BUS 280 midterm guide - Summary Entrepreneurship PDF

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Review questions for BUS 280 midterm...

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Short Answer Questions for Exam #1 Format of the exam: Three questions will be chosen in advance by your instructor from those listed below. From the remaining, three additional questions will be drawn at the start of the exam.

Chapter 1 1. What is the definition of a small business in terms of its characteristics?  Number of employees under 100  Revenue- retailing 3.5m to 13.5m, services 3.5m to 14.5m, construction 7m to 17m  Profits net operating under $300,000 for reduced tax rate  Management-ownership structure any two of: o Independent management (owner as manager) o Local area of operations o Owner-supplied capital o Relatively small size within its industry 2. Describe how small businesses contribute to a country’s economy.

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Labour intensity – more people for the output Innovation enablers – personal passion, customer connection, flexibility, experimentation, resource limitation, information sharing. See page 24 for productivity and profitability factors enjoyed by small businesses Made (and owned) in Canada Social contributions

Chapter 2 3. There are a number of advantages and disadvantages of owning and running a small business. List and briefly discuss three or four of each.

Advantages of small business ownership  Independence  More Personal Contact with People  Flexibility  Skill Development  Potential Financial Rewards  Challenge and feeling of personal accomplishment  Enjoyment Disadvantages  Risk  Stress  Limited Financial Rewards  Need for Many Abilities (skills such as accounting, finance, marketing, and personnel management)  People conflicts  Time demands

4. Small businesses often fail, sometimes due to external factors and sometimes due to internal factors. List six reasons why a business can fail and indicate whether it is an internal or external factor. External Factors Internal (Company) Factors  Economic downturns  Poor management information system  Competitive inroads  Poor expense controls  Loss of customers  Overreliance on a few key customers  Loss of suppliers  Lack of financial skills (cash flow, use of funds)  Change in laws or regulations  Too much debt  Does not reach out for help and advice 5. Entrepreneurs are not necessarily good managers, and vice versa. What characteristics or skills do entrepreneurs process that are different from those that make a good manager. List three and briefly discuss.

Chapter 3 6. List the four stages in the entrepreneurial process and describe each stage.

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Identify and evaluate an opportunity Develop the business plan Determine resource requirements (not just $) Manage the ongoing business

7. When conducting a quantitative assessment of a business, one thing you should do is figure out the sales potential. There are two methods to do this. Name and describe the process for each method.

Build up method  divide market into segments (on some basis) and estimate sales per time period. Add them up.  Look at similar businesses (NAICS, Stats Canada aggregate income statements) Breakdown method  Start with the total population of interest and remove those segments that are less likely to purchase  See table 3.3 for an example

8. There are circumstances in which a small business may have a competitive advantage over its larger competitors. A small business may have a competitive advantage when… (list 4 sources)

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Personal attention is crucial Owner contact with employees is essential for motivation and work quality The product may appeal only to a local or niche market Flexibility is required to respond to erratic demand, perishability, or personalization A product service is labour intensive more than capital intensive A business can utilize special financial, tax, counselling, or other government services

9. Where does a prospective entrepreneur get ideas for the business. List and briefly explain 5.

Work experience (occupation)  Most common source of ideas  Improve a process  Do what you know  Use work contacts Hobbies  Similar to work experience  Do what you love Experience  As a consumer  Fixing a problem in life  Serendipitous realizations Observations  Read, listen, watch – consumers, industry happenings, competitors, social trends  Where are gaps? - competitive, technological, product criteria, market segments Existing Products and Services  Improvements on the features of existing products  Targeting a different market segment with the same or modified product Deliberate Searches  Formal or informal monitoring/researching  Focus groups  Brainstorming  See the idea-generation table on our D2L 10. According to the text, there are 3 basic ways to enter a market. List them and describe each.

1. Offer a totally new product  Invent something brand new  Ride a trend 2. Product development or Market development (Ansoff)  Market development – same product, different customer segment  Product development – different or modified product to same customer segment

3. Offer a product or service similar to those existing in the same market  Focus on a differentiating advantage that is salient to a niche or segment  Differentiating factors include: lower price, better service, higher quality, specific features desired… 11. You have been considering the possibility of running your own business. You have a business idea. Before you start, what are the questions you should ask yourself to qualitatively assess your suitability for this opportunity?

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Does the business align with your goals and expectations? Is this the right kind of work for your skill set (administration, marketing, and finance) Is this the right kind of work for your temperament? Is this the lifestyle you want (long hours, never being “off”, balancing other life demands) Do you know the business?

Chapter 4 12. Discuss some of the pros and cons of starting a business from scratch.

advantages and requirements:      

Owner can define the business type and parameters (target market selection, size and extent of operation, positioning) Facilities can be designed and chosen; not necessary to go with ones already designed The location can be chosen Employees can be selected and trained in a manner suited to the business Information systems and operating and accounting systems can be chosen Expenses may be able to be better controlled

Disadvantages may include:    

Lack of access to historical business information that can help with understanding the business and planning for the future Time required to establish contacts and obtain financing Difficulty with starting up the business from scratch, working out the “bugs” Risk of an unproven concept – size of market, 4P decisions, PLC stage and diffusion of innovation, learning curves

Chapter 5 13. Bill Charters and his cousin Tom have been working in the restaurant business since they graduated from culinary school. They want to run their own restaurant and are considering either purchasing an existing restaurant (Bill’s preference) or being a franchisee (Tom’s choice). With your newly acquired knowledge, advise Bill and Tom as to the major pros and cons of both options. Provide at least 3 pros and cons for each. Advantages of Purchasing  Reduction of Risk  Reduction in Start-up Time  Financing  Location

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Established Market Structure Cost Existing Employees More Opportunity to Be Creative Reduce the Number of Competitors

Disadvantages of Purchasing  Marginal Success Record  Physical Facilities  Personnel  Inventory  Accounts Receivable  Financial Condition  Market and Key Customers  Overvalued  Paying Too Much for Goodwill Advantages of franchising Proven Market for the Product or Service Known Market & Brand Recognition Services the Franchisor May Provide  Selection of Location  Purchase or Construction of Site, Buildings, and Equipment  Provision of Financing  Standardized Methods of Operating  Advertising  Purchasing Advantages  Training  Ongoing Support Disadvantages of franchising Lack of Independence Entrepreneur lacks independence in the franchise model Cost of the Franchise Franchises usually have fees and on-going royalties Unfulfilled Promises Restrictions of the Contract Product or Service Offered Line Forcing Restrictions of the Contract Continued Termination Remodeling Clauses Saturation of the Market Lack of Security Cost of Merchandise Effectiveness of Promotion Exaggeration of Financial Success 14. When considering a franchise opportunity, how should you evaluate it? Provide 5 aspects to consider and explain each. 1.Unproven versus Proven Franchise  Proven Franchise is usually a safer investment but more expensive  Unproven Franchises are normally less expensive but carry more risk 2.Financial Stability of Franchise  How many Franchises

 How successful are the Franchisees  Experience and history of the Franchisor 3.Potential Market for the New Franchise 4.Profit Potential for a New Franchise  Develop Pro Forma Statements to Determine Profit Potential & Risks 5.Territorial Protection  Does the Franchisor offer Territorial Protection? Terms? 6.Training and Operations Assistance  Extent of training 7.Contract Length and Renewal and Termination Terms  Duration & Terms 8.What current Owners are Saying About their Franchise  Why did they choose the franchise?  Are they happy? Any problems?  Would they invest again? 15. When considering the purchase of an existing business, what are some of the things you should consider. List and briefly describe some key considerations. 1.Industry Analysis  Sales and Profit Trends in the Industry  State of the Economy  Legal Restrictions and Pending Legislation  Social Concerns 2.The Previous Owner  Why are they selling?  Impact owner has had on success.  Will owner help finance the business  Previous owner’s future plans 3.Financial Condition of the Business  Validity of the Financial Statements  Evaluation of the Financial Statements 4.Condition of the Assets  Liquid Assets (Cash and Investments)  Accounts Receivable  Inventory  Building and Equipment  Real Estate  Goodwill 5.Quality of Personnel 6.External Relationships of the Business 7.Conditions of the Records

Chapter 6 16. What are the advantages of equity financing for your business?

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No obligation to pay dividends or interest means firm can invest earnings back into the business in the early years Equity financing often comes with investor expertise and contacts. Equity capital expands the borrowing power of the business for debt financing. Equity financing spreads the risk of failure of the business to others.

17. Bootstrap financing is one way to meet short-term money needs. Describe what bootstrap financing is and what it entails. Using any possible method to conserve cash. 18. When considering a business such as the Clark’s Sporting Goods activity done in class, what kinds of costs are incurred in a start-up and what are some costs incurred on an on-going basis?

Typical start-up Costs  Initial inventory  First few month’s payroll, including owner’s salary  First few months’ utilities  First few months’ rent  Initial advertising  Prepaid items (utility deposits, rent deposits, and insurance)  Licences and permits  Equipment  Remodeling  Other operating costs to be paid before revenues are generated...