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435 Lecture 1
435 Lecture 1
Small Business
Management
By
David LIN
The component of this course
Part A Getting Started
2. Introduction to small business
3. Finding an opportunity
4. Information and assistance
5. The legal environment
6. Franchising
7. Planning and the business system
The component of this course
Part B Financial management
2. Financial information
3. Cash flow
4. Financing the business
5. Profit planning
The component of this course
Chemists Newsagents
Purchasing Marketing
Production Finance
staffing Products/services
1.
Financial feasibility
What are your annual living expenses?
Say, $30,000
2. What is the gross income (before tax) that is required to leave you with
$30,000?
At 33% tax rate = $30,000 * 1.5 = $45,000
3. How much money will be invested in assets for the business?
Say, $50.000
4. What rate of return should you get on the assets given the riskiness of
small business?
Say, 15%
5. How much return should you receive annually?(step3 times step4)
$50,000 * 15% = $7,500
6. What income do you require from this business?(step2 plus step5)
$45,000 + $7,500 = $52,500
7. For this type of business what is the average net profit as a percentage of
sales? This figure can be obtained from your local BIZinfo, a trade
association or your accountant.
Say, 10%
8. What amount of sales is necessary to generate the level of income you
require?(step6 divided by step7)
$52,500 / 10% = $525,000
Financial feasibility
1. How many households are in the target market area and what are
their characteristics? This information is available from Statistics
New Zealand.
Say, 5,000 households
2. What is the average weekly household expenditure for this type of
product or service? Consult the Statistics New Zealand Household
Expenditure Survey.
Say, $5.26 per week or about $273 per year
3. What is the total potential for sales of this product or service in this
target market? (step1 times step2)
5,000 households * $273 per year = $ 1,365,000 per year
4. What is the actual sales for this product or service in this target
market? To determine how much of the market is currently held by
competitions, consult the Statistics New Zealand Business Activity
Statistics.
Say, $850,000 per year
5. What is the potential for sales in my business? (step3 minus step4)
$1,365,000 - $850,000 = $515,000 per year
Establishing a new business
Advantages
- Match the business to your own goals
- Innovate when you have the flexibility to select
your target market, product and service strategy,
competitive strategy, location and facilities
- Design the business around the policies and
procedures that you select and you can train the
staff you own way
- Avoid the ‘goodwill’ expense of buying an existing
- Not inherit any pre-existing ill will from previous
customers suppliers, creditors or employees
Establishing a new business
Disadvantages
- Highest risk of failure
- Takes time and energy to create an image, build
patronage, work the bugs out of new systems and
procedures, and reach a break-even level of sales
- Staff need to be found, contacts developed with
suppliers, and a marketing strategy implemented
- The added risks that investment capital customers
may be more difficult to attract than you anticipate
- Run a significant risk that the time-lag between
investment and cash flow will be too long
Establishing a new business
Critical factors
- Identifying a target market and its basic needs
- Assessing the size of the target market and its ability to
sustain a profitable business
- Determining the amount and availability of start-up capital
- Devising a product strategy that matches the target market
- Devising a competitive strategy that can gain protect a
share of the market
- Finding a suitable location and physical facilities
- Selecting and training staff
- Obtaining equipment, fixtures and supplies
- Determining and meeting legal obligations
- Developing a carefully considered business plan
Buying an existing business
Advantages
- Not only receive immediate income from sales o
existing customers, but you will also save the time
and effort needed to equip and stock the business
yourself
- Have a proven location, established relationships
with suppliers and creditors, and existing
employees
- It is much simpler to finance a single-purchase
transaction, and a proven track record makes an
existing business easier to finance
Buying an existing business
Disadvantages
- You could pay too much for the business if you
misjudge its value, and there could be unexpected
expenses if the business turns out to be run-down.
If the previous owner had a bad reputation, you are
likely to inherit ill will among some customers and
poor morale among staff