Entrepreneurial Blog

Describe three kinds of credit accounts which a company can use to support its credit sales?

The three kinds of credit accounts which a company can use to support its credit sales are revolving agreement, charge agreement, and installment agreement.

Revolving Agreement:

In a revolving credit agreement you are charged interest on the amount of the balance that was not paid at the end of the period due.  If you pay for your purchases in full at the end of each period then you will not be charged any interest.  If you make a partial payment then the unpaid balance will be charged interest until paid in full.  If you make no payment then the unpaid balance will accrue interest until paid.

Charge Agreement:

In a charge credit agreement you agree to pay in full at the end of the period for all purchases.  Since there are no outstanding balances at end of the period there will be no finance charges.

Installment Agreement:

In a installment credit agreement you agree to pay a certain amount equally over a specific time with a fixed amount of interest.  Your periodic payment is applied to the interest accrued and pay down of principle balance until the total balance is zero.

Describe three methods for limiting the risk for a company that extends credit to its customer?

Three methods for limiting risks for a company that extends credit to its customers is to have each customer complete and update annually a credit application, check its customers credit worthiness with reference checks and credit score checks, and only offer small credit balances.

Credit Applications:

Each customer whom wishes to have credit with your business must complete a credit application to include: contact info, Federal Identification Numbers, personal guarantee of owners with social security numbers along with acceptance to check credit scores.  These credit applications must be kept on file and updated annually.

Check Credit Worthiness:

Each credit application should be reviewed for accuracy and credit worthiness should be checked.  Credit references should be obtained and updated annually.  Credit score should be obtained and received annually.

Keep Small Credit Balances:

Limit the amount of credit available to customers.  Keep balances small, if credit limit is not used reduce yearly or if needed increase.  Maintain a equilibrium with past performance.  Account receivable balances should be reviewed periodically and be kept within terms.  The minimum number of days in accounts receivable is preferable.

How does the extensive use of credit cards by their customers affect small businesses?

The extensive use of credit cards by their customers affect small businesses in the increased chances of fraud by the customer, the increased fees in credit card processing, and the increased chances of credit card theft.

Fraud by Customer:

If protocols are not in place to protect from credit card fraud then a small business can be a victim of fraud.  A fraudulent credit card could be used for purchases in a storefront or online store.  If used in a storefront then the product or service will have been given to the customer right away, if in a online store then the product would be shipped to the customer.  The small business owner might not discover the fraud until a month or two later, when the appropriate person opens their credit card statement to see the fraudulent charge.  Once victim of credit card theft disputes the charges then the credit card company takes the appropriate money from the small businesses account. The small business will lose the income from the sale as wells as have already lost the product or service with no way to recover the loss.

Increase Credit Card Processing Expense:

For a small business there are no fees involved when accepting cash for products or services.  If a small business accepts credit cards then there are fees involved.  These fees include monthly statement fees, percentage fees per dollar amount of transaction, and fee per transaction.  These fees are an added expense for the small business as well as reducing the profits of the small business.

Increase Chance of Credit Card Theft:

When taking credit cards from customers to process there is a chance that your customers could obtain those credit card numbers for fraudulent purposes thus exposing your small business to risk.

Explain the scope of fraud and why it impacts small businesses to a greater extent than large businesses. What should the owners or managers do to prevent fraud from occurring in the first place?

Fraud impacts a small business to a greater extent that large business in that there are not enough safe guards in place to protect the small business.

Cash Theft:

In a small business if there are many people handling the cash transactions then it could be easier for cash theft.  There should be oversights in place to check for cash theft loss.  Each cashier should have their own secure registers and at the end of the shift another person, either a supervisor or business owner should tally the receipts against the cash to see if there are any overage or shortages and problems should be immediately corrected.  A surveillance system with camera should be in place covering each cash register.

Credit Card Number Theft:

In a small business customers’ credit cards should be securely handled without keeping the full credit card number on receipts.  The customer’s credit card numbers should be x’ed out to prevent others from using the credit card for fraudulent purposes.  A surveillance system with camera should be in place covering each credit card transaction.

Credit Card Fraud:

A customer could use a fraudulent credit card to make transactions.  The small business should have safe guards in place to prevent this.  Checking identification so that it matches the credit card holder is one way to prevent fraud.  Keeping name, address, and phone numbers of customers can also help in preventing fraud.  Also a noticeable surveillance system with camera should be in place covering each transaction will also help to prevent fraud..

Inventory Theft:

Periodic planned and sporadic inventory reconciliation should be performed.  This will reduce the amount of inventory theft.  A surveillance system with camera should be in place covering all inventory locations.

Employee Time Abuse:

Employees in a small business may overstate their hours easier than in a larger firm.  An electronic time clock with individual personal employee codes could be used to minimize employees overstating their hours.  A surveillance system with camera should be in place covering all time clock locations.

What are the pros and cons of doing business entirely online without a physical storefront or presence? Consider this question from the perspective of selling a tangible product.

The pros of doing business entirely online without a physical storefront or presence include less overhead costs, less personnel costs, and less startup funds.  When a business is entirely online there is not any additional overhead costs for managing a storefront; including, rent, utilities, property taxes, and costs for furniture and fixtures.  The only overhead costs would be for a warehouse and not the additional overhead costs of a storefront.  One could set up the personnel in the warehouse to follow sales.  If one finds that they only make online sales at specific times, certain days, or certain seasons then personnel at the warehouse could follow this schedule but if one also had a store front then this would need to be manned more hours on the off chance that a customer might walk in the store.  Since one would not also have to purchase furniture and fixtures, pay deposit for a storefront as well as a warehouse then the start up costs would be lower.

The cons of doing business entirely online without a physical storefront or presence include potential for fraud, less customer loyalty, and some providers will not sell to a business that does not have a physical presence.  Customers could purchase your product with a fraudulent credit cards which you might not discover until after you have shipped the product.  The chances of using a fraudulent credit card at s storefront is minimized since you could ask to see identification with each credit card purchase.  When a customer gets to know a business owner and can come in to  a storefront for personalized attention then that customer has a greater likelihood of becoming a repeat customer.  This personalized service is lost with an online marketplace and it would be harder to inspire customer loyalty.  Some providers refuse to sell to a business with only an online presence, they require a storefront in order to purchase from them.  This could drive your costs of goods sold up if you could not purchase from the wholesaler and had to purchase from an intermediary.

Why are large firms so slow to change? Think about the reward systems in place in such firms, as well as organizational issues.

Large firms are slow to change in that there are many departments and people that make decision for the firms and this lead to many many meetings and discussions about changes.  Sometime the entire personnel in the company may need to be involved to decide on which changes would best suit the company.  Some people in the company may try to thwart the change which will also slow the process.  With the greater number of deciders finial decision take the greater amount of time.

Is there such a concept as “good will” in reality and is it transferable? Why or why not? Give an example.

Goodwill is considered an intangible assets.  It is the value of the business in excess of the price for the assets and accounts receivables.  When a business is purchased with the price in excess of the value of the assets and the value of the accounts receivable then this overage is considered as purchasing the goodwill of the company.  This goodwill includes the relationship the company has with the community, its customers, and its stakeholders.  Goodwill includes the position of that company in the marketplace, customer loyalty, excess business earnings, and the continued expected future economic benefits of the business.  Goodwill is the day to day performance of the business operations that make it successful.  Goodwill can be transferable if the new owners continue to follow the same path as the previous owners and in making changes they always look to the  effect on the community, its customers, and its stakeholders and not only look at how to increase profits at others expense.

Discuss the advantages and disadvantages of buying a business as opposed to starting one from scratch. What two ways can one buy a business and which is preferable ? Why?

The advantages and disadvantage of buying a business as opposed to starting one from scratch include many different items.  The advantages of buying a business are having the past performance as a guide, having readymade inventory, personal, and infrastructure, and an easier way of obtaining a commercial mortgage if you can show a proven track record.  The disadvantages of buying a business include not knowing if the financials are accurate, there may be undisclosed problems with the product or service, and you might have a larger investment if you are paying a premium price for the existing business.  The advantages of starting one from scratch are knowing from the ground up that all legal policies, procedures, and laws have been followed, you can choose your own personnel and you can choose your own products and services and brand them as yours.  The disadvantages of starting your own business from scratch include a more difficult time obtaining a commercial mortgage, trying to decide on a product or service and making the necessary implementations to achieve these products and services.

When you buy a business you have their past performance and history to help you gauge future performance.  You will already have in place the people you need to run the business and many of these people might be beneficial in guaranteeing you keep the same customers especially if there are important business relationships already established.

The two ways one can buy a business is to purchasing the stock in the business or to purchase the assets of the business.  The disadvantage of purchasing the stock could is the taking on of additional liabilities, these liabilities could come up at a later date with no ability for retribution from the previous stock holders.  When you buy the assets of a company you can chose which assets to purchase, these could include inventory, accounts receivables, the building, equipment, and furniture and fixtures.  Other intangible assets you could buy include buying the name of the business, buying the contact list of customers, and buying any branding, trademarks, or patents.  Buying the assets would be preferable in that your potential for liability is reduced.

What is typically provided by a franchisor to its franchisees? Why would these be valuable to a nascent entrepreneur? Why is the failure rate lower for franchisees than it is for independent businesses?

Typically a franchisor provides branding, training, marketing, products, supplies, and a proven way of doing business.  Branding is name, logo, product, or service that is specific to a company.  The brand name McDonalds brings to mind a hamburger joint.  The brand name Taco Bell brings to mind a fast food place to eat tacos and other Mexican items.  When one sees the symbol for Taco Bell one knows that they can have a taco, burrito, taco salad, or one of their other specialties.  People associate a brand with a particular product, part of the franchisee’s marketing is done with branding.  The franchisor will provide training for the franchisee.  This would include from design of the building to placement of the equipment to full in-depth training of the crew on the exact methods to produce the end product for the customer.  For a Taco Bell franchises this would include the exact type of building to building including shape and colors to how to set up the interior.  Crew members will learn the proven method to cook each food item as well as how to package and present to the customer.  the franchisor will also provide the exact product and ingredients for their product.  The franchisors will provide the Taco Bell franchisee with the specific foods and ingredients to prepare the Taco Bell menu, this will ensure that all Taco Bell’s have the same food and that the quality will remain consistent throughout the franchisees and company owned stores.  The franchisor also provides a proven method of doing business.  Many Taco Bells are successful and continue to be profitable by following the franchisor’s proven methods.

These would be valuable to a nascent entrepreneur because of the proven way of doing business and the proven profit potential.  Many franchisors may also test out new products or services at their company owned stores then after successful then move the new product or services to the franchisee.  This will eliminate costly mistakes for the franchisee as problems will be delimited before hand.

The failure rate is lower for franchisees than it is for independent businesses since the franchisor had already proven to have a successful model.  Many mistakes have already been made and rectified making a franchisee more profitable.  The franchisor also has a stake in making sure the franchisee is successful since the franchisor will make money off the franchisee in either franchise fees, share of the profits, or both.  Because the franchisor also has an investment in the franchise the franchisor will try to do everything they can to see that the endeavor is profitable.

What is the difference between a franchisee and a company owned store within a franchise chain? Why might one prefer to be the franchisee or the manager of a company owned store?

The difference between a franchisee and a company owned store is that the franchisee pays a franchise fee to the franchisor, keeping the profits or losses  (after any additional commission paid to franchisor if any) with the franchisee while the company owned store does not pay any fees and all of the profits and losses remain solely with the franchisor.  The franchisee is responsible for all personnel and operating decision of its store while the company owned store has the vast knowledge of the franchisor to make these decisions.

One might prefer to be the franchisee over the manager of a company owned store is the possibility of financial profits and the franbshciss’s dreams being realized.  But one might not want to take the risks of having a franchisee and the possibility of a loss and chose to be the manager of a company owned store.

To have a Taco Bell franchisee one needs to pay $1,200,000 to $1,700,00 in franchising fees along with the costs of land, building, and equipment.  The franchising agreement is almost impossible to financing and it has a 20 year term.  After 20 years as a Taco Bell franchisee you have to pay another franchisee fee or lose your Taco Bell designation.  There would probably also be in your contract a clause that did not allow you to open another restaurant or Mexican type restaurant in your location even if you own the land and the building outright.  It is profitable to have a Taco Bell franchisee in many areas as Taco Bell has risen to one of the most profitable companies.  Taco Bell (Yumi Yumi Brand) also offers expensive branding and training programs for one to be successful.

If one did not have the large investment required for a franchisee like Taco Bell and they did not want to risk their investment then being a manager of a company owned store is more appropriate.  The manager of the company owned store is guaranteed a salary and most times they also share in the profits.  Personnel can be provided from corporate and help is readily available for the manager of a company owned store.