ACCOUNTING AND THE SMALL BUSINESS OWNER ‘‘A good accountant is the most important side advisor the small business owner has,’’ according out-to the Entrepreneur Magazine Small Business
Trang 2ENCYCLOPEDIA of Small Business
A-I VOLUME 1
SECOND EDITION
Trang 3ENCYCLOPEDIA of
Small Business
A-I VOLUME 1
SECOND EDITION
Kevin Hillstrom Laurie Collier Hillstrom
Trang 4Kevin Hillstrom and Laurie Collier Hillstrom, Editors
Gale Group Staff
Jane A Malonis, Senior Editor Erin Braun, Managing Editor Paul Lewon, Technical Training Specialist Mary Beth Trimper, Production Director Evi Seoud, Assistant Production Manager Cynthia Baldwin, Product Design Manager EricJohnson, Art Director
While every effort has been made to ensure the reliability of the information presented in this publication, Gale Group does not guarantee the accuracy of the data contained herein Gale accepts no payment for listing; and inclusion in the publication of any organization, agency, institution, publication, service, or individual does not imply endorsement of the editors or publisher Errors brought to the attention of the publisher and verified to the satisfaction of the publisher will be corrected in future editions.
Library of Congress Cataloging-in-Publication Data
Hillstrom, Kevin,
1963-Encyclopedia of small business / Kevin Hillstrom, Laurie Collier Hillstrom —2nd ed.
p cm.
Includes bibliographical references and index.
ISBN 0-7876-4906-6 (set : hardcover : alk paper)—ISBN 0-7876-4907-4 (vol.
1)—ISBN 0-7876-4908-2 (vol.2)
1 Small business—Management—Encyclopedias 2 Small business—
Finance—Encyclopedias I Hillstrom, Laurie Collier, 1965— II Title.
HD62.7 H5553 2001 658.02’2-dc21
2001033781
This publication is a creative work fully protected by all applicable copyright laws, as well as by misappropriation, trade secret, unfair competition, and other applicable laws The authors of this work have added value to the underlying factual material herein through one or more of the following: unique and original selection, coordination, expression, arrangement, and classification of the information.
All rights to this publication will be vigorously defended.
䉷 2002 Gale Group, Inc.
27500 Drake Rd.
Farmington Hills, MI 48331-3535 All rights reserved including the right of reproduction in whole or in part in any form.
Printed in the United States of America
No part of this book may be reproduced in any form without permission in writing from the
publisher, except by a reviewer who wishes to quote brief passages or entries in connection
with a review written for inclusion in a magazine or newspaper.
Gale Group and Design is a trademark used herein under license.
ISBN 0-7876-4906-6 (set), ISBN 0-7876-4907-4 (Vol 1), ISBN 0-7876-4908-2 (Vol 2)
Trang 5Introduction and User’s Guide xiii
VOLUME 1, A—I Absenteeism 1
Accelerated Cost Recovery System (ACRS) 3
Accounting 3
Accounting Methods 7
Accounts Payable 9
Accounts Receivable 10
Activity-Based Costing 11
Advertising Agencies 13
Advertising Budget 16
Advertising, Evaluation of Results 19
Advertising Media—Audio 20
Advertising Media—Infomercials 21
Advertising Media—Internet 22
Advertising Media—Print 23
Advertising Media—Video 25
Advertising Strategy 26
Affirmative Action 29
Age Discrimination 32
Age Discrimination in Employment Act 34
AIDS in the Workplace 36
Alien Employees 38
Alternative Dispute Resolution (ADR) 40
Americans with Disabilities Act (ADA) 42
Amortization 45
‘‘Angel’’ Investors 46
Annual Percentage Rate (APR) 47
Annual Reports 48
Annuities 51
Application Service Providers 54
Apprenticeship Programs 54
Articles of Incorporation 55
Assembly Line Methods 56
Assets 57
Assumptions 59
Audits, External 60
Audits, Internal 64
Automated Guided Vehicle (AGV) 68
Automated Storage and Retrieval Systems (AS/RS) 69
Automation 70
Automobile Leasing 72
Baby Bonds 75
Balance Sheet 76
Bankruptcy 77
Banks and Banking 80
Banner Advertisements 82
Bar Coding 84
Barriers to Market Entry 85
Bartering 86
Benchmarking 89
Best Practices 90
Better Business Bureaus (BBBs) 91
Biometrics 92
Blue Chip 94
CONTENTS
Trang 6Bonds 95
Bookkeeping 96
Boundaryless 97
Brainstorming 98
Brand Equity 99
Brands and Brand Names 101
Break-Even Analysis 103
Budget Deficit 105
Budget Surplus 106
Budgets and Budgeting 106
Business Appraisers 113
Business Associations 114
Business Brokers 115
Business Cycles 117
Business Education 120
Business Ethics 121
Business Expansion 123
Business Failure and Dissolution 127
Business Hours 129
Business Incubators 130
Business Information Sources 133
Business Insurance 135
Business Interruption Insurance 139
Business Literature 140
Business Name 141
Business Plan 142
Business Planning 146
Business Proposals 151
Business Travel 152
Business-to-Business Marketing 154
Buying an Existing Business 157
C Corporation 163
Cannibalization 166
Capital 167
Capital Gain/Loss 169
Capital Structure 170
Career and Family 171
Career Planning and Changing 174
Cash Conversion Cycle 176
Cash Flow Statement 177
Cash Management 180
Casual Business Attire 182
Census Data 184
Certified Lenders 185
Certified Public Accountants 185
Chambers of Commerce 187
Charitable Giving 188
Child Care 190
Children’s Online Privacy Protection Act (COPPA) 193
Choosing a Small Business 195
Clean Air Act 197
Clean Water Act 199
Closely Held Corporations 200
Clusters 201
Collateral 203
Collegiate Entrepreneurial Organizations 204
Communication Systems 204
Community Development Corporations 208
Community Relations 209
Comp Time 210
Competitive Analysis 211
Competitive Bids 214
Comprehensive Environmental Response Cleanup and Liability Act (CERCLA) 216
Computer Applications 218
Computer Crimes 221
Computer-Aided Design (CAD) and Computer-Aided Manufacturing (CAM) 224
Computers and Computer Systems 226
Consolidated Omnibus Budget Reconciliation Act (COBRA) 229
Construction 232
Constructive Discharge 233
Consultants 235
Consulting 237
Consumer Advocacy 241
Consumer Price Index (CPI) 241
Consumer Product Safety Commission (CPSC) 242
Contracts 244
Cooperative Advertising 246
Cooperatives 247
Copyright 249
Corporate Culture 254
Corporate Image 255
Corporate Logo 257
Corporate Sponsorship 259
Cost Control and Reduction 261
Cost Sharing 263
Cost-Benefit Analysis 264
Costs 265
Coupons 268
Credit 269
Credit Bureaus 273
Credit Card Financing 275
Trang 7Credit Evaluation and Approval 276
Credit History 278
Crisis Management 279
Cross-Cultural/International Communication 282
Cross-Functional Teams 285
Cross-Training 289
Customer Retention 291
Customer Service 292
Data Encryption 295
Database Administration 296
Day Trading 300
Debt Collection 302
Debt Financing 304
Decision Making 307
Decision Support Systems 310
Delegation 312
Delivery Services 315
Demographics 316
Depreciation 318
Desktop Publishing 319
Difficult Customers 320
Difficult Employees 322
Direct Mail 324
Direct Marketing 327
Direct Public Offerings 331
Disability Insurance 334
Disabled Customers 336
Disaster Assistance Loans 337
Disaster Planning 338
Discount Sales 341
Discounted Cash Flow 344
Discretionary Income 345
Distribution Channels 346
Distributorships and Dealerships 349
Diversification 352
Dividends 353
Dot-coms 354
Double Taxation 356
Downloading Issues 357
Drug Testing 359
Due Diligence 361
Economic Order Quantity (EOQ) 363
Economies of Scale 364
Economies of Scope 365
8(a) Program 366
Elasticity 369
Eldercare 369
Electronic Bulletin Boards 371
Electronic Data Interchange 372
Electronic Mail 374
Electronic Tax Filing 376
Emerging Markets 377
Employee Assistance Programs 378
Employee Benefits 382
Employee Compensation 386
Employee Hiring 388
Employee Leasing Programs 391
Employee Manuals 394
Employee Motivation 395
Employee Performance Appraisals 398
Employee Privacy 401
Employee References 403
Employee Registration Procedures 405
Employee Reinstatement 406
Employee Retention 406
Employee Retirement Income Security Act (ERISA) 408
Employee Reward and Recognition Systems 409
Employee Rights 412
Employee Screening Programs 413
Employee Stock Ownership Plans (ESOPs) 415
Employee Strikes 417
Employee Suggestion Systems 419
Employee Termination 421
Employee Theft 424
Employer Identification Number (EIN) 426
Employment Applications 427
Employment Contracts 428
Employment Interviews 430
Employment of Minors 432
Employment Practices Liability Insurance 435
Empowerment Zones 436
Endorsements and Testimonials 438
Enterprise Resource Planning (ERP) 440
Entrepreneurial Couples 443
Entrepreneurship 445
Environmental Audit 449
Environmental Law and Business 452
Environmental Protection Agency (EPA) 455
Equal Employment Opportunity Commission 456
Equipment Leasing 457
Trang 8Equity Financing 459
Ergonomics 462
Estate Tax 463
European Union (EU) 464
Expense Accounts 467
Export-Import Bank 468
Exporting 469
Exporting—Financing and Pricing 473
Facility Layout and Design 477
Facility Management 479
Factoring 482
Family Limited Partnership 484
Family and Medical Leave Act 486
Family-Owned Businesses 488
Feasibility Study 491
Federal Trade Commission (FTC) 492
FICA Taxes 495
Fiduciary Duty 496
Finance Companies 497
Finance and Financial Management 498
Financial Analysis 498
Financial Planners 501
Financial Ratios 502
Financial Statements 505
Firewalls 509
Fiscal Year 511
Fixed and Variable Expenses 512
Flexible Benefit Plans 513
Flexible Spending Account (FSA) 514
Flexible Work Arrangements 516
Flow Charts 519
Focus Groups 520
Forecasting 523
Fortune 500 525
401(k) Plans 526
Franchising 529
Free-lance Employment/Independent Contractors 533
Gender Discrimination 537
Globalization 540
Goodwill 542
Government Procurement 543
Graphical User Interface 546
Green Marketing 547
Green Production 550
Grievance Procedures 551
Groupthink 553
Groupware 554
Health Insurance Options 557
Health Maintenance Organizations and Preferred Provider Organizations 560
Health Promotion Programs 562
High-Tech Business 563
Home Offices 565
Home-Based Business 568
Hoteling 571
HTM L 572 HUBZone Empowerment Contracting Program 574 Human Resource Management 575 Human Resource Management and the Law 579 Human Resource Policies 580 Income Statements 583
Incorporation 585
Individual Retirement Accounts (IRAs) 589
Industrial Safety 591
Industry Analysis 593
Industry Life Cycle 595
Information Brokers 597
Initial Public Offerings 598
Innovation 602
Insurance Pooling 603
Intellectual Property 604
Intercultural Communication 605
Interest Rates 607
Internal Revenue Service (IRS) 609
International Exchange Rate 610
International Marketing 611
Internet Domain Names 614
Internet Payment Systems 615
Internet Security 618
Internet Service Providers (ISPs) 621
Internships 624
Interpersonal Communication 626
Intranet 627
Intrapreneurship 630
Inventions and Patents 632
Inventory 635
Inventory Control Systems 639
Investor Presentations 641
Investor Relations and Reporting 643
IRS Audits 644
ISO 9000 645
Trang 9VOLUME 2, J—Z
Job Description 649
Job Sharing 651
Job Shop 653
Joint Ventures 654
Keogh Plan 657
Labor Surplus Area 659
Labor Unions 660
Labor Unions and Small Business 664
Layoffs and Downsizing 667
Learning Curves 669
Leasing Property 670
Legal Services 674
Letter of Intent 676
Leveraged Buyouts 678
Liabilities 680
Licensing 681
Licensing Agreements 684
Life Insurance 685
Limited Liability Company 687
Liquidation and Liquidation Values 689
Loan Proposals 691
Loans 692
Local Area Networks (LANs) 694
Loss Leader Pricing 697
Mailing Lists 699
Mail-Order Business 702
Management Information Systems (MIS) 706
Management by Objectives 707
Manager Recruitment 709
Managing Organizational Change 710
Manufacturers’ Agents 712
Market Analysis 714
Market Questionnaires 715
Market Research 716
Market Segmentation 719
Market Share 722
Marketing 723
Markup 727
Material Requirements Planning (MRP) 728
Medicare and Medicaid 730
Meetings 731
Mentoring 735
Merchandise Displays 736
Mergers and Acquisitions 738
Metropolitan Statistical Area (MSA) 742
Mezzanine Financing 743
Minimum Wage 745
Minority Business Development Agency 747
Minority-Owned Businesses 748
Mission Statement 751
Mobile Office 752
Modem 753
Money Market Instruments 755
Multicultural Work Force 756
Multilevel Marketing 760
Multiple Employer Trust 761
Multitasking 762
Myers-Briggs Type Indicator (MBTI) 763
Mystery Shopping 764
National Association of Small Business Investment Companies (NASBIC) 767
National Association of Women Business Owners 768
National Business Incubation Association (NBIA) 769
National Labor Relations Board (NLRB) 770
National Venture Capital Association (NVCA) 771
Negotiation 772
Nepotism 774
Net Income 775
Net Worth 776
Networking 776
New Economy 778
Newsgroups 779
Non-Competition Agreements 781
Nonprofit Organizations 782
Nonprofit Organizations, and Human Resources Management 787
Nonprofit Organizations, and Taxes 790
Nonqualified Deferred Compensation Plans 793
Nontraditional Financing Sources 796
Nonverbal Communication 797
North American Free Trade Agreement (NAFTA) 797
North American Industry Classification System (NAICS) 800
Occupational Safety and Health Administration (OSHA) 805
Office Automation 809
Office Romance 812
Office Security 815
Office Supplies 818
Online Auctions 819
Trang 10Operations Management 821
Opportunity Cost 824
Optimal Firm Size 825
Oral Communication 825
Organization Chart 827
Organization Theory 828
Organizational Behavior 832
Organizational Development 833
Organizational Growth 836
Organizational Life Cycle 837
Organizational Structure 839
Original Equipment Manufacturer (OEM) 840
Outsourcing 841
Overhead Expense 844
Overtime 845
Packaging 847
Partnership 850
Partnership Agreement 854
Part-Time Business 855
Part-Time Employees 857
Patent and Trademark Office (PTO) 859
Payroll Taxes 861
Penetration Pricing 863
Pension Plans 864
Per Diem Allowances 866
Personal Selling 867
Physical Distribution 869
Point of Sale Systems 872
Portability of Benefits 873
Postal Costs 874
Pregnancy in the Workplace 875
Present Value 878
Press Kits 879
Press Releases 879
Price/Earnings (P/E) Ratio 881
Pricing 882
Private Labeling 886
Private Placement of Securities 888
Privatization 890
Pro Forma Statements 893
Probationary Employment Periods 896
Product Costing 897
Product Development 899
Product Liability 902
Product Life Cycle 904
Product Positioning 906
Productivity 908
Professional Corporations 911
Profit Center 913
Profit Impact of Market Strategies (PIMS) 916
Profit Margin 917
Profit Sharing 918
Program Evaluation and Review Technique (PERT) 920
Promissory Notes 921
Proprietary Information 922
Prototype 923
Proxy Statements 925
Public Relations 925
Purchasing 929
Quality Circles 933
Quality Control 935
Racial Discrimination 941
Rebates 944
Reciprocal Marketing 946
Record Retention 946
Recruiting 948
Recycling 950
Reengineering 953
Refinancing 955
Regulation D 956
Regulatory Flexibility Act 957
Relocation 959
Remanufacturing 961
Renovation 963
Request for Proposal 965
Research and Development 966
Re´sume´s 971
Retail Trade 972
Retirement Planning 973
Return on Assets (ROA) 977
Return on Investment (ROI) 978
Return Policies 979
Revenue Streams 980
Right-to-Know (RTK) Laws 981
Risk Management 984
Risk and Return 986
Robotics 987
Royalties 989
Royalty Financing 993
Rural Businesses 994
S Corporation 997
Sales Commissions 999
Sales Contracts 1002
Sales Force 1003
Sales Forecasts 1004
Trang 11Sales Management 1009
Sales Promotion 1013
Scalability 1018
Search Engines 1018
Seasonal Businesses 1020
SEC Disclosure Laws and Regulations 1024
Securities and Exchange Commission (SEC) 1025
Seed Money 1027
Self-Assessment 1028
Self-Employment 1029
Self-Employment Contributions Act (SECA) 1031
Selling a Business 1032
Seniority 1036
Service Businesses 1037
Service Corps of Retired Executives (SCORE) 1039
Sexual Harassment 1040
Shared Services 1044
Shoplifting 1045
Sick Leave and Personal Days 1046
Simplified Employee Pension (SEP) Plans 1048
Site Selection 1049
Small Business Administration 1052
Small Business Consortia 1056
Small Business Development Centers (SBDC) 1057
Small Business Innovation Research (SBIR) Program 1057
Small Business Investment Companies (SBIC) 1058
Small Business Job Protection Act 1060
Small Business/Large Business Relationships 1061
Small Business Technology Transfer (STTR) Program 1064
Small Business-Dominated Industries 1065
Small Claims Court 1066
Smoke Free Environment 1068
Sole Proprietorship 1070
Spam 1072
Span of Control 1074
Standard Mileage Rate 1075
Stocks 1076
Strategy 1081
Subcontracting 1083
Substance Abuse 1085
Succession Plans 1088
Supplier Relations 1089
Supply and Demand 1092
Sustainable Growth 1093
Syndicated Loans 1095
Target Markets 1099
Tariffs 1100
Tax Deductible Business Expenses 1101
Tax Planning 1104
Tax Preparation Software 1107
Tax Returns 1109
Tax Withholding 1110
Telecommuting 1111
Telemarketing 1113
Temporary Employment Services 1117
Testing Laboratories 1118
Toll-Free Telephone Numbers 1121
Total Preventive Maintenance 1122
Total Quality Management (TQM) 1122
Trade Shows 1125
Trademarks 1128
Training and Development 1130
Transaction Processing 1135
Transportation 1136
Transportation of Exports 1137
Tuition Assistance Programs 1139
Undercapitalization 1143
Underwriters Laboratories (UL) 1144
Uniform Commercial Code (UCC) 1145
U.S Chamber of Commerce 1146
U.S Department of Commerce 1147
U.S Small Business Administration Guaranteed Loans 1148
Valuation 1153
Value-Added Tax 1155
Variable Pay 1156
Variance 1158
Venture Capital 1159
Venture Capital Networks 1162
Vertical Marketing System 1163
Virtual Private Networks 1164
Virus 1166
Warranties 1169
Web Site Design 1171
Wholesaling 1173
Wide Area Networks (WANs) 1175
Women Entrepreneurs 1175
Work for Hire 1177
Trang 12Workers’ Compensation 1178
Workplace Anger 1179
Workplace Safety 1183
Workplace Violence 1185
Workstation 1188
Written Communication 1189
Young Entrepreneurs’ Organization (YEO) 1191
Zoning Ordinances 1193
MASTER INDEX 1195
Trang 13Welcome to the second, revised edition of the
Encyclopedia of Small Business (EOSB-2) Like the
first edition, this encyclopedia is published in
recogni-tion of a growing trend toward entrepreneurship and
small business development in North America
Count-less studies indicate that small business enterprises
continue to be a vital component of economic growth,
and both academic research and anecdotal evidence
suggest that entrepreneurial ventures have increased in
size, number, and importance in recent years
EOSB-2 serves as a one-stop source for valuable
and in-depth information on a wide range of topics of
interest to small business owners, including:
● Americans with Disabilities Act
ness world In addition, EOSB-2 features 120 new
essays on a variety of topics suggested by our guished panel of advisors These entries expand the
distin-Encyclopedia’s coverage of electronic commerce,
In-ternet security, and other issues that have arisen tochallenge small business owners, such as:
● Biometrics
● Casual Business Attire
● Children’s Online Privacy Protection Act
● Data Encryption
● Enterprise Resource Planning
● Flexible Spending Accounts
● Licensing
● Online Auctions
● Portability of Benefits
● Smoke-Free Environments
As in the first edition, special emphasis is given
to how these issues—many of which affect businesses
of all sizes and in all industries—impact small nesses, from new entrepreneurial ventures to well-established family businesses to rapidly growing en-terprises poised for expansion into new markets andemerging industries
busi-Finally, EOSB-2 is written so that it is accessible
and relevant to entrepreneurs and small business
own-ers from a variety of backgrounds Whether the
Ency-clopedia’s user is a budding entrepreneur looking for
INTRODUCTION AND USER’S GUIDE
Trang 14sources of venture capital, an established business
owner interested in pursuing Internet commerce, a
veteran free-lancer hoping to expand her client base,
or a retiring business owner looking to pass his
busi-ness on to the next generation, EOSB-2 contains a
great deal of information to help guide their efforts
USER’S GUIDE
EOSB-2 has been designed for ease of use The
600 essays are arranged alphabetically by topic in two
volumes, with Volume 1 covering essays beginning
with A–I and Volume 2 containing essays J–Z
Spe-cial features that can be found within individual
es-says include the following:
● See Also references appear at the end of
many entries and direct the reader to related
topics listed within EOSB-2.
● Further Reading sections are included at
the end of most entries These bibliographic
citations point the reader toward additional
sources of information on the topic
The second, revised edition of the Encyclopedia
of Small Business also includes a Master Index, which
can be found at the back of Volume 2 This index
contains alphabetical references to the following, as
mentioned in EOSB-2 essays: important terms in
ac-counting, finance, human resources, marketing,
oper-ations management, organizational development, and
other areas of interest to small business owners;
names of institutions, organizations, associations,
government agencies, and relevant legislation; and
‘‘see also’’ references Each index term is followed by
volume and page numbers, which easily direct the
user to main topics as well as to all secondary ence terms as mentioned above
refer-ADVISORY BOARD
The editors would like to thank the followingindividuals for their advice and suggestions in gener-
ating the topiclist for EOSB-2: Galen Avery,
Librar-ian, Spengler Nathanson PLL, Toledo, Ohio; ArthurCheroske, Business Librarian, San Francisco PublicLibrary; Linda Fritschel, Business Librarian, Minne-apolis PublicLibrary; Dr Marilyn M Helms, Profes-sor and Sesquicentennial Endowed Chair, Division ofBusiness and Technology, Dalton State College,Dalton, Georgia; and Dietmar U Wagner, BusinessLibrarian, Ann Arbor PublicLibrary
CONTRIBUTING WRITERS
The editors would like to express their sincereappreciation to contributing writers Dr Marilyn M.Helms, Amy Lucas, Matthew M Totsky, and KarenTroshynski-Thomas
COMMENTS AND SUGGESTIONS
We welcome any questions, comments, or
sug-gestions regarding the Encyclopedia of Small
Busi-ness Please contact:
Editor
Encyclopedia of Small Business
The Gale Group
27500 Drake RoadFarmington Hills, MI 48331-3535
Toll-free Phone: 800-347-GALE
Trang 15Absenteeism is the term generally used to refer to
unscheduled employee absences from the workplace
Many causes of absenteeism are legitimate—personal
illness or family issues, for example—but
absentee-ism also can often be traced to other factors such as a
poor work environment or workers who are not
com-mitted to their jobs If such absences become
exces-sive, they can have a seriously adverse impact on a
business’s operations and, ultimately, its profitability
COSTS OF ABSENTEEISM
‘‘Unscheduled absences hurt,’’ wrote M
Mi-chael Markowich in a summary of an article he wrote
for the September 1993 issue of Small Business
Re-ports ‘‘Most sick leave policies foster a ‘use it or lose
it’mind-set, and employees feel entitled to a certain
number of sick days.’’ Markowich went on to note
that a survey of 5,000 companies conducted by
Com-merce Clearing House Inc (CCH Inc.) found that
un-scheduled absences cost small businesses, at that time,
$62,636 a year, on average, in lost productivity, sick
time, and replacement costs
Indeed, absenteeism can take a financial toll on a
small business (or a multinational company, for that
matter) in several different respects The most obvious
cost is in the area of sick leave benefits—provided
that the business offers such benefits—but there are
significant hidden costs as well The SOHO
Guide-book cites the following as notable hidden cost factors
associated with absenteeism:
● Lost productivity of the absent employee
● Overtime for other employees to fill in
● Decreased overall productivity of those ployees
em-● Any temporary help costs incurred
● Possible loss of business or dissatisfied tomers
cus-● Problems with employee morale
Indeed, Attacking Absenteeism author Lynn
Tylczak contended that excessive absenteeism, if leftunchecked, can wear on a company in numerousways ‘‘[Absenteeism] forces managers to deal withproblems of morale, discipline, job dissatisfaction, jobstress, team spirit, productivity, turnover, productionquality, additional administration, and overhead Tosummarize: You don’t have an absentee problem Youhave a profit problem.’’
DEVELOPING AN ABSENCE POLICY
Many small business owners do not establishabsenteeism policies for their companies Some own-ers have only a few employees, and do not feel that it
is worth the trouble Others operate businesses inwhich ‘‘sick pay’’ is not provided to employees
Workers in such firms thus have a significant tive to show up for work; if they do not, their pay-check suffers And others simply feel that absenteeism
incen-is not a significant problem, so they see no need toinstitute new policies or make any changes to the fewexisting rules that might already be in place
But many small business consultants counsel trepreneurs and business owners to consider establish-ing formal written policies that mesh with state andfederal laws Written policies can give employers
en-A
Trang 16added legal protection from employees who have
been fired or disciplined for excessive absenteeism,
provided that those policies explicitly state the
allow-able number of absences, the consequences of
exces-sive absenteeism, and other relevant aspects of the
policy Moreover, noted The SOHO Guidebook, ‘‘a
formal, detailed policy that addresses absences,
tardi-ness, failure to call in, and leaving early can serve to
prevent misconceptions about acceptable behavior,
inconsistent discipline, complaints of favoritism,
mo-rale problems, and charges of illegal discrimination
General statements that excessive absenteeism will be
a cause for discipline may be insufficient and may
lead to problems.’’
Other steps that have been touted as effective inreducing absenteeism concern making changes in
company culture and policy CCH Incorporated, for
instance, has noted that workplace flexibility can
dra-matically cut incidents of unscheduled absenteeism
Many small businesses that have introduced flextime,
compressed work weeks, job sharing, and
tele-commuting options to their workforce have seen
ab-senteeism fall significantly, for these policies provide
employees with much greater leeway to strike a
bal-ance between office and home that works for them
(and the employer)
ABSENTEEISM POLICIES
Most employees are conscientious workers withgood attendance records (or even if they are forced to
miss significant amounts of work, the reasons are
legitimate) But as Markowich noted, ‘‘every
com-pany has a small number of abusers—about 3 percent
of the workforce—who exploit the system by taking
more than their allotted sick time or more days than
they actually need And when they begin calling in
sick on too many Monday or Friday mornings, who
picks up the slack and handles the extra work? More
important, who responds to customer requests?’’
To address absenteeism, then, many small nesses that employ workers have established one of
busi-two absenteeism policies The first of these is a
tradi-tional absenteeism policy that distinguishes between
excused and unexcused absences Under such
poli-cies, employees are provided with a set number of
sick days (also sometimes called ‘‘personal’’ days in
recognition that employees occasionally need to take
time off to attend to personal/family matters) and a set
number of vacation days Workers who are absent
from work after exhausting their sick days are
re-quired to use vacation days under this system
Ab-sences that take place after both sick and vacation
days have been exhausted are subject to disciplinary
action The second policy alternative, commonly
known as a ‘‘no-fault’’ system, permits each
em-ployee a specified number of absences (either days or
‘‘occurrences,’’ in which multiple days of continuousabsence are counted as a single occurrence) annuallyand does not consider the reason for the employee’sabsence As with traditional absence policies, once theemployee’s days have been used up, he or she issubject to disciplinary action
‘‘USE IT OR LOSE IT’’ Some companies do not allowemployees to carry sick days over from year to year.The benefits and disadvantages of this policy continue
to be debated in businesses across the country Someanalysts contend that most employees do not requirelarge numbers of sick days, and that systems thatallow carryovers are more likely to be abused by pooremployees than appropriately utilized by good em-ployees, who, if struck down by a long-term illness,often have disability alternatives But Markowichwarns that ‘‘today, most employees feel entitled to aspecified number of sick days And if they don’t takethose days, they feel that they are losing a promisedbenefit Your company may be inadvertently reinforc-ing this ‘use it or lose it’attitude by establishingpolicies under which employees ‘lose’their sick time
if it is not used by the end of the year.’’
ESTABLISHING A SYSTEM FORTRACKING ABSENCES
Absenteeism policies are useless if the businessdoes not also implement and maintain an effectivesystem for tracking employee attendance Some com-panies are able to track absenteeism through existingpayroll systems, but for those who do not have thisoption, they need to make certain that they put to-gether a system that can: 1) keep an accurate count ofindividual employee absences; 2) tabulate companywide absenteeism totals; 3) calculate the financial im-pact that these absences have on the business; 4)detect periods when absences are particularly high;and 5) differentiate between various types of ab-sences
FURTHER READING:
Allerton, Haidee E ‘‘How To.’’ Training and Development,
August 2000.
Ceniceros, Roberto ‘‘Written Policies Reduce Risk in Firing
Workers Comp Abusers.’’ Business Insurance April 21, 1997.
‘‘Don’t Let Unscheduled Absences Wipe You Out.’’
Work-force, June 2000.
Hunt, David ‘‘ ‘There’s a Bit of Flu Doing the Rounds,
Boss,’’’ Employee Benefits, April 2000.
Keenan, Denis ‘‘Too Much Time Off.’’ Accountancy April
1993.
‘‘Link Absenteeism and Benefits—And Help Cut Costs,’’ HR
Focus, April 2000.
Markowich, M Michael ‘‘Attendance Required.’’ Small
Busi-ness Reports September 1993.
The SOHO Guidebook CCH Incorporated, 1997.
Trang 17Tylczak, Lynn Attacking Absenteeism: Positive Solutions to an
Age-Old Problem Crisp, 1990.
SEE ALSO: Employee Motivation; Sick Leave and Personal
Days
ACCELERATED COST RECOVERY
SYSTEM (ACRS)
The Accelerated Cost Recovery System (ACRS)
is a method of depreciating property for tax purposes
that allows individuals and businesses to write off
capitalized assets in an accelerated manner Adopted
by the U.S Congress in 1981 as part of the Economic
Recovery Tax Act, ACRS assigns assets to one of
eight recovery classes—ranging from 3 to 19 years—
depending on their useful lives These recovery
classes are used as the basis for depreciation of the
assets
The idea behind ACRS was to increase the tax
deduction for depreciation of property and thus
in-crease the cash flow available to individuals and
busi-nesses for investment It was put in place during an
economic recession and ‘‘unleashed a torrential flow
of corporate cash,’’ according to Elizabeth Kaplan in
Dun’s Business Month In fact, at the time it was
enacted, ACRS was expected to add between $50 and
$100 billion to the incomes of individuals and
busi-nesses over a 10-year period
Proponents of ACRS claimed that this
deprecia-tion method and related tax law changes led to a huge
increase in investment that helped the U.S economy
recover But other people criticized ACRS for making
reported business earnings look better than they
actu-ally were ‘‘The dangers of treating depreciation as
merely an accounting convention—and not a real
economic cost that provides for the eventual
replace-ment of plant and equipreplace-ment—were exacerbated by
ACRS, which allowed companies to take ultrarapid
depreciation on capital-intensive assets,’’ Kaplan
ex-plained ‘‘By reducing corporate tax bills, ACRS also
exaggerated the disparity between cash flow and
re-ported earnings The cash generated by a
com-pany’s operations is being hailed as a far more reliable
barometer of financial health than the more traditional
earnings yardstick, which can be skewed by
accounting conventions.’’
Perhaps the most dangerous trend to grow out of
the favorable tax treatment of capitalized assets was a
large number of hostile takeovers ‘‘ACRS
inadver-tently unleashed a potent weapon for corporate raiders
who specialize in leveraging the assets of the target
company to finance their attacks,’’ Kaplan noted
Responding to criticism, the U.S Congress
re-vised the ACRS as part of the 1986 Tax Reform Act
The new depreciation method for tangible propertyput in use after 1986 is called the Modified Acceler-ated Cost Recovery System (MACRS) The maindifference between ACRS and MACRS is that thelatter method uses longer recovery periods and thusreduces the annual depreciation deductions grantedfor residential and nonresidential real estate
Some people expressed concern that the changewould spur consumption at the expense of investmentand thus end the period of economic recovery andgrowth Others worried that the frequency of changeswould unnecessarily complicate the tax code Afterall, taxpayers were required to use the useful lifemethod to depreciate property put in service prior to
1981, the ACRS method for property put in use tween 1981 and 1986, and the MACRS method forproperty put in use after 1986
be-MACRS actually encompasses two different preciation methods, called the General DepreciationSystem (GDS) and the Alternative Depreciation Sys-tem (ADS) GDS is used for most types of property
de-ADS applies only to certain types of property—thatwhich is used for business purposes 50 percent of thetime or less, is used predominantly outside the UnitedStates, or is used for tax-exempt purposes, for exam-ple—but can also be used if the taxpayer so chooses
FURTHER READING:
Blumenfrucht, Israel ‘‘Depreciation of Personal Property.’’
Management Accounting April 1987.
Duncan, William A., and Robert W Wyndelts ‘‘The ated Cost Recovery System after the Tax Reform Act of 1986.’’
Acceler-Review of Taxation of Individuals Summer 1987.
Flynn, Maura P ‘‘Property Located Outside United States
Sub-ject to Different Depreciation Rules.’’ Tax Adviser August
Kaplan, Elizabeth ‘‘Wall Street Zeroes in on Cash Flow.’’
Dun’s Business Month July 1985.
Tandet, Steven N ‘‘Modified Accelerated Cost Recovery
Sys-tem.’’ Tax Adviser April 1989.
SEE ALSO: Depreciation
ACCOUNTING
Accounting has been defined as ‘‘the language ofbusiness’’ because it is the basic tool for recording,reporting, and evaluating economic events and trans-actions that affect business enterprises Accountingprocesses document all aspects of a business’s finan-cial performance, from payroll costs, capital expendi-
Trang 18tures, and other obligations to sales revenue and
own-ers’equity An understanding of the financial data
contained in accounting documents, then, is regarded
as essential to reaching an accurate picture of a
busi-ness’s true financial well-being Armed with such
knowledge, businesses can make appropriate financial
and strategic decisions about their future; conversely,
incomplete or inaccurate accounting data can cripple a
company, no matter its size or orientation
Account-ing’s importance as a barometer of business health—
past, present, and future—and tool of business
navi-gation is reflected in the words of the American
Insti-tute of Certified Public Accountants (AICPA), which
defined accounting as a ‘‘service activity.’’
Account-ing, said the AICPA, is intended ‘‘to provide
quantita-tive information, primarily financial in nature, about
economic activities that is intended to be useful in
making economic decisions—making reasoned
choices among alternative courses of action.’’
A business’s accounting system contains mation potentially relevent to a wide range of people
infor-In addition to business owners, who rely on
account-ing data to gauge their enterprise’s financial progress,
accounting data can communicate relevant
informa-tion to investors, creditors, managers, and others who
interact with the business in question As a result,
accounting is sometimes divided into two distinct
subsets—financial accounting and management
ac-counting—that reflect the different information needs
of these end users Financial accounting is a branch of
accounting that provides people outside the
busi-ness—such as investors or loan officers—with
quali-tative information regarding an enterprise’s economic
resources, obligations, financial performance, and
cash flow Management accounting, on the other
hand, refers to accounting data used by business
own-ers, supervisors, and other employees of a business to
gauge their enterprises’s health and operating trends
GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Generally accepted accounting principles(GAAP) are the guidelines, rules, and procedures used
in recording and reporting accounting information in
audited financial statements Various organizations
have influenced the development of modern-day
ac-counting principles Among these are the American
Institute of Certified Public Accountants (AICPA),
the Financial Accounting Standards Board (FASB),
and the Securities and Exchange Commission (SEC)
The first two are private sector organizations; the SEC
is a federal government agency
The AICPA played a major role in the ment of accounting standards In 1937 the AICPA
develop-created the Committee on Accounting Procedures
(CAP), which issued a series of Accounting Research
Bulletins (ARB) with the purpose of standardizingaccounting practices This committee was replaced bythe Accounting Principles Board (APB) in 1959 TheAPB maintained the ARB series, but it also began topublish a new set of pronouncements, referred to asOpinions of the Accounting Principles Board In mid-
1973, an independent private board called the cial Accounting Standards Board (FASB) replaced theAPB and assumed responsibility for the issuance offinancial accounting standards The FASB remainsthe primary determiner of financial accounting stan-dards in the United States Comprised of seven mem-bers who serve full-time and receive compensation fortheir service, the FASB identifies financial accountingissues, conducts research related to these issues, and ischarged with resolving the issues A super-majorityvote (i.e., at least five to two) is required before anaddition or change to the Statements of FinancialAccounting Standards is issued
Finan-The Financial Accounting Foundation is the ent organization to FASB The foundation is governed
par-by a 16-member Board of Trustees appointed from thememberships of eight organizations: AICPA, Finan-cial Executives Institute, Institute of Management Ac-countants, Financial Analysts Federation, AmericanAccounting Association, Securities Industry Associa-tion, Government Finance Officers Association, andNational Association of State Auditors A FinancialAccounting Standards Advisory Council (approxi-mately 30 members) advises the FASB In addition,
an Emerging Issues Task Force (EITF) was lished in 1984 to provide timely guidance to the FASB
estab-on new accounting issues
The Securities and Exchange Commission, anagency of the federal government, has the legal au-thority to prescribe accounting principles and report-ing practices for all companies issuing publicly tradedsecurities The SEC has seldom used this authority,however, although it has intervened or expressed itsviews on accounting issues from time to time U.S.law requires that companies subject to the jurisdiction
of the SEC make reports to the SEC giving detailedinformation about their operations The SEC hasbroad powers to require public disclosure in a fair andaccurate manner in financial statements and to protectinvestors The SEC establishes accounting principleswith respect to the information contained within re-ports it requires of registered companies These re-ports include: Form S-X, a registration statement;Form 1O-K, an annual report; Form 1O-Q, a quarterlyreport of operations; Form S-K, a report used to de-scribe significant events that may affect the company;and Proxy Statements, which are used when manage-ment requests the right to vote through proxies forshareholders
Trang 19ACCOUNTING SYSTEM
An accounting system is a management
informa-tion system that is responsible for the collecinforma-tion and
processing of data useful to decision-makers in
plan-ning and controlling the activities of a business
orga-nization The data processing cycle of an accounting
system encompasses the total structure of five
activi-ties associated with tracking financial information:
collection or recording of data; classification of data;
processing (including calculating and summarizing)
of data; maintenance or storage of results; and
report-ing of results The primary—but not sole—means by
which these final results are disseminated to both
in-ternal and exin-ternal users (such as creditors and
inves-tors) is the financial statement
The elements of accounting are the building
blocks from which financial statements are
con-structed According to the Financial Accounting
Stan-dards Board (FASB), the primary financial elements
that are directly related to measuring performance and
the financial position of a business enterprise are as
follows:
● Assets—probable future economic benefits
obtained or controlled by a particular entity
as a result of past transactions or events
● Comprehensive Income—the change in
eq-uity (net assets) of an entity during a given
period as a result of transactions and other
events and circumstances from nonowner
sources Comprehensive income includes all
changes in equity during a period except
those resulting from investments by owners
and distributions to owners
● Distributions to Owners—decreases in
eq-uity (net assets) of a particular enterprise as
a result of transferring assets, rendering
ser-vices, or incurring liabilities to owners
● Equity—the residual interest in the assets of
an entity that remain after deducting
liabili-ties In a business entity, equity is the
owner-ship interest
● Expenses—events that expend assets or
in-cur liabilities during a period from
deliver-ing or providdeliver-ing goods or services and
carry-ing out other activities that constitute the
entity’s ongoing major or central operation
● Gains—increases in equity (net assets) from
peripheral or incidental transactions Gains
also come from other transactions, events,
and circumstances affecting the entity
dur-ing a period except those that result from
revenues or investments by owners
Invest-ments by owners are increases in net assets
resulting from transfers of valuables from
other entities to obtain or increase ship interests (or equity) in it
owner-● Liabilities—probable future sacrifices ofeconomic benefits arising from present obli-gations to transfer assets or provide services
to other entities in the future as a result ofpast transactions or events
● Losses—decreases in equity (net assets)from peripheral or incidental transactions of
an entity and from all other transactions,events, and circumstances affecting the en-tity during a period Losses do not includeequity drops that result from expenses ordistributions to owners
● Revenues—inflows or other enhancements
of assets, settlements of liabilities, or a bination of both during a period from deliv-ering or producing goods, rendering ser-vices, or conducting other activities thatconstitute the entity’s ongoing major or cen-tral operations
com-FINANCIAL STATEMENTS
Financial statements are the most comprehensiveway of communicating financial information about abusiness enterprise, and a wide array of users—frominvestors and creditors to budget directors—use thedata it contains to guide their actions and businessdecisions Financial statements generally include thefollowing information:
● Balance sheet (or statement of financial sition)—summarizes the financial position
po-of an accounting entity at a particular point
in time as represented by its economic sources (assets), economic obligations (li-abilities), and equity
re-● Income statement—summarizes the results
of operations for a given period of time
● Statement of cash flows—summarizes theimpact of an enterprise’s cash flows on itsoperating, financing, and investing activitiesover a given period of time
● Statement of retained earnings—shows theincreases and decreases in earnings retained
by the company over a given period of time
● Statement of changes in uity—discloses the changes in the separatestockholders’equity account of an entity,including investments by distributions toowners during the period
stockholders’eq-Notes to financial statements are considered anintegral part of a complete set of financial statements
Notes typically provide additional information at theend of the statement and concern such matters as
Trang 20depreciation and inventory methods used in the
state-ments, details of long-term debt, pensions, leases,
income taxes, contingent liabilities, methods of
con-solidation, and other matters Significant accounting
policies are usually disclosed as the initial note or as a
summary preceding the notes to the financial
state-ments
ACCOUNTING PROFESSION
There are two primary kinds of accountants: vate accountants, who are employed by a business
pri-enterprise to perform accounting services exclusively
for that business, and public accountants, who
func-tion as independent experts and perform accounting
services for a wide variety of clients Some public
accountants operate their own businesses, while
others are employed by accounting firms to attend to
the accounting needs of the firm’s clients
A certified public accountant (CPA) is an countant who has 1) fulfilled certain educational and
ac-experience requirements established by state law for
the practice of public accounting and 2) garnered an
acceptable score on a rigorous three-day national
ex-amination Such people become licensed to practice
public accounting in a particular state These licensing
requirements are widely credited with maintaining the
integrity of the accounting service industry, but in
recent years this licensing process has drawn criticism
from legislators and others who favor deregulation of
the profession Some segments of the business
com-munity have expressed concern that the quality of
accounting would suffer if such changes were
imple-mented, and analysts indicate that small businesses
without major in-house accounting departments
would be particularly impacted
The American Institute of Certified Public countants (AICPA) is the national professional orga-
Ac-nization of CPAs, but numerous orgaAc-nizations within
the accounting profession exist to address the specific
needs of various subgroups of accounting
profes-sionals These groups range from the American
Ac-counting Association, an organization composed
pri-marily of accounting educators, to the American
Women’s Society of Certified Public Accountants
ACCOUNTING AND THE SMALL
BUSINESS OWNER
‘‘A good accountant is the most important side advisor the small business owner has,’’ according
out-to the Entrepreneur Magazine Small Business
Advi-sor ‘‘The services of a lawyer and consultant are vital
during specific periods in the development of a small
business or in times of trouble, but it is the accountant
who, on a continuing basis, has the greatest impact on
the ultimate success or failure of a small business.’’
When starting a business, many entrepreneursconsult an accounting professional to learn about thevarious tax laws that affect them, and to familiarizethemselves with the variety of financial records thatthey will need to maintain Such consultations areespecially recommended for would-be business own-ers who: anticipate buying a business or franchise;plan to invest a substantial amount of money in thebusiness; anticipate holding money or property forclients; or plan to incorporate
If a business owner decides to enlist the services
of an accountant to incorporate, he/she should makecertain that the accountant has experience dealingwith small corporations, for incorporation brings with
it a flurry of new financial forms and requirements Aknowledgeable accountant can provide valuable in-formation on various aspects of the start-up phase.Similarly, when investigating the possible pur-chase or licensing of a business, a would-be buyershould enlist the assistance of an accountant to lookover the financial statements of the licenser-seller.Examination of financial statements and other finan-cial data should enable the accountant to determinewhether the business is a viable investment If a pro-spective buyer decides not to use an accountant toreview the licenser-seller’s financial statements,he/she should at least make sure that the financialstatements that have been offered have been properlyaudited (a CPA will not stamp or sign a financialstatement that has not been properly audited and certi-fied)
Once in business, the business owner will have toweigh revenue, rate of expansion, capital expendi-tures, and myriad other factors in deciding whether tosecure an in-house accountant, an accounting service,
or a year-end accounting and tax preparation service.Sole proprietorships and partnerships are less likely tohave need of an accountant; in some cases, they will
be able to address their business’s modest accountingneeds without utilizing outside help If a businessowner declines to seek professional help from an ac-countant on financial matters, pertinent accounting in-formation can be found in books, seminars, govern-ment agencies such as the Small BusinessAdministration, and other sources
Even if a small business owner decides againstsecuring an accountant, however, he/she will find itmuch easier to attend to the business’s accountingrequirements if he/she adheres to a few basic book-keeping principles, such as maintaining a strict divi-sion betwen personal and business records; maintain-ing separate accounting systems for all businesstransactions; establishing separate checking accountsfor personal and business; and keeping all businessrecords, such as invoices and receipts
Trang 21CHOOSING AN ACCOUNTANT
While some small businesses are able to manage
their accounting needs without benefit of in-house
accounting personnel or a professional accounting
outfit, the majority choose to enlist the help of
ac-counting professionals There are many factors for the
small business owner to consider when seeking an
accountant, including personality, services rendered,
reputation in the business community, and expense
The nature of the business in question is also a
consideration in choosing an accountant Owners of
small businesses who do not anticipate expanding
rap-idly have little need of a national accounting firm, but
business ventures that require investors or call for a
public stock offering can benefit from association
with an established accounting firm Many owners of
growing companies select an accountant by
inter-viewing several prospective accounting firms and
re-questing proposals which will, ideally, detail the
firm’s public offering experience within the industry,
describe the accountants who will be handling the
account, and estimate fees for auditing and other
pro-posed services
Finally, a business that utilizes a professional
accountant to attend to accounting matters is often
better equipped to devote time to other aspects of the
enterprise Time is a precious resource for small
busi-nesses and their owners, and according to the
Entre-preneur Magazine Small Business Advisor,
‘‘Ac-countants help business owners comply with a
number of laws and regulations affecting their
record-keeping practices If you spend your time trying to
find answers to the many questions that accountants
can answer more efficiently, you will not have the
time to manage your business properly Spend your
time doing what you do best, and let accountants do
what they do best.’’
The small business owner can, of course, make
matters much easier both for his/her company and the
accountant by maintaining proper accounting records
throughout the year Well-maintained and complete
records of assets, depreciation, income and expense,
inventory, and capital gains and losses are all
neces-sary for the accountant to conclude his work; gaps in a
business’s financial record only add to the
account-ant’s time (and to his or her’s fee for services
ren-dered)
Such attitudes also reflect an ignorance of the
potential management insights that can be gleaned
from accurate and complete accounting information
Many small businesses, noted Ian Duncan in CMA
Magazine, see accounting primarily as a ‘‘paperwork
burden It is often delegated to the firm’s external
accountant, and it is designed primarily to meet
gov-ernment reporting and taxation requirements.’’ But
Duncan and many others contend that small firms
should recognize that accounting information can be avaluable component of a company’s management anddecision-making systems, for financial data providethe ultimate indicator of the failure or success of abusiness’s strategic and philosophical direction
FURTHER READING:
Anthony, Robert N., and Leslie K Pearlman Essentials of
Accounting Prentice Hall, 1999.
Bragg, Steven M Accounting Best Practices John Wiley, 1999.
Cornish, Clive G Basic Accounting for the Small Business:
Simple, Foolproof Techniques for Keeping Your Books Straight and Staying Out of Trouble Self-Counsel Press, 1993.
Duncan, Ian D ‘‘Making the Accounting System All That It
Can Be.’’ CMA Magazine June 1993.
Fuller, Charles The Entrepreneur Magazine Small Business
is important for small business owners to decidewhich method to use up front, based on what will bemost suitable for their particular business
CASH VS ACCRUAL BASIS
Accounting records prepared using the cash basisrecognize income and expenses according to real-timecash flow Income is recorded upon receipt of funds,rather than based upon when it is actually earned, andexpenses are recorded as they are paid, rather than asthey are actually incurred Under this accountingmethod, therefore, it is possible to defer taxable in-come by delaying billing so that payment is not re-ceived in the current year Likewise, it is possible to
Trang 22accelerate expenses by paying them as soon as the
bills are received, in advance of the due date The cash
method offers several advantages: it is simpler than
the accrual method; it provides a more accurate
pic-ture of cash flow; and income is not subject to taxation
until the money is actually received
Since the recognition of revenues and expensesunder the cash method depends upon the timing of
various cash receipts and disbursements, however, it
can sometimes provide a misleading picture of a
com-pany’s financial situation For example, say that a
company pays its annual rent of $12,000 in January,
rather than paying $1,000 per month for the year The
cash basis would recognize a rent expense for January
of $12,000, since that is when the money was paid,
and a rent expense of zero for the remainder of the
year Similarly, if the company sold $5,000 worth of
merchandise in January, but only collected $1,000
from customers, then only $1,000 would appear as
revenue that month, and the remainder of the revenue
would be held over until payment was received
In contrast, the accrual basis makes a greatereffort to recognize income and expenses in the period
to which they apply, regardless of whether or not
money has changed hands Under this system,
reve-nue is recorded when it is earned, rather than when
payment is received, and expenses recorded when
they are incurred, rather than when payment is made
For example, say that a contractor performs all of the
work required by a contract during the month of May,
and presents his client with an invoice on June 1 The
contractor would still recognize the income from the
contract in May, because that is when it was earned,
even though the payment will not be received for
some time The main advantage of the accrual method
is that it provides a more accurate picture of how a
business is performing over the long-term than the
cash method The main disadvantages are that it is
more complex than the cash basis, and that income
taxes may be owed on revenue before payment is
actually received
Under generally accepted accounting principles(GAAP), the accrual basis of accounting is required
for all businesses that handle inventory, from small
retailers to large manufacturers It is also required for
corporations and partnerships that have gross sales
over $5 million per year, though there are exceptions
for farming businesses and qualified personal service
corporations—such as doctors, lawyers, accountants,
and consultants A business that chooses to use the
accrual basis must use it consistently for all financial
reporting and for credit purposes For anyone who
runs two or more businesses, however, it is
permissi-ble to use different accounting methods for each
CHANGING ACCOUNTING METHODS
In some cases, businesses find it desirable tochange from one accounting method to another.Changing accounting methods requires formal ap-proval of the IRS, but new guidelines adopted in 1997make the procedure much easier for businesses Acompany wanting to make a change must file Form
3115 in duplicate and pay a fee A copy should beattached to the taxpayer’s income tax return and theother copy must be sent to the IRS Commissioners.Any company that is not currently under exami-nation by the IRS is permitted to file for approval tomake a change Applications can be made at any timeduring the tax year, but the IRS recommends filing asearly as possible Taxpayers are granted automaticsix-month extensions provided they file income taxes
on time for the year in which the change is requested.The amended tax returns using the new accountingmethod must also be filed within the six-month exten-sion period In considering whether to approve a re-quest for a change in accounting methods, the IRSlooks at whether the new method will accurately re-flect income and whether it will create or shift profitsand losses between businesses
Changes in accounting methods generally result
in adjustments to taxable income, either positive ornegative For example, say a business wants to changefrom the cash basis to the accrual basis It has ac-counts receivable (income earned but not yet received,
so not recognized under the cash basis) of $15,000,and accounts payable (expenses incurred but not paid,
so not recognized under the cash basis) of $20,000.Thus the change in accounting method would require
a negative adjustment to income of $5,000 It is portant to note that changing accounting methodsdoes not permanently change the business’s long-termtaxable income, but only changes the way that income
im-is recognized over time
If the total amount of the change is less than
$25,000, the business can elect to make the entireadjustment during the year of change Otherwise, theIRS permits the adjustment to be spread out over fourtax years Obviously, most businesses would find itpreferable for tax purposes to make a negative adjust-ment in the current year and spread a positive adjust-ment over subsequent years If the accounting change
is required by the IRS because the method originallychosen did not clearly reflect income, however, thebusiness must make the resulting adjustment duringthe current tax year This provides businesses with anincentive to change accounting methods on their own
if they realize that there is a problem
Trang 23Horngren, Charles T., and Gary L Sundem Introduction to
Financial Accounting 4th ed Englewood Cliffs, NJ: Prentice
Hall, 1990.
Sherman, W Richard ‘‘Requests for Changes in Accounting
Methods Made Easier.’’ The Tax Adviser October 1997.
Walsh, Joseph G ‘‘More Accounting Method Changes Granted
Automatic Consent.’’ Practical Tax Strategies July 1999.
ACCOUNTS PAYABLE
Accounts payable is the term used to describe the
amounts owed by a company to its creditors It is,
along with accounts receivable, a major component of
a business’s cash flow Aside from materials and
supplies from outside vendors, accounts payable
might include such expenses as taxes, insurance, rent
(or mortgage) payments, utilities, and loan payments
and interest
For many small businesses, the significance of
every overdue payment can often be greatly
magni-fied For this reason, it is absolutely essential for
entrepreneurs and small business owners to deal with
the accounts payable side of the business ledger in an
effective manner Bills that are unpaid or addressed in
a less than timely manner can snowball into major
credit problems, which can easily cripple a business’s
ability to function
By making informed projections and sensible
provisions in advance, the small business can head off
many credit problems before they get too big
Obliga-tions to creditors, ideally, should be paid off
concur-rently with the collections of accounts receivable
Payment checks should also be dated no earlier than
when the bills are actually due In addition, many
small companies will find that their business fortunes
will take on a cyclical character, and they will need to
plan for accounts payable obligations accordingly
For instance, a small grocery store that is located near
a major factory or mill may experience surges in
cus-tomer traffic in the day or two immediately following
the days in which paychecks are disbursed at that
facility Conversely, the store may see a measurable
drop in customer traffic during weeks in which the
factory or mill is not distributing paychecks to
em-ployees The canny shop owner will learn to recognize
these trends and address the accounts payable portion
of his or her business accordingly
Generally, not all bills will need to be paid at
once Expenses such as payroll, federal, and local
taxes, loan installment payments, and obligations to
vendors will, in all likelihood, be due at various times
of the month, and some—such as taxes—may only be
due on a quarterly or annual basis (tax payments
should always be made on schedule, even if it means
delaying payment to vendors; it is far better to dispute
a tax bill after it’s been paid than to run the risk ofbeing charged with costly fines) It is important, then,for small business owners to prioritize their accountspayable obligations
PRIORITIZING AND MONITORING
This is especially true for fledgling business ers who are often stretched pretty tightly financially
own-Entrepreneurs who find themselves struggling to meettheir accounts payable obligations have a couple ofdifferent options of varying levels of attractiveness
One option is to ‘‘rest’’ bills for a short period in order
to satisfy short-term cash flow problems This cally amounts to waiting to pay off debts until thebusiness’s financial situation has improved There areobvious perils associated with such a stance: delayscan strain relations with vendors and other institutionsthat are owed money, and over-reliance on futuregood business fortunes can easily launch entrepre-neurs down the slippery slope into bankruptcy An-other option that is perhaps more palatable is to makepartial payments to vendors and other creditors Thisgood-faith approach shows that an effort is beingmade to meet financial obligations, and it can helpkeep interest penalties from raging out of control
basi-Partial payments should be set up and agreed to assoon as payment problems are forecast, or as early aspossible It is also a good idea to try to pay off debts tosmaller vendors in full whenever possible, unlessthere is some clear benefit to be had in making install-ment payments to them
Usually, signs of cash flow problems will start toshow up well before the company’s financial fortunesbecome truly desperate One key concern is aged pay-ables Bills should never be allowed to ‘‘ripen’’ morethan 45 to 60 days beyond the due date, unless aspecial payment arrangement has been made with thevendor in advance At 60 days, a company’s creditrating could be jeopardized, and this could make itharder to deal with other vendors and/or loaning insti-tutions in the future
Outstanding balances can drive interest penaltiesway up, and this trend is obviously compounded ifmany bills are overdue at the same time Such exces-sive interest payments can seriously damage a busi-ness’s bottom line Business owners should keep inmind, however, that it is in the best interest of vendorsand other creditors to keep the fledgling businesssolvent as well Explaining current problems and theirplanned solutions to creditors can deflect ill feelingsand buy more time Some—though by no means all—
creditors may be willing to waive, or at least reduce,growing interest charges, or make other changes to thepayment schedule
Trang 24It is crucial to the success of a small business thataccounts payable be monitored closely Ideally, this
aspect of the firm’s operations would be supervised by
a financial expert (either inside or outside the
com-pany) who is not only able to see the company’s
financial ‘‘big picture,’’ but is able to analyze and act
upon fluctuations in the company’s cash flow This
also requires detailed record keeping of outstanding
payables Reports ought to be checked on a weekly
basis, and when payments are made, copies should be
filed along with the original invoices and other
rele-vant paperwork Any hidden costs, such as interest
charges, should also be noted in the report Over a
period of time, these reports will start to paint an
accurate cash flow picture
Effective monitoring practices not only ensurethat payments are made to vendors in a complete and
timely fashion, but also serve to protect businesses
against accidental overpayment These overpayments,
which often take the form of overpayment of sales and
use taxes, can be caused by any number of factors,
including internal miscommunication, encoding
errors, sloppy or inadequate recordkeeping practices,
or ignorance of current tax codes Internal audits of
accounts payable practices can be an effective method
of addressing this issue, especially for expanding
companies ‘‘As companies grow, owners tend to
become less involved in day-to-day operations and
relinquish control of some functions to staff,’’ stated
Cindy McFerrin in Colorado Business Magazine.
‘‘Set up systems and procedures in your company that
encourage communication, provide for staying
cur-rent with tax codes, and lessen the risk of multiple
payments and other mistakes Laying the groundwork
for accuracy today can keep you profitable and in
control tomorrow.’’
FURTHER READING:
Anthony, Robert N., and Leslie K Pearlman Essentials of
Accounting Prentice Hall, 1999.
Cornish, Clive G Basic Accounting for the Small Business:
Simple, Foolproof Techniques for Keeping Your Books Straight
and Staying Out of Trouble Self-Counsel Press, 1993.
Ludwig, Mary S Accounts Payable: A Guide to Running an
Efficient Department John Wiley, 1998.
McFerrin, Cindy ‘‘Understanding Overpaying.’’ Colorado
Business Magazine December 1997.
ACCOUNTS RECEIVABLE
Accounts receivable describes the amount ofcash, goods, or services owed to a business by a client
or customer The manner in which the collection of
outstanding bills are handled, especially in a small
business, can be a pivotal factor in determining acompany’s profitability Getting the sale is the firststep of the cash flow process, but all the sales in theworld are of little use if monetary compensation is notforthcoming Moreover, when a business has troublecollecting what it is owed, it also often has troublepaying off the bills (accounts payable) it owes toothers
MAKING COLLECTIONS Just as there’s an art of thesale, there is an art of the collection In an ideal world,
a company’s accounts receivable collections wouldcoincide with the firm’s accounts payable schedule.But there are many outside factors working againsttimely payments, some of which are beyond the con-trol of even the most efficient of collection systems.Seasonal demands, vendor shortages, stock marketfluctuations, and other economic indicators can allcontribute to a client’s inability to pay bills in a timelyfashion Recognizing those factors, and learning tomake business plans with them in mind, can make abig difference in establishing a solid accounts receiva-ble system for your business
By looking at receipts from past billing cycles, it
is often possible to detect recurring cash flow lems with some clients, and to plan accordingly.Small business owners need to examine clients on acase-by-case basis, of course In some instances, thedebtor company may simply have an inattentive salesforce or accounts payable department that needs re-peated prodding to make its payment obligations But
prob-in other cases, the debtor company may simply need alittle more time to make good on its financial obliga-tions In many instances, it is in the best interests ofthe creditor company to cut such establishments alittle slack After all, a business that is owed money by
a company that files for bankruptcy protection islikely to see very little of it, whereas a well-managedbusiness that is given the chance to grow and prospercan develop into a valued long-term client
METHODS OF COLLECTINGA good way to improvecash flow is to make the entire company aware of theimportance of accounts receivable, and to make col-lections a top priority Invoice statements for eachoutstanding account should be reviewed on a regularbasis, and a weekly schedule of collection goalsshould be established Other tips in the realm of ac-counts receivable collection include:
● Do not delay in making follow-up calls, pecially with clients who have a history ofpaying late
es-● Curb late payment excuses by including aprepaid payment envelope with each invoice
● Get credit references for new clients, andcheck them out thoroughly before agreeing
to do business with them
Trang 25● Know when to let go of a bad account; if a
debt has been on the books for so long that
the cost of pursuing payment it is proving
exorbitant, it may be time to consider giving
up and moving on (the wisdom of this
de-pends a lot on the amount owed, of course)
● Collection agencies should only be used as a
last resort
ACCOUNTS RECEIVABLE FINANCING
Accounts receivable financing provides cash
funding on the strength of a company’s outstanding
invoices Instead of buying accounts, lenders use
invoices as collateral for the loan Besides benefiting a
business in debt, accounts receivable financiers can
assume greater risks than traditional lenders, and will
also lend to new and vibrant businesses that
demon-strate real potential An accounts receivable lender
will also handle other aspects of the account,
includ-ing collections and deposits, freeinclud-ing the company to
focus on other areas of productivity However, risks
are involved, and agreements are typically lengthy
and steeped in legal lingo Before considering this
type of financing, sound financial and legal advice
should be secured to make sure that it is appropriate
for your company
FURTHER READING:
Bragg, Steven M Accounting Best Practices John Wiley, 1999.
‘‘Collecting Yourself.’’ Inc March 2000.
Cornish, Clive G Basic Accounting for the Small Business:
Simple, Foolproof Techniques for Keeping Your Books Straight
and Staying Out of Trouble Self-Counsel Press, 1993.
Duncan, Ian D ‘‘Making the Accounting System All That It
Can Be.’’ CMA Magazine June 1993, p 30.
Flecker, Cody Collect Your Money: A Guide to Collecting
Outstanding Accounts Receivable Cobra, 1998.
Schechter, Karen S ‘‘Compare Costs, Benefits of Billing
Ser-vice Vs In-house.’’ American Medical News July 24, 2000.
Schmidt, David ‘‘Agents of Change.’’ Business Credit October
2000.
ACTIVITY-BASED COSTING
Activity-based costing (ABC) is an accounting
method that allows businesses to gather data about
their operating costs Costs are assigned to specific
activities—such as planning, engineering, or
manu-facturing—and then the activities are associated with
different products or services In this way, the ABC
method enables a business to decide which products,
services, and resources are increasing their
profitabil-ity, and which are contributing to losses Managers are
then able to generate data to create a better budget andgain a greater overall understanding of the expensesthat are required to keep the company runningsmoothly Generally, activity-based costing is mosteffective when used over a long period of time, asopposed to shorter-term solutions such as the theory
of constraints (TOC)
Activity-based costing first gained notoriety inthe early 1980s It emerged as a logical alternative totraditional cost management systems that tended toproduce insufficient results when it came to allocatingcosts Harvard Business School Professor Robert S
Kaplan was an early advocate of the ABC system
While mainly used for private businesses, ABC hasrecently been used in public forums, such as those thatmeasure government efficiency
HOW ACTIVITY-BASED COSTING WORKS
Activity-based costing programs require properplanning and a commitment from upper management
If possible, it is best to do a trial study or test run on adepartment whose profit-making performance is notliving up to expectations These types of situationshave a greater chance of succeeding and showingthose in charge that ABC is a viable way for thecompany to save money If no cost-saving measuresare determined in this pilot study, either the activity-based costing system has been improperly implemen-ted, or it may not be right for the company
The first thing a business must do when usingABC is set up a team that will be responsible fordetermining which activities are necessary for theproduct or service in question This team should in-clude experts from different areas of the company(including finance, technology, and human resources)and perhaps also an outside consultant
After the team is assembled and data on suchtopics as utilities and materials is gathered, it is thentime to determine the elements of each activity thatcost money Attention to detail is very important here,
as many of these costs may be hidden and not entirelyobvious As Joyce Chutchian-Ferranti wrote in an
article for Computerworld: ‘‘The key is to determine
what makes up fixed costs, such as the cost of atelephone, and variable costs, such as the cost of eachphone call.’’ Chutchian-Ferranti goes on to note thateven though in many instances technology has re-placed human labor costs (such as in voice-mail sys-tems), a business manager must still examine thehidden costs associated with maintaining the service
Nonactivity costs like direct materials and servicesprovided from outside the company usually do nothave to be factored in because this has previouslybeen done
Trang 26Once all of these costs are determined and noted,the information must be input into a computer appli-
cation Chutchian-Ferranti explains that the software
can be a simple database, off-the-shelf ABC software,
or customized software This will eventually give the
company enough data to figure out what they can do
to increase profit margins and make the activity more
efficient
After a business has had enough time to analyzethe data obtained through activity-based costing and
determine which activities are cost effective, it can
then decide what steps can be taken to increase profits
Activities that are deemed cost prohibitive can then be
outsourced, cut back, or eliminated altogether in an
effort to make them more profitable The
implementa-tion of these changes is known as activity-based
even money on gathering and going over the data that
is collected Too many details can prove frustrating
for managers involved in ABC On the other hand, a
lack of detail can lead to insufficient data Another
obvious factor that tends to contribute to the downfall
of activity-based costing is the simple failure to act on
the results that the data provide This generally
hap-pens in businesses that were reluctant to try ABC in
the first place
In 1999, Gary Cokins wrote an article aimed atcertified public accountants who have difficulty em-
bracing activity-based costing In ‘‘Learning to Love
ABC,’’ Cokins explains that activity-based costing
usually works best with a minimum amount of detail
and estimated cost figures He backs this up by stating
that ‘‘typically, when accountants try to apply ABC,
they strive for a level of exactness that is both difficult
to attain and time-consuming—and that eventually
becomes the project’s kiss of death.’’
In 2000, Cokins wrote another article entitled
‘‘Overcoming the Obstacles to Implementing
Activ-ity-Based Costing.’’ In this work Cokins noted that
‘‘activity-based costing projects often fail because
project managers ignore the cardinal rule: It is better
to be approximately correct than to be precisely
inac-curate When it comes to ABC, close enough is not
only good enough; close enough is often the secret to
success.’’ Cokins also notes that the use of average
cost rates, the use of overly detailed information, and
the failure to connect information to action can also
hinder ABC projects By understanding these
con-cepts, Cokins feels that CPAs can enhance their roles
as business partners and consultants
Another limiting factor is that activity-basedcosting software can be pricey As Mark Henricks
wrote in a 1999 article for Entrepreneur: ‘‘Most ABC
practitioners find that special-purpose ABC software
is required to make the task manageable At $6,000and up for one package sold by ABC Technologies,software can add significantly to outlays for this type
of accounting technique There are, however, somepilot packages available for $500.’’
Time can also be a factor for businesses seeking aquick fix Henricks notes that ‘‘although some compa-nies see results almost instantly, it typically takesthree months or so for most businesses to experiencethe benefits of ABC And depending on your product
or business cycle, it could take much longer.’’
ACTIVITY-BASED COSTING ANDSMALL BUSINESSES
It used to be that large corporations were the onlybusinesses involved in activity-based costing Not sotoday Service industries such as banks, hospitals, in-surance companies, and real estate agencies have allhad success with ABC But since its inception, activ-ity-based costing has seemed to have been more suc-cessful when implemented by larger companies ratherthan by smaller ones As Henrick noted, ‘‘Companieswith only a few products and markets aren’t likely toget as much benefit from basing costs on activities ascompanies operating with diverse products, servicelines, channels and customers.’’ But since setting upactivity-based costing for a business usually takes lesstime for a smaller project, a small business that isunsure about the effectiveness of ABC can consider asimple test program to determine whether it is rightfor them
Douglas T Hicks is one expert who feels that thetime is right for small businesses to implement activ-
ity-based costing In a 1999 Journal of Accountancy
article entitled ‘‘Yes, ABC is for Small Business,Too,’’ Hicks presented a case study for one of hisclients, a small manufacturer that builds componentsfor the automobile industry Hicks detailed how theywere able to triple sales and increase profits fivefold in
a four-year span after adopting ABC ‘‘Much of thisimprovement came from a profitable mix of contractsgenerated by a costing/quoting process that moreclosely reflects the actual cost structure of the com-pany,’’ Hicks stated ‘‘This has enabled the company
to improve the management of its contracts.’’ ing and measuring the cost of material movement andusing the data to justify many operational changeswere other factors Hicks cited for the success hisclient had with ABC
Isolat-Hicks also noted a change in management’s tude after the success of ABC: ‘‘On an important butless tangible level, management’s knowledge of and
Trang 27attitude toward cost information have undergone a
substantial change Where once managers had their
own way of measuring the cost impact of management
actions, they now measure those costs in a formal,
uniform way When managers contemplate changes,
they have a mental model that directs them toward
changes that truly benefit the organization.’’
Hicks went on to say that ‘‘any small or midsize
organization can develop an ABC system It doesn’t
require a great commitment of time or financial
re-sources Nor does it require the implementation of
special software integrated into the general ledger—
although for larger organizations that may be a
bene-fit It requires only that management view its
opera-tions through ‘the lens of ABC’and create a model
that will enable it to measure costs in accordance with
that view.’’
Gary Cokins, director of industry for a noted
ABC software and services firm, tends to agree with
Hicks In his book Activity-Based Cost Management:
Making It Work, he proclaimed that ‘‘Within 10 to 20
years, everyone will have some sort of ABC It’s a
matter of when, not if.’’
FURTHER READING:
Cokins, Gary Activity-Based Costing: Making It Work 1998.
Cokins, Gary ‘‘Learning to Love ABC.’’ Journal of
Account-ancy August 1999.
Cokins, Gary ‘‘Overcoming the Obstacles to Implementing
Activity-Based Costing.’’ Bank Accounting and Finance Fall
Hicks, Douglas T Activity-Based Costing: Making it Work for
Small and Mid-Sized Companies 1998.
Hicks, Douglas T ‘‘Yes, ABC Is for Small Business, Too.’’
Journal of Accountancy August 1999.
Lobo, Yane R.O., and Paulo C Lima ‘‘A New Approach to
Product Development Costing.’’ CMA—The Management
Ac-counting Magazine March 1998.
SEE ALSO: Overhead Costs; Product Costing
ADVERTISING AGENCIES
Advertising agencies are full-service businesses
which can manage every aspect of an advertising
campaign They vary widely in terms of size and
scope and cater to different kinds of businesses Some
agencies have only one or two major clients whose
accounts they manage Others have hundreds of
cli-ents spread throughout the country or the world, as
well as many field offices from which to service them
In general, an advertising agency will be able to age an account, provide creative services, and pur-chase media access for a client
man-STRUCTURE OF ADVERTISING AGENCIES
An agency, depending on its size, will likely havedifferent departments which work on the separateaspects of an account An account manager or theaccount planning department will coordinate the work
of these departments to insure that all the client’sneeds are met The departments within a full-serviceagency will typically include:
RESEARCH The research department will be able toprovide clients with some details about the prospec-tive audience of the final advertising campaign, aswell as information about the market for the productbeing advertised This should include specific marketresearch which leads to a very focused ad campaign,with advertising directed to the ideal target audience
CREATIVE SERVICES Advertising agencies employexperts in many creative fields that provide quality,professional services that conform to the standards ofthe industry Copywriters provide the text for printads, and the scripts for television or radio advertising
Graphic designers are responsible for the presentation
of print ads, and the art department is responsible forproviding the necessary images for whatever formatadvertisement is decided upon Some agencies havein-house photographers and printers, while others reg-ularly employ the services of contractors
The individuals involved in creative services areresponsible for developing the advertising platform,which sets the theme and tone of the ad campaign Theadvertising platform should draw upon specific, posi-tive features of the product advertised and extrapolatethe benefits the consumer could expect to receive as aresult of using the product The campaign, through thedevelopment of this platform, should prove to be eye-catching, memorable, and in some way unique Theadvertising that is remembered by consumers is thatwhich stands out from the rest; it is the advertisingagency’s (and specifically the creative services de-partment’s) responsibility to provide this quality fortheir clients
The final advertising provided by an agencyshould be fully developed and polished Televisioncommercials should be produced with professional-ism; print ads should be attractive, informational, andattention-getting; radio spots should be focused and ofhigh audio quality
MEDIA BUYING One of the services provided byadvertising agencies is the careful placement of fin-ished advertisements in various media, with an eyetoward maximizing the potential audience The re-
Trang 28search conducted by the agency will inform any
me-dia-buying decisions
An agency will be able to negotiate the terms ofany contracts made for placing ads in any of various
media A full-service agency will deal confidently
with television, radio, newspapers, and magazines
Some agencies are also branching into direct mail
marketing and point of purchase incentives; some
agencies have expanded into Internet advertising; and
some agencies will also place an ad in the local yellow
pages, or utilize outdoor advertising or one of the
more creative avenues of incidental advertising, such
as commercial signs on public buses or subways or on
billboards
The media-buying staff of an advertising agencywill draw on specific research done for the client, as
well as on past experience with different media
Through this research and careful consideration, the
agency will develop a media plan: this should be a
fully realized plan of attack for getting out the client’s
message Some factors to be considered in the
devel-opment of the media plan include:
Cost Per Thousand: This refers to the cost of an
advertisement per one thousand potential customers it
reaches Media-buyers use this method to compare the
various media avenues they must choose between For
example, television ads are considerably more
expen-sive than newspaper ads, but they also reach many
more people Cost per thousand is a straightforward
way to evaluate how to best spend advertising dollars:
if a newspaper ad costs $100 and potentially reaches
2,000 customers, the cost per thousand is $50 If a
television ad costs $1000 to produce and place in
suitable television spots, and reaches a potential of
40,000 viewers, the cost per thousand is only $25
Reach: This term is used when discussing the
scope of an advertisement The reach of an ad is the
number of households which can safely be assumed
will be affected by the client’s message This is
usu-ally expressed as a percentage of total households For
example, if there are 1,000 households in a town, and
200 of those households receive the daily paper, the
reach of a well-placed newspaper ad could be
ex-pressed as 20 percent: one-fifth of the households in
the community can be expected to see the
advertise-ment
Frequency: The frequency of a message refers to
how often a household can be expected to be exposed
to the client’s message Frequency differs widely
be-tween media, and even within the same medium
Newspapers, for example, are read less often on
Satur-days, and by many more households (and more
thor-oughly) on Sundays Fluctuation like this occurs in all
media
Continuity: The media-buyer will also need to
consider the timing of advertisements Depending on
the client’s product, the ads can be evenly spread outover the course of a day (for radio or television adver-tisements), a week (for radio, television, or print ad-vertisements), or a month (radio, television, print, orother media) Of course, seasonal realities influencethe placement of advertisements as well Clothingretailers may need to run more advertisements as anew school year approaches, or when new summermerchandise appears Hardware stores may want toemphasize their wares in the weeks preceding theChristmas holiday Grocery stores or pharmacies,however, might benefit from more evenly distributedadvertising, such as weekly advertisements that em-phasize the year-round needs of consumers
SETTING AN ADVERTISING BUDGET
Deciding on an advertising budget is highly jective, depending on the type of business, the com-petitive atmosphere, and the available funds It willalso depend on how well established the business is,and what the goal of the advertising is Trade publica-tions are often good resources to consult in ponderingthis matter; many provide information on industrystandards for advertising budgets
sub-PRICE STRUCTURES Advertising agencies chargetheir clients for all the itemized expenses involved increating finished ads, including hiring outside con-tractors to complete necessary work The clientshould receive invoices for all such expenses For ex-ample, the client may receive an invoice for a televi-sion ad which includes a photographer’s fee, a re-cording studio’s fee, an actor’s fee, and the cost ofthe film itself The client will also be charged for thecost of placing the final advertisement in whatevermedia the agency has chosen (and the client hasagreed to, of course)
Beyond these expenses, easily invoiced anditemized for the client, advertising agencies include acharge for their services This fee pays for the exten-sive account management, creative services, research,and media placement provided by the agency, all thehidden costs involved in the production of a qualityadvertising campaign, and profit margin
When working with a new client, and particularlywith a small business, an agency may ask that theclient put the agency on a retainer This retainer willconsist of the full advertising budget agreed upon, andwill be used to pay all production expenses and mediabuying costs, as well as provide the agency with itsfee The client should still insist on detailed andaccurate invoices for expenses taken from the retainer
DECIDING TO USE AN AGENCY
Depending upon how important advertising is tothe overall health of the particular business, and the
Trang 29amount of resources available for use in advertising,
the small business owner should consider whether an
investment in the services of advertising agency will
yield meaningful benefit
BENEFITS OF ADVERTISING AGENCIESAdvertising
agencies provide a valuable resource for any
enter-prise seeking to increase its customer base or its sales
They bring together professionals with expertise in a
wide array of communication fields, and often—
though not always—produce polished, quality ads
that are well beyond the capacities of the client
Agen-cies are generally knowledgeable about business
strat-egy and media placement as well The media-buying
experts at an agency will develop a strategic, targeted
media plan for their clients, drawing upon years of
experience and close relationships with media
profes-sionals This experience and these connections are
likely not available to the small business owner, and
can be important factors in launching a successful
media campaign
DRAWBACKS OF ADVERTISING AGENCIES One
drawback to using an agency, of course, is the added
stress of dealing with unfamiliar people and unknown
territory Choosing the right agency will take time,
and the process of reaching a satisfactory ad campaign
can be a taxing and time-consuming one (especially if
the client is vague about his or her desires, or expects
a top-dollar campaign at a bargain-basement price)
Work will have to be reviewed, changed, and
re-viewed again And the account will have to be
moni-tored closely As with any outside contractor, the
small business owner will need to keep careful tabs on
what is received for his or her hard-earned dollar
Cost is another factor that must be weighed
care-fully by the small business owner Although
advertis-ing agency campaigns are often extremely valuable in
terms of shaping market share, product recognition,
and public image, the small business owner will have
to carefully consider the potential benefits against the
costs associated with hiring an agency of any size
When deciding whether or not to use an agency, the
small business owner should consider if the
advertis-ing he or she envisions really requires a team of
experts working on it If the ads will be fairly simple,
or if they will be placed only in one medium (such as a
local newspaper), the owner should probably attempt
to create the ads without the aid of an agency It will
be more economical to hire one expert, such as a
graphic designer, and to place the ads personally than
to hire an agency
SELECTING A PARTICULAR
ADVERTISING AGENCY
Agencies vary widely in their focus Some cater
to only a few large clients, and do not generally accept
new accounts Others have hundreds of clients ofvarying sizes It is important for a small business towork with an agency that will be able to devote thetime needed to insure a successful ad campaign
Smaller, local agencies can usually offer more on-one attention On the other hand, agencies thatmaintain a stable of larger companies are unlikely toregard a small business as an important client unlessthey are convinced that the establishment is destinedfor big things At the same time, however, largeragencies can sometimes enhance a small business’sreputation and improve its geographic reach
one-Instead, the agency should ideally be one that isfamiliar with the specific set of concerns shared bymost small businesses Indeed, it is very importantthat the advertising agency understand the issues that
a small business owner must consider These includehaving a limited advertising budget, finding a niche in
a community, and establishing a loyal customer base
The agency should have worked in the past for clients
in similar situations; it is not imperative, though, thatthey have other clients which are exactly the same asyour business If the business is a bookstore, for ex-ample, and the agency has never promoted a book-store before, it does not mean they will necessarily be
a poor choice to create and manage an advertisingcampaign They may have done work for other localretail stores that have faced the same obstacles andchallenges
In an article for Entrepreneur, Kim T Gordon
outlined a series of questions for small business ers to ask when evaluating a potential advertisingagency First, they should ascertain whether theagency is familiar with the target audience and knowshow to reach them An agency that works primarilywith consumer markets may not be the best choice for
own-a smown-all business whose mown-ain customers own-are otherbusinesses or the government, for example Second,the small business should make sure that the agencyhas done extensive work in the media they plan to usemost extensively An agency that has built a reputa-tion for creating great television ads may not be well-suited to Internet advertising Third, small businessowners should ask about the results the agency hasachieved in working with similar clients And finally,the business owner should ask for a clear picture ofwhat they should expect to accomplish with theirspecific advertising budget
One of the best ways to choose an agency is thesame way you would choose a bank, a doctor, or ahousepainter: ask someone you trust who they use Ifyour friends, neighbors, or fellow business ownershave used an agency they were pleased with, it isworth further inquiry If you see advertising you reallylike, call up the business and compliment them ontheir good taste; then ask who prepares their ad copy
The agency-client relationship is very much
Trang 30based, and the creative work agencies do is subjective.
You should work with an agency whose collective
personality and creative work make you feel
comfort-able These services will cost a considerable amount,
and starting off with a firm you feel optimistic about
will help insure your satisfaction throughout the
rela-tionship The American Association of Advertising
Agencies (AAAA) helps match agencies and clients
through their Web site
During the introductory meeting, the agency will
be prepared to show samples of their work These are
called case histories, and they should be relevant to
your business These samples should reflect the
agency’s understanding of the needs of your small
business—including who your customer base is—
and a working knowledge of the kind of marketing
necessary to sell your product As a potential client,
you should feel free to ask many questions concerning
the approach of the advertisements, the audience
reached by certain media, and what media plans have
been developed for businesses similar to yours An
agency, though, should never be asked to do work
‘‘on spec.’’ Advertising agencies cannot afford to use
their considerable creative resources doing free work
for potential clients The case histories they provide,
along with the answers to any questions you may
have, should be sufficient to decide whether to give
them your business
Once you have found an agency you feel fortable with, and have together agreed upon a budget
com-and a timeline for the advertising, the agency will
begin producing copy for you to approve Laying a
strong foundation, including asking all the questions
you have as they arise, will pave the way for a
productive, mutually beneficial relationship
FURTHER READING:
‘‘Checking the Local Market, Asking Media Can Help Start
Long-Term Relationship.’’ Arkansas Business December 27,
Poteet, G Howard (editor) Making Your Small Business a
Success: More Expert Advice from the U.S Small Business
Administration Liberty Hall Press, 1991.
‘‘Select an Advertising Agency.’’ Milwaukee Business Journal.
as well, especially for new and/or small business
en-terprises As William Cohen stated in The
Entrepre-neur and Small Business Problem Solver, ‘‘In some
cases your budget will be established before goals andobjectives due to your limited resources It will be agiven, and you may have to modify your goals andobjectives If money is available, you can work theother way around and see how much money it willtake to reach the goals and objectives you have estab-lished.’’ Along with marketing objectives and finan-cial resources, the small business owner also needs toconsider the nature of the market, the size and demo-graphics of the target audience, and the position of theadvertiser’s product or service within it when puttingtogether an advertising budget
In order to keep the advertising budget in linewith promotional and marketing goals, an advertisershould answer several important budget questions:
1) Who is the target consumer? Who is ted in purchasing the advertiser’s product orservice, and what are the specific demo-graphics of this consumer (age, employ-ment, sex, attitudes, etc.)? Often it is useful
interes-to compose a consumer profile interes-to give theabstract idea of a ‘‘target consumer’’ a faceand a personality that can then be used toshape the advertising message
2) Is the media the advertiser is consideringable to reach the target consumer?
3) What is required to get the target consumer
to purchase the product? Does the productlend itself to rational or emotional appeals?Which appeals are most likely to persuadethe target consumer?
4) What is the relationship between advertisingexpenditures and the impact of advertisingcampaigns on product or service purchases?
In other words, how much profit is earnedfor each dollar spent on advertising?
Answering these questions will provide the vertiser with an idea of the market conditions, and,thus, how best to advertise within these conditions.Once this analysis of the market situation is complete,
ad-an advertiser has to decide how the money dedicated
to advertising is to be allocated
Trang 31BUDGETING METHODS
There are several allocation methods used in
developing a budget The most common are listed
below:
● Percentage of Sales method
● Objective and Task method
● Competitive Parity method
● Market Share method
● Unit Sales method
● All Available Funds method
● Affordable method
It is important to notice that most of these
meth-ods are often combined in any number of ways,
de-pending on the situation Because of this, these
meth-ods should not be seen as rigid, but rather as building
blocks that can be combined, modified, or discarded
as necessary Remember, a business must be
flex-ible—ready to change course, goals, and philosophy
when the market and the consumer demand such a
change
PERCENTAGE OF SALES METHOD Due to its
sim-plicity, the percentage of sales method is the most
commonly used by small businesses When using this
method an advertiser takes a percentage of either past
or anticipated sales and allocates that percentage of
the overall budget to advertising Critics of this
method, though, charge that using past sales for
figu-ring the advertising budget is too conservative and
that it can stunt growth However, it might be safer for
a small business to use this method if the ownership
feels that future returns cannot be safely anticipated
On the other hand, an established business, with
well-established profit trends, will tend to use anticipated
sales when figuring advertising expenditures This
method can be especially effective if the business
compares its sales with those of the competition (if
available) when figuring its budget
OBJECTIVE AND TASK METHOD Because of the
im-portance of objectives in business, the task and
objec-tive method is considered by many to make the most
sense, and is therefore used by most large businesses
The benefit of this method is that it allows the
adver-tiser to correlate advertising expenditures to overall
marketing objectives This correlation is important
because it keeps spending focused on primary
busi-ness goals
With this method, a business needs to first
estab-lish concrete marketing objectives, which are often
articulated in the ‘‘selling proposal,’’ and then
de-velop complimentary advertising objectives, which
are articulated in the ‘‘positioning statement.’’ After
these objectives have been established, the advertiser
determines how much it will cost to meet them Of
course, fiscal realities need to be figured into thismethodology as well Some objectives (expansion ofarea market share by 15 percent within a year, forinstance) may only be reachable through advertisingexpenditures that are beyond the capacity of a smallbusiness In such cases, small business owners mustscale down their objectives so that they reflect thefinancial situation under which they are operating
COMPETITIVE PARITY METHOD While keeping one’sown objectives in mind, it is often useful for a busi-ness to compare its advertising spending with that ofits competitors The theory here is that if a business isaware of how much its competitors are spending toinform, persuade, and remind (the three general aims
of advertising) the consumer of their products andservices, then that business can, in order to remaincompetitive, either spend more, the same, or less onits own advertising However, as Alexander Hiam and
Charles D Schewe suggested in The Portable MBA in
Marketing, a business should not assume that its
com-petitors have similar or even comparable objectives
While it is important for small businesses to maintain
an awareness of the competition’s health and guidingphilosophies, it is not always advisable to follow acompetitor’s course
MARKET SHARE METHOD Similar to competitiveparity, the market share method bases its budgetingstrategy on external market trends With this method abusiness equates its market share with its advertisingexpenditures Critics of this method contend that com-panies that use market share numbers to arrive at anadvertising budget are ultimately predicating their ad-vertising on an arbitrary guideline that does not ade-quately reflect future goals
UNIT SALES METHOD This method takes the cost ofadvertising an individual item and multiplies it by thenumber of units the advertiser wishes to sell
ALL AVAILABLE FUNDS METHOD This aggressivemethod involves the allocation of all available profits
to advertising purposes This can be risky for a ness of any size, for it means that no money is beingused to help the business grow in other ways (purchas-ing new technologies, expanding the work force, etc.)
busi-Yet this aggressive approach is sometimes usefulwhen a start-up business is trying to increase con-sumer awareness of its products or services However,
a business using this approach needs to make sure thatits advertising strategy is an effective one, and thatfunds which could help the business expand are notbeing wasted
AFFORDABLE METHOD With this method, ers base their budgets on what they can afford Ofcourse, arriving at a conclusion about what a smallbusiness can afford in the realm of advertising is often
advertis-a difficult tadvertis-ask, one thadvertis-at needs to incorporadvertis-ate overadvertis-all
Trang 32objectives and goals, competition, presence in the
market, unit sales, sales trends, operating costs, and
other factors
MEDIA SCHEDULING
Once a business decides how much money it canallocate for advertising, it must then decide where it
should spend that money Certainly the options are
many, including print media (newspapers, magazines,
direct mail), radio, television (ranging from 30-second
ads to 30-minute infomercials), and the Internet The
mix of media that is eventually chosen to carry the
business’s message is really the heart of the
advertis-ing strategy
SELECTING MEDIA The target consumer, the product
or service being advertised, and cost are the three
main factors that dictate what media vehicles are
selected Additional factors may include overall
busi-ness objectives, desired geographic coverage, and
availability (or lack thereof) of media options
SCHEDULING CRITERIA As discussed by Hiam and
Schewe, there are three general methods advertisers
use to schedule advertising: the Continuity, Flighting,
and Massed methods
● Continuity — This type of schedulingspreads advertising at a steady level over theentire planning period (often month or year,rarely week), and is most often used whendemand for a product is relatively even
● Flighting—This type of scheduling is usedwhen there are peaks and valleys in productdemand To match this uneven demand astop-and-go advertising pace is used Noticethat, unlike ‘‘massed’’ scheduling, ‘‘flight-ing’’ continues to advertise over the entireplanning period, but at different levels An-other kind of flighting is the pulse method,which is essentially tied to the pulse or quickspurts experienced in otherwise consistentpurchasing trends
● Massed—This type of scheduling places vertising only during specific periods, and ismost often used when demand is seasonal,such as at Christmas or Halloween
ad-ADVERTISING NEGOTIATIONS
AND DISCOUNTS
No matter what allocation method, media, andcampaign strategy that advertisers choose, there are
still ways small businesses can make their advertising
as cost effective as possible Writing in The
Entrepre-neur and Small Business Problem Solver, author
Wil-liam Cohen put together a list of ‘‘special negotiation
possibilities and discounts’’ that can be helpful to
small businesses in maximizing their advertising lar:
dol-● Mail order discounts—Many magazineswill offer significant discounts to businessesthat use mail order advertising
● Per Inquiry deals—Television, radio, andmagazines sometimes only charge advertis-ers for advertisements that actually lead to aresponse or sale
● Frequency discounts—Some media may fer lower rates to businesses that commit to acertain amount of advertising with them
of-● Stand-by rates—Some businesses will buythe right to wait for an opening in a vehicle’sbroadcasting schedule; this is an option thatcarries considerable uncertainty, for onenever knows when a cancellation or otherevent will provide them with an opening, butthis option often allows advertisers to savebetween 40 and 50 percent on usual rates
● Help if necessary—Under this agreement, amail order outfit will run an advertiser’s aduntil that advertiser breaks even
● Remnants and regional editions—Regionaladvertising space in magazines is oftenunsold and can, therefore, be purchased at areduced rate
● Barter—Some businesses may be able to fer products and services in return for re-duced advertising rates
of-● Seasonal discounts—Many media reducethe cost of advertising with them duringcertain parts of the year
● Spread discounts—Some magazines ornewspapers may be willing to offer lowerrates to advertisers who regularly purchasespace for large (two to three page) advertise-ments
● An in-house agency—If a business has theexpertise, it can develop its own advertisingagency and enjoy the discounts that otheragencies receive
● Cost discounts—Some media, especiallysmaller outfits, are willing to offer discounts
to those businesses that pay for their tising in cash
adver-Of course, small business owners must resist thetemptation to choose an advertising medium onlybecause it is cost effective In addition to providing agood value, the medium must be able to deliver theadvertiser’s message to present and potential cus-tomers
Trang 33RELATIONSHIP OF ADVERTISING TO
OTHER PROMOTIONAL TOOLS
Advertising is only part of a larger promotional
mix that also includes publicity, sales promotion, and
personal selling When developing an advertising
budget, the amount spent on these other tools needs to
be considered A promotional mix, like a media mix,
is necessary to reach as much of the target audience as
possible As Gerald E Hills stated in ‘‘Market
Oppor-tunities and Marketing’’ in The Portable MBA in
Entrepreneurship, ‘‘When business owners think
about the four promotion tools, it becomes obvious
why promotion managers must use a mix There are
clear trade-offs to be made between the tools.’’
The choice of promotional tools depends on what
the business owner is attempting to communicate to
the target audience Public relations-oriented
promo-tions, for instance, may be more effective at building
credibility within a community or market than
adver-tising, which many people see as inherently deceptive
Sales promotion allows the business owner to target
both the consumer as well as the retailer, which is
often necessary for the business to get its products
stocked Personal selling allows the business owner to
get immediate feedback regarding the reception of the
business’product And as Hills pointed out, personal
selling allows the business owner ‘‘to collect
informa-tion on competitive products, prices, and service and
delivery problems.’’
FURTHER READING:
Bly, Robert W Advertising Manager’s Handbook Englewood
Cliffs, NJ: Prentice Hall, 1993.
Burnett, Leo The Leo Burnett Worldwide Advertising Fact
Book Chicago: Triumph Books, 1994.
Clark, Scott ‘‘Do the Two-Step with Advertising Budget.’’
Memphis Business Journal March 3, 2000.
Cohen, William The Entrepreneur and Small Business Problem
Solver 2d ed New York: John Wiley & Sons, 1990.
Gordon, Kim T ‘‘Call in the Pros.’’ Entrepreneur December
2000.
Hills, Gerald E ‘‘Market Opportunities and Marketing.’’ The
Portable MBA in Entrepreneurship Edited by William D.
Bygrave 2d ed Wiley, 1997.
Rasmussen, Erika ‘‘Big Advertising, Small Budget.’’ Sales and
Marketing Management December 1999.
Silver, Jonathan ‘‘Advertising Doesn’t Have to Break Your
Budget.’’ Washington Business Journal May 1, 1998.
ADVERTISING, EVALUATION OF
RESULTS
Once the small business owner has successfully
designed and placed an ad (or had that ad successfully
designed and placed by an agency), he or she will be
eagerly awaiting the increased sales that advertisingpromises While advertising can be an effective means
of increasing profitability, measurable increases insales may not be immediately forthcoming But if theadvertising was well-planned, well-placed, and well-executed, it will likely produce positive results even-tually
CUMULATIVE EFFECTS
It is widely accepted among advertising expertsthat one major benefit of advertising any business isthe cumulative effect of the message on consumers
This effect occurs as consumers are repeatedly posed to advertising which may not have an immedi-ate impact, but becomes familiar and remains in thememory This message will be recalled when the needarises for the service which was advertised The con-sumer, because of the cumulative effects of advertis-ing, will already be familiar with the business’s name,
ex-as well ex-as the image that it hex-as cultivated through itsadvertising campaigns For example, a consumer hasheard a carpet cleaning company’s ads for months, butuntil the need arises to have his or her carpets cleaned,there is no reason to contact the company When thatneed does arise, however, he or she will already knowthe name of the company and feel familiar enoughwith it to engage its services
CONSISTENCY One trap that advertisers sometimesfall into is that of restlessness or boredom with a long-running campaign The ownership of a small businessmay feel a need to change a long-running advertise-ment simply because of a desire to try a new, moreexciting avenue There are certainly valid reasons fordoing so (stagnant sales, changing competitive dy-namics, etc.) at times, but advertising experts discour-age businesses from yanking advertisements that con-tinue to be effective just for the sake of change ‘‘If itain’t broke, don’t fix it,’’ is the guiding principlebehind this caution They note that consumers learn toassociate businesses with certain advertisements, de-sign elements, or themes, but that these associationssometimes take time to sink in Similarly, industryobservers counsel small business owners to maintain alevel of consistency with the advertising media theyutilize (provided those media are effective, of course)
By choosing an appropriate style and theme, andcarefully placing ads in effective media, the smallbusiness owner begins to create a lasting foundationfor his or her company Maintaining an advertisingcampaign in itself advertises the stability, dependabil-ity, and tone of a business If customers are finding theads useful, then the advertising is working; changingthe ads could diminish their effectiveness
Trang 34STRATEGIES FOR TRACKING
ADVERTISING’S EFFECTIVENESS
Before the advertiser decides to stick with oneadvertising plan for the next several years, however,
he or she wants to be sure that the advertising is
having some effect Because of the cumulative effect
of advertising, this can sometimes be difficult to
as-certain The following are suggestions for the
some-times vague science of tracking the effectiveness of
advertising:
MONITORING SALES FIGURES This strategy
in-volves tracking sales from a period before the current
advertising was used, and then comparing those
fig-ures to sales made during the time the advertising is
active One pitfall of this strategy is not choosing a
representative time period One month’s worth of
sales figures may not be enough to fully gauge the
effectiveness of an ad Ideally, the business owner
could compare figures from long periods of sales to
exclude changes due to factors other than advertising,
such as seasonal fluctuations and holiday sales
RUNNING A COUPON One satisfyingly concrete way
of tracking how many customers were exposed to
advertising is to use coupons These coupons, which
will typically provide some sort of discount or other
incentive to customers to use them, can be easily
tabulated, providing businesses with tangible
evi-dence of the advertising campaign’s level of
effective-ness Such measurements, however, are limited to
print campaigns Another version of the coupon,
which is effective across media types, is to encourage
customers to mention their exposure to an ad in return
for a bonus For example, a radio ad might include the
sentence, ‘‘Mention this ad for an additional 5 percent
off your purchase!’’
SURVEYING CUSTOMERS Perhaps the most accurate
and easiest method of tracking the effectiveness of a
media campaign is simply asking customers how they
were directed to you You can ask if a customer saw a
particular ad, or more generally ask how they came to
know about the shop or service Consumers are
gener-ally pleased to be asked for their input, and they can
give you firsthand accounts of how advertising is
effecting your business
FURTHER READING:
Bovee, Courtland L., and William F Arens Contemporary
Ad-vertising 3d ed Homewood, IL: Irwin, 1989.
Nucifora, Alf ‘‘Getting the Most from Your Media Purchase.’’
LIBusiness News October 23, 1998.
ADVERTISING MEDIA—AUDIO
The most common audio advertising media is
FM radio Placement of an advertisement on FM radiocosts about as much as an advertisement placed in ametropolitan newspaper However, radio is more dy-namic than print alternatives because it allows theadvertiser essentially to talk with the consumer In-deed, many small business consultants believe that anentertaining and informative radio advertising cam-paign can be a major asset Nonetheless, some ana-lysts contend that small business owners should pro-ceed cautiously before deciding to rely exclusively onradio advertising Indeed, most businesses incorporate
a media mix when attempting to sell their products orservices, utilizing radio advertising in concert withprint and other advertising media The key for smallbusiness owners is to study what types of advertisingbest suits their products and services and to use thatmedia to spearhead their advertising campaign
ADVANTAGES AND DISADVANTAGES
OF RADIO
Radio stations feature many different ming emphases These range from music-oriented for-mats such as country, adult contemporary, classicrock, and alternative rock to news- or talk-orientedformats Since these different formats attract differentdemographic segments of the total audience, businessowners can take appreciable measures to reach theirtarget audience simply by buying time on appropriatestations Another major advantage of radio advertis-ing is that it is inexpensive to place and to produce,allowing small business owners to place advertise-ments on more than one station in a given market Inaddition, radio advertising content can be changedquickly to meet changes in the market or to reflectnew business objectives Finally, radio reaches largenumbers of commuters, income-generating peoplewho often pay more attention to radio advertising than
program-to other advertising media, especially if they are ing alone
driv-The costs associated with purchasing radio vertising time reflect this emphasis on reaching thecommuter audience The four time slots, or
ad-‘‘dayparts,’’ offered for advertisers by most radio tions are the morning drive, daytime, afternoon drive,and evening The two most expensive—but also mosteffective advertising slots—are the morning and af-ternoon drive times
sta-Although radio advertising is effective, there aredrawbacks to consider when deciding whether to cre-ate and place a radio spot Aspects to consider includecompetitor clutter, the cumulative costs associated
Trang 35with long-term radio spots, and the fleeting nature of a
radio message In addition to these drawbacks, several
other legal and procedural guidelines need to be
con-sidered Nation’s Business writer Phil Hill provided a
rundown of some of these concerns in his article
‘‘Make Listeners Your Customers’’:
1) If celebrity soundalikes are used, make sure
a clear disclaimer is included in the
adver-tisement, saying that the soundalikes are not
the actual celebrities
2) If working with a station to create an
adver-tisement, always work with a contract
3) Treat the competition fairly Federal law
mandates that advertisers must accurately
depict the competition
4) Be prepared to run a radio advertisement
often Industry analysts indicate that an
ad-vertisement needs to be heard by a consumer
on several occasions before it is likely to
generate a response
5) Be cautious about excessive reliance on one
station There may be some instances in
which a business’s products or services are
compatible with only one station (i.e., a
dealer in sports paraphernalia may want to
limit his or her radio advertising to the lone
sports-talk station in town), but small
busi-nesses that offer less niche-oriented services
or products can dramatically expand the
au-dience they reach if they use more than one
station for their audio advertising
AM RADIO
AM radio is a curious anomaly for most young
adults who grew up with FM radio, cassettes, and
CDs Yet AM radio still exists, has a folksy charm,
and is listened to by a significant percentage of the
population AM offers alternative programing to the
predominantly music formats broadcast on FM
sta-tions AM stations, which suffered serious declines in
the 1960s and 1970s, now broadcast talk shows,
sporting events, news programs, and traffic and
weather reports In addition, AM radio broadcasts can
reach remote locations, such as those found in many
western states—places that truckers and summer
va-cationers traverse
FURTHER READING:
Drexler, Michael D ‘‘Future for Media Requires Interaction; To
Stay in Game, Old Media Must Involve Audience.’’ Advertising
Usually thirty minutes long, these extended cials, which are often hosted by celebrities, typicallytarget a diverse audience from both the lower andupper middle classes Research over the past dec-ade—the time period in which infomercials became
commer-an advertising superpower—has shown that mostpeople who make purchase decisions while watchinginfomercials are between the ages of 25 and 44
In the words of Thomas Burke, president of theinfomercial division of Saatchi & Saatchi Advertis-ing, infomercials are ‘‘the most powerful form ofadvertising ever created.’’ Given the growth of info-mercials and their astounding success, it is a claimwith significant market support According to Kevin
Whitelaw, writing in U.S News & World Report,
info-mercials were a $1.5 billion dollar industry in 1995
Much of this success is due to the creativity of mercial advertisers who use the infomercial’s mar-ginality to create a kind of cultural or sub-culturalsymbol, giving a voice in the form of purchasingpower to the late night and early morning consumer
info-These consumers are likely to be homemakers, collar workers, and salespeople This demographic in-formation is an essential component in determiningwhich products are selected for infomercial treatment
blue-One sign that the legitimacy of infomercials as aneffective marketing tool has been recognized in recentyears is the growing attention that larger companieshave paid to the practice Whitelaw points out that in
1995 ten percent of infomercials were being produced
by big companies, such as Microsoft, Apple, Lexus,Magnavox, Sears, and AT&T The presence of thesenewcomers has pushed up the prices of the ad spots onthe cable stations which have traditionally carriedinfomercials, leaving only the very early morningspots (i.e., four a.m) within the budget of most small-and mid-sized businesses However, with the prolifer-ation of cable and satellite television, and the newrespectability that infomercials have gained in recentyears, they are still a viable advertising option forsmall businesses with the right kind of product orservice and the creativity to sell it
Infomercials usually work best with products thatare easy to demonstrate, so that an interaction with theviewing audience can be achieved This interaction isquite often that of teacher to student, so that infomer-cials become a medium for instruction, teaching peo-ple (or supposing to teach) how to better their social
Trang 36lives or their bodies Such an approach creates a
dialogue that the viewer can take part in, which often
leads to a viewer inquiry for more information or to a
purchase
Another useful approach is to create a
‘‘storymercial,’’ in which the infomercial sells its
product by encasing it—and the targeted consumer—
within a story These ‘‘storymercials’’ often look and
feel like documentaries in which a family or
business-person go about their daily lives aided tremendously
by the advertiser’s product Testimonials, or little
product specific anecdotes, are similar, both pulling
viewers into a world where the product is essential to
success and happiness All in all, these infomercials
are attempting to show the consumer how to answer
the question ‘‘How can this product help me?’’
When planning an approach, advertisers oftenconsider several criteria, such as how similar products
have fared in other markets, time slots, and seasons
Most infomercial producers believe that even small
television ratings for an infomercial can translate into
strong returns As Dan Danielson told Brad
Edmond-son and John Maines in American Demographics:
‘‘It’s not uncommon for an infomercial to register no
rating points whatsoever, yet net strong profits.’’
FURTHER READING:
Edmondson, Brad, and John Maines ‘‘Victoria the Video
Hunter.’’ American Demographics June 1993.
McDonald, Marci ‘‘The Dawning of the Infomercial Age.’’
Maclean’s September 4, 1995.
Nucifora, Alf ‘‘Is Advertising on Television Right for Your
Wares?’’ LIBusiness News November 6, 1998.
Whitelaw, Kevin.’’Not Just Slicing and Dicing.’’ U.S News &
World Report September 9, 1996.
ADVERTISING MEDIA—INTERNET
The invention of the World Wide Web made theInternet a viable advertising vehicle It is an ‘‘open
system,’’ and therefore potentially available for
any-one to use, which gives the Web tremendous reach
The Web allows the combination of sound, graphics,
and text at one electronic location, which can be
linked to other similar locations by ‘‘hyperlinks.’’ The
linked multimedia capabilities of the Web center
around the creation of ‘‘homepages,’’ which are
Inter-net locations that provide information about a chosen
subject These ‘‘cyberstores,’’ as they are often called,
are used by many small businesses to advertise and
sell their products and services
Indeed, a homepage on the World Wide Webgives even the smallest business the ability to compete
with large companies Since small companies can tablish an attractive presence on the Internet at rela-tively modest cost, say industry experts, the mediumeffectively eliminates the advantages of size and eco-nomic power which enable large companies to domi-nate other advertising media ‘‘Many small-businessusers see the Internet as a way to increase their mar-keting power, reduce costs and do more things atonce, so they’re using it to find ways to do business
es-smarter,’’ remarked one analyst in Entrepreneur.
MEANS OF ADVERTISING ON THE WEB
BROWSERS Small businesses seeking to establish apresence on the World Wide Web need to understandthe importance of browsers, such as Netscape andMicrosoft’s Internet Explorer, to the Web and to Webadvertising These browsers are tools needed to readthe HTML (hypertext mark-up language) documentsthat make up the World Wide Web These documentsare fairly easy to create, and many word processingprograms and Web browsers can assist an advertiser
in creating one Since the Web could not exist withoutthese browsers, advertisers needs to understand howthey function and how to use them to their advantage.Browsers locate information through search en-gines, such as Infoseek and Yahoo Most search en-gines locate sites that contain a specific set of words,
as specified by the logic chosen for the search (i.e
small business and media) Browsers also need
‘‘plug-ins’’ to run certain sound and visual effects, so smallbusiness owners need to weigh the benefits of suchfeatures before adding such extra expenses to ads.After all, many potential customers that find their way
to your homepage may not have the necessary ins’’ to experience those effects
‘‘plug-SEARCH ENGINES Search engines generate the est percentage of new traffic to Web pages, followed
larg-by links from other sites, printed media, and word ofmouth For this reason, small businesses hoping toestablish a presence on the Internet should make suretheir Web sites are listed with a number of searchengines Advertising on some of the larger searchengines, like Yahoo or AltaVista, tends to be expen-sive but also gives advertisers more options For ex-ample, small businesses can buy space for a banneradvertisement within a certain search category or even
a specific search term This way, if an Internet usersearches for information on ‘‘canoeing,’’ the banneradvertisement for a canoe livery or riversidecampground could appear on the screen with thesearch results
HOMEPAGES In a 1997 Forbes article, writer
Wil-liam Davidow pointed out that advertising on the ternet ‘‘will be intimately tied to the sales process.Consumers will search out advertising sites when theywant to gather information about products and ser-
Trang 37vices They will purchase directly over the network.’’
He and other industry observers note that homepages
already function in a fashion similar to an
advertise-ment in the yellow pages A homepage, then, needs to
provide potential consumers with the necessary
mation (phone numbers, addresses, and product
infor-mation) for customers to follow through on desired
purchases—or at least provide them with enough data
to pique their interest and enable them to make a
purchase or get additional information via more
tradi-tional (i.e., non-electronic) means Of course, many
people using the Internet are comfortable making
pur-chases over the Web itself, so business homepages
should also be equipped with the ability to take
prod-uct orders directly
When developing a homepage, a business needs
to consider several relevant aspects of electronic text
and presentation First and foremost, a homepage
should be easy to navigate both visually and
physi-cally Key to creating an inviting homepage, other
than subjective aesthetic concerns, are ‘‘hyperlinks,’’
which allow the reader to move vertically through the
text Many experts claim that each level of a
homepage should contain text on one topic, which
should be clearly indicated by the headings or
graph-ics there A visually cluttered homepage will be
ig-nored by Web users, who are notorious for quickly
moving on to other sites when confronted with
con-fusing or uninteresting homepages
ADVERTISING BANNERS Banner advertisements are
graphic advertisements that appear on a World Wide
Web site and are intended to build brand awareness or
generate traffic for the advertiser’s Web site Since the
first advertisements appeared on the Web in 1993,
Internet advertising has grown into a $4.62 billion
industry Banner advertisements are the leading form
of Internet advertising, accounting for 56 percent of
all online ads in 1999 ‘‘In the most basic terms,
online advertising is the rectangular-shaped ad
ap-pearing at the top of many Web pages,’’ Charles
Dobres wrote in Marketing ‘‘The advertiser’s hope is
to entice you to click on this ‘banner’to be transported
to its own Web site, where you feel the irresistible
urge to buy something, or at least fill in lots of
infor-mation about yourself.’’
Often banners are part of a ‘‘link exchange,’’ or
cooperative advertising arrangement, in which two
businesses with complimentary products and services
advertise each other on their respective sites in order
to reach a large segment of a given market However,
some Web advertising agencies claim that few people
access homepages through banners, and these
agen-cies are now trying new motion and graphic
technolo-gies to make the banners more inviting One new
approach is to turn a banner into a mini homepage
where the consumer can make purchases without
leaving the current page they are viewing
PC/Com-puting recently published a Web study in which they
found that there is ‘‘virtually no chance’’ that Webusers will click on a banner they’ve seen more thanfour times Because of this declining effectiveness,
the editors of PC/Computing suggested businesses
de-sign a number of different banners for theirhomepages Other experts suggest that businessesconsider advertising banners as just one part of anonline marketing mix
E-MAIL ADVERTISING The use of ‘‘direct e-mail,’’ inwhich businesses send unsolicited mail messages to alist of e-mail accounts, is currently being debated Thepractice is sometimes referred to as SPAMing (eventhe use of the word SPAM for this practice is underlegal scrutiny), and has been received negatively byWeb users To avoid alienating customers, increasingnumbers of businesses have supplemented their gen-eral customer satisfaction surveys with queries con-cerning the customer’s feelings about being put on adirect mailing list In this way, businesses are devel-oping lists they can use to keep in touch with theconsumers both through traditional mail and e-mail
The key here is that these lists, and the subsequentadvertising strategies created around them, be di-rected at the desires of the consumer, and not onlytoward the goals of the business
Dowling, Paul J., Jr., et al Web Advertising and Marketing.
Rocklin, CA: Prima, 1996.
Fass, Allison ‘‘Banner Ads Still Dominate.’’ New York Times.
August 15, 2000.
Page, Heather ‘‘Surf’s Up.’’ Entrepreneur November 1997.
Streitfeld, David ‘‘Ads Fail to Click with Online Users.’’
Inter-national Herald Tribune October 31, 2000.
‘‘Time to Set a Standard.’’ Marketing November 16, 2000.
‘‘Web Advertising.’’ PC/Computing February 1997.
Williamson, Debra Aho ‘‘Marketers Spend On Sites, but Not
on Ads.’’ Advertising Age April 14, 1997.
ADVERTISING MEDIA—PRINT
The two most common print media are pers and magazines, but print media also includeoutdoor billboards, transit posters, the yellow pages,and direct mail Print media is important because itcan reach such a large audience, and the great number
newspa-of specialized publications enable businesses to focus
in on a target audience with a specific set of istics Print media are allowed to advertise most any-
Trang 38thing, such as cigarettes, liquor, and contraceptives;
however, many publications will not accept
contro-versial ads
TYPES OF PRINT MEDIA
NEWSPAPERS When deciding upon a newspaper in
which to advertise, there are three physical criteria to
consider: distribution, size, and audience Newspapers
are either daily or weekly, come in a standard or
tabloid size, and reach nearly all of the reading public,
which is estimated to be around 85-90 percent of the
population Because of the broad demographic reach
of most newspapers it is difficult to target a specific
audience; however, newspapers are effective in
in-creasing awareness of a business’products and
ser-vices in a specific geographical area
Types of ads placed in newspapers include: play ads, classified ads, public notes, and preprinted
dis-inserts Newspaper ads have some flexibility in their
size For instance, some are small boxes that take up
only a small portion of a page, while others might
span one or two full pages (the latter, however, are
typically only bought by larger corporations)
Regard-less of this flexibility, newspaper ads can only use
limited special effects, such as font size and color
These limitations lead to advertising ‘‘clutter’’ in
newspapers because all the ads look very similar
Therefore, advertisers must use original copy and
headings to differentiate their ads from their
competi-tors The quick turnover of newspapers also allows the
advertiser to adjust ads to meet new market
condi-tions; however, this turnover means that the same ad
may need to be inserted over a significant period of
time in order to reach its target audience
MAGAZINES With magazines an advertiser can focus
in on a specific target audience As the Small Business
Administration pointed out in ‘‘Advertising Your
Business’’: ‘‘Audiences can be reached by placing
ads in magazines which have [a] well-defined
geo-graphic, demogeo-graphic, or lifestyle focus.’’ An
attrac-tive option for many small businesses may be placing
an ad in the localized edition of a national magazine
But magazine advertisements often have a lag time of
a couple months between the purchase of ad space and
the publication of the issue in question Magazines,
then, are sometimes not the optimum option for
busi-nesses seeking to target fast-changing market trends
In addition to the above factors, it is also tant to consider the nature of the magazine ad copy
impor-Magazines allow elaborate graphics and colors, which
give advertisers more creative options than do
news-papers Also, recent surveys have indicated that
infor-mative ads are the most persuasive Therefore, it is
important to include copy and art work that is direct
and presents important product information to the
consumer, such as how the product works, how itbenefits the consumer, and where it can be purchased
DIRECT MAILMany consultants feel that direct mail isthe best way for a small businesses to begin develop-ing awareness in their target consumers Mailing listscan be generated (even though they are often difficult
to maintain) with the names of those people mostlikely to purchase the advertiser’s products or ser-vices However, direct mail is not always cost effec-
tive According to James W Taylor, author of
Mar-keting Planning: A Step by Step Guide, a direct
mailing campaign can cost as much as $1,000 to reach1,000 people, whereas television can reach a similarnumber of potential customers at a fraction of thatcost But business experts indicate that direct maildoes tend to generate more purchasing responses thandoes television, and they observe that the products ofmany small businesses are often more suited to adirect mailing campaign than to indirect, image adver-tising
YELLOW PAGES The Small Business Administrationstated in ‘‘Advertising Your Business’’ that a yellowpage ad is often used to ‘‘complement or extend theeffects of advertising placed in other media.’’ Such an
ad has permanence and can be used to target a specificgeographic area or community Essentially, a yellowpage ad gives the consumer information needed tomake a purchase Therefore the key information toinclude in such an ad includes: the products and ser-vices available; location; phone number; businesshours; special features, such as the acceptable kinds ofpayment (i.e credit cards, checks); parking availabil-ity; discounts; and delivery policies and emergencyservices The best way to arrange this information is
in a list, so that the consumer will be able to scan the
ad for the desired information
A major consideration with a yellow page ad iswhere to place it, which primarily depends on thedirectory (or category) under which businesses choose
to locate their ads Central to this choice are theproducts or services that the company wishes to em-phasize The ad copy should compliment the direc-tory, indicating the main products and services forsale, so that the ad will emerge from the similar look-ing ads that surround it
OUTDOOR ADVERTISING Outdoor advertising ally comes in two forms: billboards and transit pos-ters Like yellow page ads, outdoor advertising isusually used to support advertisements placed in other
usu-media As Alf Nucifora noted in the LIBusiness
News, perhaps the greatest strength of outdoor
adver-tising is as a directional marker to point customerstoward your business Since the prospective consumeroften has only fleeting exposure to billboards andtransit posters, the advertising copy written for thesemedia needs to be brief with the ability to communi-
Trang 39cate ideas at a glance; this, of course, requires efficient
use of graphics and headings
FURTHER READING:
Addis, Jim ‘‘How the Net and Print Media Can Help Each
Other.’’ Marketing November 1999.
Nucifora, Alf ‘‘Getting the Most from Your Media Purchase.’’
LIBusiness News October 23, 1998.
Taylor, James W Marketing Planning: A Step by Step Guide.
Prentice Hall, 1997.
ADVERTISING MEDIA—VIDEO
Video advertising can be an effective avenue of
reaching an audience, in large measure because of the
proliferation of televisions, cable channels, and VCRs
in American homes over the past few decades Video
advertising also has the advantage of being free of the
presentation limitations associated with other
adver-tising media With video media, an advertiser can
combine audio, visual, and textual effects as well as
other media in presenting its products or services
Although video gives advertisers the ability to reach a
wide audience, it is primarily oriented toward
con-sumers This means that it may not be the best
possi-ble medium for advertising industrial, technical, or
business oriented products and services The broad
reach of video advertising may also be inappropriate
for companies that operate in small, clearly defined
niche market or geographic area Video advertising
can be very expensive, but there are several video
options that can be used effectively by small
busi-nesses of modest financial means
TYPES OF VIDEO ADVERTISING
NETWORK TELEVISION Network television reaches
the largest audience of all advertising media As the
Small Business Administration noted in Advertising
Your Business, most small businesses use ‘‘spot
tele-vision,’’ which is an ad ‘‘placed on one station in one
market.’’ Placing such a spot ad on one of the national
networks can be rather expensive, depending on the
size of the audience reached and the demand of the
specific time slot desired In any case, such network
television spots are often priced well beyond the
fi-nancial means of small businesses
Local television, on the other hand, is much more
affordable, and many small businesses use it to reach
local consumers Local network advertising time is
usually purchased as 30-second ‘‘spot
announce-ments,’’ which are similar to the network spot ads
The time slots for local ads begin in the early morning
and continue up until the network news broadcasts
begin As with network television, the cost for such aspot depends on the size of the audience determined to
be watching and the demand for the particular timeslot
CABLE AND SATELLITE TELEVISION Cable and ellite stations offer selectivity, low cost, and flexibil-
sat-ity Since many cable stations, like ESPN and the
History Channel, broadcast specific kinds of
pro-grams that appeal to certain demographic groups, adefined audience can be targeted Spot ads are pur-chased from either a national cable network or from alocal cable station The cost depends on the cablepenetration in the area and the channel’s viewership
For example, most infomercials are broadcast on
ca-ble stations, such as the Lifetime Network, because of
the programming flexibility and comparatively lowadvertising costs
Drawbacks associated with the purchase of vertising time on cable television include fragmenta-tion (which refers to the wide range of viewing op-tions available on cable—and thus the dilution ofimpact that any one ad may have) and image Thelatter factor is primarily associated with local cablestations, which typically have low budgets andviewerships Moreover, some locally produced cableshows are amateurish and/or feature offensive con-tent
ad-INTERACTIVE TELEVISION Interactive and direct sponse television is growing in both availability andpopularity It promises to be a dynamic area in thefuture of video advertising Interactive digital televi-sion now includes direct response features that allowviewers to order a pizza, book a test drive for a newautomobile, or order a new music CD without leavingtheir sofas In addition to the benefits for consumers,interactive TV also offers businesses the opportunity
re-to collect a great deal of data about their potentialcustomers Some experts predict that this will usher in
an era of targeted, highly personalized television vertising
ad-VIDEOTAPE AND CASSETTES As VCRs and homemovies exploded in popularity, video cassettes be-came a viable advertising option This viability rests
in part on the modest cost associated with producing
many business videos As Target Market noted, video
companies could produce and distribute a video sette advertisement for as little as $1.50 per unit in themid-1990s These cassettes are often categorized intothree general types: promotional videos, demonstra-tion videos, and training videos
cas-Promotional videos are used to create awarenessamong both consumers and investors These kinds ofvideos can be played on monitors from store showrooms to those in parking garages They can also beused by salespeople to help with their sales pitches
Trang 40Demonstration videos can be used in a direct mail or
‘‘V-Mail’’ campaign to introduce consumers to a
business’s products and services, though the cost
as-sociated with such campaigns is usually prohibitive
for small enterprises Finally, videos have become an
increasingly popular tool for internal use in the
busi-ness world Human resources and sales departments
often use videos to educate their employees Such
videos reduce the amount of time experienced staff
are required to spend on training their employees
These videos also make sure that the information each
employee receives is consistent, communicating
agreed upon business objectives
FURTHER READING:
Anderson, Leann ‘‘Show and Tell.’’ Entrepreneur October
1997.
Nucifora, Alf ‘‘Is Advertising on Television Right for Your
Wares?’’ LIBusiness News November 6, 1998.
Vickers, Amy ‘‘Being at One with the Consumer: The New Art
of Interactive Advertising.’’ New TV Strategies June 2000.
‘‘Video Marketing Gets Attention and Results.’’ Target Market.
October 1995.
ADVERTISING STRATEGY
An advertising strategy is a campaign developed
to communicate ideas about products and services to
potential consumers in the hopes of convincing them
to buy those products and services This strategy,
when built in a rational and intelligent manner, will
reflect other business considerations (overall budget,
brand recognition efforts) and objectives (public
im-age enhancement, market share growth) as well As
Portable MBA in Marketing authors Alexander Hiam
and Charles D Schewe stated, a business’s
advertis-ing strategy ‘‘determines the character of the
com-pany’s public face.’’ Even though a small business
has limited capital and is unable to devote as much
money to advertising as a large corporation, it can still
develop a highly effective advertising campaign The
key is creative and flexible planning, based on an
in-depth knowledge of the target consumer and the
ave-nues that can be utilized to reach that consumer
Today, most advertising strategies focus onachieving three general goals, as the Small Business
Administration indicated in Advertising Your
Busi-ness: 1) promote awareness of a business and its
product or services; 2) stimulate sales directly and
‘‘attract competitors’ customers’’; and 3) establish or
modify a business’image In other words, advertising
seeks to inform, persuade, and remind the consumer.
With these aims in mind, most businesses follow a
general process which ties advertising into the other
promotional efforts and overall marketing objectives
of the business
STAGES OF ADVERTISING STRATEGY
As a business begins, one of the major goals ofadvertising must be to generate awareness of the busi-ness and its products Once the business’reputation isestablished and its products are positioned within themarket, the amount of resources used for advertisingwill decrease as the consumer develops a kind ofloyalty to the product Ideally, this established andever-growing consumer base will eventually aid thecompany in its efforts to carry their advertising mes-sage out into the market, both through its purchasingactions and its testimonials on behalf of the product orservice
Essential to this rather abstract process is thedevelopment of a ‘‘positioning statement,’’ as defined
by Gerald E Hills in ‘‘Marketing Option and
Market-ing’’ in The Portable MBA in Entrepreneurship: ‘‘A
‘positioning statement’explains how a company’sproduct (or service) is differentiated from those of keycompetitors.’’ With this statement, the business ownerturns intellectual objectives into concrete plans Inaddition, this statement acts as the foundation for thedevelopment of a selling proposal, which is composed
of the elements that will make up the advertisingmessage’s ‘‘copy platform.’’ This platform delineatesthe images, copy, and art work that the business ownerbelieves will sell the product
With these concrete objectives, the following ments of the advertising strategy need to be consid-ered: target audience, product concept, communica-tion media, and advertising message These elementsare at the core of an advertising strategy, and are oftenreferred to as the ‘‘creative mix.’’ Again, what mostadvertisers stress from the beginning is clear planningand flexibility And key to these aims is creativity, andthe ability to adapt to new market trends A rigidadvertising strategy often leads to a loss of marketshare Therefore, the core elements of the advertisingstrategy need to mix in a way that allows the message
ele-to envelope the target consumer, providing ample portunity for this consumer to become acquaintedwith the advertising message
op-TARGET CONSUMER The target consumer is a plex combination of persons It includes the personwho ultimately buys the product, as well as those whodecide what product will be bought (but don’t physi-cally buy it), and those who influence product pur-chases, such as children, spouse, and friends In order
com-to identify the target consumer, and the forces actingupon any purchasing decision, it is important to definethree general criteria in relation to that consumer, asdiscussed by the Small Business Administration: