HDCS 4369 Study Guide, Chapters 6-12 There will be 102 multiple-choice questions from the textbook. The exam will cover chapters 6-12. Chapter Six: 1. What should be the length of time when projecting financial and operational aspects of a proposed business? Three to five years 2. What is a prospectus when doing business planning? A document that contains all the information necessary to satisfy federal and state requirements for warning potential investors about the possible risks of the investment; also known as an offering memorandum. 3. Who are the primary outside users of a business plan? Customers, lenders, suppliers and investors. 4. Define a business plan. A document that presents the basic idea for the venture and includes descriptions of where you are now, where you want to go, and how you intend to get there. 5. What are a potential investor’s major goals? To maximize potential ROI on an investment through cash flows received with minimal risk exposure. 6. What are one-minute investors? Investors in startup and early-stage companies who will spend a very short amount of time looking over your business plan. 7. What type of plans appeal most effectively to investors? Market-oriented credible plans with a prospectus. 8. How long should an effective plan be? 15-30 pages? 9. How should a person determine how much planning should be done for a business? Based on how complex and big the business will be and how much they want it to grow. 10. If the business concept is not the best can the business plan rescue it? It can help the entrepreneur adjust the concept to something more feasible and successful. 11. When should competition be discussed in the business plan? In the industry, target customer and competitor analysis section. 12. How should a managerial team be composed - does that affect investors view of the business? A managerial team should be composed of a well-balanced group of people with financial, marketing, and production expertise. Investors would often rather have a great management team with an okay product. 13. When should facilities and location be described in the business plan? In the operations and development section. 14. What is the key statement in the financial plan? Cash flows. 15. What do business plan software packages do for a business--should they be used for creating the business plan? They can make it faster to write and ensure they include all basic sections; however, they do not produce a unique plan, so if they are used they should be added to with other information and formatting. 16. Does business planning stop at some point--so the business plan is completed? The plan should evolve with the company so that they maintain and shift focus as needed. Chapter Seven: 1. What activities are included in small business marketing? Those that direct the creation, development, and delivery of the bundle of satisfaction to the customer. 2. How have marketing philosophies traditionally been categorized? Productionoriented, sales-oriented, and consumer-oriented 3. What is the most recent focus of U.S. businesses? Consumers 4. How does a firm's marketing philosophy relate to strategic marketing activities? It dictates how the firm should use the various elements in its marketing mix and what to include. 5. What is the generally preferred philosophy for most businesses? Consumer-oriented 6. What scenarios should sales forecasts ideally include? Most likely, pessimistic and optimistic scenarios 7. What should marketing plans include? Market analysis, competition, and marketing strategy. 8. What is the most detailed and scrutinized section of a formal marketing plan? The marketing strategy 9. What are the steps in the marketing research process? Identifying the informational need, searching for secondary data, and interpreting the data gathered. 10. Define primary and secondary data--when is each type most appropriate? Primary data is new market information gathered by the firm conducting the research. Secondary data is market information that has previously been compiled. 11. Should a small business conduct marketing research or is this only available to large firms due to the required resources? A small business should conduct market research; resources necessary can be minimized by using low-cost research like surveys and questionnaires. 12. What are the problems typically associated with the use of primary and with secondary data? Primary is hard to get a large sampling, secondary is not catered to your business specifically. 13. How are the techniques used to collect primary data often classified? As either observational methods or questioning methods. 14. What is the basic instrument used to guide the researcher and the respondent when surveys are taken? The questionnaire 15. Define purchasing power. The amount of money the consumer has to use toward purchasing the product. 16. What causes a group of potential customers to be considered a market? Their possession of purchasing power and unsatisfied needs. 17. Define a sales forecast. A prediction of how much of a product or service will be purchased within a market during a specified time period. 18. What decisions should be based on a sales forecast? Production schedules, inventory policies and personnel decisions 19. Is forecasting for a new venture easy or difficult--why or why not? It is difficult because existing data may not be available and the entrepreneur/manager may be unfamiliar with quantitative analysis and forecasting methods. 20. What is a breakdown process? A forecasting method that beings with a larger-scope variable and works down to the sales forecast; also known as the chain-ratio method. 21. What is a buildup process? A forecasting method in which all potential buyers in the various submarkets are identified and then the estimated demand is added up. Chapter Eight: 1. How important is a strong management group to a new venture? Very; studies show that team-founded ventures do better than sole ventures and it is likely more talents and experience are needed than one person has. 2. What is the key to strong management in a new firm? Having a balanced group where there is strength in all areas is key. 3. Who are the best sources of outside assistance? The entrepreneur’s social network of contacts. 4. Define a sole proprietorship, partnership, & corporation--know advantages & disadvantages of each. sole proprietorship: A business owned by one person who bears unlimited liability for the enterprise. Advantages: Simple, cheap, nobody else bosses you around. Disadvantages: The owner’s personal assets are at risk, no insurance benefits, death of owner dissolves the business. partnership: A legal entity formed by 2 or more co-owners to carry on a business for profit. Advantages: Easy to set up, management is shared. Disadvantages: Unlimited liability is shared. corporation: A business organization that exists as a legal entity & provides limited liability to owners. Advantages: Liability is placed on the business, not the owner’s assets. Disadvantages: Pain in the ass to set up, expensive. 5. Be able to describe a corporate charter and how it is obtained. A corporate charter is a document establishing a corporation’s existence; it is also called the articles of incorporation or certificate of incorporation. One is obtained by having an attorney create it and filing it and paying the incorporation fee to the Secretary of State. 6. Where does permission to incorporate a business come from? The Secretary of State. 7. Does owning shares in a business confer a legal right to manage the firm? No. 8. Do stockholders have limited liability at all times? No; sometimes the bank issuing a loan may require owners to assume personal liability by signing promissory notes. 9. Who does direct control of a corporation pass to when a major stockholder dies? An heir, executor or stock purchaser. 10. Is ownership in a corporation easier or more difficult to transfer than ownership in other forms of business? Easier. 11. Which types of business owners have unlimited liability for business debts? Sole proprietors and partners. 12. How are taxes paid for each legal form of business? sole proprietorship: taxed with personal income of owner partnership: taxed with personal income of each partner corporation: taxes are filed separately for the corporation itself and the stockholder is taxed if/when dividends are received 13. What must a firm do to be eligible to be an S corporation? Have no more than 100 stockholders; have all stockholders as individuals or certain qualifying estates/trusts; have only 1 outstanding stock class; operate on a calendar year fiscally; not allow nonresident alien stockholders. 14. What are strategic alliances? What type of opportunities do strategic alliances represent? Strategic alliances are organizational relationships linking two or more independent business entities in a common endeavor. They provide a way to increase effectiveness by sharing resources without losing independent legal status. Chapter Nine: 1. What are good reasons for relocating a typical manufacturing business? High taxes, pricey real estate, paying for things you don’t need like good customer accessibility or a pretty storefront, zoning ordinances that limit a manufacturer’s means in creating the product, not being near to raw materials. 2. What are the site-related factors that should be taken into consideration when selecting a retail location? Customer accessibility, a pretty storefront. 3. What environmental conditions affect selection of a business location? Weather, local competitors, legal requirements, tax structure, location incentives offered, and zoning ordinances. 4. What are the personal reasons for choosing a person's hometown as a location for a new business? They appreciate local business and feel comfortable with the atmosphere of the community. They can more easily establish credit with hometown bankers and may know other business owners in the location to help them. They know local consumers’ tastes and preferences, and may have relatives and friends in the area to help. 5. What is a business incubator and why is it used? A business incubator is a facility that provides shared space, services, and management assistance to new businesses. They are used to offer fledgling businesses help with getting space, management advice, and clerical assistance to lower operating costs, so that they can eventually leave the incubator. They are often sponsored by the government or a university. 6. Why might a business lease rather than buy a facility? To avoid a large cash outlay and risks by investing in a location that proves unsuitable or if the business does not succeed. 7. What determines the suitability of a building for a business? Customer accessibility, resource availability, environmental conditions, site availability and costs, and the entrepreneur’s personal preference. 8. Where is a home-based business located? At the residence of the business owner. 9. How can the owner of a home-based business establish boundaries between the business and the home? Maintaining a professional office in the home and making rules about what residents and other houseguests can do in what areas of the home. 10. Define E-commerce. The paperless exchange of business information via the Internet. 11. Define a bricks-and-mortar store. The traditional physical store from which businesses have historically operated. 12. What advantages do E-commerce innovators have? They can compete with bigger businesses without needing as much capital or resources; no public building space is required; they are not limited to a geographical set of customers; they can use electronic means of building customer relationships and loyalty. 13. What is the consumer-centric data warehouse? the heart of the eCRM (Electronic Customer Relationship Marketing) system; a database of all customer information. 14. Define business model. A group of shared characteristics, behaviors and goals that a firm follows in a particular business situation. 15. Define a B2C firm. Business to consumer; a business that has the final consumer as its customer and sells directly to them. 16. Why might customers avoid doing business online? They are reluctant to send credit card data online for fear it may not be secure; they want to see the product before purchasing it. 17. Define Internet auction site. Web-based businesses offering participants the ability to list products for bidding. 18. Where are revenues from auction sites come from? Listing fees and sales commissions. 19. Define content/information-based model. A business model in which the website provides information but not the ability to buy or sell products or services. Chapter Ten: 1. What does the income statement show? The amount of profits generated by a firm over a given time period. 2. Be able to provide examples of current assets, fixed assets. Current assets, or gross working capital, are those that can be converted to cash in an operating cycle. Examples are cash, AR and inventories. Fixed assets are relatively permanent and include machinery, equipment, buildings and land. 3. Define cash flow and know why it is important to the business. Cash flow is the firm’s sources and uses of cash. It is important because without positive cash flow, even profitable companies can go broke. 4. What does a cash flow statement show? A firm’s sources and uses of cash. 5. Define projected financial statement. Statements that project a firm’s financial performance and condition, including its profitability, how much capital is needed, and what type of financing will be used. Also called a pro forma financial statement. 6. What are the steps in projecting the firm's income? Revenue – cost of goods sold= gross profit. Gross profit – operating expenses=Operating income. Operating income-interest expense=Earnings before taxes – income tax=net income. 7. How long does a typical startup experience losses? 8. When forecasting capital requirements for a proposed venture what should be considered? The amount of working capital (cash, inventories) and fixed assets (equipment, buildings) that will be needed. 9. How is the liquidity of a firm measured? Using the current ratio, which is computed by dividing current assets by current liabilities. 10. What does liquidity represent? The degree to which a firm has current assets available to meet maturing short-term debt. 11. What are the common weaknesses in small business financing? 12. What are retained profits? Profits less withdrawals (dividends) over the life of the business. Chapter Eleven: 1. What does "bootstrap" means for financing? Minimizing a firm’s investments. 2. How much of their investment do typical venture capitalists invest in later- and earlier-stage businesses? The great majority (90%+) of their investment goes to established companies, not small startups. 3. What does a banker look at when financing a company (types of assets)? The company’s soft assets such as other debts vs. working-capital needs like AR and inventory. 4. What are the drawbacks of selling stock as a source of funds? Finding outside stockholders is hard without a history of profitability. 5. What are the factors that influence the choice between debt and equity financing? Risk, potential profitability, and voting control 6. What are the common sources of financing for small businesses? Personal savings, family and friends, credit cards, banks, the government, and investors. 7. Compare borrowing money to purchase equipment as opposed to leasing. Leasing leaves firm cash free, creates available lines of credit, and provides a solution to equipment becoming obsolete. Borrowing money means no installments to the various vendors to keep up with and possibly a better interest rate. 8. What is the traditional way to locate business angels? Through business contacts, accountants, lawyers, and other entrepreneurs. 9. Define venture capital companies. Limited partnerships formed for the purpose of raising venture capital from large institutional investors. 10. How does the federal government provide funds to small businesses? Through the SBA and state and local governments, Chapter Twelve: 1. What is harvesting? The process used by entrepreneurs and investors to reap the value of a business when they leave it; also known as exiting. 2. How does the availability of exit options affect investors? They will be more likely to invest in a company with a well thought-out harvest strategy so that they can minimize their loss. 3. What does an employee stock ownership plan represent? That the employees own a part of the company obtained by the contribution the company makes into their retirement fund. 4. What does a firm earning high rates of return on the firm's asset indicate? That the business is worth more running than if it were sold or dissolved. 5. Can having publicly traded stock be beneficial to the owners--why or why not? It creates interest in the company, is more easily accessible by investors, and is more attractive to personnel with stock options. 6. What are the steps in the IPO process? 1) Decide to go public; 2) Have financial statements for the past 3 years audited by a CPA; 3) Select an investment banker to guide the company through the IPO; 4) File an S-1 Registration with the SEC (takes about a month to review); 5) Respond to SEC comments & issue a red herring/prospectus describing the firm; 6) Spend 2 weeks on the road presenting the firm to investors; 7) Set actual offering price based on demand 1 day before the offering is made public: 8) Offer stock to public. 7. How are exiting owners usually paid in a harvest situation? Cash, and rarely stock (but cash is preferred). 8. How do uncertainties accompanying an impending sale of a business affect employees? It often lowers morale and can distract from daily affairs. 9. What does running a public company require? More expenses and reporting financial results to investors and the SEC. 10. Once the entrepreneur sells the business what may cause them to become disillusioned? They realize how much of their personal identity and time and effort were wrapped up in the business.