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Starting Your Business by Business Owners Toolkit Many of us hear the Siren song of small business. Complete freedom. Unlimited opportunity. Dreams realized. But of those who answer it, most don't succeed. Why? What separates those who succeed from those who fail? Knowledge of the business, sufficient capital, good experience, and a unique idea at the right time are just some of the characteristics of a successful business owner. Although there isn't any way that you can guarantee that you'll become a successful owner, you can greatly improve your odds by becoming well-prepared for the task. That's where we come in. We'll take you through the process of starting a new business, from thinking about it to planning it to actually doing it. |
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Do You Have What It Takes? Starting a small business takes a lot of courage. But, as they say, courage doesn't pay the bills. To be successful – to stay in business – you need more than courage. You need a combination of hard work, skill, perseverance, and good old-fashioned luck. Generally, people who start their own businesses can be grouped into two broad categories. The first group consists of people who know exactly what they want to do and are merely looking for the opportunity or resources to do it. Usually, these people have already developed many of the skills necessary to succeed in their chosen field. They are also likely to be familiar with industry customs and practices, which can help during the startup phase of a new business. The second group consists of people who want to start their own business, but don't have any real definite ideas about what they'd like to do. While these people have developed skills in the course of their employment or education, they may not be interested in opening a business in the same field of endeavor. How you proceed will depend, in large part, on which group you're in. For those who know what they want to do, the task is a bit easier. There's no need to research business ideas and opportunities to decide which might be suitable. Instead, these folks can jump right in and assess their chances for success in the type of business they've selected. Those who merely want out of the traditional corporate world have an extra step: choosing the right small business for you. In this section, we'll take a closer look at just how much hard work, skill, and perseverance you'll need if you're to be successful. (We can't do much about the luck.) We'll try to give you a sense of what you can expect from a small business, as well as what a small business will expect from you. To evaluate your own aptitude for small business ownership, you need to: Understand the responsibilities of ownership. What's involved in owning a business and what are the roles you'll have to play if you own one? This is a good place to start if you're considering starting your own business but haven't owned one before. Set your goals. What do you want from your business? If you want to "succeed," how will you know if you get there? Knowing what you want from your business permeates all of the other decisions you'll have to make in starting a new business. It will affect which business you choose, how you evaluate your chances for success, and how you determine if you have the right skills. Find out if you have the right stuff How can you evaluate your own skills and make judgments about whether you're ready to own your own business? This is a good place to start if you already know that you want to own a business. Estimate the impact on your everyday life. How will your life change when you become a business owner? Many of the more "secure" aspects of employee life will vanish when you open up your own business. BOT
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The Right Small Business for You Finding the right small business to meet your individual strengths, needs, and goals has two components. What kind of business should you start? Many people who want to start a small business have a pretty good idea of what type of business they want to own. But some only have a general idea, while others don't have any idea at all. Should you buy an existing business rather than build from the ground up? A business or franchise that's already operating can save time and, sometimes, money BOT
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Choosing a Type of Business Most of the books you can read on the subject of finding a small business will tell you that the best place to start is with a matching of your skills and experiences to some business that requires those skills. For example, if you love to cook, they'll suggest you open a catering business or a restaurant. If you have a strong interest in something, think about the needs of other people who share your interests. Is there something you can provide? It may help to think in terms of goods and services. Most businesses involve a mixture of both, but this dichotomy can help narrow the focus. Ultimately, considering doing something you love is a start, but it has to be further analyzed by examining the market potential, competition, resources required to enter the market, consumer/buyer demand, and uniqueness of the idea. Of course, you don't necessarily have to sell a new or different product or service in order to succeed; you can succeed if you can improve what is already being sold. In the above example, you should open a catering business if you can provide a better service than other catering businesses, such as a wider menu or lower prices. But that's still a function of what consumers want. Your research would have told you that there is a demand for a new catering business if prices were lower or if the menu were more varied. Now that you have an idea of what you need, here's how to get it: A comprehensive study and analysis of all your potential markets is something most small business owners either don't know how to do themselves because they lack the training or can't afford to pay someone else to do because it's so expensive. But there are a few less expensive (and, admittedly, less scientifically exact) techniques that you can use to find out what consumers want. Once you have some idea of what the market wants, now is the time to begin looking at your skills and experiences. You'll need to match your skills with what the market wants. Once you match your skills to what's available, you should be well on your way to picking the small business that's right for you. As we all know, a lot of new small businesses fail each year. In most of those cases, the small business owners were probably convinced that their idea for a business was a perfect match for their skills. They were wrong. But you can learn from their errors by avoiding the mistakes they made. In fact, there are some common mistakes that many failed small businesses make. BOT
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Work Smart The best place to start in picking a small business is with consumers (including other businesses that may want your product or service). What do consumers or businesses want that's not being provided to them? Ultimately, whether you succeed will depend upon whether you are able to meet some unmet need in the market. In fact, if you love to cook, you're more likely to succeed if you open an interior decorating service – even if you know nothing about interior decoration – than you are if you open a catering service, if there is a demand for interior decorating services but not for another catering company in your area. It's far easier to hire someone who knows something about interior decoration than it is to sell consumers something that they don't want.
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BOT Market Research Techniques If money is not an issue, you may want to contact a market research firm and ask them to analyze your community and find out for you where small business opportunities exist. If, like most of us, money is an issue, you'll have to gather the information yourself. A good place to start is with the mainstream press: your local newspaper, The New York Times, The Wall Street Journal, Time, U.S. News and World Report, Newsweek and USA Today. You should also look at the business press: Fortune, Forbes, Business Week, or any of the other business periodicals to which you have access. When you read them, look for trends that may be emerging, not just in business but in our culture at large. To give you some idea of what you should be looking for, here are three examples of current trends and how you might parlay those trends into a small business. Trend #1: Increasingly, husband and wife are both wage earners. This means that many couples don't have the time or energy to perform tasks that were most commonly performed by the wife. How can you fill in the gap? Some business ideas are: child care provider, grocery delivery service, house-cleaning service, interior decorator, dog walking service, household manager, and gift purchase and delivery service. Trend #2: In an effort to cut costs, many companies have laid off employees. This means that companies are increasingly looking outside of the company to perform tasks previously performed in-house. In business-speak, it's called outsourcing. Ask yourself: which tasks are businesses most commonly outsourcing? Some business ideas are: copywriting services, legal and paralegal services, billing and other human resources-related services, public relations services, and meeting planning. Trend #3: Computers are now everywhere. Many businesses, however, lack the in-house expertise they need to take full advantage of the emerging technologies. How can you meet the need? Some business ideas are: Web site developer, graphics designer, desktop publisher, and database consultant. In addition to reading newspapers and magazines, you should talk to friends, relatives, business associates, and other small business owners about ideas they may have or needs in the market they don't believe are being met. And, last but not least, don't forget the often most-overlooked resource - yourself. You're a consumer. If you've wished that a particular service were available, chances are that others have too. Also, when you think about market opportunities, think about how you can improve upon a product or service that is already being provided. But be aware that there are at least two potential stumbling blocks here. The first is the tendency to believe too readily that you can improve upon an existing product or service. This is just old-fashioned overconfidence. Be sure that you've thought through the specific things you can do to improve what's already out there. The second is the fact that your being able to improve upon a product or service is no guarantee of its success. In other words, you must be sure not only that you can improve what's already there, but also that there is also a demand for the improvement. For additional information on how you might develop a market opportunity, consider the following: niche marketing additional social and business trends
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Market Research Today the world is defined by the term "information age." All businesses require accurate and timely information to be successful. Whether your company is large or small, the right amount of financing, equipment, materials, talent, and experience alone are not enough to succeed without a constant flow of the right business information. Many large companies make market research into a very sophisticated and lengthy process, so that they can find out everything possible about their customers. For example, Philip Kotler, author and economist, writes in Marketing Management, "Coke knows that we put 3.2 ice cubes in a glass, see 69 of its commercials every year, and prefer cans to pop out of vending machines at a temperature of 35 degrees . . . We each spend $20 per year on flowers; Arkansas has the lowest consumption of peanut butter in the United States; 51 percent of all males put their left pants leg on first, whereas 65 percent of women start with the right leg; and . . .P&G once conducted a study to find out whether most of us fold or crumple our toilet paper. . ." While you probably won't be able to afford a separate marketing research department to gather and monitor all the information that could possibly help you, all successful business owners must know their markets, competitors, customer wants and needs, and "what it takes to be competitive." It is not enough to know the answers to what, where, when, and how questions about our businesses. We also need to know why people buy our products and services. You should expect to budget at least a minimal amount of time and money for research, especially if you are starting a new business or branching out into a new direction. Determine your market research needs and objectives. The first step in doing market research is to decide what you really need to find out. The kind of information you are seeking should determine the type of research you will do (although of course budgetary constraints will play a part in your decision). Do you need to obtain a general feel for how key target buyers think about your product category and its various types of items, brands, and buying occasions? If so, interviewing groups of target buyers in focus groups may be the way to go, even though this type of research indicates only directional trends and may not be statistically reliable. Or is the confirmation of general trends in your industry sufficient? In that case, reading information from outside information services, industry trade associations, and industry experts may be all that you need to do. You may wish to conduct blind tests of different formulas before finalizing recipes for a new product. In that case, you can do "laboratory" tests, where brands, packages, and names of products are not revealed to the test subjects, and achieve statistically reliable results at the 90 percent to 95 percent confidence level of predictability. Or perhaps you have completed extensive product development and testing and are now ready for a field test of your prototype products. Market research procedures. Generally, market research procedures break down into the following categories: Primary research: Research involving the actual data-gathering about the specific usage patterns, product feature likes and dislikes, etc., of target buyers or current users of your products is considered primary research. Secondary research: Most of us are familiar with secondary research from doing library research with books and periodicals. With secondary research, someone else has done the actual data-gathering in the field and has written it up in a form that's easier for you to use. Secondary research is generally much less time-consuming and cheaper than primary research. These two main types of research can be further broken down into sub-categories, as follows: Market research possibilities for small companies. As you can see in the chart above, there are many market research techniques available. However, some may not be affordable or appropriate for your company. Managers of smaller companies may have to be more creative and proactive in: deciding to do a limited amount of necessary research and setting affordable budgets working with market research specialists or outside experts to define research problems and the design of the research accepting the possibility of a greater number of errors or a "lower confidence level" in the mathematical predictability of research results due to: small budgets small sample sizes samples chosen in a manner that's not completely random conducting and analyzing the necessary market research yourself or with company personnel BOT
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bot Your Business's Financing Profile Most entrepreneurs consider their resource pool to consist of whatever personal assets they're willing to sink into the business, and whatever money they might be able to get through a local bank loan. Yet, a number of alternative (or additional) financing options may be available to you. To assess whether your business can take advantage of any of these financing options, you should begin by realistically evaluating the investment profile and creditworthiness of your enterprise. The basic things to consider are: the stage of your business's development in the financial life cycle of that type of business (e.g., startup, developing, or mature) the appeal of your business and its operators, in the eyes of investors the amount of capital needed for your business whether personal financing can cover most of your needs whether insider financing can fill the gap between what you have and what you need whether bootstrapping can reduce your need for additional funds our quick pick chart showing the best financing options for businesses in different stages of development
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Save Time Most financiers will request certain financial statements and a business plan from you before they are willing to invest in your business. In order to be prepared for this scrutiny of your business, your should make your assessment of the creditworthiness and investor appeal of your business before you develop a business plan. While the plan should reflect your personal business goals, keep in mind who your audience is, and draft the plan so that it sells your ideas to people who are in the business of making money.
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bot Building Your Personal WealthAs a small business owner your personal finances are closely tied to how successfully you manage your business finances. But even if business is booming and your company is incredibly well managed (of course!), this does not mean that your personal financial picture will always be so rosy. Maybe one of these statements hits close to your financial situation: You feel that your personal finances are in order. You are enjoying a satisfying lifestyle, and are able to pay all necessary expenses, while staying on track to meet all your financial goals, including retirement. Still, you're always on the lookout for an idea or two to make things even better. You seem to be doing OK on a day-to-day basis. You generally pay your bills on time, have an acceptable standard of living, and are able to meet relatively short-term goals (such as a new car or a vacation). You have been able to save some money, but you have the nagging feeling that it won't be enough to meet major long-term goals, like retirement. The phrase "the faster I go, the behinder I get" seems to best describe your personal financial picture. You're working hard and your business is churning out a good income, but you still have trouble making ends meet. What's more, you'd rather not think about how things will be when you retire. What is going wrong? Whatever your situation is now, planning can help you to build your financial wealth. Creating your wealth-building plan shows you how to get started by taking inventory of your current assets, budget, and other arrangements; setting and quantifying goals; and developing a plan to get "from here to there." Building blocks of financial plans helps you to examine the elements of your plan, including compensation and benefits, investing outside the business, retirement planning, insurance, credit and borrowing, and options for legal forms of ownership. Passing along wealth to your heirs discusses the importance of having a will, and presents your options for ensuring the right people receive your assets. It also explains the operation of estate taxes, and discusses ways to keep your hard-earned dollars out of the tax-collector's grasp.
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bot Managing Your Business Finances If you want to succeed in business, you need to know about financial management. No matter how skilled you are at creating a product, providing a service, or marketing your wares, the money you earn will slip between your fingers if you don't know how to efficiently collect it, keep track of it, save it, and spend or invest it wisely. Poor financial management is one of the leading reasons that businesses fail. In many cases, failure could have been avoided if the owners had applied sound financial principles to all their dealings and decisions. Financial management is not something that you can leave to your banker, financial planner, or accountant – you need to understand the basic principles yourself and use them on a daily basis, even if you plan to leave the more complicated work to hired professionals. In this module we'll outline the basic concepts of financial management, as they apply to small business owners, starting with the simplest, everyday bookkeeping tasks and moving on to more sophisticated concepts: Your basic bookkeeping explains how to record daily transactions, work with your accountant, and, for the do-it-yourselfers, how to close the books and draw up financial statements. Credit and collections discusses the pros and cons of accepting credit cards or offering trade credit, and tells you how you can more quickly and effectively collect the money your customers owe you. Managing your cash flow describes the professional way to manage your cash flow to reduce the lag between cash outflows and inflows, and tells how to invest the surplus cash you'll soon have on hand! Major purchases and projects shows you how to evaluate larger investments in capital equipment or business facilities, by using some of the same financial tools used by accountants and other financial professionals. Analyzing your current financial position delves into some of the more sophisticated ways of examining your financial statements and other aspects of your business, to identify trends, spot problems before they become too large, and compare your business to others in the same industry.
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bot Your Basic Bookkeeping To succeed in business, one of your most important tools is financial analysis, based on your business records. Accurate financial records will help you answer some very important questions. Are you making money, or losing it? How much? Is your business on sound financial ground, or are troubles lurking ahead? A sound bookkeeping system is the foundation on which all of this valuable financial information can be built. As a small business owner, you probably rely on an outside accountant to do your taxes and prepare financial statements. However, like many small business owners, you may find that it's too expensive to pay an accountant to do routine bookkeeping chores. Someone in your organization must take on the responsibility of keeping an accurate set of financial records. Fortunately, you may find this task easier than you thought, especially if you use your computer. In the following sections, we'll discuss: the importance of good records working with your accountant the accounting system and accounting basics how to record daily transactions closing the books at the end of an accounting period preparing financial statements tax accounting and how it compares to your financial accounting
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BOT Importance of Good Records Unless your business is accounting or bookkeeping, keeping financial records is probably not what you do best. Most likely, you'd rather spend your time selling your product or service. However, if you are going to run a successful business, accurate and timely financial information is a must. Here are some of the reasons why you need a good financial recordkeeping system: Monitoring the success or failure of your business. It's hard to know how your business is doing without a clear financial picture. Am I making money? Are sales increasing? Are expenditures increasing faster than sales? Which expenses are too high based on my level of sales? Do some expenditures appear to be "out of control?" Providing the information you need to make decisions. Evaluating the financial consequences should be a part of every business decision you make. Without accurate records and financial information, it may be hard for you to know the financial impact of a given course of action. Will it pay to hire another salesperson? How much will another production employee cost? Is this particular product line profitable? Obtaining bank financing. A banker will usually want to see financial statements: a balance sheet, income statement, and cash flow budget for the most current and prior years, as well as your projected statements showing the impact of the requested loan. A banker may even want to see some of your bookkeeping procedures and documents to verify whether you run your business in a sound, professional manner. Obtaining other sources of capital. If your business has reached the point where you need to take in a partner, any prospective partner will want to become intimately familiar with your financial picture. If you need capital and are thinking of taking in an outside investor, you will need to produce a lot of financial information. Even your suppliers and other creditors may ask to see certain financial records. Such information may be produced by your outside accountant, but it is based on your day-to-day recordkeeping. Budgeting. All businesses should use a budget for planning purposes. A budget will help keep your business on track by forecasting your cash needs and helping you control expenditures. In addition, if you are seeking bank financing or other sources of capital, a banker or prospective investor will probably want to see your budget as evidence that your business is well planned and stable. You must have solid financial information to prepare a meaningful budget. Preparing your income tax return. Whether your business is a sole proprietorship, partnership, or corporation, you must file an income tax return and pay income taxes. With good records, preparing an accurate tax return will be easier and you're more likely to be able to do it on time. Poor records may result in your underpaying or overpaying your taxes and/or filing late (and paying penalties). If your accountant prepares your income tax return, poor records will almost certainly result in your paying higher accounting fees. If your business is a partnership, not only will you have to prepare a partnership tax return, but partnership return amounts will pass directly to the tax return of each partner. So your recordkeeping will directly affect the tax return of each partner. Complying with federal and state payroll tax rules. If you have employees, you are aware of the myriad rules and regulations relating to payroll taxes. Payroll tax deposits must be made according to strict deadlines. Late payment of payroll taxes results in severe, and unnecessary, penalties. Also, you must file a payroll tax return every quarter, which you must reconcile with the payroll deposits made during the quarter. Then at the end of the year, you are required to give your employees and the government W-2 forms, which must agree with your quarterly payroll returns. Sound bookkeeping practices will make compliance with all these payroll rules easy. Poor records will make it impossible. Submitting sales taxes. If you collect sales tax from your customers, good records will make it easy for you to compute the tax due and prepare the required reports. Distributing profits. If your business is a partnership, you will need good records to determine the correct amount of profits to distribute to each partner. If you are operating as a corporation, you must determine the company profits that you will be paying out as dividends to the shareholders.
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Working with Your Accountant In most cases, with a little study and help from computer software tools, you should be able to manage your most basic financial records without the help of an accountant. This includes the daily recording of transactions, maintenance of a general ledger, and maintenance of your cash records. There are some other records you may need to maintain, depending on your business, such as accounts receivable ledgers and accounts payable ledgers. You may need an accountant to help with less routine tasks, such as preparing periodic adjusting entries, financial statements, closing entries, and income tax returns, or helping you prepare a budget. You may also decide to have your accountant set up your books when you first open your business. If you've been in business for a while, your accountant could give your bookkeeping procedures and records a one-time or periodic checkup. If you are using an outside accountant, how often will you need his or her services? At a minimum, you will need your accountant to help you close the books annually because you have to file an income tax return every year. If you are having financial statements prepared, you will want them done at least annually. However, annual financial statements may not be enough to help you keep tabs on your business. You may want financial statements every quarter, or even monthly. Depending on the size of your business, you may want to have your accountant close the books every month, particularly if you need to submit monthly sales tax to the state. For more on dealing with an outside accountant, see our discussions on: selecting an accountant getting records ready for the accountant
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BOT The Accounting System Before you can set up your accounting records, dive into your day-to-day transactions, and get your books ready for end-of-month or end-of-year reporting, you must gain an understanding of basic accounting concepts. Accounting is the method in which financial information is gathered, processed, and summarized into financial statements and reports. An accounting system can be represented by the following graphic, which is explained below. Every accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check or a sales invoice. A journal is a place to record the transactions of a business. The typical journals used to record the chronological, day-to-day transactions are sales and cash receipts journals and a cash disbursements journal. A general journal is used to record special entries at the end of an accounting period. While a journal records transactions as they happen, a ledger groups transactions according to their type, based on the accounts they affect. The general ledger is a collection of all balance sheet, income, and expense accounts used to keep a business's accounting records. At the end of an accounting period, all journal entries are summarized and transferred to the general ledger accounts. This procedure is called "posting." A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger. The sum of the debit balances should equal the sum of the credit balances. If total debits don't equal total credits, you must track down the errors. Finally, financial statements are prepared from the information in your trial balance. Your accounting records are important because the resulting financial statements and reports help you plan and make decisions. They may be used by some third parties (bankers, investors, or creditors) and are needed to provide information to government agencies, such as the Internal Revenue Service. For a more in-depth explanation of the accounting system, take a look at the following: accounting basics definitions of accounting terms cash vs. accrual accounting who can use the cash method? single- or double-entry accounting
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