Better Business 5th Edition by Michael R. Solomon – Test Bank

$20.00

Pay And Download
Complete Test Bank With Answers
 
 
Sample Questions Posted Below

 

 

 

 

 

Better Business, 5e (Solomon/Poatsy/Martin)

Chapter 5  Small Business and the Entrepreneur

 

1) A(n) ________ is defined as a business that is independently owned and operated and is not dominant in its field of operations.

  1. A) incubating business
  2. B) small business
  3. C) noncompetitive business
  4. D) minority-owned business
  5. E) entrepreneurship

Answer:  B

Explanation:  According to the Small Business Administration, a small business is one that is independently owned and operated and is not dominant in its field of operations. Some, but not all, small businesses may be part of a business incubator and could be minority owned.

Diff: 1

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

2) Small businesses are important to the economy because they ________.

  1. A) are more dominant than larger companies
  2. B) improve productivity by hiring less-expensive staff in countries outside the United States
  3. C) generate nearly 65 percent of new jobs in the United States
  4. D) create more than two-thirds of the U.S. gross domestic product
  5. E) export more than one-half of total U.S. exported goods and services

Answer:  C

Explanation:  Because there are so many small businesses, they are very important to the economy and the job market. In fact, they generate nearly 65 percent of new jobs and generate almost one-half of the U.S. gross domestic product. If U.S. small businesses made up their own economy, it would be one of the world’s largest. Small businesses export about one-third of total U.S. exported goods and services.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

3) Which of the following past events provides an example of the role that small businesses can play in fostering innovation?

  1. A) Dell Computer’s sale of computers directly to consumers
  2. B) Hewlett-Packard’s sale of computers to small retail establishments
  3. C) Intel’s invention of the Pentium processor
  4. D) Sony’s invention of the PlayStation video game device
  5. E) IBM’s spinning off of Lexmark

Answer:  A

Explanation:  Dell Computer was a fledgling start-up business when it shook up the computer retail industry by selling computers directly to consumers via the Internet, rather than retail stores.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Application

Learning Outcome:  Describe the role of small businesses in the economy

 

4) Which of the following BEST explains why small businesses can be so effective in fostering innovation?

  1. A) SBA’s venture capital program provides funding needed for rapid new product development.
  2. B) Entrepreneurs typically prefer to work in small businesses rather than large ones.
  3. C) Employees of small businesses tend to be more creative than those of large businesses.
  4. D) Small businesses flexibility allows them to react quickly to changing market needs and trends.
  5. E) Small businesses don’t need to adhere to all the regulations that larger companies do.

Answer:  D

Explanation:  Small companies often introduce new products or procedures that many large businesses do not have the flexibility, the time, or the inclination to produce or offer. In fact, small businesses create more patents per employee than do large firms. The flexibility small businesses have allows them to react more quickly than larger companies to changing market trends and needs.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

5) Technology has had a significant impact on small businesses because ________.

  1. A) it creates new business opportunities and new ways to conduct business
  2. B) the failure of so many Web-based businesses in the late 1990s made capital unavailable
  3. C) the information technology market has become oversaturated and unfriendly
  4. D) most small businesses cannot afford the high costs of new technologies to help run their businesses
  5. E) it has made marketing for new businesses more expensive

Answer:  A

Explanation:  Technology creates new business opportunities and new ways to conduct business. For example, small businesses are finding that compared to traditional advertising, social networks, blogs, and mobile devices are more cost effective ways to interact with, market to, and keep abreast of their customers.

Diff: 2

AACSB:  Information Technology

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

6) All of the following are reasons why people start small businesses EXCEPT ________.

  1. A) financial independence
  2. B) reduced levels of responsibility
  3. C) more control of business decisions
  4. D) lack of other employment opportunities
  5. E) idea for product or service not currently available

Answer:  B

Explanation:  People may start a small business because of opportunity, financial independence, control, flexibility, or unemployment. Since a small-business owner is in control of the entire business, he or she would expect to have more responsibility as a business owner than as an employee of someone else’s business.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

 

7) Ever since Kim opened her own nail salon, she has made all the important decisions about how it is run. She recently launched a website to market her services and a new line of organic nail products. Which reason for starting a small business is BEST displayed by Kim’s situation?

  1. A) financial independence
  2. B) flexibility
  3. C) control
  4. D) marketplace need
  5. E) unemployment

Answer:  C

Explanation:  A small business owner has control over his or her own business, including decisions about products and services, and marketing. Since Kim is making decisions about how the salon will operate and be marketed, Kim is demonstrating control over her business.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Application

Learning Outcome:  Describe the role of small businesses in the economy

8) Since Ben opened his own computer repair business, he has had to take a lot of time off to care for his mother who has been seriously ill. In his old job, he would not have been allowed to take so much time off. What advantage of owning a small business is BEST displayed by Ben’s situation?

  1. A) financial independence
  2. B) opportunity
  3. C) self-motivation
  4. D) flexibility
  5. E) innovation

Answer:  D

Explanation:  Small business owners have the flexibility to adjust schedules based on circumstances. Since Ben is his own boss, it is not a problem for him to be with his mother while she is ill.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

 

9) If you are planning to start a new business, how long should you realistically expect it to take for your business to earn a profit?

  1. A) six to twelve months
  2. B) one to two years
  3. C) three to five years
  4. D) five to ten years
  5. E) more than ten years

Answer:  C

Explanation:  Most small businesses do not start out as profitable ventures. Traditionally, it takes three to five years for new businesses to become profitable.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

10) To qualify for Small Business Administration programs and benefits specifically targeted for small businesses, a business must generally have fewer than 20 employees.

Answer:  FALSE

Explanation:  The Small Business Administration offers programs and benefits to small businesses that meet certain standards. For example, a small business generally must have fewer than 500 employees to qualify for government programs and benefits.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

11) Small businesses are important to the economy because they account for nearly 90 percent of America’s gross domestic product.

Answer:  FALSE

Explanation:  Small businesses are vital to the economy because they account for almost half of America’s gross domestic product, but not 90 percent.

Diff: 1

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

 

12) In the United States, small businesses hire a larger proportion of part-time workers than large corporations do.

Answer:  TRUE

Explanation:  Small businesses hire a larger proportion of part-time workers, younger workers, and older workers than large corporations, so they help employ millions who do not fit into a traditional corporate structure.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Concept

Learning Outcome:  Describe the role of small businesses in the economy

 

13) Small businesses are becoming increasingly important to the economy. Describe several specific ways that small business is contributing to the American economy.

Answer:  The text includes several ways that small businesses are important to the economy, including:

1) Small businesses account for nearly half of America’s gross domestic product.

2) Small businesses generate about 65 percent of new jobs.

3) They also help the economy by employing millions of workers who might not fit into the traditional structure of a large corporation: small businesses hire a larger proportion of younger workers, older workers, and part-time workers than large businesses do. In total, small businesses employ approximately 50 percent of the private workforce.

4) Small businesses also provide opportunities for minorities and women to contribute to the economy. According to the SBA Office of Advocacy, more than one-third of all U.S. small businesses are owned by minorities. Women, who own 5.3 million businesses, make up approximately one-third of all small business owners.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.1: Describe the role and structure of small business within the American economy.

Classification:  Application

Learning Outcome:  Describe the role of small businesses in the economy

 

14) A(n) ________ is someone who takes the risk of creating, organizing and operating a business, usually to satisfy a need in the marketplace that is not being adequately met.

  1. A) business owner
  2. B) entrepreneur
  3. C) venture capitalist
  4. D) innovator
  5. E) opportunist

Answer:  B

Explanation:  An entrepreneur is someone who takes the risk of creating, organizing and operating a business, usually to satisfy a need in the marketplace that is not being adequately met. Business owners may not have created the business they own.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

15) James lives near a university and observes that almost every student uses a cell phone. He decides to open a small shop offering repair services for cell phones. His shop is an instant success. James has satisfied an area of need called ________.

  1. A) the marketplace
  2. B) fertile ground
  3. C) an oversaturated demand
  4. D) an opportunity niche
  5. E) a bandwidth need

Answer:  D

Explanation:  What makes a new venture entrepreneurial is that the business is innovative, change-oriented, or that it fills an opportunity niche by satisfying a need in the market that is not being adequately met.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

16) Which of the following is LEAST likely to be a characteristic of successful entrepreneurs?

  1. A) likes to take risks
  2. B) is motivated to succeed
  3. C) prefers not to work around other people
  4. D) prefers not to work for other people
  5. E) is flexible and self-directed

Answer:  C

Explanation:  Successful entrepreneurs are not necessarily solo performers. They typically work well with others, possess good leadership skills, and are systems thinkers who see the big picture of their business.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

17) Which of the following is the BEST example of entrepreneurial innovation?

  1. A) launching the first Starbucks store
  2. B) expanding a landscaping business to serve more clients
  3. C) buying a McDonald’s franchise
  4. D) providing financing for a start-up business
  5. E) opening a second location of a cafe

Answer:  A

Explanation:  Entrepreneurial innovation happens when entrepreneurs see problems to be solved or opportunities that aren’t being addressed in the marketplace. Although Starbucks is a large company now, it was initially a new idea created by entrepreneurs who took the risk that people would pay premium prices for inventive coffee drinks that they could enjoy in a comfortable environment. Someone who expands a landscaping business, buys an existing franchise, or opens a second location of a cafe is an entrepreneur, but is not as innovative because they are offering products and services for which there is an established demand in the marketplace. Providing financing for a start-up is not an example of innovation, although the company that is receiving the financing may be engaged in an entrepreneurial innovation.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

18) Amy is the founder of a small IT firm that specializes in social networking applications. She meets weekly with the members of her development team to solicit their ideas, address any problems they are having, and provide motivation and encouragement. Amy is demonstrating which characteristic of a successful entrepreneur?

  1. A) risk-taking
  2. B) leadership and communication skills
  3. C) innovative
  4. D) self-directed
  5. E) flexible

Answer:  B

Explanation:  Amy demonstrates good leadership and communication skills because she meets regularly with her work associates to discuss issues and provide encouragement.

Diff: 2

AACSB:  Written and Oral Communication

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

19) Which statement BEST describes why a successful entrepreneur needs to be flexible?

  1. A) Starting a new business often leads to envy in the wider business community.
  2. B) People with whom entrepreneurs work are often opinionated and rigid.
  3. C) Entrepreneurial ventures involve risky situations and unexpected events.
  4. D) Initial business revenues tend to be low and may remain low for several years.
  5. E) Many new businesses suffer from a lack of organization.

Answer:  C

Explanation:  Flexibility is essential to the successful entrepreneur because the nature of a new business is that events are unpredictable and the entrepreneur must be able to adapt effectively to quickly changing circumstances and downturns.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

20) Lifestyle entrepreneurs ________.

  1. A) create upscale products and services that appeal to affluent customers
  2. B) want flexibility and freedom in the way they balance their personal and work lives
  3. C) create programs that help people live in a more environmentally responsible manner
  4. D) anticipate and take advantage of upcoming trends in fashion and home design
  5. E) cater to customers with alternative tastes and preferences

Answer:  B

Explanation:  Lifestyle entrepreneurs choose entrepreneurship to satisfy their desire for a personal life that allows for freedom and flexibility. Because their personal lifestyle is their highest priority, lifestyle entrepreneurs may be less motivated by other factors, such as earning a high income or building a large business, than traditional entrepreneurs.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

21) A(n) ________ is a type of entrepreneur who prefers to keep his or her business small.

  1. A) intrapreneur
  2. B) minipreneur
  3. C) nanopreneur
  4. D) micropreneur
  5. E) petitpreneur

Answer:  D

Explanation:  Micropreneurs have no desire to grow a large business or manage large numbers of employees. Their reasons for becoming entrepreneurs are varied, including a desire to preserve a balanced life or to maintain control over the details of the business.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

22) Which of the following types of entrepreneurs does NOT become involved in starting his or her own business?

  1. A) growth entrepreneur
  2. B) intrapreneur
  3. C) Internet entrepreneur
  4. D) home-based entrepreneur
  5. E) micropreneur

Answer:  B

Explanation:  Intrapreneurs work in an entrepreneurial way within established organizations, including developing creative approaches to meet market needs. However, they are paid employees who do not own their own business or assume the financial risks of the typical entrepreneur.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

23) A(n) ________ business is one that has at least 20 percent sales growth per year for five years, starting with a base revenue of at least $100,000.

  1. A) cheetah
  2. B) hyper-growth
  3. C) consistent-growth
  4. D) gazelle
  5. E) enterprise zone

Answer:  D

Explanation:  By definition, a gazelle business is one that has at least 20 percent sales growth per year for five years, starting with a base revenue of at least $100,000.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

24) Maggie wants to start a fine dining restaurant in her town and dreams someday of having a chain of restaurants all over the country. She can be considered a growth entrepreneur because she ________.

  1. A) hopes that her restaurant will attract customers
  2. B) believes that revenues from her restaurant will grow rapidly
  3. C) plans to have her business expand beyond her original restaurant
  4. D) understands that there is an increasingly large market for dining experiences
  5. E) wants to be able to run her business out of her home

Answer:  C

Explanation:  A growth entrepreneur wants to expand his or her business. Maggie wants to open chains all over the country, which would be a large expansion. All entrepreneurs would like to attract customers and grow revenue.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

25) An entrepreneurial team is ________.

  1. A) a group of qualified individuals with varied experiences and skills that come together to form a new venture
  2. B) a strategic alliance among two or more companies who collaborate to launch a new product
  3. C) a group of individuals who come together to discuss their feelings about working for their employer
  4. D) a group of individuals who meet regularly to provide mutual support to group members
  5. E) a group of students who create fictional business ventures to test out their viability

Answer:  A

Explanation:  By definition, an entrepreneurial team is a group of qualified individuals with varied experiences and skills that come together to form a new venture. Within the entrepreneurial team are all the necessary skills and traits to manage a successful project from the idea generation stage to a successful business offering.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

26) Marge designs an innovative and fashionable laptop bag, but feels she lacks experience to turn her creation into a viable business. Marge’s BEST option is to ________.

  1. A) license the idea for selling an innovative bag to someone else
  2. B) recognize that she lacks the business savvy to start a business
  3. C) put together an entrepreneurial team to market the bag
  4. D) overcome her doubts and try to market the bag herself
  5. E) accept that this precludes her from starting her own business

Answer:  C

Explanation:  If an entrepreneur lacks any of the skills needed to make a venture successful, an ideal solution would be to pull together a team that collectively possesses all the skills that are needed to help a new business succeed. In this case, Marge would benefit from others’ expertise while maintaining control of her innovation. If Marge were to license the bag design, she would earn some predictable revenue, but might lose a significant portion of the potential financial benefits of her unique creation.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

27) A system thinker is someone who focuses on the entire process of turning an idea into reality.

Answer:  TRUE

Explanation:  Although entrepreneurs start companies based upon an idea, they must focus on the entire process of turning an idea into reality in order to succeed. Successful entrepreneurs are systems thinkers who are able to see the whole picture and develop solid plans that cover production, financing, marketing and distribution of a product or service.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

28) Because entrepreneurs can hire other people to manage their business for them, they do not need strong leadership skills.

Answer:  FALSE

Explanation:  Although some entrepreneurs may be able initially to work on their own, at some point most entrepreneurs need to hire other people with complementary skills who can help the business succeed. Thus, entrepreneurs need leadership and communication skills to help motivate employees to contribute to the success of the entrepreneurial enterprise.

Diff: 1

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

29) Entrepreneurs may be motivated to succeed in order to take care of their families.

Answer:  TRUE

Explanation:  Entrepreneurs are motivated by many different factors. Some are motivated to provide for themselves and their families, while others may be motivated to succeed by the personal fulfillment they feel when they launch a business.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

30) What are the major traits that successful entrepreneurs have in common? Briefly describe how each of those traits contributes to entrepreneurial success.

Answer:  Students should be able to identify and discuss several of the following traits:

1) They are innovative. Successful entrepreneurs see problems to be solved or opportunities that aren’t being addressed in the marketplace—they recognize opportunity niches.

2) They take risks. Being an entrepreneur involves risk, including the risk of failure, the risk of losing one’s career, and, of course, financial risks. Successful entrepreneurs therefore take calculated risks—that is, they consider the likelihood of success before deciding whether to take a particular risk.

3) They are motivated to succeed. Entrepreneurs are motivated by many different factors. Some entrepreneurs are motivated to provide for themselves or their families. Other entrepreneurs are motivated to succeed by the personal fulfillment they feel upon successfully launching a business.

4) They are flexible and self-directed. Because entrepreneurial ventures are subject to uncertainty and risk, entrepreneurs need to be able to react quickly to new and unexpected situations. An entrepreneur must be able to wear many hats, acting not only as the executive, but also the sales manager, financial director, secretary, and mailroom person.

5) They have people skills and leadership skills. Entrepreneurs may come up with the initial idea behind their business, but entrepreneurs rarely work by themselves. If their business expands, they must hire employees and other managers to help them run it. Leadership and communication skills are therefore important traits of successful entrepreneurs who must motivate others to feel as passionately about the entrepreneurial enterprise as they do.

6) They are “system thinkers.” Entrepreneurs must focus on the entire process of turning their idea into a business in order to succeed. They determine how to resolve a problem or to capitalize on an opportunity by developing a solid plan, including the production, financing, marketing, and distribution of the service or product.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

31) There are a number of different categories of entrepreneurs operating today. Identify and describe the different types of entrepreneurs.

Answer:  Students should be able to identify and discuss several of the following entrepreneurial types:

1) Lifestyle entrepreneurs become entrepreneurs because of the personal benefits to their lives. Some are looking for freedom from corporate bureaucracy or the opportunity to work at home or in a location other than an office. Others want more flexibility in work hours or travel schedules.

2) Micropreneurs start their own business, but are satisfied with keeping the business small. A micropreneur might open a single restaurant and be satisfied with running only that one restaurant, instead of expanding. Micropreneurs have no aspirations of growing large and/or hiring hundreds or thousands of employees.

3) Home-based entrepreneurs run their businesses out of their homes. They are often parents who like being able to stay home with their children and run a business.

4) Internet entrepreneurs. Advances in technology have spawned another type of entrepreneur, the Internet entrepreneur, who creates businesses that operate solely online.

5) Growth entrepreneurs strive to create fast-growing businesses and look forward to expansion. The companies that these types of entrepreneurs create are known as gazelles. Typically, a gazelle business has at least 20 percent sales growth every year for 5 years, starting with a base of at least $100,000.

6) Intrapreneurs are employees of a company who work in an entrepreneurial way within the organizational environment. Although employees are not separately compensated for their ideas, they are pleased that the company asks for their ideas and have responded enthusiastically.

7) Social entrepreneurs set out to create innovative solutions in the social sector; they are entrepreneurs with a social mission. Similarly, social intrapreneurs build and develop ventures within a company that are designed to identify and solve large-scale social problems.

8) Serial entrepreneurs seem to like the process of building and growing a business and doing it over and over again.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

32) What is an entrepreneurial team? Describe the major reasons why an entrepreneurial team might be formed.

Answer:  An entrepreneurial team is a group of qualified individuals with varied experiences and skills that come together to form a new venture. The skills of the entrepreneurial team members complement one another so that, as a group, the team has the necessary skills and traits to manage a successful project. Entrepreneurial teams are also great for those who want to run their own business but perhaps lack the personal experience. For example, many college and business school students form entrepreneurial teams to get their first project launched.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.2: Explain what the traits of an effective entrepreneur are, and differentiate the types of entrepreneurs.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

33) Kyle is an entrepreneur who runs his own advertising agency. He can see the whole picture of what is involved in growing his company, and he has developed a solid plan for every aspect of the business, including production, financing, and marketing. This approach to his business indicates that Kyle is a ________.

  1. A) system thinker
  2. B) risk taker
  3. C) people person
  4. D) producer
  5. E) motivator

Answer:  A

Explanation:  System thinkers focus on everything involved in running a business in order to succeed and use their ability to see the whole picture to create solid business plans.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

34) A franchise is a method of doing business in which ________.

  1. A) an entrepreneur sets up and manages a small business based on an innovative idea or product
  2. B) a company’s products or services are sold to independent third-party operators under the company’s name
  3. C) a company buys ownership of another company and absorbs its employees and customer base into its own structure
  4. D) a business is able to achieve rapid sales growth in the service sector due to taking advantage of many advertising opportunities
  5. E) a small company is bought by a larger one and is absorbed into its existing structure

Answer:  B

Explanation:  By definition, a franchise is a method of doing business in which the franchisor sells a company’s products or services under the franchisor’s name to independent third-party operators called franchisees.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

35) Which of the following statements is TRUE about franchising?

  1. A) Franchisees enjoy guaranteed minimum annual revenues based on their territory.
  2. B) Franchisors encourage franchisees to be independent and creative in running their operations.
  3. C) Franchisees have relatively lower risk than other small business start-ups.
  4. D) Franchisees don’t need to pay royalty fees to their franchisors.
  5. E) All franchises restrict the location and number of their franchise locations.

Answer:  C

Explanation:  A successful franchisor has determined, through trial and error, the best system of daily operations for the established business. New franchisees can therefore avoid many of the common start-up mistakes of new business owners. Because the franchise’s success rests on a proven business model, franchisees are discouraged from making creative changes to operating methods. Franchisors do not guarantee minimum revenues to their franchisees, nor do they necessarily conduct any local market research on their behalf. Franchisees must pay a monthly royalty fee to the franchisor, which is typically 6–10 percent of gross revenues. Some franchises do not restrict the location or number of their franchise locations. In those instances, franchisees could experience serious competition not only from another company but also from other franchisees in the same franchise organization.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

36) Which of the following does a franchise company offer to people who want to start a business?

  1. A) creative control and flexibility
  2. B) lower initial costs than when starting a business from scratch
  3. C) guaranteed freedom from local competition
  4. D) marketing and financial tools to run a business
  5. E) geographic and demographic studies of the best location to open a new store

Answer:  D

Explanation:  Franchisees are usually provided marketing materials generated by the corporation, as well as standardized financial and accounting systems. Franchisees are not offered creative control and flexibility in running their business, nor are there guarantees that they will have no competition from other franchisees. Initial costs are often higher when compared with independent start-ups because franchisors charge significant up-front fees and monthly royalties. Some franchises do not offer geographic or demographic studies of the best location to open a new store and instead may expect the franchisee to have completed a good market analysis and be familiar with the surrounding competition.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

37) Peter has applied for a loan to purchase a franchise of a popular convenience store in an area that is experiencing rapid population growth. If the loan is approved, it will MOST likely be because ________.

  1. A) there is less risk associated with a franchise than with an independent business start-up
  2. B) the franchise company will provide the financing
  3. C) the population growth justifies the market need for the store
  4. D) the franchise company will prevent other franchisees from operating in the same area
  5. E) the franchise company has influence over the bank’s loan decisions

Answer:  A

Explanation:  As a franchisee, it is often easier to get approved for a business loan because lending institutions view franchisees as carrying fewer risks than independent small businesses. A franchise company does not typically provide funding, nor would it necessarily prevent other franchisees from operating in the same area. Population growth would be a less important consideration for the lender, because there may be other similar stores competing with the new business to satisfy any increased demand for convenience store products.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

38) Which of the following is NOT a disadvantage of franchising?

  1. A) lack of control
  2. B) workload
  3. C) competition
  4. D) brand recognition
  5. E) royalty fees

Answer:  D

Explanation:  Lack of control, heavy work load, competition from other franchisees, and royalty fees are all potential disadvantages of franchising. Because franchise owners are able to capitalize on consumers’ familiarity with the franchise company’s name, brand recognition would be an advantage rather than a disadvantage of franchising.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

39) Isaac is a franchise owner of a fast food restaurant. When another franchisee is accused of using artificial meat in its hamburgers, sales at Isaac’s franchise location drop dramatically. What disadvantage of franchising is BEST demonstrated by Isaac’s situation?

  1. A) competition
  2. B) sharing common problems
  3. C) lack of advertising support
  4. D) workload
  5. E) poor initial training

Answer:  B

Explanation:  Because franchises share a company name, any problem that affects one franchise affects other franchisees.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

40) Regardless of how well or poorly a franchise business is doing, franchisees must give the franchisor a monthly ________.

  1. A) personnel report
  2. B) marketing plan
  3. C) royalty fee
  4. D) inventory report
  5. E) training update

Answer:  C

Explanation:  The franchise is obligated to pay a monthly royalty fee to the franchisor, which is due regardless of how the business is doing financially.

Diff: 1

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

41) Since Donna was laid off from her job a few months ago, she has enjoyed having more time to relax, exercise, and be with her family. Now she is wondering whether she should start her own business. Donna should consider purchasing a franchise ONLY if she ________.

  1. A) does not have enough capital to start an independent business
  2. B) is prepared to handle the heavy workload that comes with a franchise
  3. C) wants the protection from competition that the franchisor would guarantee
  4. D) is interested in the products sold by a particular franchise
  5. E) requires complete creative control

Answer:  B

Explanation:  Franchisees spend a lot of time managing a business, as all new business owners must; therefore, a franchisee must be prepared for a heavy workload. If Donna does not have enough funds to start an independent business, she may have even more difficulty funding a franchise, since franchises require typical new business start-up costs as well as a franchise fee. Donna also should not expect that a franchisor would protect her territory from competition by other franchisees. Donna may consider a franchise of a product in which she is interested, but should realize that her personal interest in the product may have little to do with her satisfaction or success in running a business offering that product. In a franchise, there is not much opportunity to contribute creatively to the franchise because the franchisor often controls the look of the store and the product or the service.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

42) Joe is very confident about his purchase of a franchise from a well-known full-service restaurant company. What is one of the things he MOST likely did before he bought the franchise?

  1. A) spent months researching the franchisor’s background and track record
  2. B) developed a menu of innovative dishes that would differentiate his restaurant from competitors
  3. C) came up with a unique plan to streamline the daily operations of the franchise
  4. D) trained staff to help him run the business
  5. E) hired a designer to design the restaurant’s layout and decor

Answer:  A

Explanation:  Joe’s ultimate success depends on choosing the right franchise for his situation and learning everything he can about the business he is purchasing. Therefore, one of the most important things Joe could have done was to thoroughly research the franchise company. Preparing an innovative menu would be unnecessary, since the franchise company would require that Joe offered their standard menu items. Joe also would not need to develop his own plan of operations, since the franchise provides well-established methods of operation that Joe is expected to follow. Finally, Joe would not be in a position to hire or train any staff unless he had already bought the franchise, so it is unlikely that he would train staff prior to purchase.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

43) Which of the following is NOT an advantage of buying an existing business?

  1. A) It is simpler than beginning a new business from scratch.
  2. B) There is a reduction in start-up time and energy.
  3. C) An existing business has less competition.
  4. D) An existing business has an existing customer base.
  5. E) It might be easier to obtain financing to purchase the existing business.

Answer:  C

Explanation:  An existing business does not necessarily have less competition than any other type of business. It may or may not have a product or service that is better than that of its competitors. In either case, it is important to gather information about the competitive environment of any business one is considering buying. Buying an existing business is often simpler than beginning a new business from scratch. An existing business has an existing method of operating, experienced staff and a customer base; therefore, it can take less time and energy for the new ownership to get established. If the business had a positive track record, it may be easier to obtain financing to purchase it.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

44) In determining the value of an existing business, one of the potential sources of value is the current owner’s goodwill. In this case, goodwill refers to ________.

  1. A) the location of the business in a desirable area
  2. B) intangible assets such as customer service
  3. C) donations to local charities
  4. D) the current owners’ membership in professional associations
  5. E) involvement with the community

Answer:  B

Explanation:  By definition, goodwill refers to the intangible assets represented by the business’s name, customer service, employee morale, and other factors that might be lost with a change in ownership.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

45) ________ is the process of performing research and analysis of a business to uncover any hidden problems associated with it.

  1. A) Business assessment
  2. B) Due diligence
  3. C) Risk auditing
  4. D) Valuation
  5. E) Demographic surveying

Answer:  B

Explanation:  Before buying an existing business, make sure you perform due diligence–which is conducting a reasonable investigation into the business’s history, operating and financial records, contracts, and the valuation of the business.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

46) When naming a business, which of the following approaches would NOT be a mistake?

  1. A) hiring a company to create a name
  2. B) using geographic names
  3. C) involving employees or clients in the naming decision
  4. D) using a generic name
  5. E) using a name that tries to marry description with product

Answer:  A

Explanation:  In today’s competitive environment, creating a memorable business name is challenging. A business’s name should communicate the key elements of your business; therefore, using a generic name, such as “General Electric,” would be a mistake. Involving employees or clients in the naming decision is also a mistake, since the resulting name may lack your unique perspective on the business. Using a geographic name is also a mistake, unless you are certain that you will always be located in a particular geographic area. Although it may seem catchy at the time, the result of company names that try to marry description with product is forced and often trite. Given how difficult it is to create a distinctive name for your business, hiring a company to create your business’s name would be a wise move.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

47) Which of the following is ALWAYS TRUE about the purchases of existing businesses?

  1. A) Once under new ownership, existing businesses outperform initial revenue projections.
  2. B) Once under new ownership, any underlying problems are the responsibility of the new owner.
  3. C) Once under new ownership, consumer curiosity about the new ownership will cause a spike in sales.
  4. D) Once under new ownership, remaining staff are suspicious or fearful of the new owner.
  5. E) Once under new ownership, existing customers will be resentful toward the new owner.

Answer:  B

Explanation:  There is no way to predict in advance exactly how a business will perform once it is purchased. Some businesses will do better than expected; others may initially do worse. Any problems that do arise are the responsibility of the new owner; therefore, a careful due diligence process prior to purchase is essential.

Diff: 2

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

48) Which of the following is NOT an advantage of buying an existing businesses?

  1. A) ease of start-up
  2. B) low purchase price
  3. C) financing opportunities
  4. D) existing customer base.
  5. E) existing staff

Answer:  B

Explanation:  If you need to buy the owner out of the business, the initial purchase price may be high. The purchase price may be more than the immediate up-front costs associated with starting a business from scratch and in some cases purchasing a franchise.

Diff: 2

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

49) Franchisees are independent third-party operators who market and sell a company’s products or services under the company’s name.

Answer:  TRUE

Explanation:  Franchises are owned by people who pay a franchising fee and royalties in order to sell the franchise company’s product or services under the company’s name. Franchises are often desirable ways to start up a business because the owner can take advantage of the franchise company’s reputation, training, and established operating system.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

50) An advantage of buying a franchise is that no initial training is necessary.

Answer:  FALSE

Explanation:  An advantage of buying a franchise is that the franchisor often provides initial training in operating the business to ensure that a franchise has a successful opening.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

51) A disadvantage of buying a franchise is that some franchises do not restrict the location or number of their franchises.

Answer:  TRUE

Explanation:  Some franchisors do not restrict the location or number of their franchise locations. In those instances, franchisees could experience serious competition not only from another company, but also from other franchisees within the same franchise organization.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

52) What is a franchise? What are the major advantages and disadvantages of owning a franchise business?

Answer:  A franchise is a method of doing business whereby the business (the franchisor) sells a company’s products or services under the company’s name to independent third-party operators (the franchisees).

 

Advantages:

1) Proven system of operation. Instead of dealing with all the uncertainties of new business ownership by themselves, franchisees benefit from the collective experience of the franchise company.

2) Strength in numbers. Because as a franchisee you belong to a group, you might benefit from economies of scale achieved by purchasing materials, supplies, and services at discounted group rates. It can be easier to get approved for business loans when running a franchise.

3) Training. The franchisor offers initial training to ensure you have a successful opening and might offer ongoing training if new products or services are added to the franchise line.

4) Marketing support. Franchisees are often given marketing materials generated at the corporate level and have the benefit of any national advertising programs that are created.

5) Good franchisors do considerable market research and can generally conclude whether there is demand for the product or service in the area before selling a franchise.

 

Disadvantages:

1) Lack of control. Little opportunity to contribute creatively to the franchise since the franchisor often controls the look of the store and the product or service.

2) Start-up and ongoing costs. In addition to the typical start-up costs, there is also a franchise fee. Also, franchisees must pay a monthly royalty fee to the franchisor, regardless of how the business is doing.

3) Work load. New franchisees should expect to spend a significant amount of their time running the business.

4) Competition. Some franchises do not restrict the location or number of their franchise locations, so franchisees could experience competition from other franchisees in the same franchise organization.

5) Share common problems. If the franchisor or another franchisee is having problems, all franchisees will likely feel its pain. When a Wendy’s restaurant was falsely accused of serving chili with a human thumb mixed in, business in all Wendy’s restaurants plummeted.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

53) The decision to buy an existing business should be carefully thought out. What are the most important pros and cons that should be weighed?

Answer:  Advantages:

1) It is often simpler than beginning one from scratch.

2) There is a reduction in start-up time and energy if you are purchasing a business that is operational and without serious problems. This means that suppliers, existing staff and management, and equipment and inventory are all in place to help facilitate taking over the business.

3) An existing business may have an existing satisfied customer base. If no significant changes are made to drive away current customers, the business can continue to run and provide immediate cash flow.

4) If the business has had a positive track record, it might be easier to obtain financing to purchase the existing business.

 

Disadvantages:

1) Because you may need to buy the owner out of the business, the initial purchase price may be high. This can be more than the immediate up-front costs associated with a start-up, but not necessarily any different from a franchise. While you can easily determine the value of the physical business and its assets, it is more difficult to determine the true value of the previous owner’s goodwill—the intangible assets represented by the business’s name, customer service, employee morale, and other factors—that might be lost with a change in ownership. Often the intangible assets are overvalued, making the business cost more than it is worth.

2) With a pre-existing business, you are sometimes stuck with the previous owner’s mistakes. This means you might inherit dissatisfied customers, bad debt, and unhappy distributors or purchasing agents. You’ll need to work to change the minds of people who have had a bad experience with the previous ownership.

3) There is no guarantee that existing employees, management, customers, suppliers, or distributors will continue to work with the business once new ownership takes over. If staff does stay, you might be inheriting unanticipated problems.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.3: Summarize the advantages and disadvantages of franchising and buying existing businesses.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

54) ________ of all start-ups fail in the first year.

  1. A) Just over three-quarters
  2. B) Approximately two-thirds
  3. C) More than one-half
  4. D) Almost a third
  5. E) Nearly one-fourth

Answer:  E

Explanation:  Starting a business is hard work and comes with no guarantee of success. Nearly one-fourth of all start-ups fail in the first year, and two-thirds survive only two years, with just over one-half surviving after five years of operation.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

55) Fred started his new landscaping business with a commercial loan. He uses his credit card to pay for weekly supplies such as fertilizer and mulch. Business growth has been slow and Fred is having a difficult time keeping up with his monthly loan and credit card payments. He is now considering borrowing against his home to stay current with his initial loan and for other needed expenses. Fred’s business is MOST at risk because ________.

  1. A) Fred has not acquired enough customers
  2. B) Fred’s home may not have enough equity to qualify him for an additional loan
  3. C) Fred is taking on too much debt
  4. D) Fred’s business does not have enough revenue
  5. E) Fred is too lenient on the terms of collection

Answer:  C

Explanation:  While Fred’s business may be at risk for a number of reasons, the most significant risk factor is that he has taken on too much debt relative to his business’s income.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

56) Jodi owns a business that designs and creates lingerie. In an effort to get her product into as many stores as possible, Jodi has been lenient on the terms of collection, allowing stores at least 30 days credit. As a result, it is taking her too long to collect payments and she has inadequate cash flow. What is the MOST likely cause of Jodi’s business difficulties?

  1. A) Jodi is not developing enough goodwill.
  2. B) Jodi is trying to expand her business too rapidly.
  3. C) Jodi is not adequately managing the financial aspects of her business.
  4. D) Jodi is spending too much of her time on product design.
  5. E) Jodi is making her product available at too many locations.

Answer:  C

Explanation:  Jodi’s lenient credit terms are putting her business at risk of failing, which indicates that she is not properly managing the financial aspects of her business.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

57) Many e-commerce businesses failed in the late 1990s because ________.

  1. A) their online stores were a source of identity fraud
  2. B) they were owned by young entrepreneurs
  3. C) there was an economic decline called the “dot-com bust”
  4. D) they did not plan for rapid growth and lacked sufficient inventory to fulfill orders
  5. E) they had too many other online competitors

Answer:  D

Explanation:  Many e-commerce firms were initially successful, but failed because they did not anticipate or plan for rapid growth in the demand for their products. Thus, they did not have sufficient quantities of products to fulfill all the orders they received.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

58) A ________ is a formal document that states the goals of the business as well as the intended process for reaching those goals.

  1. A) strategy
  2. B) business plan
  3. C) prospectus
  4. D) vision statement
  5. E) marketing plan

Answer:  B

Explanation:  By definition, a business plan is a formal document that states the goals of the business as well as the plan for reaching those goals.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

59) Sam is eager to start a local magazine that will include articles about health and fitness and provide a place for local health and fitness professionals to advertise their services. Which of the following does he NOT need to include in his business plan?

  1. A) risk analysis
  2. B) financial plan
  3. C) product plan
  4. D) operational plan
  5. E) marketing plan

Answer:  C

Explanation:  A business plan includes a marketing plan, an operational plan, a financial plan, and a risk analysis, and identifies the competition and highlights opportunities for success.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

60) Which of the following should a business owner create monthly?

  1. A) marketing plans
  2. B) financial statements and budgets
  3. C) mission statement
  4. D) risk analysis
  5. E) operational plans

Answer:  B

Explanation:  Financial statements and budgets need to be created honestly and adhered to each month. Elements of the business plan, such as marketing and operational plans, mission statement, and risk analysis, are not created monthly.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

61) Maria is the owner of Pet Heaven, a new pet day care, grooming, and boarding business. Maria envisions her business expanding to five locations in her state within three years. To help her succeed, which of the following does Maria MOST need?

  1. A) familiarity with state licensing requirements
  2. B) a formal business plan
  3. C) more customers
  4. D) a business partner
  5. E) an MBA

Answer:  B

Explanation:  A formal business plan states the goals of the business as well as the plan for reaching those goals. Neglecting to create a formal plan could doom Maria’s desire to expand.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

62) Rashan has been working as a pharmacist at a large drug store chain. He would like to open his own small pharmacy but is not sure if he could be successful given the predominance of large competitors. What part of his business plan would best address his concern?

  1. A) company information
  2. B) risk analysis
  3. C) marketing plan
  4. D) operational plan
  5. E) mission statement

Answer:  C

Explanation:  The marketing plan section of a business plan would include a competitive analysis, thus helping Rashan answer questions about whether or not he could compete successfully with larger businesses.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

63) Which of the following statements about small business failure is FALSE?

  1. A) Business owners may fail if they do not anticipate necessary personal sacrifices.
  2. B) Business owners may fail if they take excessive time in creating a business plan.
  3. C) Business owners may fail if they are not prepared to invest their money and time.
  4. D) Business owners may fail if they are unable to take on multiple responsibilities.
  5. E) Business owners may fail if they take on too much debt.

Answer:  B

Explanation:  A business plan should be done carefully, spending as much time and allocating as many resources as are necessary to ensure that there is a realistic plan for business success.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

64) The ________ is an independent agency of the federal government that was formed to aid, counsel, assist, and protect the interests of small businesses.

  1. A) Small Business Agency
  2. B) National Business Incubators Association
  3. C) Entrepreneurs Organization
  4. D) Small Business Administration
  5. E) Service Corps of Retired Executives

Answer:  D

Explanation:  In addition to financial assistance, the SBA offers help with the legalities needed to start and operate a business as well as education and training, disaster assistance, and counseling for small business owners. The SBA holds workshops in financial analysis, creating a business plan, and launching a business. It offers free online courses and coordinates links to academic institutions that offer private online training.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

65) Which of the following statements is TRUE?

  1. A) The Small Business Administration provides tax credits for small businesses.
  2. B) The Small Business Administration provides administrative services to small businesses.
  3. C) The Small Business Administration offers free online training to small business owners.
  4. D) The Small Business Administration works to increase regulatory requirements for small businesses.
  5. E) The Small Business Administration is composed entirely of volunteers.

Answer:  C

Explanation:  The SBA offers free online training on topics such as creating a business plan, financial analysis, and launching a business. It does not provide tax credits or administrative services to small businesses, and it works to reduce, not increase, regulatory requirements for small businesses.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

66) Gary Smith, owner of a small business in San Diego, heard that the Small Business Administration will hold a series of workshops in his city. Which of the following topics is MOST likely to be included in the Small Business Administration’s workshops?

  1. A) creating a business plan
  2. B) lobbying
  3. C) filing for unemployment
  4. D) retirement planning
  5. E) mentoring

Answer:  A

Explanation:  Creating a business plan is a common topic covered in SBA workshops. Other topics would likely not be covered in a workshop about small businesses.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

67) The Service Corps of Retired Executives is composed of ________ who can provide advice to small business owners.

  1. A) part-time employees
  2. B) full-time employees
  3. C) freelance executives
  4. D) volunteers
  5. E) interns

Answer:  D

Explanation:  By definition, the Service Corps of Retired Executives is composed of volunteers who can provide advice to small business owners.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

68) Small business owners can seek professional advice at no cost through ________.

  1. A) the Service Corps of Retired Executives
  2. B) Fortune 500 companies
  3. C) the Volunteer Corps of America
  4. D) McKinsey & Company management consulting
  5. E) the Better Business Bureau

Answer:  A

Explanation:  The Service Corps of Retired Executives is made up of volunteers who offer counseling to small businesses at no cost. Neither Fortune 500 companies nor McKinsey & Company are known to offer free counseling services to small business owners.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

69) Timothy is the 60-year-old founder of a publishing company that has over $2 million in annual gross sales. Is he eligible to have a mentor through the Entrepreneurs Organization?

  1. A) Yes, because his company makes more than $1 million annually.
  2. B) Yes, because there are no specific requirements for mentoring.
  3. C) No, because he is over 50 years old.
  4. D) No, because his company can no longer be considered a start-up.
  5. E) No, because his company is not currently a viable operation.

Answer:  C

Explanation:  To qualify for mentoring through the Entrepreneurs Organization, a business must make a minimum of $1 million in annual gross sales and the owner must be younger than 50 years old. Timothy’s business meets the gross sales requirement, but he is ineligible because of his age. Although Timothy’s company may no longer be considered a start-up, the mentoring program sets no requirements based on stage of the business.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

70) ________ support start-up businesses by offering resources such as administrative and technical support and business networking.

  1. A) Advisory boards
  2. B) Virtual assistants
  3. C) Partners
  4. D) Business incubators
  5. E) Entrepreneurs

Answer:  D

Explanation:  Business incubators are designed to provide groups of start-up businesses a place where they can get administrative and technical support and engage in business networking. Neither advisory boards nor partners provide administrative or technical support, though they may provide business networking. Virtual assistants may provide administrative or technical support, but would not provide business networking.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

71) Alex Garcia has an idea for an Internet technology business that involves innovative search engine tools. He was referred to an organization that helps start-up businesses by offering resources such as administrative services, technical support, and business networking. This type of organization is called ________.

  1. A) a business incubator
  2. B) the Service Corps of Retired Executives
  3. C) an angel investor group
  4. D) the Entrepreneurs Organization
  5. E) the Small Business Administrative Assistants

Answer:  A

Explanation:  Business incubators are organizations that provide support for start-up businesses including administrative and technical support and business networking. Neither the Service Corps of Retired Executives, the Entrepreneurs Organization, nor an angel investor would provide the full range of support services offered by a business incubator.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

72) Over the past few decades, many cities, as well as developed and developing countries, have started public ________, often in conjunction with universities and research institutions, to promote new business development.

  1. A) franchises
  2. B) angel investors
  3. C) serial entrepreneurs
  4. D) venture capitalists
  5. E) business incubators

Answer:  E

Explanation:  For example, the National Science Foundation has created Innovation Corps (I-Corps) –a $5 million incubator for student entrepreneurs–and Rensselaer Polytechnic Institute runs one of the oldest incubator programs in the country.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

73) Which of the following is NOT true of business incubators?

  1. A) Some business incubators are started by developing countries.
  2. B) Some business incubators are run by universities.
  3. C) Some business incubators have been started by the Small Business Administration.
  4. D) Some business incubators are private organizations.
  5. E) Some business incubators are created by cities.

Answer:  C

Explanation:  The Small Business Administration provides many services that assist individuals in starting new businesses, but it does not sponsor business incubators. Business incubators are often run by two- and four-year colleges, universities, and technical schools and many are sponsored by economic development organizations, cities, or countries.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

74) An advisory board is composed of a group of ________.

  1. A) experts who make decisions on behalf of the new business owner
  2. B) individuals who offer guidance to the new business owner
  3. C) professionals who provide expertise in return for a share of the new business’s profits
  4. D) individuals who fill in for the management team members when needed
  5. E) interns who assist with administrative duties

Answer:  B

Explanation:  An advisory board provides advice and guidance to a business owner. Such boards are similar to boards of directors in publicly held companies except that they do not have the authority to make decisions. An advisory board member may or may not have a financial interest in the company, nor would an advisory board member be expected to fill in for an employee of the firm. Board members are in a position to offer advice because they are experienced in the world of business; they are not interns helping with clerical duties.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

75) Advisory boards generally do NOT have the authority to ________.

  1. A) offer guidance
  2. B) make decisions
  3. C) provide financial knowledge
  4. D) suggest operational improvements
  5. E) act as mentors

Answer:  B

Explanation:  Advisory boards may offer suggestions and recommendations on any aspect of a business, including operations and finance. Unlike a board of directors, however, an advisory board does not have the authority to make decisions.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

76) A(n) ________ offers the company expertise that a new business owner does not possess in exchange for a share in its profits and liabilities.

  1. A) partner
  2. B) business incubator
  3. C) advisory board
  4. D) stockholder
  5. E) mentor

Answer:  A

Explanation:  A partner offers a company expertise that the owner does not possess and also shares in the company’s profits and liabilities. An advisory board also offers needed expertise, but does not necessarily share in profits or liabilities. Business incubators offer support, but do not take a share in the profits. A stockholder shares in the company’s profits or liabilities, but is not typically asked for guidance or expertise. Mentors offer advice, but not in exchange for profits.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

77) What would be the GREATEST advantage of having a partner as opposed to having an advisory board?

  1. A) A partner would be less likely to disagree with the other owner’s ideas.
  2. B) A partner would be more committed to the success of the business than an advisory board.
  3. C) A partner would be able to make decisions that differed from that of the other owner.
  4. D) A partner would provide more varied perspectives than that of an advisory board.
  5. E) A partner would not be authorized to make decisions.

Answer:  B

Explanation:  Because a partner shares in the company’s profits and liabilities, a partner would likely be more committed to the success of the business than would members of an advisory board. Having a partner who did not disagree with the other owner could be detrimental to the business, since a primary benefit of having a partner is that a partner can offer different perspectives. But it would not be an advantage to have a partner making decisions that are at odds with those of the other partner. It is unlikely that a single partner would offer more varied perspectives than that of a group of advisory board members, and a partner would have power to make decisions.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

78) Which of the following is a potential disadvantage of teaming up with a business partner?

  1. A) A partner is able to offer only financial help, not practical advice.
  2. B) A partner gains full control of the business’s decision-making process.
  3. C) A partner expects a share of the business profits.
  4. D) A partner is not responsible for any of a business’s liabilities.
  5. E) A partner must take over the role of CEO.

Answer:  C

Explanation:  Having a partner is a good idea if the business owner does not possess all the necessary strengths required to run the business. A partner is able to offer financial help and practical advice. In return, a partner shares both profits and liabilities of the business.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

79) What is the most common reason small business owners neglect to seek outside help when starting a business?

  1. A) They assume that no one outside of their family would be interested in helping them.
  2. B) They believe that professional advice is not necessary.
  3. C) They believe that it is exclusively up to the business owner to make a small business succeed.
  4. D) They think that they cannot afford professional advice.
  5. E) They think outsiders would not act in the best interests of their business.

Answer:  D

Explanation:  Many small business owners do not think they can afford to pay for professional advice. So they rely on their own efforts, advice from family and friends, and trial and error.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

80) Only 20 percent of small businesses survive after five years of operation.

Answer:  FALSE

Explanation:  Just over half of all start-ups survive after five years of operation. This indicates that there are significant risks associated with starting a small business.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

81) One of the biggest reasons that small businesses fail is that the owner spent excessive time engaged in formal planning.

Answer:  FALSE

Explanation:  There is no evidence that spending too much time planning is a risk factor for new businesses. One of the biggest reasons businesses fail is that there was no formal plan in place to begin with. Many business owners, in the excitement of starting something new, neglect to take the “boring” but necessary steps of building an effective business plan.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

82) The Small Business Administration acts as an advocate for small business owners to national and state policymakers.

Answer:  TRUE

Explanation:  The Small Business Administration works to reduce regulatory requirements and maximize benefits that small businesses receive from the government.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

83) The Entrepreneurs Organization connects business owners with experts in their industries for individual mentoring.

Answer:  TRUE

Explanation:  The Entrepreneurs Organization facilitates mentoring relationships between small business owners and experts in their respective industries. However, the organization limits membership to those who are currently a founder, co-founder, owner, or controlling shareholder of a business with a minimum of $1 million in annual gross sales, and who are younger than 50 years old.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

 

84) An advisory board is responsible for making and implementing recommendations concerning varied aspects of a small business.

Answer:  FALSE

Explanation:  An advisory board offers valuable guidance regarding the operations of a business, but it generally does not have the authority to make decisions, and therefore would not be responsible for implementing its recommendations.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

85) Only two-thirds of start-up businesses survive the first two years, and just over half survive after five years of operation. What are the most significant reasons that account for such a high rate of start-up business failures?

Answer:  Reasons include:

1) Too Much Debt. Most new business owners begin a new business borrowing funds. Regardless of whether the loan comes from a bank, an outside investor, or a credit card company, if the new business does not generate returns quickly enough to begin to pay back the initial loan, there is temptation to take on more loans to keep the business running. Interest on loans can accumulate, too. Some business owners borrow against their personal assets, putting them at risk of personal bankruptcy.

2) Inadequate Management. Although entrepreneurs and small business owners are good at coming up with ideas, they may not be great at managing the books and their employees. The fact that so many businesses fail due to high levels of debt can be a sign of poor financial and business management. For some businesses, the challenge of managing growth has driven them under when they find that they cannot handle the increase in sales.

3) Poor Planning. One of the biggest reasons businesses fail is that there was no formal plan in place to begin with. The old adage “failing to plan is planning to fail” certainly applies to starting a business. Many budding business owners, in the excitement of starting something new, neglect to take the “boring” but necessary steps of building an effective business plan.

4) Unanticipated Personal Sacrifices. New businesses also may fail when owners do not adequately anticipate the many personal sacrifices—financial and otherwise—that new business owners are forced to make. For example, the cost of health insurance and retirement accounts fall solely on the shoulders of the new business owner. Additionally, the amount of time and effort owners must invest in the business, as well as the necessity to take on multiple responsibilities, makes running your own business not for the faint of heart.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

86) You have a friend who has asked for your advice about how to start a small bookkeeping business for the first time. What professional resources would you recommend to help your friend, and why?

Answer:  Resources that would be appropriate for the prospective small business owner include:

1) The Small Business Administration (SBA), an independent agency of the U.S. government, is an ideal resource for a prospective first-time business owner because it offers assistance in the legalities associated with beginning and operating a business as well as education and training, financial assistance, disaster assistance, and counseling. The SBA offers workshops in financial analysis, creating a business plan, and launching a business. It also offers free online courses and coordinates links to academic institutions that offer private online training.

2) SBA’s Service Corps of Retired Executives (SCORE) provides individual counseling to small businesses at no cost. SCORE volunteers are currently working in or have been in the field and can therefore provide advice to new or existing small business owners. They review business plans, help with tax planning, and offer new ideas and fresh insights.

3) Mentoring Sources. Industry-related conferences or seminars often present new business owners with opportunities to find others who can serve as sounding boards and mentors. Therefore one might recommend that a would-be new business owner make a point of attending a conference in his or her field to find a mentor.

4) An advisory board is a group of individuals who offer guidance to the new business owner. Such boards are similar to boards of directors in publicly held companies except that they generally do not have the authority to make decisions. The friend described in the interview could benefit from advice and recommendations of a group of advisors.

Resources that would NOT be appropriate for this situation include the Entrepreneurs Organization (EO) and business incubators.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

87) What is the purpose of a business plan, and what are the major elements that should be included in an effective business plan?

Answer:  A business plan is a formal document that states the goals of the business as well as the plan for reaching those goals.

 

The major elements of an effective business plan are:

1) Company Information, including a mission statement, history, and qualifications of the owner and management team

2) Operational Plan, including plans for staffing, R&D, manufacturing, and information technology

3) Financial Plan, including current financing, including funding plan, financial history and forecasts, and company valuation

4) Marketing Plan, including competitive analysis, pricing, distribution promotion and brand development

5) Risk Analysis, including risk evaluation and a risk management plan

Diff: 2

AACSB:  Reflective Thinking

LO:  5.4: Discuss the factors that can lead to small business failure and the steps and resources available to diminish the potential of small business failure.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

88) Bootstrap financing includes all of the following EXCEPT ________.

  1. A) using one’s own funds
  2. B) borrowing from family
  3. C) borrowing from friends
  4. D) borrowing from a bank
  5. E) trading services and products with vendors and clients

Answer:  D

Explanation:  When entrepreneurs start a business with little capital, they are said to be using bootstrap financing. This includes financing using your own money, borrowing funds from family and friends, and possibly trading services and products with vendors or clients. These informal funding options may be enough to start the business. Friends and family are generally go-to financing options for new business owners because, unlike banks, family and friends often do not require high rates of return on the money they have invested or demand the business turn a quick profit.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

89) The major advantage of borrowing money from friends or family to start a business is they ________.

  1. A) will be aware of all credit problems that might affect financing
  2. B) will not expect to be repaid
  3. C) will not usually expect a high rate of return on their investment
  4. D) will ensure that you do not overestimate your initial funding needs
  5. E) do not need to be kept informed of any risks of the venture

Answer:  C

Explanation:  Family and friends are often good sources of financing a small business, because unlike banks or other lending institutions, they often do not require a high rate of return or demand to see the business turn a quick profit. Yet family members do expect to be repaid. Since family and friends do not use the same process as a bank would for deciding whether or not to approve a loan, it is less likely that family or friends would be aware of all credit problems affecting business funding or that they would be able to help you accurately estimate your funding needs. However, they should be kept informed of any risks of the venture.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

90) When borrowing money from friends or family members, you should ________.

  1. A) ask for more money than you think you will need so that you have room to negotiate, recognizing that if they give all that you ask for you do not need to accept all of it
  2. B) provide the person from whom you borrowed money a document indicating how and when you intend to pay them back
  3. C) ask the person from whom you borrow money for advice about how to run your business since they obviously know how to make money
  4. D) provide the person from whom you borrow money a monthly financial report and budget and always ask their opinions before making business decisions
  5. E) explain to the person that this is not a professional relationship, and that it is likely they will not be repaid

Answer:  B

Explanation:  When borrowing from friends and family, it is important that you treat them as professionally as possible. Therefore, you should be honest with them about your actual financial needs and not inflate your funding request as a bargaining tool. Most importantly, you should give them a document that indicates how you intend to pay them back and some sort of a contingency plan if things go wrong. In addition, they should be kept informed of any risks of the venture. However, it is not necessary to ask for their advice as a condition of the loan, nor is it necessary to provide them with formal monthly reporting documents.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

91) What is the worst thing that could happen to small business owners who use credit cards as a source of financing?

  1. A) They might have to get a second credit card to pay for additional expenses.
  2. B) They might need to significantly increase their revenues.
  3. C) They might pay fines for using personal cards for business purchases.
  4. D) They might face rapidly growing interest charges and be unable to pay the money back.
  5. E) They might need to ask for an increase in their credit limit.

Answer:  D

Explanation:  Credit cards can be a good source of funds if the business owner can afford to pay off the balance every month. If this is not possible, then applying for an additional credit card is likely to compound the problem, increasing the amount of money that the business owner cannot afford to repay. There is no official entity that would assess a fine for making business purchases on a personal credit card, although such a practice might make business record-keeping more difficult. The worst thing that can happen to a person who uses credit cards as a source of financing is not being able to pay the money back. The interest charged on the unpaid balances can grow quickly because the interest rates on credit cards are extremely high compared to other types of financing

Diff: 2

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

92) People supporting a business on a crowdfunding site like Kickstarter ________.

  1. A) are providing a loan
  2. B) are making a donation
  3. C) are guaranteed that the venture will be successful
  4. D) own a part of the new business
  5. E) get a management stake in the firm

Answer:  B

Explanation:  People who fund projects on crowdfunding sites typically donate small amounts of money and are offered free products from the startups they contribute to–perhaps the chance to purchase a product in a special edition or color or meet with the product’s designer. People supporting a business on a crowdfunding site do not own any part of the new business and are not guaranteed that it will be successful–they are simply making a donation.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

93) Sites like Kickstarter and Indiegogo have popularized a type of start-up financing known as ________, in which entrepreneurs post a detailed explanation of their projects or businesses on the site and ask for financing.

  1. A) small business grants
  2. B) angel investment
  3. C) venture capital
  4. D) bootstrap financing
  5. E) crowdfunding

Answer:  E

Explanation:  People who fund projects on crowdfunding sites typically donate small amounts of money and are offered free products from the startups they contribute to–perhaps the chance to purchase a product in a special edition or color or meet with the product’s designer. People supporting a business on a crowdfunding site do not own any part of the new business and are not guaranteed that it will be successful–they are simply making a donation.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

94) If you’re purchasing an existing business or a franchise, banks may offer lines of credit to help you ________.

  1. A) create a business plan
  2. B) find an angel investor
  3. C) avoid borrowing from a savings and loan association
  4. D) make payroll when business is slow
  5. E) repay loans from family and friends

Answer:  D

Explanation:  Banks offer lines of credit to help business owners keep their businesses running. A common use of lines of credit is to help the new small business owner pay employees when business is slow. Although a business owner may want to create a business plan or find an angel investor, neither represents a significant cost that would require a line of credit. Banks extend lines of credit only when the business owner qualifies, not because they fear that business owners would go to a different lending institution.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

95) Janet planned to purchase a McDonald’s franchise. Meanwhile, Jason decided to open his own sandwich shop. Both decided to finance their new business ventures by applying for bank loans. Janet’s loan application was approved, but Jason’s was denied. Which of the following is the MOST likely explanation for these results?

  1. A) Banks view franchises as having fewer risks than other start-up businesses.
  2. B) Banks can charge higher interest rates when financing franchisees.
  3. C) Banks consider women business owners to present fewer risks than those who are men.
  4. D) Banks prefer to lend to companies that have the potential of a public stock offering.
  5. E) Banks are not allowed to loan to customers starting a business from scratch.

Answer:  A

Explanation:  It is often easier to get approved for business loans when running a franchise, as lending institutions often view that there is less risk associated with owning a franchise. Banks view franchises as having fewer risks because of the assumption that such businesses are unlikely to fail because of their established brand. Banks do not charge higher interest rates to franchises, nor is there any evidence that bank lending practices discriminate against male entrepreneurs. Since McDonald’s is already a publicly traded company, the bank could not make a lending decision based on the potential of a future stock offering.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

96) Small business owners interested in venture capital funding should know that venture capitalists ________.

  1. A) charge interest rates for balances owed and set monthly minimum repayment requirements
  2. B) fund multiple projects but only with a limited amount of money for each
  3. C) provide funding only for capital expenses such as buildings and equipment
  4. D) look for the potential of a public stock offering before investing in a company
  5. E) do not seek a management position or control of the business

Answer:  D

Explanation:  Venture capitalists provide funding with no contractual obligation to pay back the money. Venture capitalists contribute money to a business in return for some form of ownership in the business. To increase the odds of a positive return on their investment, venture capitalists look for businesses with the potential of a public stock offering. The amount of funding they would provide is not arbitrarily limited in amount, nor is it restricted to fund only certain types of business expenses.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

97) If you were a venture capitalist, which of the following start-up businesses would you be most likely to fund?

  1. A) a Domino’s Pizza franchisee
  2. B) a modern art gallery within a shopping center
  3. C) a producer of unique iPhone applications
  4. D) a private accountant’s office
  5. E) a high-end coffee bar

Answer:  C

Explanation:  Venture capitalists are very selective about their investments: They look for the potential of a public stock offering; therefore, a venture capitalist would likely provide financing only to businesses that have the potential to become larger regional or national companies. A company that makes unique iPhone applications is the most likely of the choices to progress to a public stock offering. A pizza franchisee would not be eligible for a public stock option, since the franchisee does not control many aspects of the franchise company’s brand. Neither a modern art gallery nor a private accountant nor a coffee bar represents distinctive businesses that would be likely to appeal to a venture capitalist.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

98) Which of the following start-up businesses would a typical venture capitalist be MOST likely to fund?

  1. A) a Domino’s Pizza franchisee
  2. B) a modern art gallery within a shopping center
  3. C) a producer of unique iPhone applications
  4. D) a private accountant’s office
  5. E) a high-end coffee bar

Answer:  C

Explanation:  Venture capitalists are very selective about their investments: They look for the potential of a public stock offering; therefore, a venture capitalist would likely provide financing only to businesses that have the potential to become larger regional or national companies. A company that makes unique iPhone applications is the most likely of the choices to progress to a public stock offering. A pizza franchisee would not be eligible for a public stock option, since the franchisee does not control many aspects of the franchise company’s brand. Neither a modern art gallery nor a private accountant nor a coffee bar represents distinctive businesses that would be likely to appeal to a venture capitalist.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

99) When a wealthy individual invests his or her own money into a business project or start-up company with little intention to influence decision making, he or she is MOST often called a(n) ________.

  1. A) angel investor
  2. B) venture capitalist
  3. C) financier
  4. D) shadow partner
  5. E) business incubator

Answer:  A

Explanation:  By definition, an angel investor is a wealthy individual who invests personal funds into an early-stage company. They tend to fund more projects with lesser amounts of money than venture capitalists. Angel investors hope for an equity return in the future, but are not partners of the company. A financier is a general term that could apply to anyone who deals in large financial operations or investments.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

100) ________ are private venture capital firms licensed by the Small Business Administration to make equity capital or long-term loans available to small companies.

  1. A) Small Business Investment Companies
  2. B) Business incubators
  3. C) Entrepreneurial lenders
  4. D) Angel investors
  5. E) Crowdfunders

Answer:  A

Explanation:  The Small Business Investment Companies are private venture capital firms licensed by the Small Business Administration to make varied types of funding available to small companies, generally in the range of $250,000 to $5 million. They are the only venture capital firms licensed by the SBA to provide this type of funding. Business incubators, angel investors, private entrepreneurs, and crowdfunding organizations do not have a formal relationship with the Small Business Administration.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

 

101) One of the safest ways to finance your business is to borrow against a personal asset, such as your retirement account.

Answer:  FALSE

Explanation:  When new business owners borrow against their personal assets, such as the equity in their house or against their retirement accounts, they could lose that money if their businesses fail. Safer alternatives would be to establish a line of credit from a bank or get a start-up loan.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

102) Credit cards are not suitable sources of long-term funding for start-up companies.

Answer:  TRUE

Explanation:  Although credit cards are a convenient form of short-term borrowing, interest rates tend to be much higher than those of other types of funding, such as lines of credit. High credit card interest rates could cause a business owner to accumulate too much debt, putting the business at risk of failing. Therefore, credit cards should be used only if a business owner can pay the balance completely every month.

Diff: 1

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

103) Venture capitalists prefer to invest in innovative companies that have just begun operating.

Answer:  FALSE

Explanation:  Venture capitalists generally offer funding only to businesses that have been operating for several years.

Diff: 2

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

 

104) If you needed significant funds to start a new business, what options would you have for borrowing start-up funds? What would be the trade-offs you would consider in deciding how to finance your new business? In an ideal case, which type or types of borrowing would you use to fund your start-up?

Answer:  The text identifies a number of borrowing options, including:

1) Friends and family. Personal contacts are often good sources for financing because, unlike banks or other lending institutions, they often do not require a high rate of return or demand to see the business turn a quick profit. However, borrowing from friends or family could complicate personal relationships if you are unable to repay them as agreed.

2) Credit cards are a convenient way to obtain funds quickly. But the risk associated with using credit cards for initial business financing is the high rate of interest charged on unpaid balances, which could cause a business owner to take on too much debt. They would be a good source of funding smaller sums that can be paid off in full each month and are not good sources of large amounts of money that would have to be paid off over a long period of time.

3) Home equity loan or line of credit or borrowing against any other personal asset such as a retirement fund. Such borrowing could make a large amount of funds available, but the consequences of the business failing are very severe since that money could be lost forever.

4) Business loans and lines of credit. Banks and savings and loan institutions offer start-up loans and lines of credit to help businesses make payroll during slower periods as well as capital loans to buy equipment or machinery. Such loans or credit lines would make larger amounts of money available and at more reasonable interest rates than credit cards, and would not jeopardize personal assets. However, lending institutions do not approve all loan requests.

 

Of these four options, a business loan or line of credit would be the optimal choice. Both offer the most reasonable credit terms, at the least risk to personal resources or relationships.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Application

Learning Outcome:  Explain the entrepreneurship process

 

105) If an individual needs funds to finance a small business and does not want to finance the business using loans, what other sources of funding might be available? Briefly describe each potential source of funding and indicate what kind of business enterprise would be the ideal candidate for each source of funding.

Answer:  The text identifies a number of funding sources that might be available to the small business owner, including:

1) Venture Capitalists. Unlike banks, where there is a contractual agreement to pay back the money, venture capitalists contribute money to your business in return for some form of equity, or a piece of ownership. Venture capitalists are very picky about the projects in which they invest. The type of business in which they would like to invest is one which offers the potential of a public stock offering; therefore, such financing is generally only available to those businesses that have been operating for several years and that have the potential to become larger regional or national companies.

2) Small Business Investment Company (SBIC) program. SBICs are private venture capital firms licensed by the Small Business Administration to make equity capital or long-term loans available to small businesses. The size of the financing provided by SBICs is generally in the $250,000 to $5 million range; therefore, the type of business that would be a good candidate for SBIC funding would be one large enough to require a substantial amount of funding.

3) Angel Investors. Angel investors are wealthy individuals who are willing to put up their own money in hopes of a profit return later on. Angel investors tend to fund more projects with lesser amounts of money than venture capitalists. More companies would qualify for funding by an angel investor than by a venture capitalist since many angel investors are willing to provide funding at the beginning stage of a company’s development.

Diff: 3

AACSB:  Reflective Thinking

LO:  5.5: Compare the potential benefits and drawbacks of each major source of small business financing.

Classification:  Concept

Learning Outcome:  Explain the entrepreneurship process

There are no reviews yet.

Add a review

Be the first to review “Better Business 5th Edition by Michael R. Solomon – Test Bank”

Your email address will not be published. Required fields are marked *

Category:
Updating…
  • No products in the cart.