Entrepreneurial Finance E-Book

M. J. Alhabeeb

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 797

Veröffentlichungsjahr: 2014

Beschreibung

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

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

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

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

Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business is an ideal textbook for upper-undergraduate and first-year graduate courses in entrepreneurial finance within business, economics, management science, and public administration departments. The book is also useful for MBA-level courses as well as for business and management PhD majors as a resource in methodology. The book is also an idea reference for entrepreneurs, business managers, market analysts, and decision makers who require information about the theoretical and quantitative aspects of entrepreneurial finance.

Leseprobe

The first effective form of investment was realized when the primitive man discovered that saving a bone for a club to hunt animals was more rewarding than breaking it for its marrow.

ENTREPRENEURIAL FINANCE

Fundamentals of Financial Planning and Management for Small Business

M. J. ALHABEEB

University of Massachusetts Amherst

Copyright © 2015 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data

Alhabeeb, M. J., 1954–    Entrepreneurial finance : fundamentals of financial planning and management for small business / M. J. Alhabeeb.       pages cm    Includes bibliographical references and index.    ISBN 978-1-118-69151-9 (cloth)  1. Small business–Finance. I. Title.    HG4027.7.A44 2015    658.15–dc23

2014024598

To My wife Nidal and our children Junior and Reema

CONTENTS

PREFACE

PART I

ENTREPRENEURIAL PERSPECTIVE

CHAPTER 1

SMALL BUSINESS AND THE ENTREPRENEUR

1.1 What is Entrepreneurial Finance?

1.2 Significance of the Small Business

1.3 Entrepreneurship and the Entrepreneur

1.4 The Idea and the Opportunity

1.5 From an Idea to Reality

1.6 Summary

Key Concepts

Discussion Questions

CHAPTER 2

SMALL BUSINESS OPTIONS

2.1 Starting a New Business

2.2 Buying an Existing Business

2.3 Purchase Options

2.4 Franchise

2.5 Home Business and Family Business

2.6 Summary

Key Concepts

Discussion Questions

CHAPTER 3

SMALL BUSINESS PURCHASE PRICE

3.1 Asset-Based Value

3.2 Cash Flow–Based Value

3.3 Market-Based Value

3.4 Capitalized Earnings–Based Value

3.5 Financial Ratios–Based Value

3.6 Summary

Key Concepts

Discussion Questions

PART II

ENTREPRENEURIAL ORGANIZATION

CHAPTER 4

FORMS OF BUSINESS OWNERSHIP

4.1 Sole Proprietorship

4.2 Partnership

4.3 Corporation

4.4 Other Forms of Business Ownership

4.5 Summary

Key Concepts

Discussion Questions

CHAPTER 5

THE BUSINESS PLAN

5.1 What is a Business Plan?

5.2 Contents of the Plan

5.3 Other Elements of the Plan

5.4 Reviewing the Plan

5.5 Anticipating and Preparing Responses to Potential Risks

5.6 Financing the Plan

5.7 Presenting the Plan

5.8 Updating the Plan

5.9 Grooming the Plan

5.10 Summary

Key Concepts

Discussion Questions

PART III

ENTREPRENEURIAL FINANCE AND VALUATION

CHAPTER 6

FINANCIAL STATEMENTS AND THEIR ANALYSIS

6.1 The Balance Sheet

6.2 Income–Expenses Statement

6.3 Financial Statement Analysis

6.4 Ratio Analysis

6.5 The Dupont Model

6.6 Summary

Key Concepts

Discussion Questions

CHAPTER 7

CAPITAL STRUCTURE AND LEVERAGE

7.1 Debt and Equity Capital

7.2 The Optimal Capital Structure

7.3 Leverage

7.4 Summary

Key Concepts

Discussion Questions

Note

CHAPTER 8

PROFIT AND THE COST–VOLUME ANALYSIS

8.1 Profit Concept Between Economics and Accounting

8.2 Profit Margin and Markup

8.3 Profit and Cash Flow

8.4 Profitability and Earning Power

8.5 When Would a Firm Start Collecting Profits?

8.6 Break-Even Quantity and Break-Even Revenue

8.7 Break-Even Graphics

8.8 Desired Profit and the Break-Even Point

8.9 Non-Cash Charges and the Break-Even Point

8.10 Profit Planning

8.11 Summary

Key Concepts

Discussion Questions

CHAPTER 9

PRO FORMA STATEMENT AND FINANCIAL FORECASTING

9.1 Basic Pro Forma Statements

9.2 Pro Forma and the Sales Ratio

9.3 Change in Sales (ΔS) and the Needed Fund

9.4 Role of Financial Forecasting

9.5 Basic Steps of Forecasting

9.6 Types of Forecasting Models

9.7 The Analysis of Time Series

9.8 Fitting the Model

9.9 Adjusting for Seasonality

9.10 The Smoothed Forecasts

9.11 Barometric Forecasting

9.12 Testing Forecasting Accuracy

9.13 Summary

Key Concepts

Discussion Questions

CHAPTER 10

WORKING CAPITAL

10.1 What is Working Capital?

10.2 Working Capital and Profit-Risk Manipulation

10.3 Working Capital and Financing Strategies

10.4 Summary

Key Concepts

Discussion Questions

CHAPTER 11

FINANCIAL MANAGEMENT OF WORKING CAPITAL

11.1 Cash Management

11.2 Marketable Securities Management

11.3 Account Receivable

11.4 Account Payable and Trade Discounts

11.5 Summary

Key Concepts

Discussion Questions

CHAPTER 12

INVENTORY MANAGEMENT AND CONTROL

12.1 What is Inventory?

12.2 Economic Order Quantity (EOQ)

12.3 The Reorder Point

12.4 JIT-Inventory System

12.5 Summary

Key Concepts

Discussion Questions

CHAPTER 13 INVESTMENT PROJECT EVALUATION AND RISK MANAGEMENT

13.1 Categories of Investment Purposes

13.2 Steps for Project Selection

13.3 Types of Projects

13.4 Patterns of Cash Flow

13.5 Project Evaluation Techniques

13.6 Risk and its Sources

13.7 Methods of Risk Management

13.8 Sensitivity Analysis, Scenario Analysis, and Simulation

13.9 Summary

Key Concepts

Discussion Questions

CHAPTER 14 BUSINESS VALUATION AND HARVESTING

14.1 What is Business Valuation?

14.2 Valuation Tools

14.3 Valuation Techniques

14.4 What is Business Harvesting?

14.5 Harvesting Strategies

14.6 Summary

Key Concepts

Discussion Questions

PART IV

ENTREPRENEURIAL MANAGEMENT AND CONTROL

CHAPTER 15 Basic Entrepreneurial Management

15.1 Planning

15.2 Organizing

15.3 Staffing

15.4 Directing

15.5 Controlling

15.6 Business Strategies

15.7 Summary

Key Concepts

Discussion Questions

CHAPTER 16 Location and Layout

16.1 Factors Affecting the Selection of Location

16.2 Types of Business Outlets and Locations

16.3 Site Selection

16.4 Site Alternatives

16.5 Layout and Design

16.6 Summary

Key Concepts

Discussion Questions

Note

CHAPTER 17

OPERATIONS, BUDGETING, AND TAXES

17.1 Material and Supplies: Buying or Making?

17.2 Product Quality

17.3 Budgetary Variance and Flexible Budgeting

17.4 Types of Budgets

17.5 Considerations for Budgetary Control

17.6 Types of Taxes

17.7 Taxes and Forms of Business Ownership

17.8 Considerations and Strategies

17.9 Summary

Key Concepts

Discussion Questions

CHAPTER 18

MARKETING, PROMOTION, AND DISTRIBUTION

18.1 Market and Customer

18.2 Marketing and Customer's Decisions

18.3 Marketing Research

18.4 Product

18.5 Price

18.6 Place

18.7 Promotion

18.8 Summary

Key Concepts

Discussion Questions

CHAPTER 19

HUMAN RESOURCE MANAGEMENT

19.1 Job Analysis

19.2 Personnel Planning

19.3 Summary

Key Concepts

Discussion Questions

APPENDIX

GLOSSARY

FURTHER READING

INDEX

END USER LICENSE AGREEMENT

List of Tables

Chapter 1

Table 1.1

Chapter 2

Table 2.1

Table 2.2

Table 2.3

Chapter 3

Table 3.1

Table 3.2

Table 3.3

Table 3.4

Table 3.5

Table 3.6

Chapter 4

Table 4.1

Table 4.2

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 7.6

Table 7.7

Table 7.8

Table 7.9

Chapter 8

Table 8.1

Chapter 9

Table 9.1

Table 9.2

Table 9.3

Table 9.4

Table 9.5

Table 9.6

Table 9.7

Table 9.8

Table 9.9

Table 9.10

Table 9.11

Table 9.12

Table 9.13

Table 9.14

Table 9.15

Table 9.16

Table 9.17

Table 9.18

Table 9.19

Chapter 10

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Table 10.5

Table 10.6

Chapter 11

Table 11.1

Table 11.2

Chapter 12

Table 12.1

Table 12.2

Chapter 13

Table 13.1

Table 13.2

Table 13.3

Table 13.4

Table 13.5

Table 13.6

Table 13.7

Table 13.8

Table 13.9

Table 13.10

Table 13.11

Table 13.12

Table 13.13

Table 13.14

Table 13.15

Table 13.16

Table 13.17

Table 13.18

Table 13.19

Table 13.20

Chapter 14

Table 14.1

Table 14.2

Chapter 16

Table 16.1

Table 16.2

Table 16.3

Chapter 17

Table 17.1

Table 17.2

Table 17.3

Table 17.4

Table 17.5

Table 17.6

Table 17.7

Chapter 19

Table 19.1

Appendix

Table 1.1

Table 1.2

List of Illustrations

Chapter 1

Figure 1.1

Small Business by Industry in the United States

Figure 1.2

Survival Rates of Small Business by Year of Operation

Figure 1.3

Failure Rates of Small Business by Number of Employees

Figure 1.4

Entrepreneurial, Managerial, and Leadership Skills by Creativity and Innovation Requirements

Figure 1.5

Entrepreneurship and Management Phases

Figure 1.6

New Business Start-Up by Number of Partners

Figure 1.7

Small Business Owned by Minorities in Selected Sectors

Figure 1.8

Sources of New Business Ideas

Figure 1.9

Steps for Entrepreneurship and Management Phases

Chapter 2

Figure 2.1

Price Negotiation

Figure 2.2

Business Survival by Generations of Owners

Chapter 4

Figure 4.1

Distribution

Figure 4.2

Revenue

Figure 4.3

Profits

Chapter 6

Figure 6.1

Cash Flow Cycle

Figure 6.2

The DuPont Model

Chapter 7

Figure 7.1

Major Costs and Financial Leverage

Figure 7.2

Return on Equity in Three Firms Facing Different Rate of Return on Total Investment

Figure 7.3

Three Plans for Capital Structure

Figure 7.4

The Effect of Change in Sales on Profit

Figure 7.5

Fixed Cost Increase and DOL in Three Firms

Figure 7.6

Chapter 8

Figure 8.1

Cash Flow Diagram

Figure 8.2

Status of Earning Power in a Business

Figure 8.3

Break-even Point

Figure 8.4

Break-even Point and Change in Price

Figure 8.5

Break-even Point and Revenue Fluctuations

Figure 8.6

Break-even Point and a Pre-determined Profit

Figure 8.7

Break-even Point and Shifts in Cost

Chapter 9

Figure 9.1

Steps to Estimate Net Profit

Figure 9.2

Basic Steps of Forecasting

Figure 9.3

Time-Series and Data Variations

Figure 9.4

Quadratic Functions and Linear Trends

Figure 9.5

Actual Data and Interpolation I

Figure 9.6

Actual Data and Interpolation II

Figure 9.7

Residual Values

Figure 9.8

Smoothness of Five-Quarter Versus Three-Quarter Forecasts

Figure 9.9

Major Groups of Economic Indicators

Figure 9.10

Smoothness of High vs. Low Alpha Values

Chapter 10

Figure 10.1

The Negative Relationship Between Current Asset Ratio (CA/TA) and Both Profit (Pr) and Risk Level (R).

Figure 10.2

The Positive Relationship Between Current Liabilities Ratio (CL/TA) and Both Profit (Pr) and Risk Level (R)

Chapter 11

Figure 11.1

Determinants of FICO Score

Figure 11.2

Account Receivable Aging

Figure 11.3

Collection Cost and Bad Debt

Figure 11.4

List Price Between the Manufacturer and Firm

Chapter 12

Figure 12.1

Inventory Level Over Time

Figure 12.2

Inventory Carrying and Ordering Costs

Figure 12.3

The ROP and Inventory Level

Figure 12.4

Service Level and Stock-Out Level Under the Normal Distribution

Chapter 13

Figure 13.1

Cash Outflow and the Present Value of Future Cash Inflows

Figure 13.2

The Annuity Pattern of the Conventional Cash Flow

Figure 13.3

The Non-Annuity Pattern of the Conventional Cash Flow

Figure 13.4

The Non-Conventional Pattern of Cash Flow

Figure 13.5

Figure 13.6

Figure 13.7

Figure 13.8

Figure 13.9

Figure 13.10

The NPV Profile and Crossover Point

Figure 13.11

Risk Premium and the Risk-Free Rate of Return

Figure 13.12

The Certainty Equivalence and Attitudes Towards Risk

Figure 13.13

The Decision Tree

Chapter 15

Figure 15.1

Types of Leadership

Figure 15.2

Firm's Strategy Matrix

Chapter 16

Figure 16.1

Reilly's Law of Retail Gravitation

Figure 16.2

A Typical Grocery Store Layout

Figure 16.3

A Typical Convenient Store Layout

Figure 16.4

A Typical Boutique Layout

Figure 16.5

(a) Retail Store Layout Based on Percentage of Sales; (b) Retail Store Layout Based on Descending Value Sections

Figure 16.6

Assembly Line Patterns

Chapter 17

Figure 17.1

Business Operation

Chapter 18

Figure 18.1

Purchasing Power and Population Size of Major Ethnic Groups

Figure 18.2

Rates of Change in Age Groups (the Young Versus. the Old) Between 2010 and 2030

Figure 18.3

Customer's Decision-Making Process

Figure 18.4

Cost, Sales, and Profit Throughout the Product Life Cycle

Figure 18.5

Channels of Distribution

Figure 18.6

Advertising Expenditures by Media Type

Chapter 19

Figure 19.1

Workforce Ethnic Makeup Between 1995 and 2050

Guide

Cover

Table of Contents

Preface

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PREFACE

As the wrenching changes in the economy continue to push corporations and large companies deep into their struggle to stay competitive, interest in small business and entrepreneurial studies has been rapidly increasing, not only by entrepreneurs and business owners, but also by the public. It is probably in response to the growing trend of downsizing and outsourcing that have been widely practiced by large corporations. The growing interest in the self-employed style of business has been publicly considered safer and more rewarding, especially since small businesses and entrepreneurial projects have proved their ability in initiating successful endeavors, elevating productivity, fueling innovation, and ultimately leading economic progress. Furthermore, embracing small business ventures has largely been looked at as a commitment to the American ideal of free enterprise that cherishes freedom, independence, individuality, hard work, and creativity. Academic response has been matching the public interest, for there has been a significant inclination by students and faculties to study entrepreneurship and explore how to finance, start up, manage, and maintain a small business, as well as examine the efficiency of venture capital investment. These exciting areas of business have grown rapidly in community colleges and public universities and even in increasing number of high schools around the country, as well as globally.

Entrepreneurial finance is the third major field of finance, along with personal finance and corporate finance. It is all about applying the fundamental financial principles and basic theories in the domain of new and small-scale business firms. Moreover, it is adapting those principles and theories for planning and developing, starting up, operating, growing and maturing, valuing, and harvesting entrepreneurial business projects. The nature, needs, and dynamics of a new venture and the entrepreneurial aspect are what primarily characterize and identify entrepreneurial finance and distinguish it from other finance fields. What remains the common ground is the decision-making process and its fundamentals, although it would be different according to the nature and scope of the applications from one finance field to another.

My major objective here is to present a comprehensive and efficient textbook, which would serve as a complete learning package in the area of small business and entrepreneurship. The focus has been on the fundamentals in theory and applications to promote a solid and independent learning experience through detailed and timely information that is helpful in the classroom and beyond. The language in this book is clear, straightforward, and non-technical, in most parts; and the delivery of topics is systematic and easy to follow, emphasizing the learning schemes of exposition, synthesis, analysis, and evaluation. Although the book is written primarily for the upper-level undergraduate students majoring in business, managerial economics, and entrepreneurship, it would still satisfy the academic requirements of the first-year graduate students in business and economics, MBA, and other related majors such as industrial organization and engineering. It is also intended to satisfy the needs for learning flexibility in our classrooms, where a diverse group of students who are taking different paths and having different learning styles are always present. Lastly, the book would perfectly make a useful reference for entrepreneurs and business managers, executives, and researchers.

It was intentional not to make the text heavy with supplemental learning aids, as many of the texts tend to do nowadays. The core purpose, here, is to increase the studying efficiency by focusing on the core material, where a semester is normally not enough to cover that core in its entirety. However, I made each chapter end with a brief summary, a list of key concepts, and ten discussion questions. The questions are straightforward, aiming at reviewing the learned material and placing the concepts in their proper context. Although the covered material is for more than one semester, the organizational breakdown of units and chapters is flexible enough to allow professors to choose the optimal amount of material that would best serve the orientation and focus of their courses.

Topics are organized into four parts with a total of 19 chapters. The first part comes under the title “Entrepreneurial Perspective,” which is an essential introduction to the whole area of small business. It includes three chapters: Small Business and the Entrepreneur; Small Business Options; and Small Business Purchase Price. The second part is dedicated to the “Entrepreneurial Organization.” It includes two chapters: Chapter 4 addresses the different forms of business ownership, and Chapter 5 covers the business plan. This is a central chapter that provides the practical and hands-on component of this book. The contents serve as a necessary tool to learn and practice writing and presenting a professional business plan as an essential key in the process of funding and establishing a new venture. The third part presents the core material in this text. It is the “Entrepreneurial Finance and Valuation” part that is thoroughly covered by nine chapters. Chapter 6 introduces the financial statements and their analysis; Chapter 7 is on capital structure and leverage; Chapter 8 is on profit and the cost–volume analysis; and Chapter 9 is on the pro forma statement and financial forecasting. Chapter 10 introduces the working capital, while Chapter 11 discusses the financial management of working capital. Chapter 12 discusses inventory management and control; Chapter 13 explains the process of investment project evaluation and risk management; and Chapter 14 addresses the subject of business valuation and harvesting. The fourth part is entitled “Entrepreneurial Management and Control,” which covers material that has always been integrated with the financial topics above. It consists of five chapters: Chapter 15 discusses the basic entrepreneurial management; Chapter 16 addresses business layout and location; Chapter 17 covers operations, budgeting, and taxes; Chapter 18 discusses marketing, promotion and distribution, and Chapter 19 wraps up the material of this book by addressing the human resource management.

I tried my level best to produce an error-free text. However, there are always some mistakes and flaws that escape the best watchful eyes. They would remain my sole responsibility. Readers, particularly students and instructors, are invited to submit any error they may catch or suggestions they may have to improve the quality of the text for the next edition. I am indebted to the former departmental secretary Peggy Cialek, who typed up the entire manuscript with exceptional patience and efficiency. Special thanks go to my Wiley's senior editor Susanne Steitz-Filler and senior editorial assistant Sari Friedman for their professional excellence, understanding, and patience. My sincere thanks also go to the production editor Katrina Maceda, project manager Shalini Sharma, and the copyeditor Anju Shalini for their professional handling of the book and their remarkable punctuality and care. Great appreciation is also due to my friend, the innovative artist Heike Schenk Arena, for her generosity in providing the beautiful image of the book cover.

M. J. ALHABEEB

Belchertown, MA

November 2014

PART IENTREPRENEURIAL PERSPECTIVE

Small Business and the Entrepreneur

Small Business Options

Small Business Purchase Price

CHAPTER 1SMALL BUSINESS AND THE ENTREPRENEUR

1.1 What is Entrepreneurial Finance?

Finance, technically, refers to any transaction of money, or money-related medium of exchange and monetary measurement. More broadly, finance can be considered the art and science of money handling and capital management. Its significance lies in the understanding of how money works in a society, and how it is related to economic and legal systems, given the society's rules and regulations, and the structure of its financial institutions. The ultimate goal of finance is to achieve the highest efficiency in the way of using funds regardless of the nature and direction of the utilization of money. In this sense, and in the business domain, financial management would represent the firm's responsibility to plan, acquire, and manage capital to efficiently run the business as well as to grow it and further invest in its capital.

Entrepreneurial finance is the third major field of finance along with personal finance and corporate finance. It is all about applying the fundamental financial principles and basic theories in the domain of new and small-scale business firms. Furthermore, it is adapting those principles and theories for planning and developing, starting up, operating, growing and maturing, valuing, and harvesting entrepreneurial business projects. The nature, needs, and dynamics of a new venture and the entrepreneurial aspect are what primarily characterize and identify entrepreneurial finance and distinguish it from other finance fields. What remains common ground is the decision-making although it is different by nature and scope from finance field to another. In entrepreneurial finance, entrepreneurs and managers make decisions to finance, establish, and run a new business project, while in , the chief financial officer and his team make decisions to generate, manage, and monitor the flow of public funds in a corporation. To a smaller and individual scale, a consumer would make all the financial decisions for himself and family, but the basic financial principles remain very close, and the field becomes .