435

Small Business
Management

By
David LIN
 The component of this course
Part A Getting Started
2. Introduction to small business
3. Finding an opportunity
4. Information and assistance
5. The legal environment
6. Franchising
7. Planning and the business system
 The component of this course
Part B Financial management
2. Financial information
3. Cash flow
4. Financing the business
5. Profit planning
 The component of this course

Part C Marketing management

2. Marketing strategy
3. Advertising sales and customer service
4. Export marketing
 The component of this course

Part D Operations management

2. Retail and service operations
3. Manufacturing operations
4. Employing staff
5. Computers and the internet
6. Troubleshooting and recovery
 Lecture 1

1. Introduction to small business

2. Finding an opportunity
 1. INTRODUCTION TO SMALL
BUSINESS
 Pros and cons of self-employment
 Personal characteristics and success
 Management skills and experience
 Start-up sequence
 Family businesses
 Women in small business
 Risk of failure
 Pros and cons of self-employment
 Advantages
- You can be your own boss, you can be independent, and
you can exercise your own talents and capabilities.
- You will have the chance to make money- maybe even a
great deal of money- and you will not be dependent on a
fixed wages or salary.
- You will have the opportunity to achieve a feeling of
personal worth, accomplishment and recognition.
- You can develop your own ideas, products and services.
- You will be able to work at something you enjoy, and you
will perhaps succeed where others have not.
- You may achieve economic security for yourself and your
family.
- You may be able to provide something of value to the
community.
 Pros and cons of self-employment
 Disadvantages
- You can fail and see your money, as well the money your
friends or relatives may have invested in your business.
- You will have to work hard, perhaps as long as 15 hours a
day for many weeks at a time, meaning that time for family
and friends will be difficult to find.
- Your income may be uncertain and could fluctuate
tremendously as a result of factors that you cannot control.
- You will face the unrelenting pressure of having to make
decisions and solve problems that may call for expertise
beyond your current capabilities.
- You will still have a boss- in fact you will have many
bosses, including customers, suppliers, government
agencies and your banker.
- You may eventually hate your business in the same way
that other people hate their jobs, and you may fins it
difficult to get without incurring an unacceptable loss.
Personal characteristics and success
 Drive and energy  Self- confidence
 Long- term involvement  Persistence
 Goal-setting  Sense of time
 Moderate risk-taking  Dealing with failure
 Using feedback  Initiative
 Tolerating uncertainty  Using outside resources
 Innovation  Assertiveness
 Opportunity recognition  Ambition
 Competitiveness  Independence
 Resourcefulness  Determination
 Task orientation  optimism
 Management skills and experience
Marketing skills:
 Business location  Sales forecasting
 Product life-cycle  Competitor evaluation
 Marketing research  Guarantees and service
 Marketing strategy  Distribution channels
 Product positioning  Packaging and
 Store layout presentation
 Pricing and discounts  Personal selling
 Credit terms  Advertising and promotion
 merchandising
 Management skills and experience
Financial skills:
 Profit planning  Profit and loss
 Budgeting statement
 Cash flow  Balance sheet
management  Ratio analysis
 Break-even analysis  Debtor control
 Contribution analysis  Creditor control
 Book-keeping  Cost control
 Types of finance  Payroll
 Applying for finance  Tax planning
 Banking relationships  Using an accountant
 Management skills and experience
Operating skills:
 Purchasing  Improving productivity
 Stock control  Quality control
 Warehousing and storage  Scheduling and
 Plant and equipment workflow
 Transport and freight
 Recruitment and selection
 Computer systems
 Regulations and awards
 Negotiating
 Staff training
 Problem-solving
 supervising
 Decision-making
 Start-up sequence
 Step1: Examine your motivation for going
into business
 Step2: Choose a business that suits you
 Step3: Evaluate the feasibility of your chose
business
 Step4: List all your start-up requirements
 Step5: Develop a business plan
 Family businesses
Family goals
- Provide opportunities to
relatives who are in need
- Allocate ‘allowances’ in
accordance with ‘need’
- Promote sibling equally
- Provide education and
training for individual
development
Business goals
- Hire only the most
competent people
- Allocate salaries and
benefits in accordance
with performance
- Identify high performers for
promotion
- Provide education and
training to match the
needs of the business
 Risk of failure

 A desire to be one’s own boss

 A desire for financial independence
 A dislike of working with others
 A disdain for bureaucracy and paperwork
 A desire for creative freedom
 Risk of failure
 The owner relies on the advice of family and
friends
 The small business operator gets worn out
 Cause too much family pressure on the owner
 The owner is not fully aware of the nature of the
marketplace
 The owner does not appreciate the importance of
timely and accurate financial information
 2. FINDING AN OPPORTUNITY
 Types of small business
 Sources of business ideas
 Reality testing
 Establishing a new business
 Buying an existing business
 Working from home
 Types of small business
services:
 Hotels and motels  Accountants
 Medical doctors  Solicitors
 Car hire  Appliance repairers
 Financial planners  Dentists
 Chimney sweeps  Employment agencies
 Cinemas  Hairdressers
 Insurance agents  Food services
 House painters  Gardening services
 Real estate agents  Childcare centers
 Bed and breakfast  webmasters
 Translation services
 Types of small business
Retailing:
 Groceries  Appliance stores

 Car dealers  Music shops

 Petrol stations  Shoe shops

 Clothing stores  Jewellery stores

 Hardware stores  Sports shops

 Chemists  Newsagents

 Furniture stores  Greengrocers

 Bottle shops  Butchers

 Types of small business
Manufacturing:
 Obtaining an adequate and consistent
supply of raw materials
 Choosing a location that maximizes
proximity to raw materials, labour, transport
and customers
 Product quality and quality control
 Changes in consumer tastes, particularly for
producers of a single product or product line
 Inability to change
 Types of small business
Manufacturing:
 Boat builders  Joineries
 Saw-millers  Cheese makers
 Garment makers  Quick print shops
 Furniture makers  Bottling plants
 Wineries  Bakeries
 Jewellery makers  Wholesale nurseries
 Types of small business
Wholesaling
 Assuming a substantial part of the capital
investment in warehouse capacity and inventory to
service a variety of retailers
 Having many products available near retail outlets
to meet immediate consumer demand
 Extending credit to retailers, enabling them to
carry a more comprehensive inventory
 Co-operating with retailers in sales promotion
campaigns
 Providing retailers with advice on such matters as
market research, merchandise display, new
product lines and inventory control
 Types of small business
Wholesaling
 Building products  Beer, wine and spirits
 Textiles  Plumbing supplies
 Clothing  Jewellery
 Hardware  Medical supplies
 Groceries  Magazines
 Appliances  Petroleum products
Sources of business ideas
product / service and market ideas
 Spotting market trends
 The proportion of people aged over 65 is rapidly increasing
 A decreasing proportion of the population is working
 The proportion of people with formal educational
qualifications is rising
 The proportion of women in the workforce has increased
dramatically
 Changes are occurring to our value system
 Convenience is an increasing feature of the goods and
services demanded
 New Zealand companies have been streamlining their
operations focusing on core business activities
 Reality testing
 Sector characteristics
 Personal fit
 Essential strategic factors
 Financial feasibility
 Essential strategic factors
Some examples of strategic factors:
 The need for a certain type or size of strategic
factors
 Availability of certain productions
 Dependence on a highly reliable source of
supply
 A certain size, location or layout of facilities
 Provision of essential services such as
telecommunications or transport
 Assured finance on reasonable terms
 Highly skilled or experienced staff
 Essential strategic factors
Uncontrollable factors:

 Competition  Legal restrictions

 Economic conditions  Government regulations
 Social and cultural trends  Industrial relations
 Technology  taxation
 Essential strategic factors
Controllable factors:

 Purchasing  Marketing
 Production  Finance
 staffing  Products/services
1.
Financial feasibility
What are your annual living expenses?
Say, $30,000
2. What is the gross income (before tax) that is required to leave you with
$30,000?
At 33% tax rate = $30,000 * 1.5 = $45,000
3. How much money will be invested in assets for the business?
Say, $50.000
4. What rate of return should you get on the assets given the riskiness of
small business?
Say, 15%
5. How much return should you receive annually?(step3 times step4)
$50,000 * 15% = $7,500
6. What income do you require from this business?(step2 plus step5)
$45,000 + $7,500 = $52,500
7. For this type of business what is the average net profit as a percentage of
sales? This figure can be obtained from your local BIZinfo, a trade
association or your accountant.
Say, 10%
8. What amount of sales is necessary to generate the level of income you
require?(step6 divided by step7)
$52,500 / 10% = $525,000
 Financial feasibility
1. How many households are in the target market area and what are
their characteristics? This information is available from Statistics
New Zealand.
Say, 5,000 households
2. What is the average weekly household expenditure for this type of
product or service? Consult the Statistics New Zealand Household
Expenditure Survey.
Say, $5.26 per week or about $273 per year
3. What is the total potential for sales of this product or service in this
target market? (step1 times step2)
5,000 households * $273 per year = $ 1,365,000 per year
4. What is the actual sales for this product or service in this target
market? To determine how much of the market is currently held by
competitions, consult the Statistics New Zealand Business Activity
Statistics.
Say, $850,000 per year
5. What is the potential for sales in my business? (step3 minus step4)
$1,365,000 - $850,000 = $515,000 per year
 Establishing a new business
 Advantages
- Match the business to your own goals
- Innovate when you have the flexibility to select
your target market, product and service strategy,
competitive strategy, location and facilities
- Design the business around the policies and
procedures that you select and you can train the
staff you own way
- Avoid the ‘goodwill’ expense of buying an existing
- Not inherit any pre-existing ill will from previous
customers suppliers, creditors or employees
 Establishing a new business
 Disadvantages
- Highest risk of failure
- Takes time and energy to create an image, build
patronage, work the bugs out of new systems and
procedures, and reach a break-even level of sales
- Staff need to be found, contacts developed with
suppliers, and a marketing strategy implemented
- The added risks that investment capital customers
may be more difficult to attract than you anticipate
- Run a significant risk that the time-lag between
investment and cash flow will be too long
 Establishing a new business
 Critical factors
- Identifying a target market and its basic needs
- Assessing the size of the target market and its ability to
sustain a profitable business
- Determining the amount and availability of start-up capital
- Devising a product strategy that matches the target market
- Devising a competitive strategy that can gain protect a
share of the market
- Finding a suitable location and physical facilities
- Selecting and training staff
- Obtaining equipment, fixtures and supplies
- Determining and meeting legal obligations
- Developing a carefully considered business plan
 Buying an existing business
 Advantages
- Not only receive immediate income from sales o
existing customers, but you will also save the time
and effort needed to equip and stock the business
yourself
- Have a proven location, established relationships
with suppliers and creditors, and existing
employees
- It is much simpler to finance a single-purchase
transaction, and a proven track record makes an
existing business easier to finance
 Buying an existing business
 Disadvantages
- You could pay too much for the business if you
misjudge its value, and there could be unexpected
expenses if the business turns out to be run-down.
If the previous owner had a bad reputation, you are
likely to inherit ill will among some customers and
poor morale among staff