Entrepreneurial Finance Fundamentals of Financial Planning and Management for Small Business

Featuring key topics within finance, small business management, and entrepreneurship to develop and maintain prosperous business ventures

With a comprehensive and organized approach to fundamental financial theories, tools, and management techniques, Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business equips readers with the necessary fundamental knowledge and advanced skills to succeed in small firm and business settings. With a unique combination of topics from finance, small business management, and entrepreneurship, the book prepares readers for the challenges of today?s economy.

Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business begins with key concepts of small business management and entrepreneurship, including management tools and techniques needed to establish, run, and lead business ventures. The book then delves into how small businesses are operated, managed, and controlled. General finance skills and methods are integrated throughout, and the book also features:

• Numerous practical examples and scenarios that provide a real-world perspective on entrepreneurship and small business management
• A brief summary, list of key concepts, and ten discussion questions at the end of each chapter to prepare readers for the challenges of today's economy
• A practical guide to the complete life of a small business, from establishing a new venture to training and developing young entrepreneurs tasked with maintaining and developing a prosperous economy
• An in-depth discussion of the entire process of writing a successful business plan, including the rationale, significance, and requirements
• Techniques needed to solidify the free enterprise tradition, develop entrepreneurial strategies, and grow small businesses

Preface xvii

Part I Entrepreneurial Perspective

Chapter 1 Small Business and the Entrepreneur 3

1.1 What is Entrepreneurial Finance? 3

1.2 Significance of the Small Business 5

1.3 Entrepreneurship and the Entrepreneur 9

1.4 The Idea and the Opportunity 12

Sources of New Business Ideas 14

1.5 From an Idea to Reality 16

Stage I: Development, Start Up, and Early Growth 16

Stage II: Increasing Growth and Maturity 18

1.6 Summary 18

Key Concepts 18

Discussion Questions 19

Chapter 2 Small Business Options 20

2.1 Starting a New Business 20

Advantages and Disadvantages of Starting from Scratch 21

Important Steps for the Right Start 21

2.2 Buying an Existing Business 22

Advantages 22

Disadvantages 23

Due Diligence 23

2.3 Purchase Options 24

Buy-Out Option 24

Buy-In Option 25

Bulk-Asset Buying Option 25

Take-Over Option 25

The Final Steps in the Buying Process 25

2.4 Franchise 26

Types of Franchise 27

Advantages and Disadvantages of the Franchise Option 28

The Legal Aspect of Franchising 30

2.5 Home Business and Family Business 30

2.6 Summary 34

Key Concepts 34

Discussion Questions 34

Chapter 3 Small Business Purchase Price 36

3.1 Asset-Based Value 36

3.2 Cash Flow–Based Value 39

3.3 Market-Based Value 40

3.4 Capitalized Earnings–Based Value 41

3.5 Financial Ratios–Based Value 43

3.6 Summary 44

Key Concepts 45

Discussion Questions 45

Part II Entrepreneurial Organization

Chapter 4 Forms of Business Ownership 49

4.1 Sole Proprietorship 49

Advantages of Sole Proprietorship 49

Disadvantages of Sole Proprietorship 50

4.2 Partnership 50

Partners’ Rights 51

Partners’ Responsibilities 51

Types of Partnership 52

Types of Partners 52

Advantages of Partnership 53

Disadvantages of Partnership 53

4.3 Corporation 54

Justifications for the Creation of Corporations 55

Organizational Structure and Management of Corporations 55

S-Corporation 56

Advantages of Corporation 57

Disadvantages of Corporation 58

4.4 Other Forms of Business Ownership 58

Limited Liability Company (LLC) 58

Professional Service Corporation (PSC) 60

Joint Venture (JV) 60

Non-Profit Corporation (NPC) 60

Cooperatives 60

4.5 Summary 62

Key Concepts 62

Discussion Questions 63

Chapter 5 The Business Plan 64

5.1 What is a Business Plan? 64

Types of Business Plan 64

Importance and Rationale 65

5.2 Contents of the Plan 66

Title Page 67

Confidentiality Statement 67

Table of Contents 67

Executive Summary 68

Vision, Mission, and Elevator Pitch 68

Business Description 69

Background 69

Product 70

Market 70

Functional Plans 70

Operational Plan 71

Management Plan 71

Marketing Plan 71

Financial Plan 73

Appendix 75

5.3 Other Elements of the Plan 76

Milestone Chart 76

SWOT Analysis 76

Critical Risks 77

Measures of Control 78

Succession Plan 78

Environmental Impact 78

5.4 Reviewing the Plan 79

5.5 Anticipating and Preparing Responses to Potential Risks 82

5.6 Financing the Plan 83

Venture Capitalists 83

Angel Investors 84

5.7 Presenting the Plan 84

5.8 Updating the Plan 86

5.9 Grooming the Plan 86

The Written Text 87

The PowerPoint Slides 87

5.10 Summary 88

Key Concepts 88

Discussion Questions 89

Part III Entrepreneurial Finance and Valuation

Chapter 6 Financial Statements and Their Analysis 93

6.1 The Balance Sheet 93

Components of the Balance Sheet 94

Balances of the Balance Sheet 96

The Cash Flow Cycle 96

6.2 Income–Expenses Statement 97

6.3 Financial Statement Analysis 99

Vertical Analysis 100

Horizontal Analysis 101

6.4 Ratio Analysis 102

Profitability Ratios 102

Market-Based Ratios 105

Operational Ratios 109

Liquidity Ratios 111

Debt Ratios 113

6.5 The DuPont Model 115

A Final Word About Ratios 117

6.6 Summary 117

Key Concepts 118

Discussion Questions 118

Chapter 7 Capital Structure and Leverage 120

7.1 Debt and Equity Capital 120

Debt Capital 120

Equity Capital 121

Debt versus Equity Financing 122

7.2 The Optimal Capital Structure 125

The Traditional Approach 125

The Modigliani–Miller Approach 130

Other Approaches to Capital Structure 130

7.3 Leverage 133

Operating Leverage 133

Operating Leverage, Fixed Cost, and Business Risk 136

Financial Leverage 137

Total or Combined Leverage 144

7.4 Summary 145

Key Concepts 146

Discussion Questions 146

Chapter 8 Profit and the Cost–Volume Analysis 148

8.1 Profit Concept Between Economics and Accounting 148

8.2 Profit Margin and Markup 149

8.3 Profit and Cash Flow 152

8.4 Profitability and Earning Power 154

8.5 When Would a Firm Start Collecting Profits? 156

Cost–Volume–Profit Analysis 156

8.6 Break-Even Quantity and Break-Even Revenue 158

8.7 Break-Even Graphics 162

8.8 Desired Profit and the Break-Even Point 164

8.9 Non-Cash Charges and the Break-Even Point 166

8.10 Profit Planning 168

8.11 Summary 169

Key Concepts 170

Discussion Questions 170

Chapter 9 Pro Forma Statement and Financial Forecasting 172

9.1 Basic Pro Forma Statements 173

Pro Forma Income Statement 174

Pro Forma Balance Sheet 176

9.2 Pro Forma and the Sales Ratio 176

9.3 Change in Sales (ΔS) and the Needed Fund 178

Financial Forecasting 178

9.4 Role of Financial Forecasting 179

9.5 Basic Steps of Forecasting 180

9.6 Types of Forecasting Models 181

Qualitative Models 182

Quantitative Models 183

9.7 The Analysis of Time Series 184

Time Series and Data Variations 184

9.8 Fitting the Model 185

9.9 Adjusting for Seasonality 189

The Simple Average of Errors Method 190

The Actual to Forecast (A/F) Ratio Method 193

The Dummy Variables Method 194

9.10 The Smoothed Forecasts 197

Simple Moving Average Method 197

The Weighted Moving Average 200

Exponential Smoothing 201

9.11 Barometric Forecasting 204

9.12 Testing Forecasting Accuracy 206

The RMSE Check 207

The MAD Check 209

The MAPE Check 211

9.13 Summary 212

Key Concepts 213

Discussion Questions 213

Chapter 10 Working Capital 214

10.1 What is Working Capital? 214

10.2 Working Capital and Profit-Risk Manipulation 215

10.3 Working Capital and Financing Strategies 218

The Aggressive Approach 219

The Conservative Approach 219

The Balanced Approach 219

10.4 Summary 221

Key Concepts 221

Discussion Questions 221

Chapter 11 Financial Management of Working Capital 223

11.1 Cash Management 223

The Required Minimum Cash 224

Types of Cash and Floats 225

11.2 Marketable Securities Management 228

Common Marketable Securities 228

11.3 Account Receivable 229

Credit Control 229

Credit Evaluation 231

Cash Discount to Speed Up Collection 233

Account Receivable Aging 235

Current Liabilities Management 237

11.4 Account Payable and Trade Discounts 238

1. The Traditional Method 238

2. The NCRF Method 239

Cash Discount for Prompt Payments 240

Cumulative and Quantity Discounts 240

11.5 Summary 241

Key Concepts 241

Discussion Questions 242

Chapter 12 Inventory Management and Control 243

12.1 What is Inventory? 243

Inventory Functions 244

Inventory Cost 244

ABC Analysis 245

12.2 Economic Order Quantity (EOQ) 245

EOQ for Quantity Discount 249

EOQ for the Production-Run Model 251

12.3 The Reorder Point 255

Determining the Safety Stock Level 255

12.4 JIT-Inventory System 260

12.5 Summary 260

Key Concepts 261

Discussion Questions 261

Chapter 13 Investment Project Evaluation and Risk Management 263

13.1 Categories of Investment Purposes 264

Replacement Projects 264

Renewal Projects 264

Expansive Projects 264

Cost-Reduction Projects 264

Conforming Projects 264

Other projects 264

13.2 Steps for Project Selection 265

13.3 Types of Projects 266

Independent Projects 266

Mutually Exclusive Projects 266

13.4 Patterns of Cash Flow 267

The Conventional Pattern 267

The Non-conventional Pattern 269

13.5 Project Evaluation Techniques 269

Average Rate of Return 269

Payback Period 271

Net Present Value 272

Internal Rate of Return 276

NPV versus IRR for Mutually Exclusive Projects 279

NPV Profile, Crossover Rate, and the Ranking Reversal 282

Profitability Index and Capital Rationing 284

Investment Projects and Business Risk 286

13.6 Risk and its Sources 287

Where Would Risk Come From? 288

13.7 Methods of Risk Management 288

Risk-Adjusted Discount Rate 289

Risk-Adjusted Returns 292

The Statistical Adjustment 295

13.8 Sensitivity Analysis, Scenario Analysis, and Simulation 297

Decision Tree 300

13.9 Summary 300

Key Concepts 301

Discussion Questions 301

Chapter 14 Business Valuation and Harvesting 303

14.1 What is Business Valuation? 303

14.2 Valuation Tools 304

Book Value of Assets and Shares 304

Market Price of Shares 304

Capitalization of Major Variables 304

14.3 Valuation Techniques 305

The Multiplier Approach 305

The Capitalization Approach 308

Varieties of the Capitalization Approach 311

Harvesting 311

14.4 What is Business Harvesting? 311

14.5 Harvesting Strategies 312

Systematic Liquidation 312

Outright Sale 313

Acquisition 314

Going Public 315

14.6 Summary 317

Key Concepts 317

Discussion Questions 317

Part IV Entrepreneurial Management and Control

Chapter 15 Basic Entrepreneurial Management 321

15.1 Planning 322

Concepts of Planning 322

The Planning Process 323

15.2 Organizing 324

Defining the Tasks 324

Functional Departmentalization 324

Range of Control 324

Delegation of Authority 325

Types of Organizational Structures 325

15.3 Staffing 326

15.4 Directing 326

Leadership and Leaders 327

15.5 Controlling 329

15.6 Business Strategies 330

Product Differentiation 330

Cost Minimization 330

Niche Creation 331

15.7 Summary 331

Key Concepts 332

Discussion Questions 332

Chapter 16 Location and Layout 334

16.1 Factors Affecting the Selection of Location 335

The General Factors 335

Specific Factors 336

16.2 Types of Business Outlets and Locations 337

Outlets by Types of Goods and Services 338

Retail Outlet Locations 339

Service Outlet Locations 340

Wholesale Outlet Locations 340

Production Plant Locations 340

16.3 Site Selection 341

Low Customer Contact Businesses 342

High Customer Contact Businesses 343

Good Visibility 343

Adequate and Proper Parking 343

Selected Quantitative Measures 344

Radius of the Trading Area 346

Expansion Consideration 347

16.4 Site Alternatives 347

Downtown Area 347

Shopping Plazas and Malls 347

Throughout Neighborhoods 347

At Home 348

16.5 Layout and Design 348

Retail Layout 348

Wholesale Layout 353

Manufacturing Layout 353

Service Layout 354

Exterior/Interior Considerations 356

Sight, Sound, and Smell Considerations 356

Environmental Considerations 357

16.6 Summary 357

Key Concepts 357

Discussion Questions 358

Chapter 17 Operations, Budgeting, and Taxes 359

Operations 359

17.1 Material and Supplies: Buying or Making? 360

17.2 Product Quality 361

Quality Control 362

Statistical Methods to Control Quality 362

Budgeting 363

17.3 Budgetary Variance and Flexible Budgeting 364

17.4 Types of Budgets 365

Operating Budget 365

Cash Flow Budget 366

17.5 Considerations for Budgetary Control 368

Taxes 368

17.6 Types of Taxes 369

Firm’s Own Business Taxes 369

Sales Taxes 369

Employment-Related Taxes 369

Owner’s Taxes 370

17.7 Taxes and Forms of Business Ownership 371

17.8 Considerations and Strategies 371

17.9 Summary 373

Key Concepts 374

Discussion Questions 374

Chapter 18 Marketing, Promotion, and Distribution 375

18.1 Market and Customer 375

The Changing Target Market 376

18.2 Marketing and Customer’s Decisions 378

Identifying the Needs/Wants 378

Searching and Collecting Information 379

Evaluating the Alternatives 379

Making the Final Choice 379

Post-Purchase Stage 380

18.3 Marketing Research 381

Secondary Data 381

Primary Data 382

Marketing Strategy 383

18.4 Product 383

Product Life Cycle 384

The Total Product 385

Product Commercialization 389

18.5 Price 389

Considerations for a Pricing Policy 389

Price Strategies 390

18.6 Place 393

Storage 393

Transportation 394

Distribution 394

18.7 Promotion 396

Personal Selling 396

Sales Promotion 397

Advertising 398

Publicity and Public Relations 399

18.8 Summary 400

Key Concepts 400

Discussion Questions 401

Chapter 19 Human Resource Management 402

19.1 Job Analysis 402

Job Description 403

Job Specification 403

Job Application 403

Job Satisfaction 404

19.2 Personnel Planning 404

Recruiting 405

Screening and Selecting 406

Hiring and Orienting 408

Compensation and Benefits 412

Appraisal and Evaluation 414

Terminating 416

Other Issues 416

The Discipline System 418

19.3 Summary 419

Key Concepts 420

Discussion Questions 420

Appendix 421

Glossary 427

Further Reading 439

Index 441