SECTION III Launching the Business
· Chapter 8 Building a Powerful Bootstrap Marketing Plan
Building a Bootstrap
Marketing Plan
Marketing is the process of creating and delivering
desired goods and the services for customers and it will be involves all of the
activities which associated with winning and retaining loyal customers. The
“secret” to successful marketing is to understand what your target customers’
needs, demands, and wants are before your competitors can; to offer them the
products and services that will satisfy those needs, demands, and wants; and to
provide customer service, convenience, and value so that they will keep coming
back.
Successful entrepreneurs recognize that modern marketing
strategies also must include techniques such as social media and cause
marketing that pull customers into their companies’ sphere of influence. The
good news is that many of these “pull” strategies are relatively inexpensive
and, when infused with a healthy dose of creativity, are extremely effective.
By using bootstrap marketing strategies—unconventional,
low-cost, creative techniques—small companies can wring as much or more “bang”
from their marketing bucks An effective bootstrap marketing campaign does not
require an entrepreneur to spend large amounts of money, but it does demand
creativity, ingenuity, and an understanding of customers’
A Seven-Sentence Bootstrap (Guerrilla) Marketing Strategy
1.
What is the purpose of your marketing?
2.
What primary benefit can you offer customers?
3.
Who is your target market?
4.
What is the marketing tools will you use to
reach your target market?
5.
What is your company’s niche in the marketplace?
6.
What is your company’s identity in the
marketplace?
7.
How much your budget want to spent in
marketing??
Pinpointing the
Target Market
One of the first steps in building a bootstrap marketing
plan is to identify a small company’s target market Smart entrepreneurs know
they do not have the luxury of wasting resources. They must follow a more
focused, laserlike approach to marketing. Entrepreneurs must identify a
specific market niche that has a specific need or “pain point” and tailor a
solution, be it a product or a service, to address this need
Most successful businesses have well-defined portraits of
the customers they are seeking to attract. From market research, they know
their customers’ income levels, lifestyles, buying patterns, likes and
dislikes, and even their psychological profiles—why they buy. These companies
offer prices that are appropriate to their target customers’ buying power,
product lines that appeal to their tastes, and service they expect. The payoff
comes in the form of higher sales, profits, and customer loyalty. For
entrepreneurs, pinpointing target customers has become more important than ever
before as markets in the United States have become increasingly fragmented and
diverse. Mass marketing techniques no longer reach customers the way they did
30 years ago because of the splintering of the population and the influence
exerted on the nation’s purchasing patterns by what were once minority groups
such as Hispanic, Asian, and African Americans
Determining Customer
Needs and Wants through Market Research
Entrepreneurs who ignore demographic trends and fail to
adjust their strategies accordingly run the risk of becoming competitively
obsolete. Entrepreneurs who stay in tune with demographic, social, and economic
trends are able to spot growing and emerging market opportunities.
The Value of Market Research
Market research is the vehicle for
gathering the information that serves as the foundation for the marketing plan.
It involves systematically collecting, analyzing, and interpreting data
pertaining to a company’s
Small companies cannot afford to
make marketing mistakes because there is little margin for error when funds are
scarce and budgets are tight.
How to Conduct Market Research
Step 1. Define the objective.
Step 2. Collect the data
Step 3. Analyze and interpret the
data.
Step 4. Draw conclusions and act
Plotting a Bootstrap
Marketing Strategy: How to Build a Competitive Edge
To be successful bootstrap marketers, entrepreneurs must be
as innovative in creating their marketing strategies as they are in developing
new product and service ideas
Bootstrap Marketing Principles
The following 14 principles can
help business owners create powerful, effective bootstrap marketing strategies.
BE A NICHE AND USE IT
USE THE POWER OF PUBLIC
DO NOT JUST SELL BUT ENTERTAIN
TOO!
YOU NEED TO STRIVE TO BE UNIQUE
THAN OTHER
COMMUNITY WITH
CUSTOMERS IS IMPORTANT
CONNECT WITH CUSTOMERS ON AN
EMOTIONAL LEVEL
CREATE AN IDENTITY FOR YOUR
BUSINESS THROUGH BRANDING
EMBRACE SOCIAL MARKETING
BE DEDICATED TO SERVICE AND
CUSTOMER SATISFACTION
RETAIN EXISTING CUSTOMERS
BE DEVOTED TO QUALITY
ATTEND TO CONVENIENCE
CONCENTRATE ON INNOVATION
EMPHASIZE SPEED
Conclusion
Small companies lack the marketing budgets of their larger
rivals, but that does not condemn them to the world of second-class marketers
and its resulting anonymity. By using clever, innovative bootstrap marketing
strategies such as the ones described in this chapter, entrepreneurs can put
their companies in the spotlight and create a special connection with their
customers.
· Chapter 9 E-Commerce and the Entrepreneur
E-commerce has created a new way of doing business, one that
is connecting producers, sellers, and customers via technology in ways that
have never been possible before. The characteristic of successful companies are
they are embracing the Internet not merely as another advertising medium or
marketing tool but as a mechanism for transforming their companies and changing
everything about the way they do business. The winners are discovering new
business opportunities, improved ways of designing work, and better ways of
organizing and operating their businesses.
The connection between online and offline business runs both
ways. As a result of offline exposure to a company’s ads, shoppers are likely
to conduct online Web searches of the products and services they see
advertised. In addition, customers value other shoppers’ opinions about the
products they purchase and their shopping experiences with companies
Factors to Consider
before Launching into E-Commerce
Before launching an e-commerce effort, entrepreneurs should
consider the following important strategic issues:
● The way in which a company exploits the Internet’s
interconnectivity and the opportunities it creates to transform relationships
with its suppliers and vendors, its customers, and other external stakeholders
are crucial to its success.
● Success requires a company to develop a plan for
integrating the Internet into its overall business strategy. The plan should
address issues such as Web site design and maintenance, creating and managing a
brand name, marketing and promotional strategies, sales, and customer service.
● Developing deep, lasting relationships with customers
takes on even greater importance on the Internet. Attracting online customers
costs money, and companies must be able to retain their online customers to
make their Web sites profitable. That means that online companies must give
their customers good reasons to keep coming back.
● Creating a meaningful presence on the Internet requires an
ongoing investment of resources—time, money, energy, and talent. Establishing
an attractive Web site brimming with catchy photographs and descriptions of
products is only the beginning.
● Measuring the success of its Internet-based sales effort
is essential if a company is to remain relevant to customers whose tastes,
needs, and preferences are always changing. Using Web analytics to continuously
improve a Web site is essential.
Doing business on the Internet takes more time and energy
than many entrepreneurs expect. The following six factors are essential to
achieving e-commerce success:
● Acquiring customers. The first e-commerce skill that
entrepreneurs must master is acquiring customers, which requires them to drive
traffic to their Web sites. Entrepreneurs must LO1 Understand the factors an
entrepreneur should consider before launching into e-commerce.
develop a strategy for using the many available tools, which
range from display ads and Google Adwords to social media and search marketing.
● Optimizing conversions. Every online entrepreneur’s goal
is to convert Web site visitors into paying customers. The efficiency with
which an online company achieves this goal plays a significant role in
determining its profitability. Unfortunately, more than 97 percent of visitors
to the typical retail Web site do not purchase anything.
● Maximizing Web site performance. Once shoppers find a
company’s Web site, they should encounter a site that downloads quickly, is
easy to navigate, and contains meaningful content they can find quickly and
efficiently. A fast, simple checkout process also is essential. Otherwise,
shoppers will abandon the site, never to return.
● Ensuring a positive user experience. Achieving customer
satisfaction online is just as important as it is offline. Visitors who are
satisfied with a site are 71 percent more likely to purchase from the site (and
67 percent more likely to purchase in the future) than visitors who are
dissatisfied.15 An above-average bounce rate (the percentage of singlepage
visits to a Web site) and shopping cart abandonment rate and a conversion rate
that is below average are signs that a company’s Web site is not providing a
positive customer experience.
● Retaining customers. Just as in offline stores, customer
retention is essential to the success of online businesses. One study reports
that increasing customer retention by 2 percent produces the same financial
impact as reducing costs by 10 percent.16 Entrepreneurs must create an online
shopping experience that engages customers, offers them value, and provides
them with convenience.
● Use Web analytics as part of a cycle of continuous
improvement. Entrepreneurs have a multitude of Web analytics tools (many of
them free) that they can use to analyze the performance and effectiveness of
their Web sites. A Web site is never really “finished”; it is always a work in
progress, and analytics tools provide the data for driving continuous
improvement. Unfortunately, a survey conducted by The Incyte Group and SiteApps
reports that 75 percent of small business owners do not use analytics tools to
measure their Web sites’ performance. “Small businesses know how important
their web presence is for presenting a desirable online identity and attracting
new customers, yet don’t fully understand how to achieve those goals, implement
new technologies, or adapt to new trends as deftly as larger companies,” says
Phillip Klien, CEO of SiteApps.
Ten Myths of
E-Commerce
Myth 1. If I Launch a Site, Customers Will Flock to It
Some entrepreneurs think that once
they set up their Web sites, their expenses end there. Not true! Without
promotional support, no Web site will draw enough traffic to support a
business. With more than 785 million Web sites in existence and 51 million
added each year, getting a site noticed in the crowd has become increasingly
difficult
Myth 2. Online Customers Are Easy to Please
Customers who shop online today
tend to be experienced Internet users whose expectations of their online
shopping experiences are high and continue to rise. Experienced online shoppers
tend to be unforgiving, quickly clicking to another site if their shopping
experience is subpar or they cannot find the products and information they
want. Because Web shoppers are increasingly more discriminating, companies are
finding that they must improve their Web sites constantly to attract and keep
their customers.
Myth 3. Making Money on the Web Is Easy
Promoters who hawk “get-rich-quick”
schemes on the Internet lure many entrepreneurs with the promise that making
money online is easy. It isn’t. Doing business online can be very profitable,
but making money online requires an up-front investment of time, money, and
energy. Success online also requires a sound business strategy that is aimed at
the appropriate target audience and that an entrepreneur must implement
effectively and efficiently—in other words, the same elements that are required
for success offline. Many entrepreneurs are earning healthy profits from their
Web-based businesses, but doing so requires hard work!
Myth 4. Privacy Is Not an Important Issue on the Web
The Internet allows companies to
gain access to almost unbelievable amounts of information about their
customers’ online behavior. Tracking tools monitor customers’ behavior while
they are on a site, giving Internet-based businesses the information they need
to make their Web sites more customer friendly. Many sites also offer visitors
“freebies” in exchange for information about themselves. Companies then use
this information to learn more about their target customers and how to market
to them more effectively. Concern over privacy and the proper use of this
information has become the topic of debate by many interested parties,
including government agencies, consumer watchdog groups, and customers
themselves
Myth 5. “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”
Building a successful e-business is
no different than building a successful brick-and-mortar business. It requires
a well-thought-out strategy. Building a strategy means an entrepreneur must
first develop a clear definition of the company’s target audience and a
thorough understanding of those customers’ needs, wants, likes, and dislikes.
To be successful, a Web site must be appealing to the customers it seeks to
attract just as a traditional store’s design and decor must draw foot traffic.
If a Web site is to become the foundation for a successful e-business, an
entrepreneur must create it with the target audience in mind
Myth 6. The Most Important Part of Any E-Commerce Effort Is Technology
Technology advances have reduced
significantly the cost of launching an e-commerce business. Brian Walker, an
e-commerce expert at Forrester Research, says that a just decade ago, the cost
to launch an online retail business was three to five times higher than it is
today. “The technology to run the site, the physical warehouse, site hosting,
and staff required a significant investment before the site even went live,”
says Walker. 27 Modern e-commerce entrepreneurs can build a Web site for next
to nothing, outsource the tasks of storing and shipping products, lease space
on a server, and rent cloud-computing software to operate their online
businesses—all of which lower the cost and the complexity of starting an online
company.
Myth 7. Customer Service Is Not as Important Online as It Is in a
Traditional Retail Store
The Internet offers the ultimate in
shopping convenience. Numerous studies report that convenience and low prices
are the primary drivers of online shopping. In fact, customers say convenience
is more important than getting the lowest prices when shopping online. 30 With
just a few mouse clicks or taps on the screen of a smart phone or tablet,
people can shop for practically anything anywhere in the world and have it
delivered to their doorsteps within days. As convenient as online shopping is,
customers still expect high levels of service. Unfortunately, some e-commerce
companies treat customer service as an afterthought, an attitude that costs
businesses in many ways, including lost customers and a diminished public
image. The fact is that customer service is just as important (if not more so) on
the Web as it is in traditional brick-andmortar stores.
Myth 8. Flashy Web Sites Are Better Than Simple Ones
Businesses that fall into this trap
pour significant amounts of money into designing flashy Web sites with all of
the “bells and whistles.” The logic is that to stand out online, a site really
has to sparkle. That logic leads to a “more-is-better” mentality when designing
a site. On the Internet, however, “more” does not necessarily equate to
“better.” A Web site that includes a simple design, easy navigation, clear
calls to action on every page, and consistent color schemes show that a company
is putting its customers first. A site that performs efficiently and loads
quickly is a far better selling tool than one that is filled with “cornea
gumbo,” slow to download, and confusing to shoppers
Myth 9. It’s What’s Up Front That Counts
Designing an attractive, efficient
Web site and driving traffic to it are important to building a successful
e-business. However, designing the back office, the systems that take over once
customers place their orders on a Web site, is just as important as designing
the site itself. If the behind-thescenes support is not in place or cannot
handle the traffic from the Web site, a company’s entire e-commerce effort will
come crashing down. The potentially large number of orders that a Web site can
generate can overwhelm a small company that has failed to establish the
infrastructure needed to support the site. Although e-commerce can lower many
costs of doing business, it still requires a basic infrastructure in the
channel of distribution to process orders, maintain inventory, fill orders, and
handle customer service.
Myth 10. My Business Doesn’t Need a Web Site
Nearly one in five small businesses
does not have a Web site, and many of those that do have sites that lack the
ability to make sales online. To online shoppers, especially, these businesses
might as well be invisible because doing business online and offline are
inextricably connected. Today’s shoppers prefer to purchase from companies that
offer a multichannel approach, particularly those that offer in-store pick-up
for online orders and in-store returns for online purchases. 48 A multichannel
approach pays big dividends even for small businesses that consider themselves
completely “local.”
Strategies for
E-Success
People now spend more time online than ever before. Today,
the average American spends more time with digital media than he or she does
watching television. 52 However, converting these digital users into online
customers requires a business to do more than merely set up a Web site and wait
for the hits to start rolling up. Building sufficient volume for a site takes
energy, time, money, creativity, and, perhaps most important, a well-defined
strategy.
·
FOCUS ON A NICHE IN THE MARKET
·
DEVELOP A COMMUNITY
·
LISTEN TO YOUR CUSTOMERS AND ACT ON WHAT YOU
HEAR
·
ATTRACT VISITORS BY GIVING AWAY “FREEBIES”
·
SELL THE “EXPERIENCE”
·
MAKE CREATIVE USE OF E-MAIL BUT AVOID BECOMING A
“SPAMMER”
·
MAKE SURE YOUR WEB SITE SAYS “CREDIBILITY”
·
MAKE THE MOST OF THE WEB’S GLOBAL REACH
Designing a Killer
Web Site
Setting up a shop online has never been easier, but creating
a Web site that drives sales requires time and commitment. To be successful,
entrepreneurs must pay careful attention to the look, feel, efficiency, and
navigability of their Web sites and the impression their sites create with
shoppers. A site’s look and design determine a visitor’s first impression of
the company. “Your Web site isn’t ‘about’ your company,” says one writer. “It’s
an extension of your company.
Tracking Web Results
Web sites offer entrepreneurs a
treasure trove of valuable information about how well their sites are
performing—if they take the time to analyze it. Web analytics, tools that
measure a Web site’s ability to attract customers, generate sales, and keep
customers coming back, help entrepreneurs to know what works—and what
doesn’t—on their sites. Online companies that use Web analytics have an
advantage over those that do not.
Ensuring Web Privacy and Security
Privacy
The Web’s ability to track
customers’ every move naturally raises concerns over the privacy of the
information companies collect. Concerns about privacy and security are two of
the greatest obstacles to the growth of e-commerce. E-commerce gives businesses
access to tremendous volumes of information about their customers, creating a
responsibility to protect that information and to use it wisely. To make sure
they are using the information they collect from visitors to their Web sites
legally and ethically, companies should take the following steps:
·
Develop a company privacy policy for the
information you collect. A privacy policy
·
Post your company’s privacy policy prominently
on your Web site and follow it
·
Take an inventory of the customer data collected
Security
Security For online merchants,
shoppers’ concerns over privacy and security translate into lost sales. One
recent survey reports that half of online shoppers are concerned about their
privacy, security, and safety when they make online purchases. 125 Ninety-eight
percent of the data that cybercriminals target involves customer records stolen
from companies for the purpose of identity theft, which affects 12.6 million
people annually. 126 Every company with a Web site, no matter how small, is a
potential target for hackers and other cybercriminals. Cybercrime has become a
big business, costing U.S. companies an estimated $100 billion per year
· Chapter 10 Pricing and Credit Strategies
Setting prices is a business decision governed
by both art and science—with a touch of instinct thrown in for good measure.
Setting prices for their products and services requires entrepreneurs to
balance a multitude of complex forces, many of them working in opposite
directions. Entrepreneurs must determine prices for their goods and services
that will draw customers and produce a profit. Unfortunately, many small
business owners set prices without enough information about their cost of
operations and their customers. Price is an important factor in building
long-term relationships with customers
Three Potent Forces: Image, Competition, and Value
Price Conveys Image
A company’s pricing policies
communicate important information about its overall image to customers. Pricing
sends an important signal to customers about a company, its brand, its position
in the market, the quality of its products and services, the image it wants to
create, and other important concepts
Competition and Prices
Competitors’ prices can have a
dramatic impact on a small company’s sales. Today, small companies face
competition from local businesses as well as from online businesses that may be
many time zones away. Price transparency due to the Internet, the ease of
mobile shopping, and customers’ persistent post-recession price sensitivity
impose constraints on companies’ ability to raise prices
Focus on Value
Ultimately, the “right” price for
a product or service depends on one factor: the value it provides for a
customer. There are two aspects of value, however. Entrepreneurs may recognize
the objective value of their products and services, which is the price
customers would be willing to pay if they understood perfectly the benefits
that a product or service delivers for them. Unfortunately, few if any
customers can see a product’s or a service’s true objective value; instead,
they see only its perceived value, which determines the price they are willing
to pay for it
Pricing Strategies and Tactics
Introducing a New Product
When pricing any new product, the
owner should try to satisfy three objectives:
1. Get
the product accepted
2. Maintain
market share as competition grows
3. Earn
a profit
Pricing Established Goods and Services
Each of the following pricing
tactics or techniques are part of the toolbox of pricing tactics entrepreneurs
can use to set prices of established goods and services.
§
ODD PRICING
§
PRICE LINING
§
FREEMIUM PRICING
§
DYNAMIC PRICING
§
LEADER PRICING
§
GEOGRAPHIC PRICING
§
DISCOUNTS
§
OPTIONAL-PRODUCT PRICING
§
BUNDLING
Pricing Strategies and Methods for Retailers
As customers have become more price
conscious, retailers have changed their pricing strategies to emphasize value.
This value–price relationship allows for a wide variety of highly creative
pricing and marketing practices. As discussed previously, delivering high
levels of recognized value in products and services is one key to retail
customer loyalty.
Pricing Concepts for Manufacturers
For manufacturers, the pricing
decision requires the support of accurate, timely accounting records. The most
commonly used pricing technique for manufacturers is cost-plus pricing. Using
this method, a manufacturer establishes a price that is composed of direct
materials, directPricing Strategies and Methods for Service Firms labor,
factory overhead, selling and administrative costs, plus a desired profit
margin. Figure 10.5 illustrates the cost-plus pricing components
The Impact of Credit on Pricing
Credit Cards
Companies that accept credit cards
incur additional expenses for offering this convenience, however. Businesses
must pay to use the system At Marcia and Dean Harris’s Itzy Bitzy Ritzy Shop, a
store in Norwalk, Connecticut, that sells furniture designed for small spaces,
shoppers with mobile devices use Square Wallet to make their furniture
purchases quickly and easily, and the money shows up in the store’s bank
account the next day.
Installment Credit
Small companies that sell
big-ticket consumer durables—such as major appliances, cars, and
boats—frequently rely on installment credit to support their sales efforts. For
some businesses, such as furniture stores and used car dealerships, this
traditionally has been a major source of income
Trade Credit
Companies that sell small-ticket
items frequently offer their customers trade credit—that is, they create
customer charge accounts. Before deciding to use trade credit as a competitive
weapon, business owners must make sure that their companies’ cash position is
strong enough to support the additional pressure credit sales create.
· Chapter 11 Creating a Successful Financial Plan
Basic Financial Statements
The Balance Sheet
Like a digital camera, the balance
sheet takes a “snapshot” of a business’s financial position, providing owners
with an estimate of its worth on a given date. Its two major sections show the
assets the business owns and the claims creditors and owners have against those
assets. The balance sheet is usually prepared on the last day of the month.
The Income Statement
The income statement (also called
the profit-and-loss statement) compares expenses against revenue over a certain
period of time to show the firm’s net income (or loss). Like a digital video
recorder, the income statement is a “moving picture” of a company’s
profitability over time. The annual income statement reports the bottom
line of the business over the fiscal or calendar year.
The Statement of Cash Flows
The statement of cash flows show
the changes in a company’s working capital from the beginning of the accounting
period by listing both the sources of funds and the uses of those funds. Many
small businesses never need to prepare such a statement; instead, they rely on
a cash budget, a less formal managerial tool you will learn about in Chapter 12
that tracks the flow of cash into and out of a company over time. Sometimes, however,
creditors, lenders, investors, or business buyers may require this information.
Creating Projected Financial Statements
Projected Financial Statements for a Small
Business
One of the most important tasks
confronting the entrepreneur launching a new enterprise is to determine the
amount of funding required to begin operation as well as the amount required to
keep the company going until it begins to generate positive cash flow.
§
THE PROJECTED INCOME STATEMENT
§
THE PROJECTED BALANCE SHEET
§
LIABILITIES
Break-Even Analysis
Another key component of every
sound financial plan is a break-even (or cost-volume-profit) analysis. A small
company’s break-even point is the level of operation (typically expressed as
sales dollars or production quantity) at which it neither earns a profit nor
incurs a loss. At this level of activity, sales revenue equals expenses—that
is, the firm “breaks even.
Calculating the Break-Even Point
1. Forecast
the expenses the business can expect to incur.
2. Categorize
the expenses estimated in step 1 into fixed expenses and variable expenses.
3. Calculate
the ratio of variable expenses to net sales.
4. Compute
the break-even point by inserting this information into the following formula:
Break
even sales ($) = Total fixed cost / Contribution margin expressed as a
percentage of sales
· Chapter 12 Managing Cash Flow
Cash Management
A survey by American Express OPEN
Small Business Monitor reports that 52 percent of small business owners say
they experience problems managing cash flow. 4 Managing cash flow is a
universal problem for entrepreneurs; a recent survey of Britain’s small and
medium-sized businesses reports that 46 percent of owners say they had suffered
at least one disruption to their companies’ cash flow, most often caused by
customers paying their bills late or not at all.5 Although cash flow is a
common concern for almost every business owner, the sluggish recovery from the
Great Recession has put excess strain on many companies’ cash flow
The “Big Three” of Cash Management
It is unrealistic for business
owners to expect to trace the flow of every dollar through their businesses.
However, by concentrating on the three primary causes of cash flow problems,
they can dramatically lower the likelihood of experiencing a devastating cash
crisis. The “big three” of cash management are accounts receivable, accounts
payable, and inventory. These three variables are leading indicators of a company’s
cash flow.
Accounts Receivable
Selling merchandise and services
on credit is a necessary evil for most small businesses. Many customers expect
to buy on credit, and business owners extend it to avoid losing customers to
competitors. However, selling to customers on credit is expensive; it requires
more paperwork,
Accounts Payable
Entrepreneurs should strive to
stretch out payables as long as possible without damaging their companies’
credit rating. Otherwise, suppliers may begin demanding prepayment or
cash-on-delivery (C.O.D.) terms, which severely impair a company’s cash flow,
or they may stop doing business with it altogether
Inventory
Offering customers a wider variety
of products is one way a business can outshine its competitors, but product
proliferation increases the need for tight inventory control to avoid a cash crisis.
The typical grocery store now stocks about 42,700 items, three times as many as
it did 20 years ago, and many other types of businesses are following this
pattern.
Conclusion
Successful owners run their
businesses “lean and mean.” Trimming wasteful expenditures, investing surplus
funds, and carefully planning and managing the company’s cash flow enable them
to compete effectively. The simple but effective techniques covered in this
chapter can improve
SECTION IV Putting
the Business Plan to Work: Sources of
Funds
· Chapter 13 Sources of Financing: Equity and Debt
Equity Capital versus Debt Capital
Equity
capital represents the personal investment of the owner (or owners) in a
business and is sometimes called risk capital because these investors assume
the primary risk of losing their funds if the business fails. If a venture
succeeds, however, founders and investors share in the benefits, which can be quite
substantial
Debt
capital is the financing an entrepreneur borrows and must repay with
interest. Very few entrepreneurs have adequate personal savings to finance the
total start-up costs of a small business; many of them must rely on some form
of debt capital to launch their companies.
Sources of Equity Financing
1. Personal Savings
The
first place entrepreneurs should look for start-up money is in their own
pockets. It’s the least expensive source of funds available! A start-up has
very little if any financial history, and investors view investments in
early-stage companies as high risk. Therefore, the earlier in the life of the
company that an entrepreneur must raise capital, the more he or she will likely
have to give up in ownership to secure that financing.
2. Friends and Family Members
Although most entrepreneurs look to their own bank accounts first to
finance a business, few have sufficient resources to launch their businesses
alone. After emptying their own pockets, where should entrepreneurs turn for
capital? The second place most entrepreneurs look is to friends and family
members who might be willing to invest in (or lend to) a business venture.
Because of their relationships with the founder, these people are most likely
to invest. Often they are more patient than other outside investors and are
less meddlesome in a business’s affairs (but not always!) than many other types
of investors.
3. Crowd Funding
Investing in entrepreneurial businesses has been the realm of those with
the knowledge and financial ability to assume the risks that come with such
investments. Known as accredited investors, these people must have a sustained
net worth (excluding their primary residence) of at least $1 million or annual
income of at least $200,000. There are between 5 million and 7.2 million
accredited investors in the United States; however, only about 756,000 of these
accredited investors have made direct investments in entrepreneurial businesses.
4. Angels
After dipping into their own pockets and convincing friends and relatives
to invest in their business ventures, many entrepreneurs still find themselves
short of the seed capital they need. Frequently, the next stop on the road to
business financing is private investors. These private investors (angels) are
wealthy individuals, often entrepreneurs themselves, who are accredited
investors and choose to invest their own money in business start-ups in
exchange for equity stakes in the companies
5. Venture Capital Companies
Venture capital companies are private, for-profit organizations that
assemble pools of capital and then use them to purchase equity positions in
young businesses they believe have highgrowth and high-profit potential,
producing annual returns of 300 to 500 percent within five to seven years. More
than 400 venture capital firms operate across the United States today,
investing billions of dollars (see Figure 13.3) in promising small companies in
a wide variety of industries.
6. Corporate Venture Capital
Large
corporations have gotten into the business of financing small companies and
invest in businesses for both strategic and financial reasons. More than 300
large corporations across the globe, including Google, BMW, Comcast, Amazon,
Qualcomm, Intel, General Electric, Dow Chemical, Cisco Systems, UPS, Wal-Mart,
Unilever, and Johnson & Johnson, invest in small companies, usually
companies that are in the later stage of growth and because of their maturity
are less risky.
Sources of Debt Financing
o
Commercial Banks
o
Short-Term Loans
o
Intermediate- and Long-Term Loans
Other Methods of Financing
1. Factoring Accounts Receivable
Instead of carrying credit sales on its own books (some of which may
never be collected), a small business can sell outright its accounts receivable
to a factor. A factor buys a company’s accounts receivable and pays for them in
two parts. The first payment, which the factor makes immediately, is for 50 to
80 percent of the accounts’ agreed-on (and usually discounted) value. The
factor makes the second payment of 15 to 18 percent, which makes up the balance
less the factor’s service fees, when the original customer pays the invoice.
High interest rates (often 36 percent or more) make factoring a more expensive
type of financing than loans from either banks or commercial finance companies,
but for businesses that cannot qualify for those loans, it may be the only
choice. Factoring volume totals more than $101 billion per year.
2. Leasing
Leasing is another common bootstrap financing technique. Today, small
businesses can lease virtually any kind of asset, including office space,
telephones, computers, and heavy equipment. By leasing expensive assets, the
small business owner is able to use them without locking in valuable capital
for an extended period of time. In other words, entrepreneurs can reduce the
long-term capital requirements of their businesses by leasing equipment and
facilities and are not investing their capital in depreciating assets. In
addition, because no down payment is required and because the cost of the asset
is spread over a longer time (lowering monthly payments), a company’s cash flow
improves.
3. ROBS
Thousands of aspiring entrepreneurs, particularly Baby Boomers, are
tapping into their retirement accounts to fund business start-ups or
acquisitions of existing small businesses. Many of them are turning to
Rollovers as Business Startups (ROBS) as a means of using their retirement savings
to fund their businesses. By using a 401(k) rollover, entrepreneurs are able to
move existing retirement funds into a start-up. The tax laws governing ROBS are
complex, and if not set up properly, this form of funding can lead to
significant penalties by the IRS. Recent IRS cases show increased scrutiny of
these funding plans, so entrepreneurs should exercise extreme care when using a
retirement account rollover to fund a business. Once established, ROBS require
entrepreneurs to meet certain reporting and fiduciary responsibilities
4. Merchant Cash Advance
A merchant cash advance is used by small businesses to help finance
working capital needs. The provider of the merchant cash advance prepurchases
credit and debit card receivables at a discount. Each time a sale is made, a
percentage of the card receivable is forwarded to the cash advance provider or
purchaser until all of the purchased receivables are paid off. Merchant cash
advances are most often used for the purchase of new equipment, purchasing
inventory, expansion or remodeling, payoff of debt, and emergency funding. Like
factoring accounts receivable, merchant cash advances are an expensive source
of funding.
5. Peer-to-peer Lending
New online funding options are emerging to help small businesses with
credit. Peer-to-peer loans are Web-based vetting platforms, such as Lending
Club, Prosper, and Fundation, that create an online community of lenders who
provide funding to creditworthy small businesses. Lending Club reports that it
is making more than $120 million in loans to small businesses each month!
Interest rates can range from less than 7 percent to more than 25 percent.
Lending Club has a maximum loan limit of $35,000. Lydia Aguinaldo, owner of
Pines Home Health Care Services, in Broward County, Florida, secured a $250,000
loan from Fundation at a 19 percent interest rate payable over three years
6. Loan Brokers
Loan brokers specialize in helping small businesses find loans by tapping
into a wide network of lenders that include SBA lenders, working capital
financing, real estate l oans, bridge
financing, franchise financing, merchant cash advances, and asset-based
lending. Most loan brokers do not charge a fee for the initial evaluation and
consulting on financing options for a small business. Loan brokers take a small
percentage of the total loan amount, usually 1 to 2.5 percent, once the
business is successfully financed. MultiFunding, Biz2Credit, and Loan Finder
are a few of the larger companies offering these services to small business
clients.
7. Credit Cards
Unable to find financing elsewhere, many entrepreneurs launch their
companies using the fastest and most convenient source of debt capital
available: credit cards. A study by the Kauffman Foundation reports that 7
percent of the capital for start-up companies comes from credit cards. Prudent entrepreneurs rely on credit cards
only for making monthly purchases that they are certain can be paid off when
the credit card bill comes due.
· Chapter 14 Choosing the Right Location and Layout
Location: A Source of Competitive Advantage
Choosing the Region
The first step in selecting the
best location is to focus on selecting the right region. This requires
entrepreneurs to look at the location decision from the “30,000-foot level,” as
if he or she were in an airplane looking down. In fact, in the early days of
their companies, Sam Walton, founder of retail giant Wal-Mart, and Ray Kroc,
who built McDonald’s into a fast-food giant, actually used private planes to
survey the countryside for prime locations for their stores.
Choosing the State
Every state has an economic
development office working to recruit new businesses. Even though the
publications produced by these offices will be biased in favor of locating in
that state, they still are an excellent source of information and can help
entrepreneurs assess the business climate in each state. Some of the key issues
to explore include the laws, regulations, and taxes that govern businesses,
costs of operation, workforce availability, and incentives or investment
credits the state may offer to businesses that locate there.
Choosing the City
§
POPULATION TRENDS
§
COMPETITION
§
CLUSTERS
§
COMPATIBILITY WITH THE COMMUNITY
Location Criteria for Retail and Service Businesses
Trade Area Size
Every retail and service business should determine the extent of its
trading area, the region from which a business can expect to draw customers
over a reasonable time span.
Retail Compatibility
Shoppers tend to be drawn to clusters of related businesses.
Degree of Competition
The size, location, and activity of competing businesses also influence
the size of a company’s trading area
The Index of Retail Saturation
One of the best measures of the level of saturation in an area is the
index of retail saturation (IRS), which takes into account both the number of
customers and the intensity of competition in a trading area.
Location Options for Retail and Service Businesses
Central Business District
The central business district
(CBD) is the traditional center of town—the downtown concentration of
businesses established early in the development of most towns and cities
Neighborhood Locations
Small businesses that locate near
residential neighborhoods rely heavily on the local trading area for business
Shopping Centers and Malls
Until the early twentieth century,
central business districts were the primary shopping venues in the United
States
The Location Decision for Manufacturers
Foreign Trade Zones
Foreign trade zones can be an
attractive location for small manufacturers that engage in global trade and are
looking to reduce or eliminate the tariffs, duties, and excise taxes they pay
on the materials and the parts they import and the goods they export
Business Incubators
For many start-up companies, a
business incubator may make the ideal initial location. A business incubator is
an organization that combines low-cost, flexible rental space with a multitude
of support services for its small business residents
Layout and Design Considerations
Once an entrepreneur chooses the
best location for his or her business, the next issue to address is designing
the proper layout for the space to maximize sales (retail) or productivity
(manufacturing or service). Layout is the logical arrangement of the physical
facilities in a business that contributes to efficient operations
Layout: Maximizing Revenues, Increasing Efficiency, or Reducing Costs
The ideal layout for a building
depends on the type of business it houses and on the entrepreneur’s strategy
for gaining a competitive edge. An effective layout can reinforce a brand and contribute
to a company’s desired image.
Layout for Retailers
Retail layout is the arrangement
of merchandise and displays in a store. For retailers, layout is all about
understanding a company’s target customers and crafting every element of a
store’s design to appeal to those customers
Layout for Manufacturers
Manufacturing layout decisions
take into consideration the arrangement of departments, work stations,
machines, and stock-holding points within a production facility
· Chapter 15 Global Aspects of Entrepreneurship
Why Go Global?
Failure to cultivate global markets
can be a lethal mistake for modern businesses, whatever their size. A few
decades ago, small companies had to concern themselves mainly with competitors
who were perhaps six blocks away; today, small companies face fierce
competition from companies that may be six time zones away! As a result,
entrepreneurs find themselves under greater pressure to expand into
international markets and to build businesses without borders.
Strategies for Going Global
Small companies pursuing a global
presence have 10 principal strategies from which to choose: creating a presence
on the Web, relying on trade intermediaries, establishing joint ventures,
engaging in foreign licensing arrangements, franchising, using countertrading
and bartering, exporting products or services, establishing international
locations, importing and outsourcing, and becoming an expat entrepreneur.
Barriers to International Trade
o
Domestic Barriers
o
International Barriers
o
Political Barriers
o
Business Barriers
o
Cultural Barriers
· Chapter 16 Building a New Venture Team and Planning for the Next Generation
To be successful, an entrepreneur
must assume a wide range of roles, tasks, and responsibilities, but none is
more important than the role of leader. Some entrepreneurs are uncomfortable
assuming this role, but they must learn to be effective leaders if their
companies are to grow and reach their potential. Leadership is the process of
influencing and inspiring others to work to achieve a common goal and then
giving them the power and the freedom to achieve it
Building an Entrepreneurial Team: Hiring the Right Employees
How to Hire Winners
·
COMMIT TO HIRING THE BEST TALENT
·
ELEVATE RECRUITING TO A STRATEGIC POSITION IN
THE COMPANY
Create Practical Job Descriptions and Job
Specifications
Business owners must recognize
that what they do before they interview candidates for a position determines to
a great extent how successful they will be at hiring winners
Effective Interview
·
Involve others in the interview process
·
Develop a series of core questions and ask them
of every candidate
·
Ask open-ended questions (including on-the-job
“scenarios”) rather than questions calling for “yes or no” answers
·
Create hypothetical situations that candidates
would be likely to encounter on the job and ask (or better yet watch) how they
would handle them.
·
Ask candidates to describe a recent success and
a recent failure and how they dealt with them
·
Arrange a “noninterview” setting that allows
several employees to observe the candidate in an informal setting.
Contact References and Conduct a Background
Entrepreneurs should take the time
to conduct background checks and contact candidates’ references. Background
checks are inexpensive to perform but can save companies many thousands of
dollars by identifying “red flags” in candidates’ backgrounds, helping them
avoid making expensive hiring mistakes
Creating an Organizational Culture That Encourages Employee Motivation
and Retention
Culture
A company’s culture is the
distinctive, unwritten, informal code of conduct that governs its behavior,
attitudes, relationships, and style.
Job Design
Over the years, managers have
learned that the job itself and the way it is designed is an important factor
in a company’s ability to attract and retain quality workers.
Motivating Employees to Higher Levels of Performance:
Rewards and Compensation
Another important aspect of
creating a culture that attracts and retains quality workers is establishing a
robust system of rewards and compensation.
Management Succession: Passing the Torch of Leadership
More than 80 percent of all
companies in the world are family owned, and their contributions to the global
economy are significant. Family-owned businesses account for 70 to 90 percent
of global GDP.
Exit Strategies
Most family business founders want
their companies to stay within their families, but in some cases, maintaining
family control is not practical.
Selling to Outsiders
selling a business to an outsider
is no simple task. Done properly, it takes time, patience, and preparation to
locate a suitable buyer, strike a deal, and make the transition.
Selling to Insiders
When entrepreneurs have no family
members to whom they can transfer ownership or who want to assume the
responsibilities of running a company, selling the business to employees is
often the preferred option. In most situations, the options available to owners
are a leveraged buyout and an employee stock ownership plan.
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