Chapter 2 Financial Management and Planning
CHAPTER OUTLINE
Learning Objectives
Management Functions
Planning
Organizing
Business Organizations and Ownership
Sole Proprietorship
Partnership
Corporation
Conclusion
Review and discussion questions
Exercises and problems
Case Study: Introduction to Entrepreneurship
REVIEW AND DISCUSSION QUESTIONS
1. What is planning? Compare strategic planning with functional planning. Planning is a systematic
process that takes us from some current state to some future desired state. Strategic planning establishes the
2. What role does goal setting play in the planning process? Goal setting is a precursor to establishing a
3. Develop a list of at least 10 products that exist today that did not exist 10 years ago. We recommend
4. What are the five functions of a manager? Planning, organizing, staffing, directing, and controlling.
5. What are the three steps of controlling? Establish a standard of measurement, measure actual
performance against the standard, and take corrective action when actual performance varies from the
established standard.
6. List and briefly explain three forms of business ownership. The sole proprietorship, which is a business
7. What is meant by unlimited liability? The owner of a business is personally liable for any debts of the
8. How does a limited partnership differ from a general partnership? A limited partnership is one in
9. What advantages does a corporation have over a sole proprietorship?
Advantages of the corporation primarily include unlimited access to financial capital (stocks and bonds)
What are the disadvantages of a corporation?
Disadvantages of the corporation include numerous federal and state legal requirements, double taxation,
and owners have little or no control of how the business is run on a daily basis.
10. What distinct advantage does a private or Subchapter S-corporation have over the public
corporation. Flow through of taxes to individual owners and payment of taxes is at the individual rate.
11. What are the pitfalls of franchising? You are not truly your own boss and must comply with the legal
12. List and describe the components of a SWOT analysis. Strengths are areas of expertise that a business
13. List the major components of a business plan. What components are of primarily concerned to you,
and why? Description of the business which include legal form and name, date of formation, location,
product or service, brief history, proposed future operations, financial data and supporting documents. The
answers to these last two questions are individually determined by each student or student team.
14. What is the significance of a business succession plan? The sole proprietor and partner have personal
15. What role does the buy-sell agreement occupy in a business succession plan? It preserves the continuity
16. Discuss the federal government’s contracting programs. The federal government’s contacting programs
are covered in the Federal Acquisition Regulation (FAR). The contracting programs to help small business
EXERCISES AND PROBLEMS
1. Carol Jones wanted her business to increase sales by 50 percent over the next five years. To do this,
she must hire three more people. She wanted to determine how to evaluate these people, so she lists
their job specifications and develops job descriptions. She also listed where these employees would
work and what training they would require. What management functions is Carol performing, and
how do they apply to this scenario?
Carol is performing the management function of planning because she wants to increase sales by 50% over
2. Jerry is a personnel manager for a large retail department store. He just received a memo stating
that the company will build three new stores in Phoenix over the next five years, with one store
opening in 24 months, one opening in 36 months, and one opening in 60 months. The memo that
Jerry received relates to what type of business plan?
The memo that Jerry received relates to the strategic overall plan for his company.
If Jerry is directed to develop a personnel plan for Phoenix, what type of planning will Jerry be
doing?
3. Joe Doe just started a business. He wants the business income to flow directly to his own personal
tax return, but he wants to make sure that he has limited liability. What form(s) of business
ownership would you recommend for Joe? Recommend either a Subchapter S corporation or a Limited
Liability Company.
4. You buy 1,000 shares of ABC Company at $6 per share. The company is sued for millions of dollars,
and ABC Co. is forced into bankruptcy. The newspaper stated that the cost of this suit would
amount to $12 per share of stock. What is the maximum amount of money you can lose with this
investment? Why? You can only lose $6,000 ($6 per share times the 1,000 shares). Since this is your
5. Sam Jones, Mary Adams, and Larry Brown have been talking about starting their own business for
several years. Sam is an electronic repairman, Mary is a partner in a large law firm, and Larry is an
excellent sales person. Sam and Larry will work in the business on an equal basis. It will cost
$100,000 to start this business. Sam has no money, Mary has $60,000 and Larry has $40,000. If they
form a partnership, how would you recommend that they organize? You should recommend a limited
partnership with Mary as the limited partner. Sam and Larry would be general partners and would each be
6. Barry McGuire wants to purchase a dry-cleaning establishment. Barry has heard of the SWOT
analysis and wants to use this methodology to determine whether he should purchase the business.
He found the following information: The dry cleaner is located in a busy shopping center and
currently does all the cleaning on the premises. It has three commercial accounts that comprise 20
percent of its business. The population in the local area is growing by approximately 6 percent per
year. Located across the street in another shopping center is a price-cutting dry cleaner that
advertises heavily in the local area. With the exception of this shopping center and the property
across the street, all property in this area is zoned residential. Most of the residents in this area are
professional people who wear suits to work. The shop has an assumable lease, and the lease has a
fixed rental fee for the next five years. Barry has had five years of experience in the dry-cleaning
business, and would run the shop full time. Based on this information, perform a SWOT analysis.
Strengths include the fact that Barry has five years of experience, dry cleaning business is already
7. Joe Latte wants to open up a coffee and gelato shop. He figures with the popularity of coffee shops
and Italian ice cream shops that a combination business will be a clear winner. Write a two page
paper describing the following elements of a business plan: description of the business, factors
affecting location, and product or service to be offered. This should be graded based on the rigor of the
8. Joe Latte has completed a business plan and determined that it will take $120,000 to open the coffee
and gelato shop. He has $30,000 of his own money and will have to obtain $90,000 in loans or grants.
How should Joe go about getting financing? What is the probability that he can obtain a grant to
start an Italian ice cream shop? Joe’s first step should be to complete a business plan and contact the
SUGGESTED GROUP PROJECT
There are really no instructor solutions for this assignment. There are four recommended group projects and the
instructor should choose which if any of these would be used in the course.
1. Determine a business for the group to start. Do a SWOT analysis on the business and
the team members.
2. Each team member selects two factors that help make up a business plan and explains
3. Using the elements from the business plan outline, construct a business planfor one of
the following companies:
♦ Friendly’s Ice Cream
♦ Texas Utilities (TXU)
♦ Shopko
4. Pick a company from the list above. Using resources from the Internet, trace the
company through the stages of development from the seed stage through maturity.
CASE STUDY QUESTIONS
1. What were the management functions that Art used in his grandfather’s store and at
S.E. Nichols? How were these functions carried out by the business? He did planning,
2. Based on the duties that Art performed in his grandfather’s store and at S.E.
Nichols, should Art be paid minimum wage? If your answer is yes, why? If your
answer is no, why not? No because he was actually performing management functions.
3. Art’s grandfather asks you to advise him on what form of business ownership he should
create. Select a form of ownership for Art’s grandfather and list and explain its
advantages and disadvantages. We would recommend a Limited Liability Company (LLC).