Essay Example on Small Biz Owner v. Entrepreneur: Who's Who?

Introduction

Running own business does not mean one is an entrepreneur. Key difference between a small business owner and an entrepreneur can be clearly noted by defining the terms themselves. an entrepreneur is "a person who organizes and operates a business or businesses, taking on greater than normal financial risks to do so." A small business owner can be defined as "an individual or entity who owns a business entity in an attempt to profit from the successful operation of the company." Small business owners tend to fill a gap in a community and they know their target market, along with taste and preference. On the other hand, entrepreneurs have big dreams and tend to come up with new ideas that have never been introduced before. Small business owners focus on the likelihood of the future events and their place of occurrence, then make decisions based on the clear outcome. Therefore, Carlos should open the business as a small business owner because he intends to offer affordable quality equipment which are currently difficult to get in the market.

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Capital needed

In order to determine the amount of Carlos should first identify the resources requires with their costs, and estimate benefits that are likely to flow from the business. Determining cost of resources needed will help him Know the amount of capital to seek from financing sources (Harrison, Horngren, & Thomas, 2014). Additionally, estimating future cash flows of the business and appraising its performance will help Carlos ascertain its profitability.

In order to make a decision on Carlos Rodriquez source of external financing, the company will need to carry out research on financing sources in order to select the best source. In choosing the best source, we, therefore, have to discuss the advantages and disadvantages of different sources of finance. We will also have to discuss the cash budgeting which will involve cash receipts and cash payments.

Advantages of short-term financing

It provides easy access to finance when in need as short-term loans can be received within two weeks upon the approval hence can help the firm to meet its cash requirements immediately.

Short-term financing does not consider the amount of credit that the company has. Short term sources do not depend on credit report like long-term financing sources rather they also consider other avenues like the asset value.

Repayment of the short-term loan is flexible due to the range of options available for repayments

The disadvantage of short-term is a high-interest rate associated with the short-term loan. This makes the overall total cost of capital high. Again, repayment period of the principal of the short-term loan is normally short, in 3 months, 6 months or less than 12 months.

Advantages of long-term debt financing

Long-term financing provides a stable source of finance, unlike short-term financing. This stability extends to the interest rate that the firm is supposed to pay every month hence making it easier for earnings and cash flows projections.

Long-term financing gives a firm a better view of the long-term cost of capital and the consider if the project is worth it or not.

Long-term debt financing does not dilute the company control, credit holders lack the right to vote and share company assets. This enables the company to keep higher EPS.

Interest expense on the long-term loan is an allowable deduction for tax purposes.

Disadvantages of long-term debt financing

Duration of loan repayment is usually fixed and any default in repayment may render the company bankrupt.

It has a fixed rate of interest which is charged on the outstanding loan and must be paid whether the company incur losses or make profits.

Long-term debt finance increases a company debt ratio or debt-to-equity ratio. This may result in difficulty in accessing more loans. Higher debt ratio indicates that the company is operating under high financial risk. lenders normally prefer a lower debt ratio. lower debt ratio confirms that the company has higher internal finance that the amount of loan within the specified duration.

Credit holders have not right to influence the company decisions.

Advantages of long-term equity financing

The company will not be obliged to repay any fund on investment, thus enabling an improved cash flow statement.

New investors bring valuable experience to the firm and even managerial or technical skills that were not available in the firm before.

Unlike long-term debt sources, investors are normally willing to add finances as the business develops

New shareholders will help in sharing the risk of owning the company

Equity funding reduces the Debt to equity ratio hence making it easy for banks to approve loans to the firm.

Disadvantages of long-term equity financing

Equity capital is associated with the share of ownership. New investors will have a right to share profit and contribute to the company decision making. New investors will have a right to influence the operations of the business.

Time spent to explain to the investors about the business and makes them reach a decision of investing in the business is more. Therefore, equity financing is also time-consuming and require money.

Issuance of new stock may require the company to comply with certain statutory requirements.

Equity financing sources do not require collateral; the company will retain their fixed assets.

Financial statements needed

While seeking for the financing sources, Carlos will need to prepare several financial statements that will be given to lenders and other investors to allow them assess the expected performance of the business. First of all, Carlos will have to prepare a detailed cash budget which can be monthly or annually for two years; this will help him determine cash surplus or deficit at the end of each month or each year. Cash budget statement also helps to Know the expected movement of cash inflow and cash outflow in the business. The second financial statement needed is the income statements; this helps record the expected revenue and expenses and determine net profit the business is expected to generate within the period forecasted. Income statement also helps to reveal the profitability of the business and it is used by lenders and investors to determine the ability of the company to generate enough profits to set off interest expense and give return on shareholder's investment. The third financial statement that Carlos needs to prepare is the balance sheet statement to show the expected assets and liabilities of the business as well as the Owner's capital (Harrison, Horngren, & Thomas, 2014). Balance sheet shows the financial position of the business and components of its capital structure.

Business Structure

Carlos should choose a business structure that will offer him the advantages that will save him money and help the business grow. There are several types of businesses and their futures help in deciding the most appropriate one. Among the several business structures, Carlos should set up a limited liability company (LLP). The business form is simple to set up and it allows owners, partners, or shareholders to limit their personal liabilities while enjoying the benefits of tax and flexible partnership. Under LLP, Carlos will be protected from personal liabilities of the business. LLP structure protects the owners from personal liabilities while imposing tax on the individuals' earnings from a business. LLC allows for one or more members and profits or losses are not necessarily shared equally. Carlos opting for LLP structure will create space for Julio to join the ownership if interested in the area and allows them to share profit at an agreed ratio.

The role Julio should assume in the business

LLP structure allows Julio to acquire part of the business ownership but management position can still be appropriate if he is not interested in the business ownership. If Julio acquire the ownership of the business, he will have influence on the company's management and decision making process. He will also have access to the boos of the business and can still take the position of a director. If Julio chose not to acquire the company's interest, he can resume the position of general manager, in which case he will be responsible for the efficient operations of the business and ensures that it generates high return.

Specific types of marketing the business should pursue

Marketing strategies allows a business to collaborate with customers. It also creates consumer awareness about the features, specifications, and benefits the business products and services. There are two types of marketing that the business can employee which are: Business to business (B2B) marketing and Business to consumer (B2C) marketing. The most appropriate type that the business can use is the B2C which include the paid advertising through TVs, magazines, daily newspapers, and online platforms; cause marketing, relationship marketing, and undercover marketing.

Employee recruitment

Hiring a manager depends on the size of the business at start and it ability to expand within a short period. If Carlos intends to open the business in a large scale, then it should hire a manager who will oversee the company's operations, this will come along with other employees since it will not be able to carry out all the duties. If the business will operate in a small scale when starting, then Carlos should manage the business by himself and employ a manager only from the expansion stage; this will make him understand it business trend properly and save on avoidable costs during the initial stage of the business. Employees are the key objects to business success, therefore, needs to be valued and feel satisfied at work. Employees can be motivated by recognizing their efforts and awarding them based on their performance. Employee needs should also be considered and set up programs that advances their skills such as learning and development programs.

References

Harrison Jr, W. T., Horngren, C. T., & Thomas, C. W. (2014). Financial accounting. Pearson Education.