pollutants threaten the health of both people and wildlife
Cleanup is complicated and costly because of runoff and toxic contamination
Acid rain from sulfur emissions of industrial smokestacks is contributing to the deterioration of coastal waters, lakes, and marine life

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Air pollution
Aviation emissions of carbon dioxidein the upper atmosphere are contributing to global warming
Carbon monoxide and hydrocarbons emitted by motor vehicles and smoke and other pollutants emitted by manufacturing plants can be partially eliminated through pollution-control devices
Weather and geography can contribute to air pollution

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Land pollution
Fundamental issues are how to restore damaged or contaminated land and how to protect unpolluted land from future damage
Problem is worsening because technology produces chemical and radioactive waste
There is a shortage of landfill space for waste disposal
Incinerators help solve the landfill shortage problem, but they produce toxic ash
Other causes of land pollution include strip-mining, nonselective cutting of forests, development of agriculture land for housing and industry
The EPA has been criticized for its handling of the $1.6 billion Superfund created in 1980 by Congress

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Noise pollution
Excessive noise can do physical harm
Ways to reduce noise levels
Isolating the source of the noise
Modifying machinery and equipment
If noise cannot be reduced, workers can be protected by wearing noise-reduction gear

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Chapter Three
Exploring Global
Business

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The Basis for International Business
International business
All business activities that involve exchanges across national boundaries
Some countries are better equipped than others to produce particular goods or services
Absolute advantage
The ability to produce a specific product more efficiently than any other nation
Comparative advantage
The ability to produce a specific product more efficiently than any other product
Goods and services are produced more efficiently when each country specializes in the products for which is has a comparative advantage

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The Basis for International Business (cont’d)
Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in
Exporting
Selling and shipping raw materials or products to other nations
Importing
Purchasing raw materials or products in other nations and bringing them into one’s own country

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The Basis for International Business (cont’d)
Balance of trade
The total value of a nation’s exports minus the total value of its imports over some period of time
Trade deficit
A negative (unfavorable) balance of trade—imports exceed exports in value
Balance of payments
The total flow of money into a country minus the total flow of money out of that country over a period of time

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U.S. International Trade in Goods
Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=78260&table_id=1&area_id=3, accessed September 18, 2008.

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Types of Trade Restrictions
Import duty (tariff)
A tax levied on a particular foreign product entering a country
Revenue tariffs are imposed to generate income for the government
Protective tariffs are imposed to protect a domestic industry by keeping the prices of imports at or above the price of domestic products
Dumping
The exportation of large quantities of a product at a price lower than that of the same product in the home market

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Types of Trade Restrictions (cont’d)
Nontariff barriers
Nontax measures imposed by a government to favor domestic over foreign suppliers
Import quota—a limit on the amount of a particular good that may be imported during a given time
Embargo—a complete halt to trading with a particular nation or in a particular product
Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold

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Types of Trade Restrictions (cont’d)
Nontariff barriers (cont’d)
Currency devaluation—the reduction of the value of a nation’s currency relative to the currencies of other nations
Bureaucratic red tape—a subtle form of trade restriction that imposes unnecessarily burdensome and complex standards and requirements for imported goods
Cultural attitudes—can impede acceptance of products in foreign countries

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Reasons for and Against Trade Restrictions
FOR
To equalize a nation’s balance of payments
To protect new or weak industries
To protect national security
To protect the health of citizens
To retaliate for another country’s trade restrictions
To protect domestic jobs
AGAINST
Higher prices for consumers
Restriction of consumers’ choices
Misallocation of international resources
Loss of jobs

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Value of U.S. Merchandise Exports and Imports, 2007
Source: U.S. Department of Commerce, International Trade Administration, http://www.census.gov/foreign-trade/statistics/
highlights/top/top0712.html, accessed September 22, 2008.

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The General Agreement on Tariffs and Trade and the World Trade Organization
General Agreement on Tariffs and Trade (GATT)
International organization of 153 nations dedicated to reducing or eliminating tariffs and other trade barriers
Most-favored-nation status (MFN)—Each member of GATT was to be treated equally by all other members
Kennedy Round, Tokyo Round, Uruguay Round, Doha Round
World Trade Organization (WTO)
Created in the Uruguay Round of GATT negotiation as a successor to GATT
WTO oversees GATT provisions, has judicial powers to meditate trade disputes arising from GATT rules and exerts more binding authority than GATT

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Methods of Entering International Business
Licensing
A contractual agreement in which one firm permits another to produce and market its product and use its brand name in return for a royalty or other compensation
Advantage
It allows expansion into foreign markets with little or no direct investment
Disadvantages
The product image may be damaged if standards are not upheld
The original producer does not gain foreign marketing experience

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Methods of Entering International Business (cont’d)
Joint ventures
A partnership formed to achieve a specific goal or to operate for a specific period of time
Advantages
Immediate market knowledge and access
Reduced risk
Control over the product attributes
Disadvantages
Complexity of establishing agreements across national borders
High level of commitment required of all parties involved

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Totally owned facilities
Production and marketing facilities in one or more foreign nations
Advantage
Direct investment provides complete control over operations
Disadvantage
Risk is greater than that of a joint venture
Two forms
Building new facilities in the foreign country
Purchasing an existing firm in the foreign country

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Strategic alliances
Partnerships formed to create competitive advantage on a worldwide basis
Trading companies
Firm that provide a link between buyers and sellers in different countries
Take title to products and perform all the activities necessary to move the products from one country to another

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Countertrade
An international barter transaction
Avoids restrictions on converting domestic currency to foreign currency
Multinational enterprise
A firm that operates on a worldwide scale without ties to any specific nation or region

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Financing International Business
The Export-Import Bank of the United States (Eximbank)
An independent agency of the U.S. government whose function it is to assist in financing the exports of American firms
Multilateral Development Bank (MDB)
An internationally supported bank that provides loans to developing countries to help them grow
World Bank, Inter-American Development Bank (IDB), Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD)
The International Monetary Fund (IMF)
An international bank with 185 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits

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Chapter Four
Choosing a Form of
Business Ownership

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Sole Proprietorships
A business that is owned (and usually operated) by one person
The simplest form of business ownership and the easiest to start
Many large businesses began as a small struggling sole proprietorships
The most widespread form of business ownership

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Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S.
Sole proprietorships are most common in retailing, agriculture, and the service industries
Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2008, p. 487 (www.census.gov).

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Advantages and Disadvantages of Sole Proprietorships
ADVANTAGES
Ease of start-up and closure
Pride of ownership
Retention of all profits
Flexibility of being your own boss
No special taxes
DISADVANTAGES
Unlimited liability
A legal concept that holds a business owner personally responsible for all the debts of the business
Lack of continuity
Lack of money
Limited management skills
Difficulty in hiring employees

A voluntary association of two or more persons to act as co-owners of business for profit
Less common form of ownership than sole proprietorship or corporation
No legal limit on the maximum number of partners; most have only 2
Large accounting, law, and advertising partnerships have multiple partners
Partnerships are usually a pooling of special talents or the result of a sole proprietor taking on a partner
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Partnerships

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Types of Partners
General partner
A person who assumes full or shared responsibility for operating a business
General partnership: a business co-owned by two or more general partners who are liable for everything the business does
Limited partner
A person who contribute capital to a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership
Limited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it
Master limited partnership (MLP): a business partnership that is owned and managed like a corporation but taxed like a partnership

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Advantages and Disadvantages of Partnerships
DISADVANTAGES
Unlimited liability
Management disagreements
Lack of continuity
Frozen investment
ADVANTAGES
Ease of start-up
Availability of capital and credit
Personal interest
Combined business skills and knowledge
Retention of profits
No special taxes

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Corporations
An artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts
There are 5.6 million corporations in the U.S.
They comprise only 20% of all businesses, but they account for 83.8 % of sales revenues

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Corporate Ownership
Corporate ownership
Stock
The shares of ownership of a corporation
Stockholder
A person who owns a corporation’s stock
Closed corporation
A corporation whose stock is owned by relatively few people and is not sold to the general public
Open corporation
A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual

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Forming a Corporation
Incorporation
The process of forming a corporation
Most experts recommend consulting a lawyer

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Forming a Corporation (cont’d)
Where to incorporate
Businesses can incorporate in any state they choose
Some states offer fewer restrictions, lower taxes, and other benefits to attract new firms
Domestic corporation
A corporation in the state in which it is incorporated
Foreign corporation
A corporation in any state in which it does business except the one it which it is incorporated
Alien corporation
A corporation chartered by a foreign government and conducting business in the U.S.

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Articles of incorporation
A contract between the corporation and the state in which the state recognizes the formation of the artificial person that is the corporation
Articles of incorporation includes
Firm’s name and address
Incorporators’ names and addresses
Purpose of the corporation
Maximum amount of stock and types of stock to be issued
Rights and privileges of stockholders
Length of time the corporation is to exist

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Stockholders’ rights
Common stock
Stock owned by individuals or firms who may vote on corporate matters but whose claims on profit and assets are subordinate to the claims of others
Preferred stock
Stock owned by individuals or firms who usually do not have voting rights but whose claims on dividends are paid before those of common-stock holders
Dividend
A distribution of earnings to the stockholders of a corporation
Proxy
A legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individuals

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Organizational meeting
The last step in forming a corporation
The incorporators and original stockholders meet to elect their first board of directors
Board members are directly responsible to stockholders for how they operate the firm

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Corporate Structure
Board of directors
The top governing body of a corporation, the members of which are elected by the stockholders
Responsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operation
Outside directors: experienced managers or entrepreneurs from outside the corporation who have specific talents
Inside directors: top managers from within the corporation

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Corporate Structure (cont’d)
Corporate officers
The chairman of the board, president, executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the board
Implement the chosen strategy and direct the work of the corporation, periodically reporting results to the board and stockholders

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Hierarchy of Corporate Structure
Stockholders exercise a great deal of influence through their right to elect the board of directors

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Advantages and Disadvantages of Corporations
ADVANTAGES
Limited liability
Each owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stock
Ease of raising capital
Ease of transfer of ownership
Perpetual life
Specialized management
DISADVANTAGES
Difficulty and expense of formation
Government regulation and increased paperwork
Conflict within the corporation
Double taxation
Lack of secrecy

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Advantages and Disadvantages

S-corporations
A corporation that is taxed as though it were a partnership (income is taxed only as the personal income of stockholders)
Advantages
Avoids double taxation of a corporation
Retains the corporation’s legal benefit of limited liability
S-corporation criteria
No more than 100 stockholders allowed
Stockholders must be individuals, estates, or exempt organizations
There can be only one class of outstanding stock
The firm must be a domestic corporation
There can be no nonresident-alien stockholders
All stockholders must agree to the decision to form an S-corporation
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Special Types of Business Ownership

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Special Types of Business Ownership (cont’d)
Limited-liability company (LLC)
A form of business ownership that provides limited-liability protection and is taxed like a partnership
Advantages
Avoids double taxation of a corporation
Retains the corporation’s legal benefit of limited liability
Provides more management flexibility
Difference between LLC and S-corporation
LLCs not restricted to 100 stockholders
LLCs have fewer restrictions on who can be a stockholder

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Advantages and Disadvantages

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Government-owned corporations
A corporation owned and operated by a local, state, or federal government
Purpose
To ensure that a public service is available
Examples
Tennessee Valley Authority (TVA), the National Aeronautics and Space Administration (NASA), and the Federal Deposit Insurance Corporation (FDIC)

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Not-for-profit corporations
Corporations organized to provide social, educational, religious, or other services, rather than to earn a profit
Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability

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Cooperatives, Joint Ventures, Syndicates
Cooperatives
Associations of individuals or firms whose purpose is to perform some business function for its members
Members benefit from the efficiencies of the cooperatives’ activities, such as reducing unit costs by making bulk purchases and coordinating services such as transportation, processing, and marketing products

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Cooperatives, Joint Ventures, Syndicates (cont’d)
Joint ventures
Agreements between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time
Example: Wal-Mart and India’s Bharti Enterprises
Syndicates
Temporary associations of individuals or firms organized to perform a specific task that requires a large amount of capital
Most commonly used to underwrite large insurance policies, loans, and investments

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Corporate Growth
Growth from within
Introducing new products
Entering new markets
Growth through mergers and acquisitions
Merger: the purchase of one corporation by another; essentially the same as an acquisition
Hostile takeover: a situation in which the management and board of directors of the firm targeted for acquisition disapprove of the merger
Tender offer: an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares
Proxy fight: a technique used to gather enough stockholder votes to control the targeted company

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Three Types of Growth by Merger

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Chapter Five
Small Business, Entrepreneurship,
and Franchises

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Small Business: A Profile
A business that is independently owned and operated for profit and is not dominant in its field
SBA “smallness” guidelines
Manufacturing—500 employees
Wholesale trade—100 employees
Agriculture—$750,000
Retail trade—$6.5 million
General and heavy construction—$31 million
Dredging—$18.5 million
Special trade construction—$13 million
Travel agencies—$3.5 million (commissions & other income)
Business and personal services—$6.5 million
Architectural, engineering, surveying, etc.—$4.5 million
Dry cleaning, carpet cleaning—$4.5 million

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Small Business: A Profile (cont’d)
Small-business sector
There are about 27.2 million businesses in the U.S.
Just over 17,000 employ more than 500 workers
In the last decade, the number of small businesses increased 49 percent
Part-time entrepreneurs have increase fivefold and account for one-third of all small businesses
Two-thirds of new businesses survive at least two years, 44 percent survive at least four years, and 31 percent survive at least seven years
The primary reason for these failures is due to poor management stemming from a lack of business know-how
Small businesses provide over 50% of the jobs in the U.S.

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Industry Group-Size Standards
Source:http://www.sba.gov/services/contractingopportunities/sizestandardstopics/summarywhatis/, accessed October 3, 2008.

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The People in Small Businesses: The Entrepreneurs
Why people go into business for themselves
The “entrepreneurial spirit”
The desire for independence
The desire to determine one’s own destiny
The willingness to find and accept a challenge
Personal background
Age
“Had enough” of working for someone else
High-tech opportunities, especially for teens
Losing a job and deciding to start a business
An idea for a new product
An opportunity presents itself

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How Old Is the Average Entrepreneur?
Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.

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Why Some Entrepreneurs and Small Businesses Fail
Lack of capital and cash-flow problems
Lack of management skills
Overexpansion

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The Importance of Small Businesses in Our Economy
Providing technological innovation
Innovation among small-business workers is higher than among workers in large businesses
Small firms produce 2.5 times as many innovations as large firms relative to the number of persons employed
More than half of the major technological advances of the 20th century originated with individual inventors and small businesses
Inventions may spark new industries or contribute to established industries

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The Importance of Small Business in Our Economy (cont’d)
Providing employment
Small firms hire a larger proportion of younger workers, older workers, women, and part-time workers
Small businesses provide 67% of workers with their first job and initial job skills
Small businesses represent 99.7% of all employers and employ about 50% of the private work force
Small businesses provide 2/3 of the net new jobs added to the economy

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The Importance of Small Business in Our Economy (cont’d)
Providing competition
Small firms can compete with large firms, forcing the larger firm to become more efficient and responsive to customer needs
Filling needs of society and other businesses
Small firms can meet the special needs of smaller groups of customers
Small firms can act as specialized suppliers of goods and services to larger businesses

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The Pro and Cons of Smallness
ADVANTAGES
Personal relationships with customers and employees
Ability to adapt to change
Simplified recordkeeping
Independence
Advantages of sole proprietorships
Keeping all profits
Ease and low cost of going into business
Keeping business information secret
DISADVANTAGES
Risk of failure
Limited potential
Limited ability to raise capital

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Sources of Capital for Entrepreneurs
Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.

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Developing a Business Plan
Business plan—A carefully constructed guide for the person starting a business
Three basic purposes
Communication
Management
Planning
Accuracy and realistic expectations are crucial

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The Small Business Administration
A governmental agency that assists, counsels, and protects the interests of small business in the U.S.
SBA management assistance
Management courses and workshops
Service Core of Retired Executives (SCORE)
Help for minority-owned small businesses
Small-business institutes
Small-business development centers
SBA publications

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The Small Business Administration (cont’d)
SBA financial assistance
Regular business loans
Loans are made by private banks but are partially guaranteed by the SBA
Small-business investment companies
Venture capital: money invested in small firms that have the potential to become very successful
Small business investment companies: privately owned firms that provide venture capital to small enterprises that meet their investment standards

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Franchising
Franchise
A license to operate an individually owned business as though it were part of a chain of outlets or stores
Franchising
The actual granting of a franchise
Franchisor
An individual or organization granting the franchise
Franchisee
A person or organization purchasing a franchise

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Types of Franchises
A manufacturer authorizes retailers to sell a certain brand-name item
A producer licenses distributors to sell a product to retailers
A franchisor supplies brand names, techniques, or services instead of a complete product

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Franchising (cont’d)
Are franchises successful?
The success rate for franchises is higher than that for other small businesses
94 percent of franchise owners report that they are successful
Too rapid expansion, inadequate capital or management skills, or other problems can cause franchises to fail

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Advantages of Franchising
TO THE FRANCHISOR
Fast and well controlled distribution of its products
No need to construct and operate its own outlets
More working capital available for expanded production and advertising
Franchising agreements maintain product and quality standards
Motivated work force of franchisees
TO THE FRANCHISEE
Opportunity to start a proven business with limited capital
Guaranteed customers
Franchisor available for advice and guidance
Materials for local promotional campaigns and participation in national campaigns
Cost savings when purchasing in cooperation with other franchisees

5 | 99
Disadvantages of Franchising
TO THE FRANCHISOR
Failure of the franchisee to operate franchise properly
Disputes with and lawsuits by franchisees over the terms of the franchise
TO THE FRANCHISEE
Franchisor retains a large amount of control over the franchisee’s activities
Franchisor opening competing franchises within the franchisee’s market

Unit 1 Test PowerPoints

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