Risks Faced by Small Businesses in Colorado - Case Study Example

Evaluation of Risks Faced by Small Businesses in Colorado ABSTRACT This paper provides a research design for the study of a small firm located in Boulder, North Boulder Café. The research is to identify the risks faced by such a small firm and how it impacts on the business. The research is presented in a way and manner that provides guidelines and information about how to deal with issues and matters relating to the actual study Table of Contents Introduction 3 The Purpose Statement 5 Literature Review 6 Research Question(s)/Hypotheses 9 Methodology 10 Reliability and Validity 12 Sampling Plan 13 Data Analysis 14 Limitations of the Study 15 Ethical Considerations 16 Future Considerations and Implications 17 References 18 Introduction The North American Industry Classification code sets up standards for each industry in relation to the definition of the size of the industry. In general, most industries are classified as small businesses if they have less than an annual turnover of $7 million and a staff strength of 500 employees (Small Business Administration, 2014). Like all other businesses, these entities are faced with a unique set of situations and circumstances. As such, such entities have to come up with unique and distinct solutions to their problems, issues and matters. North Boulder Café is a small café in the Boulder Colorado. The café prepares hearty and delicious breakfasts and lunch and offers authentic homemade Mexican food. North Boulder Café is known for providing old-fashioned comfort and its menu is traditional and well situated for the discerning customer in the region. The menu includes a specialized range of coffees, burgers and Mexican dishes that are prepared by qualified chefs with an in-depth level of experience. North Boulder Café is a family owned entity that competes with the major giants in the breakfast and coffee industry including Starbucks and others. North Boulder Café is classified as a small business. Due to that, it has major capital structure needs and other marketing concerns. This puts the business in a major risk. However, the firm managed to thrive through difficult times and periods. This includes the credit crunch and other circumstances and it seem to be doing fairly well. It controls a very strict niche and this niche remains faithful to the firm. The sales approach includes the use of local marketing channels and media. However, the threats posed by larger entities in the industry are serious. This puts the firm in a major risk of folding up. In spite of this, it is apparent that with the careful research into the business environment, identification of real risks and formulation of solutions, North Boulder Café is likely to survive and beat all the competition it faces. a) Aims of Research The aim of this research is to identify the risks faced by North Boulder Café and how these risks can be ameliorated in order to make the firm survive into the future. b) Research Question Based on the aim, we will pose the fundamental question “what are the risks faced by North Boulder Café and how can they be resolved to make the café survive into the long-run?” c) Research Approach The research will involve an empirical study of the elements and aspects of the business environment of North Boulder Café to ascertain risks and identify how these risks can be contained and dealt with. This will involve various tools of data collection and analysis to conduct an empirical research into the organization and identify solutions to the main problems and issues in the firm. The Purpose Statement The problem with North Boulder Café is that the management might want to consider getting the franchise of a larger brand like Starbucks or MacDonald’s in order to survive into the foreseeable future. This will give them a collection to a national brand and through this, they will leverage their efforts and will be able to compete with other entities in the industry. However, the management of North Boulder Café insists that they want to grow organically and honor the values and culture of the founders. Hence, there is a strong quest for the growth and expansion of the café. In this quest, the researcher asks what the actual risks are. Are there major issues that can prevent North Boulder Café from growing/ Are there matters of concern that affects them as a small business in the state? To this end, the research will seek to investigate the risk through the use of tools of empirical business research and analyze how they can be applied to deal with the dilemma and ensure a sustained growth on the basis of competitive advantage into the future. Literature Review Gilmore et al identify that there is a clear relationship between small business risks and small business failures (2004). This relationship also indicates that there is a high occurrence of business failures amongst small businesses with their owner and manager being the same person. In their qualitative study, Gilmore et al (2004) identified that the main sources of risk amongst small owner-managed businesses include: 1. Cash flow; 2. Company size; 3. Entering new markets and new products & 4. Entrusting staff with responsibility. Gilmore et al’s research seem to have provided the core elements and the core structures that pose the main risks that affect small businesses. This can be classified as liquidity and profitability risks. The liquidity risks involve the ability of a small business to raise funds whilst the profitability risks are about the circumstances that will enable a firm to stay in business. Turvey et al (2012) analyzed credit solution for small businesses in relation to the provision of credit solutions where a firm is faced with income risks. This was an in-depth analysis of the liquidity risks of a small business. This is an issue because most small firms rely heavily on income and profits to grow and expand their activities. Therefore, the study examines how firms can deal with their financial risks and how those risks can be dealt with. They conclude that risks relating to financing can best be dealt with through the utilization of contingency credit systems and structures that ensures that a firm is able to get capital to deal with its payment and liquidity needs to ensure that the firm continues to grow. Another research conducted by Ho et al (2010) focused on the different factors and the different strategies that were adopted by firms in response to extreme circumstances. This research was done with an emphasis on the global financial crises which was at its height at the time of the study and the research. The study focused on small businesses in Hong Kong like North Boulder Café. Ho et al identified that under adverse conditions, these firms come up with methods and systems that they use to deal with the conditions and thrive (2010). The findings indicated that there are many survival strategies that can be employed. This will include changes in focus and an application of a blend of strategies that will enable a firm to survive through such harsh times and such situations. In most cases, the small companies set up a system of cost effective methods of running the business and make significant cuts. They are also willing to boost their competitive advantage in order to survive and remain profitable. Synthesis of Literature Review The literature review indicates that there are liquidity and profitability risks that face small businesses. This is because most of these firms do not get huge stocks of capitals to fund their working capital base. Thus, they need to rely on the resources of a small and often closed group of investors. Their only options is therefore the opportunity and possibility to make high and sustained profits in order to fund their growth. This is popularly known as organic growth and expansion in the world of business. The issue with organic growth is that it creates profitability risks because where the markets fail to yield results, a small business will need to go out of business because it will not earn the money it needs to remain liquid. In such a situation, the only option for a firm is to seek contingent financing. This could be in the form of extra money and extra funding that will be made available to the firm in order to deal with its issues and problems. Also, in extreme times and situations, a firm will be able to survive by coming up with a system of modifying its strategy. This include the identification of better methods and better means of dealing with its matters and cutting costs, maintaining optimal performance and improving the survival and profitability options of the firm. Research Question(s)/Hypotheses Based on the literature review, some important hypothesis can be presented and analyzed in order to come up with questions that can provide answers to the research needs and expectations. A hypothesis is a tentative statement that is tested for its truthfulness or falsity (Creswell, 2013). There are three of such questions that come up which can be used to design the research: H1: North Boulder Café is a business that does not rely heavily on capital from outside. Therefore, there is a major risk that the activities of a major competitor in the area and poor practices in the markets will cause North Boulder Café to fold up quickly; H2: Since there is a limited capital base for North Boulder Café, there will be the need for a contingency capital arrangement to be conducted to ensure the survival of the firm in future; H3: In the case of severe economic conditions and systems, North Boulder Café will need to modify its strategy and cut down costs to ensure sustained profitability without the need to seek excessive external funding support. Methodology The research will involve a mix of quantitative and qualitative studies. A qualitative analysis of information from the management and an analysis of dominant trends and processes in the firm. This blend will involve an analysis of the environment within which our firm under study operates and how things are structured. This will provide information that will be used to provide answers to the hypothesis. Additionally, there will be a critical and thorough evaluation of information that will be conducted within the firm to ascertain specific information and data that will be quantitatively analyzed and evaluated. Qualitative research is defined as the evaluation of the trends and processes of an entity within which a research is being conducted (Creswell, 2013). It attempts to provide a logical explanation after a thorough analysis of a phenomenon (Creswell, 2013). Quantitative research on the other hand, involves the caliberation and definition of measures and an attempt to collect empirical data to evaluate the variables of the research in order to come up with a conclusion (Cooper and Schindler, 2014). In order to conduct this study, there will be three main phases of the research that will correspond with the three hypothesis of the study. Phase 1: A critical review of competitor capabilities and its implications. This will involve the identification of risks that will occur if the firm gets a competitor that targets its primary and secondary customers. The methods will include observation of the trading process and a review of the marketing reports to identify dominant trends in the company and its operations. Phase 2: A review of the financial and capital base of North Boulder Café to ascertain the possibilities for funding in order to ensure the continuous growth of the firm throughout different circumstances. The method of doing this will involve an analytical review of the financial statements of North Boulder Café and an evaluation of the ratios of the firm. Phase 3: An evaluation of possible options for the cutting down of costs and the attainment of sustained profitability through tough times. This will be a case analysis of different possibilities and different scenarios. Reliability and Validity Reliability in research is fundamentally based on the possibility of other researchers replicating the finding and getting the same or similar result (Creswell, 2013). Validity has to do with the extent to which the constructs and framework measures the issues at hand to provide solutions to the research. Phase 1 is primarily qualitative. Due to this, the researcher will need to exercise discretion in many ways and manner. And this will lead to the formulation of opinions that could vary from researcher to researcher. This will be against reliability and validity of the findings. Phase 2 is fairly objective. There are numerous ratios that can be calculated according to generally accepted accounting practice. Based on this, the financing risks of North Boulder Café can be easily identified. However interpretation of these findings have implications for validity and reliability. Phase 3 is also based on fairly subjective ideas and views. And this could lead to diverging findings amongst different researchers. Sampling Plan In order to conduct the research, there have to be samples that will be used. A sample is taken where a researcher cannot study 100% of the population. For Phase 1, the sample will involve a general analysis of the firm and an in-depth evaluation of three different products sold by the café. For phase 2, the data for the first year and current financial statements of North Boulder will be evaluated. Finally, in phase 3, an evaluation of the long-term implication will involve the sample used in Phase 1. Data Analysis The data for Phase 1 will involve identifying the market risks and the competitor risks faced by North Boulder Café. Phase 2’s ratios will show the liquidity and solvency risks faced by the firm whilst Phase 3 will be analyzed in relation to strategic choices available to the firm and a choice of the best for survival. Limitations of the Study The primary limitation of the research is the fact that most of it has qualitative elements. Qualitative research often tends to have subjective elements. This is because they do not actually follow a scientific pathway that is universal. Instead, they may vary from researcher to researcher. From the analysis of the market and the evaluation of ratios, subjective elements could divert ideas. Secondly, predicting the future is often problematic. And it will be difficult to identify extraordinary events that can make major impacts on the firm. Ethical Considerations The main ethical issue is the fact that North Boulder Café will not want to leak out their trade secrets and business information. This is because information being given to the researcher could easily get to competitors who could abuse and misuse it. This implies that there is going to be a major matter about trust and this will need to be resolved. The main way the issue of confidentiality can be dealt with is to provide assurances and guarantees that information given in this exercise will not be given to third parties. The researchers must take reasonable steps to ensure that information is kept away from third parties who might abuse the information or use it in an inappropriate manner. Future Considerations and Implications There are bound to be changes in the markets and operational matters. The future consideration for research includes the presentation of propositions for expansion. This is because it is important for North Boulder Café to grow its operations and carefully expand. Thus, the information and conclusions draw must be used to provide a plan for expansion and growth. References The Belmont Report: Ethical principles and guidelines for the protection of human subjects of research (1979). Retrieved from http://ohsr.od.nih.gov/guidelines/belmont.html Creswell, J. W. (2013). Qualitative, quantitative, and mixed methods approaches (4th ed.). Thousand Oaks, CA: SAGE. Cooper, D. R. , & Schindler, P. S., (2014). Business research methods. New York, NY: McGraw-Hill. Gilmore, A., Carson, D. and O’Donnell, C. (2004) “Small-Business Owner-Managers and their attitude to risks” Journal of Applied Marketing 22(3) pp349 – 360 Ho, G. T. S., Choy, K. L., Chung, S. H., Lam, C. H. Y. (2010) "An examination of strategies under the financial tsunami", Industrial Management & Data Systems, Vol. 110 Iss: 9, pp.1319 - 1336 Rousseau, D. M., (2006). Is there such a thing as evidence-based management”? Academy of Management Review, 31(2), 256-269. Small Business Administration (2014) Summary if Size Standard by Industry [Online] Availabel at: http://www.sba.gov/content/summary-size-standards-industry Retrieved: March 6, 2014. Turvey, C. G., Bogan, V. L. and Yu, C. (2012) "Small businesses and risk contingent credit", Journal of Risk Finance, Vol. 13 Iss: 5, pp.491 - 506 Read More