CHAPTER 4
ENTREPRENEURSHIP,
SMALL BUSINESS and FRANCHISING
WHAT IS A SMALL BUSINESS?
Small business is a business that is independently owned and operated and is not dominant in its field. Barber, beauty saloon, flower shop, auto repair shop, newspaper stands are examples of small businesses.
Smallness is a relative concept. Measurement of size depends on:
Annual sales revenue (500,000-1 milyon USD)
Number of employees (9 to 49 employees)
Assets (500,000 to 1 million USD)
Market share
Small Grocery Store Supermarket Gross Market
A small business is a firm that meets two or more of the following criteria:
Owners manage the business.
One person, or small group of people, provide the financing.
Owners and employees live near the firm.
The firm is small compared to the others in the same industry.
ECONOMIC and SOCIAL CONTRIBUTIONS OF SMALL BUSINESS
¤ Provide employment to approximately 60% of nation's labor force.
¤ 2 out of 3 workers get their entry level jobs from small business.
¤ Generates new jobs that are more for younger, older, and female workers.
¤ Creates part-time jobs.
¤ Trains first-time job holders in basic job skills.
¤ Small firms introduce many new products.
¤ Small firms are suppliers to larger firms.
Most common types of small Business exists in wholesale trade, retail trade, services, construction, furniture, metal working, representation, distribution, etc.
SABAH Newspaper of
05 September 1996
However, small business should not be one that uses out dated technology, engaged in customary production, rejecting developments, only drawn by the close by market, fearing competition and avoiding growth, and lacking adventureous personality. On the contrary; it should symbolise an etrepreneur type that is a modern entreprenuer, open to all developments, sees his market as the global market, accepts active competitive practice as reason for his existance and success, sees growth as the most important criteria of accomplishment, and is ready to take rational risk based full concideration.
Why, then, small business? Because “small is beautiful”? No, this question is too important to be replied as only small is beautiful. Although small is beautiful, there are cases where big is better. Beauty and goodness change in time. Therefore, instead of small is beautiful or big is better, the motto should be: “Whether small or big, as long as its good!”
Why is it important for our country, Turkey, to have small businesses? Turkey, or in better terms; Turks, have always been a worrior communitee. Even at times of the Ottoman Empire, trade and business was looken down upon and was left to the control of the minorities. Following the establishment of the Turkish Republic, it was up to the government to set up and operate businesses in Turkey. This caused state ownership in almost every are of business.[1]
If we look around us and try to find establishments that date back a few generations with 100 or 200 years of age, the number is very minor. In the “Century old Companies” supplement of the Dünya newspaper, of January 18, 1990, companies established between 1700 and 1800 are: Cağaloğlu Hamamı (1471), Ali Muhittin Hacı Bekir (1777), and Cukurova Gıda Sanayi (1783). Those established between 1800 and 1900 are unfortunately less than the number of fingers in our hand: İskender Kebapçısı (1871), Kuru Kahveci Mehmet Efendi ( 1871), Vefa Bozacısı (1876), Komili (1878), Güllüoğlu (1885), Hacı Şakir (1887), Abdullah Efendi Lokantası (1888) Pera Palas (1888), Tuzcuoğlu (1893) and Konyalı (1897).
As you can see, these are all small businesses. There are no large organisations like General Motors, General Electric in the United States, Daimler Benz, Siemens in Germany, Court St. Georges in Belgium that started as a small business bu grew to very large scales.
SUCCESS and FAILURES of SMALL BUSINESS
STRENGTHS OF A SMALL BUSINESS
1) Greater flexibility: Quick response to changes
2) More personal attention to customers and employees: Direct contact with customers and better feel for what they want.
3) Lower Fixed costs: Cost that do not vary in total as the volume of business vary.
Small business sells its product for a less cost than
its larger competitor.
5) Greater motivation of owners: The desire to be independent and one's own boss
is a powerful motivator.
FACTORS IN SMALL BUSINESS FAILURE
There are actually two main causes of small-business failure:
Poor Management
This is number one cause of small business failure. Most small businesses
owners have limited education and spend very little time inpreparation to run
a business, they fail to learn from experience and their mistakes, and cannot
hold back their optimism.
Inadequate Financing
In a small business, the main source of financing is the owners personal re-
soures. Owners who start with insufficient funding find it very hard to get loans.
Dun & Bradstreet Corporation has studied the subject of business failure for
many years and identified the causes which cover the following:
Neglect (bad habits, poor health, marital problems, etc.)
Disaster ( burglary, fire, death of owner, etc.)
Fraud (embezzlement, false agreement, etc.)
Economic Factors (insufficient capital, high interest rates, loss of market)
Experience (incompetence lack of managerial experience, etc.)
Sales (competitive weakness, inventory difficulties, very few customers)
Expense (burden of credit debt, heavy operating expenses)
Customers ( receivable collection difficulties, very few customers)
Assets (excessive fixed assets, overexpansion)
Capital
SHOULD YOU GO INTO BUSINESS FOR YOURSELF?
First answer these questions:
YES NO
1) Are you afraid of taking a risk?
2) Do you feel you should enjoy the good life today because you might
not be here tomorrow?
3) Do you have problems getting along with people?
4) Do you lose interest in things that don't work out as quickly or a well as
you think they should?
5) Are you easily frustrated?
6) Do you have trouble coping in situation that require quick judgment?
7) Do you cave in under stress?
8) Are you unable to learn from your mistakes?
9) Are you too good to do manual labor?
10) Do you have trouble getting started without prodding from others?
11) Do you prefer to follow others rather than lead them?
12) Do you find it difficult to organize things?
13) Do you find it difficult to buckle down and work long hours day after day?
14) Do you have health problems?
15) Do you dislike making decisions?
If you answered NO to most of these questions, you probably have the
traits needed to succeed.
BENEFITS and BURDENS of ENTREPRENEURSHIP
BENEFITS * Freedom. To have more control over their own work and life
* High satisfaction from being your own boss.
* Decision maker
BURDENS * Requires your full attention.
* Problems follow you home.
* Your customers are your boss.
* You should wear many hats.
HOW TO BECOME A SMALL BUSINESS OWNER?
TAKING OVER FAMILY BUSINESS
Easiest and simplest way! If the family is willing to take the risk you have a business rightaway.
BUYING AN EXISTING FIRM
The most important question to tackle is; why is the owner selling the business?
a) Owner wants to retire. Is the owner telling you the truth,
is he really retiring or leaving the
b) Owner wants to unload a business. business? Check out the firm’s
profit over the past few years.
c) Owner wants to sell a profitable business. Ask for a No Compete Clause!
STARTING A NEW BUSINESS
STARTING A NEW BUSINESS
This requires a great deal of planning. You should get the advice of a lawyer, banker, insurance agent and you should practice entrepreneurial networking. (Meeting and sharing problems and experience with other people in the similar business.)
SIX STEP APPROACH
1. CONDUCT A SITUATION ASSESSMENT
First answer these questions:
Why do you want to go into business for yourself?
Are you tired of working for someone else?
Do you simply want to change to make it on your own?
How much time and effort can you put into your business?
What rate of return do you want to make on the money you
put into the firm?
Then analyze your resources:
How much cash and other resources do you have to invest
in the business?
Can you afford to quit your present job? When you start
to establish your own business you will have to leave your
existing work, which means there will be no income from
that source.
Look at the environmental variables:
The goal is to match your overall objectives and resources
with market opportunities.
2. DEVELOP AN OVERALL BUSINESS PLAN
The overall business plan is a document that spells out in detail the firm's mission, its objectives and the actions (strategies and tactics) needed to achieve the firm's objective. The firm's mission statement is a document in which top management establishes the specific nature and scope of its market and operations by answering the questions; "What business are we in?" and "What do we want the business to become?"
The business plan should include the following data. The most important is to be honest and frank with ourself and put forth the correct information:
- Executive summary
- Product section
- Manufacturing and distribution
- Market section
- Financial information
3. PROJECT FINANCING NEEDS
Set up a Capital Budget - projection of your need over a stated period of time.
Monthly projected Income Statement - farecasted sales revenues and operating
expenses, by monrh.
Monthly projected Cash Flow Statement - cash inflow from cash sales and cash
outflow for expenses (supplies, salaries, electricity, telephone. etc.)
Projected Balance Sheet - to show the net worth (value) of your firm at the end
of the first year.
4. SECURE THE NEEDED RESOURCES AND PERMITS
Get capital together - cash, loans, bank credits.
Completre your human resource requirements.
Establish insurance and legal contacts.
5. ESTABLISH INTERNAL CONTROL SYSTEM
Establish accounting systems to keep control of revenues, expenses, receivables,
any other cash flow.
Take measures for theft inside/outside.
6. START SERVING THE CUSTOMERS
GO TO MAKE A PROFIT !
54
[1] Türkiye’de Küçük ve Orta Ölçekli İşletmeler
Prof Dr Tamer Müftüoğlu, Ankara 1998,
FRANCHISING
Franchising is a system invented in the United States to expand or start a business. As we discussed in the beginning of this chapter, despite their importance to the economy, small businesses have a great deal of failures. One reason is lack of customer base that results as slow development of the business and, consequently, low income in the beginning due to lack of recognition. Whereas people who go into business with a known, reputable brandname behind them have much more chance of success.
FRANCHISOR FRANCHISEE FRANCHISED UNIT Company with a You The new outlet like a
proven product, good branch.
reputation and fame
FRANCHISOR is a firm that licenses other firms the use of its business ideas and procedures and to sell its goods and services in return for royalty and other types of payment. Around us Burger King, McDonalds, Pizza Hut, Kentucky Fried Chicken, Holiday Inn are all franchised units.
FRANCHISEE is a person or firm to whom the franchisor grants the use of his business idea, procedures, brand name, and is often granted an exclusive right to sell the franchisers goods or services in a specified territory (area).
BURGER KING!!!
FRANCHISEE BENEFITS
As a small business firm you cannot afford to create and develop a new product, the technology required, training of the staff and a big promotional campaign. Through franchising you get these almost for free while benefiting to be part of a chain operation. The franchising operation has led many people to go into business for themselves.. The franchisees own and operate their own businesses enjoying the benefit of an internationally known, successful chain organization’s support.
1) Franchisee recognition - Consumer recognizes you through the proven service and standard you are given.
2) Management training and assistance
3) Economies in buying, reduced cost - Franchisor buys large volumes of ingredients
and supplies and sells to franchisee.
4) Financial assistance - Normally the franchisee puts up all the funds needed for the fi-
nancing of the operation. However, the franchisor may help this new outlet with addi- tional funding. The franchisor often backs up the franchisee in securing a loan.
5) Promotional assistance - Promotionary supplies, mass-advertisement and publicity is
mainly handled to cover the “brand name” where all the franchisees receives a benefit and contribute for the cost. This is called cooperative advertising.
6) Franchisee motivation - As the owner of the business, franchisees retain their profit
from the business.
FRANCHISER BENEFITS
1) Recognition - both nationally and internationally
2) Expands his business, capital profit, and revenue without any cost.
3) No employment problems.
4) Promotional assistance
5) Franchisee payments; initial fee, royalty, percentage from monthly or annual sales
6) Franchisee motivation - Franchisee works long hours for his own business, actually con-
tributing to the franchiser’s name.
HOW TO START
Following the required investigations, the Franchisee and the Franchisor sign an agrement. Franchisee receives the right to use the trade name, to produce the product, the management experience. In exchange, he pays a royalty and a percentage from the revenue made by the unit.
Franchisor supervises the pre-opening and post-opening by sending his representatives. This representative from the headquarters supervises the interior design, the placement of the equipment, the uniforms of the staff, etc.
Franchisor provides Franchisee with operational manuals and standard policies, backs up the operation by control.
Franchisor receives a monthly or annual royalty and fees for advertising from the Franchisee.
DRAWBACKS TO FRANCHISING
1. Some promoters sell franchises that have little chance of success.
2. Fixed monthly payments have to be made to the franchisor even if the profit is low.