Klicker- Chapter 19- Starting a Business Flashcards Preview

Management- Mors 200 Study Guide > Klicker- Chapter 19- Starting a Business > Flashcards

Flashcards in Klicker- Chapter 19- Starting a Business Deck (144):

A business that is independently owned and operated and not dominant in its field.

Small Business


One who organizes, manages, and assumes the risk of the business firm.



  • Manufacturing: 500-1500
  • Wholesale trade: 500
  • Retail trade: 20-100 (except for a limit of 500 employees in department and variety stores)
  • Services: 25-300

Number of Employees


  • Actively managed by owners
  • Highly personalized
  • Largely local in its area of operations
  • Largely dependent on internal sources of capital to finance its growth
  • Not dominant in the industry

Qualitative Sales Criteria


Business that makes finished goods from raw materials by hand or machinery



Business that purchases goods for resale.



Business that provides a service as opposed to a product.



  • Manufacturing
  • Merchandising
  • Services

Types of Activity


  • Interdependence of business
  • Stimulating economic competition
  • Innovation

Economic Contributions of Small Business in the United States


Decide on the legal form of operation that will be the most advantageous to you. Do not make these decisions alone. Your financial advisor and lawyer should help you make the decision.

  • Sole Proprietorship
  • Partnership
  • Corporations
  • Limited Liability Company

Steps for Start-Ups


An individual conducting a business as an individual and sole owner. A funeral director operating a funeral home in this way will be held personally liable for all of his or her actions and those of his or her staff.

Sole Proprietorship


  • Ease of starting
  • Low cost or organization
  • Freedom to manage
  • Profit incentive

Advantages of Sole Proprietorship


  • Unlimited risk
  • Limited size
  • Limited life
  • Limited management ability

Disadvantages of Sole Proprietorship


  • General
  • Limited



An association of two or more persons who conduct business as co-owners.

  • General partners are personally liable for the obligations of the business (i.e. being sued)

General Partnership


Where there are general partners and parterners who have limited interest.

  • Limited partners are usually investors who put up the capital, have a limited interest in the profits, and their liability is limited to the amount in their capital.

Limited Partnership


  • Combined management, talent, and capital
  • Easy to form
  • Efficiency of labor

Advanages of Partnership


  • Lack of continuity
  • Decisions binding
  • Frozen investments

Disadvantages of Partnership


Legal entities established under state law.

  • Usually the preferred manner for owning and operating a funeral home.



  • Have shareholders
  • Usually established under the state's Business Corporation Act
  • Shareholders- rarely personally liable for the actions of a funeral home corporation
  • Directors and officers of a funeral home corporation- probably not be personally liable for their actions if they were acting within the scope of their employment.

Profit Corporations


  • Continuity in existence
  • Ease of ownership
  • Limited liability
  • Large financial capability

Advantages of Corporations


  • Legal restrictions on activities
  • Separation of ownership/control
  • Lack of personal interest
  • Double taxation of earnings

Disadvantages of Corporations


A legal entity that has the option of being taxed like a partnership, but shields assets from business debt like a corporation.

Limited Liability Company


  • Corporate-like limited liability and asset protection
  • Flexibility of partnership
  • No significant requirements
  • Tax status of partnership

Advantages of Limited Liability Company


  • If not properly structured, can be taxed as a "C" corporation
  • Must have limited life, usually 30 years.
  • Due to newness there is no well developed body of case law or IRS ruling.

Disadvantages of Limited Liability Company


  • Sales Tax I.D. Number
  • State required permits and licenses
  • Local licenses and permits
  • Federal taxes and federal employer identification number (EIN)

Before you Start your Business, Obtain:


Contact State Department of Taxation and Finance to obtain this.

Sales Tax I.D. Number


Contact the office of Business Permits and Regulatory Assistance (OBPRA) to obtain a permit assistance kit.

State Required Permits and Licenses


Contact the city/town hall and the county office for local requirements.

Local Licenses and Permits


  • Corporation or partnership or planning to hire employees- you must file for this  
  • Sole proprietorship with no employees- you may use your own social security number on federal tax forms
  • Contact local IRS office to obtain appropriate paperwork.

Federal Taxes and Federal Employer Identification Number (EIN)

(IRS Form SS-4)


Obtain EIN by contacting IRS. Once you return the completed form, you will receive the forms that you will be required to submit to the federal government.

  • Contact your state Department of Labor to determine your obligation to state unemployment.
  • Contact your State Department of Taxation and Finance regarding forms for state withholdings, if relevant.
  • Check on obtaining Workers Compensation and disability insurance coverage for your employees.

If you Plan to Hire Employees


  • Certified public accountants- advise on tax strategies and record keeping
  • Lawyer- review and produce legal documents and general advice
  • Commercial Insurance person- for liability coverage and any other forms of insurance your business may require.

Build a Team of Advisors to Help You


Maintain this account separte from your personal account.

  • Bank requires a stamped and certified DBA certificate and a copy of your incorporation papers with your corporate seal affixed.

Open a Business Checking Account


By doing this, you will be entitled to a business listing.

  • Consider an answering service for calls that come in during your absence.

Arrange for a business phone line to be installed


A summary of how a business owner, manager, or entrepreneur intends to organize the business endeavor and implement activities necessary for the venture to succeed.

  • Encourages loans
  • Promotes growth
  • Provide a road map to follow

Business Plan


  • Executive summary
  • Markey analysis
  • Company description
  • Organization and management
  • Advisors
  • Marketing strategies
  • Service product line
  • Funding request
  • Financial data
  • Appendix

What is in a Business Plan?


A concise overview of the entire plan, together with a history of the company if it is an existing company.

Executive Summary


Illustrates your knowledge of the business you are in. It should include:

  • Target market information
  • Market test results
  • Evaluation of competition
  • Regulatory restrictions

Market Analysis


Include information abotu the nature of your business and a list of primary factors you believe will make your business successful.

Company Description



  • your company's organizational structure
  • details about the ownership
  • profiles of the management team.

Organization and Management


Include a list of any successful people in the business who are acting as advisors to you.



  • How do you plan to market your business?
  • Goals for advertising
  • Public relations
  • Communications

Marketing Strategies


Describes your services and products. Not just a description:

  • How are you better than your competition?
  • Why people will want to come to you for these services and merchandise instead of your competitor.

Service Product Line


You request the amount of money you will need to start or expand your business.

Funding Request


Most creditors wil want to see historical data for an existing business for the last three to five years, including income statements, balance sheets, and cash flow statements.

  • Start-ups or growing businesses- creditors will want financial projections including forecasting income and expenditures for at least the first year and usually from three to five years.

Financial Data


This may not have to be included in the plan, but should be available on request and should include:

  • Credit history
  • Letters of reference
  • Details of marketing studies
  • Licenses and permit copies
  • Legal documents
  • Leases
  • Contracts
  • Names of your attorneys and accountants



  • Keep a cash cushion on hand for emergencies- enough for 3-6 months of expenses
  • Announcements- send announcements of your business start-up to the media, potential customers, and friends
  • Contact the US Small Business Administration for Information
  • Utilize free counseling services with:
    • SCORE (service corps of retired executives)
    • SBDC (Small business development centers)

Other Factors to Consider: Business Plan


  • Working Capital, Circulating capital
  • Fixed capital

Types of Capital Needed


Difference between current assets and current liabilities.

Working Capital (Circulating Capital)


Long-term capital invested in the business.

Fixed Capital


  • Personal, equity capital
  • Debt equity
  • Trade credit
  • Venture capitalist

Sources of Funds


Capital invested in the business by the owner(s).

Personal Equity Capital


Borrowed or loaned capital invested in the business that must be repaid to creditors:

  • Loans from friends
  • Mortgage loans
  • Commercial loans
  • Small business administration (SBA)
  • State and regional development companies
  • Taking in partner(s)
  • Issue capital stock

Debt Equity


Credit extended by one business to another to help finance distribution of a producer's goods.

Trade Credit


Private individuals or groups who loan money for business.

Venture Capitalist


  • Leasing vs. buying
  • Selling off excess inventory
  • Factoring

Ways to make financing more affordable


  • Reason(s) the owner is selling
  • Profit potential
  • Tangible assets
  • Intangible assets
  • Competition
  • Human resource forecast
  • Number and type of funerals the firm does each year

Buying a Funeral Home

Factors to Consider


The physical asset that possesses genuine value.

Tangible Assets


A type of asset that is not able to be physically touched but is retained by a small business because its genuine value appeal.

Intangible Asset


The practice of trying to obtain something that is being sought by others under similar circumstances at the same time.



Determining personnel needs in terms of numbers of individuals and their required skills.

Human Resource Forecast


  • Who are the potential buyers for the funeral home?
  • Are there growth oopportunities in the market?
  • Have you considered what you quality of life will be like?
  • Is your decision a sound financial one or is it based on emotion?
  • Do you have experienced advisors to assist you?

Paul Kuper's Suggested Questions


  • Value of tangible assets
  • Book value
  • Replacement value approach
  • Liquidation value (Market Value) approach

Considerations in Determining Price


The cost of a fixed asset less accumulated depreciation.

Book Value


The fair market price to purchase similar assets.

Replacement Value Approach


The anticipated value of an asset that would be realized in case of liquidation of the business.

Liquidation Value Approach (Market Value Approach)


  • Name
  • Goodwill
  • Copyrights
  • Patents
  • Trademark

Value of Intangible Assets


An intangible asset such as the name of a funeral home; also, an intangible asset which enables a business to earn a profit in excess of the normal rate of profit earned by other businesses of the same kind.



The registered right of a creator to reproduce, publish, and sell the work that is the product of the intelligence and skill of that person.



The registered right of an inventor to make, use, and sell an invention.



A name, symbol, or characteristic identifying a product offically registered and legally restricted to the use of the owner or manufacturer.



  • Cash
  • Owner financing
  • Third party financing

The Terms of Sale


  • Prior work experience
  • Personal experience
  • Hobbies
  • Accidental discoveries

Sources of New Venture Ideas


SBA uses much the same criteria as any private lender. The tree primary tests of credit worthiness:

  1. Cash flow
  2. Management
  3. Equity

Applying for a Loan- General Credit Requirements


Applicants must show that they can meet business expenses, owner's draw, and all payments from the earnings of the business.

  • Usually demonstrated with a cash flow projection

Cash Flow


Applicants must show ability to operate the business successfully. For a new business, applicants must have significant management experience as well as experience in the type of business they propose to enter.

  • New business (or buying a business)- applicants should have approximately one dollar of cash or business assets for each two dollars of the loan.
  • Established firm- the proforma (after the loan) ratio of total debt to net worth should be approximately 4:1 or better.



  • Human resource planning
  • Capital shortages- lack of available money
    • securing funds, goods rates
    • maintaining reserves
    • securing equity capital
  • Tax burdens
  • Government regulations
  • Consumerism

Causes of Failure

External Probelms


  • Lack of expertise (mismanagement)
  • Financial shortages
  • Human resource management

Causes of Failure

Internal Problems


  • Will the size of the building meet your needs?
  • Is it accessible to the public?
  • What impression does the internal and external appreances give?
  • Is there room for expansion?
  • Are parking facilities adequate?
  • What is the external traffic pattern?
  • What is the internal traffic pattern?
  • What state of repair is it?
  • Will fixtures and equipment be purchased or leased?
  • What are the physical surroundings?

Building Requirements

(constructing new or purchasing)


  • Fixed expenses
  • Variable expenses
  • Cost control

Cost Analysis


A cost that, for a given period of time and range of activity called the "relevant range," does not change in total but becomes progressively smaller on the per-unit basis as volume increases. Do not increase with increased business, not do they decrease with declining business activity.

  • Rent
  • Supervisory
  • Salaries
  • Depreciation
  • Insurance
  • Debt

Fixed Expenses


A cost which is uniform per unit but fluctuates intotal in direct proportion to change in the related activity or volume.

  • Supplies
  • Repairs
  • Taxes
  • Hourly wage expenses
  • Utilities

Variable Expenses


Any cost not specifically associated with production of identifiable products and services and can include variable expenses or fixed expenses.



The point at which total sales revenue equals total costs.

Break-Even Point (Break-Even Analysis)


  • Expense classifications- based on the industry
  • Ratio examples- Comparison to industry standard. 

Cost Control


Profit and each item of expense in the income statement as expressed as a percentage of sales income.

  • Total operating expense ratio
  • Net profit
  • Rent expense ratio
  • Employee wage ratio
  • Proprietor's wage
  • Advertising expense

Cost Control Ratio


  • 30 years ago- FD agreed to wait until estate was settled before he was paid. Many FDs advanced third-party costs (church and cemetery fees) and waited for that money. Offered credit and loned money.
  • Today- Almost all funeral homes require families to pay up front (either cash advances or entire funeral bill) Others will extend credit for 30, 60, oro 90 days, but do charge interest.

Extending Credit


  1. Sales increased
  2. A more personal relationship can be maintained
  3. Customers are likely to be more regular than cash customers who go where the bargain is.
  4. More like to be interested in quality of service than price.
  5. Goodwill is built and maintained more easily
  6. Goods can be exchanged and adjustments made with greater ease. (also sent out on approval).
  7. Credit applications and charge files contain consumer information that is useful in planning inventories and special sales promotions.

Advantages of Extending Credit


  • Capital is tied up in merchandise bought
  • If firm has borrowed extra money required when credit is granted, interest must be added to the cost of goods sold.
  • Some losses from bad debts, and customers with fraudent intentions are bound to occur.
  • Some customers pay slowly because they overestimate their ability to pay in the future.
  • Customers are more likely to abuse privileges of returning goods and having goods sent out on approval.
  • Credit increases operating and overhead costs by adding the expenses of investigation and bookkeeping entailed in keeping accounts, sending out statements, and collecting payments.

Disadvantages of Extending Credit


  • Charge accounts
  • Installment credit
  • Open-end credit- revolving accounts
  • Credit card services

Types of Consumer Credit


  • 2/10, n/30 - 2% discount if paid in 10 days; net bill is due in 30 days
  • MOM (middle of month)
  • EOM (end of month)
  • CWO (cash with order)
  • CBD (cash before delivery)
  • COD (cash on delivery)

Common Business Credit/Sales Terms


  • The older the account, the harder to collect
  • Attempting to collect money due takes time away from other duties.
  • Former customers avoid the firm because it is embarrassing to meet one to whom they owe money.
  • Collection ties up funds needed to operate other aspects of the business.

Collection Policy- Problems with Collection


A general procedure for outstanding bill:

  1. A friendly reminder
  2. A reminder letter
  3. Personal contact
  4. Collection agency
  5. Lawsuit-last resort

Credit Collections


Obtaining cash before payments are received from customers by selling off one's accounts receivable to a third party.



All efforts designed to preserve assets and earning power associated with a business.

  • Eliminate risks- remove the cause
  • Minimize risks- good mangement
  • Shift risks- purchase outside insurance
  • Absorb risks- self-insure

Risk Management


Protection for the small business or small business owner with regard to monetary compensation in the event that a business and/or personal peril is experienced.



Based on actuarial and mathematical principals, guarantees a speicified sum of money upon the death of the person who is insured.

Life Insurance


Evolved from scientific principals to provide funds for medical expenses due to sickness or injury and to cover loss of income during a disability.

Health Insurance


Provide a stream of income by making a series of payments to the annuitant for a specific period of time or for his or her lifetime.



  • Loss of damaged property, including supplies, fixtures, and buildings
  • Loss of income resulting from the interruption of business due to fire, etc.
  • Liability to employees
  • Liability to the public
  • Death of key employees
  • Extensive loss from bad debts
  • Faulty title to real estate
  • Riots or civil disobedience
  • Shoplifting
  • Loss through dishonest employees
  • Financial hardships
  • Vehicles
  • Burglary/robbery

Types of Losses


  • Accident and health insurance
  • Buy-sell Life insurance
  • Business interruption insurance
  • Casualty insurance
  • Credit insurance
  • General liability insurance
  • Endowment life insurance
  • Key-person life insurance
  • Liability insurance
  • Life insurance
  • Product liability insurance
  • Self insurance
  • Term life insurance
  • Universal life insurance
  • Whole life insurance
  • Malpractice insurance

Type of Insurance


Insurance against loss through accident or sickness.

Accident and Health Insurance


Insurance covering motor vehicles

Auto Insurance


Insurance on an owner of a business that will supply enough money for a partner to buy his share of the business upon death.

Buy-Sell Life Insurance


An insurance that protects companies during the period necessary to restore property damaged by an insured peril. Coverage pays for lost income and other expenses related to recovery.

Business Interruption Insurance


Insurance that provides monetary benefits to a business that has experienced an unforeseen peri such as flood, fire, etc.

Casualty Insurance


Insurance that protects non-retailing businesses from abnormal bad debt losses.

Credit Insurance


Insurance covering business liability to customers who might be injured on or off premises of from the product sold to them.

General Liability Insurance


Life insurance that allows the insured, rather than the beneficiary, to collect the face value of the policy upon maturity or to collect that value in annual payments.

Endowment Life Insurance


Life insurance that protects a firm against losses due to the death of a key employee.

Key-Person Life Insurance


Insurance that covers business liability to customers of others who might be injured from the product sold to them.

Liability Insurance


Insurance that provides death benefits to the survivors of the insured.

Life Insurance


Insurance that protects a firm against claims that its product caused bodily injury or property damage to the user.

Product Liability Insurance


A form of risk management whereby a part of hte firm;s earnings is earmarked as a contingency fund for possible future losses, specifically for individual loss categories such as property, medical, or worker's compensation.



Life insurance that has no cash value whenever the policy expires.

Term Life Insurance


A combination of whole life insurance and term life insurance.

Universal Life Insurance


Life insurance that gives lifetime protection to the insured person.

Whole Life Insurance


The type of insurance to purchase for protection against litigation.

  • Often additional coverage under General Liability policy
  • Sometimes can be purchased seprately
  • some companies have group insurance with this

Malpractice Insurance (Professional Liability Insurance)


A clause in an insurance policy under which the insured agrees to maintain insurance equip to some specified percentage of hte property value or otherwise to assume a portion of any loss.

Coinsurance Clause


Insurance policy provision that makes the insurer liable for only losses in excess of the stated deductible.

Deductible Clause


  • Suitability- consider remodeling
  • Customer accessibility- ADA compliant?
  • Internal/external flow
  • Room for expansion and visual spaciousness
  • Internal and external appearance
  • Parking facilities
  • Equipment/fixtures requirements
  • Customer service and merchandise organization

Building Requirements and Design Factors


  • Physical surroundings
  • Visual spaciousness
  • Customer image
  • Space utilization
  • Government regulations

Design Factors and Guidelines


  • Check regulations for the area you want to build or purchase
  • Real estate agent and lawyer should be consulted



Must be in compliance to ensure your funeral home is accessible to people with disabilities.

Federal ADA (Americans with Disabilities Act)


  • Caskets
  • Vaults
  • Urns
  • Prayer cards
  • Register books
  • Religious items- crosses, rosaries
  • Thank you cards
  • Memorial jewelry
  • Clothing for deceased



  • Embalming chemicals
  • Coveralls
  • Funeral flags and stickers for cars
  • Office supplies
  • Cleaning supplies



  • Manufacturer or wholesalers?
  • Cooperative buying group?
  • Consider imported products?

Selecting Suppliers


  • How fast can you receive the item?
  • How adaptable is the company to customizing the product?
  • Can you receive discounts or rebates?
  • Do you like and trust the sales representative?
  • Is the quality of the product good, better, or best?
  • Is their customer service fair, good, great?
  • Do they honor warranties or guarantees?
  • Do you provide training and technical assisstance?
  • Do they provide sales aids?
  • Are prices compeitive?
  • Can you buy on consignment?
  • Are you comfortable in selling their merchandise?

Consideration Concerning Suppliers


  • Economic order quantity
  • Inventory turnover

Inventory Control Considerations


  • Cost of products, including any shipping and handling costs
  • Operating expenses including overhead, payroll, and marketing

Determining Price


  • What your competitor charges
  • What your customers are willing to pay
  • Amount of profit you desire
  • Supply and demand
  • Economic fluctuations
  • banking conditions
  • marketing strategy
  • value of the merchandise

Other Factors Related to Determining Price


  • Competition based pricing
  • Cost plus mark-up pricing
  • Loss leader pricing
  • penetration pricing
  • Economy pricing
  • Package pricing
  • Psychological pricing

Methods of Pricing


Setting the price based upon the similar products and services charged by the competition.

Competition Based Pricing


Adding a pre-determined percentage or amount to the cost of the product.

Cost Plus Mark-up Pricing


Occurs when you advertise a lower price in house that people will find something more expensive that they will like.

  • illegal if you dont sell inexpensive merchandise or services
  • Legally and morally alright if you do offer inexpensive merchandise and services

Loss Leader Pricing


Setting an initial low price at the beginning of your business in hopes of attracting customers. This price will rise as you gain more market share.

Penetration Pricing


No-frills low price. Used by funeral homes that decide this will be the philosophy of their business.

  • often called discounters

Economy Pricing


A set serice and merchandise package at a set price. This price is usually slightly lower than if everything was purcahsed seprately.

  • advised by many consultants- consumers like the ease of this
  • Legal according to FTC if it can still be itemized on the GPL

Package Pricing


A strategy where the merchandise price ends in an odd number such as 5, 7, or 9 because it is believed that consumers perceive it to be a fairer price.

  • Round down rather than up

Psychological Pricing


  • Legislation
  • Types of merchandising
  • Purchasing practices
  • Desired clients

Other Factors Affecting Price


Funeral directors must conform to federal and state rules regarding every aspect of doing business, including pricing.



  • Determine quality of merchandise
  • high end, low end, mixture of both?
  • Most funeral homes offer a mixture

Types of Merchandise


  • Merchandisers offer special deals
  • Rebates

Purchasing Practices


  • Lower income
  • Higher income (the carriage trade)
  • Dont pre-judge the family
  • Should have a good reason the family should choose you over an competitor

Desired Clients