Financial Statements Part Two

See Attachment. 

Financial Statements Part two

Part 1. Answer the following questions, within 100 words minimum

Need by 8/01/2018

Chapter 13 Investment Project Evaluation and Risk Management

Project evaluation alternatives

1.  Under what circumstance would project evaluation methods be used?  Define and explain the pros and cons of NPV, IRR, and Payback methods.  As a small business owner which method do you think you would find most useful.?

Risk and Uncertain

2. What is the difference between risk and uncertainty? Where would the risk come from? And what are the methods of risk management?

Types of Project analysis

3. What is the major difference between the independent project and the mutually exclusive project? And would the evaluation process be different for each?

Selling all or a part of the business

4. What factors would influence the decision to sell a component of the business to raise capital to facilitate growth of another component of the business? If you owned a small business, what factors would influence a decision to sell the entire business?

Chapter 14

Business Valuation

and Harvesting

Harvesting

5. What is harvesting? And why would the business need to plan for it?

Going Public

6. List and briefly explain at least five of the reasons why going public is not a good idea.

Valuation Approaches

7. There are two basic approaches that can be taken to determine a business valuation. What are they and how would the value be calculated under them?

Business Valuation

8. You have found a potential business of interest.  How would you value the business?  What are the major tools for valuation and what are the pros and cons of these methods? Why might harvesting strategies be useful to a business?

9. What kinds of payment terms might the business venture have with its vendor to help manage its cash flow?

Determining Cash Needs

10. How would you determine the need for cash in your business?   Give an example to illustrate your answer.

Chapter 16

Location

11. List key factors needed for consideration in choosing a business location?  Why is location a key finance factor for most businesses?

Part 2: Funding the Business Need by 8/02/2018

Successful small business owners look to others for counsel on important business decisions. In this assignment, you will come up with ideas, calculate risks, and contemplate opportunities related to choosing a location for your business operations.

Your company is thinking about purchasing a small, successful business. You have two choices: Small Business A or Small Business B. The purchase price of each business is $250,000 (and you cannot spend more than that, so acquiring both is not an option). 

Review the following data: 

Small Business A:
Revenue = $100,000 in year one, increasing by 10% each year.
Expenses = $20,000 in year one, increasing by 15% each year.
Depreciation Expense = $5,000 each year.
Tax Rate = 25%
Discount Rate = 10%

Small Business B: 
Revenue = $150,000 in year one, increasing by 8% each year.
Expenses = $60,000 in year one, increasing by 10% each year
Depreciation Expense = $10,000 each year
Tax Rate = 25%
Discount Rate = 11%

Assignment Steps

Identify the key factors to be considered when it comes to choosing a business location.

Analyze how models such as Reilly’s Law of retail gravitation can affect understanding the competition and financial success.

Create a team presentation of 25 slides in total with appropriate references in which you outline the key factors you used to select a business location. Explain why the choice of location can make or break a business, and analyze how capital budgeting impacts location in both the short and long run. 

Note: for your presentation make notes.

Selecting a Business Location

Grading Guide

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5

Version 3

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Selecting a Business Location Grading Guide

FIN/375 Version 3

Financial Management in the Small Business

Copyright

Copyright © 2017 by University of Phoenix. All rights reserved.

University of Phoenix® is a registered trademark of Apollo Group, Inc. in the United States and/or other countries.

Microsoft®, Windows®, and Windows NT® are registered trademarks of Microsoft Corporation in the United States and/or other countries. All other company and product names are trademarks or registered trademarks of their respective companies. Use of these marks is not intended to imply endorsement, sponsorship, or affiliation.

Edited in accordance with University of Phoenix® editorial standards and practices.

Learning Team Assignment: Selecting a Business Location

Purpose of Assignment

Successful small business owners look to others for counsel on important business decisions. In this assignment students will work with their in-class counsel (learning team) to come up with ideas, calculate risks, and contemplate opportunities related to choosing a location for your business operations.

Grading Guide

Content		Met		Partially Met		Not Met		Comments:
The student identifies the key factors to be considered when it comes to choosing a business location.
The student analyzes how models such as Reilly’s Law of retail gravitation can affect understanding the competition and financial success.
The student uses appropriate references in which they outline the key factors they used to select a business location.
The student explains why the choice of location can make or break a business, and analyzes how capital budgeting impacts location in both the short and long run.
The presentation is 25 slides in length.
	Total Available		Total Earned
10	#/10

Met

Partially Met

Not Met

Comments:

Total Available

Total Earned

Presentation Guidelines
Organization
The tone is appropriate to the content and assignment.
The introduction provides a sufficient background on the topic and previews major points.
Major points are stated clearly; are supported by specific details, examples, or analysis; and are organized logically.
Paragraph transitions are present, logical, and maintain the flow throughout the paper.
The conclusion is logical, flows from the body of the paper, and reviews the major points.
Mechanics
The presentation is laid out with effective use of headings, font styles, font sizes, and white space.
Intellectual property is recognized with in-text citations and a reference slide.
Sentences are complete, clear, and concise.
Rules of grammar and usage are followed including spelling and punctuation.
	5	#/5

Assignment Total	#	15	#/15
Additional comments:

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Chapter 16 Location and Layout

Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small

Business, First Edition. M. J. Alhabeeb.

© 2015 John Wiley & Sons, Inc. Published 2015 by John Wiley & Sons, Inc.

AMONG THE MANY management decisions that have to be made is the decision on the

geographical location of the business and the physical setting and layout of the facility

where the business operations are conducted. This decision takes its importance from the

fact that it is among the few long-term decisions that have a lasting effect on the

business.

Therefore, once it is made, the owner and managing team have to live with it for a long

time. Although such a decision has to be made, in most cases, at the start when the business

is established, there could be a need to make the decision later on in cases of expansion and

relocation. Selecting the right location and layout would have a significant impact on the

business efficiency, and ultimately on its profitability. For this reason, and for the fact that it

involves a great deal of expense, planners and managers have to be very careful and

thoughtful in their decision process. For certain businesses, choosing the location would be

a matter of make it or break it, while it might not be that crucial for other businesses. It all

depends on the type of business, its market, region, and other factors. It is well known that

the upper management of the national franchise chains would prefer to spend a significant

amount of money on selecting the right location of its branches for they know, by

experience, how much they can get back if the choice is right. Generally speaking, the major

criteria for making the right choice of location would come down to knowing the key factor

for any specific business to have a competitive advantage in that spot. That key factor could

be one or more of the following:

– Proximity to raw material supplier

– Ease of transportation

– Availability of skilled labor

– Access to water

– Availability and low cost of energy

– Access to target market

– Lower taxes

– Fewer and less complicated state or local restrictions

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– Light zoning ordinance

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16.1 Factors Affecting the Selection of Location

There are many factors that play an important role in guiding the process of selection for a

business location. We can divide them into two groups: the group of general factors that

would affect choosing a location regardless of the nature and type of business, and the

group of specific factors that would be more relevant to certain types of business.

The General Factors

• Personal preference. The entrepreneur’s own taste and preference to establish a

business can be a major factor for some, and can also have no impact for others.

Entrepreneurs and business owners might prefer to stay in their home town, near their

families and relatives and friends, or may prefer a certain climate or geographic area or

cultural environment.

• Operating cost. Any business owner would like to reduce the operating cost as much as

possible. Many elements of the cost, such as the cost of land, labor, energy, utilities,

taxes, and the like, would be determined by where the business is located. Some areas

may offer advantages of having most of these resources for affordable prices, and other

areas may not.

• Availability of General utilities and services, and proper access to them. Those utilities

and services, such as electricity, water, phone lines, sewage services, postal services,

police and fire services and the like, are what businesses would need, but in different

degrees. Some are crucially needed, and others are not, depending on the nature of

business.

• Welcoming community. This can be a crucial factor in some areas and may not be so in

others. Some communities, for reasons related to tradition or history or some cultural

factors, would not welcome a business boom and prefer to keep life plain and simple.

On the other hand, a compatible and welcoming community can offer so many

advantages and make life easier and more productive for a business.

• Quality of life. Most, if not all, business entrepreneurs and owners would like to have

their businesses located in an area that offers a good quality of life to be integrated with

the business activities, and enhance and strengthen its ability to achieve its objectives.

Quality of life can be measured by the goodness of physical, human, and environmental

elements available in that area. Good weather, cultural and entertainment activities,

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educational and training centers, transportation network, and public services can all

contribute to the quality of life in a certain area.

• Rules and regulations. Any business entrepreneur or owner would love to establish his

business in an area where business rules and regulations are favorable, or at least not

too restrictive to the point of preventing starting up a business or making it very hard to

be cost-effective and efficient. Several zoning

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laws and ordinances, as well as building code standards, city or state regulations on

hours of operation, traffic, noise, polluting, parking, waste disposal and the like, need to

be checked carefully before making any decision on location.

Specific Factors

These factors are related to the type of business, its needs and specialties.

• Availability and access to resources. It is wise and more economic for a business to be

located where the needed resources for production are readily available, and within a

reasonable access. Any of the following resources, or any combination of them, can be a

leading determinant for a relevant business to be located where that resource is

available and accessible.

– Raw material for certain production.

– Labor force skilled in certain specialty and trained for a certain line of production

or service.

– Network of suppliers for special parts or material.

– Specific energy source such as solar or wind or water energy.

– Specific transportation mode. Trains might be the best to carry some material while

ships and boats or airplanes might be the only appropriate mode of transportation

for other types of products or materials.

– Internet connection can be essential specifically for high tech businesses and e-

commerce companies.

• Proximity to the right market. One of the significant impacts on reducing production

cost and increasing the efficiency of operation is to identify the target market and locate

the business in its proximity. The right customer base is where the demand of the

product will be, since each product has its own customers. It would be obvious that

thrift stores will not be needed in upscale areas, while they would have their hot market

in low income areas. Also, agricultural equipment would not find its proper customer

base in a metropolitan downtown area, as compared to a rural agricultural area.

• Competitive businesses. Selecting the right location requires collecting good knowledge

about the existing and potential competitors. Sometimes being close to competitors

serves all businesses collectively. Some businesses can share customers, especially the

customers who like comparison shopping such as in the case of car sales. This is the

reason why auto dealers usually locate near each other. However, for some other types

of businesses, locating in an area where there is a great number of competitors may

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work against the interest of each business, especially in the case of having to deal with

cutting down the market share for each.

• Clustered industry. Some businesses would have a competitive advantage if it can locate

itself in an area of a clustered industry related to what the business produces or serves.

California’s Silicone Valley and Cleveland’s biomedical

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industry are good examples to attract the high tech companies and the health-care

institutions and centers, respectively.

• Local incentives. In order to attract business activities, some states and cities offer

companies incentives to come and establish their businesses. These incentives are often

in forms of tax relief, loans and grants in favorable terms, regulatory tolerance, and

enterprise zones. Enterprise zones are state-designated areas that offer tax relief and

regulatory incentives to businesses in order to promote projects and bring jobs to

economically deprived areas. So, entrepreneurs and owners must know about these

incentives before making the decision to locate a business site.

• Demographic characteristics. It has been confirmed by research that small businesses

would have a much better chance of succeeding in an area where there is a sustained

population growth. This is tied to the fact that it is a very important consideration for

business owners and entrepreneurs to know, as much as possible, about the

demographic characteristics of an area in order to determine the right location.

Population size, growth, and density along with income distribution, family size, age

and gender structure, education, employment trends, ethnic and religious makeup,

home ownership, and the like are all essential factors to know in deciding where the

next business should be located.

• Complementary businesses. Many businesses complement each other for the full

service of their customers. It would be wise for any of those companies, whose product

complements the products or services of other companies to be located close to where

those complementary production facilities are. For example, bookbinding shops are

almost always located where print and copying shops, and press companies are located.

Considering these factors would, of course, be viewed in light of whether the business is

retail, wholesale, services, or manufacturing businesses. Last, but not least, it would be

worthwhile for any entrepreneur contemplating to locate a site for a new business or a

business expansion to check the state or city development office for what is being offered to

attract businesses. The information offered by these offices, along with information from

other sources, would provide a good basis for deciding the final candidate location for the

proposed business. Table 16.1 lists the most and least friendly states for small business as it

was prepared by the Small Business and Entrepreneurship Council (Scarborough, 2012, p.

523). The states were ranked based on their policies toward small business, where 36 factors

were assessed such as regulatory standards and cost, zoning ordinance, tax policies, and

health-care standards and cost.

16.2 Types of Business Outlets and Locations

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Selecting business locations would first require identifying the nature of business, its

characteristics, objectives, and where it could fit most appropriately. While it is for

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the entrepreneur to think about finding the right location for the proposed business, it is for

the customer to choose what business and in what location the needs and wants would be

more satisfied. These two ways of thinking and two choices are interacting with each other

constantly, although may not be directly. The following three types of business outlets are

examples on how the outlet type would fit into the customer’s needs from the consumption

point of view. Also, how they fit into the entrepreneur’s need from the production point of

view. In other words, it is the common fact of how the consumer pursues the satisfaction of

his own need, and how the businessman pursues satisfying the customer.

Table 16.1 Most and Least Friendly States for Small
Business

Keating, R.J. (2009). Small Business Survival Index: Ranking the Policy Environment for

Entrepreneurships Across the Nation. Small Business and Entrepreneurship Council,

Oakton, Virginia.

Scarborough, N.M. (2012). Effective Small Business Management: An Entrepreneurial

Approach, 10th edition. Prentice Hall.

Outlets by Types of Goods and Services

Outlets for Regular Goods and Services

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This is the section that would represent most of what we buy on a daily basis. Everything

we need from food to household items to regular clothes is found in regular grocery stores,

convenient stores, variety stores, and department stores. The difference between these

outlets would be the volume, range, and variety of the items they carry, customer traffic,

hours of operation, and perhaps quality of products and their prices. These differences may

impact where an outlet would be located.

Outlets for Comparatively Shopped Goods and Services

These outlets usually carry distinct items that are not consumed as frequently as the regular

goods. They also have higher prices, which lead consumers to be more careful and diligent

in making their purchase decisions. This would justify for the consumer to spend time and

energy in comparing the alternatives to buy, and in assessing the quality, price, and other

characteristics before deciding on purchasing any of these goods. This would also justify, for

the business management, to depend on sales people who are knowledgeable and trained to

provide customers with the information they need and

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promote a friendly, welcoming, and helpful atmosphere to promote sales along with

elaborate advertising campaigns. Typical goods in this category are automobiles, real estate

properties, and high tech equipment.

Outlets for Special Goods and Collectibles

These are the outlets for items that are used even less frequently than any other items of

consumption. Their real value is in their brands and in the perception of those who seek

them. Most of these goods are considered conspicuous, and needless to say that the outlets

are exclusive and the prices are very high. For that reason, they have their own special

consumers for whom store management and sales people extend special treatment.

Examples of these items are precious jewelry, antiques, and collectibles.

Outlets for Seasonal Goods and Services

These outlets carry goods and services that are consumed in certain seasons but can be

either available all year round or just around the specific season. Some sports goods and

services are relevant to certain seasons such as skiing equipment, swimming merchandize,

and boating items. Christmas goods are probably the most typical of the seasonal items in

addition to yard tools and lawn care equipment, goods, and services.

As for the typical location of these outlets, they could be grouped into the retail outlet and

service outlet locations.

Retail Outlet Locations

Freestanding and Open Shopping Plazas

Retail outlets in this category could be anywhere in town but most likely in various strategic

locations where there is an easy access to most consumers and suppliers. The advantages in

these locations are relatively less expensive rent, ample parking spaces, flexible business

hours, free flowing traffic, and more affordability to offer relatively lower prices to

customers because of the cost-effectiveness.

Shopping Malls

Shopping malls are large enclosed spaces for retail business that are designed to attract a

very large number of customers for extended business hours. It includes a variety of stores

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and it offers many other services that are designed to help customers to spend a long time

inside the facility. These services include, but not limited to restaurants, cafes, cinemas,

playground for kids, video game stores, skating rinks, sports and spa facilities, lounges, and

the like. There would also be entertainment events and activities which are held at certain

times. To attract as many shoppers as possible, shopping malls are designed to have what is

commercially called anchor stores at each end of the mall floor plan. These are usually large

and popular department stores which serve as magnets for customers from their access to

the parking lot in all directions. Smaller stores and vendors would be located between these

anchor stores. Shopping malls usually have a centralized management to oversee certain

commercial policies that would be put forward by the merchant’s association, and followed

by the individual stores.

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Downtown Stores and Vendors

The downtowns, in most towns and cities, have been traditionally characterized by a

concentration of commercial, financial, and governmental offices and activities. Retail

business is usually limited to a few freestanding stores, compact malls, restaurants, apparel

shops, and convenient and drug stores to serve the needs of people who work in the area

and the visitors of the downtown offices. Some of the typical problems that may prevent the

expansion of retail businesses in downtown areas are traffic jams, lack of parking space,

higher prices of real estate, expensive insurance, security, utilities, and higher crime rate.

Service Outlet Locations

At the Customer’s Place

There are services that must be done at the customer’s place and cannot be done elsewhere

such as plumbing, renovating, chimney sweep, pest control, lawn mowing,

and the like.

There are also many services that can be chosen to be performed at the customer’s place

such as electronic repair, carpet cleaning, hairdressing, nursing, and food ordering.

Nowadays, and because of the advances in the computer technology, there are some

services where the server and the served communicate only electronically such as in the

case of movie rental.

At the Server’s Place

This is the typical way of having a certain site to deliver the services to the customers who

come in. The major reasons for having one’s own place are the requirements of space and

equipment, and also the obligation to conform with the local regulations. Examples of this

type of service are auto repair, restaurants, laundry, and dry cleaning. Some of these

services can dedicate part of their activities to home delivery such as in the case of food

delivery, laundry pick up, and delivery services.

Wholesale Outlet Locations

The wholesale business exists to deliver goods to the retail stores and it is, therefore, tied to

the size and location of the retail activities. The space, equipment, and storage capacity,

which are required by the wholesale outlets, make it more economic for them to locate at

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the edge of the city. In that, they can have convenient access to both the inner city and the

suburbs using a truck network for delivery.

Production Plant Locations

If we exclude some small production that can be operated at home or in small offices in

residential areas without violating the zoning restrictions, we can realize that most of the

production plants deal with many bulky and heavy equipment and machinery and

therefore need to be outside the city limits. Rural areas are prepared for the advantages it

would offer such as inexpensive land, lower taxes, less regulations, ample parking, less

traffic problems, and better opportunities for expansion. Choosing a good location depends

on balancing these benefits with the expected high cost of transporting in raw material and

transporting out finished products. The transportation mode and

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cost may determine if the right location is to be near a railroad, close to a highway network,

or by a river or a lake. Also, the necessity to keep a product fresh may dictate where the

plant should be such as in the case of fish and seafood canning plants that must be right on

the shore or even sometimes on a large ship. Also, food processing plants that need fresh

fruits and vegetables better be built as close as possible to the fields and orchards where the

produce is harvested. Going outside the city limits would become imperative, especially if

the production plant involves handling hazardous material, producing pollution, loud

noises or offensive odors, or using a great number of heavy equipment.

The increasing cost of production and tightening of the regulations and restrictions may

push some of the manufacturing businesses to change their strategies, especially those

businesses which are on the margin and cannot cope with the cost and restriction

difficulties. Short of shutting down or changing the line of business, those companies may

decide to:

– move offshore to take advantage of lower cost of labor, material, energy, and also less

restrictions and additional market, and probably benefits such as tax breaks and grants;

– contract out its production to another firm which can cut the cost and ease some

pressing difficulties; this strategy is called “production by contract”;

– find a non-profit organization or philanthropy institution to take on production or

assembly by employing the handicapped and rehabilitated people; this strategy is called

“sheltered production.”

16.3 Site Selection

After the general location considerations have been taken, the efforts would be

concentrated on choosing the exact spot on which the business would be operating.

Generally, the major factors that would be considered are the size, cost, traffic and

transportation, safety, neighborhood status, and customers’ accessibility. A careful

consideration of all the affecting factors would often lead the entrepreneurs and owners to

follow a systematic evaluation system by which they can assess and rank the possible

alternative sites in order to appropriately make the right decision. Such an evaluation

system may depend on a checklist or a worksheet such as the one that is suggested by

Corman, Pennel, and Lussier, which is shown in Table 16.2. After narrowing the alternative

to two or three best candidate sites, it is recommended that the entrepreneurs and owners

make on-site visits to each potential site to add a real perspective to the collected

information on paper.

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Based on the extent to which a business makes direct contact to its customers, there are the

low and high ranges of contacts. Based on the extent to which a business makes direct

contact with its customers, an entrepreneur or owner should activate the right level of

contact in order to locate the business in the appropriate site.

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Table 16.2 Answer the Following Questions by Indicating
Whether It Is a Strength (S) or Weakness (W) of the
Potential Site Relative to Your Business. Once You Have
Completed a Worksheet for Each Perspective Location,
Compare the Relative Strengths and Weaknesses of Each
Site to Determine the Value of Each to the Success of Your
Business

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Corman, J., Pennell. L., and Lussier R. (2009). Small Business Management: A Planning

Approach, 3rd edition. Cengage Learning. P. 168.

Low Customer Contact Businesses

Typical examples of these businesses are the production plants and manufacturing

businesses. Customer contact is not direct and therefore is not a factor in the site selection.

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More important factors would be the space, transportation, energy, employees’ convenience,

and equipment quality and performance.

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High Customer Contact Businesses

Typical examples are businesses that deliver both goods and services directly to customers

such as restaurants, grocery stores, department stores, hospitals, clinics, and the like. What

is more crucial here for the site choice of these businesses is

– The customer convenience in getting in and out, and in the manner they get what they

need and pay for it. This would include facilities such as available and accessible

parking lots, rest rooms, and handicap ramps, and the like.

– The surrounding businesses must be helpful for the site to be chosen. Being close to

businesses that have the ability to attract a large number of customers would help the

new business benefit from those customers indirectly. Those businesses can be

unrelated or complementary or even competitive. It is no accident that we see a

combination of a gas station, fast food, mechanic shop, and tire supplies in rest stops

along the highway. We also often see restaurants, coffee and pastry shops, and ice

cream parlors all together on the same stretch. They jointly benefit from the same

customers. In the case of complementary businesses, we also observe that pharmacies

and drug stores are often located close to hospitals and clinics. As mentioned before,

even competing businesses sometimes draw customers to each other when the

customers do comparison shopping such as in the case of auto dealers who can be

clustered in large numbers in the same area.

We can say that the high level customer contact businesses are well represented by most of

the retail and service businesses. The following are some of the basic criteria for the site

selection of this type of business.

Good Visibility

It is essential for the high customer contact business to be visible through an attractive and

inviting location with pleasant display and good and easy arrangements. This is especially

true for the face-to-face customer contact businesses. Needless to say that visibility would

not be important enough to be at the top of location criteria for businesses of low customer

contacts, especially for those which can conduct their businesses via phone or online. A

tightly related issue to the visibility is how heavy or light the customers traffic in that area

is. Good visibility would not mean much in a location of no or very light traffic.

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Adequate and Proper Parking

Since the majority of customers use their own cars to reach their retail and service places of

business, having an available and easy accessed parking lot can play a major role in the

success or failure of the business. It would be much easier for a customer to dismiss a visit

to a store with no or difficult parking and seek an easier alternative. Practically and

collectively, this would mean that the business would constantly lose customers. Other

issues which are related to the availability and access of parking

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and should be considered are safety, hours of operation, and whether the parking is free or

has to be paid for by customers. Good planners would consider a certain ratio to determine

the proper parking space for any given shopping area. For example, the ratio that is

commonly used for shopping malls is one average-size parking space per 200 square feet of

shopping area.

Selected Quantitative Measures

Just like the aforementioned ratio of parking space, there are other ratios which can be

calculated and used as indices to help entrepreneurs and owners in their decisions on site

location. One of these ratios is the potential share of sales (PSS) of a certain product in a

certain location, and the other is Reilly’s Law, which could be used to gauge the extent to

which customers are drawn to a certain location.

Potential Share of Sales

This index is obtained by dividing the estimated average sales (EAS) in a particular location

by the total area of sales (TAS) in that location.

where PSS is the potential share of sale of a certain product in a certain location. EAS is the

estimated average sales of that product in that location. It is calculated by multiplying the

estimated total number of customers who would be expected to buy the product in that

location by the average of their spendings on the product in that location. TAS is the total

area of sales measured by the number of square feet of the space dedicated for selling that

product.

As we will see in the following example, depending on such a simple quantitative criteria

can be more reliable than the common sense in judging what site is better.

Example

Suppose that an entrepreneur wants to choose one of the two final sites A and B as they are

described in

Table 16.3

.

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The first impression is that site A would be better than site B since it offers more customers

who spend more, but calculating the index reveals that site B is better because the potential

share of sale for this site is $17.01 per square foot as compared to $14.98 for site A.

Table 16.3

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Figure 16.1

Reilly’s Law of Retail Gravitation

Reilly’s Law of Retail Gravitation

This concept goes back to a 1931 study by William J. Reilly who was inspired by Newton’s

law of gravity in physics. It was his application in the field of marketing. The main idea

focuses on determining the trade area boundaries around commercial centers that would

be impacted by their masses. In this case, the centers would be some cities, as represented

by the size of their population. They would also refer to business site locations. As

illustrated in Figure 16.1, if two cities, X and Y, are 60 miles from each other and they have

the same size of population, say 200,000, the trade areas around them would be equal so

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that the midpoint in the linear distance between them would be what Reilly called the break

point. It is the point at which customers would be indifferent about going to either location

for shopping. This break point would be at 30 miles from either

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location. However, if the two cities have different sizes of population, the break point would

be determined by

where D is the distance of the break point from location X. D is the linear distance

between the two locations X and Y. P is the population size of X. P is the population size of

Y.

If the distance between X and Y stays the same as 60 miles, but their populations are now

different at 140,000 for X and

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,000 for Y, the break point (d ) would then be

The direct conclusion of this law, as it is related to the selection of business site, is that it

would give an entrepreneur a general understanding that customers are impacted by how

far they have to travel to buy what they want, and how many customers are around any

specific location. Of course, the assumption was that the distance between the two locations

was flat and plain. That was without accounting for any barrier or difficulty related to the

geography of the area, or the traffic problems or any other complication.

Reilly, W.J. (1931). The Law of Retail Gravitation. New York: Kinckerbocker Press.

Radius of the Trading Area

As we have seen above, the trading area of business can be defined by the circle

surrounding the business. It refers to the geographic area from which a business would get

its major customers. The size of this area, or let us say, the radius of that circle, can be

influenced by the type of business, its size, the uniqueness of its product or service, the

variety of its offerings, accessibility, complementary or substituting businesses, and

barriers. It is important not to be confused about the impact of the variety of business

offerings, specialty of business, and uniqueness of its product, which may sound

contradictory. While the wider variety of products and services the business can offer, the

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X XY

X Y

X

1.

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more customers it can draw, it is also true that a unique product or service would draw

customers from a greater distance. If one movie theater is available in an area, customers

would come to it from a wider circle. The same would occur if there is only one shop

specialized in repair of sewing machines, then you would find people traveling a great

distance to get this service. Ease and comfort of accessibility to a location would increase

the radius of the trading area. Accessibility here could be the availability and ease of

transportation, communication, parking, as well as better customer services. This is why we

see most of the shopping malls are located by major highways. The more complementary

and the less substitutive businesses surrounding the location, the more customers can be

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drawn to a certain location. Also, the more the customer’s barriers, the smaller the trading

area for a business. Barriers here could be economic such as higher taxes, and more

expensive transportation and parking. It could also be cultural barriers such as the

exclusiveness of an area or location to a special ethnic group, and could also be related to a

higher or lower crime rate in a specific area.

Expansion Consideration

Last, but not least, one of the basic criteria for site selection is the consideration of a possible

expansion and renovation in the future. If a business does well, it would most likely

respond to the high demand and customer satisfaction by expanding the facility and adding

more of the variety to the products and services. This would be a possibility to think about

and, therefore, the considered site must be flexible enough to accommodate any future plan

for expansion and renovation in the future.

16.4 Site Alternatives

For retail and services, the following are most likely to be the choices to consider.

Downtown Area

As mentioned earlier, the downtown area, in most towns and cities, is traditionally a place

for a variety of small businesses clustered among government and professional offices. The

biggest advantage is the high traffic of customers but there are many disadvantages such as

the high rent, difficult traffic, lack of adequate parking, and safety issues.

Shopping Plazas and Malls

The most striking features of shopping plazas and malls are the clustering of a wide variety

of businesses that function under one roof and benefit from the continuous stream of

customers. This is a great advantage for any small business if the entrepreneur can make it

to one site within this concentration.

Throughout Neighborhoods

This is probably the oldest type of business location where the major business activity is to

serve the small local area. Typical businesses would be grocery stores, drug stores,

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hardware stores, fabric stores, restaurants, barber shops, and the like. Advantages of such

sites are the close circle of customers, low rent, relative safety and trust, good accessibility,

and the like.

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At Home

This is also an old and traditional type of business site, and it is increasing for the great

convenience and saving it offers for the entrepreneurs and owners. According to the Small

Business Administration, more than half of all small businesses in the United States operate

from home. Sometimes operating from home is only the initial stage of establishing the

business, while other times being a home-based business is a permanent characteristic.

16.5 Layout and Design

Layout refers to the physical arrangement of the business facility in a way to maximize the

efficiency of operation. Efficiency would most likely mean maximizing sales and customer

satisfaction for retail and service, and maximizing productivity and following the planned

schedule for manufacturing. The arrangement would mean different things for different

types of businesses. It would generally include arranging the exterior and interior spaces,

product, fixtures, equipment, machinery, furniture, tools, displays, and demonstrations. It

would also include arranging the procedures and scheduling for activities such as pick up

and delivery, storage, cleaning and maintenance, and the way employees and customers

move around. Although the main objective of the layout is to be efficiently functional, it

should also maintain certain aesthetic standards to achieve the best possible attractiveness,

and be as pleasant as it can be for both customers and employees. The following would

briefly address the layout issues for the major types of business.

Retail Layout

The main objectives of the basic layout in retail business are

– To maximize sales of goods and services

– To maximize customer satisfaction

– To optimize operations

– To optimize flow of customers

– To optimize safety and protection for customers, employees, and property

To achieve all or most of these objectives, retail stores have been adopting the following

types of interior layouts:

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Grid Layout

Grid layout is an arrangement in which all merchandize is lined up in parallel rectangular

aisles to achieve the highest and most systematic exposure, better control the traffic flow,

increase security measures, and simplify cleaning and maintenance. Figures 16.2 and 16.3

show general samples for a grocery store and convenience store layout.

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Figure 16.2 A Typical Grocery Store Layout

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Figure 16.3 A Typical Convenient Store Layout

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Figure 16.4 A Typical

Boutique Layout

Boutique Layout

Boutique layout utilizes certain themes as a basis to arrange merchandize in separate

individual areas. The main justification is to better accommodate customer’s variety in

tastes and individuality and add a more artistic touch to the whole shopping experience.

Free Pattern Layout

Free pattern layout is an informal arrangement that is aimed to give more freedom and

flexibility and make customers pleased and relaxed so to entice them to stay longer in the

store, and to come back more frequently. Sometimes boutique and free-flow pattern are

combined together such as in Figure 16.4.

Self-

Service Layout

Self-service layout is another informal layout that is aiming at being more friendly and

respective to customers’ choices in order to make them feel at home by granting them

higher trust and direct access to merchandize. We typically see this type of layout in food

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buffets, salad bars, and vegetable and fruit stands, where customers are allowed to examine

what they buy by touching, feeling, and smelling before making any choice.

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Figure 16.5 (a) Retail Store Layout Based on Percentage of Sales; (b) Retail Store
Layout Based on Descending Value Sections

The grid layout remains the most common and most effective layout among these

alternatives, especially when it comes to maximizing the sales. Observational marketing

research has shown that the vast majority of shoppers entering a store would immediately

turn to the right rather than to the left of the store. They would proceed counter clockwise

to the middle, then clockwise to the right again. Also, most people would stop at the front

either when entering or exiting or both. This general movement of customers throughout

the store is illustrated in the upper panel

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of Figure 16.5. These research results, plus the actual common experience, prompted

marketing planners and layout designers to arrange the store’s merchandize according to

the following principles, assuming that the store is divided into three rows and three

columns.

– The front row of the store takes the most of the customer’s attention.

– The back row of the store takes the least of the customer’s attention.

– The middle row of the store takes an average attention.

Similarly,

– The right column of the store takes the most of the customer’s attention.

– The left column of the store takes the least of the customer’s attention.

– The middle column of the store takes an average attention.

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– In case of the multi-level store, the first floor would enjoy the most attention, and the

attention would decrease as we go up.

Based on these principles, layout designers and store managers would arrange merchandize

in the following way.

– Goods with the highest profit margin and those that are characterized by quick sale, are

placed first in the right front (RF), then in the right middle (RM), and then to the middle-

middle (MM).

– Goods with a lower profit margin and those of a slow sale are placed first in the left

front (LF), then in the left middle.

– Goods with the lowest profit margin and those which are the slowest to sell, as well as

some of the store services, and the low involvement goods are placed in the back row.

Low involvement goods are those goods that are purchased merely because the

customer needs them and may not have much of a choice in their shape, color, style, or

even price. Therefore, it would not make any sense to entice the customer into buying

these types of goods. A good example of the low involvement goods are the prescription

drugs. That is why this section is almost always placed right at the back row of the store.

Contrary to this type are the high involvement goods which are purchased with a great

deal of customer’s choice, and selected with a significant level of personal taste such as

cosmetics, jewelry, and perfume. These are commonly placed in the middle or close to

the front.

– Impulse goods are placed in the front and by the checkout area. Impulse goods are

those goods, which customers do not usually plan to buy, but they buy them on the spur

of the moment, and especially when they fall into sight. Contrary to that are the demand

goods that the customers plan to get and go to the store specifically to purchase them.

Impulse goods generate a high level of profit, not only because they sell more since they

are imposed on the customer’s whim as he checks out, but also because they are priced

relatively higher than they should be. Some retail stores positively responded to public

criticism and removed all children’s merchandize from the checkout area, which was

considered as unnecessary pressure on parents. Candy, gum, soft drinks, and tabloid

magazines remain as the major impulse items, which are specifically placed near the

cash registers.

As for the layout distribution percentages, Figure 16.5a shows how the interior space of a

retail store is divided according to the percentages of sales that are expected to achieve

from each of the nine zones of the grid.

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According to this distribution, the hot spot for sales would be the right lower corner that

includes four zones: the right front (RF), right middle (RM), middle-middle (MM), and

middle front (MF). This prime area is expected to generate 65% of all sales leaving 35% for

the rest of the store. It is the shaded area in Figure 16.5a. This is consistent with a similar

marketing scheme that would divide the interior space into four quarters where the space

value declined following this order:

The consistency appears to be confirming and following the aforementioned customer’s

movement throughout the store. As in Figure 16.5b, the order would be from right front

quarters (Q ) to the right back quarter (Q ) to the left front quarter (Q ), and finally to the

left back quarter (Q ). The idea of 40:30:20:10 space value is assumed to reflect the sale

percentages which are expected to be generated from these quarters.

Wholesale Layout

While customer satisfaction is a direct objective in retail business, it is indirect in the

wholesale business. Wholesale customers, who are mostly retail businesses, usually use

phone, e-mail, fax, and online communication to place their orders. This would make the

main objective the layout should help achieve is to make the staff of a wholesale warehouse

able to fill orders and ship material as quick and safe as possible. The typical layout for a

wholesale warehouse contains wide aisles, large and easy accessible shipping platform that

is usually placed in the middle, while separating the fast-moving and frequently ordered

material from the slow-moving and less frequently ordered material. Usually each would be

placed on one side of the warehouse. The purpose is to smoothen and speed up the ordering

and shipping process.

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Manufacturing Layout

The main objective of any manufacturing layout is to run the production process as

smoothly as possible in order to increase productivity, optimize time, and maintain safety.

Manufacturing layout comes in three types.

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Assembly Line

Assembly line is also called product line layout. It is where the production process is

arranged in sequential steps along a continuous line on which the product moves from

station to station until the initial input that enters at the start of the line turns out to be the

finished output at the end of the line. It is an efficient and highly controlled process but it

requires a significant initial cost of facility and equipment that would be covered over time

and with the increase in production size. This layout is suited for highly standardized

product, the typical example of which is the auto production. If the production process is a

little complicated and requires many work stations along the line, it would not mean the

line should be extended horizontally because that would not be cost-effective since it

requires also extending the land and building and everything else. Designers can utilize the

same lot to fit many possible lengths of the line by multiplying the length of the line as

needed. This would result in several possible shapes as it is illustrated in Figure 16.6. The

main point is to keep the line running unbroken.

Function (process) Layout

It is also called process layout. By this layout, the production process is arranged according

to a certain function of the equipment or timing or any other way that would not require a

predetermined sequence like in the product line layout. This type of layout is necessitated

by the variation in the production process or the lack of any standardized procedures. Since

the production involves several individual and different functions, the drawback would be

a harder control and lower productivity.

One-Spot Layout

Unlike the product line that would require the product to be assembled through a running

line, and unlike the functional layout that would route the product through several specific

functions, the one-spot layout requires the product to be completed in one fixed position

where workers and machines go around it and build it from the ground up. It is typical in

the shipyard and the aircraft production.

Service Layout
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Since services are significantly diverse, it would be difficult to imagine any standard layout

that would fit all types of services. Generally, we can classify services from the customer

contact perspectives into two major types.

– Services of a direct contact with customers such as hotels, restaurants, hair dressing,

dental work, and the like. Here, the primary consideration of the lay-out is to be

pleasant and safe for customers so that to ensure the highest customer satisfaction, if

the service is rendered in a competent and professional way.

– Services of indirect contact to customers, such as repair shops, where the customers

would not be present at the work site but they can only be in contact with the reception

and waiting area. Here, pleasing the customers with good appearance and kind

treatment becomes the primary objective for that section of layout. The typical example

is the auto repair where large dealerships pay a great deal of attention to offer a

customer receiving area that is neat, friendly, and welcoming.

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Figure 16.6 Assembly Line Patterns

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In both types of services, an important aspect that the planners should consider in designing

the layout is the ease of customers’ traffic flow and their parking. Needless to say, other

standard functional requirements have to be well considered for a successful layout such as

convenient and safe entrance and exit, adequate restrooms, proper lighting and climate

control (heating and air conditioning), fire hazard, and all the necessary adjustments for the

physically challenged customers.

Last but not least on the layout issue in general is a quick mention of the major factors that

would significantly impact any layout design. We can briefly put these impacting factors

into three categories: the exterior–interior structure and looks; sight, sound, and smell; and

the environmental consideration.

Exterior/Interior Considerations

The exterior layout can be summarized by how the store front would look like to a passerby.

The building size and architectural style, color scheme, lighting, signs, entrance and exit all

would give a first impression to customers that may instantly convey a certain message and

establish the business identity in the customer’s mind. In some businesses, such as food,

health care, and clothing stores, an attractive and neat look is essential because it would be

a major role into turning the customer either on or off. The impact of look and what it

would convey becomes even more effective in the interior space. Planners should consider

both the code requirements of health and safety and the ambiance requirements that would

offer comfort and stability to the employees and good and pleasant service to the customers.

Again, arrangement of merchandize, fixtures, and furniture along with the color and style

that are proper for the type of business and its customers needs to be done with

professional help that is based on studies and research maximize their ultimate benefits

into the business success.

Sight, Sound, and Smell Considerations

For a successful layout, all senses should be affected in a way that would lure customers in

and make them buy the product. The store sign, for example, plays an important visual

factor that could attract customers to the business by properly employing the visual

elements of size, color, contrast, style, and lighting. Good lighting is not only affecting

customers positively, it has been shown in several studies to positively affect workers’

attitudes and energy. Work environment with good natural light has been reducing

employees’ stress, increasing their productivity, and boosting their satisfaction. Many retail

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stores use certain background music to enforce the business image and strengthen the

connection to their target customers. Music during shopping hours can be effective in

increasing sales as long as it is chosen correctly in terms of its age, status, and cultural

appropriateness. As far as smell is concerned, everyone knows how powerful the food

aroma can be in attracting the customers. Whether it is the sizzling grill, fresh brownies and

cinnamon buns, or coffee, all have a significant impact on stimulating the customer’s senses.

Perfumes and cosmetic departments are famous for diffusing a pleasant smell, and

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many other stores of clothing, personal care products, furniture, home merchandize, and

appliances are experimenting with the effects of smell on their customers.

Environmental Considerations

The environmentally considerate culture has been powerfully creeping into the main

stream, especially in the last two decades. Businesses have been adopting increasingly

effective ways to use environment-friendly material and technologies, not only to go with

the joneses but also to reap the benefits of having satisfied and grateful customers and

employees. Many environmentally conscious methods have been almost a standard in many

production processes such as ways to save energy, conserve water, recycle material, and

reduce waste, pollution, and noise.

16.6 Summary

This chapter discussed the importance of considering and choosing the location and layout

of a business facility. It started off by categorizing the factors that would affect the election

of location into general and specific. Under the general came the entrepreneur’s preference,

operating cost, welcoming community, quality of life, and rules and regulations. Under the

specific factors that would be related to a certain type of business came the availability and

access to resources, proximity to the right market, competition, clustered industry, local

incentives, demographic characteristics, and complementary businesses. The next topic was

the types of business outlets and locations. They were for regular goods and services, for

special goods and collectives, and for comparatively shopped goods. Retail outlet locations

were categorized into freestanding and open plazas, shopping malls, and downtown stores

and vendors. As for the service outlets, they were either at the customer’s place or at the

server’s place. Wholesale outlets and production plants were mostly limited by their

requirements of space, equipment, and storage, and they usually stay outside the cities. The

narrowing of the decision process was discussed and a sample worksheet was provided. On

the technical side, Reilly’s Law of Retail Gravitation was explained and numerical example

and illustration were given.

For the layout design, the retail layout, wholesale layout, and manufacturing layout were

discussed with illustrations, and finally the common factors that impact the layout design

were listed and explained. They included the exterior–interior structure and look; sight,

sound, and smell; as well as the environmental considerations.

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Key Concepts

Layout    Enterprise zone    Comparatively shopped goods

Anchor stores    High level contact    Low level contact

Reilly’s    Law High involvement product    Low involvement product

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