2. Discuss the red flags for a small business related to business failure and bankruptcy.
The high failure rate of small business start-ups is a major concern for many entrepreneurs, reason why they should be sensible to red flags in the business and the environment that may be early warning signs of trouble. Before engaging in new ventures entrepreneurs have to make sure that they are choosing a profitable sector, have enough cash reserves, and anticipate the price, the competitors, and the changing behaviors of consumers. Also, it is important that the entrepreneurs pay close attention to following red flags because they can be signs of bankruptcies:
Finances are becoming so lax ...view middle of the document...
S. Small Business Administration, Office of Advocacy (www.sba.gov/advo/research/rs371tot.pdf), and we can clearly see the impact of Federal Regulations in the chart draw below from the total of annual cost by Firm Size.
3. Discuss the precautions the owner and management team will take to ensure the success of the new venture.
In early stages of a new venture entrepreneurs have to be aware of the stress points when the business is growing and start to require new survival strategies, reason why he must develop a management team that have loyalty and commitment to the organization. The team must be able to accomplish three functions: Execute the business plan, identify fundamental changes in the business as they occur, and make adjustment to the plan based on changes in the environment and market that will maintain profitability. Because there are no specifics to ensure success but leader of the organization must create a workplace where employees are motivated and rewarded for good work, and show flexibility in trying new things. Also, entrepreneurs could learn tips from those who have failed and what is usually required for keeping the new venture afloat are:
Avoid excess optimism when the business appears to be successful
Always prepare good marketing plans with clear objective
Make good cash projections and avoid capitalization
Keep abreast of the marketplace
Identify stress points that can put the business in jeopardy
4. Discuss how the investors and lenders will be protected from financial loss in the new venture.
Financial loss is an inevitable part of business, but when it happen and the entrepreneur could bankrupt, so to protect the investors and lenders the entrepreneur have three options usually, extend the time of payment plans, liquidation, or reorganize to keep the venture going.
Chapter 13 bankruptcy is when the entrepreneur create a five year repayment plan under the supervision of the court, for each case, the court appointed trustee receives money from the debtor and then is responsible for making scheduled payment to all creditors. This reform changed since October 17, 2005 is more beneficial for the creditors than the old law, but some have argued that it will stifle entrepreneurial activity. Liquidation, our second option can be done voluntary by the entrepreneur determination to end venture, usually here also the court will require current income and expense statement, or involuntary bankruptcy which is filed by creditors. Involuntary bankruptcy can be very complicated and long to resolve, so liquidation of the company is the best interest for entrepreneur if there is no hope to recover from the situation, unless the entrepreneur and management decide to take things around and reorganize the business.
Because getting back up from failure can be very tough, bankruptcy should be contemplated as the last resort, but it is important for the entrepreneur to be honest with him and know when...