Instructor's Manual for Canadian Entrepreneurship and Small Business Management 11th Edition.

Instructors Manual For Canadian Entrepreneurship And Small Business Management 11th Edition By Wesley Balderson

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Supplemental Case Notes Thompson Greenhouse ............................................................................................................................ 1 Robinson Test Prep Co ............................................................................................................................. 4 The Beach Buddy ..................................................................................................................................... 6 Organic Gourmet Express......................................................................................................................... 8 The Winslow Clock Company ................................................................................................................... 9 Windows Tech ....................................................................................................................................... 10 Edge Hockey .......................................................................................................................................... 12 Beach Stake ........................................................................................................................................... 14 The Framemakers .................................................................................................................................. 15 Top Human Tech Inc. ............................................................................................................................. 21 Clovis Jewellers ...................................................................................................................................... 22 Blake Lock and Security Systems ............................................................................................................ 23

Thompson Greenhouse Case overview Thompson Greenhouse is family business owned by Earl and Lisa Thompson. The business has enabled them to supplement their income and provide work for their children. With increased competition from major retailers the Thompsons are unsure how they should compete in the year’s ahead and if they should invest further into their business.

Discussion questions

1. Discuss the implications of the Thomsons’ attempt to obtain additional commercial contracts (the department stores) for their products.

2. Evaluate the decision to construct another greenhouse from a financial and an organizational point of view. (Use rate of return, payback, and break-even analysis in your evaluation.)

3. Comment on the financial health of Thomson Greenhouse through a review of the financial statements.

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4. Discuss the implications for succession of the business if the decision were to pass the business to one of the sons sell the business to someone outside the family.

Instructors may opt to use these questions or ask the students to complete a simple case analysis including a problem statement, SWOT, alternatives and recommendation.

Solutions to discussion questions

1. Discuss the implications of the Thomsons’ attempt to obtain additional commercial contracts (the department stores) for their products.

Student answers will vary. Students will likely point out that this is becoming an increasing popular choice amongst consumers. Students should also note that the business will come with much lower margins than they have now. Some students may question if the Thompson’s should pursue this type of business.

2. Evaluate the decision to construct another greenhouse from a financial and an organizational point of view. (Use rate of return, payback, and break-even analysis in your evaluation.)

The case does not provide all the financial information needed to complete the tasks at hand, so some estimates are needed.

To keep things simple: Margin: 20.53% (using revenue and all expenses) New Greenhouse - $75,000 Variable Cost of the Greenhouse - $60,0000 @ 8 percent interest over ten years = $26,861.45 in interest costs. Total repayment including interest would be $86,861.45. Variable cost per year using interest only would be 26,861.45/12 = 2,238.45 Extra Income - $60,000 a year If you read through their financials, most of their costs are fixed and would likely not increase as a result of the added greenhouse.

The two extra expenses would be Power and Heat@ $6,450. There is no discussion of additional labour required.

Hence the income before income, taxes and depreciation would be: 60,000 – 6450 – 2,223.45 (interest) = $53, 326.55 Beststudy284@gmail.com

3. Comment on the financial health of Thomson Greenhouse through a review of the financial statements.

Student answers will vary.

4. Discuss the implications for succession of the business if the decision were to pass the business to one of the sons sell the business to someone outside the family.

If the business is sold, the owner would most likely maximize the value of the company. The sale may be slightly hindered as the marketplace is changing. Leaving the business in the family would ensure the long-term continuation of the company but the owner’s may not be able to maximize the sales price. Anytime there is an internal succession there is potential for stress among family members.

Case Method: Problem Statement: Long term succession/planning Strengths:  Family owned and operated  Due income  Partnership agreement – tax benefits  Income from renting land  Loyal customers  Customer Service  Commercial accounts Weaknesses:  Seasonal and perishable business  Marketing (while effective) is aged in methods  Greenhouse condition  No income in the winter  Sales Opportunities:  Pursue commercial accounts  Expand Threats:  Large retailers  Succession planning Alternatives: 1. Sell the business 2. Expand and allow one of the interested son’s to take over Beststudy284@gmail.com

3. Close the business 4. Pursue commercial accounts Student answers for recommendations will vary. Given the access to land, and their family’s interest in keeping the business going it would be likely that most students would see expansion and succession planning as an optimal strategy.

Robinson Test Prep Co. Case overview Olivia Robinson is the founder and CEO of Robinson Test Prep, an Ontario company specializing in preparing people for the Certified Accountant (CA) exam. In the Spring of 2019 she felt that she was not achieving market share and growing in the right direction. After three years of operation, Robinson had about five ercent of the market and was facing fierce competition from her primary rival, Canadian Assessment Centres. Olivia wanted to improve marketing and gain market share.

Discussion questions 1. Although Olivia is confident about her share of the market in one-to-one test prep, but she sees potential for online course offerings to expand outside the region. How could she assess the demand to ensure the idea is worth pursuing?

2. What are the quantitative factors of this new business Olivia should consider? What about nonquantitive factors?

3. Olivia is already successful in her current business, but she recognizes she is weak in a few areas. Write a small business plan for Olivia, identifying what she is missing from her current business and why those aspects are important to include.

4. Reformatting the course and adjusting the work of the professors she has hired will mean recalculating her costs. Walk Olivia through her options for financing this new business venture.

Solutions to discussion questions 1. Although Olivia is confident about her share of the market in one-to-one test prep, but she sees potential for online course offerings to expand outside the region. How could she assess the demand to ensure the idea is worth pursuing?

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Students answers will vary. Some potential answers will include she could complete a market potential and market share calculation for Canada.

Other students may note that she could complete primary market research first by surveying potential customers about their willingness to enrol. The information would enable her to create pro forma financial statements.

Students may also note other less formal methods such as using social media to gauge interest 2. What are the quantitative factors of this new business Olivia should consider? What about nonquantitive factors?

Olivia should calculate financial statements and pro forma financial statements for any expansion. She should also consider the impact of expansion on her personal life. An expanded business may enable her to reach financial goals, enjoy her business more, challenge her, and so forth. Of course an expansion/continuation of her business may lead to an increase in risk, stress, time demands, conflicts and she may not achieve her financial goals.

3. Olivia is already successful in her current business, but she recognizes she is weak in a few areas. Write a small business plan for Olivia, identifying what she is missing from her current business and why those aspects are important to include.

Students answers will vary.

Students will most likely note that she needs to ramp up her marketing. She needs to expand her social media use.

Students may also question her methods of course delivery and note that using online learning would make much more sense and broaden out her geographical reach.

Student should also consider if she could expand on the services she is offering and sell expanded or additional customized services.

4. Reformatting the course and adjusting the work of the professors she has hired will mean recalculating her costs. Walk Olivia through her options for financing this new business venture.

Student answers will vary. Savvy students may note that Olivia could likely bootstrap the expansion of her business. Students may also mention that she could borrow the money from traditional lenders, consider non-traditional lenders or sell an equity stake into her business.

Faculty may want to extend the question out and ask the about the advantages and disadvantages of various methods and have students make a recommendation.

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The Beach Buddy Case overview

Jack McDonald has a brand-new product the Beach Buddy, a lightweight cooler which does not require ice and comes with a rechargeable battery, built in speakers, plug in mic, charging station and a built-in blender. McDonald is unsure about the best way to launch his product which he sees as a vast improvement over the only similar product in the market place the Coolest Cooler which requires ice to keep food and beverages cold.

Discussion questions While the case does not provide formal questions allowing the instructor to formulate discussion in any direction. Instructors may want to consider the following questions: 1. Complete a SWOT of the product/company and determine if McDonald should proceed with the business: 2. What distribution strategy would you recommend to McDonald? Why? What factors does he need to consider for various strategies?

3. Would you recommend McDonald proceed with the business?

Solutions to discussion questions

1. Complete a SWOT of the product/company and determine if McDonald should proceed with the business: Strengths:      

Innovative product which does not require ice.

Product is multi-functional and will appeal to several marketing including college students and families.

McDonald is clearly enthusiastic about the product.

Support of his family in the form of $750,000. Family money often comes with favorable terms.

Some market research.

Healthy margins based on the $299 price point

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Weaknesses:    

No formal proof of concept Limited market research No formal marketing/business plan Price is more expensive than major competitor.

Opportunities:  

Coolest Cooler has been a runaway success proving a market does exist.

Product is globally appealing.

Threats:   

Competition from the Coolest Cooler and much cheaper basic cooler modules Potential of portable refrigerator companies entering the marketplace Any downturn in the economy may negatively impact sales of the premium product

2. Where should McDonald initially sell the product? Why? What factors does he need to consider for various strategies?

Student’s Answers will vary. Students may discuss the following: A. Crowdfunding: Students may point out that crowdfunding will offer substantial proof of concept, inject capital into the business and create exposure. This will occur at quite a low cost.

Students may also note that a crowdfunding campaign will take time, McDonald doesn’t appear to need the capital and perhaps he would be better going straight to market.

B. Merchants: Students may advocate for distribution through merchants either higher end of discount. Students should note that this would allow for the quickest roll out of the product in North America and using merchants could compliment any social media marketing strategy.

Students should recognize that using merchants will substantially reduce margins and may cause a more complicated shelfing process.

C. Amazon or Online: Students may state that McDonald could use a website or Amazon to sell his product. Amazon will cut his margins, but students should be aware that they offer a number of services to small merchants. Solely selling the product on his website and using social media is another option. The method will allow for the highest margins but would need to be supported by a substantial marketing campaign.

3. Would you recommend McDonald proceed with the business?

Most students would recommend that McDonald proceed with the business based on the small number of competitors (one), healthy margins and clear market for the product.

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Organic Gourmet Express Case overview Gourmet Express is an interesting case and remains current. The entrepreneur is starting a business which not only delivers groceries but also recipes with easy to follow instructions for busy urbanites. The meals and ingredients are premium in nature and all deliveries will come pre-sorted with detailed storage and recipe instructions. A selling feature is that all meals can be prepared in under 20 minutes.

Discussion questions 1. Based on the assessment of the business do you think Organic Gourmet Express will succeed?

Why or why not?

2. What gaps were missed in the business analysis?

3. What recommendations would you make to Jan Jones?

Solutions to discussion questions

1. Based on the assessment of the business do you think Organic Gourmet Express will succeed?

Why or why not?

While answers will and should vary students should draw on the premium aspect of the service, the readiness of the ingredients and so forth. Students should recognize the competitors who have entered the market but perhaps stress the emphasis on fresh and local being a major competitive factor.

2. What gaps were missed in the business analysis?

Student answers will vary. Clearly a much more comprehensive competitor analysis is required.

In addition there has to be recognition of potential new entrants into the marketplace from grocery stores themselves. Some consideration should be given to price and making some money from the source of food as well.

3. What recommendations would you make to Jan Jones?

Student answers will vary. Students should ultimately stress that the business can be successful but a heavy emphasis will likely be needed on the fresh and organic aspect of the products.

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The Winslow Clock Company Case overview The Winslow Clock Company was founded by Dr. Michael Winslow, inventor of a “throwable” alarm clock. After ten years of development, Dr. Winslow is poised to present his business plan to investors. He needs capital to manufacture, market, and distribute the product.

This case requires students to thoroughly examine the information given in the Winslow Clock Company business plan and to make the changes they think will improve Dr. Winslow’s chances of gaining investors’ confidence.

Discussion questions 1. Based on the information here, do you think the Winslow Clock Company will succeed? Why or why not?

2. What gaps were missed in the business analysis?

3. What recommendations would you make to improve the business plan?

4. Is there a less-expensive market-entry strategy involving lower risk that should be considered?

Why should Winslow consider such a strategy?

Solutions to discussion questions 1. Based on the information here, do you think the Winslow Clock Company will succeed? Why or why not?

Student answers will vary.

2. What gaps were missed in the business analysis?

Student answers will vary. Students will most likely point out that online sales and the use of social media to promote the product would make sense.

3. What recommendations would you make to improve the business plan?

The business plan as presented is basically concise and well-written, but it could benefit from a few changes. To begin with, the “Summary” is much too long. With the summary shortened, a separate financial section should be developed, expanding on the material presented now. Third, Beststudy284@gmail.com

there is no support offered for the sales projections or the marketing approach selected. A great deal of more information needs to be presented on the marketing of the product.

4. Is there a less-expensive market-entry strategy involving lower risk that should be considered? Why should Winslow consider such a strategy?

Student answers will vary. Students should likely determine that crowdfunding would be the quickest and easiest way to provide proof of concept and funds for the business. The product as described is a good fit for crowdfunding.

Windows Tech Case overview

This is a good case to illustrate the start of a franchise company. The business being discussed is a home improvement business with a patented process for window restoration. Students often think about franchising in terms of restaurants or retail stores so this is a unique aspect to the case.

While not asked in the case, instructors may want to ask students if they think it is a good company to franchise and look for justification in their response. Students may argue that the company is a good choice for franchising as it will allow the owner to expand quickly with limited risk, it is a patent protected product, and the franchisees will be motivated managers.

Other students may argue the company is not a good choice for franchising. It’s a relatively unproven concept, there is no franchise agreement and establishing one could be difficult as it’s not clear the franchisor will be able to exert control over franchisees and accurately determine franchisee revenue and so forth. Some students may argue Ahmed would be better off selling the patent to a larger company.

Questions and discussion 1. Ahmed needs to know how to go about franchising the business. What kind of legalities would be involved?

2. He knew that he had patent protection on the machine, but what kind of procedures should Ahmed follow in terms of setting up guidelines for owning a Window Tech franchise?

3. Ahmed wants to sell his franchise to the group or groups that would give the Window Tech name the most exposure and continue to emphasize the quality of the work. Which group should he target for franchising?

4. How much should the franchise cost?

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5. How should Ahmed proceed?

Solutions to discussion questions 1. Ahmed needs to know how to go about franchising the business. What kind of legalities would be involved?

In general franchise business offer the most value when they meet the following:    

The franchise business is a sound concept.

The franchise is distinct, practical, and fill a need.

The processes are easy to teach and clearly communicated to others.

It must be capable of being replicated and transferred to other geographic areas.

Ahmed’s business certainly meets all of these standards. There may be some concern about the ability teach and execute the process but there does not appear to be much concern about this in the actual case.

Some of the legal requirements may include:  

Registration and disclosure with government agencies; some provinces require detailed information before franchising can begin.

The required business licences and incorporations.

In addition, the franchise contract should be drawn up by someone with legal expertise to ensure that the rights of both parties are protected.

2. He knew that he had patent protection on the machine, but what kind of procedures should Ahmed follow in terms of setting up guidelines for owning a Window Tech franchise?

Ahmed should develop a planned and standardized program of operations, he will need to establish initial training and an on-going support system, and he will have to carefully select his franchisees, ideally selecting people with experience or training in carpentry, restorations and/or related industry experience.

3. Ahmed wants to sell his franchise to the group or groups that would give the Window Tech name the most exposure and continue to emphasize the quality of the work. Which group should he target for franchising?

Student answers will vary. One could make an argument that selling to new franchisees without existing businesses would create the largest exposure for the company/brand.

In reality, he could pursue all three markets noted in the case and students should recognize he should expand outside of his geographical area.

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4. How much should the franchise cost?

Student answers will vary.

Students should recognize that this remains a relatively unknown product in one geographical area and suggest a low number. Students should note that a royalty stream should be established and this should be considered the key aspect of any franchise agreement.

5. How should Ahmed proceed?

Most students will likely recommend Ahmed proceed with the franchise model but some students may argue an outright sale of the technology may make the most sense.

Edge Hockey Case overview Edge Hockey was founded by Jack Supple as a successful side hustle to his teaching career. Jack had stated the business four years ago as a bit of a micro company with a trial one-week experiment. Since then, Jack is running five hockey camps a year but is starting to see an overall reduction in participation rates and additional competition. As such he is questioning the future of his business.

Discussion questions 1. What are some of the advantages and disadvantages in running a supplementary business such as Edge Hockey for Jack?

2. Based on the information in the case what would you recommend to Jack? Why? 3. Complete a financial analysis of Jack’s current business and determine if he will make money at 75 percent capacity?

4. If Jack is going to market his business more formally, how would you recommend he do this?

Solutions to discussion questions 1. What are some of the advantages and disadvantages in running a supplementary business such as Edge Hockey for Jack?

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The major advantage of running a side business include extra income, but beyond that Jack is likely increasing his hockey knowledge for a sport he loves, improving his social networks, enjoying himself, and achieving some self-actualization goals. The main disadvantages include the potential stress of losing money, the time he invests in the firm which likely takes up most if not all of his vacation and time away from family.

2. Based on the information in the case what would you recommend to Jack? Why? Given his family situation and his love of sports the option of closing the business does not make a lot of sense. Students may opt to recommend either Option #2 (expansion) or Option #3 (downsize). Valid arguments can be made for both. Students recommending Option #2 may note that Jack could substantially increase his profits, he enjoys the business and he has a growing family to support. Proponents of Option #3 may state that Jack could likely make the same amount of money with less risk.

3. Complete a financial analysis of Jack’s current business and determine if he will make money at 75 percent capacity?

Jack’s business is similar to a lot of side hustles where the financial record keeping is fairly simple.

Weeks of Business for Jack: Five @ 75% of his average capacity equates to Jack registering 25 players per week Revenue: (25*450)*5 weeks = $56,250 in revenue Ice Costs: (20 hours a week *250 an hour) * 5 weeks = $25,000 Coaching Help @ $30 an hour average, he will normally employ five coaches given his numbers.

(25 hours of coaching * $30 an hour wage) = $750 coach per week. ($750 coach per week * 5 coaches) * five weeks = $18,750 in coaching expense Insurance: $2500 Supplies: $2500 A simplified Income Statement: Revenue: $56,250 Expenses: Ice Costs: $25,000 Coaches Expense: $18,750 Insurance: $2,500 Supplies: $2,500 Beststudy284@gmail.com

Net Income: $7,500 Jack will make a small profit at 75 percent capacity. Given that more than 50% of his costs are fixed faculty may want to point out the impact of additional participants has a significant impact on Jack’s bottom line. For example, if Jack operated at 100% of capacity at 36 participants his revenue would increase to $81,000 and his profits would rise dramatically to approximately $29,000. So an additional 11 participants a week makes a significant different to Jack’s bottom line.

4. If Jack is going to market his business more formally, how would you recommend he do this?

Students answers will vary. Students should recognize the importance of low cost or no cost alternatives especially social media, email campaigns and as simple as signs in rinks.

Beach Stake Case overview Will Miller is a University student/entrepreneur/inventor who believes he has created the latest craze in beach toys, the Beach Stake. He is considering whether to go ahead and just order inventory or perhaps use crowdfunding to further test his concept.

Discussion questions 1. What would be the advantages and disadvantages of crowdfunding for Will’s business?

2. If Will opted to use crowdfunding, what would he have to do to create a successful crowdfunding campaign?

3. Has Will overlooked anything in completing his business analysis? If so, what did he not consider?

4. What recommendations would you make to Will?

Solutions to discussion questions 1. What would be the advantages and disadvantages of crowdfunding for Will’s business?

There would be several advantages to crowdfunding for Will including:  Offer Will proof of concept for his product.  Provide revenue.  Increase the exposure of his products.  Expand sales to global marketplace.

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

Get feedback.

Disadvantages include:  Potential reputation loss to product if unsuccessful.  Time it takes to plan a successful campaign.  Potential loss of sales.

2. If Will opted to use crowdfunding, what would he have to do to create a successful crowdfunding campaign?

Answers will vary. Students should discuss that Will should develop a plan to be successful. He will need to select an appropriate site, he will need both phots and video and a compelling story to tell. Will must also bring attention to his campaign through social media, traditional public relations and so forth.

3. Has Will overlooked anything in completing his business analysis? If so, what did he not consider?

Answers will vary. People should mention that Will does not seem to have a plan to actually sell his product, money for marketing or additional activities.

4. What recommendations would you make to Will?

Answers may vary. Students should see crowdfunding as a safer method for Will to determine proof of concept.

The Framemakers Case overview Robert and Teresa Norman have decided to leave a family business and start their own retail picture-framing business.

Discussion questions 1. What aspects of Robert and Teresa Norman’s backgrounds will contribute to their success with the picture-framing store?

2. What positive things have Robert and Teresa done in investigating the feasibility of the new store and what additional information might they have collected? From what sources could this information be obtained?

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3. From the information provided, evaluate the business plan they have prepared for their new business.

4. Weigh the relevant pros and cons for the Normans of operating a U-Frame-It franchise instead of starting their business from scratch.

5. Evaluate the Normans’ initial approach to obtaining financing for The Framemakers.

6. Assuming you are the banker, evaluate the financial requirements and projections Robert and Teresa prepared.

Solutions to discussion questions 1.

What aspects of Robert and Teresa Norman’s background would contribute to success if they decide to go ahead with the picture-framing store?

The Norman’s have several things going for them if their decision is to proceed with the new business. a.

Robert has had business and interior design college training – both aspects should be helpful in managing the new business. b.

Both Robert and Teresa enjoy working with people and have had considerable retail experience. The new business will undoubtedly involve this type of customer contact. c.

The Normans have some background in the picture framing business having done it on the side for the some time. d.

Robert is independent. He does not enjoy working for others. e.

Teresa is interested in and is very fond of framing. f.

The business may have more growth opportunities than the painting business which to some extent is limited being a service business because of the expertise of the owner. g.

The proposed business is something both Robert and Teresa enjoy.

2.

What positive things have Robert and Teresa done in investigating the feasibility of the new store and what additional information might they have collected? From what sources could this information be obtained?

The Normans have done several positive things in their investigation: a. They have talked to a manager of a framing shop and has learned valuable information about the operations. b. They have learned about industry growth and have made contacts with the industry association, suppliers and other dealers. c. They have subscribed for the trade magazines which are relevant to the proposed business.

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d. They have prepared a preliminary evaluation of saturation of this type of business in the City of Brandon and a per customer profit analysis.

One of the first things Robert should be doing at this point is to evaluate the new opportunity relative to his goals, capabilities, and experience. He should also collect more information in order that he can prepare a financial feasibility study for the proposed business.

For example: Market Potential: a. He did not clearly define his market area. Was it just the City of Brandon or a surrounding area as well? What is the population of this area? This information is likely available form the City of Brandon or the Brandon Chamber of Commerce. b. He has no idea of sales revenues in the market area for this type of business. He may be able to obtain this information from provincial or municipal government sources. If this is not available, per capita expenditures from Federal Government data may be helpful. The $32.00 spent per customer is helpful but Robert needs to get some idea of number of customers that he can expect. Another weakness of the secondary data is that it is for the "typical" store. Robert needs to obtain some information about "his" store in Brandon. He may solve this problem and lack of availability of secondary data by doing a consumer survey for his market to assess level of demand for the store. c. Some adjustments to the secondary data may be required. These would involve such things as updating the data, and allowing for in-shopping from the outlying regions around Brandon. The result of estimating market potential should be a dollar revenue based on number of customers multiplied by the amount spent per customer.

Market Share: Robert should then calculate a potential market share by multiplying his store's share of retail-service capacity by the market potential. This capacity probably could be measured in square footing devoted to framing in the city. He should also make some adjustments to this amount by assessing consumer satisfaction with the existing store in Brandon (which could be obtained from the survey), and by assessing the competitive strengths and weaknesses his store might have. The above information could provide an estimated sales revenue amount Robert and Teresa could expect for the first year.

Projected Income Statement: Using the figure obtained from the market share calculation combined with the expense figures already obtained, Robert should be able to construct a projected income statement. He may be well advised to verify the material and overhead expense figures of his business for the Brandon area. As part of the financial feasibility he should also calculate start-up costs. Robert and Teresa also probably moved too quickly in closing down the painting business. They should have at least waited until they had collected some of this data.

3.

From the information provided, evaluate the business plan they have prepared from their new business.

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Robert has covered some of the key aspects of a business plan such as target market, financial requirements, location, personnel, layout and regulations. However, he has left some critical points out of the plan.

Objectives: Robert's only objective is to own a "big" business "someday." He should try to quantify this goal and others if possible and set a time limit. Sales and profit targets for the first year would be a good place to start.

Market Approach: Although he has defined his target customer he hasn't obtained information about its size, characteristics and needs. He also needs to do more work on firming up his plans for his marketing mix (i.e., product, pricing, location and promotion) in response to the target market's needs.

Robert may be overlooking some important environmental influences such as the (potential) competition in Brandon, and the economy's influence on the business. More data could be obtained on the trend to do-it-yourself picture framing as well as any legislation that might affect the business.

Financial: It doesn't appear Robert has done a very thorough job of estimating the financial requirements for the business. This was discussed in Framemakers part II. He has taken much of his data from the store in Winnipeg. A part of his business plan should include the type of financial record keeping he will employ as well as operating standards which can be evaluated.

Personnel: Even if he and Teresa do not plan to hire anyone at present, they should set down a division of responsibilities between themselves and begin developing plans for the recruitment and management of other employees as the business grows.

Physical Facilities: Robert again appears to be approaching this aspect of planning in a haphazard way. Estimates should be obtained and evaluated before purchases are made. The location decision appears also to have been made without much evaluation although there was recognition of the need for a high traffic location.

Regulations: Robert knows he must obtain a business license. There are several other potential regulations which should be investigated however. Does he need a provincial license as well as one from the city? Are there any zoning regulations which preclude the Framemakers type of business in certain locations? What taxes apply to the business? Would incorporation reduce some of the risk in starting the business? Robert would be well advised to consult a lawyer in seeking answers to these questions.

4.

Weigh the relevant pros and cons for the Normans of operating a U-Frame-It franchise instead of starting their business from scratch.

The relevant pros and cons to franchise for the Normans are: Pros

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They have little experience in the industry. A franchise would provide considerable training to overcome this deficiency which could be especially valuable during startup.

They would have some instant recognition of the name to help with market demand.

This may help them in planning and obtaining needed financing.

The franchiser may provide additional services such as location selection (a very important aspect in this situation), interior layout, training, advertising, possible financing and would undoubtedly speed up the establishment time.

The "U Frame It" franchise is looking at expanding to Brandon even if the Normans do not sign on with them. This will be additional competition.

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Cons -

The $20,000 franchise fee would be particularly burdensome for the Normans.

Robert appears to be very independent and would no doubt resent franchiser monitoring and restrictions over their operations.

It is unclear without further research what increase in sales would come from affiliation with the franchise.

There is potential for non-delivery of franchiser obligations in terms of training, advertising, discounts, etc.

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5.

Evaluate the Norman’s initial approach to obtaining financing for The Framemakers.

Robert and Teresa were due to run into difficulties obtaining financing because of their lack of investigation. Some of the things they could have done to alleviate the problem are as follows: -

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Give some thought to the proportion of debt versus equity they would employ.

Perhaps they might have obtained equity financing from family or prospective partners.

Much more care should have been taken in obtaining estimates of financial requirements. This information should have been tailored to Framemakers in Brandon rather than a "typical" store in Winnipeg.

This would have involved utilizing both secondary and primary sources such as checking with government agencies and suppliers of necessary inventory and equipment.

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6.

The Normans might have investigated the possibility of obtaining financing from government sources. It appears that they were aware of this source.

The investigation of financial requirements should have taken place well in advance of the need for funding. This would have resulted in much less stress on the Normans as the store opening approached. each item of start-up and operating costs should be sourced if possible with some backup for "estimates."

Assuming you are the banker, evaluate the financial requirements and projections Robert and Teresa prepared.

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From the information provided in the case, we can see that Robert underestimated several items. In general, a verified source for each item on both statements should have been provided. Once again Robert appears to have been following the P.P.F.A. averages rather than obtaining information specific to Brandon. The P.P.F.A. averages also reflect results of businesses currently operating - not one just starting up.

Based on the format, it is easy to see why the banker required the Normans to rework their statements several times.

Some of the specific weaknesses of the proposal, some of which were mentioned, are: Proposal Requirements Inventory - 4000 appears low - should have used amounts from existing stores Equipment & Fixtures - low - should have obtained specific quotes First Month's Rent - should have verified amount from landlord Utilities & Phone deposit - should have verified amount from utility and phone company.

Supplies - did not estimate an amount for supplies Contingency - should have budgeted an amount for contingencies First Year Projection Revenue - 76,800 - should have made this estimate by looking at more than P.P.F.A. averages i.e. - Winnipeg stores, adjust for Brandon and its competitive situation, surprising that Framemakers was new and would take some time to build up a clientele.

Expenses - 57,600 - these should have been itemized and verified rather than rely on P.P.F.A. estimates only i.e. cost of goods sold, salaries, supplies, promotion, rent, utilities, interest, phone, repairs, and depreciation. Each of these expenses could have been different for framemakers than for the average framing shop.

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Top Human Tech Inc. Case overview This is a case where instructors can discuss growth and how a company can succeed internationally. While the case does not come with formal questions, instructors may ask students to complete a full analysis or discuss the case in class. From a discussion standpoint, instructors may ask students the following questions:

Discussion questions 1. What do you think are the keys to success for the company?

2.

How will the company expand in the future?

3. What do you think about relying on word of mouth as the sole method for advertising?

Solutions to discussion questions 1. What do you think are the keys to success for the company?

While student answers may vary students should discuss their business strategy, investment of ownership, establishment of communications department and forwardthinking founders.

2.

How will the company expand in the future?

While student answers may vary students should discuss international expansion or by adding other products. Students should be concerned about quality control and impact on culture. The company is well placed to continue to pursue growth initiatives.

3. What do you think about relying on word of mouth as the sole method for advertising?

While student answers will vary they should recognize that this is a low- cost way of marketing which has resulted in significant revenue. Some students will argue that in the future they may have to in fact invest in more traditional advertising.

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Clovis Jewellers Case overview This is a very interesting case that allows for multiple uses. The instructor and students should recognize that this is a small family jewelry store, like so many, which are struggling to survive.

While not professionally done, the instructor may fine this video useful in highlighting the difference between small local and online retailers: https://www.youtube.com/watch?v=-m0mRA-I6kU Video Title: Blue Nile vs Local Jeweler Brief Description: This is a common conversation between an online diamond shopper and a local jeweler. This one has a happy ending...

Posted By: diamondvids Published: October 6, 2010 The case is detailed enough where an instructor could assign the case as a formal written case submission. In the formal submission students could be asked to complete a case analysis with a SWOT, alternatives and a recommendation or students could be asked to follow the fundamental question in the case and evaluate each section.

Problem Statement: Company wants to be sustainable in the long term. Recent decline in sales due to external forces. Online competition is also an issue (not discussed in detail in the case – students should be aware).

Strengths:  Purchasing gemstones direct  Reputation/Brand  Little employee turnover  Quality merchandise  Good markup  Owner  Quality control  Improvements in management of finances Weakness:  Recent decline in sales  Financial controls  Reliant on ring and stone sales  Potential damage to brand due to product switch (temporary)  Formulating prices  Marketing  Lack of inventory control  Lack of formal planning Beststudy284@gmail.com

Opportunities:  Customization  Expansion  Online sales  Target events Threats:    

Competition including online Local economy Regulations Anti diamond campaign

Alternatives: 1. Focus on customization 2. Improve marketing, especially social media and stress local business angle.

3. Cut prices due to new deal with diamond suppliers.

Students could create a pro and con table.

Student recommendations should vary. It would likely make the most sense to focus on either alternative one or two or a combination of them both.

Blake Lock and Security Systems Case overview Paul Blake started Blake Lock and Security Systems (BLSS) two years ago offering locksmithing services to residential and commercial customers as well as automobile owners in the greater Halifax area. Blake has limited his service offerings by excluding alarm installations and after hours emergency service.

Discussion questions 1. Paul Blake has asked you to be his mentor as he has decided to overhaul his business practices. What first steps would you advise Paul to take? Why?

Solutions to discussion questions

1. Paul Blake has asked you to be his mentor as he has decided to overhaul his business practices. What first steps would you advise Paul to take? Why? Beststudy284@gmail.com

Student Answers will vary. Students will likely engage in a discussion about marketing and the long-term sustainability of the business.

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PART ONE: The Decision to Start a Small Business

CHAPTER 1: The Role of Entrepreneurship & Small Business in Canada

CHAPTER LEARNING OBJECTIVES LO1. Discuss the level of interest and activity in the small business sector.

LO2. Evaluate common methods of defining small business and explain why a definition is important.

LO3. Summarize the current extent of entrepreneurship and small business in Canada.

LO4. Describe the benefits a healthy small business sector can offer to society.

LO5. Explain the probable future environment for entrepreneurship and the small business community.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 1-1: CROWDFUNDING HELPS BROTHERS BUILD A BETTER WATER BOTTLE 1. Do you think the Pressa Bottle will continue to be a successful product? Why or why not?

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Answer: Student Choice

2. What do you think are some of the advantages and disadvantages of crowdfunding?

Answer: Student Choice – however students should mention from the entrepreneur’s perspective that it allows them to test market product ideas, provides additional sources of capital and can assist in pre-selling products. From a disadvantage side, entrepreneurs have additional work to communicate with many people, it is fairly unregulated and some entrepreneurs and/or investors could act unethically.

3. Visit the Kickstarter website and report back to the class on some of the best ideas that are being pitched. What are the terms associated with the ideas? Would you personally donate or invest money using crowdfunding?

Answer: Answer will vary on student work.

SMALL BUSINESS IN ACTION 1-2: YOUNG CANADIAN SOCIAL ENTREPRENEURS 1. How would you define social entrepreneurship? Do you think there is a difference between social entrepreneurs and regular entrepreneurs? Why, or why not?

Answer: Student Choice 2. Can an entrepreneur consider themselves social entrepreneurs if they retain all the profits from their business?

Answer: Student Choice – however students may mention that businesses can provide society benefits and still make profits. Donating profits is not essential to being a social entrepreneur.

3. Either in groups or individually, list some ideas for a social enterprise. If time permits, discuss the marketing mix for the social enterprises, including the product or service you will sell, how you will promote the business, the price you will charge, and where the business will be located.

Answer: Answer will vary on student work.

SMALL BUSINESS IN ACTION 1-3: FASHIONING AN ONLINE BUSINESS 1. What are some of the advantages and disadvantages of the Chic Marie business model?

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Answer: Students may mention from a customer’s perspective that they will enjoy being able to replenish their wardrobe once a month, that the company is providing women with a service which is relatively low in cost, consumers can purchase clothes they like and the use of the Scarlett app. From the business perspective students may mention the high growth in sales, relationships with designers may allow for cheaper clothes and that the company is essentially renting out clothes at a significant margin. On the disadvantage side for consumers, students may discuss that clothes may not fit or be out of style. Speaking specifically to the business, students may discuss the high start-up costs, the need to find additional designers, and the difficulty in raising capital.

2. Do you think Chic Marie will be a long-term success? Why or why not?

Answer: Student Choice 3. Simard is quickly expanding her business both in Ontario and into the United States. Do you think this is a good idea? Why or why not? What are some advantages and disadvantages of pursuing expansion?

Answer: Student Choice – however students may mention that expansion will lead to higher sales, increase the brand awareness and enable Simard to gain valuable first-mover advantage.

Disadvantages could include difficulties in managing a rapidly growing company including keeping costs in check, the need to raise additional funds, where to find new designers, and that the U.S. market tends to be more competitive than Canada.

4. Were you surprised Simard experienced some initial difficult in raising capital? Why or why not?

Answer: Student Choice – however students should mention from the entrepreneurs perspective that it allows them to test market product ideas, provides additional sources of capital and can assist in pre-selling products. From a disadvantage side entrepreneurs have additional work to communicate with many people, it is fairly unregulated and some entrepreneurs and/or investors could act unethically.

5. There are many monthly subscription services. Working either in a small group or independently, develop some products you think would fit well into this subscription model. Be sure to justify the choices, identify target markets, and how you would appeal to customers.

Answer: Answer will vary on student work.

6. Use Internet resources to find out about the current state of Chic Marie's business. Has the business model remained the same? Has the company reached its expansion goals?

Answer: Answer will vary on student work.

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SMALL BUSINESS BEGINNINGS 1-2: PEACE BY CHOCOLATE 1. The Hadhad family has been quite successful in public relations (PR). The business has been featured in numerous articles and on television. What are some of the advantages of this type of marketing? Do you think the business will be able to maintain this positive PR long term? Why or why not?

Answer: Students may discuss that PR is free and it comes with credibility with readers/consumers.

Students may offer different opinions on the company’s ability to maintain as much PR coverage in the long run. Some students may offer that the media may move on to more current stories while other students may note that the Hadhad’s appear interested in using PR for their business and if they maintain a good strategy and promote new topics/concepts that it may continue.

2. What do you think would be some of the advantages and disadvantages associated with starting a business in rural Nova Scotia, specifically Antigonish, which has a population of approximately 4300 people.

Answer: Advantages: Caring community, community support, people who moved away may be willing to move back for work, lower wages, lower rent, assist in generating PR, less taxes.

Disadvantages: Inability to attract workers, far away from urban centres may increase shipping costs, taxes and costs could be higher 3. Do you think Peace by Chocolate should be considered a social enterprise? Why or why not?

Answer: Answer will vary on student work.

SMALL BUSINESS IN ACTION 1-4: INNOVATION IN NEW BUSINESS - A SOCIAL MEDIA SUCCESS STORY 1. What are some of the advantages and disadvantages of using a product like HootSuite for your company?

Answer: Student Choice – however students may discuss that HootSuite allows business owners to post to multiple social media sites from one location saving time and money.

2. Given that many consumers are becoming increasingly concerned about privacy rights, do you think HootSuite or companies that use its social media tracking tools could be subject to public backlash against monitoring social media use and activities?

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Answer: Student Choice 3. If time permits, visit HootSuite’s website, and try out the free tools. Report back to the class if the tools worked as you expected. Prepare a summary of the features HootSuite can offer businesses.

Answer: Student Choice SMALL BUSINESS IN ACTION 1-5: ECONOMIC DOWNTURN PRESENTS OPPORTUNITIES 1. Why do you think some companies fail to plan for a downturn in the economy?

Answer: Student Choice – however students may mention it is human nature to assume things will be good for a long period of time; owners may want to keep the money rather than re-invest.

2. Do you think it is ethical for businesses to negotiate deep price cuts from suppliers? Why or why not?

Answer: Student Choice 3. What on-going actions do you think an entrepreneur should engage in to sustain a business for the long?

Answer: Student Choice – however some students many mention investing in the business; continuous improvement; diversification

ANSWERS TO DISCUSSION QUESTIONS 1. Why do you think entrepreneurial activity has increased? Do you think these trends will continue? Why or why not?

Answer: Student Choice - however the following aspects should be covered - significant contribution to society as a result of a healthy small business sector. Examples such as employment, innovation, productivity, flexibility, competitiveness and social contributions should be included.

2. What excites or interests you about being an entrepreneur? What are your major concerns?

Answer: Student Choice 3. Under what conditions would the various definitions of small business be more appropriate? (i.e., the level of profit may be used by Revenue Canada to determine the small business tax rate.)

Answer: The appropriate definition would depend on the use of the information. For example: To obtain counselling assistance form the CASE Program of the Business Development Bank of Canada, the number of employees would be used (75).

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To obtain funding under the Small Business Loans Act gross sales would be used $5 million).

To receive the reduced "Small Business" tax rate from Revenue Canada net operating profit would be used ($500,000).

4. What is meant by the statement “Small business is the backbone of the Canadian economic system"? Give evidence to support this statement.

Answer: Several factors illustrate the impact of small business to our economy.

1.

As indicated in the text, there is considerable evidence that those economies that provide the most encouragement for entrepreneurship and small business are those which have experienced the highest growth rates since the 1950's.

2.

Small firms have accounted for most of the new jobs created.

3.

Further evidence shows that 97% to 99% (depending on the definition) of businesses operated are small businesses and approximately 50% of gross domestic product is provided by small business.

4.

A large portion of the inventions we enjoy today were provided by Canadian entrepreneurs.

5.

Small businesses make approximately 32% of all business profits.

6.

Approximately 29% of Canadian gross sales and 17.5% of exports are made by small business.

7.

20% of all business assets are owned by small businesses.

8.

Small business is also more flexible and can respond more quickly to changes in the economy.

9.

A much higher percentage of small businesses are Canadian owned than compared to large corporations.

10.

Finally, small businesses seem to be more socially conscious than large companies and tend to operate with the community in mind.

All of these factors contribute to the theory that small business is the backbone of our economy.

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bureaus, and mainframe versus microcomputer specialists. What effect does this type of industry fragmentation have on the small business community?

Answer: Fragmentation of markets to better service consumer needs and wants is beneficial to the future of small business. A small specialized time sharing service bureau, for example, has some economic and service advantages over a large firm with large overhead that handles all types of computer services. On this premise the outlook for small business in the future is very promising as many industries are following a similar pattern as the data processing industry.

ANSWER TO EXPERIENTIAL EXERCISES 1. Form groups of two to three, and start a small business or mini-venture that will run for a period of four to six hours.

The only rules are: a. The business has to be legal b. No lotteries c. Maximum investment of $1 d. Businesses must cease operations at day’s end.

After completing the project, write a reflection stating what you did, whether you made a profit, and what you learned. you may also present this information to the class.

Answer: Dependent on student choice.

2. Ask three small business owners about their projections for the future of small business. What problems and opportunities do they foresee?

Answer: Will vary based on the entrepreneurs selected 3. Using Internet resources, find out how different Canadian organizations define social enterprise.

After preparing a summary report on your findings, draft your own definition of the term.

Answer: Student Choice 4. Write a short essay discussing your views on the future of small business given current trends in society and in your geographic area.

Answer: Student Choice – however student's answers should be positive.

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Why has there been an increase in entrepreneurial activity throughout the world in recent years?

Answer: Many countries are turning to small business and private initiative to assist in their economic growth.

What evidences are there that there is an entrepreneurial "revolution" occurring?

Answer: The entrepreneurial revolution is evidenced by increases in: business establishments, employees in small businesses, government small business programs, college small business classes, and entrepreneurial activities of large companies.

Why is it important to define small business?

Answer: Although defining a small business is difficult, it is important to make for comparison, evaluation, and various lending and assistance programs.

What are the criteria used to make this definition?

Answer: Some of the common criteria in defining small are total revenue, number of employees, profitability and type of management structure.

What is the extent of small businesses in Canada?

Answer: Small business accounts for roughly 98% of all businesses, 29% of gross sales, 26% of gross domestic product and 56% of the labour force, 32% of business profits, 17.5 % of all business assets, 25% of exports and 52% of net job creation.

What two demographic groups have shown an increase in proprietorships in recent years in Canada?

Answer: In recent years there has been an increase in small businesses established by seniors and women.

What are the contributions small businesses can make to a society?

Answer: Small business promotes Canadian ownership and economic growth, provides jobs, innovations, high productivity, flexibility, and social contributions to a society.

What are the positive and negative factors which may influence the small business community in the future?

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Answer: The climate for starting a small business in the future should improve; however there will continue to be competitive disadvantages which may negate this potential advantage. The factors which may influence this change include technology, consumer demographics and buying patterns, and the competitive aspects of markets.

KEY TERMS (Not in text) Baby Boom Generation: People born between 1946 and 1964 and are the 2nd largest cohort of people in Canada. They are characterized by being quite wealthy and are attractive potential customers for business owners.

Canadian Federation of Independent Businesses: A non-profit organization which represents, promotes and advocates for small businesses and entrepreneurs in Canada.

Entrepreneurs: A person who starts a business. A wide variety of definitions exist.

Entrepreneurship: The act of starting a new business or acting intrapreneurially within an existing company.

Labour Intensity: The number of employees a firm employs to produce outputs.

Global Entrepreneurship Monitor: A report which examines new and growing business in 21 countries.

Millennial Generation: People who were born between 1980 and 2000. They are the largest cohort of people in Canada and entrepreneurs are interested in Millennials as potential customers due to the size of the group and their spending power.

Red Tape Reduction Action Plan: A Federal government plan to reduce red tape and regulations taking into account their impact on small business.

Social entrepreneur: A person who applies the skills of entrepreneurship, such as risk taking, problem solving, and business planning, to create social change. Social entrepreneurs not only strive to make money but also work toward making the world a sustainable community.

Social enterprise: An organization that is committed to improving society.

Small Business: The term is defined differently by numerous organizations in Canada. Most definitions cite state a business must be independently managed and have fewer than 500 employees.

SME: Small and medium enterprise

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VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Suggested Panel: https://www.youtube.com/watch?v=DIQpJUo9_bM

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 1 and 3 from this Chapter would make excellent group assignments/projects.

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CHAPTER 2: The Small Business Decision

CHAPTER LEARNING OBJECTIVES LO1. To discuss the advantages and disadvantages of small business ownership as a starting point in making the small business decision.

LO2. To review the personal and organizational attributes of a successful small business owner.

LO3. To explain the reasons some businesses succeed and others fail.

LO4. To discuss entrepreneurial development in large business.

LO5. To identify the differences between an entrepreneur and a manager.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 2-1: MOMPRENEURS

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1. Given the challenges associated with starting and running a business, do you think being a mompreneur allows for more work–life balance compared with traditional work or part-time employment?

Answer: Student Choice – however students should mention a motivation for many mompreneurs was to start a business so they could be personally in charge of their own work schedule 2. What do you think are some of the advantages and disadvantages of being a mompreneur?

Answer: Student Choice – however students should review the advantages and disadvantages discussed in the text.

3. What do you think are some business ideas that would allow work and life balance?

Answer: Student Choice SMALL BUSINESS IN ACTION 2-2: TAKING THE PLUNGE 1. What are some of the reasons that Asaria’s businesses have succeeded?

Answer: Industry experience, there was a demand for the products/service, lack of competition, innovation in marketing, and ability to raise money.

2. Asaria has managed to raise millions for Well.ca prior to stepping down as CEO and ultimately selling the company. He has since raised in excess of $51 million for Tulip. Would you have invested money in Well.ca and Tulip? Why or why not?

Answer: Answer will vary on student work. Some students may note some hesitation about Tulip based on the trend away from traditional retail. Other students may note they would invest based on the innovativeness of the product, his track record and the number of retailers using the service.

3. Asaria hopes to grow Tulip into a $100-billion company? Do you think he will be successful? Why or why not?

Answer: Answer will vary on student work.

4. What do you think are some of the advantages and disadvantages of Asaria pledging 80 percent of his shares in Tulip to an employee-controlled trust?

Answer: Answer will vary on student work.

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SMALL BUSINESS BEGINNINGS 2-1: SOCIAL SELLING 1. What do you think are some of the advantages and disadvantages of social or direct selling?

Answer: Advantages: People selling the product are motivated as their compensation is tied to sales; Associates are often owners or empowered entrepreneurs in the company; Sales occur in a fun, party like atmosphere; Lower costs using social selling. No retail stores are needed and salespeople are only paid if they make a sale. Disadvantages: Maybe difficult to find people to sell products; Motivation of salespeople can wane; Social sales may take away from online sales; Company lacks control of message from salespeople/owners.

2. Develop a list of business ideas you think would be successful using the direct sales model. Your idea should include a product(s) and some justification why social selling would work.

Answer: Answer will vary on student work.

3. Use Internet resources to discover other social selling businesses. Identify some opportunities you think have significant potential and present them to class. Be sure to include the product(s), what support the company offers, and, if possible, the commission structure.

Answer: Answer will vary on student work.

SMALL BUSINESS IN ACTION 2-3: YOUNG ENTREPRENEUR APPEARS TO POSSESS ALL THE KEYS TO SUCCESS 1. Review the keys to entrepreneurial success above. Does Satok possess most of these characteristics?

Answer: Student Choice – however most students will cite alertness to change and the ability to obtain capital.

2. 2. Do you think AppHero was/is a strong product? Will the company succeed? Why, or why not?

Answer: Student Choice 3. 3. Are you surprised by Apple’s behaviour towards its competitors? Why or why not? Was their behavior ethical?

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Answer: Student Choice – however most students will note that young people lack experience, often have a hard time getting people to believe in them and lack their own money to invest in the business.

4. Were you surprised that an 18-year-old was able to raise $1.8 million for a business? What do you think made the app attractive to investors? What do you think are some of the challenges with trying to raise money while still in high school?

Answer: Student choice 5. Satok, now works for Fuse Powered, do you think entrepreneurs can easily switch to the role of employee?

Answer: Student Choice 6. Mobile business offers entrepreneurs incredible opportunities. List and, if time permits, develop an explanation of some mobile-based businesses you may want to start. For example, for a similar project, an Acadia University student developed a beer appreciation app that he is now selling.

Answer: Answer will vary on student work.

ANSWERS TO DISCUSSION QUESTIONS 1. What are the advantages and disadvantages of small business ownership?

Answer: There are many advantages and disadvantages to owning a small business. Some of the most common advantages are: independence, more personal contact with people, skill development, potential financial rewards, challenge, and enjoyment. The possible disadvantages include: risk, stress, need for many abilities, limited financial rewards, people conflicts, and time demands.

2. Which of the characteristics of successful small business owners do you think is the most important? Why? Answer: The students could develop answers for a number of characteristics. Three characteristics stand out as important for any successful small business. The first characteristic is to stay close to the consumer. Businesses that are constantly monitoring the market have a good idea of what the consumer wants and needs. A second very important characteristic is the ability to attract and hold competent employees. A manager cannot do everything in the firm so he/she needs good employees to effectively carry out duties and deal with the client on an everyday basis. A third important characteristic of successful small businesses is to have very thorough operating details. These Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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successful businesses have goals, reports, and constant evaluation and adjustments to follow a detailed business plan.

3. How do managerial skills differ from entrepreneurial skills? When would an entrepreneur's skills be more useful than a manager's? Why? Answer: The text outlines the difference between an entrepreneur and a manager. Entrepreneurial skills tend to be more valuable in starting and expanding a business. Managerial skills, on the other hand, are more useful for maintaining and solidifying an existing business.

4. Select a successful small business, and discuss the reasons for its success, drawing on the success characteristics outlined in the text.

Answer: The answers will vary.

5. What are the most common reasons for small business failure?

Answer: Students should note external shocks and management problems.

ANSWERS TO EXPERIENTIAL EXERCISES 1. Investigate a local business that has recently failed. Using Internet sources and other research methods, identify why the business ceased to exist.

Answer: The answers will vary.

2. Interview a local small business owner about what he or she feels are the advantages and disadvantages of small business ownership.

Answer: Dependent on student interview and reflection.

3. Interview an entrepreneur and attempt to identify his or her entrepreneurial characteristics and leadership style.

Answer: Student Choice.

4. Select a successful small business, and discuss the reasons for its success, drawing on the success characteristics outlined in the text.

Answer: Applicant question - dependent on the small business chosen.

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CONCEPT CHECKS (Not in text) List the advantages and disadvantages of owning a small business?

Answer: There are many advantages and disadvantages to owning a small business. Some of the most common advantages are: independence, more personal contact with people, skill development, potential financial rewards, challenge, and enjoyment. The possible disadvantages include: risk, stress, need for many abilities, limited financial rewards, people conflicts, and time demands.

What are the characteristics of successful small business owners?

Answer: There are certain personality characteristics required to be a successful ownermanager. This list includes: achievement oriented, risk taker, independence, innovative, strong verbal and numerical skills, problem solving ability, strategic planning, and the ability to persevere.

What are the characteristics of a successful business?

Answer: A healthy small business generally has the following characteristics: a good owner manager rapport, more labour intensive, personal attention to daily operations by the owner, flexibility, and a market where demand is local.

What are the major causes of business failure?

Answer: The major causes of business failure are generally related to external shocks and/or management problems. Statistics Canada estimates that roughly 68 percent of businesses fail due to some type of external shock. These commonly include a downturn in the economy, changes in the economy such as interest and/or currency rates, new competition, loss of customers, loss of suppliers, new competition or substitute product, and/or change in laws or regulations. Management problems usually revolve around issues such as starting a business without raising enough funds, inability to raise additional capital, failure to control costs, problems attracting or retaining employees, growing too quickly, and/or poorly planned expansion. Additionally, some entrepreneurs will also suffer from burnout associated with working too many hours.

What is the difference between an entrepreneur and a manager?

Answer: Entrepreneurial skills such as inventiveness and creativity tend to be more valuable in starting and expanding a business. Managerial skills are more useful for maintaining and solidifying the already started business.

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KEY TERMS (Not in text) Achievement Orientation: A common characteristic of entrepreneurs refers to their desire to achieve goals both personal and financial.

Direct Sales/Social Selling: When members of the public sell directly to one another.

Entrepreneurial Skills: The specific traits such as creativity, flexibility, innovativeness and risk taking that are required to successful start and manage a business.

External Shocks: Incidents which happen in the macro environment which negatively impact a business. Statistics Canada estimates that roughly 68 percent of businesses fail because of some type of external shock.

Independence: The primary reason for going into business for yourself. This includes the freedom to make your own decisions without having to ask a superior.

Innovativeness: A willingness to try new ideas.

Intrapreneur: A person who acts entrepreneurial within an existing business which they do not own.

Management Skills: The skills a manager has such as strategy development, goal setting, marketing and so forth which enables them to maintain and solidify an existing business.

Management Problems: One of the reasons commonly cited for business failure. It refers to management’s inability to successfully run their business.

Mompreneur: Female business owner who is actively balancing the role of mom and the role of entrepreneur. A mompreneur can run both small and very large businesses.

Perseverance: A common characteristic of entrepreneurs refers to their ability to not give up when facing challenges.

Risk Taking: A common characteristic of entrepreneurs refers to their ability to take chances or risks with their time and/or money.

Small business decision: Process of determining if an idea is worth pursuing as a business.

Small business decision: Establishing business objectives and developing different ways to achieve them. Strategic planning relies on anticipating changes in the marketplace and planning accordingly.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 1 and 4 from this Chapter would make excellent group assignments/projects.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

Copyright © 2020, McGraw-Hill Ryerson Ltd.

CHAPTER 3: Evaluation of a Business Opportunity

CHAPTER LEARNING OBJECTIVES LO1. List the four stages of the entrepreneurial process.

LO2. Identify the various sources of ideas for new ventures.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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LO3. Summarize the non-quantitative aspects of evaluating business opportunities.

LO4. Describe the methods by which an entrepreneur can enter a market with a product or service.

LO5. Recognize the ways that an entrepreneur can develop a strategic competitive advantage.

LO6. Examine the types of information available to assist in the quantitative analysis of selecting a small business and illustrate how that information can be used.

LO7. Identify a systematic way to quantitatively assess an industry and evaluate the financial feasibility of a specific small business opportunity.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 3-1: CANADA DRIVES: CHANGING HOW CANADIANS SHOP FOR CARS 1. Would you use a site like Canada Drives? Why or why not.

Answer: Student opinion – however students should support their opinion with facts from the case.

2. Many of Green’s customers are still considered under-banked. As such, some of them will pay very high interest rates on any car they purchase. Do you think it’s ethical to assist people in obtaining a car with interest rates that many would call excessive?

Answer: Student Choice 3. Think about your past experiences. Can you identify any opportunities for a business? List your ideas and then select the best three to share with your peers.

Answer: Student Choice

SMALL BUSINESS IN ACTION 3-2: CONSUMER TRENDS

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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1. Do you think entrepreneurs can identify business opportunities by visiting media sites such as the ones mentioned above?

Answer: Student Choice 2. Many businesses have become quite successful by taking an idea from someone else and making it their own. If you observe a great business opportunity on Dragons’ Den or see an idea for a product on Indiegogo.com, do you think it is ethical to cimply duplicate the idea under a nw business name? Why or why not? What if a student talks about an idea she has in class? Would it be ethical for you to start a business based on your peer’s idea?

Answer: Student Choice 3. Visit some of the trend and crowdfunding sites mentioned above individually or in small groups.

Report back to the class on some ideas you found that have the most business potential. What ideas were you surprised by? Did you think any ideas were really bad?

Answer: Student Opinion 4. What do you think are some of the advantages and disadvantages of using social media sites to discover trends? What social media sites would you recommend to trend watchers?

Answer: Advantages may include that social media is now an important marketing tactic that consumers turn to when looking for brands they can trust, consumer reviews and customer service.

Disadvantages may include that trust in social media has never been lower, and Facebook usage and engagement has dropped. Recommendations are students’ opinions but may include sites such as Instaram Stories and LinkedIn. SMALL BUSINESS IN ACTION 3-3: FAN-CONTROLLED FOOTBALL: YOU’RE THE GM AND THE COACH 1. What do you think are some of the advantages and disadvantages of the business concept?

Answer: Student answers will vary. Students should note that some advantangous include the trend towards fantasy sports, the interactivity of the fans/owners, the relationship with Twitch, and some success in raising money. On the disadvantage side, students may point out the over reliance on Twitch, that fans may not want this much involvement and the high costs of operations.

2. With any new venture, creating revenue streams wil be vital to the company’s long-term success.

Think about social media, sports and other related industries. Develop a list of five to ten ways in which the league could earn additional revenue.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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Answer: Student Choice 3. Do you think the business will be successful? Why or why not? Would you invest in the company if given the opportunity?

Answer: Student Choice

SMALL BUSINESS IN ACTION 3-4: WEB SUCCESS 1. Review the information in this chapter on market entry and competitive advantage. How did Dickie choose to enter the market, and how has he achieved a competitive advantage?

Answer: Student Choice – however students should likely state that Dickie is offering a product or service that is similiar to others and he is striving to differentiate his business through service.

2. Goalline’s original business was web hosting for sports teams, specifically hockey teams. The company has recently expanded into several other businesses. Do you think this is a good strategy for the company? Why, or why not?

Answer: Student Choice - however students should note that expansion can lead to additional revenue albeit with the challenge of managing multiple businesses.

3. Why do you think Goalline has been aggressively looking for other revenue streams?

Answer: Student Choice 4. What do you see are the primary advantages of TTC to consumers?

Answer: TTC will allow teams to book hotels, cars, and make other arrangements through one point of contact saving time and money.

SMALL BUSINESS IN ACTION 3-5: THE INTERNET’S IMPACT ON COLLECTING INFORMATION 1. What do you think are some of the advantages and disadvantages of entrepreneurs using online information to assess an opportunity?

Answer: Some advantages students may mention include that the information they receive is quick and informative and likely comes for free. Some potential disadvantages include, some entrepreneurs may lack the knowledge to use online tools to collect information. Furthermore, not all

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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consumers are online, so relying solely on online sites could lead to businesses making the wrong conclusion.

2. Do you think Robert Fung and Mike Brcic obtained enough information online to make the correct business decision for their companies? Why or why not?

Answer: Student choice 3. A lot of business owners are spending countless hours reading and, in many cases, responding to online reviews about their companies. Do you think reading and responding to online reiews is a good business strategy? Why or why not?

Answer: Student choice 4. If you were going to start a travel company catering to university students, how would you use the Internet to evaluate the opportunity? How could you use social media and online information to improve your marketing mix?

Answer: Student choice

SMALL BUSINESS IN ACTION 3-6: SHOULD CROWDFUNDING REPLACE MARKET RESEARCH? 1. What are some of the advantages and disadvantages of using crowdfunding instead of market research?

Answer: Advantages: Gain quick feedback on ideas and to test if there is a market for their product.

Low costs, allowing the entrepreneur to change ideas quickly, and so forth.

Disadvantages: Crowdfunding is not market research, not everyone is on a crowdfunding site.

Entrepreneurs may conclude that a product or service is not appealing when poor results could result from a poor crowdfunding campaign.

2. Most, if not all crowdfunding sites, offer backers or consumers little to no protection if entreprenerus fail to deliver on their promises. The sites make money off the backers by charging a percentage of money raised. Do you think this is ethical? Why or why not?

Answer: Student choice.

3. Do you think Tapplock should have pre-sold their lock prior to fully understanding their manufacturing process and costs? Why or why not?

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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Answer: The answers will vary. Some students may say no, as the practice is unethical and perhaps lacking in sound business planning. Other students may note that this is exactly how crowdfunfing works and the entrepreneurs were engaging in a common business practice.

4. Do you think Tapplock should have sold their locks on sites such as Amazon prior to fulfilling all their pre-orders from Indiegogo? Why or why not?

Answer: The answers will vary. Some student may note that the entrepreners may have needed the money in order to meet production demands and to satisfy investors. Other students may find the practice unethical and state the entrepreneurs should have focused on delivering goods to backers first as they were waiting for such as extended period of time.

ANSWERS TO DISCUSSION QUESTIONS 1. Briefly explain the ways of entering a market. List examples that fit these methods other than those mentioned in the text.

Answer: Student choice 2. J&J Inc. is thinking of developiong a new coin laundry. The firm first needs to do some market research to determine the demand for the product. What kind of information should it collect?

Answer: Student choice 3. Why is it important to make adjustments in market potential and market share figures?

Answer: Student choice 4. For a small business of your choice, show how you swould evaluate nonquantitative factors, such as goals, experience, lifestyle and content of work.

Answer: Student choice 5. Discuss the difficulties of preparing a feasibility analysis for an e-commerce business.

Answer: Student choice

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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ANSWERS TO EXPERENTIAL EXERCISES 1. Form groups and brainstorm ideas that you could turn into a business. Select two or three ideas from the group and develop the marketing mix for the idea along with some justification why the business will be successful (competitive advantage). Present the ideas to the class.

Answer: Student Choice 2. Design a simple mail questionnaire to assess demand for a carpet cleaning business in your city.

Answer: Applications question - answer dependent on student choice but a sample questionnaire is provided here.

1. How often do you normally have your carpets professionally cleaned? If your answer is never, end of questionnaire. If answer is yes, fill out the rest of the questionnaire.

Never Less than once a year Once a year Twice a year Three times a year More than three times a year 2. The last time you had your carpets cleaned, what was the approximate cost?

3. Are you going to have your carpets cleaned again in the near future?

Yes No Demographic Information:

3. Contact an entrepreneur of your choice and ask what the person feels is his or her competitive advantage.

Answer: Answer will depend on the entrepreneur chosen.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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CONCEPT CHECKS (Not in text) Describe the entrepreneurial process.

Answer: The process of starting a new venture can be referred to as the entrepreneurial process. The process involves four specific stages that include (1) identification and evaluation of an opportunity, (2) development of a business plan, (3) determination of the resources required, and (4) management of the business. While the stages proceed sequentially, no one stage is dealt with in isolation or completed before work on the next stage begins.

Where do the major sources of ideas for starting a business come from?

Answer: Most new ideas come from the entrepreneur’s occupation, hobbies, obervations and deliberate searches such as focus groups and/or brainstorming.

Describe the non-quantitative factors which should be considered in selection of a small business?

Answer: Before deciding what small business to go into it is necessary to consider some nonquantitative factors such as goals, content of work, lifestyle, capabilities and experience.

What is opportunity assessment and what steps are included in the process?

Answer: Opportunity assessment is the process of determining if an idea can become a profitable business. It normally includes answering the following questions: 1. What product or service will the business provide? How will the business offer value to customers? 2. How will you enter the market? What will your competitive advantage be? 3. Who will the customers be? Why will they buy from you? 4. Assess the industry and environments your business will be operating in: What is the state of the economy? What are the economic trends? Who will your competitors be? What advantages and disadvantages do they have? What are the key success factors? 5. How will you market your product or service? What will your marketing mix look like? 6. Where will you get your major supplies? What will your costs be? Will suppliers sell to a new firm? What terms are offered? 7.

What will your start-up costs be? Where will you get the money? Project your income over the next three years?

What are the three ways of entering a market?

Answer: There are three ways of entering a market with a new product or service. The first is to offer a totally new product, the second method is to offer an existing product to a different market or

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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industry and the third method is to offer a product or service similar to those which already exist in the same market.

What are the two methods of collecting market information? In what situations would secondary data be most useful? Primary?

Answer: There are two general types of information available to aid a potential small business owner in selecting a small business. The first and most inexpensive method is collecting secondary research on a potential market. There are many government documents and other sources that can provide valuable secondary data. When there is a lot of money at stake or no current secondary data the prospective small business owner can collect primary data to help determine the feasibility of his business.

What are the 3 methods of collecting primary data? Which is most relevant to small business?

Answer: Primary data is information that is collected through one's own research. Although it is usually more costly, it can be more relevant and current to the analysis. There are three general methods of doing primary research: observation, survey, and experimentation. Surveying seems to be the most commonly used method for small businesses.

What are the steps involved in determining the financial feasibility of a retail store?

Answer: There are essentially three steps in estimating financial feasibility of a proposed business venture. The first step is the determination of potential revenues for the total market. Secondly, one must estimate the proposed business share of that total market. The third step is to subtract the associated expenses from the revenue estimate to determine an estimated net income of the prospective business.

KEY TERMS (Not in text) Brainstorming: A deliberate search where people come together to develop solutions or new ideas.

Competitive Advantage: When a business offers product(s) or service(s) which are viewed as better than its competitors.

Deliberate Search: A formal process of identifying ideas.

Entrepreneurial Process: The process of starting a new venture. The process involves four specific stages: (1) identification and evaluation of an opportunity, (2) development of a business plan, (3) determination of the resources required, and (4) management of the business.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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Feasibility Analysis: The process whereas the entrepreneur creates financial statements to determine the future profit potential for a new or existing business.

Focus Group: A process where a moderator leads people through a discussion of a business idea.

Market Potential: The dollar or unit sales estimates for a geographical area.

Market Research: A systematic collection of information used in opportunity assessment.

Market Share: The percentage of the total market potential the proposed business will obtain.

Observations: Observation involves monitoring the who, what, where, when, and how relating to market conditions. It can be used in idea development or as part of market research when assessing opportunities.

Opportunity: An idea, when managed properly can result in a new business.

Opportunity Assessment: Consists of a qualitative and quantitative assessment to determine if an idea can become an actual business.

Primary Data: Information that is collected by the entrepreneur. The information is new.

Qualitative Assessment: A part of opportunity assessment that discusses non-financial factors. The assessment determines if the idea aligns with an individual’s goals and expectations.

Quantitative Assessment: A part of opportunity assessment that determines whether the business will earn the income the entrepreneur desires.

Secondary Data: Information that is used in opportunity assessment that is already published or available. Secondary data take the form of reports, studies, and statistics that another organization or individual has already compiled.

Survey: A formal method of collecting information in opportunity assessment.

Test Marketing: Involves an attempt to simulate actual market conditions to determine is a market exists for a product.

VIDEOS

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

Copyright © 2020, McGraw-Hill Ryerson Ltd.

Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Additional CBC video links: o EnRICHed Academy: http://www.cbc.ca/dragonsden/pitches/enriched-academy

GROUP PROJECT While many of the experiential questions would work as group projects. Questions from this Chapter would make excellent group assignments/projects.

COMPREHENSIVE CASE SOLUTION Dan Kim Part I 1. If Dan came to you asking for advice about whether to pursue this idea, what advice would you provide?

Student Choice 2. What aspects of Dan’s background and personality traits are suited to owning his own business?

What aspects might hinder his success?

Student Choice – however, students should note he is motivated, wants to earn additional financial rewards, has experience in the insutry and has done some research.

3. Briefly discuss aspects of the product and business that may contribute to or hinder the success of the business.

Student Choice – however, students should note that the product is innovative although the market is unproven.

4. What positive things has Dan done in investigating the new business?

The positive things that Dan has done include the following: a. He has taken a course on small business management.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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b. His wife has agreed to support him in this venture. c. He has collected some secondary information that will help him determine the feasibility of the venture. d. He has collected some information online from potential consumers. d. He can make the product and knows what the production costs are.

5. What additional information should Dan obtain before completing his feasibility analysis?

The additional information Dan should collect include: a. He should obtain information about the number of construction companies that might be a part of the market (roofing, siding, and home renovation companies) for his market area. b. He should verify his estimates of 1 in 10 homeowners have ladders and 30% would be interested in his product. c. He should determine whether he has the capacity to manufacture the Ladder Helper rails in high volumes at the same cost.

6. With the information provided, prepare a feasibility analysis for the homeowner market.

The Market Potential for Mahilton could be estimated as follows: -260,968 X .10 X .30 = 7829 ladder rails -7829@ $40= $313,161 Market Share should be the same as there is no apparent competition Projected Income -$313,161 – (7829*10 costs per Ladder Helper)= 234,871 7. What other information would make this calculation more accurate?

Other information needed to make this estimate more accurate include – an estimate of other expenses such as overhead costs, marketing costs, and Dan’s own salary. He should also, as mentioned previously, obtain an estimate of the number of businesses that might use his product.

PART-ENDING AND COMPREHESIVE CASE SOLUTIONS

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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CASE SOLUTIONS FOR PART 1 Petite Shop A Petite Shop B Big D’s Painting Company April’s Micro-Business Mobile Marketing Company PETITE SHOP "A" QUESTIONS AND SOLUTIONS 1. Using the information provided, prepare an estimate of the market potential for Alice Wood’s target market: Solution Per family income =

Population / Households X Per Capita Income = 86,100 / 29,200 X 25,000 = 73,715

Per family expenditures at 73,715 income level = 1000 / year (given) Women's clothing expenditures in Prince George = 29,200 X $1,600 = $46,720,000 Share for Sizes 3 to 9 = 46,720,000 x .20 = 9,344,000 Therefore market potential for this target market is approximately $9,344,000.

2. What portion of this market potential could Alice expect for Petite Shop's market share?

Solution Market Potential = 9,344,000 Total Square Footage Devoted to Target Market Clothing stores: 180,000 sq. ft. x .10 = 18,000 sq. ft.

Dept. stores: 6500 sq. ft.

Total: 24,500 sq. ft.

Market Share = (1000 sq ft)/(24,500 + 1,000) = 3.9% 3.9% x 9,344,000 = 364,416 Market Share

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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3. What non-quantitative considerations should be brought into this analysis?

Solution There are several negative and positive factors which could conceivably cause Alice to alter her proposed sales figure.

Negative: a. The fact that Petite Shop is new and will require several months to build up this proposed market share. b. The existing stores may have better locations and an evaluation of the proximity of competition to her proposed store should be done. c. The established shops and department stores may be more price competitive because of buying volume and established supply networks etc.

Positive a. Alice is planning to specialize in clothing for this target market - this should give her store some "competitive edge" in terms of service, expertise, etc. b. The city of Jacakes is the centre of a trading area so the market potential figure should be adjusted to reflect people living outside Jacakes that will make purchases within the city.

PETITE SHOP "B" QUESTIONS AND SOLUTIONS 1. Using the information presented in Petite Shop "A" and this case prepare an estimated income statement and return on investment calculation for Petite Shop's first year of operation.

Solution 1. Using the market share amounts calculated in "Petite Shop "A", a pro-forma income statement might be as follows: Petite Shop Pro-Forma Income Statement For First Year of Operations Source of Info Gross Sales Less Cost of Goods Sold (58.4)

364,416 212,818

Petite Shop "A" D & B report

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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Gross Profit

$151,597

Expenses: Wages Rent Taxes Utilities Insurance Depreciation License etc.

Website and hosting Advertising Miscellaneous TOTAL EXPENSES Net Income

48,000 20,000 2550 3,600 2,500 12,000 100 3035 7288 5,000 104,073 47,524

Petite Shop "B" Petite Shop "B" Petite Shop "B" Petite Shop "B" Petite Shop "B" Petite Shop "B"(8000 @ 20%) Petite Shop "B" Petite Shop "B" Petite Shop "B"

2. Calculate pro forma return on investment: Personal Investment Alice Wood = 45,000 Net income year one 47,524 Return On Investment

47,524/45,000 = 105.61*

*Keep in mind, however, Alice has not taken a salary out for herself - once this is done the R.O.I. will be lower in year one.

2. What are some of the potential advantages and disadvantages of using social media to determine the potential for success for Alice's store compared to more formal market research?

Solution Advantages include quick access to information, low costs, ability to be interactive with consumers and so forth Disadvantages include that its not scientific, not everyone is using social media, peers/friends may offer advice based on relationships 3. What areas has Alice overlooked in her investigation?

Solution

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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1. As mentioned in the solution to question one she has made no provision for her own drawings. As she is working full-time a figure should be shown for this.

2. Some of her expenses such as advertising, miscellaneous and cost of goods sold will probably be higher in the start-up phase than for an existing business. Alice could also consider just using social media to promote her business to save money.

3. She should perhaps investigate borrowing from a government lending agency where the rates may be slightly less.

4. She should also prepare a cash flow statement to check debt servicing capability of the business.

5. She should prepare more than one year's income statement to get long term indication of the business' performance.

4. If Alice does not raise money from a bank, what are some alternate sources of funds?

Solution Alice could raise money from family and friends. She may also consider crowdfunding or an angel investor. Alice may opt not to open a store and just sell online resulting in a significant reduction in start-up costs allowing her to perhaps self fund her business also known as bootstrapping.

5. Do you think Alice should open up an actual store or sell online instead? Why? Solution Student Choice. Students may note that she appears set on opening an actual store. Others may argue that its much cheaper to start online and given her niche product line, starting online would allow her to access much larger groups of customers at lower start-up costs and she may actually make more money with an online business.

6. Do you think Alice will have to spend as much money on advertising as her banker suggests?

Why or why not?

Solution Student Choice.

7. Given your analysis, what would you recommend to Alice?

Solution Student choice although instructor should see that students have sound reasoning for their recommendation. For example, if the recommendation is to start the business Alice should recognize:

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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a. the time commitment involved b. the low returns for the business for the first few years. c. the extra risk associated with the new venture

BIG D’S PAINTING COMPANY QUESTIONS AND SOLUTIONS 1. Using the information provided, prepare an estimate of total market revenue and Dave’s share of market revenue for the first year of operation.

Solution Total Market Revenue 66,323 X .33 X $1700 = $372,207,203 Market Share 1/101= 0.01 X $37,207,203 = 372,072 Projected Income $372,072 – 80,000 = 292,072

2. What adjustments should Dave make to the above information to be more accurate with the total market revenue?

Solution Dave should adjust for those homeowners within the market area that might use painting companies outside of these communities for their projects.

Dave should collect more accurate information regarding the fraction of homeowners using painting services. For example, Statistics Canada provides data that would be helpful such as the percent of homeowners doing renovations (65%) that were painting (38%). Combining these 2 percentages the estimate of homeowners initiating painting projects on their homes is 24.7% which would make a significant difference in the revenue estimate.

3. What adjustments/additions should be made to the information to be more accurate with the market share and projected income statement for the first year of operations?

Solution Dave should use a more relevant base to estimate service capacity such as number of employees for each competitor rather than treating each company as having the same service capacity. If this was

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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done and the average number of employees per company was 4 the adjusted share would be 2/400 = 0.005 rather than 0.01. This will make a significant difference in the market share estimate.

Dave should make adjustments to market share for such things as customer loyalty and reputation of competitors and that is business is new. These factors will have the effect of reducing his market share further.

Dave should provide sources for all expenses included in the income statement. He should also provide details of start up costs, amortization on equipment, and interest costs if he will borrow funds to start the business.

APRIL’S MICRO-BUSINESS MOBILE MARKETING COMPANY QUESTIONS AND SOLUTIONS 1. What other information could April look for in determining the viability of her business idea?

How should she obtain this information.

Solution April needs to find out more about the potential for her product in this industry. April should likely engage in some formal market research with prospective clients as well as continue to speak to potential mentors.

2. Do you think April should be concerned about discussing her business idea with potential competitors via Twitter? Why or why not?

Solution The answer will vary.

3. What are some of the advantages for April in starting her business? Some of the disadvantages?

Solution – Student choice 4. What would you recommend April do? Why? Solution – Student choice

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PART TWO: PREPARING FOR SMALL BUSINESS OWNERSHIP CHAPTER 4: ORGANIZING A BUSINESS- THE BUSINESS PLAN

CHAPTER LEARNING OBJECTIVES LO1. To describe the advantages and disadvantages of organizing a business from scratch compared to purchasing a business or becoming a franchisee.

LO2. To discuss the importance of formulating and following a business organizational plan.

LO3. To review the essential components of a small business plan.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 4-1: THE LEAN START-UP 1. What do you think are some of the advantages and disadvantages of the lean startup method?

Please be sure to expand your answer beyond the reasons cited in the case.

Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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Answer: Advantages: 1. Speed/Quick to market; 2. Customer feedback comes early; 3. Business will change based on consumer feedback. The entrepreneur is not focused on a set service or product but focused on solving a problem.

Disadvantages: 1. May not be appropriate for traditional small business; 2. Feedback may not be accurate or organized following proper methods; 3. May lead to the premature elimination of good ideas; 4. Emphasis is on speed to market and it should be on strategy.

2. Students should attempt to replicate the lean startup method. Students should quickly develop an idea and share it with classmates. Students should then report to their peers about the quality of feedback, the quantity and if they would change their concept based on feedback.

Answer: The answer will depend on student’s work.

3. Use Internet resources to search out companies who have engaged in the lean startup. There are an abundance of successes and failures? Report back to class on your search and what you discovered. Based on your research are you convinced that the lean startup is better than traditional business planning? Why or why not?

Answer: The answer will depend on student’s work.

SMALL BUSINESS IN ACTION 4-2: YOUNG. PROFESSIONAL. CONNECTED. 1. Do you think Brass should have started with a national site, or was he correct in originally only focusing on the Toronto market? Why? Answer: Student Choice 2. Why would advertisers want to promote their products on Notable’s site? What are the advantages and disadvantages?

Answer: The site offers advertisers a large number of visitors and the target market is young, successful and at a point in their lives where they are making significant purchases.

3. While Notable Life does focuses mostly on Toronto, it does offer some articles about Montreal, Calgary, and Vancouver. Would the Toronto-centric information negatively impact the number of visitors from other regions of the country? Why or why not?

Answer: Student Choice 4. Given the small size of many of Canada’s cities, should Notable focus on becoming a national site, or should it continue to focus on its niche of large urban areas?

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Answer: Student Choice – however students should note that the cities are quite large and it is easier to create content for urban regions than a national audience.

5. Instead of branching out to other Canadian cities, would it be a better strategy to expand to larger American urban markets? Why, or why not?

Answer: Student Choice 6. Visit the Noteable.ca site, and note the company’s strengths and weaknesses. What recommendation would you make to the company’s owner Julian Brass?

Answer: Student Choice SMALL BUSINESS IN ACTION 4-3: OWNERS OF SHOCKBOX HELMET SENSOR APPEARS TO HAVE THE PERFECT PLAN 1. Do you think Shockbox will ultimately be successful? Why or why not?

Answer: Student Choice 2. Review the major aspects of the marketing plan cited in the chapter, and answer the following questions: Who will be the target market for the product? How should they promote Shockbox?

Answer: Student Choice – however students should note that the likely target market will be athletes, parents and sports teams.

3. Given the price tag of $180 for one sensor, do you think parents or sports teams will be willing to pay this much for a product that does not prevent concussions?

Answer: Student Choice – however students may note the product may ultimately help lower liability for players and teams.

4. In groups or as individuals, draft an executive summary for Shockbox that could be used in a business plan. Present this to the class.

Answer: Student Choice 5. Athlete Intelligence planned to sell the Cue for roughly $99 will this make the product more appealing to consumers? Why or why not? Visit the company’s current website to see if they were able to stay true to their plan.

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6. Are you surprised helmet manufacturers engaged in an education campaign against Shockbox?

Why or why not? Do you think their actions were ethical?

Answer: The answer will depend on student’s work.

SMALL BUSINESS IN ACTION 4-4: QUICKSNAP: THE EVER-CHANGING OWNERSHIP STRUCTURE 1. Based on the information in the case, what are some of the advantages and disadvantages of the three major forms of business (sole proprietorship, partnership, and corporation)?

Answer: Student Choice – however students should note that sole proprietorships are easy to start, and you can work independently but you are dependent entirely on yourself and you may have difficulty raising money. Partnerships allow for additional capital and a sharing of duties but there can be disagreements. Corporations allow additional capital and unlimited liability but there can be a cost of diluting equity and disagreements about management.

2. What do you think are some of the potential markets for Quicksnap? How would you promote the product?

Answer: Student Choice – however students should note children and seniors are likely markets for the product.

3. Were you surprised to learn the entrepreneurs agreed to give up 50 percent ownership of their business for $125,000? Why, or why not?

Answer: Student Choice 4. Would you have sold off shares in your business like Reynolds, who was trying to grow his business quickly, or would you prefer the slow growth method where you maintain 100 percent ownership of your company? Why? Answer: Student Choice SMALL BUSINESS IN ACTION 4-5: SHOULD PARTNERS HAVE A SHOTGUN? 1. If you were to ever join a partnership, would you want to have a shotgun clause?

Answer: Student Choice 2. What are some of the advantages and disadvantages of a shotgun clause?

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Answer: Advantages: Allow for a quick end to a partnership that is no longer working. Furthermore, the cash offer is usually at a premium as the person making the offer risks getting removed from the business if he or she makes a low offer.

Disadvantages: Often used too quickly when other dispute resolutions could be used to save partnerships, that shotguns favour the partner with the most resources, and that executing a shotgun clause normally ends any personal relationships among partners.

3. What alternatives would you suggest to using a shotgun clause?

Answer: Student Choice – however students may note having an independent third party make a decision is a viable option.

4. Would you ever enter into a partnership with someone if they had previously used a shotgun to terminate a partnership? Why or why not?

Answer: Student Choice – however students may note that investigating the reasons the potential partner used the shotgun clause would make sense.

SMALL BUSINESS IN ACTION 4-6: BUSINESS PLAN: THE FOUNDATION OF BUSINESS EXPANSION 1. Many consumers see Ratehub as a consumer-friendly site offering comparison pricing on financial products. Do you think consumers would think Ratehub is acting ethically by also operating their own brokerage? Why or why not?

Answer: Student Choice

2. If you were a broker who worked with Ratehub for five years purchasing leads from the company, would you think Ratehub was acting ethically by starting their own in-house brokerage and keeping some of the leads for themselves? Why or why not?

Answer: Student Choice 3. Ratehub has updated their business plan numerous times since the company was founded in 2010. What are some of the advantages and disadvantage with their changing strategy?

Answer: Advantages: 1. Let the company maintain a current strategy; 2. Allow the company to measure if they are reaching business objectives; 3. Allow the company to take advantage of opportunities; 4. Allow the company to pivot quickly

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Disadvantages: 1. Too much time might be spent planning; 2. The company may change strategy too quickly before giving a current strategy time to work.

4. Visit Ratehub’s website. What do you see are some of the websites strengths and weaknesses?

Answer: Student Choice

5. Would you have invested money in Ratehub? Why or why not?

Answer: Student Choice

ANSWERS TO DISCUSSION QUESTIONS 1. Given the difficulties in accurately predicting the future, is a business plan useful?

Answer: Student Choice – however students should note that a good business plan is based on research and details a planned course of action. Writing a plan will enable the entrepreneur to better understand the business and will likely lead to success.

2. What makes an excellent business plan?

Answer: Student Choice – however students should note that a strong marketing plan, financial section and an appropriate human resource section are all essential to most business plans.

3. Would the entrepreneur be better off spending more time selling his or her product rather than investing so much time in writing a business plan?

Answer: Student Choice 4. If a business plan is to be used to raise capital, then why would the entrepreneur want to advertise the firm’s major risks by detailing them in the business plan?

Answer: Student Choice – however students should note that assessing risk explains to investors that the entrepreneur has a well thought out plan and is open and honest about his/her chances of success.

5. What is the purpose of the business plan if the audience is (a) the entrepreneur, (b) an investor, and (c) a key supplier? How might the plan be adapted for these different audiences? Or do you believe that it is better to simply have one business plan that serves all audiences?

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Answer: Plans can serve different purposes. An entrepreneur will use a detailed plan as a guide in making business decisions. The entrepreneur may also use the plan to raise money or to gain access to favorable terms with suppliers and as such this plan may include detailed financial statements as well as wording to sell the business as one worth investing in or extending credit towards.

6. What do you think are some of the advantages of buying a business or a franchise compared with starting a business from scratch?

Answer: The major advantage of buying a business or franchise include gaining access to market knowledge, a reduction in start-up time and maybe the ability to retain employees. The disadvantage when you buy a business is you do not get to establish exactly what you want in a firm, the brand may be established which can be both good or bad, determining a sales price and assessing employees can be difficult.

7. You are thinking of opening up a small business consulting company. What uncontrollable factors might affect your decision? Explain.

Answer: The uncontrollable factors than might affect a decision to start a small business consulting service in Canada are: Legislation: Past and future legislation have involved the public sector to a greater extent. The public sector services are government subsidized, making it difficult for private sector consultants to compete. There is also the problem of legislation governing collection of information.

Economy: As the economy slows down, invariably the demand for good consulting services increases. But then, can a company feeling the effects of a recession afford to hire a consultant?

Competition: There is a lot of competition from the public and private sector which makes it difficult to get work.

Technology: The computer industry is changing so rapidly that equipment only a few years old is fast becoming obsolete. On the other hand, the collection and analysis of information has been revolutionized with the capabilities of our modern day computers and has opened up new jobs and project possibilities.

ANSWERS TO EXPERIENTIAL EXERCISES 1. Using Internet resources find a business that is for sale. Compare the costs of buying the business to starting the business from scratch. What do you think is a better choice? Why?

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Answer: Student Choice 2. The saturation index is useful to a prospective small business owner in selecting a trading area. a.

Using the information in the following table, which trading area would you recommend to the prospective owner?

LOCATION 1 2 3 Number of customers for the store:

100,000

50,000

25,000

Average purchase per customer:

$5

$7

$9

Total square footage of the drug store: (including the proposed store)

20,000 15,000 10,000

b.

If you excluded the proposed store (3,000 square feet) which area would you select?

c.

Which index of saturation is more accurate-- the calculation with the proposed store square footage or the calculation without it? Why?

Saturation Index = Competing Retail Sales/ Competing Retail Space Answer: a.

Trading area 1 100,000 * $5 = $500,000/20,000= $25 Trading Area 2 50,000 * $7= $350,000/15,000= $23.33 Trading area 3 25,000 * $9= $225,000/10,000= $22.5 sales per sq.ft.

Therefore trading area number one would have the highest Index and most attractive trading area.

b.

Trading area 1 $500,000/17,000= $29.41 Trading area 2 $350,000/12,000=29.17 Trading area 3 $225,000/7,000=32.14 sales per sq.ft.

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Therefore trading area number three would be the most attractive. c.

Part A (calculation with the proposed store) would be more accurate for an estimation of saturation index because it gives a true indicator of the competition with the new store as a part of the trading area.

3. Which variables are important in site location for a pharmacy?

Note: In answering the question, consider the variables in Figure 4-4 and rank them from 5 (most important) to 1 (least important). Justify your ranking on each variable.

Answer:

Fig. 4-4

1= Poor 5= Excellent Pharmacy Accessibility Costs History Restrictions Effect of other business Physical characteristics

5 4 3 3 4 4

Accessibility - This is very important as convenience in shopping is a major criteria in pharmacy patronage.

Costs - Effect of other business - Physical Characteristics These areas are also important as usually most businessmen do not have unlimited capital. The effect of other businesses determine to an extent what clientele you have. Physical space and appearance must be conducive to friendly and convenient shopping.

Restrictions and History - These are probably of least importance for a pharmacy owner.

4. Interview a small business owner about details of his or her start-up plan. Find out what aspects were omitted from the plan that should have been included.

Answer: Application exercise - dependent upon student interview.

1.

2.

3.

Establish business objectives Plan the Market Approach Select the Location Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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4.

5.

6.

7.

Determine the physical facilities Plan the financing Plan the personnel Research the legal requirements

5. Choose a specific type of small business and obtain advice from an insurance agent on the types of insurance needed and the precise costs. Write a short report on your findings.

Answer: The answer is dependent on student discussion with an insurance agent.

6. Contact the Canadian Intellectual Property Office (CIPO) Website and find out the requirements for registering a patent.

Answer:

1.

2.

3.

File a formal patent search request.

Conduct a search at the patent office to ensure that the idea is not already registered.

File an application which is the formal request for the patent and includes a description of the idea.

7. Contact local chartered bankers and entrepreneurs about coming to class to listen to the various business ideas that students have. Students should prepare two ideas each and pitch the concept in less than one minute to the visitors. Each visitor should then be given 3 to 5 minutes to provide feedback. If the class is large, this can be done in small groups on an informal basis. Assign one entrepreneur and one commercial banker to a group of five to eight students, and have them complete the activity within the group.

Answer: Student Choice 8. Have student(s) write and present a written business plan.

Answer: Student Choice 9. Have student(s) write and prepare a small written business plan for a charitable event that they can run for a period of five to 15 days. Have the students run the event and assess the following: • Did planning help?

• Did you follow the business plan? Why, or why not?

• Was the event a success?

• Did you meet the goals described in the business plan?

Answer: Student Choice

CONCEPT CHECKS (not in text) Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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What are the advantages and disadvantages of organizing a small business?

Answer: There are several advantages and disadvantages of organizing your own business. The advantages of having a hand in determining the type of business, equipment, employees, inventory and market are balanced against the disadvantages of uncertainty concerning demand, unforeseen problems and time required to establish the business.

What steps are involved in preparing a business plan?

Answer: The basic steps in preparing a business plan are as follows: prepare the table of contents, prepare an executive summary, describe the management team, establish business objectives, plan the market approach, select the location, determine the physical facilities, plan the financing, and plan the personnel and research the legal requirements.

What criteria must be evaluated before choosing a trading area?

Answer: There are several criteria which are commonly used when selecting a trading area such as economic base of trading area, attitude of the trading area towards new businesses, the competition and the costs involved in set up.

Once the trading area has been selected what items should be evaluated to choose a specific site location?

Answer: Once the trading area is chosen there are several criteria used in choosing the actual site of location. These criteria include such things as, accessibility, site cost, restrictions, site history, proximity to other businesses and physical characteristics of the site.

When is it usually advantageous to lease your location instead of owning it?

Answer: Because purchasing is generally more expensive, most small businesses find that to reduce the already high risk at the initial stages of the business, leasing is the most attractive option.

What information should be investigated before construction of buildings and purchasing equipment?

Answer: Prior to construction of buildings and purchasing of equipment, the relevant building codes and construction standards should be investigated and the required permits obtained.

Why is insurance purchased? What are some of the common types of insurance purchased by small businesses?

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Answer: Insurance is a method of transferring some of the risks associated with operating a business to another party. The common insurable risks for small businesses include: loss or damage of property, business interruption, liability and disability, as well as life insurance.

What major financial aspects should be planned in advance of business operation?

Answer: There are four major financial aspects of the new business that should be planned in advance. They are, planning the capital requirements and feasibility projections, determining sources of funding, planning the accounting and bookkeeping system and determining some financial and evaluation measures.

What are the four legal structures that a future owner can utilize?

Answer: The owner must decide which legal structure the business is going to operate under. The four types of structures which can be used are sole proprietorship, partnership, cooperative, and a corporation.

What are the advantages and disadvantages of incorporation?

Answer: The advantages of incorporation are, continuity, limited liability, professional management, easier to raise funds and some tax advantages. The disadvantages of incorporating are: the high cost of incorporating, increased reporting requirements, reduced flexibility, some tax disadvantages and a personal guarantee that is usually required.

What level of government issues business licenses?

Answer: The provincial and municipal governments require business licenses for most businesses operating in their jurisdiction.

What taxes are levied by the Federal Government?

Answer: The most common taxes required by the federal government for small business are income tax and sales and excise taxes.

What are the steps required to register a patent?

Answer: The specific steps required to register a patent are as follows: 1. Conduct a search at the patent office to ensure that the idea is not already registered.

2. File an application which is the formal request for the patent and which includes a description of the idea.

KEY TERMS (Not in text)

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Analysis of Competitors: An aspect of the business plan which involves, determine who the competitors are, determine their marketing mix, interview their customers and suppliers, and assign strengths and weaknesses.

Assessment of Risk: A component of the business plan which discusses the potential risks to the business including but not limited to weaknesses of the business, new technologies, competition and contingency plans.

Business Plan: A plan or a blueprint, which spells out the steps in establishing and managing a business.

Description of the Venture: A component of the business plan which discusses the products or services the business will sell, the size of the business and may include the background of the entrepreneur.

Executive Summary: A key part of the business plan or any large document. The executive summary of a business plan provides a short summary of the highlights for the reader and should stimulate the interest of the reader, especially if the entrepreneur is using the business plan to raise money. The executive summary should sell the business to investors and sell the entrepreneur.

Financial Plans: A component of the business plan which discusses the financial statements and sources of capital.

Industry Analysis: A component of the business plan which discusses future outlook and trends, analysis of competitors, market and industry forecasts.

General Partnership: When the partners share in the management or control of the business, it is referred to in legal terms as a general partnership.

Lean Startup: A method of starting a business without a formal business plan. The method relies on gaining consumer feedback and bringing a product or service to market as quick as possible. The product can change substantially as it is being developed.

Limited Partnership: In a limited partnership, one or more partners obtain limited liability in exchange for not taking an active part in the day-to-day management of the business or acting on behalf of the company. These partners, often called silent partners, usually provide only the financial investment as their part of the ownership interest.

Marketing Plan: A component of the business plan which discusses markets including segments, targets, marketing mix, description of customers and forecasts.

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Measuring Plan Progress: The process of setting timelines to determine if your business is reaching important goals and objectives. Some key measurements include: Inventory control, Production control, Quality control, Sales control, and Disbursement control.

Organizational Plan: A component of the business plan which discusses the forms of ownership of the business, identifies any partners, describes the management team and personnel plans.

Operational Plan: A component of the business plan which discusses how the business will operate including the flow of goods and services and the technology uses.

Partnership: Business run by two or more people. Much like a sole proprietorship they are responsible for any losses the business incurs and they keep any profits.

Production Plan: A component of the business plan which discusses the manufacturing process, the physical plant set up, machinery and equipment and potential suppliers of materials to the business.

Sole Proprietorship: The simplest form of business ownership. The business is run by one person who makes all decisions, takes on all liability and keeps all the profits or incurs all the losses.

Trading Area: The geographic location of the business.

Updating the Plan: The process of updating a business plan at regular set intervals.

VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Additional CBC video links: o EnRICHed Academy: http://www.cbc.ca/dragonsden/pitches/enriched-academy

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 1, 7 and 9 from this Chapter would make excellent group assignments/projects.

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CHAPTER 5: BUYING A BUSINESS AND FRANCHISING

CHAPTER LEARNING OBJECTIVES LO1. Describe the advantages and disadvantages of purchasing an ongoing business compared with the other methods of small business ownership.

LO2. Identify the sources of businesses that are for sale.

LO3. Explain how to evaluate a business that is for sale.

LO4. Describe the methods used in determining the price to pay for a business.

LO5. Discuss the significance of franchising in the Canadian economy.

LO6. Explain the various types of franchises available for small business.

LO7. List the relative strengths and weaknesses of franchising as a method of starting a small business.

LO8. Explain how to evaluate a franchise opportunity.

LO9. Discuss how to organize a franchising system.

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ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 5-1: ROCKY MOUNTAIN SOAP COMPANY INC. 1. Why was the acquisition of Rocky Mountain Soap Company Inc. such a success?

Answer: Student Choice – however students should mention the expansion in the U.S. market, the research and the overall improvements to the business.

2. What are the advantages of buying a successful company compared with buying a company that may be struggling?

Answer: Students should note that a successful company is making money so there is less risk, it will likely be easier to obtain financing for the purchase and there is a proven market for the product or service.

3. Use Internet resources to find out the current state of Rocky Mountain Soap Company. What are the company’s major strengths, weaknesses, opportunities, and threats?

Answer: Student Choice

SMALL BUSINESS IN ACTION 5-2: TAKEOVER HELPS COMPANY MEET ITS TARGET 1. What are some of the questions Mogul should have asked prior to buying the business?

Answer: Student Choice – however students may mention the length and terms of the Target contract, the financial situation of the company and why the company was for sale.

2. Given the complexity of integrating one business into another would you have recommended Mogul pursue this strategy? Why, or why not?

Answer: Student Choice 3. What are some of the advantages of the acquisition?

Answer: Students should mention: 1. Economics of scale; 2. Expansion of product line; 3. New customers; 4. Prevent a competitor from becoming stronger 4. How could Mogul achieve additional economics of scale by purchasing Artic Zone?

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Answer: Students should note that the company can eliminate redundant jobs; that manufacturing could be completed on a larger scale with the most efficient methods; When shipping products the company will be able to ship larger orders together reducing costs; and so forth.

SMALL BUSINESS IN ACTION 5-3: WILL NOVASCOTIAN CRYSTAL BE SAVED? 1. Re-read the opening Small Business Profile; based on this information and the material above, do you think Campbell will be able to turn the business around? Why, or why not?

Answer: Student Choice – however students may mention that the company has a strong brand, there is a new furnace, they no longer have to meet significant debt obligations, and she has the capital to invest in the business 2. Based on the information in the chapter, would you have purchased the business? Why, or why not? What are some of the negative and positive characteristics of the business from a purchaser’s standpoint?

Answer: Student Choice – however students may mention from a positive side that the company has a good brand, strong sales, skilled workers and opportunities for expansion. On the negative side students should note the business has failed in the past, it is very seasonal and the product while nice is expensive.

3. Do you think it is ethical for Campbell to take over the operations of the business in a deal that likely saw unsecured creditors and investors left with next to nothing, in terms of payment? Why, or why not?

Answer: Student Choice 4. Given NS Crystal is both a local employer and a tourist attraction, should the government have stepped in and provided the business with some financial assistance? Note that some government agencies are listed as creditors of the firm but the amounts would not be classified as significant.

Why, or why not?

Answer: Student Choice 5. What are the key success factors for the company moving forward?

Answer: Student Choice – however students may mention the new furnace, additional Internet sales and not having to meet past debt obligations.

SMALL BUSINESS IN ACTION 5-4: BOOSTER JUICE - A CANADIAN FRANCHISE SUCCESS STORY

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1. What do you think are some of the strengths and weaknesses of the Booster Juice franchise?

Answer: Student Choice – however students may mention the company has been quite successful,, they offer consumers a healthy product, they have good systems in place and support the franchisee.

From a weakness perspective students may mention the company is still small, their products are expensive, fruit can be expensive driving up costs, and they have switched to frozen products.

2. Do you think Booster Juice grew too fast in the early years? What are the disadvantages to rapid growth from a franchisor–franchisee perspective?

Answer: Student Choice – however students may mention that rapid growth can result in poor franchisee selection, lack of controls, and an inability to provide service and support.

3. The company originally started out serving fresh fruit, but has since moved to frozen produce to control costs. Do you think this is a good idea? Why, or why not?

Answer: Student Choice SMALL BUSINESS IN ACTION 5-5: TIM HORTONS’ FRANCHISEES VS. THE FRANCHISOR 1. Were you surprised that the judge agreed with the franchisor in this particular case?

Answer: Student Choice 2. Do you think it’s fair that Tim Hortons, the franchisor, is setting the price of menu items below cost and then taking a royalty on the sale of these items, furthering the franchisees’ loss?

Answer: Student Choice 3. While many Tim Hortons’ franchisees are no doubt quite successful, the ones that are struggling would have been negatively impacted by the change in donut prices. What if anything could Tim Hortons do to help these franchisees?

Answer: Student Choice 4. Based on what you have read in this case, would the information deter you from buying a Tim Hortons’ franchise? Why, or why not?

Answer: Student Choice

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SMALL BUSINESS IN ACTION 5-6: VELOFIX, A MOBILE FRANCHISE PURSUING HIGH GROWTH 1. Do you think Velofix offers potential franchisee owners enough advantages over starting their own independent mobile bicycle-repair services to justify the franchisee fee and the ongoing royalty? Why or why not?

Answer: The answer will depend on student’s work. Students may discuss that Velofix offers strong support to franchises with scheduling software, partnerships with bicycle companies, and a proven model. Students may argue that this is not enough to justify the franchise investment and royalty.

2. Why do you think Velofix is hoping to grow so quickly? What are some of the advantages and disadvantages of a high-growth strategy?

Answer: The answer will depend on student’s work. Some students may discuss the need to be first to market is motivating growth, a desire to meet demand, and to build a brand. Disadvantages could include a potential loss of control over costs, in managing franchisees, and experiences in managing growth in general.

3. Velofix currently has very few competitors. Given the relatively low cost of starting a rival franchised business, would you invest in Velofix as a franchisee? Why or why not?

Answer: Student Choice

4. Velofix has taken a service that has traditionally been performed in repair shops and made it mobile. Develop a list of other businesses (products or services) which could move from a brickand-mortar location to the mobile world. Share the list with your classmates.

Answer: The answer will depend on student’s work.

SMALL BUSINESS IN ACTION 5-7: UNHAPPYFRANCHISEE.COM 1. Given that not all posts are signed, how much credibility would you give to the reviews on the site? Would you consider them at all? Why, or why not?

Answer: Student Choice 2. Given that the information published about A&W was part the company’s internal records, would this impact your decision to purchase an A&W franchise? Why, or why not?

Answer: Student Choice

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3. Given the fact that Bazner responded to the website, does he add credibility to the report and the website itself? Does Bazner’s response offer enough to put potential franchisees at ease with their decision to purchase an A&W franchise?

Answer: Student Choice 4. Use the Internet to visit the site, look at Bazner’s complete response. Does his response explain the high failure rate of A&W stores? Why, or why not?

Answer: Student Choice SMALL BUSINESS BEGINNINGS 5-2: SPRAY-NET COMING TO A HOME NEAR YOU 1. What are some advantages and disadvantages of franchising from the franchisor’s perspective?

Answer: Advantages: 1. Quick expansion; 2. Expansion with less capital; 3. Motivated owners/operators Disadvantages: 1. Potentially less long term profits (franchisee keeps majority of profits); 2.Loss control; 3. Creating a franchise model takes considerable time in planning and subsequently in management and training of franchisees.

2. Spray-Net has not patented their paint or their technology. Would this concern you if you were a potential franchisee?

Answer: Student Choice 3. Use Internet resources to see what the current franchisee costs are for establishing a Spray-Net franchise. Based on information you can find online and information in this case, would you invest in a Spray-Net franchise? Why or why not?

Answer: The answer will depend on student’s work.

ANSWERS TO DISCUSSION QUESTIONS 1. Why are there so many different techniques for determining the worth of a firm? In any given situation, is there one “right answer” for a company’s value? What effects do your answers to these questions have on the entrepreneur making an acquisition?

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Answer: There are a number of techniques to determine a firm's value including using the asset value, a multiple of earnings or a combination method. A combination method which takes into account multiple factors is likely the best approach to determining value.

2. Being a franchisor seems to be a mechanism for growth, but what are the growth prospects for entrepreneurs that are franchisees? Isn’t the entrepreneur limited in his or her ability to pursue all the different types of growth strategies?

Answer: Student Choice 3. Is being a franchisee simply substituting one type of employment for another type of employment?

Answer: Student Choice 4. What do you think is the best method of becoming an entrepreneur? Starting a business from scratch? Buying an existing business? Buying a franchise? Why? Answer: Student Choice 5. Discuss in detail the steps you would follow in developing a house-cleaning franchise system.

Answer: 1.

Ideally before developing a maid cleaning franchise there should be a successful prototype in operation to have experienced and overcome any potential problems the franchisee will experience.

2.

Prepare a prospectus outlining the marketing plan for the franchise with promotional material and financial data of what a typical franchisee can earn. A typical cash flow or Income statement would be appropriate to disclose financial information.

3.

Understand the legal requirements to developing this franchise. a.

In some provinces registration and disclosure with the government is necessary.

b.

A business license must be obtained and the business would probably want to incorporate if they haven't already done such.

c.

Be aware of any laws regulating the operations of the business.

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4.

The business procedures and all other vital information necessary for success must be documented in a operations manual.

5.

The franchisor must assure that he/she has worked out an accurate cash flow to ensure that adequate funds for franchising the business are available.

6. What possible benefits does a franchise realize in franchising its businesses instead of expanding through company-owned outlets? What method of expansion would you prefer? Why? Answer: 1.

Positive cash position quickly; The franchise will be able to use the OPM (other people’s money) principle to expand more rapidly.

2.

The franchise has a vested interest in the franchisee success. As a result of this the franchisee works as if the business is his/her own.

3.

High success rate;

ANSWERS TO EXPERIENTIAL EXERCISES 1. Find a local business that is for sale, and investigate and evaluate the company. Determine whether the business is overvalued, fairly valued, or undervalued. If you had the capital, would you buy this business? Have other groups evaluate each business, and compare the results.

Answer: Student Choice 2. John Van Gogh wants to own his own business. His area of expertise is the sporting goods market. He has checked into opening his own store versus purchasing an existing store in the downtown area. The existing store is a seven-year-old proprietorship with sagging sales. There are four main sporting good shops in the city (60,000 people). The existing business is in a prime location and the market and product line is well established. The financial condition, however, includes a large amount of accounts receivable. With this information John turns to you as a consultant. What advice would you give John regarding whether to purchase the existing business or start his own? What additional factors should he consider? Justify your answer.

Answer: As a consultant the student should point out the obvious advantages and disadvantages of purchasing an existing business over organizing your own business.

Advantages of purchasing your own business:

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Reductions of Risk - The existing sporting goods store already has an established clientele and as a result has less risk associated with it.

Reduction of Time and Expense - An existing business already has in place its physical facilities.

Possible reduction of a Competitor - By buying an existing business Mr. Van Gogh reduces the competition.

Capitalization of Business Strength - The existing business has a prime location which is very important for a retail business of this nature.

Possible assistance from the Previous Owner - Mr. Van Gogh could have written into the sales contract that the previous owner must assist him during the transition period.

Easier Planning - With existing historical records it would be much easier to make sales forecasts and other business plans.

Disadvantages of Purchasing an Existing Business: Personnel - There is a possibility that the employees might resist the new ownership and reduce their productivity.

Inventory - The inventory may be obsolete or hard to sell.

Financial Condition - As indicated the financial health of this business is deteriorating and we are not aware of the specific problems in the financial condition.

Accounts Receivable - There are obvious problems with outstanding accounts.

Deciding on the Price - Another potential problem could be to arrive at a mutually agreeable selling price. Mr. Van Gogh should be advised to determine the extent of the financial and accounts receivable problems. Before Mr. Van Gogh considers buying this business he should come up with a plan to increase sagging sales and solve the financial problems and come to a mutually agreeable price. If these problems can be solved Mr. Van Gogh should go ahead with the purchase of the business.

3. You are investigating the purchase of a fertilizer manufacturing plant. The results of your analysis of the firm are extremely positive, except for an unidentifiable annual payment of $100,000. On further investigation you learn that the $100,000 is being paid in fines for dumping toxic waste. The previous owner has determined that it costs less to pay the fines than it would to properly dispose of the waste by deep well injection. In light of recent government actions, how would this situation affect your decision to purchase? Explain.

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Answer: This question brings a moral and ethical issue with this purchase decision. It also considers an uncontrollable variable. The final decision on whether to purchase or not will depend on the purchaser (student choice) but the student should justify his or her stand on this issue. It is important in determining the purchase price to realize the effects of government legislation. If the government introduces tougher legislation that makes proper disposal inevitable then extra costs would be incurred. The costs of development of proper disposal should be considered in the selling price if the student is going to purchase the business.

4. Sally's Bar and Grill is available for purchase. Sally's earnings for the past five years were as follows: Last year $50,000 Two years ago $60,000 Three years ago $30,000 Four years ago $40,000 Five years ago $25,000 Determine the value of the business using the following methods (using current bank interest rates) using both general and weighted average methods. a. b.

Capitalized earnings formula Times earnings method

Answer: a.

Capitalized Earnings Value; Average Earnings/Predetermined Interest Rate = Capitalized Value Year 1.

3.

4.

5.

$25,000 2. $30,000 $60,000 $50,000

$40,000

$205,000/5 = $41,000 average earnings Using an interest rate of 11% 41,000/.11 = $372,727 Capitalized earnings value b.

Times Earnings Value: Average Earnings * Times value 41,000 * 5 = $205,000 Times Earnings Value

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5. Do an industry analysis for the existing grocery stores in your area. Complete your analysis using all the areas mentioned in the text. Refer to the checklist in the Appendix and on the Connect site.

Answer: This is an application question which gives the student an opportunity to analyse the following areas as outlined in the Industry Analysis section in the chapter.

- Sales and profit trends (might not be accessible) - Degree and number of competitors (calculate saturation index) - State of the economy in the market area - Legal restrictions which affect the operations of an artist supply shop (i.e. zoning restrictions and hours of operations) -Social concerns which may have an adverse effect on the industry in the future.

6. Have students visit the website, www.Entrepreneur.com, and complete a search for the top franchises for the year, fastest-growing franchises, and low-cost franchises. The students can proceed to engage in a number of activities, including the following: • Select one franchise from each category, and complete a profile of the company that can be submitted or presented to class.

• Select on franchise and complete a full investigation, and conclude whether the franchise would be a good investment for the geographic region.

• Compare the support, training, costs, and so forth associated with a low-cost franchise with one of the top or high-growth companies. Have the students determine if the added costs are justified.

Answer: Answer dependent on student choice and the assigned questions.

7. Visit a local franchise in your city, and ask the manager what he or she thinks are the advantages and disadvantages of franchising.

Answer: Answer dependent on student choice.

CONCEPT CHECKS (Not in text) What are the potential advantages and disadvantages of purchasing a small business?

Answer: There are many potential advantages to purchasing your own small business. Most of these advantages surround the reduction of risk, time, and expense. The potential disadvantages usually include problems associated with determining price, marginal success rate, and purchasing a deteriorating business.

What are the common sources of determining which businesses are for sale?

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Answer: The common sources for locating a business for sale include: Internet, classified ads, government departments, real estate brokers, word of mouth and other professionals such as lawyers, accountants, and bankers.

In addition to experience what key areas should be investigated in an industry analysis?

Answer: The key areas that an entrepreneur should investigate in carrying out an industry analysis are studying sales and profit trends, looking at the degree of competition, the state of the economy in the market area, reviewing any legal restrictions, and assessing if there are any social concerns that may have an adverse effect on the industry in the future.

Why is it important to investigate the background on the previous owner?

Answer: It is important before making a purchase decision to understand what effect the previous owner's reputation had on the success of the business. It is also important to determine why the owner is selling the business. If the background of the owner is known and some expertise can be gleaned for him the future feasibility of the business can be determined.

What parts of the business should be analyzed to determine the financial condition of the business?

Answer: To determine the financial viability of any business one should analyse the validity of the financial statements, make an evaluation of these statements, and review the condition of the assets, the personnel, the external relationships of the business, as well as the existing records.

Under what conditions would it be advantageous to purchase a business even though financially it isn't all that sound?

Answer: There are some situations in which a business may be a good purchase even if it is unprofitable at the time of evaluation. These situations are: if the current owner is incompetent or unknowledgeable of the industry, if the industry is or will shortly be in a growth position and if the main contribution to the companies lack of profitability is the lack of capital. In all of these situations if the potential owner can correct or improve these situations, then the struggling business may be a wise purchase.

What non-financial aspects of a business should be evaluated?

Answer: When looking to purchase a business there are several non-financial aspects which should be evaluated. A buyer should do an industry analysis, evaluation of previous owner, examine the quality of the personnel, study the condition of the external relationships of the business and examine the condition of the records of the company.

What methods are available in determining a price for a business which is for sale?

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Answer: There are a number of approaches to valuing a business. Some of the approaches commonly used to determine the selling price include: using the asset value to determine the price; use the earnings of the business to set the value of the business or a combination of these methods.

What areas should be included in the purchase agreement?

Answer: When developing a purchase agreement, make certain that the purchase price, payment date(s), conditions of purchase and any provisions for non-compliance with conditions are included.

Why is franchising enjoying such rapid growth in the Canadian economy?

Answer: In recent years franchising has enjoyed phenomenal growth. One of the reasons franchising is popular is because of the increased incentive to franchisees. Franchising continues to be successful because many organizations with a proven concept or product have been able to expand much more rapidly to meet demand through franchising.

What are the three general categories of franchises?

Answer: The three types of franchises are: the manufacturer directed franchise where the manufacturer of a product grants the right to a dealer to sell the product. The wholesaler-retailer directed franchise, where one of the members of the distribution channel such as the wholesaler or retailer initiates the organization of the franchise, and the franchise company which involves a company selling a product, service or system in exchange for an initial predetermined fee and an ongoing royalty.

What are the potential advantages and disadvantages of franchising?

Answer: Compared to the other two methods of starting a small business, franchising offers the following advantages: a proven market, services such as selection of location, purchase or construction of site, providing financing, providing standardized methods of operating, advertising, volume purchasing, and training. The potential disadvantages of franchising are: lack of independence, cost of the franchise, promises not fulfilled, restrictions of the contract, termination, saturation of the market, lack of security, cost of merchandise, effectiveness of promotion, possible exaggeration of financial success, and difficulty in settling disputes.

When investigating purchasing a franchise what sources of information are available to assist in making the decision?

Answer: There are several key areas which should be examined in evaluating a franchise. Information can be obtained from several sources to assist in this decision. These sources include; Canadian Franchise Association, Professionals such as lawyers and Accountants, other franchisees, and government agencies.

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When investigating a franchise opportunity what factors must an entrepreneur consider?

Answer: There are a number of factors to consider when investing in a franchise including: 1. Unproven versus Proven Franchise; 2. Financial Stability of the Franchise; 3. Potential Market for the New Franchise; 4. Profit Potential for New Franchise; 5. Territorial Protection; 6. Training and Operations Assistance; 7. Contract Length and Renewal and Termination Terms; 8. What Current Owners Are Saying About Their Franchise What steps are involved in becoming a successful franchiser?

Answer: There are seven steps in becoming a successful franchiser. The first step is to develop a franchise prototype to iron out any "bugs". The second step is to prepare the necessary information for the prospective franchisee. The third step is to investigate the legal requirements in setting up a franchise company. The next step is to plan and standardize the program of operation so that the franchiser can easily monitor operations. The next step is establish a support system. The next step is to make sure the franchiser has adequate financial capacity to keep up with the possible rapid expansion. Finally the entrepreneur is ready to sell franchises.

KEY TERMS (Not in text) Acquisition/Purchasing a Business: A method of acquiring an existing business to either become and entrepreneur or as an expansion strategy.

Analytical Method: An approach to evaluating a business for sale that combines three factors to arrive at the value for the business: adjusted net worth, past earnings, and future earnings.

Asset Value: An approach to evaluating a business for sale using the value of the assets to determine a selling price. The assets may be evaluated at book value or replacement value.

Capitalization of Earnings Method: The capitalization of earnings method is commonly used to arrive at a quick estimate of the price of a business. The capitalized value is found by dividing average earnings of the business by a specified rate of return expressed as a decimal.

Combination Method: An approach to evaluating a business for sale which combines multiple methods. The most common forms include the analytical method and historical method.

Earnings Value: An approach to evaluating a business for sale using a multiple of the firm’s earning as the basis for determining a selling price.

Evaluating a Business for Sale: The process of investigating a business for sale. The process may include an industry analysis, an assessment of the previous owner, an evaluation of the financial condition of the business, the assets and the employees.

Franchisee: An individual who acquires a franchise.

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Franchising: A method of business whereas franchisor (overall owner of the concept/knowledge) provides the franchisee with knowledge, trademarks, brands and so forth to run a business in return for a fee and/or on-going royalties. The formal text definition: “Franchising is a system for selectively distributing goods or services through outlets owned by the franchisee. A common definition for a franchise arrangement is a patent or trademark licence entitling the holder to market particular products or services under a brand or trademark according to prearranged terms or conditions.”

Franchising Company: This type of franchise usually involves a company (the master licensor) that sells a product or service in exchange for an initial predetermined fee and an ongoing royalty. The franchisee gains the right to sell under the franchisor’s name and receives the franchisor’s assistance and managerial expertise. Franchising companies are commonly found in the retail and service industries.

Goodwill: Goodwill is essentially the favourable reputation the business has established under the tenure of the previous owner.

Historical Method: An approach to evaluating a business for sale which uses historical experience in determining relevant indicators of the components of the value of a business.

Line Forcing: A practice whereas the franchisor forces the franchisee to carry certain products or offer services at a loss.

Manufacturer-Direct Franchise: In manufacturer-directed franchises, the manufacturer (producer) of a product grants a dealer the right to sell the product. This right, which tends to be geographically exclusive, often requires no initial fee.

Market Value: A method of evaluating a business based on current market conditions. The buyer and seller assign a value based on what similar businesses in the area sell for.

Normalizing Earnings: When using average earnings in evaluating a business, extraordinary items that have affected income should be deleted to make the estimate a true average.

Overvaluing: A common risk in buying a business. It occurs when the purchaser wrongly assigns to much value to an existing business leasing to overpaying for a company.

Times Earning Method: An approach to evaluating a business for sale, the times earnings method arbitrarily multiplies average earnings by a number, usually between 1 and 10, based on past sales and industry experience, to arrive at the price for the business. This is often called the price-earnings ratio. Small businesses are usually sold at between four- and five-times earnings.

Wholesaler-Retailer–Directed Franchise: A wholesaler-retailer–directed arrangement, one member of the distribution channel such as the wholesaler or retailer initiates the organization of the franchise. The primary purpose of such an organization generally is to centralize many managerial and operational functions and take advantage of volume buying for a group of sellers. As with the Balderson, Canadian Entrepreneurship & Small Business Management, Tenth Edition Prepared by Peter Mombourquette

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manufacturer-owned franchise, there is usually no initial fee, but an equity investment in the franchise may be required.

VIDEOS Other Video Resources:  Centre to Entrepreneurship Education & Development (CEED): Subscribe to this YouTube channel here: https://www.youtube.com/channel/UCgxnMK3Kglw607FnhuZJixQ  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Additional CBC video links: o Massage Addict - http://www.cbc.ca/dragonsden/pitches/massage-addict

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 1, 5 and 6 from this Chapter would make excellent group assignments/projects.

COMPREHENSIVE CASE SOLUTION Dan Kim - Part II 1. Evaluate the business plan that Dan has prepared. Suggest improvements.?

Answer: Although Dan has prepared information about several important aspects relating to the business plan the following weaknesses can be identified: a. There is only one objective and it should be more specific. b. The marketing section is not specific or focused enough. There is no mention of uncontrollable factors which might affect the business. More detail is needed regarding promotion and it should be focused toward the target customer. c. Cost details are needed should he decide to build the plant. d. The financial section should be much more detailed including specific costs and their sources, projected income and cash flow statements, as well as a better researched estimate of revenue.

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e. Given the extent of outside funds to be obtained, the liability issues, the projected income, and the scope of the business Dan would likely be well advised to incorporate the business. f. The personnel section should also be more detailed and specific.

2. Where do you think Dan will be able to secure the funds required to start the business? Do you think the bank will lend him money? Why or why not?

Answer: Student Choice 3. How would you market the Ladder Helper? List some of your best ideas and share them with the class.

Answer: Student Choice

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CHAPTER 6: FINANCING THE SMALL BUSINESS

CHAPTER LEARNING OBJECTIVES LO1. Discuss financing problems experienced by small businesses.

LO2. Identify the types of start-up capital the entrepreneur may require.

LO3. Explain the stages of venture funding.

LO4. Illustrate a method for determining the amount of capital required.

LO5. Identify the sources of equity and debt funds available to start and operate a small business.

LO6. Explain the considerations in obtaining equity or debt financing.

LO7. Discuss what elements to include when preparing a proposal to obtain financing for the small business.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS

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SMALL BUSINESS IN ACTION 6-1: DO CANADIAN ENTREPRENEURS PREFER AN APPLE SEED TO A FULL TREE? 1. If entrepreneurs knew all the facts, do you think they would be so quick to dismiss equity as a source of capital?

Answer: Student Choice 2. If you owned a growing business would you make use of equity financing from investors? Why, or why not?

Answer: Student Choice 3. Would you sell majority control of your business like Suleman did to access the capital to grow?

Why, or why not?

Answer: Student Choice SMALL BUSINESS BEGINNINGS 6-1: CREATING A SUCCESFUL CROWDFUNDING CAMPAIGN 1. Given what you have read in this and other chapters, is crowdfunding a worthwhile idea for an entrepreneur to pursue? Why or why not?

Answer: Student Choice. Students may discuss the major advantages of crowdfunding including the capital it can provide entrepreneurs, an increase in public profile, a way to test market a product or sometimes referred to as proof of concept, and an opportunity to get valuable feedback and advice from the public. Disadvantages could include the lack of national laws in Canada allowing entrepreneurs to sell equity in their firm, the potential damage to entrepreneurs’ reputations if they fail to meet their goals or build their products, and possible negative comments or publicity based on unmet promises or poorly produced products.

2. Imagine you have created a new revolutionary steak knife that will never have to be sharpened.

Create a compelling message, or hook, for the product.

Answer: The answer will depend on student’s work.

3. Crowdfunding can be time consuming. Why would an entrepreneur pursue this type of funding compared to other financing methods?

Answer: The answer will depend on student’s work. Students may discuss some of the advantages mentioned in answer one and include that crowrdfunding may be the only option for an entrepreneur.

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and report on them to the class.

Answer: The answer will depend on student’s work.

SMALL BUSINESS BEGINNINGS 6-2: BEYOND CROWDFUNDING 1. Do you think a successful crowdfunding campaign is enough to serve as proof of concept? Why or why not?

Answer: Student Choice. Students may mention that a successful campaign may serve as validity for a product. Students may also discuss that an unsucceful campaign may speak to the product or the campaign itself.

2. Kickstarter charges roughly eight percent of funds raised for all successful campaigns. Do you think this is a fair percentage? Why or why not?

Answer: Student Choice 3. Based on what you have read in the text, would you be inclined to use crowdfunding for an idea for which you only have a prototype? Why or why not?

Answer: Student Choice SMALL BUSINESS IN ACTION 6-2: NEURALITIC OFFERS ENTREPRENEURS A ROADMAP TO VC SUCCESS 1. Why do you think Neuralitic was successful in raising capital?

Answer: Student Choice – however students may mention that the product was innovative, they targetted investors who had invested in similiar products, they focused their presentation on the potential profitability of the company.

2. Do you think the sale of Neuralitic, a Canadian company, to a U.S. firm is a positive development?

Why, or why not?

Answer: Student Choice 3. If you were the owner of Neuralitic would you have preferred to keep the company for yourself, or would you have jumped at the opportunity to sell your shares at a profit to a larger company?

Why? Answer: Student Choice

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SMALL BUSINESS BEGINNINGS 6-4: FORMER VENTURE CAPATILIST OPTS FOR BOOTSRAPPING OVER INVESTOR 1. Based on the information in this case and the chapter, what do you think are some of the advantages and disadvantages of start-ups working with venture capitalists and angel investors?

Answer: Advantages: 1. Acees to funds; 2. Access to assistance either in advice and/or networks; 3.

Board participation; 4. Positive impact on growth; 5. Prescence of angels and VCs may make it easier to attract invesrors and/or employees; 6. Investment often comes in the form of equity with no required debt payments.

Disadvantges: 1. Give up equity, sometimes a higher percentage than desirable; 2. May lose some independence; 3. Investors can shape strategy 2. Why would venture capitalists want to emphasize growth over profits? Why would this matter to a founding entrepreneur?

Answer: The answer will depend on student’s work. Students may mention that an investor is likely not looking for initial payback of funds and is hoping to maximize the exit strategy of the business. An entrepreneur may want to be profitable to pay himself a salary or to not have to take on debt or give up additional equity.

3. Does the information in the case and chapter make it more or less appealing to you to persuade venture capital and/or angel investors if you start a business? Why? Answer: Student Choice SMALL BUSINESS BEGINNINGS 6-5: OUT WITH THE OLD IN WITH FINTECH 1. What are some obstacles to entrepreneurs and Canadians using more FinTech services in their businesses and daily lives? How can FinTech companies overcome these obstacles?

Answer: The answer will depend on student’s work. Students may mention the lack of knowledge about some products, the lack of integration with traditional banking, issues with trust and idea sharing. Fintech could improve communication, use vendors, work with traditional finance companies and so forth to overcome these obstacles.

2. Think about some financial services you use at banks and other traditional financial institutions.

Select some of the financial services and create a FinTech company that can offer superior solutions. Ensure you can communicate the advantages of your new firm over traditional enterprises and pitch it to your class.

Answer: The answer will depend on student’s work.

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3. Use Internet resources to identify 5 to 10 new FinTech companies. Narrow your list down to the one or two you think will be the most successful in the long term. Communicate your results to your peers and/or instructor. Be sure to identify advantages for the new companies and barriers they will have to overcome.

Answer: Student Choice

SMALL BUSINESS IN ACTION 6-3: LENDINGLOOP.CA – PEER TO PEER LENDING 1. Peer to peer lending has grown into a billion-dollar industry. Are you surprised how large the industry has become? What do you think are the reasons for the growth?

Answer: Student choice 2. The returns offered to lenders are actually higher for business loans than personal loans. Why do you think this is the case?

Answer: Student choice 3. Do you think its ethical to charge people 15% interest rate to borrow money when the banks are charging much less?

Answer: Student choice 4. What type of companies do you think are most likely to be attracted to peer-to-peer lending?

Answer: Student choice 5. Lending Loop is not allowing start-ups to access their service. Why do you think this is the case?

Do you think start-ups should be given access to peer to peer lending?

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6. The Canadian government has yet to regulate peer to peer lending for businesses. Should the government pass rules and regulations for the industry? Why or why not?

Answer: Student choice SMALL BUSINESS IN ACTION 6-4: DO CHARTERED BANKS LEND MONEY TO ENTREPRENEURS? 1. Do you think banks should be willing to lend money based on a strong business plan and credit scores alone? Why, or why not?

Answer: Student Choice 2. Since many angel investors make a healthy return on investing in start-ups, are banks missing out on an opportunity for profits by not investing in new or small companies? Why do you think banks are not doing this?

Answer: Student Choice 3. Since Canadian banks tend to be highly profitable and appear to benefit from some federal laws that limit competition, should they as a group be more willing to invest in small business given its importance to the Canadian economy. Do you think rather than invest in small business themselves that government should stipulate a percentage of bank loans be made to new businesses? Why, or why not?

Answer: Student Choice

ANSWERS TO DISCUSSION QUESTIONS 1. What is the cheapest source of funds? When all other sources turn down your request for funding, what source is most likely to say yes? Why is this the case?

Answer: Equite, specifically owner's investment is the cheapest form of capital. The most likely source of investors is friends and family as they know the entrepreneur.

2. What are the advantages and disadvantages of debt and equity financing?

Answer: The advantages of equity capital as compared to debt financing include, interest obligation, expertise of the investor(s), expanded borrowing power and spreading risk. The disadvantages of using equity financing include diluting ownership, the increased possibility of disagreements, and the Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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cost incurred in the issuance of the ownership interest. The potential advantages of debt financing as compared to equity capital are as follows: possible higher return on investment, deductibility of interest, flexibility, and ease of obtaining. The disadvantages include interest expense, additional paper work, and the lack of diversification of risk to other investors.

3. What do you think are the advantages and disadvantages of angel investors?

Answer: See some of the advantages of equity above. In addition angels usually provide advice and assistance in managing a company and they do not want control. The major disadvantages include disputes with investors.

4. Are investors on crowd-funding sites in need of some government protection, or do you agree that it is their money and they should be able to spend it as they see fit?

Answer: Student Choice 5. Should government provide loans for entrepreneurs starting new businesses? Should government guarantee loans for small businesses that are missing the necessary track record, assets, or other ingredients to obtain a commercial bank loan? What benefit do we, as a nation of taxpayers, receive from such loan guarantees?

Answer: Student Choice 6. An investor provides an entrepreneurial firm with the capital that it needs to grow. Over and above the capital, in what other ways can the investor add value to the firm? What are the possible downsides of having an angel or venture capitalist as an investor in the business?

Answer: Student Choice

ANSWERS TO EXPERIENTIAL EXERCISES 1. Indicate whether each of the following is a start-up cost (S), an ongoing operating cost (O), or both (B).

Answer: a. b. c. d. e. f. g.

$1,000 for first month's rent $25,000 for store fixtures $1,000 for third month’s rent Weekly cleaning fee of $250 Purchase of $50,000 inventory Payroll expense $50,000 for T.V. advertising

S S 0 B S B B

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2. Imagine you are preparing a business plan for a small manufacturing firm in your province or territory. Using Internet resources, determine what government programs are available for possible assistance. How could each program help your client’s business?

Answer: Answer will vary on student work.

3. Search the Internet for services that provide access to business angels or informal investors. How do these sites work? If you were an entrepreneur looking for funding, how much would it cost to use this service? How many business angels are registered on the typical database? How many entrepreneurs are registered on the typical database? How effective do you believe these services are? (Use data, where possible, to back up your answer.)

Answer: Answer will vary on student work.

4. Interview an employee at one of the government agencies that offer equity or debt financing to small businesses. Determine the purpose, the merits, and the weaknesses of that program.

Answer: Answer will vary on student work.

5. Interview a banker and someone at the Canadian Youth Business Foundation to determine what he or she looks for in a loan application. Compare the differences.

Answer: Answer will vary on student work.

6. Instructors can form groups in class into an equal number, label each group as either venture capitalist or entrepreneur. Inform each group that their job is to negotiate a deal with one another based on the following information—the entrepreneur has a company that has revenue of $2 million; expected annual growth is 25 percent a year for five years, and then 5 percent a year after that; looking for an investment of $5 million for 10 percent equity. Find out which VC firm and entrepreneur group negotiates the best deal.

Answer: Answer will vary on student work.

7. Interview three small business owners about things they do (or have done) to bootstrap the financing of their business. How effective were these techniques? Be prepared to present this list to class and describe how the techniques work.

Answer: Answer will vary on student work.

8. Go to a directory of venture capitalists and ascertain what percentage of funds for a typical venture- capital firm are invested in seed, start-up, expansion or development, and acquisitions or Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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leveraged buyouts. What criteria do venture capitalists report using in their initial screening of business proposals?

Answer: Answer will vary on student work.

CONCEPT CHECKS (NOT IN TEXT) What problems are often the result of lack of management competence and experience?

Answer: Lack of management competence and experience can often result in such financing problems as the following: underestimating financial requirements, undercapitalization, lack of knowledge of sources of equity and debt capital, inability to obtain funds or low cost funds, lack of skills in preparing and presenting a proposal for financing to a lender, failure to plan in advance for future needs resulting in last minute financial crises, and poor financial control in payment of loan obligations.

What are some of the issues entrepreneurs should be aware of the following issues when trying to raise capital?

Answer: Entrepreneurs should be aware of the following issues when trying to raise capital: 1. How much do you need? 2. When will the funds be used? 3. How long will the money last? 4. Where can the money be raised and what type of financing (debt versus equity) will be used? 5. Do you need funds immediately? 6. Will I get anything else besides money?

What are some of the operating costs involved in determining the start-up capital needed?

Answer: Start-up capital includes initial inventory, deposits and first month's payment for payroll, utilities, rent, advertising, insurance, licenses and permits. Accounts receivable and any other operating cost which needs to be paid before revenues are generated should also be planned for.

Why is it important to determine the Owner's Net Worth?

Answer: An essential step in determining the amount of capital needed is to determine the Owner's net worth. This helps in determining the amount of funds the owner(s) has to invest in the company and will probably be required by a lending institution in order to borrow capital.

What are the two general sources of funds can be used to finance a small business?

Answer: The two general sources of funds are equity or ownership financing. The second is funds obtained from borrowing, usually referred to as debt financing (including trade credit). Many small businesses use both forms of financing to get established.

What are the sources of equity financing for the small business?

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Answer: Equity financing options include: 1. Personal funds and retained earnings; 2. Family and friends; 3. Crowd-funding; 4. Informal Risk-Capital or Angels; 5. Corporate investors; and 6. government programs.

What are the advantages and disadvantages of equity financing?

Answer: The advantages of equity capital as compared to debt financing include, interest obligation, expertise of the investor(s), expanded borrowing power and spreading risk. The disadvantages of using equity financing include diluting ownership, the increased possibility of disagreements, and the cost incurred in the issuance of the ownership interest.

What is the advantage of using personal funds or retained earnings?

Answer: These the least expensive funds in terms of cost and control, but they are absolutely essential in attracting outside funding, particularly from banks, private investors, and venture capitalists.

What is crowd-funding and what is a major disadvantage?

Answer: Crowd-funding occurs when an entrepreneur solicits small donations from the public to fund the start-up or growth of their company or social enterprise. A major constraint for entrepreneurs who want to sell equity using crowd-funding is technically, it is not yet legal in North America. Currently, entrepreneurs who want to sell shares to the public in Canada have to create a prospectus, which is a document that explains the opportunity to the investor.

Given that these are expensive and timely to create, many smaller companies and start-ups do not draft these documents. These entrepreneurs, rather than sell shares to the public, often target friends and family and accredited investors (angels and venture capitalists), who are exempt from the prospectus requirements when selling equity to raise funds.

What is the informal risk-capital market?

Answer: The informal risk-capital market is the most misunderstood type of risk capital. It consists of a virtually invisible group of wealthy investors, often called business angels, who are looking for equity-type investment opportunities in a wide variety of entrepreneurial ventures.

Typically investing anywhere from $10,000 to $500,000, these angels provide the funds needed in all stages of financing, but particularly in start-up (first-stage) financing.

What are angel organizations?

Answer: A new trend that has emerged in angel investing over the last decade is the formation of angel clubs or associations. Angels use these clubs to network with other angels, share investment opportunities, and pool money to invest in start-up ventures.

What is bootstrap financing?

Answer: Bootstrap financing involves using any possible method for conserving cash.

What are the advantages and disadvantages of debt financing?

Answer: The potential advantages of debt financing as compared to equity capital are as follows: possible higher return on investment, deductibility of interest, flexibility, and ease of Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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obtaining. The disadvantages include interest expense, additional paper work, and the lack of diversification of risk to other investors.

What are the major sources of debt financing?

Answer: The sources of debt financing are, owners of the business, corporate lenders, regular lending institutions, and the government agencies.

What are the potential advantages and disadvantages of borrowing through government lenders?

Answer: Government agencies at both federal and provincial levels lend money, provide grants and counselling assistance to small business. The potential advantages of approaching a government agency as opposed to the other sources of debt financing are: they finance higher risk businesses, they may be more willing to rewrite loan terms and conditions, they may provide lower interest rates, and they may provide equity capital. The potential disadvantages of borrowing from government agencies are: they usually require more information, there tends to be a longer time period for the approval of a loan, more collateral may be required and most agencies exert more monitoring and control over the businesses they lend to.

What criteria do lenders use in making a loan decision?

Answer: Most lenders will make the loan decision using the following criteria: the entrepreneur's management ability, the proposal itself, and the applicant's credit worthiness.

What can the entrepreneur do if he/she is unsuccessful in obtaining financing?

Answer: If the entrepreneur is unsuccessful in obtaining financing the proposal should be reevaluated and changes made so the proposal can be made more attractive to potential investors. Secondly, the entrepreneur could consider leasing instead of purchasing to reduce the amount of funds required.

KEY TERMS (Not in text) Acquisitions and leveraged buyout financing: Financing issued for such activities as traditional acquisitions, leveraged buyouts (management buying out the present owners), and going private (a publicly held firm buying out existing stockholders, thereby becoming a private company).

Angels (Informal Risk Capital-Market): Individual investors who invest anywhere from $10,000 to $500,000 in a new or growing business. Angels provide the funds needed in all stages of financing, but particularly in start-up (first-stage) financing.

Angel Organizations: Normally regional associations of business angels who listen to pitches together as a group.

Bootstrap Financing: One alternative to acquiring outside capital that should be considered is bootstrap financing. Bootstrap financing involves the entrepreneur relying on personal investment Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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including retained earnings to fund the startup of a business. Bootstrap financing also involves using any possible method for conserving cash.

Canadian Small Business Financing Program (CSBF): CSBF is a loans program that aims to increase the availability of capital for existing small and medium-sized businesses that are looking to improve or expand their small business (startups can qualify for the program). The program allows business owners to apply for a maximum loan of $1 million at any of the participating lenders, including banks, credit unions, and caisses populaires, with the federal government acting as a guarantor for 85 percent of the lender’s losses.

Capital: Funds used to start or sustain a business. There are two primary sources of capital: Debt & Equity Capital Requirements: The total funds needed by an entrepreneur/business owner. The amount is determined by adding in any start-up costs plus operating requirements and subtracting owner’s assets which can be used for investment.

Crowdfunding: Crowdfunding occurs when entrepreneurs solicit small investments or donations from the public to fund the start-up or growth of their company. Crowdfunding is now being successfully used by larger firms.

Debt Financing: Money which an entrepreneur or firms borrows. Sources of debt financing often include private lenders, corporate lenders, and government agencies/corporations.

Equity Financing: Equity financing involves giving up ownership of the business in return for capital.

The sources of equity financing are private investors, including personal funds, friends and family, informal investors better known as angel investors, corporate investors commonly called venture capitalists, and government.

Family and Friends Financing: Money invested in a business by the entrepreneur’s family and friends.

After the entrepreneur, family and friends are a common source of capital for a new venture. They are most likely to invest because of their relationship with the entrepreneur.

Fintech: FinTech is short for the relatively new term financial technology, which is used to describe new technology solutions for traditional banking and banking-related industries. FinTech used to describe how banks would use technology to better serve customers, but it has since taken on a much larger meaning.

First Stage Financing: Funding to maintain operations as the business is striving to become profitable.

Financing is used primarily for working capital, marketing, and other day-to-day activities. Most likely sources are personal savings, retained earnings, trade credit, crowdfunding, personal or business lines of credit, and loans from chartered banks.

Fourth Stage Financing: Bridge financing as the company prepares to go public.

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National Angel Capital Organization: National organization which represents Canadian business angels.

On-Going Operating Costs: The costs/funds needed to run a business. Often new businesses do not make money right away and they need to set aside funds to offset costs.

Peer to Peer Lending: The practice of entrepreneurs, and in fact people, borrowing money from other people using the Internet and websites as the conduit.

Personal Funds: Are funds which the owner either invests in the business or retained earnings from company he/she invests back into a firm.

Second Stage Financing: The business is profitable and may be starting to expand. Most likely sources are retained earnings, crowdfunding, commercial lines of credit, and trade credit.

Seed Capital: Small amounts of money invested in a business. Most likely sources are personal savings, personal lines of credit and/or credit cards, money from friends and relatives in the form of either equity or debt, crowdfunding, and government programs.

Start-Up Funds: Funding to get the business running. The business is operating but it is unlikely that it is profitable. Financing is usually needed for working capital, inventory, and marketing. Most likely sources are personal savings, personal lines of credit and/or credit cards, loans from a chartered bank that are personally guaranteed, trade credit, money from friends and relatives either in the form of equity or debt, crowdfunding, government programs, and retained earnings.

Start-up Cost Schedule: A schedule for when the entrepreneur will need money and the source.

Third Stage Financing: Major expansion for company with rapid sales growth at break-even or positive profit levels but still a private company.

Venture Capital/Venture Capital Companies: Professional investors who normally invest in high growth ventures using sophisticated evaluation techniques.

VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Additional CBC video links: o The Happy Baker - http://www.cbc.ca/dragonsden/pitches/the-happy-baker o EnRICHed Academy - http://www.cbc.ca/dragonsden/pitches/enriched-academy o UseMyBank - http://www.cbc.ca/dragonsden/pitches/usemybank o Massage Addict - http://www.cbc.ca/dragonsden/pitches/massage-addict Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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GROUP PROJECT While many of the experiential questions would work as group projects. Questions 2, 7, and 8 from this Chapter would make excellent group assignments/projects.

PART-ENDING AND COMPREHESIVE CASE SOLUTIONS CASE SOLUTIONS FOR PART 2 Clark's Sporting Goods Jensen Roofing Conrad’s Photographer Supplies Kelly's Grill Second Cup CLARK’S SPORTING GOODS QUESTIONS AND SOLUTIONS 1. Estimate how much money Dave will need from outside sources to start his business.

Solution Start-up Costs Merchandise Shelves, racks, displays Remodelling Cash register Checkout Counter Office Supplies Telephone (deposit & installation) Utilities (deposit) Promotion Rent (1st mo. - in advance) TOTAL START UP COSTS

100,000 5,000 4,000 800 500 200 125 200 2,000 1,000 113,825

It may be wise to bring the amount to 115,000 to cover contingency.

115,000 - 30,000 = 85,000 required own funds required from outside sources

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2. Assuming Dave receives start-up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so how much?

Solution In order to determine if an operating line is necessary Dave should prepare a four month cash flow statement as follows: 1st month 2nd month 3rd month 4th month Sales Revenue (1) 20,000 20,000 20,000 20,000 Collection of A/R --20,000 20,000 20,000 Total 20,000 40,000 40,000 40,000 Cash Expenses 100,000 Merchandise Owner salary 2,000 2,000 2,000 2,000 Clerk salary 2,500 2,500 2,500 2,500 Advertising 500 500 500 500 Utilities 200 200 200 200 Phone 50 50 50 50 Rent 2,000 2,000 2,000 2,000 Interest (2) ------2,833 Total 7,250 7,250 7,250 110,083 Cash flow for mo.

12,750 12,750 12,750 (70,083) Cumulative cash flow 12,750 45,500 78,250 8,167

1. Sales Revenue

2. Interest

- 100,000 is cost of merchandise sold in 4 months - 100,000 + .6(100,000) = 160,000 in retail sales in 4 months - 160,000 divided by 4 = 40,000/month - 1/2 credit sales = 20,000/month

- 85,000 @ 10% = 8,500 divided by 12 = 708.33 - every 4 months = 708.33 x 4 = 2,833.32

According to the 4 month operating cash flow Clark’s Sporting Goods will not experience a negative cash flow and so should not require an operating line of credit.

3. Should Dave pursue debt or equity sources of funds to get started?

Solution Dave's decision could be either debt or equity but should be based on the following factors: 1. The level of control he desires (equity funds will reduce the amount of control he has over the business).

2. Whether the business can service the interest costs of debt. The cash flow indicates the business may be able to service the interest costs.

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3. Whether he could obtain debt. Based on his current equity, his education, and background of his father, he should be able to borrow the needed funds.

CONRAD’S PHOTOGRAPHER SUPPLIES QUESTIONS AND SOLUTIONS 1. If the Bingley’s decided to organize a photography store from scratch discuss how this decision would compare to the other two methods of getting into the business on a.risk b.independence c.information requirements.

Solution The comparison of these methods of entering business should include: a. Independence- Organizing allows the most independence as the Bingley’s can determining the type of business they want to establish. If they buy the business from Shelly Conrad they will have to accept what is there. With a franchise they will have the influence/guidance in setting up the business but also in ongoing operations. b. Risk- Organizing presents the greatest risk of all of the methods of starting a business. There is no guarantee that demand exists for the business. There will likely be start-up problems that can’t adequately be planned for. By buying the business there is an established track record for sales and the bugs have been worked out of the operations by the previous owner.

Risk is also lower with the franchise due to the assistance provided and the name of the franchise. c. Information Requirements- This will be greater for organizing as there is no information on part performance to use in the projections. Primary data will be required to prepare the feasibility analysis and cost estimates etc. In buying the business past financial statements provide a good idea of future performance and a franchiser has other prototype examples to draw from to help with information.

2. In evaluating this business in order to purchase it, discuss concerns you would have about a) the previous owner b) financial information c) assets of the business.

Solution Concerns might be as follows: a. Previous Owner- Richard and Karen should determine the real reason that Shelly is selling the business. They should also identify how much of the success of the business is due to Shelly’s prominence in the community. They could explore whether Shelly will help them with Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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management assistance or financing and be assured that she will not open a competing business in the near future. b. Financial Information- Richard and Karen should ensure that the statements are an accurate representation of the business. Questions regarding the method of depreciation, extraordinary items, financial treatment of repairs, the amount of the owner’s salary or drawings, and the treatment and terms of debt could all assist in determining this. (For example where are the interest costs on the debt?) c. Assets of the Business- To better understand the value of the assets of the business the following assets should be evaluated. Inventory should be valued. Accounts receivable should be aged. Goodwill should not be in the statement until it has been purchased. Other assets such as equipment made need to be appraised.

3. Assuming the information in the financial statements is accurate, is Shelly Conrad’s asking price a reasonable one? Use the book value and capitalization of earnings methods to help you answer this question.

Solution Shelly is asking $80,000 for this business. Suitability of this price could be determined by looking at the Book Value and Capitalization of earnings. a. Book Value Owner’s Equity = $29,000 which is the book value b. Capitalization of Earnings Earnings (profit) / Capitalization rate 11,000 / 0.10 = 110,000 if 10% is used 11,000 / 0.08 = 137,500 if 8% is used If these two estimates are combined the asking price is reasonable. However a caution to the Bingley’s would be that most of this price is based on earnings continuing at the same levels as the asset value is low. Therefore they should carefully evaluate the earnings trends and ensure that they will continue.

4. There is ate least 1 adjustment to the balance sheet and 2 to the income statement that should be made to make these statements more accurate and which will affect the calculation of the price of the business. Make the adjustments and re-evaluate the asking price based on your adjustments.

Solution The Balance sheet adjustment is that goodwill of $12,000 should be dropped. Good will cannot appear on a financial statement unless someone has paid for it and Shelly started the business so no goodwill exists at this time. This means that the owner’s equity would be $17,000. (29,000 – 12,000) The adjustment to the income statement is that interest costs as a result of the debt should appear.

The interest on the $60,000 debt at 8% would be $4,800 per year and should appear as an expense.

The adjusted income would be $6,200 (11,000-4,800) and the capitalization of earnings would be Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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6200 / 0.10 = $62,000. These two adjustments would have the effect of dropping the value of the business significantly.

KELLY'S GRILL QUESTIONS AND SOLUTIONS 1. How well has Kelly thought out and prepared for her decision to start her own restaurant?

Solution Although she has thought about this a lot and done some investigation there are several things she may have overlooked. a. She has no management and little working experience in the restaurant business. b. She seems to be under the impression that running the business will give her more time with her family. This is not true at least during the first few years. c. It does not look like she realizes the extra risk involved in running her own business. d. Has she realized the fringe benefits she now receives (pension, UIC, etc.) that she will be foregoing? e. She has not done much of an industry analysis or market share analysis for her business. f. Has she considered the consequences of failure, i.e. because her house has been remortgaged? g. Does she have the skills necessary to run a business? i.e. financial 2. Based on the information provided, which of the choices open to Kelly would you advise her to make?

Solution 1. Calculate market potential.

- families x food expenditure/month x 12 = $ 63,840,000 2. Calculate market share.

- outlets x average size = 165,000 sq. ft. *Note: Although Kelly doesn't have the information, a better measure of market share might be for: a. estimated traffic volume at mall. b. present patronage figures at restaurant. c. average traffic and patronage figures given by the franchisor.

Helpful Information: Market Share Calculation: Store Size/(Total Size of other stores plus proposed size of her store) Estimated Sales: Market Share * Market Potential

A. (6000/171,000)*63,840,000=$2,240,000 Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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B. (2500/165000)x63,840,000=$967,272 C. (2000/167000)x63,840,000 = $764,551 Note: Each of these amounts should be adjusted for non-quantitative factors such as strength of competition, distances people might travel to patronize, specialized restaurants, etc.

3. Projected Income Cleary some of the information is missing from the case. For example, in Option C it is not clear if there is going to be rent with the franchise. One would have to assume some rent would occur and the most likely way to calculate this would be to use either rent from Possibility A on a sq footage charge as it most likely representative of the current going rate or or an average of Possibilities A & B. Additionally, it is not clear who is paying for leasehold improvements in Possibility A. In the solution below it is assumed that Kelly will be paying.

Given Operating Statement

Gross Sales Cost of Goods Sold Gross Profit Expenses: Operating Expenses Rent Royalty Loan Payments (calculated @15 year payback)

Profit

A 2,240,000 1,120,000 1,120,000

B 967,272 483,636 483,636

C 765,551 382,276 382,276

784,000 120,000 48,000

338,545 35,000

267,593

9,513.48 (Based on borrowing $70,000@10% over 15 years) 158,486.52

$10,000 a year plus $4,077.24 ( $30,000@10% over 15 years.)

96,013.76

45,873.06 $18,427.20 ($150,000@8% over 15 years)

50.382.74 (does not include rent)

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Based on this analysis, the most profitable option would be the shopping mall. This is also closer to her home and gives her more independence than the franchise. If the sales can be confirmed from Option B than this may make the most sense as it would have an operating history and a loyal clientele built up.

3. What additional information should she obtain before making this decision?

Solution Some of the things Kelly may want to investigate are: 1. Shopping Centre - Where is the site located in the mall?

- What type of customer will patronize the mall?

- What other competition will there be?

- Are there any complimentary stores?

- What is the proposed traffic for the mall?

- Will people not shopping in mall be attracted to the restaurant?

- What regulations in the mall might affect Kelly's operations (hours, advertising, etc.).

2. Downtown - What kind of neighbourhood is restaurant in?

- What other competition is close by?

- Is parking necessary? Is there any?

- Will restaurant be open in evenings?

- Can she get financial statements from owner to better assess financial position?

- Can she get some indication of state of lease negotiations which are coming up?

3. Franchise - What kind of assistance will be given, i.e. location selection, training, advertising, etc.?

- Is rent included?

- How happy are other franchises of this chain?

- Can Kelly receive financial information about the franchise if it is not well-known - What traffic studies and research have been done by the franchise?

SECOND CUP QUESTIONS AND SOLUTIONS 1. What further analysis should be done before making this decision?

Solution Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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The analysis that should be carried out is found in Appendix 6-B at the end of chapter 6. Such information may be obtained by contacting the franchiser, industry associations, professionals such as an accountant or lawyer, government agencies, and by talking with other franchisees. In addition to the specific details of the franchising operation a determination should be made regarding the value of the name of the franchise, an indication of problems with the franchise, and an evaluation of what the franchiser provides for the franchisee.

2. What specific question about the financial information as presented by Second Cup should be asked?

Solution Some of the questions that might be asked about the financial statements as provided by the franchiser relate primarily to their applicability to Ken and Mary’s situation. Specifically, these might include the opening case balance, whether the sales level would apply, expenses such as rent, utilities etc, the salaries, and interest costs.

COMPREHENSIVE CASE SOLUTION Dan Kim - Part III Solution 1. What items have been overlooked by Dan with both the start up cost and income statements for the Ladder Helperl?

Items that have been overlooked by Dan include: a. Start-up costs such as permits, licenses, and a contingency (usually about 10% in the construction industry). b. Operating expenses such as advertising/marketing, repairs, fuel for the truck, interest costs on the loan he is hoping to obtain, and a contingency amount. c. He should also obtain sources for each number that he uses in his estimates.

2. What additional statements would the banker likely require?

A statement that his banker will want to see is the cash flow statement. This statement will indicate whether Dan’s business will be able to make the loan payments and service the interest costs.

3. Do you think Dan should consider other forms of capital like equity? Why, or why not?

Student Choice – however students may mention equity is cheaper, comes with no interest payment and some investors may bring knowledge to the company.

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4. What advantages of angel financing is Dan missing out on in his assessment of this specific type of an investor? How might Suzie persuade him to change his mind?

Student Choice – however students may mention that angels bring knowldege and contacts.

5. Would crowdfunding be a good idea for Dan to pursue? What are some of the potential advantages and disadvantages of this strategy?

Student Choice – however students may mention that crowd-funding allows the entrepreneur to test market the product, the investment comes with no interest payments and people who like the idea will share it with their friends and family.

6. What information is Dan missing in calculating his potential crowdfunding campaign profits?

Answer: Dan is missing fees to the crowdfunding site, banking fees and the money to create the campaign.

7. What advice would you offer Dan to help him improve his crowdfunding campaign?

Answer: Students may discuss: 1. Dan should develop a compelling story to convince backers to support his idea; 2. Videos should be used; 3. Dan will need to work with his social media contacts and friends and family to drive viewers to the site; 4. Dan may consider hiring a marketing company t assist him or place social media advertisements.

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PART THREE: MANAGING THE SMALL BUSINESS

CHAPTER 7: MARKETING MANAGEMENT

CHAPTER LEARNING OBJECTIVES LO1. Describe the role of marketing planning in a business enterprise.

LO2. List the major steps in a marketing plan.

LO3. Explain the need for an understanding of the external environment of the organization.

LO4. Discuss the importance of marketing research.

LO5. Describe the importance of and methods to employ effective customer relationship programs.

LO6. Discuss the importance of identifying goals and objectives.

LO7. Explain the importance of monitoring the marketing plan.

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ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 7-1: FIGHTING, EXTREME SPORTS AND FANTASY FOOTBALL – LEONARD ASPER’S TAKE ON TARGET MARKETING 1. Do you think Asper’s strategy of targeting a male audience will be successful? Why or why not?

Answer: Student Choice 2. Given women are increasingly interested in fantasy and extreme sports should Asper consider changing his message to advertisers that his company is aimed predominantly at men between the age of 25 – 45? Why or why not?

Answer: Student Choice 3. Asper, was the former CEO of Canwest Global a large company founded by his father that eventually went bankrupt. What do you think are some of the potential advantages and disadvantages of Asper’s background?

Answer: Student Choice. Students may speak to past business experience, that he will be motivated to be successful and perhaps have an extensive network of contacts.

4. Some business experts state that investing in media, especially television media, is a poor investment due to the high costs of content, declines in user rates and the increased time people are spending online. After reading this small case do you think Asper will ultimately be successful or is traditional media such as television and mainstream radio fading away?

Answer: Student Choice SMALL BUSINESS IN ACTION 7-2: TARGET MARKET FOR A HYPOTHETICAL SMALL RESTAURANT 1. Review the target market, discuss areas where it is strong, and identify weaknesses.

Answer: Student Choice 2. What information could be added to enhance the target market?

Answer: Student Choice

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3. Develop a target market and a customer profile for a well known Canadian chain such as Lululemon or Sports Chek. Compare your customer profile with others in the class to identify areas for improvement.

Answer: Student Choice 4. Do you think small business should spend significant time and resources on creating customer profiles? Why, or why not?

Answer: Student Choice SMALL BUSINESS IN ACTION 7-3: STORYTELLING AND SOCIAL ENTERPRISE 1. Birch Bark’s founder, Mark Marsolais-Nahwegahbow has been very successful in generating media and using storytelling to sell his products. As the company grows, what will be some of the challenges in relying on this form of promotion?

Answer: Student answers may vary. Students may discuss that the media may move onto other stories, that creating public relations material can be time consuming and Marsolais-Nahwegahbow may not have the time as he is managing the growth of his business, or that the public may need advertising to remind them to re-buy the coffee.

2. Companies are always trying to create a distinct marketing mix to appeal to their target markets.

Create one or two potential target markets for Birch Bark Coffee and match the company’s marketing mix to the potential targets.

Answer: Student Choice

3. There are a number of social enterprises that donate a percentage of revenue to social causes, but which have not reached the same level of success as Birch Bark. Why do you think Birch Bark has been so successful? Do you think the success is sustainable? Why or why not?

Answer: Student Choice. Students may discuss the story telling component of the company and their success in generating public relations.

4. Do you think Birch Bark should have expanded so quickly into other countries? Why or why not?

Answer: Student Choice. Students may point out that expansion makes sense there is demand and there is a lot of positive PR. The entrepreneur should generate sales when he can. Others may note that growth, especially international growth can be hard to manage, can come with a steep learning curve and sometimes can be the downfall of a company.

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SMALL BUSINESS IN ACTION 7-4: SOCIAL MEDIA MONITORING 1. Do you think organizations should be able to track who visits their websites and their online behaviour?

Answer: Student Choice 2. Do you think it is a worthwhile investment for businesses to monitor and respond to social media discussions about their companies? Why, or why not?

Answer: Student Choice. Students may mention that consumers expect a response from their queries or even complaints in society today. Furthermore companies can learn about the effectiveness of their posts, promotions and perhaps even convert contacts to sales.

3. Did Aaron’s cross the line with its monitoring tools?

Answer: Student Choice 4. If you started a business would you make use of online tools to track people’s Internet activity?

Why, or why not?

Answer: Student Choice 5. Do you think it is a good business practice to monitor smartphones and push out coupons and ads to potential customers? Why or why not? Do you think the practice is ethical? Why or why not?

Answer: Student Choice SMALL BUSINESS IN ACTION 7-5: THE LOYALTY PUZZLE 1. Do you think reward programs such as the one described above make a difference to the company’s bottom line? Why, or why not?

Answer: Student Choice – however students may mention that the program may increase customer loyalty at little cost.

2. In recent years, some larger Canadian companies such as Second Cup have abandoned their reward’s program. What are some of the advantages and disadvantages of using rewards as a way to retain customers and generate sales?

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include the need to provide discounts or free merchandise and concerns about the effectiveness of the program.

3. If you were starting a small retail business, would you implement a rewards program? Why, or why not?

Answer: Student Choice

ANSWERS TO DISCUSSION QUESTIONS 1. What are the advantages of developing a very detailed marketing plan compared with a short plan that could be drafted on a few pages? Do you think it is valuable for businesses to invest a considerable amount of time developing a detailed marketing plan? Why, or why not?

Answer: Student Choice – however students may mention that detailed plans are more comprehensive, will likely allow for better measures and controls, will assist in the long term and may help the entrepreneur succeed.

2. As noted in the chapter many businesses do not have a marketing plan. How does this affect your opinion on the usefulness of the document?

Answer: Student Choice 3. One argument in favour of market segmentation and target marketing for small companies is they often lack the resources to market to large groups of people. Is this still true with the technology available today?

Answer: Student Choice 4. What is the difference between traditional target marketing and the more enhanced target marketing discussed in this chapter?

Answer: The enhanced or needs based marketing discussed in the Chapter ensures companies have properly segmented the market and then develop a customer profile to ensure they understand who their customers are. These actions should lead to more effective marketing strategies.

5. Is market segmentation just a nice way of using “stereotypes” to sell your products? Can people really be classified so easily into groups that share common needs, wants, and demands?

Answer: Student Choice – however students may mention that people share many similar characteristics and market segmentation has a long history of working for companies.

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6. Segmentation is the process of breaking a population down into smaller groups. Is it possible for a small business to over segment? How might that be detrimental to the success of the business?

Answer: The over-segmented market may simply be too small to allow the small business to be profitable.

7. Many businesses both large and small are using online tools, specifically social media, to track Internet use of customers and potential customers. Do you think this is ethical? Why, or why not?

Answer: Student Choice 8. Why is customer retention so important? What are some of the things businesses can do to improve retention?

Answer: Student Choice – however students may mention that keeping customers is less expensive than finding new ones.

9. What are some of the key steps in establishing successful goals for a business? Do you think goals have to be quantifiable? Why, or why not?

Answer: Goals should be clear, measurable and the majority of them should be quantifiable.

ANSWERS TO EXPERIENTIAL EXERCISES 1. Define the target market(s) for your university or college. What are the target market demographics, lifestyle characteristics, purchase characteristics, and purchase motivations? Create a customer profile for one of the target markets.

Answer: Answer will vary depending on student work.

2. Identify the major competitors for your local college or university. What are their strengths and weaknesses? Where do you see an opportunity in the market to create value and grow enrolments for your school?

Answer: Answer will vary depending on student work.

3. Review the external environment for your university or college. What changes are you anticipating which could impact business? What can your school do to benefit from these changes?

Answer: Answer will vary depending on student work.

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4. Develop an idea for a new business that will operate in the local economy. Define the target market(s), create a customer profile, and examine in detail the factors in the external environment that will impact the business.

Answer: Answer will vary depending on student work.

5. Develop a marketing mix (i.e., product, promotion, price, distribution) for a high-end restaurant that you would like to open.

Answer: Answer will vary depending on student work.

6. Interview a local small business owner and find out what his or her marketing strategy is.

Determine the promotional strategy. Are these strategies similar to those discussed in the chapter?

Answer: Answer will vary depending on student work.

CONCEPT CHECKS (Not in text) What element does the marketing plan represents in the business plan for a new venture?

Answer: The marketing plan serves a number of important functions or purposes. Primarily the marketing plan establishes how the entrepreneur will effectively compete and operate in the marketplace and thus meet the business goals and objectives of the new venture. Once the strategies of how the business will operate have been established, the entrepreneur can assign costs to these strategies, which then serves the important purpose of establishing budgets and making financial projections. The marketing plan, like any other type of plan, may be compared with a road map used to guide a traveller.

What characteristics should be incorporated in an effective marketing plan?

Answer: The characteristics are as follows: 1. It should provide a strategy for accomplishing the company mission or goal. 2. It should be based on facts and valid assumptions. 3. An appropriate organization must be described to implement the marketing plan. 4. It should provide for continuity so that each annual marketing plan can build on it successfully meeting longer-term goals and objectives. 5. It should be simple and short. 6. Changes, if necessary, should be incorporated by including “what if ” scenarios and appropriate responding strategies. 7. It should specify performance criteria that will be monitored and controlled.

What are the steps in the marketing plan?

Answer: The steps in the marketing plan are: 1. Examine the product/service and market situation. 2. Review company goals and restraints. 3. Set marketing objectives that are specific and measurable. 4. Determine the marketing strategies and prepare action programs.

5. Re-evaluate programs against objectives. 6. Draft marketing plan, with steps to monitor progress of programs. 7. Match feasibility of programs against resources. 8. Finalize the marketing plan.

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Describe target marketing and market segmentation.

Answer: Market segmentation is simply defined as breaking a marketplace down into categories of buyers who share similar characteristics. Target marketing is the process of looking at what segment your company can most profitably serve and then modifying your product, price, placement, and promotion to deliver value versus your competition to your chosen targets.

What are five characteristics that segmentation must have to be useful?

Answer: The five characteristics are: 1. Meaningful: Segments must be different from one another to the point that two segments would be unlikely to be attracted to the same marketing strategy. 2. Mutually exclusive: Each segment must be mutually exclusive and collectively exclusive, meaning that each customer group only belongs to one segment. 3.

Measurable: Each segment must be measurable in both market share and market potential to the business. 4. Substantial: Each segment must be large enough to represent a group of potential customers. 5. Actionable: The entrepreneur should be able to promote his product offering to the segment.

Describe data base marketing.

Answer: Database marketing is the process of building, maintaining, and using customer databases and other databases (products, suppliers, resellers) to contact and transact with customers.

Why do some marketing plans fail?

Answer: Marketing plans fail for a number of reasons but some of the most common include not enough depth or detail in the plan, a lack of a clear strategy, unrealistic goals, or factors in the external environment.

KEY TERMS (Not in text) Customer Profile: Comprehensive profile of potential groups of customers including their needs and buying behaviour.

Customer Relationship Marketing: The process of establishing a mutually beneficial relationship with customers by learning their needs and offering them value in transactions.

Customer Retention: The process of retaining current customers. Businesses attempt to do so to lower customer acquisition costs and to enhance customer relationship management.

Marketing Mix: The actual short-term marketing decisions in the marketing plan will consist of four important marketing variables: product or service, pricing, distribution or place, and promotion known as the marketing mix.

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Marketing Plan: The marketing plan is a significant element of the business plan for a new venture. It has a number of important functions or purposes. Primarily, the marketing plan establishes how the entrepreneur will effectively compete and operate in the marketplace and thus meet the business goals and objectives of the new venture.

Market Segmentation: Breaking down a marketplace into categories of buyers who share similar characteristics.

Market Strategy: How a firm attempts to create value for customers and achieve business success.

Marketing System: The marketing system identifies the major interacting components, both internal and external to the firm, that enable the firm to successfully provide products or services to the marketplace. In the marketing system, the external environment and the internal environment affect the entrepreneur or business owner, which, in turn, affects marketing decisions and the development of marketing strategies through the marketing mix, which then affects consumers. The customers, through their actions, provide feedback to the entrepreneur.

Mission Statement: A statement that will guide where the companies goes and how it intends to get there.

Need or True Target Marketing: Enhancing market segmentation and target marketing using a defined set of criteria. The criteria is: Meaningful, Mutually Exclusive, Measurable, Substantial and Actionable.

Target Marketing: The process of looking at what segment your company can most profitably serve, and then modifying your product, price, placement, and promotion to deliver to them more value than your competition can.

Value Statement: Statements about what is important to the company, what the company is built around, and how the company will be managed.

VIDEOS Other Video Resources:  Centre to Entrepreneurship Education & Development (CEED): Subscribe to this YouTube channel here: https://www.youtube.com/channel/UCgxnMK3Kglw607FnhuZJixQ  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Additional CBC video links: o The Happy Baker - http://www.cbc.ca/dragonsden/pitches/the-happy-baker

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While many of the experiential questions would work as group projects. Questions 1, 2 and 5 from this Chapter would make excellent group assignments/projects.

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CHAPTER 8: MANAGING THE MARKETING MIX

CHAPTER LEARNING OBJECTIVES LO1. Recognize the importance of the marketing mix.

LO2. Explain how products are created.

LO3. Discuss the three methods of setting price.

LO4. Explain the different pricing strategies employed by small and medium businesses.

LO5. Identify the major elements in a promotional campaign.

LO6. Compare and contrast the different promotional tools.

LO7. Discuss the difference in marketing to consumers compared with marketing to businesses.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS

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SMALL BUSINESS IN ACTION 8-1: HEALTYH BABY, HEALTYH BUSINESS 1. How would you describe Satya’s rate of adoption? Slow or fast? What factors discussed above impacted product adoption? Please use specific terms from the text and expand on your answer?

Answer: While there is no perfect answer, students are likely going to say the adoption was fast.

Students should note that the product’s adoption was impacted by: Relative advantage: the product had an advantage over existing steroid creams and the product’s story was easy to communicate.

Complexity: the product was not complex.

Divisibility: the cream could be purchased in small amounts.

Communicability of results: results of using the product or service are quickly evident and easily communicated to others, its adoption will be more rapid.

2. How would you classify Mousseau’s product? Why? Answer: Students should note Satya is a shopping product.

3. Do you consider Mousseau to be a social entrepreneur? Why or why not?

Answer: Student Choice. Students should likely conclude yes with advantages of the product and that it helps society. Students may also point to the flexible hours she is offering people and the payment of a living wage. Others may argue she is not a social entrepreneur as she is keeping all the profits from her business and does not appear to have any plans to donate money. These students may state that in Vancouver you cannot find workers unless you pay them a high salary.

4. Read the next section, Developing the Distribution System. Based on what you learned, what are some of the strengths and weaknesses of Satya’s distribution strategy?

Answer: Student Choice. Students may note that she is engaging in short and long strategies. In her short strategy she is keeping more of the profits but is lacking reach. By engaging in a long strategy, she has increased her distribution but will be paying some money to her distributors.

SMALL BUSINESS BEGINNINGS 8-1: AMAZON AND SMALL BUSINESS AN “INTERESTING RELATIONSHIP”

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1. How would use describe the channel length and path for businesses selling primarily on Amazon?

Answer: Student Choice. However, students should note that Amazon is acting as an intermediary.

2. What are some of the advantages and disadvantages for small businesses selling on Amazon?

Answer: Student answers may go beyond the case.

Advantages: Students should note that Amazon allows them to reach millions of consumers, there is education provided to sellers and Amazon can even help ship products for firms.

Disadvantages: Amazon charges high fees, sales can come with shipping costs, Amazon is a highly competitive market.

3. Do you think Amazon is good or bad for small business? Why? Answer: Student Choice. Students should cite some of the advantages of Amazon from question two (see above). Students may also point out Amazon hurt traditional retail sale by increasing competition and likely reducing margins for businesses.

4. Use Internet resources and read about how small businesses can grow their sales on Amazon.

Report your findings back to the class.

Answer: Student answers will vary depending on their work.

SMALL BUSINESS IN ACTION 8-2: GROUPON - A DIFFERENT KIND OF COUPON 1. What are some of the potential advantages and disadvantages to firms who offer Groupon coupons?

Answer: Advantages: Groupon offers a low-cost way to acquire consumers. There is no upfront costs and firms who used these online promotions have their company name and logo emailed out to thousands, and in some larger urban centres, millions of people. The disadvantages include the high cost of participating, negative image associated with using these sites and a slowness in payment.

2. The case above cites some examples where Groupon coupons may make sense. Develop some additional alternatives where participating in Groupon-type programs would be beneficial to firms.

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Answer: Answer will vary on student work.

3. Do you think Cirque du Soleil is making a good business decision selling tickets at 50 percent off using Groupon? What are the benefits of this? What are the disadvantages?

Answer: Student Choice. Students should note that their costs are mostly fixed and selling seats at a deep discount and realizing some money is better than not selling the seats at all.

Alternatively, disadvantages include the high cost of participating, negative image associated with using these sites and a slowness in payment. Students may also mention that customers who are paying the full price may resent Cirque du Soleil for providing customers a deep discount to see the same show. Additionally, if customers know the company uses Groupon they might be slow to pay full pricing hoping for a promotional campaign offering tickets at a deep discount.

4. If you ran a business would you offer consumers Groupon coupons? Why, or why not?

Answer: Student Choice

SMALL BUSINESS IN ACTION 8-3: STEALTH MARKETING VERSUS NON-TRADITIONAL MARKETING – CAN YOU TELL THE DIFFERENCE? 1. Do you think stealth marketing is ethical? Should it be illegal?

Answer: Student Choice – however students should decide that stealth marketing is at the least unethical but recognize the lines between stealth marketing and non-traditional marketing is becoming blurred.

2. Should government create laws to protect consumers from fake or misleading recommendations on Facebook, Yelp, and TripAdvisor? Would it be possible to enforce such a law?

Answer: Student Choice 3. From the examples above, do you think alcohol companies that hire attractive or popular people to use their products are engaging in unethical behaviour? Why, or why not?

Answer: Student Choice 4. Are companies such as Apple, which spend millions on product placements, engaging in stealth marketing? Do you think product placements are an acceptable form of advertising? Why, or why not?

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Answer: Student Choice 5. Would you use stealth marketing to help you sell a product or service? Why, or why not?

Answer: Student Choice 6. How would you differentiate between stealth marketing and guerrilla marketing? Could you argue they are one and the same? Why, or why not?

Answer: Student Choice SMALL BUSINESS IN ACTION 8-4: DRAGONS’ DEN EFFECT 1. What are the advantages and disadvantages of appearing on Dragons’ Den? Answer: While there is some element of student choice to the answer students should identify the potential for sales as a result of the show, the publicity associated with the show, the potential for investment and advice. The disadvantages include having a product or service portrayed in a negative light.

2. Many entrepreneurs appear to be quite upset by some of the Dragons comments about their businesses and ideas. Do you think the potential of being called insane on national TV is worth the PR for a company?

Answer: Student Choice 3. If you had a business, would you try to get on Dragons’ Den? Why, or why not?

Answer: Student Choice. Students should likely say yes for the boost in sales and PR impact.

4. Many of the so-called successful bidders do not end up receiving any financing support from the Dragons after the show has aired. Given this information, are you more or less likely to recommend the show to an aspiring entrepreneur? If the Dragons agree to invest in a concept on the air, should they not have to honour their investment? Why, or why not?

Answer: Student Choice

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SMALL BUSINESS IN ACTION 8-5: SOCIAL MEDIA GUERRILLA MARKETING: TURNING SUCCESFUL EXAMPLES INTO SMALL BUSINESS SOLUTIONS

1. Think about the current university or college you are attending. What would be some of the potential advantages and disadvantages of the institution using a guerrilla marketing campaign?

Answer: Students answers may vary. Students may discuss the following advantages and disadvantages: Advantages: Low cost method promotions, Promotions will attract attention/potential students, Social media can expand the reach of the campaign, Can be fun and attract students/customers.

Disadvantage: Some may see universities using guerrilla marketing as inappropriate for a University, campaign may result in negative publicity, can take time with no guarantee payoff.

2. Create a list of potential social media guerrilla marketing ideas for your university or college.

Select what you think would be the best idea and describe it fully. Who will be your target market for your marketing campaign? What app will you use? Why? What will the promotion look like? How can you track results?

Answer: Student Choice 3. Small businesses can often look to see what is working for large firms and copy some of their concepts/ideas. Thinking about a small bar, a new summer hockey camp, and a independent clothing store, list five to seven potential social media guerrilla marketing ideas for each. Select one of the three businesses and what you think would be the best idea, then describe it fully. Who will be your target market for your campaign? What app will you use? Why? What will the promotion look like? How can you track results?

Answer: Student Choice

ANSWERS TO DISCUSSION QUESTIONS 1. What elements make up the marketing mix? What is the purpose of the marketing mix in a marketing plan?

Answer: The Marketing Mix includes price, promotion, place and product. Entrepreneurs want to create value for consumers using aspects of their marketing mix. It is thus central to a marketing plan.

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2. Where is Kellogg’s Corn Flakes in the product life cycle? What has Kellogg done to prolong the life cycle of this product?

Answer: Student Choice 3. Why is appealing to early adopters important to a firm?

Answer: Early adopters are often the opinion leaders in a social group. The innovators and early adopters have a far greater influence because the rest of the market usually looks to this group before purchasing. They also will often promote products on social networks and have higher incomes than the average population.

4. What methods of pricing do small firms normally use? What are some of the problems with pricing products using these methods?

Answer: Businesses use three general bases for price setting: cost, demand, and competition 5. Do you think there is a difference between guerrilla marketing and public relations? Why, or why not?

Answer: Student Choice 6. What are the advantages of using the Internet and social networking sites as a company’s major form of advertising?

Answer: Answer will vary on student work. Students should recognize the Internet can allow companies to market globally at a low cost, the Internet allows for interaction and growth in online marketing is strong. The major disadvantage include the time it takes to maintain online marketing and some concerns about its effectiveness.

ANSWERS TO EXPERIENTIAL EXERCISES 1. Develop a marketing mix (i.e., product, promotion, price, distribution) for a bakery.

Answer: Student Choice 2. Form small groups and develop public relations and guerrilla marketing activities for your college or university. Select the best five ideas, and present them to the class.

Answer: Student Choice

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3. Which pricing system would you use for the following products? Why? a. Campbell’s soup b. Toronto Blue Jays season tickets c. Patio furniture d. Automobiles Answer: Student Choice 4. If the cost of merchandise is $100 and it is sold for $150, what is the markup on cost? On selling price?

Answer: Mark-up is $50 5. You have been approached to develop an advertising campaign for a new local discount golf franchise. The owners realize they need to develop awareness among consumers but have a very limited amount of funds available for advertising. Which media type would you use for the advertising campaign? Justify your decision to use or not use each media type.

Answer: Student Choice 6. Interview a local small business owner, and find out what his or her marketing strategy is.

Determine the promotional strategy. Are these strategies similar to those discussed in the chapter?

Answer: Student Choice

CONCEPT CHECKS (Not in text) How should a marketing mix assist a company?

A good marketing mix will create value and long-term relationships with target customers and distinguish a business from its competitors.

Explain the significance of the product life cycle?

All products or services have a life cycle in which sales and profits increase and eventually decline over time. Business strategy will change as the product or service moves through its life cycle.

When introducing a new product what factors can assist in speeding up the adoption rate?

Speed of adoption of a new product can be increased by developing significant advantages over existing products, reducing complexity, providing for the purchase of the product in smaller amounts, and allowing results of using the product to be quickly evident and easily communicated.

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What are the consumer goods classifications?

The classifications of consumer goods include convenience, shopping and specialty goods.

Marketing strategy will be different for each.

When developing a distribution system, what are the three main decisions for the small business owner?

The major decision areas in distribution include being aware of the channel options, deciding on the length of the channel, and determining the channel intensity.

What characteristics help determine the length of the distribution channel?

In determining length of the distribution channel the owner-manager should examine market and product characteristics as well as the firm's capabilities.

What characteristics require a more intensive channel?

An intensive channel is utilized where product availability is important. Exclusive channels are found for products which need greater sales effort and support.

What are the three methods of price setting?

The three methods of setting price are: cost based, demand based, and competitive based pricing.

Define price elasticity.

Price elasticity is a measure of consumer sensitivity to various price levels. The owner-manager should determine how important price is to the consumer.

What are the four methods of promoting a product or service?

There are four methods of providing information about a product or service. The methods are; advertising, sales promotion, public relations, and personal selling.

Identify the steps in developing a promotional campaign.

The following are the essential steps in carrying out a promotional program: 1. Set promotional objectives 2. Specify the target of the promotion 3. Understand the target's needs and perceptions of the product or service 4. Develop the relevant theme 5. Determine the method and/or media to use 6. Develop a specific promotional message 7. Set a promotional budget 8. Implement the promotional program 9. Evaluate effectiveness of the promotion Define non-traditional marketing and provide two examples.

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Non-traditional promotional methods can be defined as pursuing traditional business goals of sales and profits through non-conventional means. Non-traditional methods are usually low in cost, generate both exposure and sales, and may or may not be interactive with consumers. The two major types of non-traditional promotions are guerrilla marketing and public relations (PR).

Define Guerrilla Marketing and Public Relations.

Guerrilla marketing consists of entrepreneurs developing creative, catchy, and—most importantly—low-cost methods to attract attention to their business and to sell their products.

Public relations is defined as generating positive awareness of your company.

What are some of the major methods of Internet Marketing?

Some of the major methods of Internet Marketing Include: 1. Company Web Pages; 2. Search Engine Optimization; 3. Social Networks Define Mobile Marketing and list the common types.

Mobile marketing is the use of mobile devices to communicate marketing messages. The most common mobile marketing methods are: Text Messages, QR Codes, Apps, Proximity/Location Based Marketing.

KEY TERMS (Not in text) Advertising: Non-personal form of promotion. It is directed at a mass audience through various forms of media, such as television, radio, newspapers, magazines, billboards, the Internet, and direct mail.

Affiliate Programs: Online partnerships where one company posts links to your website if you do the same in turn.

Banner Advertisements: Banners placed on a website as a form of advertising.

Competition-Based Pricing: Firms in a growing number of industries are using competitive pricing in which the major considerations in setting prices are the price levels and policies of competitors (external influences).

Complexity: Refers to how complex a product is to understand and adopt. The more complex the product the slower the adoption rates.

Content Marketing: The use of marketing to create valuable and relevant content such as blogs, newsletters, videos, and so forth, to acquire or retain customers. Companies that engage in content marketing are hoping to enhance their brand with consumers and ultimately become a valuable resource.

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Convenience products: Products that are purchased with minimal effort. They may be necessities, unplanned purchases, or emergency goods.

Cost-Based Pricing: Establishing the selling price based on what it costs to manufacture or produce a product/service.

Demand-Based Pricing: Demand-based pricing uses consumer sensitivity to price as the major factor in arriving at the final price level (external influences).

Digital or Internet Marketing: Using the Internet to market a company. Advantages of using the Internet as a central point of all marketing activities are it allows entrepreneurs to present consumers with a significant amount of information at lower cost than traditional methods.

Direct Mail: Personal or impersonal mail outs to potential customers. Email is replacing traditional mail as a form of delivery.

Distribution channel: The path the product or service follows from the producer to the customer. It includes the different organizations or individuals who will assist in this movement toward consumption.

Divisibility: When a product or service can be purchased in small amounts with limited financial or social risk. A product with divisibility will have quicker adoption rates.

Guerrilla marketing: Consists of entrepreneurs developing creative, catchy, and—most importantly— low-cost methods to attract attention to their business and to sell their products.

Influencer Marketing: Influencer marketing is the use of social media influencers to sell a product or service. Influencers are people who have the ability impact the purchasing decisions of their followers because the influencer is perceived to be knowledgeable and/or important.

Innovators: People who tend to adopt new products quickly.

Mobile Marketing: The use of mobile devices to market to customers. Common methods include: Apps, Text Messages, QR Codes, Voice search and Proximity/location-based marketing.

Pay-Per-Click Advertising: The process whereas firms bid on key words or phrases relevant to their target market. When a consumer enters the phrase or word in the search engine, the company will appear under the results section, and their ads will appear on the side of the viewer’s screen.

Personal Selling: Sales are made from one person to another.

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Podcasts: Podcasts are audio or video clips that can be downloaded on a mobile, such as a smartphone or a tablet.

Product Life Cycle: The stages a product goes through from introduction, growth, maturity and decline.

Public Relations: Generating positive awareness of your company. PR is a highly effective form of promotion that has been used by large and small firms.

Relative Advantage: When a product or service has a significant advantage over existing products.

Sales Promotion: Sales promotions are also non-personal forms of promotion, but they are directed at a much more restricted audience than is advertising. Examples of sales promotions are point-ofpurchase displays, coupons and discounts, trade shows and exhibitions, and contests.

People who tend to adopt new products quickly.

Search Engine Optimization: The process of using techniques such as clear title tags, document links and so forth to allow for websites to appear more frequently and higher in rankings in search engine results.

Shopping products: Products that are purchased only after comparison with similar products.

Comparisons may be made on the basis of price if competing products are viewed as similar or in terms of quality or style if competing products differ.

Social Media Dashboards: A platform which allows companies to send material to various social media sites from one central website. Dashboards also allow tracking of social media statistics.

Social networking: The concept of people engaging socially online. Businesses are increasingly using social network sites to build and strengthen relationships. Popular social networking sites include Facebook, LinkedIn, Twitter, Snapchat, Pinterest, Instagram, Youtube, and Tinder.

Social Selling: An increasingly popular form of distribution channel used by small and large organizations is social selling often referred to as multi-level marketing. In a typical social selling system, individuals associate with a parent company as an independent contractor or franchise and are compensated based on their sales of products or services, as well as sales achieved by the people they bring into the business.

Specialty product: Products that inspire substantial brand or product loyalty in consumers. As a result, they are willing to spend considerable effort to locate and purchase the brands and products they desire.

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Stealth Marketing: Companies undertake promotions to advertise to consumers without them being aware they are the object of a marketing plan. Stealth marketing often uses deception to convince consumers to buy products or to create awareness for a company.

Unsought products: Products that consumers are unaware of, such as new innovations.

Value-Based Pricing: The entrepreneur/business makes sure that a clear association with the product or service and its benefits takes place.

Webinars: Web-based seminars where you can engage in a full sales pitch with customers regardless of their location.

VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 2 and 5 from this Chapter would make excellent group assignments/projects.

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CHAPTER 9: FINANCIAL MANAGEMENT

CHAPTER OBJECTIVES LO1. To review the fundamentals of small business accounting.

LO2. To discuss the various types of accounting systems that a small business can use.

LO3. To describe the considerations in purchasing a computer for the small business.

LO4. To show how to develop and use budgets and financial planning tools.

LO5. To illustrate how to evaluate the financial operations of the small business.

LO6. To discuss the important aspects of credit management for the small business.

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ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 9-1: MANAGING CASH FLOW 1. Do you think most entrepreneurs are as thorough with their financial management as Pieter Spinder? Why or why not?

Answer: Student Choice 2. Do you Pieter Spinder’s attention to detail maybe too thorough given that most business’s expenses ebb and flow a bit? Would you like to work in an environment like this? Why or why not?

Answer: Student Choice SMALL BUSINESS BEGINNINGS 9-1: BOOTSTRAPPING TOWARD FINANCIAL SUCCESS 1. DO YOU THINK IT’S EASIER TO KEEP TRACK OF EXPENSES AT THE START OF THE BUSINESS? WHY OR WHY NOT?

Answer: Student Choice 2. AS REMIXED GROWS, WHAT FINANCIAL AND ACCOUNTING SYSTEMS SHOULD THE COMPANY PUT IN PLACE? WHY?

Answer: Student Choice

SMALL BUSINESS IN ACTION 9-2: FRESHBOOKS (WWW.FRESHBOOKS.COM) 1. What are some advantages of FreshBooks?

Answer: Student Choice – however students should mention easy access, in the cloud, allows for precise billing for service enterprises, and simple to use.

2. FreshBook’s niche, is service firms who often bill for their services in very small increments.

What are some of the advantages and disadvantages of such small incremental billing?

Answer: Student Choice.

3. Do you think some entrepreneurs would be hesitant to use FreshBooks because of their software is stored in the cloud? Why or why not?

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SMALL BUSINESS IN ACTION 9-3: INBOX MARKETER’S SIX-MILLION-DOLLAR DISEASE 1. Why is it important to have an accrual-based system?

Answer: Accrual accounting provides a better view of the business’s financial health and assists in the management of the business. Accrual accounting records income and expenses when they actually occur.

2. Up to this point Litchfield was using a cash-based accounting system. What are some of the advantages and disadvantages of a cash-based system?

Answer: The advantages of cash-based accounting is that it is simple and accounts for the cash at hand. The disadvantage is it is does not recognize when the cash is earned or when expenses occur.

This impacts planning, controlling costs and projecting revenue.

3. What are the advantages and disadvantages of more formal accounting systems?

Answer: Student Choice – however students should note that a formalized system allows for comparisons, strategic planning and should enable growth. The disadvantages is establishing the system involves an investment of both time and resources. In addition the management of the system is more time consuming than less formalized systems.

4. Given that Litchfield has grown his business to $6 million in sales without spending much time on financial and accounting systems, do you think the company’s corporate culture will easily adapt to more formal controls and planning? Why, or why not?

Answer: Student Choice SMALL BUSINESS IN ACTION 9-4: LEAN MANAGEMENT YIELDS SUCCESS 1. What are some of the advantages and disadvantages of allowing staff to work from home?

Answer: Cost savings increase as a result of not having an office. An increase in employee creativity and productivity.

2. Some business experts question the trade-off of efficiency vs cost savings in Sequel Lifestyle Hotels and Resorts model above. They note, that why office costs are reduced, people in traditional offices are more efficient due to supervision and they have greater opportunities to collaborate leading to improvements in operations. Do you think people in traditional offices are better employees? Why or why not?

Answer: Student Choice

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SMALL BUSINESS IN ACTION 9-5: LEGENDARY STORY—TED ROGERS, FOUNDER OF ROGERS COMMUNICATION AND CASH FLOW MANAGEMENT 1. Do you think Roger’s method of bill paying was ethical? Why or why not?

Answer: Student Choice 2. Do you think Roger’s strategy would work today? Why or why not?

Answer: Student Choice 3. What other solutions could have Rogers sought out to pay his creditors on time? Why do you think he didn’t try any of these solutions?

Answer: Student Choice SMALL BUSINESS IN ACTION 9-6: GLOW PROMOTIONS: GROWING WITH A FOCUS ON THE BOTTOM LINE 1. O’Connor places a heavy emphasis on growing revenue and cross-selling. What are some of the advantages and disadvantages of his strategy?

Answer: Advantages for cross-selling: Customer knowledge allows him to better serve his clients, Selling more to an established client reduces customer acquisition costs; allows for the company to further strengthen his relationship with clients Disadvantages of cross-selling: May lead to expansion into business areas where the company is lacking in knowledge or experience, some clients maybe put off by a salesperson or a company trying to sell them too much.

Students should also discuss O’Connor’s growth strategy where he is always trying to grow revenue.

Students should mention that revenue growth can lead to more profits and actually protect the company if there is a downturn in the economy. Students may mention that a focus on growth may lead to poor management decisions and a loss of control on costs.

2. O’Connor notes that he only wants to enter into businesses where he can be Number One or Number Two in the region. Do you think this is good strategy? Why or why not?

Answer: Student Choice 3. Why would managing cash flow be more challenging for O’Connor based on his business activity?

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Answer: Student Choice. Students should mention that with a lot of different rentals and rentals by large and small clients could be hard to track. Students can also mention that allocating expenses to specific rentals or projects can also be difficult.

4. What advice would you give to O’Connor for managing his company’s financials?

Answer: Student Choice

SMALL BUSINESS IN ACTION 9-7: REWARDS CARDS-WE BENEFIT- BUT WHO PAYS? 1. Do you think Visa and MasterCard are acting ethically in passing the cost of paying for consumer rewards cards to merchants in the form of higher fees? Why, or why not?

Answer: Student Choice 2. Do you think Visa is correct in that the transaction fees ranging from 1.5–3 percent are worth the advantages of being able to accept credit cards?

Answer: Student Choice 3. As a consumer, how would you feel if merchants could refuse to accept certain credit cards you use? Would you accept paying an extra fee for the right to use a rewards card? Why, or why not?

Answer: Student Choice 4. Do you support CFIB’s position as outlined in the case above?

Answer: Student Choice

ANSWERS TO DISCUSSION QUESTIONS 1. Is it more important for an entrepreneur to track cash or profits? Does it depend on the type of business and/or industry? What troubles will an entrepreneur face if he or she tracks only profits and ignores cash? What troubles will an entrepreneur face if he or she tracks only cash and ignores profits?

Answer: Student Choice – however students should note that a business really needs to manage both to be successful. Cash flow management is essential to ensuring a firm can meets its debt obligations and invest in growth. While making money/profit is essential to actually successfully staying in business.

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2. How useful is a financial plan when it is based on assumptions of the future and we are confident that these assumptions are not going to be 100 percent correct?

Answer: Student Choice – however students should note that while financial planning is not perfect it can help a business measure goals and will assist in making decisions about the allocation or resources. No plan is perfect but one based on research and thought can be most helpful in running a business.

ANSWERS TO EXPERIENTIAL EXERCISES 1. Research the software packages available to help entrepreneurs with the financials for a business plan. Which do you believe is the best? Why? Answer: Student Choice 2. Companies planning to make an initial public offering (IPO) must submit a financial plan as part of their prospectus. From the Internet, collect a prospectus from three different companies, and analyze their financial plan. What are the major assumptions made in constructing these financial plans? Compare and contrast these financial plans with what we would expect of a financial plan as part of a business plan.

Answer: Student Choice 3. Have students draw up pro forma statements for their venture ideas. (Note that the students must source these.) Then have the students break into small groups to review their expenses and try to find ways to generate savings. Ask the groups to try to reduce expenditures by at least 20 percent per business plan.

Answer: Student Choice 4. For the following transactions indicate what accounts are changed and by how much.

Increase Feb. 14/14 Cash $1,000 Accounts Receivable Feb. 14/14 Equipment $1,500 Cash Feb. 15/14 Owner's Equity $2,000 Cash Feb.18/14 Telephone Exp. $90.87 Cash

Decrease

$1,000 $1,500 $2,000 $90.87

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Feb.19/14

Supplies Inv. Accts Payable

$395.00 $395.00

Answer: The rate of return for this investment would be: Rate of Return

=

Average profit average investment

=

$30,000 125,000 24%

=

Factors affecting the investment in this business are: 1. Prime rate of interest - usually an investor will want a return at least two to three times the prime rate.

2. There is also some tax, personality and personal considerations. Refer to chapter five for all the considerations on buying a business. In order to make a purchase decision the above considerations would have to be positive.

6. Assume the annual depreciation charge for the investment in problem 3 is $25,000. Determine the payback period of the investment.

Answer: Payback period =

= =

Total Investment (Annual Depreciation + Annual Profit). $250,000 ($25,000 + $30,000) 4.55 years

This investment looks very profitable when the payback is considered. If all other results are positive, I would recommend purchasing this investment.

7. Determine the break-even point in dollars for an investment with fixed costs of $100,000 and an estimated contribution of 60 percent. How much revenue would it need to produce before your would invest?

Answer: B.E.P.

=

Fixed Costs Contribution per unit

=

$100,000

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.6 $166,667

=

Depending on the student's expectations, they could expect from $166,667 and up, for the revenue necessary for investment. If $166,667 was all that was expected there should be some potential of profit some time in the future.

8. a. From the balance sheet and income statement of Sam’s Paint and Drywall, determine the following ratios: (1) Current (2) Inventory turnover (3) Profit to sales (4) Return on investment (5) Total debt to equity b. From Dun and Bradstreet’s Key Business Ratios on industry norms, evaluate each of the above ratios.

Sam's Paint and Drywall Dec. 31 2014 (In thousands of dollars) Assets Cash Inventory Accounts Receivable Total Current Assets Fixed Assets Vehicles Equipment Building Land Total Fixed Total Assets

12 41 18 71 10 15 22 23 70 141

Liabilities and Net Worth Accounts Payable Notes Payable-Bank Other Total Current Liabilities Long Term Liabilities

15 4 20 39 41

Total Owner’s Equity

61

Total Liability and Net worth

141

Income Statement Dec. 31, 2014 (In thousands of dollars) Sales

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Less Cost of Goods Sold Gross Margin on Sales Less Operating Expenses

186 94 81

Net profit (before taxes)

13

8a. Answer: 1. Current Ratio

= Current Assets/ Current Liabilities. = $71,000/ $39,000 = 1.82 to 1

2.

Inventory Turnover

= Sales / Average Inventory. = $280,000/ $41,000 = 6.83 = Net Profit(Before Tax)/ Gross Sales. = $13,000/ $280,000 = 4.29%

3.

Profit to Sales

4.

Return on Investment

= Net Profit (Before Tax)/ Owners Equity. = $13,000/ $61,000 = 21.31%

5.

Debt to Equity

= Total Debt/ Owners Equity = $39,000/ $61,000 = .64 to 1

8b. Answer: 1.

Current Ratio: The Dunn & Bradstreet(D&B) ratio is 2.7. Although Sam's current ratio is lower than the industry norm it is not yet to a serious level. Sam should try to attempt to make his company more liquid.

2.

Inventory Turnover: The D&B average is 6.9 . Sam's is at an almost identical level.

3.

Profit to sales: The D&B average is 3.5% while Sam's has a 4.29% ratio. This profitability ratio indicates that Sam is doing very well.

4.

Return on Investment: The D&B average is 21% which is similar to Sam's R.O.I.

5.

Debt to Equity: The D&B average is 4.3 to 1 which represents a good ability to meet long term debt. Sam's ratio is 0.64 to 1 which represents a very low ratio. It appears that Sam is experiencing higher than average profitability because of his high debt load. At the same Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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time he is risking long term viability by placing himself in a high risk position to default on long-term debt.

9. Dick's Draperies has gross sales of $15,000 per month, one half which are on credit (paid within 30 days). Monthly expenses are as follows: wages, $3,000; utilities and rent, $2,000; advertising, $300; miscellaneous, $500. Inventory is purchased every three months and totals $30,000 for each order. Yearly expenses paid for in advance are insurance of $1,000 and a rent deposit of $700.

Prepare a six-month cash flow statement for Dick's Draperies. What advice would you give this business based on the cash flow statement?

Answer:

6 Month Cash Flow for Dick's Draperies

Cash In-flows

Month

Sales Cash Credit

1

2

3

4

5

6

$ 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 7,500 15,000 15,000 15,000 15,000 15,000

Cash Outflows Wages Utilities Advertising Miscellaneous Inventory Insurance Rent deposit Cash In(Out) Flow Cumulative Cash Flow

3,000 3,000 3,000 3,000 3,000 3,000 2,000 2,000 2,000 2,000 2,000 2,000 300 300 300 300 300 300 500 500 500 500 500 500 30,000 30,000 1,000 700 37,500 5,800 5,800 35,800 5,800 5,800 (30,000) 9,200 9,200 (20,800) 9,200 9,200 (30,000) (20,800) (11,600) (32,400) (23,200) (14,000)

Dick's Draperies shows a negative cash flow and should seek outside operating funding such as a bank operating loan to improve its cash flow position.

CONCEPT CHECKS (Not in text) Describe the steps in the accounting cycle.

Answer: The three step process of the accounting cycle includes the following: 1. Recording the transactions (journal).

2. Classifying the transaction totals (ledger).

3. Summarizing the data (financial statements).

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What are the three financial statements, as discussed in the text, that are valuable to a small business owner?

Answer: The three financial statements which can be valuable to the owner-manager of a small business are the balance sheet, income statement, and the cash flow statement.

List the common accounting systems used by small business.

Answer: The common types of bookkeeping systems used by small business today are one book system, one write system, manual multi-journal system, bookkeeping machines, computer service bureaus, and small business computers.

What are some of the possible disadvantages of computer ownership?

Answer: Some of the major disadvantages of computer ownership might be cost, obsolescence, employee resistance, restricted capabilities, set-up time, and failure to compensate for poor bookkeeping.

In the short-term, why is budgeting a valuable tool?

Answer: Short-term financial planning consists of preparing an estimated future financial result or a budget and comparing it to actual results.

What are the three types of long-term financial planning decisions that could affect the business?

Answer: The three types of long-term financial planning decisions are capital investment decisions, capacity decisions and expansion decisions.

What measure can be used to evaluate the results which are found in the financial statements?

Answer: The measures used to evaluate financial information are: management of current financial position, the business cycle, liquidity ratios, productivity ratios, profitability ratios and debt ratios.

What is the business cycle of a small business? Why is it so important?

Answer: The business cycle of a small business is made up of the time taken to pay account receivables, time taken to sell inventory, and time taken to receive payment for inventory.

Why is ratio analysis important?

Answer: Ratio analysis for a small business enables the financial performance of a company to be compared to other competitors firms in the industry and past performance.

KEY TERMS (Not in text) Balance Sheet: The balance sheet presents, in summary form, a snapshot of what the business owns and owes at any point in time. Those items the business owns are termed assets, and those owed are either liabilities (owed to sources outside the business) or equity (owed to owners).

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Cash Flow Statement: This statement is similar to the income statement except that only cash inflows and outflows are shown.

Debt Ratio: Measures the solvency of the business, or the firm’s ability to meet long-term debt payments.

Double Entry Accounting: The amounts of each transaction are recorded twice. This procedure accurately reflects the fact that each transaction affects two parts (accounts) of the business. Often a decrease in one means an increase in another.

Financial Statements: Formal records of financial activities for a business.

Income Statement: The income statement shows the results of the operations of the business for a given period. The profit or income is determined by taking revenue from operations and subtracting expenses incurred in earning that revenue.

Liquidity Ratios: Liquidity ratios assess the business’ ability to meet financial obligations in the current period. Two liquidity ratios are commonly used: the current ratio and the acid test or quick ratio.

Productivity Ratios: Productivity ratios measure the efficiency of internal management operations.

They include the inventory turnover ratio and the collection period ratio.

Profitability Ratios: Profitability ratios measure the effectiveness of operations in generating a profit.

There are four ratios in this category: gross margin, profit on sales, expense ratio, return on investment.

Ratio Analysis: Comparing the financial performance of the business with historical information and those of other similar businesses or with previous results for the same business.

Short-Term Financial Planning: Consists of preparing an estimated future financial result of operations of the business. Such pro forma (projected) financial statements serve as a blueprint for planning operations.

VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Additional CBC video links: o The Happy Baker - http://www.cbc.ca/dragonsden/pitches/the-happy-baker

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While many of the experiential questions would work as group projects. Questions 5 and 6 from this Chapter would make excellent group assignments/projects

COMPREHENSIVE CASE SOLUTION Dan Kim – Part IV Solution 1. What were some of the methods Dan and Suzie used to create a successful crowdfunding campaign? What other strategies could they use?

Answer: Dan has invested time learning about crowdfunding. He has created a compelling story, has a promotional video, has both a social media and a PR strategy and has reasonable expectations for the amount of money he plans on raising.

Students may suggest that Dan increase the PR for his campaign or hire a marketing firm to help.

2.

Dan is marketing his Ladder Helper through Facebook, Twitter, and email. Why do you think he opted for these methods? Should he expand his social media presence? Why or why not?

Answer: Student Choice

3. What do you think about Dan’s strategy of investing no money in marketing? Do you agree with him? Why or why not? What other non-paid forms of marketing would you recommend to Dan. Answer: Student choice.

4.

Evaluate Dan and Suzie’s financial management practices.

Answer: Dan and Suzie should have been more thorough in their financial planning. The cost overruns and surprises could have been minimized if this were the case. Also, they should be preparing regular financial progress reports (at least monthly) so that when they visit with their accountant at the end of the year they are not surprised by the result.

5. Using ratios provided by the accountant, evaluate Dan’s business and make suggestions for improvement. a. Current Ratio – Industry average = 1.52 to1 Current Assets : Current Liabilities 16,300 : 60,200 = .27 to 1 Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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The current ratio is poor and even with the bank payment delayed Dan will have to obtain more equity or move some of the accounts payable to long term if he expects to survive another year. b. Gross Margin – Industry average = 23.2% Sales – Cost of Goods Sold / Sales 145,000 – 57,000 / 145,000 = 60% The gross margin for Dan’s business in much higher than the industry average. Although the reason for this may be that the industry average may not be comparable, it is likely that the financial problems of the business lie somewhere else besides the gross margin. c. Profit on Net Sales – Industry average = 6.1% Profit / Sales Because Dan’s business is operating at a loss, this percentage cannot be calculated. d. Profit on Net Worth – Industry average = 21.13% Profit / Owner’s Equity Because Dan’s business is operating at a loss, this percentage cannot be calculated. e. Collection Period – Industry average = 59 days Accounts Receivable / Daily sales 3800/397.26 = 9.5 days Dan’s collection period is very good and likely reflects the fact that he does not normally sell to customers on credit. f. Inventory Turnover – Industry Average = 4.2 Sales / Inventory 145,000 / 10,250 = 14.4 Again, this is much higher than the industry average. It may reflect that Dan’s business is located close to the source of supply and that he is obtaining his inventory as he needs it. g. Debt to Equity – Industry Average = 1.10 to 1 Debt : Equity 177200 : 42,300 = 4.18 to 1 This ratio suggests that Dan’s business is at its limit regarding debt. It suggests that he would have trouble borrowing more money and likely needs an infusion of equity financing. This would also reduce his interest costs.

Overall it appears that Dan’s business is doing well with some of the ratios, but it appears to be undercapitalized and that wage costs are not warranted for the level of production and sales that the business is achieving.

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3.

Using the financial information provided, calculate a breakeven point and rate of return for the new addition. What additional information would he need to do a pay back analysis of the proposed expansion? a. Break Even Point- the break even point could be calculated in two ways: - If the full cost of the addition was treated as the fixed cost.

80,000 / (30.52 - 12.00) = 4319.65 units - If the yearly amortized cost was treated as the fixed cost (more accurate) 8,000 / (30.52 - 12.00) = 431.96 units b. Rate of Return Method Income / Average Cost 10,000 / 40,000 = 25% return c. Payback Method – Dan would need to determine the annual depreciation charge. If straight line depreciation was used the calculation would be as follows: 80,000 / (10,000 + 8000) = 4.44 years As the life of the addition is estimated to be 8 years, this would be a good investment.

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CHAPTER 10: OPERATIONS MANAGEMENT

CHAPTER LEARNING OBJECTIVES LO1. Review the methods of planning the production process.

LO2. Discuss the management of the components of the physical facilities of a small business.

LO3. Explain the types of layouts used in small businesses.

LO4. Describe the factors to consider in planning the layout of a store.

LO5. Illustrate the methods of purchasing and controlling inventories in the small business.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 10-1: MIND YOUR METRICS

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1. Given that Optamedia was a start-up when Bolivar instituted the operations procedures, do you think this made the implementation easier or more difficult?

Answer: Student choice. Students mat note that procedures are often easier to implement during the start-up phase as employees are not used to acting in a certain way.

2. Do you think employees would be responsive to this rigour in reporting work? Why, or why not?

Would you want to work in a company with this much rigour in reporting? Why or why not?

Answer: Student choice. Students may note that employee reaction may be tied to the explanation accompanying the system. If management did a good job in justifying the implementation, then they would likely be much more receptive. If for example, managers explained the importance of the system in accurately bidding for jobs and the impact on the bottom line most if not all employees would likely be receptive. If the system was brought in with little explanation or justification employees may not be responsive.

3. What some of the pros and cons of rigorous employee reporting.

Answer: Student choice. Students may note that some advantages include accuracy in assessing time required to complete jobs, compensation, and understanding costs. Disadvantages could include potential negative impact on employee morale and perhaps the time-consuming nature of rigorous reporting.

SMALL BUSINESS IN ACTION 10-2: GODIN GUITARS STRIKES THE RIGHT CHORD 1. Based on the material in this chapter, do you think Godin Guitars is following Total Quality Management Standards (TQM)? Why or why not?

Answer: Student Choice 2. Given that even the largest guitar producers are manufacturing outside of North America do you think Godin’s insistence of only making products in North America is sustainable in the long term?

Why or why not?

Answer: Student Choice. Students may discuss the high costs of manufacturing in North America as problematic and the lack of skilled workers. Students may also discuss that manufacturing in North America can help the company maintain quality, build a brand, create an appealing story, and so forth.

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3. Based on the management’s insistence of manufacturing in North America and the creation of “Godin Direct,” which helps many small independent retailers, would you consider Godin Guitars to be a social enterprise? Why or why not?

Answer: Student’s answers may vary considerably but should be well justified.

4. What are some of the advantages and disadvantages associated with Godin’s North American manufacturing and “Godin Direct”?

Answer: Advantages: Offsets high costs distribution costs, products can reach retailers quickly, further strengthens the company’s relationship with retailers.

Disadvantages: May limit the customers the company can reach.

SMALL BUSINESS IN ACTION 10-3: PRODUCTION IMPROVEMENT 1. Do you think implementing changes, like the ones discussed above, is easier or more difficult in times of financial crisis?

Answer: Student choice 2. Do you think there is a danger in the Kaizen system of making change for the sake of change?

How can companies ensure this does not happen?

Answer: Student choice 3. List and discuss the potential pros and cons for adopting a Kaizen system.

Answer: Student’s should cite the following as pros: 1. Reduced process; 2. Focus on being efficient, Cons: Negatively impact employee morale; 2. Lead to less efficient workers SMALL BUSINESS IN ACTION 10-3: NAVIGATING IKEA 1.

Do you think IKEA’s store layout is ethical? Why or why not?

Answer: Student choice 2.

What are the advantages of IKEA’s store design? What disadvantages do you see?

Answer: Advantages include: 1. Shoppers spend more time shopping; 2. Store offers sample rooms to help people make selections; 3. Store is set up to allow browsers and people with an item in mind to easily find the item; 4. Store is bright; 5. Store has a map

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Disadvantages: 1. Long time to shop; 2. People question ethics; 3. Hard to be quick shopping; 4.

3.

Why do you think shoppers are willing to spend so much time visiting an IKEA store?

Answer: Student choice 4.

Could a small start-up retailer mimic IKEA’s layout? Why or why not?

Answer: Student choice 5.

Why wouldn’t other larger retailers establish store layouts like IKEA? Would such a layout work for a grocery chain or a retailer such as Wal-Mart? Why or why not?

Answer: Student choice

ANSWERS TO DISCUSSION QUESTIONS 1. What kind of layout should be used for the following manufacturing firms? a.

Golf club manufacturer b.

Independent bottler c.

Bob's Machine Shop Answer: a.

Golf club manufacturer - They would use a product layout so that each product can be made with the lowest cost and time required.

b.

Independent bottler - A bottler would use an assembly line with a product layout.

Having a separate layout for the beverages enables efficiency in production.

c.

Bob's Machine Shop - A machine shop would use a process layout because they are often required to make many different custom made products.

2. What kind of layout should be used for the following retail firms? a.

Clothing store b.

Motorcycle shop c.

Small grocery store Answer: a.

A clothing store - Traditionally, clothing stores have been a grid layout but today most clothing shops are using a free flow layout to encourage browsing and to use floor space more effectively.

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b.

A motorcycle shop - A grid layout is used to promote availability and convenience.

c.

A small grocery store - A grid layout is used to provide convenience and efficiency.

3. Answer the following questions regarding the location for the following food items in a grocery store: a.

Where are the bread and milk located? Why? b.

Where are the chocolate bars and other candy located? Why? c.

Where on the shelf are the top name-brand items located? Why? d.

Where are the high-margin items positioned in the store and on the shelf? Why? Answer: a.

Convenience items such as milk and bread are located at the back of the store so the consumer can view and hopefully purchase other items as he/she travels through the store.

b.

Impulse goods such as candy are displayed at P.O.P displays near the checkout counter.

This entices the consumer to purchase these items as he/she goes through the cash register.

c.

Campbell's soups and other top brand items are located usually at eye level so the product is easier to view and select. These top brand items might pay extra for this valuable space or have enough channel power to demand this favourable shelf position.

d.

The high-margin items in a grocery store are usually located in very accessible and visible spots. These items might be close to the door, by a staple product or positioned at eye level on the shelf.

ANSWERS TO EXPERIENTIAL EXERCISES 1. Visit a small retail store or manufacturing plant and evaluate the layout.

Answer: Student application exercise.

2. Frank Newhart is opening a new DVD Appliance store, but has not determined which DVD supplier to use. Frank has narrowed the choice to two sources. Supplier 1 is newly established and is selling the units for $60 apiece. Supplier 2 is a well established firm and sells the units for $75 each, with a 7% discount on orders over 50. Evaluate each supplier from the information given.

With this information develop different scenarios in which Frank would choose supplier 1 or supplier 2.

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Evaluation of Suppliers: Supplier # 1 Dependability - Supplier # 1 has no proven track record. Frank would have to be totally convinced that supplier # 1 is reliable before placing orders. Cost - This supplier offers a $15 savings per unit.

Services Offered - No discounts are offered and no indication is given of technical assistance.

Supplier # 2 Dependability - Supplier # 2 has a proven track record so there would be likely no surprises.

Cost - This supplier offers their units a $15 more per unit but it would be cheaper if Frank can order 50 or more units.

Services offered - This supplier has the experience and track record, Frank can determine what services he has offered and if he is reliable.

Purchase options: 1.

If Frank can afford to order 50 units then he should use supplier #2.

2.

If Frank is somewhat sceptical of Supplier # 1 services he should use the experienced supplier.

3.

If supplier # 1 checks out to be dependable and offers the necessary technical services and Frank doesn't want to order 50 units at a time supplier #1 would be a logical choice.

3. Interview 3 business owners and determine which inventory ordering system they use and why.

Answer: Application question - Dependent on student interview.

4. Interview a small business owner to learn why he or she selected a particular supplier. Find out what criteria were important to the owner in making their choice.

Answer:

Student Application exercise - dependent on student interview.

5. How could a small business improve the quality of a product or service which it offered? Discuss the information provided in this chapter.

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Answer: The owner of a small business cold improve the quality of its product or service by following the steps to Total Quality Management which include: setting goals, determining the tolerance range, and developing a system for measurement and inspection.

CONCEPT CHECKS (Not in text) What is the production process?

Answer: The production process involves the conversion of inputs such as money, people, machines and inventories into outputs which are the products or services provided.

Why is it important to continually monitor the state of the physical facilities?

Answer: The physical facilities must be continually monitored as the conditions that contribute to their effectiveness will not remain static.

What are the three types of layouts used by small manufacturing firms?

Answer: The three types of layouts utilized by small manufacturing firms are: product layout, process layout and fixed position layout. Product layout is used when the business manufactures large numbers of just one or a few products. Process layout is designed for factories which manufacture smaller numbers of many different or custom-made products.

Fixed position layout is used for very large or cumbersome products.

In planning the layout of a retail store, what key areas should be analysed?

Answer: In planning the interior layout of a retail store the retailer will need to analyse the allocation of selling versus non-selling space the allocation of space among departments and/or products, classification of the merchandise and the location of displays and products on the shelf.

What are the two types of layouts used by a retail store?

Answer: The two types of layouts which can be utilized by a retail store are: the Grid layout and the Free flow layout. The Grid layout is usually used in a supermarket and is organized with customer convenience and retail efficiency in mind. The Free Flow Layout has a more relaxed atmosphere where more time is spent by the customer browsing. This type of layout is suited for clothing and many specialty types of merchandise.

What are the pros and cons of purchasing from one supplier?

Answer: It is important for the small business manager to be aware of the sources of supply.

One question that most small businesses are faced with is whether to purchase from one supplier or many. The owner-manager should be aware of the relative merits of one supplier or many.

What items of information are required to estimate the quantities of inventories to order?

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Answer: In estimating the quantities to order the essential items of information which will be required are: the time taken for delivery, sales or production estimate, minimum inventory levels required and the inventory currently on hand.

What specific methods can be used to determine order quantities?

Answer: Some of the methods used to determine order quantities are: the minimum turnover method which utilizes inventory turnover calculations, the maximum and minimum methods which can indicate the time and amounts to order, the open-to-buy method used in retailing, the economic order quantity which allows for the calculation of the minimization of the ordering and storage costs of inventory, and the A-B-C analysis which prioritizes types of inventory.

What are the three essential aspects of inventory control?

Answer: Three decision areas of inventory control are: determining the unit of control, determining the method of valuing the inventories and determining the method used in monitoring inventory levels.

KEY TERMS (Not in text) Fixed-Position Layout: The fixed-position layout, the product remains in a fixed position throughout its manufacture. The production processes move to the product.

Free-Flow Layout: Relaxed retail layout whereas consumers can see numerous tables of merchandise arranged in a variety of methods.

Grid Layout: Grid layout is organized with customer convenience and retailer efficiency in mind. Grid layouts have traditionally been used in stores such as supermarkets and hardware stores.

Inventory Control: The process of measuring the efficiency and effectiveness of inventory management including ordering, valuing, and monitoring levels.

Just-In-Time Inventory: An inventory policy whereas the order is placed so that the inventory arrives “just in time” to be used in the production process.

Layout: Refers to the arrangement of manufacturing or layout of retail location floor space.

Operations Management: Area of management concerned with the production of goods and services.

PERT: Process of evaluating and reviewing production.

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Process Layout: Designed for factories that manufacture many different or custom-made products. In this layout, similar processes are grouped together and the product moves back and forth among those areas until completed.

Product Layout: Layout often used by manufacturers of a few products. The layout resembles the production line of a large factory.

Production Process: The production process involves the conversion of inputs, such as money, people, machines, and inventories, into outputs—the products or services provided.

Supply Chain Management: Includes the movement and storage of raw material, work-in-process inventory, and finished goods from point of origin to point of consumption.

Total Quality Management: Total quality management (TQM) is a philosophy of management focusing on problem solving and control. An organization that focuses on TQM uses factors such as consumer-driven product quality, efficient distribution, quick response, continuous improvement, elimination of waste, and top management leadership and commitment as measurement tools.

VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 1, 3 and 5 from this Chapter would make excellent group assignments/projects.

COMPREHENSIVE CASE SOLUTION Dan Kim - Part V Solution 1. Discuss the layout options for Dan’s company considering the increased space and changes in product line.

There are three layout options for Dan’s company. He has been using a Product layout which is appropriate for standardized products and employs an assembly line production format. The second type of layout is the Process layout which is designed to manufacture custom-made products which require considerable product variety. The third type of layout is the Fixed Position layout which is suitable for large and cumbersome product.

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Dan’s plant has used the product layout in the past but because he has added additional products to his line, he is considering a change. The Fixed Position layout is certainly not appropriate. The Process layout may be effective but only if each product order has different requirements. It appears that at this point Dan still manufactures large numbers of standardized products although the variety is increasing. Dan would likely be wise to continue with the production layout but may have to develop more than one assembly line in the plant to accommodate the variety of products demanded.

2. What advice could you give to Dan regarding his inventory ordering and management practices?

Dan is facing a common dilemma with respect to inventory stocking. Too much inventory is costly and too little can be detrimental to sales. With improved distribution methods and Dan’s proximity to the source of supply it appears that he has arrived at the best solution – to not carry more inventory than needed at any point in time. He may lose out on some quantity discounts but he is saving on interest and storage costs.

Dan could also use an analytical technique such as ABC analysis (monitoring the most important inventory items more closely) or the Economic Order Quantity which would minimize the cost of ordering and storing inventory. Both of these methods are described in the text.

3.

Discuss the criteria which Dan could use to evaluate suppliers for metal.

As Dan is receiving calls from several suppliers, Dan needs to utilize certain criteria in deciding which to select. Such criteria include dependability (very important to a manufacturer), the services offered (such services as credit is very important to the small business), and of course, price. In obtaining price quotes, Dan should be careful to include the distribution and insurance costs as components in the total price offered by the supplier.

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CHAPTER 11: Human Resources Management

CHAPTER LEARNING OBJECTIVES LO1. Explain the importance of human resources management to the small business.

LO2. Illustrate the methods of planning for hiring and training employees.

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LO3. Identify the principles of effective human resources management for the small business.

LO4. Describe the skill areas the owner-manager can strengthen to improve personal leadership and people skills within the organization.

LO5. Identify the legal requirements relating to personnel of the small business.

LO6. Review the procedures of administering a small business payroll.

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ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 11-1: AVENUEHQ: USING FLEXIBLE BUSINESS PRACTICES TO ATTRACT AND RETAIN EMPLOYEES 1. What are the advantages of AvenueHQ’s business model? Why is this model scalable?

Answer: The firm provides a technical platform for real estate agents along with services such as creating websites and social media management, all of which are assist the real estate agent in building their brand. The company allows real estate agents to focus on creating stronger relationships with clients by removing the concerns about website development, posting to social media, and other web-related activities.

The idea is scalable as it can work in various geographic locations with limited investment in costs.

2. AvenueHQ allows for very flexible working hours. What are the advantages and disadvantages of this strategy for a growing company?

Answer: The answers will vary. Students should note potential advantages include an increased ability to recruit and retain. Disadvantages may include managing people in a high growth atmosphere will little pre-established structure can be difficult.

3. As outlined above, AvenueHQ not only provides employees with flexible working hours, but offers other perks as well. Would the company be in a better position for employee recruitment and retention if they became a bit more rigid in their working hours, reduced the perks, and put all of the money they would save back into employees’ hands by increasing their salaries? Why or why not?

Answer: Student Choice

SMALL BUSINESS IN ACTION 11-2: LINKEDIN’S IMPACT ON EMPLOYEE RECRUITMENT 1. What do you think are the advantages and disadvantages of using social media sites to recruit for employees?

Answer: Student Choice – however students should note that advantages include a reduction in costs and time. Additionally, firms can access passive job seekers people who would consider applying for a job they see but are not actively looking for work. The other major advantage is reach; not only will postings easily reach all the followers, people are inclined to share information they see on social Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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media that they think others will be interested in. The major disadvantage is not everyone is using social media and ensuring the authenticity of people’s online profiles.

2. What types of companies do you think are best suited to use LinkedIn and other social media sites for recruitment? Which types of companies do you think are poorly suited to use LinkedIn? Why? Answer: Student Choice

SMALL BUSINESS IN ACTION 11-3: MANDY RENNEHAN: BLUE COLLAR CEO 1. What are some of the advantages of Freshco’s business model?

Answer: Specialize in a niche market, interiors are redesigned much more frequently than new stores are built (three to five years) 2. Rennehan bases a lot of her hiring decisions on intuition. Do you think this is a sustainable longterm strategy? Why or why not?

Answer: Student Choice 3. What suggestions would you make to Rennehan to improve her hiring process?

Answer: The answers will vary.

4. Why do you think people, and parents, are encouraging people to go to university rather than trade schools? What, if anything, should be done to promote the trades?

Answer: The answers will vary.

SMALL BUSINESS IN ACTION 11-4: USING SOCIAL MEDIA TO REFERENCE CHECK 1. Do you think potential employers should look at people’s social media pages as part of the hiring process? Is this practice ethical or unethical? Why? Answer: Student Choice 2. Once employees are hired, do you think employers should monitor their social media usage?

Why, or why not?

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Answer: Student Choice 3. Who is responsible for privacy on social media sites - the person who posts the information or the person who visits the site?

Answer: Student Choice 4. If you managed or owned a business, would you visit a candidate’s social media sites as part of the hiring process? Why, or why not?

Answer: Student Choice SMALL BUSINESS IN ACTION 11-5: NIKOLAI BRATKOVSKI: TALENT IS THE KEY TO SUCCESS 1. Do you agree with Bratkovski’s assessment that the entrepreneur’s business idea and money they raise are not as important as the employees they surround themselves with? Why or why not?

Answer: Student Choice 2. Bratkovski has had great success in matching his employees with global experts. Do you think this practice will be sustainable in the long term? Why or why not?

Answer: Student Choice 3. Why would patients and dentists use Bratovski’s patient-matching service?

Answer: Students should note that dentists will use the service as it is a proven model to attract customers. The business likely enables dentists to focus on client services and not on patient recruitment. Patients likely use the service as the company can provide recommendations on dentists and likely provide dental care in the patients geographical area.

SMALL BUSINESS IN ACTION 11-6: PAY FOR PROFIT 1. Most firms base employee commission on revenues and not profits. Why do you think this is the case?

Answer: Student Choice

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2. What are some of the potential problems when changing an employee compensation system?

How can these be avoided?

Answer: Student Choice 3. In profit-compensation systems, salespeople will normally want to sell the merchandise which produces the highest profit. How can this negatively impact consumers? What measures can be put in place to protect consumers?

Answer: Student Choice 4. Develop an alternative compensation plan for Wasney. Then, develop arguments to explain why he should switch to your plan.

Answer: Student Choice

SMALL BUSINESS IN ACTION 11-7: IS FIDO THE KEY TO EMPLOYEE HAPPINESS? 1. What do you think are some of the advantages and disadvantages of allowing pets, specifically dogs, in a workplace?

Answer: Student Choice – however students may note that some of the advantages could include motivated, happy and productive employees. The disadvantages include pets becoming a distraction, people who do not like pets becoming less motivated, allergies.

2. Given the research on the impact of animals in the workplace is rather limited, would you allow employees to bring pets to work if you were in charge? Why, or why not?

Answer: Student Choice 3. Conduct some research on the Internet about pets in the workforce. What is the current position of the literature on employee morale and productivity?

Answer: Student Choice

SMALL BUSINESS IN ACTION 11-8: PURDY’S CHOCOLATES BUILDS EMPLOYEE LOYALTY 1. Do you think Flavelle’s approach can work for other retailers? Why or why not?

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Answer: Student Choice 2. What do you think are some of the advantages and disadvantages of providing front-line workers with so many benefits?

Answer: Student Choice 3. Do you think organizations are morally obligated to pay and treat front-line workers better? Are they ethically obligated?

Answer: Student Choice

ANSWERS TO DISCUSSION QUESTIONS 1. Discuss the relative advantages and disadvantages of the various compensation plans used in small businesses.

Answer: The answer to this question is covered in the text.

2. What industries can you think of in which profit sharing would be less successful? Why? Answer: Although the profit sharing system is very effective in many industries there are possibly some industries where a profit sharing system might not be effective. The profit sharing system might not be successful in the automobile industry where the United Auto Worker's Union are very sceptical of profit sharing plans. They have in the past negotiated at great length to obtain a standard wage increase instead of a share of the profits.

The profit sharing system might not be feasible in the construction industry where there are several subcontractors and labourers all representing different unions and companies.

3. Discuss the relative advantages and disadvantages of the different type of fringe benefits for a small manufacturing company. If possible, interview employees of such a business to find out which of these benefits are the most attractive.

Answer: The discussion of fringe benefits is found in the Chapter. Student application exercise.

4. Recently, a small business increased the wages of its employees, but its productivity is still inadequate. What could be some possible reasons for this low level of productivity?

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Answer: The reasons for lower productivity could be a result of one or more of the following factors: poor fringe benefits poor introduction of new employees to their job poor training lack of involvement in company goal or strategy setting. poor grievance handling poor working conditions The company could be meeting the financial needs of the employees but missing out on the need for advancement, extra responsibility, authority, recognition by management, esteem by peers or a sense of achievement.

5. After reading this chapter what do you believe to be the most critical small business personnel problem in the future?

Answer: Student choice.

ANSWERS TO EXPERIENTIAL EXERCISES 1. Interview two small business owners to find out their personnel policies and how they communicate those policies to their employees.

Answer: Application question - dependent on student interviews.

2. Ask three employees of small businesses what they like and dislike about their jobs. What personnel policies could be used to remedy the dislikes?

Answer: Application question - answer dependent on student interviews.

3. Determine how three employees of various small business were recruited for their present positions. What seems to be the most popular source to recruit employees for small businesses?

Why? Answer: Application Question - answer dependent on student interviews.

4. Study some online job boards or LinkedIn job advertisements and choose three examples of good job advertisements and three examples of poor job advertisements. Be prepared to explain your choices.

Answer: Student Choice

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CONCEPT CHECKS (Not in text) Why is sound personnel management important for small business managers?

Answer: Sound personnel management is a key to the success of a small business. It is important because motivated and competent personnel are one area that may be unique in a business and difficult to duplicate.

What steps should be taken to ensure the creation of a strong human resource plan?

Answer: The following steps are essential to human resource planning: 1. Determine the requirements; 2. Establish an organizational structure (for every planned hire, draw a new chart); 3.

Prepare job descriptions including job titles, qualifications, duties, reporting lines, compensation, training necessary, and potential career paths; 4. Develop a hiring plan; 5. Develop human resources policies such as sick leave, bereavement leave, tardiness policy, and so on.

What is the purpose of an organizational chart?

Answer: The organizational chart is used to integrate the tasks and employees so that the owner can visualize how the different aspects of the plan can work together.

Why is it important for small business to have written personnel policies?

Answer: A personnel policy manual is an effective way of preventing many personnel problems.

What are some policies which should be included in the policy manual?

Answer: Policies included in a policy manual should cover areas such as: job description, working conditions, holidays and leaves, remuneration and pay, employee benefits.

What are the potential sources of employees for small business?

Answer: Some of the potential sources of employees for small business are: recruitment from within, other businesses, employee referrals, advertising, using social media, employment agencies and educational institutions.

What are the methods of screening employees?

Answer: The screening devices that can be used in hiring employees include; an application form, the employment interview, checking references, and utilizing various kinds of tests. Why is it important that an interviewer uses a common interview format for each applicant?

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An interview guide can focus the discussion and can provide a constant base of information with which to compare applicants.

How are candidates selected for a position?

Answer: After the screening process, the owner or manager selects the person who they think are the most appropriate for the position. This is normally done by ranking the candidates based on their background and how they did on their interview and other selection methods. Employers should consider fit along with other criteria to ensure a proper hire is made.

What can be done to ensure that the employee has a smooth transition into a new job?

Answer: Much can be done to ensure that a new employee has a smooth transition into the job. The new employee should be introduced to fellow workers, should be shown the location of the employee facilities, informed of any regulations, and properly trained.

What are some of the general personnel management principles that the owner-manager can apply?

Answer: The owner-manager should develop the following concepts of personnel management: assess his/her leadership style, work on time management by avoiding the procrastination of important decisions or tasks, take time to do some long-term planning, and using the most productive time of the day for the more important decisions.

What can be done to improve the owner-manager's use of time?

Answer: The owner-manager should: 1.

Recognize the importance of time and try to utilize it more efficiently.

2.

Re-examine and clarify long term and short term priorities.

3.

Analyse present time consuming activities.

4.

Implement time management principles.

Define organization culture and the impact founders play on organizational culture.

Answer: In addition to managing employees and setting the vision for the company, the actions of the founding entrepreneur will also define the organization culture. Organizational culture is the blend of attitudes, behaviours, dress, and communication styles that make one business different from another. Business owners should recognize that their decisions will impact the way their employees interact with one another and with customers.

What are the two major principles of human relations management?

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Answer: Two important principles of human relations management are to have satisfactory working conditions and understand and provide for employee needs.

List the different types of compensation plans that may be used by a small business.

Answer: Compensation plans which can be used by small businesses are straight salary, straight commission, cash bonus plans, stock bonus plans and combination plans.

What are the fringe benefits available to the employee?

Answer: Some of the common fringe benefits available to the employee are: job rotation, flexible hours, employee suggestion system, flexible hours, and working from home.

What are some of the important principles of grievance management?

Answer: Some of the important principles in grievance management are: have a clear method of expressing grievances, assure employees that expressing their concerns will not jeopardize or prejudice their position in the business, and ensure that there is a minimum of red tape in the grievance process and provide a method for non-vocal or hesitant employees to use the process.

What are the steps in administering a payroll for a small business?

Answer: The steps in administering a payroll system are: obtain an employee remittance number, obtain a payroll book, make the appropriate deductions and remit these as well with the employer's share, to Revenue Canada, total and reconcile the years remittance at the end of every calendar year and send out T-4s.

KEY TERMS (Not in text) Employee Referrals: Current employees refer people to the organization for employment opportunities.

Human Resource Management: Management of people within a business or organization. HR is concerned with hiring, promotion, training, advancement, and so forth.

Job Description: Explains what is to be done, how it is to be done, and why it is done. This information goes into the job specification—a statement of the skills, abilities, physical characteristics, and education required to perform the job.

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Organizational or Corporate Culture: The blend of values, attitudes, behaviours, dress, and communication styles that make one business different from another. Business owners should recognize that their decisions/actions are significant determents of culture.

Organizational Structure: Process of integrating tasks and employees so that the owner can visualize how the different parts of the plan will work together. Structure will determine responsibility and reporting relationships.

Personnel Policies: Policies which govern how an organization administers its employees. May cover a variety of things such as sick leave, reporting relationships, Dos and Do Nots and so forth.

Personnel Requirements: Process of determining the number of jobs or tasks to be done; the level of expertise required; and the number of people needed to perform those tasks.

Profit Sharing: An increasingly common practice whereas entrepreneurs or companies share a percentage of profits with employees.

VIDEOS Other Video Resources:  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA  Additional CBC video links: o Massage Addict - http://www.cbc.ca/dragonsden/pitches/massage-addict

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 1 and 4 from this Chapter would make excellent group assignments/projects.

COMPREHENSIVE CASE SOLUTION Dan Stevens - Part VI Solution 1. Evaluate Dan’s personnel procedures.

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Dan is facing typical personnel problems experienced by many small business owners.

However, some of the difficulties could be avoided if more attention were paid to the following areas: a.

Dan needs to develop a personnel plan including job descriptions and specifications, and organizational chart showing where each employee fits and who they report to (which could help Suzie in her role when Dan is away from the plant), and a personnel plan for the future.

b.

Dan should re-evaluate the sources of his employees. Perhaps an improvement could be made in the quality and experience of his employees.

c.

Many of Dan’s problems could be alleviated by the preparation of a set of personnel policies. These should be formally written and passed on to each employee and clearly indicate what is expected of them.

d.

It appears that increased and improved training might be beneficial.

e.

Dan needs to investigate some incentives which might increase the motivation of his employees. Specific suggestions are made in the next question.

2. How could Dan motivate his employees?

Some of the methods which may increase the motivation of Dan’s employees include: a.

Increased communication in which Dan obtains ideas from his employees regarding improvements in the plant operation and in which Dan expresses appreciation to his employees for the positive things they are doing.

b.

Dan could set production goals and personal employee goals with the prospect of rewards upon meeting them.

c.

There are several methods to increase motivation using money. These include pay tied to individual performance (production levels, waste reduction, or meeting sales goals) or bonuses based on overall company performance.

d.

Dan could attempt to increase employee flexibility, job rotation, increase responsibility, and add fringe benefits.

e.

Dan could also propose some sort of employee ownership. While this is successful for some businesses, Dan may not be to the point where he wants to do this.

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3. What should be done differently for the marketing person? Why? The marketing person would require a different personnel approach that than the factory workers. These people would generally have greater communication and educational skills.

Training would be more focused on product knowledge and selling skills as opposed to details of the production process. The marketing person would most likely be paid more on a commission basis than on straight salary and the evaluation of performance would be based on sales and customer feedback to a greater degree.

4. What outside assistance might be available to help Dan with his personnel problems?

Additional help could be obtained from Federal and Provincial government sources and might include such things as training programs, financial support for Dan to send employees for training or upgrading, and financial support or subsidy for hiring certain groups of employees.

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CHAPTER 12: MANAGEMENT HELP: MENTORS, BOARDS OF ADVISORS, DIRECTORS AND TAX

CHAPTER LEARNING OBJECTIVES LO1. Illustrate how advisers, boards of directors, or boards of advisers can be used.

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LO2. To explain the importance of understanding the nature of the Canadian tax system.

LO3. To discuss key tax management principles the owner-manager can follow.

LO4. To describe specific tax-related programs that apply to small business.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 12-1: THE ABCS OF BOARDS 1. What do you see as some of the advantages and disadvantages to using an advisory board?

Answer: Student Choice – however students may mention that boards provide entrepreneurs with access to contacts, credibility, strategic thinking, and education. Disadvantages include loss of control and ability to make quick decisions.

2. Do you think brand new companies should spend money and pay members of an advisory board?

Why, or why not?

Answer: Student Choice 3. Would smaller businesses be better off using mentors and paid outside advisers or should all firms form an advisory board? Why? Answer: Student Choice SMALL BUSINESS IN ACTION 12-2: THE LITTLE SHOEBOX OF HORRORS 1. Why do you think many small business owners find it difficult to separate their personal and business expenses?

Answer: Student Choice – however students may mention that since they likely use one account for both their business and personal use that it leads to problems.

2. In small groups or as individuals come up with a list of suggestions that would help an entrepreneur better organize their financials as they pertain to taxes?

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3. The government, has been cracking down on small entrepreneurs at tax time, looking for more receipts and documentation. What are the pros and cons of such a strategy?

Answer: Student Choice – however students may mention from a positive perspective that this may result in more tax revenue for the government; may prevent people from cheating on their taxes; and may force small business owners into maintaining better financial records which should help their business. From a negative perspective it may cause additional work for small business owners and perhaps case the government in a negative light.

SMALL BUSINESS BEGINNINGS 12-3: VICTORIA SOPIK AND JENNIFER NASHMI: KIDS AND COMPANY 1. What are some of the factors that enabled the company to be successful?

Answer: There was a need, they found a niche in corporate, they planned, and had strong business backgrounds.

2. Do you think their company will be able to reach its lofty growth targets? Why, or why not?

Answer: Student Choice 3. Given that anyone can start this type of business, are you surprised more competition has yet to emerge? Why? Answer: Student Choice 4. What type of advisers should someone look for if they wanted to start a firm similar to the one above?

Answer: Student Choice

ANSWERS TO DISCUSSION QUESTIONS 1. What are the advantages of using a mentor compared to a board of advisers?

Answer: Mentors tend to be free, the relationship is more informal, the entrepreneur does not lose control and can make quick decisions.

2. Does the old saying “You get what you pay for” apply to a board of directors or a board of advisers?

Answer: Student Choice Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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3. Explain why the year-end date is significant in tax planning?

Answer: In tax planning the year-end date is significant because it may determine whether taxes can be deferred until next year. Revenue Canada levies their taxes every year-end and payment is due before the end of April the next year. A small business can set their year-end to defer the payment of taxes if they desire. If a small business has their year-end on November 30th, 1988 then all expenses incurred up to that year end are due by the following April 1989. If they set their year-end at January 31, 1989 then payments are not due until the following April 1990.

4. Which variables affect the decision to incorporate?

Answer: A company may want to incorporate for a number of reasons. If the tax liability is higher for a partnership or proprietorship than it would be for a corporation then the company could decrease their tax payments by incorporating. Other factors that might influence a company to incorporate are: the limited liability, flexibility, power to income split with a spouse or family member for estate planning purposes, and for eligibility for government.

5. Discuss with an accountant the advantages and disadvantages of the different owner compensation methods in a corporation.

Answer: Application question - Dependent on student interview.

ANSWERS TO EXPERENTIAL EXERCISES 1. The year-end for Wave Waterbeds is soon approaching. The proprietor, Tom Newcombe, estimates the company currently has taxable income of $5,500. He would like to purchase a new cash register worth $2000. Determine the tax liability if Newcombe purchases the cash register before or after the year-end (use Appendix A); cash registers are depreciated at 20%. When would you advise Newcombe to purchase the cash register? Why? Answer: Using Appendix A (online) 1)

Don't purchase the cash register before year end.

Taxable Income - $5,500 $5,500 (0.16) Tax Liability - $880

2)

Purchase a cash register before the year end.

Taxable Income - $5,100 $5,100 (0.16) Tax Liability - $816 Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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If the cash register is a necessary expense then Newcombe should purchase it before the year-end because he would save $64 in tax payments.

2. The owner-manager of L.A. Construction has just incurred the following expenses. Which expenses are tax deductible? a. b. c. d.

Incorporation expenses Advertising expense in the United States and Canada Truck Repairs of $2,000 Costs of maintaining a residential phone used for business purposes

Answer: a.

Incorporation Expense - This is not a deductible expense because it is not incurred for the purpose of earning income.

b.

Advertising Expense - The Canadian portion of the advertising is deductible but the U.S. portion is not considered tax deductible.

c.

Truck Repairs - This is a grey area in assessing whether it is a deductible or not. If the $2,000 is considered a major improvement in the value of the vehicle then it is not deductible. If the repairs don't substantially improve the value of the truck then they are tax deductible.

d.

Phone Expense - If the phone is not used solely for business purposes then the expenses incurred from it are not solely tax deductible. An appropriate proportion of the phone expense is tax deductible.

3. What is the tax liability for the following proprietorships' taxable incomes? a. b. c. d.

$ 5,496 $10,942 $34,999 $63,000

Answer: Using Appendix A the tax liabilities for parts a-d are; a. b. c.

$ 879.36 $ 1,750.72 $ 7,699.78 Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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d.

$ 16,380.00

4. Determine the federal tax liability for the following companies using Appendix 13A (online) a. b. c. d.

A Canadian controlled incorporated company with $25,000 taxable income.

A Canadian controlled incorporated company with $25,000 taxable income that qualifies for a small business deduction.

Same as part b, but the business also qualifies for the 5 percent manufacturing credit.

A proprietorship with taxable income of $25,000

Answer: a.

A Canadian Controlled incorporated company with $25,000 taxable income. tax rate - 28.12% tax income - $25,000 tax liability - $7,030

b.

A Canadian controlled incorporated company with $25,000 taxable income who qualifies as a small business deduction. tax rate - 28.12% minus Small business deduction - 15% tax income - $25,000 tax liability - $3,280

c.

Same as part b, but the business also qualifies for the manufacturing reduction. tax rate - 28.12% minus S.B. deduction - 15% minus manufacturing credit - 6% taxable income - $25,000 tax liability - $1,780

d.

Proprietorship with taxable income of $25,000 tax rate - 16% tax income - $25,000 tax liability - $4,000

5. Ask a consultant or an accountant when a business should incorporate. What are the important considerations?

Answer: Application question - Answer dependent on student choice but the answers should correlate with information given in the chapter.

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6. Assemble a board of advisers/directors for your venture idea. Make sure you can justify each person’s placement on the board, and state the attributes that they are bringing to the venture. If you are not seriously pursuing a business venture, you could complete an assessment of a peer’s company and board.

Answer: Student Choice 7. Interview five entrepreneurs about their use of a board of advisers. Ask who is on the board, how the members were selected, how they were encouraged to join the board, how useful the board has been, and so on.

Answer: Student Choice

CONCEPT CHECKS (Not in text) Why do they entrepreneurs often seek out assistance from more experienced entrepreneurs or mentors?

Answer: Many successful entrepreneurs state that seeking the advice of experienced leaders helped them grow their company. In addition to mentors, many entrepreneurs will form actual boards of advisers or directors to assist them in growing their company. Entrepreneurs should also be willing to engage in discussions with lawyers, accountants, and business counsellors as they move their business from just an idea, to start-up to a growing enterprise.

What is the first stage in formal advice for many entrepreneurs?

Answer: Often the first stage in formal advice is the use of a mentor. Mentors can be used on an ad hocbasis or formally assist the entrepreneur in running the company on an ongoing basis. Mentoring often takes the form of a new business owner forming a relationship with an experienced mentor. The experienced entrepreneur offers advice and guidance to an entrepreneur who is in the early stages of running their business.

What functions will boards of advisors/directors help the entrepreneur with?

Answer: Entrepreneurs will often form a board of board of advisers occasionally referred to as a board of directors. The board of advisers may serve a number of functions: Reviewing operating and capital budgets providing accountability and discipline; Developing longer-term strategic plans for growth and expansion; Supporting day-to-day activities; Resolving conflicts among owners, partners, or shareholders; Ensuring the proper use of assets; Developing a network of information sources for the entrepreneurs.

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Why is it imperative that the small business owner have some tax knowledge?

Answer: Basic tax knowledge may allow the small business owner to avoid many difficulties.

What are the ten fundamental areas of tax management which a owner-manager should be aware of?

Answer: The ten fundamental areas of tax management which the owner-manager should be aware of are: continual tax planning, tax deferral, income splitting, marginal tax rates, deductibles, knowledge of government tax related programs, the incorporation question, the remuneration question and the topic of capital gains.

What is continual tax planning?

Answer: Continual tax planning ensures that the owner-manager is aware of tax consequences of business decisions throughout the year, not just at the year-end.

What are two good reasons to defer taxes?

Answer: The reasons for tax deferral are: 1. The owner-manager has the use of this tax money for the period of deferral.

2. There is a possibility that tax laws may change resulting in a decreased liability in the future.

What is income splitting?

Answer: Because of the progressive nature of taxes, splitting incomes between spouses, other family members or among partners will result in a reduced overall tax liability.

What is the definition of a deductible?

Answer: A deductible expense is defined as a payment or liability created to earn income.

List the six government related programs available to small business.

Answer: Some of the more important government tax related programs are: small business deduction, manufacturing and processing deduction, tax credit, deferral programs, accelerated capital cost allowance and the small business financing programs.

Why would a company want to incorporate?

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Answer: One of the key considerations to the incorporation question is tax liability. If the partnership or proprietorship is being taxed at a higher rate than an incorporated company it would be beneficial to incorporate based on tax liability.

From a tax perspective, would it be better to take a salary or dividends from an incorporated company?

Answer: It may be preferable to draw dividends instead of salaries in an incorporated company to reduce tax liability.

KEY TERMS (Not in text) Advisors: Experienced entrepreneurs or managers who offer advice to entrepreneurs either formally or informally.

Board of Advisors: A group of mentors/advisors who formally meet with entrepreneur to help them manage their business.

Board of Directors: A formal advisory group necessary for public companies. Boards of directors can also be used for private companies as well.

General Tax Management Principles: Fundamental areas of tax that tax that all entrepreneurs should be aware of.

Income Splitting: The process of splitting income between family members to reduce the overall tax payment from a family.

Tax Deferral: The process of legally delaying tax payments.

Marginal Tax Rate: The rate of tax paid for each dollar earned.

Mentors: Often the first stage in formal advice. Experienced entrepreneurs or managers who offer advice to entrepreneurs either formally or informally.

Small Business Deduction: Special tax rate for small business owners.

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Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 6 and 7 from this Chapter would make excellent group assignments/projects.

PART-ENDING CASE SOLUTIONS CASE SOLUTIONS FOR PART 3 Derocher’s Market Home Mart Hardware Store Martha’s Designs Sadie’s Country N’ Western Dale’s Sport Pursuit Susie’s Fashions Taylor Construction Company The Barrel Bracket Threadz Garner Men’s Wear Boomerang Bouncers Entertainment

DEROCHER’S MARKET QUESTIONS AND SOLUTIONS 1. Based on figure 1 and the observations of the first four weeks, what are the weaknesses of the present store layout?

Solution There are several problems with the layout of Derocher's as presently organized: the checkout counters are in line with the door so that clerks are cold. office appears to be in prime selling space. fruit display by front window would contribute to aging of these products. fruit display is behind the shopping carts. cheese display should be closer to the dairy and meat sections.

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-

the corner by breads and crackers appears to be unutilized. lineups at checkout counters will interfere with traffic flow between aisles A and B.

2. Develop a layout that might solve these problems.

Solution Student choice, however, the points raised in question 1 should be accommodated. For example: office at back in "un-utilized" corner. cart storage by front window. cheese display with meat and dairy section. checkout counters away from door. signs should be placed on the aisles to avoid the confusion of customers not being able to find merchandise.

HOME MART HARDWARE STORE QUESTIONS AND SOLUTIONS 1. Comment on the possible reasons why Noel Branlen's employment did not turn our successfully.

Solution 1.

Relationship between Mr. West and John Burns Although they appear to get along well it appears that on some occasions Mr. West circumvents Mr. Burns supposed authority. Examples of this are: a. The hiring of Noel was done by Mr. West and Noel was Mr. West's "man" - this may tend to lessen the stake John Burns has in training Noel and seeing that he is successful. This also creates the "two boss" situation which was evidenced by Noel going directly to Mr. West with his concerns. b. Mr. West granted Noel the Christmas holiday against the advice of John Burns.

2.

Job Duties Not Explained Fully.

It didn't appear that Noel had a clear understanding of his role regarding ordering, pricing and such things as sweeping the floors.

His duties should have been spelled out clearly so no "assumptions" would be made.

3.

Outside Brought in to be Assistant Manager Although John Burns felt the existing employees were either too old or uninterested in being the assistant manager, it appears that the bringing in of the outsider and also paying him a higher salary contributed to the antagonism these employees showed towards Noel. Expecting Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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confidentiality of salary levels in a small business is unrealistic as employees usually "find out" about relative wage levels.

4.

Policy Manual Needed Even though Home Mart Hardware Store is a very small business it is evident that there needs to be clarification of personnel policies which could be made with a brief formal statement of policies. Length and timing of holidays, employee dress and grooming, and hours of work are policy areas which Noel obviously did not understand and these areas and others could have been communicated to him when he commenced work through a policy manual.

5.

Ability of John Burns as a Manager It appears that John Burns may lack the ability to delegate and train his subordinates properly.

The complaint regarding lost sales when he is away from the store is evidence of this. Perhaps it is John Burns who needs the management course at the college.

6.

Suitability of Noel Branlen as an Employee Even though they were anxious to fill a position, Mr. West and John Burns may have acted too hastily in hiring Noel. He may not have been cut out for a career in retailing. His desire for a management course, refusal to perform some of the menial tasks and his quitting to attend college seem to indicate this.

7. Difficulties of Having an Absentee Owner The problem that Noel caused in Home Mart Hardware Store should have been dealt with more quickly than it was. This situation went on for nine months before Noel finally resigned. Part of the reason for this was that the owner, Mr. West was not on top of the situation because of his other commitments.

2. How could Home Mart successfully compete against the threat of competition from WalMart or Home Depot?

Solution Home Mart is best advised to adopt the following strategies to compete with Wal Mart , a major discount mass merchandiser: 1. Reduce the size of departments where Wal Mart has the competitive advantage.

2. Strengthen departments where Home Mart has a competitive advantage.

3. Handle upscale products and different brands than Wal Mart stocks.

4. Feature services including expert advice.

5. Focus on specialty areas.

Home Mart may effectively compete with Home Depot, a “category killer” by doing the following: 1. Focus on fast-moving merchandise.

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2. Focus on convenience items.

3. Reduce slow-moving merchandise.

4. Feature services such as special order and quick delivery and installation.

5. Feature expert advice.

Source: Competing With the Retail Giants by Kenneth E. Stone, Wiley & Sons.

MARTHA'S DESIGNS QUESTIONS AND SOLUTIONS 1. Discuss the implications of Martha Millwork's potential expansion.

Solution Martha is currently deciding whether to expand. She has correctly determined that such an expansion will have major implications to the way the business operates. Some of things that will require some planning are the following: a. Martha should evaluate whether this is the type of business which can expand. For example, as sales increase, the cottage industry concept is harder to manage and may not be viable. The type of product is also one in which strict quality control is important. Martha needs to determine whether this will be able to be maintained with the larger business. b. Martha will need to spend more of her time managing the business and less time with actual production. She may be unwilling or incapable of doing this. In order to accomplish this she may have to develop a different organizational structure and delegate some of the duties she is currently performing. c. To expand the business will invariably need additional financial capital to develop markets and to expand production. d. As the business grows Martha will need to develop systems so that she can monitor the operations and performance of the business. As the business moves towards a "factory" setting from the cottage industry this will be easier to accomplish. e. Martha will spend more time travelling and monitoring the external environment as the business expands. This will affect her current lifestyle. On a personal basis Martha should also evaluate whether she has the capabilities to carry out the expansion and to manage the larger business.

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2. Evaluate the distribution channel options and promotional implications associated with them if Martha's business expanded.

Solution The channel options available for Martha are as follows: a. Long Channel- This type of channel, with the product passing through many intermediaries (middlemen), is suited for standardized, high demand, low unit value products with wide geographic dispersion. It is also the least expensive channel to use but the supplier generally receives a lower margin. It would seem that this type of channel is not suitable for Martha's products. The type of promotion which is appropriate with this channel system is advertising and direct selling to the intermediaries. b. Short Channel - This type of channel is best suited to custom-made products which require considerable personal selling and which have a relatively small market coverage. While a shorter channel appears to be best suited for Martha, such a channel system is expensive to set up and requires considerable expertise in sales force management. The type of promotion which is the most effective with this type of channel is sales promotions and efforts devoted to sales training.

Another form of short channel which might overcome these difficulties for Martha is to use direct mail in the form of a catalogue. The success of catalogue retailing has increased in recent years and now includes specialty clothing similar. The development of the catalogue and targeting the appropriate customers will be challenges for Martha if she follows this option.

Other direct marketing efforts include participating in trade shows which she has been doing to a certain extent. c. Marketing Specialist - The use of a marketing specialist or company may be a viable option for Martha to explore. Such individuals or organizations are common in the clothing industry.

Martha would need to find a representative who had the expertise with the type of market which Martha was attempting to reach in order for this type of channel to be successful. Her margins would be smaller that with the short channel but this may still be the most intelligent decision given her background and marketing expertise. The promotion which would be required would involve brochures, product samples, and some advertising.

SADIE’S COUNTRY N’ WESTERN QUESTIONS AND SOLUTIONS 1. How do you account for the ability of Sadie’s Country n’ Western Store to attract customers from outside of the local community?

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Sadie has attracted people from the area due to her advertising and sensitivity to the western culture and interests of residents in the area. It also appears that there is little direct competition for the products she sells. She is also attracting customers due to her low prices on standard products.

2. Evaluate Sadie’s marketing strategy. What additional things might be done to enhance sales?

Solution: Additional things she might do are install highway signs to alert passer-bys about her store. As this is a major highway to Calgary, she would undoubtedly attract motorists and tourists to her store. Radio advertising might also be effect on a local country and western station.

3. Evaluate Sadie’s pricing strategy. Relate your evaluation to the classification of consumer goods.

Solution: One of the reasons that her profitability may be suspect is her low prices and low margins. It appears that she is attempting to develop a specialty store due to her unique product offering, but by pricing her products lower than competitors, she is treating those products as if they are shopping goods. For a store her size it is unlikely that she will be able to compete with the large discount stores in larger centers based on price. She should perhaps focus on the uniqueness of the store and the tourist attraction aspect of the business.

DALE’S SPORT PURSUIT QUESTIONS AND SOLUTIONS 1. Discuss how the concept of product classification would provide Dale direction regarding price, distribution, and promotion strategy.

Solution The student should refer to Figure 8-8 in this chapter for direction regarding price, distribution and promotion. This product would likely be classified as a specialty product for many people, assuming that Dale can provide enough promotion to develop the brand name, and because it has no direct competition. If he could accomplish this, Dale could set a higher price and could have exclusive distribution. His promotion would follow the theme of informing the consumer about where they can purchase the product. Alternatively, the product may be classified as a shopping product in the general board game category. If this is the case, it would have to be priced competitively, located with other games, or in a toy store and promoted on its features and price.

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2. What considerations would help Dale determine whether personal selling on the Internet or selling to a national chain like Toys-R-Us would be the most effective distribution method?

Solution Considerations for making this decision include: (refer to Figure 8-9) a. Whether this product would/could be purchased on the Internet b. What price the national chain would pay Dale c. Whether he could produce the product quantities the chain would require d. Cost of setting up the web site to sell on the internet e. Whether he has the marketing expertise to sell to the chain 3. What factors could help determine whether to emphasize personal selling or advertising as the major promotional model?

Solution The solution to this question should take into consideration Figure 8-13. The factors which Dale should analyze include such things as his objective for the product. If he desires to create awareness of the product, advertising is more effective. However, if he is more interested in closing the sale, personal selling should be utilized. Because this is a new product, it is likely that Dale should at least use considerable advertising initially to successfully get the product into the market.

4. Give an example of how public relations could work with this product and mention an advantage and disadvantage of using this promotion.

Solution Dale could use public relations by attempting to make a public interest or news story (something unique) out of the product, he could sponsor an event or athletic team, or utilize an infomercial to educate and inform the public about the product. The advantage of public relations is that it is typically inexpensive, but the disadvantage is that it does not necessarily create a sale for the product.

5. If Dale wanted to export the product, briefly discuss some things he should know about each country he planned to market to.

Solution If Dale wanted to export this product he should investigate the relevant items found in Figure 8-4.

This might include such things as language differences, the political and legal system, the economy, distribution and information options, and most important consumer demand for such a product as well as the adaptation to the cultural and relevant sports of that market.

SUSIE'S FASHIONS Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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QUESTIONS AND SOLUTIONS 1. Briefly evaluate Susie Mikado's approach to starting her own business.

Solution Susie has some capabilities which could contribute to a successful business.

1. Past experience in the industry.

2. Has developed high level of expertise in making product.

3. Has some equity capital.

4. Has selected a specific type of clothing to manufacture.

5. Has a proper location for her target market.

She also has demonstrated several weaknesses in starting the business such as: 1. Lack of specific objectives and plans for reaching the target market.

2. Perhaps lacks a clear definition and evaluation of the target market - weaknesses in pricing, advertising, etc.

3. Definite weakness in financial management.

4. Personnel management concerning hiring practices and separation of family and the business.

2. Examine the pricing system for Susie’s clothes.

Solution The case does not provide information regarding Susie's price setting. However it is easy to determine she sells dress on average for $100 and robes for $90.

Dresses (per dress) Robes (per robe) Material cost $18 Material cost $24 Labour cost (4hrs*16) $64 Labour cost(3*16) $48 Direct cost Direct cost $82 $72 Price $100 Price $90 Markup for overhead Markup for overhead and profit $18 and profit $18 From this analysis, it appears that Susie may be setting prices too low and to create demand.

3. Assuming miscellaneous clothing and robe sales stay the same, how many additional dresses would have to be sold for Susie's to break-even?

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Solution Break-even Point = Fixed costs to break-even (where Profit per unit = 18) Loss to be covered = 11,968 = 665 more dresses

4. Evaluate the financial statements prepared by Darren Richards in both form and content.

Solution Form 1. The statements are put together relatively well considering what Darren had to work with.

A few changes may make them more accurate, however.

2. Depreciation - no depreciation expense has been included in the income statement.

3. Wages - a major portion of wages should be listed as part of the cost of goods sold. This would give Susie a more realistic picture of profit per item.

4. As part of completing the statements, the loss shown in income statement should be transferred to the equity portion of the balance sheet.

5. The income statement does not have a heading.

Content Evaluation of the statements using financial ratios reveals the following.

1. Current ratio : current assets 13,355 current liabilities 9,450 = 1.4 to 1 According to the current ratio Susie's business while not doing outstanding is not in high risk for insolvency.

2.

Quick ratio:

current assets - inventory 13,355-9765/9450 current liabilities =.37

The quick ratio shows that inventories will have to be converted to sales within the period or the business will be in more serious trouble.

3.

Profitability ratios: profit on sales are negative return on investment - one reason for cash flow problems

4.

Inventory turnover:

Sales/Inventory 77,220/9765=7.9

This means she turns her entire inventory over every 46 days which is good. It indicates demand for products exists. It’s possible she could use additional inventory and this number appears to indicate there is some opportunity to increase prices.

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6. Debt to equity = Debt = 14,000 Equity (6595) With this debt equity ratio, it is very doubtful if Susie's would be successful in obtaining more debt financing. That being said she maybe able to present a compelling case given her inventory turnover and low prices along with her minimal losses seem to indicate high potential for a successful turnaround.

Additional areas which may assist in solving the cash flow problem are: -

tighten hiring and labour management practices set up record-keeping system review pricing policy review labour productivity

It appears that raising prices and perhaps reducing material costs would greatly assist the business.

5. What kind of financial record-keeping system would you advise for Susie's Fashions?

Solution In view of the scope of her operations and capabilities, it would be best at this point to install a one book or one write manual system. This will help educate her to the mechanics of the system and may pave the way for her to adapt a small computer at a later date if the business continues to operate.

She cannot afford an expensive system but needs to get control of her costs. It appears that sales are steady and she has a good product.

She will need considerable training in bookkeeping or receive assistance in the financial area from an accountant or bookkeeper or it is doubtful if her business will survive through year two.

TAYLOR CONSTRUCTION COMPANY QUESTIONS AND SOLUTIONS 1. Why do you think that George has got into this situation?

Solution There may be a number of reasons for George's predicament.

1. George did not have a clear understanding of all of the potential problems of running his own business.

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2.

3.

4.

5.

6.

George was improperly prepared for the personnel management aspects of the business.

George did not use sound principles in hiring, training and managing employees.

George was unwilling to fully delegate his authority so the business could grow.

George did not set high enough standards in hiring employees.

George lacks perseverance in working with these problems.

2. What recommendations would you make to George?

Solution There are several things which George could try to improve his employees’ performance.

1. With existing employees a. Develop a set of policies or guideline and explain fully to all employees. b. Institute a system of goals, evaluation procedures and rewards (probably financial) which relate to their performance. c. Provide adequate training by letting employees know exactly how the job is to be done. d. Let employees go who do not measure up to the goals within a reasonable period of time.

2. With potential employees a. Write up job descriptions and specifications which are clear and will attract more suitable applicants. b. Institute a more effective screening procedure in hiring including interviewing, application forms and checking employment references. c. Properly train new employees and show them they are an important part of the company. d. Institute some suitable reward programs designed to improve motivation and productivity - not hours worked.

THE BARREL BRACKET QUESTIONS AND ANSWERS 1. Evaluate the three distribution options for Gary using the information provided in the textbook regarding long and short channels.

Solution Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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An evaluation of these three options should include a discussion of the information found in Figure 89 of the text and might include: a. National Hardware Chain-Selling this product through a national hardware chain would be cheaper for Gary, contain less risk, require marketing expertise, and ensure guaranteed quantities. However, Gary’s return may be low with this option. The Barrel Bracket would lend itself to this type of distribution channel because it is an inexpensive, standardized product with a widely dispersed geographic market. A concern with this option would be the amount of marketing attention that the retailer would give to the product. This would be especially critical for this product because it is new and creating awareness would be important. He may also lose control of how the product is marketed including such things as packaging, and maybe even the name of the product. b. Manufacturer Reps- The advantages of this method of marketing the Barrel Bracket are that Gary only pays the reps when they sell the product, and they are able to provide extra sales effort and answer questions about the product. This may be important because this is a new product. On the other hand, manufacturer reps would not have the geographic market coverage that the hardware chain might have, the cost per unit of sales may be higher, and the extent of sales effort may be overrated because these reps also carry products from other manufacturers. c. Salespeople- This may be the least attractive option for Gary. To utilize this option, Gary would require expertise in hiring, training, and managing a sales force. He would also need more financial resources to set off the selling organization. His geographic market coverage would be limited and slow to develop and this method would include a high per unit cost to sell.

2. Discuss the implementations for setting the price of the Barrel Bracket for each of the three distribution options mentioned.

Solution Setting the price for the Barrel Bracket for each of the three options would include: a. National Hardware Chain- Gary would be a price taker with this option. The chain would inform Gary what they could pay based on their estimate of customer demand and their required profit margin. Because the offered price is likely lower than he desired, Gary would then have to adjust the production process to see if the business could still be profitable. b. Manufacturer Reps- Gary can set the price, but must remember that he is paying a commission on sales. He would have more control over the pricing function with this option however. c. Salespeople- As with the previous option, Gary would have control over what price the Barrel Bracket sells for. He would likely have to raise his price to the consumer with this option in order for it to be worthwhile for prospective sales people.

3. What other marketing costs may Gary have overlooked?

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Solution Some of the other marketing costs which may be significant for Gary with the Barrel Bracket include: a. Initial promotion to create awareness. This could include public relations efforts as brochures and display materials. b. The costs of service and warrantees for the product. c. The costs of contacting the hardware chain or manufacture reps. This may involve renting booths at a trade show or other methods of contacting them. d. Distribution costs for the product.

THREADZ QUESTIONS AND SOLUTIONS 1. Evaluate the advantages of the system that Sarah Heatherington is suggesting.

Solution There are several advantages to the system that Sarah is suggesting. They are: -Monitor purchases of specific customers - Assist in inventory management - Assist in promotions to regular customers based on their past purchasing experience - Target new customers with similar characteristics - Share information with other retailers for promotions - Provide a more “personalized” relationship with consumers Each of these benefits of such a system could be invaluable for Threadz’ customer retention and allow Jennifer to provide the service that the larger stores may not deliver.

2. What concerns should be explored with this system?

Solution Concerns are the following: - The cost of setting up the system including technology and training - Preparing an estimate of the benefits such a system would provide - The ability of current store personnel to use the system - The potential ethics of collecting and sharing customer information 3. What steps should be followed in setting up a CRM system for Threadz?

Solution In order to set up this system Threadz should follow the steps outlined in the text on page 252 ie Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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“Five steps in developing a database information system” 4. What other promotional suggestions might improve Threadz performance?

Solution Jennifer could also look into the establishment of an “advertiser only” website which might fit into her promotional budget and produce more exposure. Advertising directed specifically to Threadz target market could also prove to be effective. This could be carried out through brochures, sponsorship at curtain activities or events related to the target market, and other public relations activities. These could be accomplished inexpensively. Of course her ability to “target” her market would be enhanced with the use of the database system.

GARNER MEN’S WEAR QUESTIONS AND SOLUTIONS 1. Comment on the financial management practices of the Adam Garner in managing Garner Men’s Wear.

Solution Adam needs to be away of the important of continual financial information. This would include preparing regular (monthly) financial statements for the business. If this was done, there would be no surprises at the end of the year when it is too late to make changes.

2. Calculate and discuss the significance of each of the following for Garner Men’s Wear: a. current ratio b. inventory turnover c. debt ratio d. return on investment e. return on sales.

Solution The calculation for the ratios for the two years are as follows: a. Current Ratio CA:CL 2019- 150,000:40,000 = 3.75:1 2020- 200,000:50,000 = 4:1 b. Inventory Turnover CofGS/Inv. 2019- 500,000/50,000 = 10 2020- 490,000/80,000 = 6.125 c. Debt Ratio D:E 2019- 140,000:150,000 = .93:1 2020- 170,000:160,000= 1.06:1 d. Return on Equity Pr/E 2019- 50,000/150,000 = 0.33 Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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2020- 10,000/160,000 = 0.063 e. Return on Sales Pr/s 2019- 50,000/750,000 = 6.7 2020- 10,000/720,000 = 1.4 The calculation of the ratios shows that the financial position of Garner’s has deteriorated during 2020. Specifically, there is more debt, both current as well as total debt. However, both of these ratios are not cause for alarm at this time and are health. The sales for 2020 have dropped slightly but the inventory on hand has increased. This has reduced inventory turnover. The primary concern would be the crop in profits which has reduced the return on equity and sales. Both of these ratios are acceptable, but the downward trend would cause for Adam to evaluate further to find the reasons for the profitability decline.

3. How many days are there in this company’s business cycle? (i.e. How long is it taking to convert cash spent back to cash available?)

Solution To determine the number of days in Garner’s business cycle in 2004 the following calculations are required: a. Time Taken to Pay Accounts Accounts Payable / Cost of Goods Sold X 365 50,000 / 500,000 X 365 = 37.24 days b. Time Taken to Sell Inventory Inventory / Cost of Goods Sold X 365 80,000 / 490,000 X 365 = 59.59 days c. Time Taken to Receive Payment Accounts Receivable / Sales X 365 120,000 / 490,000 X 365 = 89.38 days Therefore the length of Garner’s business cycle is: -37.24 + 59.59 + 89.38 = 111.73 days This is a fairly long time to convert cash spent to cash available and again suggests that Adam may have too much inventory on hand and also that he might have to tighten his credit policies.

4. Where did the $10,000 cash from the 2019 statement go in 2020 even though the business made $10,000 income during 2020?

Solution The Statement of Changes of Financial Position (comparison of the 19 and 20 balance sheets) identifies where the $20,000 in cash went.

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- $30,000 increase in accounts receivable - $30,000 increase in inventory This $60,000 use of cash is offset by only 50,000 inflow of cash in the form of decreased fixed assets (10,000), increased accounts payable (10,000), increased long term debt (10,000) and increased owner’s equity (10,000). Therefore, as mentioned in previous questions, Adam needs to look closely at the inventory levels as well as accounts receivables in order to improve the business financially in the future.

BOOMERANG BOUNCERS ENTERTAINMENT QUESTIONS AND SOLUTIONS 1. What are the advantages and disadvantages of family party versus commercial clients?

Solution Advantages of Family Party – known market, requires less employees, has been successful to date, less up-front marketing and less staff Disadvantages of Family Party – more price sensitive, higher margins for corporate clients, may limit growth

2. Do you think Cam could target both markets? Why or why not?

Solution It likely makes sense that Cam target both markets. Holidays, special occasions and so forth may be slow times for birthday parties and they may be ideal times for corporate events. Given the higher margins with corporate clients it would make considerable sense to target both markets.

3. What client group would you ultimately recommend to Cam to target? Based on your recommendations, what changes if any will he have to make to his business?

Solution Ideally students would target both groups. Cam will have to train operators for his corporate side of the business and expand his website. He may eve 4. What other services or products could Cam offer to clients to increase his sales?

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Solution 5. Cam has not spent much time promoting his business. What are some non-traditional methods Cam could use to increase public awareness of Boomerang Bouncers? Why did you choose these methods?

Solution The answers will vary.

6. What social media sites do you think Boomerang should use to market his business for birthday party clients? What sites should Cam use for corporate/commercial clients?

Solution The answers will vary. Students should likely reference Instagram, Facebook and Pinterest for parties and perhaps LinkedIn for corporate.

7. Select one target customer and develop a list of ideas that Cam could use to market his business using social media.

Solution Student Choice.

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PART FOUR: LOOKING TO THE FUTURE CHAPTER 13: MANAGING GROWTH

CHAPTER LEARNING OBJECTIVES LO1. To describe the potential problems that success and growth can bring to the small business.

LO2. To review the characteristics of the stages in the business life cycle.

LO3. To discuss how to sustain the business despite the difficulties created by growth.

LO4. To illustrate the importance of planning for growth.

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ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS BEGINNINGS 13-1: LABELS LEAD TO MILLIONS 1. What are some of the reasons Mabel’s Labels became so successful?

Answer: The product has been successful for many reasons including the quality of the labels, successful distribution with Walmart and Amazon, online sales, social media including mommy bloggers, use of consultants and so forth.

2. Rather than agree to a takeover, the founders could have brought in outside investors. What would have been the advantages and disadvantages associated with this strategy?

Answer: The answers will vary. Students may note that bringing in an outside investor may have brought someone with both capital and knowledge which would have enabled the founders to maintain control of their business. Of course, the investor would have been an unknown, may have been difficult to find and he or she could have asked for control of the business as well. Additionally, a takeover likely enabled the founders to realize some value for their equity in the business which may have been difficult to achieve with an investor.

SMALL BUSINESS IN ACTION 13-1: BEYOND THE RACK INC. 1. What are the advantages and disadvantages of Beyond the Rack sales method?

Answer: Advantages: 1. The firm does not take possession of merchandise prior to selling it this type of flash retail allows Beyond the Rack to avoid the extra cost of taking possession of unsold merchandise and storing items in warehouses; 2. The firm can then pass the savings onto consumers.

Disadvantages: 1. Process does add some extra time in getting products into the hands of consumers, 2. Consumers cannot try on the items; 3. Merchandise is only in limited quantities 2. Beyond the Rack has been spending significant amounts of money on Public Relations and marketing in an attempt to grow and grab market share. As a result, the firm has not always been profitable. What are the advantages and disadvantages of this strategy?

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Answer: Student choice 3. Imagine you are a potential investor. Would you invest in a company like Beyond the Rack? Why or why not?

Answer: Student choice 4. Why would selling non-branded Chinese products be problematic for Beyond the Rack?

Answer: The inclusion of cheap non-branded products would have devalued the company’s brand and likely negatively impacted the consumer’s shopping experience as they were coming to the site for branded items.

5. Were you surprised a buyer emerged for the company? Why or why not?

Answer: Student Choice.

6. Some retail analysts say the flash sale model is dead. They ask why consumers would continue to check flash sales sites when they know they can buy discounted items daily on Amazon. Do you agree with this sentiment? Why or why not?

Answer: Student Choice. Students may opt to agree with the analysts while others may argue that flash sales add a fun element to online shopping and consumers enjoy trying to buy limited quantities of branded products.

7. What would you suggest Beyond the Rack’s new management does to ensure longterm sustainability?

Answer: The answers will vary. Students should note that management should focus on branded items and continue to build relationships with its current customers.

Management should also try to convert their roughly 13.5 million subscribers who are not buying products into satisfied customers.

SMALL BUSINESS IN ACTION 13-3: SECURE KEY TECHNOLOGIES INC. 1. What are some of the advantages and disadvantages of Secure Key’s systems described above?

Answer: The advantages of Secure Key include: 1. Online transactions would be more secure as people would have to have the physical card to make a purchase. 2. One set of online credentials will be used for multiple online sites or access points. 3.

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Consumers would no longer have to memorize various usernames and passwords but would be able to securely access multiple sites using one secure sign-in system. 4.

Consumers would benefit from being able to access sites, some of which they may not frequently visit, relatively easily, while businesses would be able to ensure clients and employees are who they say they are. The disadvantages include potential theft of online credentials or keys.

2. Would you be more comfortable tapping your credit card against your iPhone or iPad compared with typing in your credit-card information? Why, or why not?

Answer: Student Choice 3. Do you think people would be comfortable accessing all the websites they visit using one sign-in system? Why, or why not?

Answer: Student Choice. Students may note that consumers would find this feature convenient although their maybe concerns about security and privacy.

SMALL BUSINESS IN ACTION 13-3: ENVIRO PAVING CORP. 1. What do you think are some of the challenges a small company like Enviro Paving Corp. may face in trying to grow using the franchisor-franchisee method?

Answer: They may not have the marketing money to attract franchises. In addition, they may not be well known and/or have the money to establish a significant training program. Given the small size of the company its unclear what they can offer a franchisee compared to just starting a similar company.

2. What are methods of growth could Enviro Paving Corp. pursue as an alternative to franchising?

Answer: Student choice. Most likely is company owned stores or licencing.

3. Enviro Paving Corp. is a relatively new company, with a new concept. Many prospective franchisees would assume it’s a more proven concept because they are pursuing growth via franchising. Is Enviro Paving Corp. under a moral obligation to explain this to potential franchisees or is it strictly buyer beware?

Answer: Student choice 4. Would you invest in an Enviro Paving Corp. franchise? Why or why not? What are some strong arguments for investing in the company?

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Answer: Student choice

ANSWERS TO DISCUSSION QUESTIONS 1. What are some of the advantages of growing a business?

Answer: There are many advantages to growing including the earning potential the growth business is much more significant, larger companies are better able to handle downturns in the economy, and it is easier to fend off competition. Other advantages of larger growing business include they have an easier time raising capital, can usually attract and retain employees compared with small stagnant companies, and can often be sold for more money than small firms with low growth stories.

2. What problems should the owners be aware of when expanding? How might these problems be dealt with?

Answer: The problems that can be anticipated as a result of growth are ownermanager fatigue and stress, lack of communication, human resource problems, lack of coordination, shortage of cash, low profitability, breakdown in production efficiency, lack of information and possible owner lifestyle decisions. The best solution is to craft a strong expansion plan with clear objectives and ensure communication is maintained as the business grows.

3. What are the requirements for growth?

Answer: The requirements of growth are greater management depth, intelligent expansion, increased capital, financial information, organizational change, the implementation of management controls, and increased owner-manager attention to the external environment of the business.

ANSWERS TO EXPERIENTIAL EXERCISES 1. The owner managers of a small, successful hair-cutting company want to expand their business. The growth objective is to have 35 percent of the local hair cutting market in two years' time.

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A. B.

What steps could they take to determine the feasibility of their expansion?

Outline a brief expansion plan.

Answer: A. To determine the feasibility of expansion for the hair cutting shop the owner should answer the following questions: Is the business one that can grow? Will there be restricted volume growth? If the owner determines that there is a market potential then he/she has to ask: Am I, as the owner, prepared to make the effort? Expanding the business will take additional time and funds on the owner's behalf. If the results of these questions are positive then the owner must decide how to pursue growth.

B. Expansion Plan: 1.

Objectives - To increase market share to 35% of the local market in the next two years

2.

Alternatives a. b. c. d.

3.

Purchase existing hair cutting companies in the local area Build new locations Increase revenues from existing shop through an increase in advertising/sales promotions Increase revenues through offering new services in existing shops

Select the best alternative - Assuming that the feasibility analysis was positive the best alternative to meet the company’s objective would be to purchase existing hair cutting shops in ideal locations.

The advantages of purchasing an existing business are outlined in chapter 5. To meet the objective of 35% market share within two years it will be necessary for them to purchase instead of build.

2. Interview the owner-manager of a successful small business and evaluate the potential for further growth. Would you recommend expansion for this firm? Why or why not?

Answer: Application Question - Answer dependent on student interview. The student should use the 4 questions under "evaluating the growth question" as a guideline to determine the future potential growth of the firm.

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3. Visit three small businesses that you suspect have varying sales levels. Determine the market, product and degree of owner-manager involvement in each business. Are your results significantly similar to those in Figure 13-2? Explain.

Answer: Application question - Answer dependent on student interview.

4. Identify three of the fastest-growing companies in the region. What opportunities have they pursued to achieve this level of growth? What growth mechanism have they used (internal, joint venture, acquisitions, franchising, etc.)?

Answer: Student Choice 5. Use research to come up with three examples of founding entrepreneurs that stepped aside once the firm had grown to a certain size and brought in a “professional manager.” What relationship did the entrepreneur continue to have with the firm after the transition? Provide an example of a founding entrepreneur being forced out of the position of CEO to be replaced by a professional manager.

Answer: Student Choice 6. Form groups and assume the roles of top management at your university or college.

Develop expansion strategies and objectives to grow the business. Present your findings.

Answer: Student Choice

CONCEPT CHECKS (Not in text) What are some of the advantages to growing a business?

Answer: There are many advantages to growing including the earning potential the growth business is much more significant, larger companies are better able to handle downturns in the economy, and it is easier to fend off competition. Other advantages of larger growing business include they have an easier time raising capital, can usually attract and retain employees compared with small stagnant companies, and can often be sold for more money than small firms with low growth stories.

What concepts can help the owner-manager deal effectively with growth problems?

Answer: There are three concepts which can give the owner-manager the knowledge to deal with growth problems. The first is a review of the business life cycle. Secondly, the owner-manager should be aware of the common growth problems that arise and lastly the owner-manager must know the things he/she can do to plan effectively for growth.

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What are the four stages of the business cycle?

Answer: The four stages of the business cycle include the introduction, growth, maturity and decline stages.

What are the problems caused by growth?

Answer: The problems that can be anticipated as a result of growth are owner-manager fatigue and stress, lack of communication, human resource problems, lack of coordination, shortage of cash, low profitability, breakdown in production efficiency, lack of information and possible owner lifestyle decisions.

How can the owner-manager deal effectively with growth?

Answer: In deciding upon growth the owner-manager should ask four important questions: 1.

Is the business one that can grow?

2.

Am I, as the business owner, prepared to make the effort?

3.

Do I have the capabilities to handle growth?

4.

How should the owner-manager pursue growth?

Why don't more small business owners use more formal planning?

Answer: Growth planning is often overlooked because of the following reasons: lack of understanding, not enough time and the dynamics of an industry.

What are the steps of a growth plan?

Answer: The three steps in developing an expansion plan for a small business are: set objectives, identify all the possible strategies or alternatives which would achieve the objectives, and choose the best and most viable alternative.

What are the requirements of growth?

Answer: The requirements of growth are greater management depth, intelligent expansion, increased capital, financial information, organizational change, the implementation of management controls, and increased owner-manager attention to the external environment of the business.

VIDEOS Other Video Resources:

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

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Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UCvNc3VN4KNouuQbQBU7SxA CBC video links: o UseMyBank - http://www.cbc.ca/dragonsden/pitches/usemybank o Massage Addict - http://www.cbc.ca/dragonsden/pitches/massageaddict

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 2, 3, 4, 5 and 6 from this Chapter would make excellent group assignments/projects.

COMPREHENSIVE CASE SOLUTION Dan Kim Part VII 1.

Identify the problems that growth has caused with Dan’s business and discuss possible solutions.

Dan’s business is experiencing several internal problems even though the external performance appears to be good. The growth of the company needs to be thought out and Dan should determine whether he has the capability and the desire to allow the business to continue growing. His situation calls for “intelligent expansion”, as discussed in the textbook.

There are at least four problems that Dan’s business is facing that may have been caused by rapid growth. They are cash flow difficulties, Dan’s personal and family stress level, product quality problems and reduction in employee morale. Suggestions for dealing with each include the following: a) Cash Flow- Most rapidly growing businesses experience cash flow difficulties, as production requires cash before the sale of the product generates it. Dan will need to obtain more financing from the bank to finance expansion. If demand if growing this should be possible but if not equity financing may be required. b) Dan’s Stress- This is also a common occurrence for rapidly growing small businesses. It not only affects Dan but as we see in this case it has created problems with his family life as well. Dan will have to train or hire personnel to assume some of his duties. He must be willing to delegate if the business is to grow successfully.

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c) Product Quality- Dan will need to implement managerial controls regarding product quality. These will require regular inspection and performance reporting provided to him on a regular basis. d) Employee Morale- When a small business grows it often loses one of its greatest competitive advantages – the atmosphere of “smallness” and employee contact with the owner. Dan needs to be aware of this and try to maintain some of this, but he will likely need to add some incentives to employee performance.

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CHAPTER 14: MANAGING THE TRANSFER OF THE BUSINESS

CHAPTER LEARNING OBJECTIVES LO1. Discuss the importance of planning for the long-term future and possible transfer of ownership of the small business.

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LO2. Review the unique characteristics and problems of owning a family business and passing it on to family members.

LO3. Explain the critical considerations in selling the business to someone outside the family.

LO4. Discuss information pertaining to the closing down of the business.

ANSWERS TO SMALL BUSINESS IN ACTION & SMALL BUSINESS BEGINNINGS QUESTIONS SMALL BUSINESS IN ACTION 14-1: McCAINS DISPUTE 1. Are you surprised by any elements in the case above? Which elements did you find surprising and why?

Answer: Student choice. Students may discuss some surprise that a long successful family business could not develop an acceptable succession plan.

2. What type of compromise would have been possible to avoid such a lengthy dispute?

Answer: Student choice 3. Do you really think non-family members working in the company would have been surprised or objected to Michael McCain assuming the role of CEO? Why or why not?

Answer: Student choice – however students may mention that like outsiders, non-family workers may have thought that the move made sense as Michael had held a number of high-level management positions within the company and was serving as president of McCain’s US frozen juice company at the time of his appointment as CEO. 4. Were you surprised to learn that the brothers continued their feud almost up to the time of Harrison’s death?

Answer: Student choice SMALL BUSINESS IN ACTION 14-2: SUCCESSFUL FAMILY BUSINESS 1. What are some of the benefits to planning for succession as outlined in the case above?

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Answer: Students should mention that with planning, the founder can insure that any potential successor(s) prove they are assets to the business and gain hands-on experience in the industry. The company can also work with a chartered accountant and lawyer to structure a succession plan that will help the business through the transition, as well as experts to help with tax planning. With planning, the founder can communicate upcoming changes with senior management, customers and suppliers well in advance.

2. Did the family miss any steps in their planning process? If so, what steps were missed?

Answer: Student choice 3. If you worked in a management capacity in the family business, knowing their intent to leave the company in the hands of family members, would you continue working for the firm? Why, or why not?

Answer: Student choice

SMALL BUSINESS IN ACTION 14-3: FAMILY SUCCESSION – WHEN FAIR IS NOT EQUAL 1. Why is the continuation of the family business often more important than the equal distribution of assets to the owner of the business?

Answer: The answers will vary. However, students will likely point out that people have invested in their business both financially and emotionally and founders often have a strong desire for their business to continue.

2. Given that most family businesses fail, would it not be more prudent to harvest the business at the highest valuation possible and equally divide the money among the children?

Answer: Student Choice.

3. Do you think it is ethical and fair to value the continuation of the family business over an equal distribution of the estate? Why or why not?

Answer: Student Choice. Some students may note that it’s not the children’s assets, but the parents, and the parents should be free to distribute their belongings any way they see fit.

4. Imagine you are one of the children in a family business. Your parents wish to keep the business running, so they are dividing the estate in the following way: 50 percent is going to one of your siblings while you are your other sibling each receive 25 percent. Would you be happy with this distribution? Why or why not?

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Answer: Student Choice.

ANSWERS TO DISCUSSION QUESTIONS 1. Assume you owned a company that you wanted to keep in the family. One of your three children has been working in the business and is interested in taking over. However, the other two feel that they are entitled to their one-third share of the value of the business. What would you do?

Answer: Student choice – however the owner/parent can point out that any good succession plan involves the potential successor(s) proving they are an asset to the business by having hands-on experience in the business/industry.

2. Jim Duncan is the owner-manager of a local restaurant chain. In its earlier years, the three local family restaurants were very successful. Then the recession came, and the businesses haven't been doing as well. Jim is 60 years old and is thinking about retirement or semi-retirement. He has a son who has managed one of the restaurants, but he is not sure Jim, Jr. is ready for the problems existing in the whole operation. If you were Jim Sr., how would you transfer ownership? Explain your decision.

Answer: Possible solutions: 1. A case can be developed to put the two problem stores into receivership and allow Jim Jr. to manage the one profitable store. With this solution Jim Sr. turns a healthier and smaller company over to Jim Jr. 2. An argument can be made for Jim Sr. to hand over all operations to Jim Jr. Sometimes a change in direction by a different leader can do a company good. If Jim Sr. didn't want to retire he could still serve in the business in some capacity.

3. Another option is to sell all or some of the stores to outsiders. Allowing the father and son to collect the cash and possibly go into another business.

4. The last possibility would be to make the three stores attractive enough to sell on a public offering. Thereby receiving expertise and financing for future operations.

Option number 4 may be the most advisable because the Duncans stand to win the most from that option. If the company is no longer attractive enough to have a successful public offering, then the Duncans can use option # 1. This is assuming that the two stores are beyond repair. This option would leave Jim Jr. with a smaller healthier operation to manage.

3. Your father has just made you president of the family sand and gravel company. You want to computerize the payroll and the accounts payable and receivable, but your father doesn't see the

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need for the extra expense when the expenses are already too high. What two problems exist here? How would you resolve this conflict as the newly appointed president?

Answer: The two problems evident are lack of objectives of the family owners and the blurring of roles. To resolve these problems, they should develop objectives. It would be necessary for father and son to plan out the future direction of the company. To set long and short-term goals for the company in terms of capital expenditures and the expansion plans will help to deal with any future conflicts over expenditures. Clarify roles - A clear definition of the roles, objectives and responsibilities of all family members may help in solving the difficulties between father and son. If the son understands that as president, he doesn't have the right to approve capital expenditures without his father's approval then each party understands his role. The son might not agree with the rule but at least the rule is outlined before the conflict.

4. Your parents have just made you the manager of your family's grocery store. Since the transition, problems have seldom been brought to your attention, and you have received little feedback on your instructions. What problems might be evident? How would you solve these problems?

Answer: Although officially the reins have been passed over to you the lines of communication are still going through your parents. To solve this problem, you as successor must inform each employee as to the proper lines of communication. The parents must live with their decision to make you president and allow you the responsibilities that go with the position. These responsibilities should be properly defined by the parents and the successor to help eliminate the problem.

5. Hamilton Rogers is the owner-manager of a successful machine shop. In the last year, he has promoted his sons to floor managers. Recently several employees have also left the company.

What factors could be responsible for the employees leaving the job? How could Hamilton have prevented this problem?

Answer: Two possible reasons for this problem.

1.

Non-family employee attitudes: The non-family employees thought there was a chance for promotion but after the two sons became managers they are leaving the company to look for a company with opportunity for advancement. To solve this problem Mr. Rogers will need to give the non-family employees some rewards and incentive to stay with the company. It might also be necessary to let non-family members have managerial positions.

2.

Another reason for this problem could be family incompetence. Although there might also be non-family managers in the company, the employees under the two sons might be so frustrated with their incompetence as to quit their job. This lack of respect from the Balderson, Canadian Entrepreneurship & Small Business Management, 11th Edition Prepared by Peter Mombourquette

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employees might derive from the son's lack of experience, education or intelligence. To overcome this, Mr. Rogers should let the son's gain experience or training at another shop or a trade school. If they have already tried this approach then Mr. Rogers should put his sons in positions where they can do the least harm.

6. Assume you owned a company that you wanted to keep in the family. One of your three children has been working in the business and is interested in taking over. However, the other two feel that they are entitled to their one-third share of the value of the business. What would you do?

Answer: Student choice

ANSWERS TO EXPERIENTIAL EXERCISES 1. Interview the manager of a family-owned and -operated business. What unique problems are evident?

Answer: Application question - Answer dependent on student interview.

2. Interview someone who is a future heir of a family business and now going to school or gaining business experience. What problems are evident from his or her perspective? Does this person want to go back to the business? Why or Why not?

Answer: Application question - Answer dependent on student interview.

3. Pamaona Fastener Company has suffered several years of operating losses. Because of the unfavourable outlook for the firm, it filed for bankruptcy and was dissolved. On liquidation, $570,000 was received to be split among the following creditors: Accounts Payable Secured loans from bank Accrued wages Rent due on Building Government loan Trustee's Fee

$100,000 $400,000 $ 10,000 $ 20,000 $300,000 $ 10,000

What would be the priority of payment, and how much would each class of creditor receive?

Answer: Priority of payment: 1st priority - secured creditors -

Trustee

$ 10,000

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2nd priority - preferred creditors -

Total

Bank Wages Rent *Govt loan

$400,000 $ 10,000 $ 20,000 $130,000 $570,000

* Normally in a situation like this, accounts payable wouldn't be paid. The wages and rent could be paid in full or the trustee might divide the payment of wages, rent and the government loan proportionately.

4. Interview the owner-manager of a small business that recently went public and find out what he or she learned through the experience.

Answer: Application question - Answer dependent on student interview.

CONCEPT CHECKS (Not in text) What are some of the outcomes for a business upon the owner's exit?

Answer: Generally there are several outcomes possible including selling the business, transferring ownership to family, closing the business or in some cases bankruptcy.

What are the key steps in successful succession planning?

Answer: The key steps in successful succession planning include: planning early, gradually removing the owner from the management of the business, prepare financial statements, get an evaluation of the firm, and consider hiring professionals to aid in the sale of the business, What are the unique problems of family owned businesses?

Answer: The unique problems of a family business are: higher emotional levels, blurring of roles, incompetence, non-family employee turnover, different objectives of family owners and planning for succession.

Why is the emotional level higher in a family business?

Answer: The emotional level of a family business is only natural because of the family relationship which already exists. This emotional level can result in a negative or positive bias towards other family members.

What can be done with an incompetent family member employee?

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Answer: An incompetent family member employee can be sent to acquire some more skills at college/university or at another business before returning to become fully involved in the business.

What can be done to prevent non-family employees from leaving the business?

Answer: To maintain a loyalty with non-family employees the owner-manager will need to devise various methods of reward and incentive.

Why is it important to set long-term goals in a family business?

Answer: In a family business it is important to set long-term objectives and to ensure that each family member understands his/her role in the business.

How can succession in a family business be made easier?

Answer: Succession in a family business can be made easier by letting the family member gain experience outside the business, and by allowing the heir an increasing amount of authority and control.

Why is open communication so important in a family business?

Answer: With many potential problems in a family business it is essential to maintain open communication so that differences are discussed before they develop into large scale problems.

What is the importance of capital gains in this transfer?

Answer: If a business is transferred to another family member one-half of the capital gain upon the sale will be added to the income of the person disposing of the business outside the family.

This rule applies regardless of what amount (if any) is paid for the business.

What are the methods of transferring a business to one's children?

Answer: Some of the more common methods of transferring ownership of a business to family members are the following: through a will, a sale of the business to the heirs, a gifting program, or a life estate.

What recent budget change has affected the selling of small businesses?

Answer: A recent Federal Government budget proposal allowing for a capital gains exemption will aid the owner-manager in transferring the business to outsiders or family members.

How do you know if your company should go public?

Answer: Sometimes a small business which has been successful but has a need for a significant amount of capital may sell shares to the public to meet financial needs while still maintaining control of the company.

What happens when a company is placed in receivership?

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Answer: A business that cannot be transferred can be closed down, placed in receivership or file for bankruptcy.

What is the priority order for creditors in a bankruptcy case?

Answer: The priority order for distribution of assets in a bankruptcy case is as follows: secured creditors, preferred creditors, and ordinary creditors.

VIDEOS Other Video Resources:  Centre to Entrepreneurship Education & Development (CEED): Subscribe to this YouTube channel here: https://www.youtube.com/channel/UCgxnMK3Kglw607FnhuZJixQ  Mount Saint Vincent University, Entrepreneurship Panels: Subscribe to this YouTube channel here: https://www.youtube.com/channel/UC-vNc3VN4KNouuQbQBU7SxA

GROUP PROJECT While many of the experiential questions would work as group projects. Questions 1 and 4 from this Chapter would make excellent group assignments/projects.

PART-ENDING AND COMPREHESIVE CASE SOLUTIONS CASE SOLUTIONS FOR PART 4 Bailey’s Office Supply Baker Hardware Ltd. Brian Laborsky- Premier Salons I.T.I. Educational Corporation Company’s Coming Cookbooks

BAILEY'S OFFICE SUPPLY QUESTIONS AND SOLUTIONS 1. Why would Marty want to leave the firm instead of accepting his father's offer?

Solution There may have been several reasons but two that are most likely are as follows:

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a) Even though John Bailey was prepared to turn the management of the business over to Marty, it appeared that he would still maintain an interest in the business. It is common in such situations that the parent possesses informal control of the business even though formal control as passed to the child. In addition, it appeared that John was not yet ready to turn actual ownership over to Marty at this point and Marty may have suspected parental authority would continue. b) The differences in objectives among the children may also have caused Marty's desire to leave the firm. Realizing that his brother and sister were more interested in receiving benefits from the family business rather than investing in its future may have caused Marty to realize that future decisions concerning expansion would be difficult.

2. What could be done now to salvage the situation and keep Marty with the company?

Solution Perhaps the only way to keep Marty in the company would be to transfer formal control and ownership to him. This could be done in a number of ways which could provide John with adequate financial return. (See chapter 14.) Roles of all family members should be stated to ensure that Marty's goals and objectives could be met within the firm. This would be hard for John to do but compared to the alternative it may be an advisable course of action.

3. Assuming that Marty remained with the firm, what suggestions could be made to turn the business around?

Solution Assuming that the family difficulties could be solved, Marty has put in place a fairly concrete plan for the business long term including the closure of stores, specialization in ergonomic furniture and a sizable investment in staff. He does need a sales and communications strategy to bring this plan to the market and will need to monitor his success closely.

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BAKER HARDWARE LTD. QUESTIONS AND SOLUTIONS 1. What other information should Mr. Baker obtain before he makes this decision?

Solution Although Mr. Baker has done a fairly thorough job of gathering information to make this decision, some additional data could help.

Secondary Data - From trade industry sources obtain trends in the lumber market, particularly for the do-it-yourself segment. Additionally, Mr. Baker might obtain from the Town of Souris, population and housing projections.

Primary Data - Mr. Baker should find what the asking price of Banner Building Supplies is and carry out an informal survey in the town to assess lumber needs in the future.

2. Using the information provided evaluate the alternatives Mr. Baker has identified. Be sure to evaluate the attractiveness of the proposed merchandise lines.

Solution Alternative #1 – Purchase Banner Advantages 1. Diversification of retail assortment.

3. Income potential of the new business.

4. Would remove the possibility of another person buying the business and becoming a competitor.

Disadvantages (or Further Investigation Required) 1. Financial feasibility -- Mr. Baker will need to determine whether the business is worth the purchase price.

2. Mr. Baker should examine whether his current store has the expertise and resources to take over the new business.

3. The merchandise which Banner has is different than that suggested by Home Hardware.

4. An investigation should be done into the condition of the assets.

5. An analysis should be done regarding the competitive situation of the lumber business in Souris.

It appears that it would not be wise for Baker to purchase Banner's unless the outcome of further investigation into some of these questions proves more positive.

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Alternative #2 -- Expand into Building Supplies Through Home Hardware Advantages 1. Many of the advantages to this alternative were already listed under Alternative #1.

2. Additional advantages include: would not have to purchase an additional lot (Banner Building Supplies ) . would likely receive more assistance from Home Hardware by getting established through them. does not have to worry about condition of assets and inventory purchased.

Disadvantages (or Areas Requiring Further Investigation) 1. Merchandise assortment does not seem to match what Banner's indicates is selling.

2. Have to construct storage shed.

3. Other disadvantages cited under Alternative #1 such as expertise financing market competitiveness.

4. Financial evaluation of product line suggested by Home Hardware (Table A) shows that some items may not be that successful.

Alternative #3 -- Maintain Current Operations Advantages If current building supply is in a downturn this may be the wisest course of action as it requires no additional expense expertise or debt.

Disadvantages 1. It is possible that Banners could be purchased by a competitor and if Baker wanted to go into lumber in the future it would be more difficult to do so.

2. Baker would pass up the opportunity to purchase land adjacent to his own business

3. What other alternatives has Mr. Baker not explored?

Solution Other possible alternatives might be: a.

Purchase only part of the inventory from Banner Building Supplies or the inventory and not the land. Banner may be hesitant to do this as they are looking for a purchaser for the whole business. It may be worth investigating, however. b. Add some building supplies from Home Hardware gradually as demand dictates. This may especially be appropriate if Banner's goes out of business and leaves their customers with no supply. This course of action might also be taken with little capital investment as the current warehouse could be used to store building materials. If, in the future, a solid and

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viable business was evident, Baker could follow the plan Home Hardware suggested more closely.

A guiding principle in deciding which merchandise to add should be market demand and also the product by product financial evaluation. As was carried out in Table A.

BRIAN LUBORSKY - PREMIER SALONS INTERNATIONAL INC. QUESTIONS AND SOLUTIONS 1. What are some of the problems that Brian Luborsky will likely face with the expansion to the US? What solutions can be suggested?

Solution Some of the problems Brian Luborsky might face as he expands to the US are: 1) 2) 3) 4) 5) 6)

increased owner fatigue and stress as the business becomes more time consuming increased potential for poor communication as the business expands geographically greater lack of coordination as the number of employees and outlets grow expansion may strain the company’s financial resources damage to the quality of the service as he is less able to control operations himself he may not be able to obtain up-to-date information about how each outlet is performing as there are more outlets in the organization.

2. What questions should he have evaluated prior to US expansion?

Solution Brian Laborsky should investigate several areas in relation to expanding the US 1)

Is the business one that can grow? Is the business one that can be successfully operated in new markets? Can he maintain control?

2)

Is Brian prepared to make the effort? He should assess whether he is prepared to take on the additional time and effort that expansion would require.

3)

Does he have the capabilities? Does he have the skills, or will he be prepared to hire people to complement his weaknesses?

4)

Is the US market one that his business can be successful in? Has he done the market and industry research required t prepare estimates for the business in the US?

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3. Do you think Luborsky should pursue partnerships for store-within a store concept? Why or why not?

Answer: The answers will vary. Students will likely point out the benefits of such an approach including reduced expansion costs, access to retail space that already has customers, and lower rent.

Students may question if he should be expanding so quickly given the concerns above and if retail is declining so dramatically does it make sense to enter into partnerships and making investments in stores which may end up closing.

COMPANY’S COMING COOKBOOKS QUESTIONS AND SOLUTIONS 1. Which success principles of operating a family business, which were discussed in the text, does Company’s Coming appear to be following?

Solution The solution to this question should cover the principles that are discussed in this chapter. Although not all specifically mentioned in the case, they include such things as recognizing the importance of objectivity, creating clear role structure, ensuring competence, providing incentives for non-family employees, and clarifying objectives of family owners. It appears that Jean Pare has succeeded in involving some of her children in her business and that they are filling valuable roles in the business.

2. As Jean Paré looks to the future, what concerns might she have about family members being involved in the business? How could she address these concerns?

Solution Some of the potential concerns that Jean may have are how the business will continue after she retires. She will need to have in place a succession plan which will identify the roles and ownership of each of her children. It appears that the competence issue has been addressed because of her children’s involvement in the business already. The succession plan should also take into account the tax and legal implications of a transfer of ownership. Through the whole process communication with all concerned is of prime importance.

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