CyberSummary

INTRODUCTION

There are more than 17 million small businesses operating in the United States today, each representing the vision of their entrepreneurial owners to succeed by providing new or better products.

THE NATURE OF ENTREPRENEURSHIP AND SMALL BUSINESS

An entrepreneur is a person who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something. Entrepreneurship is the process of creating and managing a business to achieve desired objectives. Pushed by technological advances and alliances with other businesses, the entrepreneurship movement is accelerating with many new, smaller businesses emerging.

Defining a small business is difficult because smallness is relative. Your text defines a small business as any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people. This definition is similar to the one used by the Small Business Administration (SBA), an independent agency of the federal government that offers managerial and financial assistance to small businesses.

Small businesses are the heart of the American economy. Over 99 percent of all U.S. firms are classified as small. These small businesses are largely responsible for fueling job creation and innovation. In recent years, 75 percent of all new jobs were created by small businesses. Many small businesses today are being started because of encouragement from larger ones. Small businesses are also important because they contribute innovation, which further fuels the economy.

Small businesses are found in virtually every industry, but retailing and wholesaling, services, manufacturing, and high technology are especially attractive to entrepreneurs because they are relatively easy to enter and require low initial financing. Small-business owners also find it easier to focus on a specific group of consumers in these fields than in others, and new firms in these industries suffer less from heavy competition, at least in the early stages, than do established firms. Retailing--acquiring goods from producers or wholesalers and selling them to consumers--attracts entrepreneurs because gaining experience and exposure in retailing is easy, and it does not require a large financial investment in equipment and distribution systems. Wholesalers supply products to industrial, retail, and institutional users for resale or for use in making other products. Services, which include businesses that work for others but do not actually produce tangible goods, are the fastest growing segment of the U.S. economy. Manufacturing goods can provide unique opportunities for small businesses because they can often customize products to meet specific customer needs and wants. High technology is a broad term for businesses that depend on advanced scientific and engineering knowledge.

ADVANTAGES OF SMALL-BUSINESS OWNERSHIP

Establishing and running a small business brings many personal and business advantages. Independence and freedom are major personal reasons why entrepreneurs go into business for themselves. Some small-business owners simply cannot work for someone else or want the freedom to choose with whom they work, the flexibility to pick where and when to work, and the option of working in a family setting: Additionally, small businesses often require less money to start and maintain than do large ones. With small size comes the flexibility to adapt to changing market demands and to make decisions quickly. Small firms can focus their efforts on a few key customers or on a precisely defined group of customers. They can also develop enviable reputations for quality and service.

DISADVANTAGES OF SMALL-BUSINESS OWNERSHIP

Small-business owners face both psychological and physical stresses because they must work long hours and function as owner, manager, sales force, shipping and receiving clerk, bookkeeper, and custodian. There are always worries about competition, employee problems, new equipment, expanding inventory, rent increases, or changing market demand.

There is no guarantee that a small business will succeed. Small businesses fail for many reasons: a poor business concept, the burdens imposed by government regulation insufficient funds to withstand slow sales, and vulnerability to competition from larger companies. The most common causes of small-business failure include undercapitalization--the lack of funds to operate a business normally--as well as management inexperience and incompetence and inability to cope with growth.

STARTING A SMALL BUSINESS

To start any business, large or small, you must first have an idea. Next, you need to devise a business plan--a precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals--to guide planning and development in the business. The business plan should include an explanation of the business, an analysis of the competition, estimates of income and expenses, a strategy for acquiring sufficient funds to keep the business going, and other information.

After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership--whether to operate as a sole proprietorship, partnership, or corporation.

The entrepreneur must also provide or obtain money (capital) to start the business and to keep it running smoothly. The most important source of funds for any new business is the owner, who may be able to provide capital in the form of savings or borrow against the value of his or her home or some types of savings. Additionally, the owner may bring to the business personal assets such as a computer or car. Such financing is referred to as equity financing because the owner uses real personal assets instead of borrowing funds from outside sources to get started in a new business. Small businesses can also obtain equity financing by finding investors. They may sell stock in the business to family members, friends, employees, or venture capitalists--persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock.

New businesses sometimes borrow over half of their financial resources. They can also look to family and friends for loans (often at favorable rates) or other assets. The amount a bank or other institution is willing to loan depends on its assessment of the venture's likelihood of success and of the entrepreneur's ability to repay the loan. A bank will often require the business owner to put up collateral, a financial interest in the property or fixtures of the business, to guarantee payment of the debt. Additionally, the small-business owner may have to offer some personal property as collateral, such as the owner's home, in which case the loan is called a mortgage. Banks and other financial institutions can also grant a line of credit--an agreement by which a financial institution promises to lend the business a predetermined sum on demand. Small businesses may obtain funding from their suppliers in the form of trade credit--that is, suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments. Occasionally, small businesses engage in bartering. Other possible sources of loans are some community groups and state and local agencies. On the federal level, the Small Business Administration offers financial assistance to qualifying businesses.

Although entrepreneurs often start new small businesses from scratch, they may elect instead to buy an already existing business. Many small-business owners find entry into the business world through franchising. A license to sell another's products or to use another's name in business, or both, is a franchise. The company that sells the franchise is the franchiser; the purchaser of a franchise is a franchisee. The franchisee acquires the rights to a name, logo, methods of operation, national advertising, products, and other elements associated with the franchiser's business in return for a financial commitment and the agreement to conduct business in accordance with the franchiser's standard of operations. The franchisee pays the franchiser a monthly or annual fee based on a percentage of sales or profits. In return, the franchisee often receives building specifications and designs, site recommendations, management and accounting support and, perhaps most importantly, immediate name recognition.

Because of the crucial role that small business and entrepreneurs play in the U.S. economy, numerous organizations offer programs to improve the small-business owner's ability to compete. Entrepreneurs can learn critical marketing, management, and finance skills in seminars and college courses. Local and national publications can also provide advice. The Small Business Administration offers many types of management assistance to small businesses, including counseling for firms in difficulty, consulting on improving operations, and training for owner/managers and their employees. The SBA also funds Small-Business Development Centers (SBDCs)--business clinics that provide counseling at no charge and training at only a nominal charge. Volunteer agencies like the Service Corps of Retired Executives (SCORE) and the Active Corps of Executives (ACE) are funded by the SBA to provide advice for small businesses and are staffed by experienced managers whose talents and experience small firms could not ordinarily afford. The SBA also organizes Small Business Institutes (SBIs) on university and college campuses where seniors, graduate students, and faculty provide on-site management counseling. Finally, the small-business owner can obtain advice from other small-business owners, suppliers, and even customers.

THE FUTURE FOR SMALL BUSINESS

Although small businesses are crucial to the economy, they can be more vulnerable to turbulence and change in the marketplace than large businesses. Demographic, technological, and economic trends that will have the most impact on small business in the future include: the aging baby boom generation; echo boomers (12 to 19 year olds); increasing number of immigrants in the US; technological advances in equipment, communications, and the Internet; and the economic slowdown.

MAKING BIG BUSINESSES ACT "SMALL"

More and more large companies are emulating small businesses in an effort to improve their own competitiveness, flexibility, and productivity. Beginning in the 1980s and continuing through the present, large companies have been downsizing reducing management layers, corporate staff, and work tasks to become more flexible, resourceful, and innovative like a smaller business. Other firms have sought to make their businesses "smaller" by making their operating units function more like independent small businesses, each responsible for its profits, losses, and resources. Trying to capitalize on small-business success in introducing innovative new products, more and more companies are trying to instill a spirit of entrepreneurship into even the largest firms. In large firms, intrapreneurs, like entrepreneurs, take responsibility for, or "champion," developing innovations of any kind within the larger organization.