The Facts About . . .
Starting a Small Business
So, you're thinking of starting your own business? Well, you're not alone. Last year thousands of people across the United States decided to exercise their independence by creating their own small businesses. It's the American entrepreneurial dream to take a business idea from the concept, research and planning stages to the day when you open your door, hang out your shingle or go live online.
Whether your target market is the entire world or just your neighborhood, the U.S. Small Business Administration has valuable information to help turn your entrepreneurial dream into a thriving new business.
New business owners often have the same concerns as new parents. Will I be successful? Who has done this before and can advise me? Where will I get the financing? What help is available, and how much will it cost? All those concerns seem to hit at once.
Most of those who succeed in starting their own businesses have planned for every phase of their success. Thomas Edison, the great American inventor, once said, "Genius is 1 percent inspiration and 99 percent perspiration." That same philosophy also applies to success in business.
To enhance your chances for success, first generate a little bit of that perspiration to eliminate the most common mistakes new business owners make. According to the experts, most novices should spend a great deal of time researching their potential businesses and the marketplace.
Developing a workable business plan can help smooth over the bumps in the road to your success. But, before you start your plan, carefully research and answer these basic questions:
Once you've determined that your business idea is feasible, answer these questions:
If you are starting a home-based business, you should answer these additional questions:
Your answers to these questions will help you create a focused, well-researched business plan that should serve as a blueprint. The plan should detail how the business will be operated, managed and capitalized.
Some questions you will be able to answer on your own. Others will require careful research. There are many sources available to help you find the answers and make informed decisions. The SBA's business information centers, located throughout the country, offer the latest in high-technology hardware, software and telecommunications to help you in your research. BICs offer electronic bulletin boards, computer databases, online information exchange, periodicals and brochures, counseling, videotapes, reference materials, texts, start-up guides, application software, computer tutorials and interactive media. One-to-one counseling with seasoned business veterans is available through SCORE members affiliated with the SBA.
Other sources include -
The Business Plan
Your business plan should cover the business basics from goals to management, from marketing to operations. A business plan is a blueprint for success, so don't scrimp on the details. A good business plan covers the following areas:
Small businesses must comply with federal, state and local laws and regulations. You need to know the legal requirements affecting your business.
Be sure to check with your state department of labor and county government. You may want to consult with an attorney for additional compliance assistance.
Registration and accounting requirements:
You may need a -
If your business has employees, you are responsible for -
The U.S. Business Advisor, a Web site found at www.business.gov, can help you identify and comply with federal regulations, and links you to the Internal Revenue Service, the Social Security Administration, the Occupational Safety and Health Administration, and numerous other federal agencies. You can also obtain federal tax information by calling the IRS at 1-800-TAX-FORM.
A home-based business is subject to many of the same laws and regulations affecting other businesses and some additional ones.
Zoning: Be aware of your city's zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on certain goods: Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink or clothing.
Understanding Your Market
Market evaluation is critical and provides the basic data that will determine if and where you can successfully sell your product or service. This process involves defining your goals, scrutinizing your competition and your customer base, and interviewing potential suppliers. The information collected can help you, if necessary, adapt your product or service to better meet customer needs. Market research can help you -
Questions To Ask
Your research should answer these basic questions:
Research on competitors is extremely important. Visit industry trade shows to find out what your competitors are selling and how they are marketing their products. Similarly, stay current on industry magazines and publications.
Market research isn't a one-time activity. Once you establish your business, you should stay in touch with your customers. You may have to adapt your product or service and alter your marketing strategy to keep up with your customers' changing needs.
Pricing Your Products and Services
There are several pricing strategies. Select the approach that will make your goods or services the most competitive and will help you reach your profit goals.
Retail Cost and Pricing
A common pricing practice among small businesses is to follow the manufacturer's suggested retail price. The suggested retail price is easy to use, but it doesn't adequately account for the element of competition.
Pricing Below Competition
This strategy reduces the profit margin per sale. It requires you to reduce your costs and -
One word of caution: pricing goods below the competition can be difficult to sustain because every cost component must be constantly monitored and adjusted. It also exposes you to pricing wars. A competitor can match the lower price, leaving you out in the cold.
Pricing Above Competition
This strategy is possible when price is not the customer's greatest concern. Factors important enough for customers to justify paying higher prices include -
This strategy targets a precise segment of the buying public by carrying products in a specific price range only. For example, a store may wish to attract customers willing to pay more than $50 for a purse. Price lining has certain advantages:
This approach involves selling a number of units for a single price, for example, two items for $1.98. This is useful for low-cost consumer products, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.
Cost Factors and Pricing
Every component of a service or product has a different, specific cost. Many small businesses fail to analyze each component of their commodity's total cost, and therefore fail to price profitably. Once you do this analysis, set your prices to maximize profits and eliminate any unprofitable services.
Cost components include material, labor and overhead costs. Material costs are the costs of all materials found in the final product, such as the wood, glue and coverings used in manufacturing a chair.
Labor costs are the costs of the work that goes into manufacturing a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers' compensation, unemployment compensation, insurance and retirement benefits.
Overhead costs are those not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat and light, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling and/or storage as well as other cost components. Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is also important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs semiannually, including increased executive salaries and other costs.
Understanding Cash Flow
Failure to properly plan cash flow is one of the leading causes of small business failures. Under-standing the basics will help you better manage your cash flow.
Your business's monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.
The Operating Cycle
The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash.
For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable credit sales, usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, increasing your cash. Now your cash has completed its flow through the operating cycle, and the process is ready to begin again.
Cash and other balance-sheet items that convert into cash within 12 months are referred to as current assets. Typical current assets include cash, marketable securities, receivables and prepaid expenses.
Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flow and will allow adequate time to plan and prepare for the growth of your business.
It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.
Planning a Positive Cash Flow
Your business can increase cash reserves in a number of ways.
Finding an Accountant
If you hire an accountant, find someone who is knowledgeable, capable and discreet. With the ever-changing complexities of tax laws and developments in accounting methods, it is important to look for an accountant who takes advantage of educational seminars, professional publications and other continuing-education opportunities. Professional accountants are listed in telephone directories under accountants, public accountants, bookkeepers and tax preparers. Look for references or recommendations from local business associates, your banker or your attorney.
Raising Money for a Small Business
One key to a successful business start-up or expansion is your ability to obtain appropriate financing. Raising capital is the most basic of all business activities.
There are several sources to consider when looking for financing. Explore all your options before making a decision. These include -
To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be aware of the bank's loan policies. Lending institutions generally require fully secured loans and sufficient commitment of capital by the borrower.
Types of Business Loans
Short-term loans: Short-term loans are paid back in less than one year. Types of short-term loans include -
Long-term loans: Long-term loans generally have maturities of more than one year but less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as -
Applying For a Loan
Approval of your loan request depends on how well you present yourself, your business plan and your financial needs to a lender or investor. The best way to improve your chances of obtaining a loan is to prepare a thoughtful and professional-looking proposal. The proposal is your business plan with a few important additions:
What Lenders Look For
Many loan officers will order a copy of your credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of yourself. The lender will also look at your work history and letters of recommendation. Using the credit report and the information you have provided, the lending officer will consider the following issues:
U.S. Small Business Administration
Financial Assistance Programs
The SBA offers a variety of financing options for small businesses. The SBA's assistance usually is in the form of loan guaranties. The SBA guarantees loans made by banks and other private lenders to small business clients. Generally, the SBA can guarantee up to $750,000 or 75 percent of the total loan value, whichever is less.
Whether you are looking for a long-term loan, a general working-capital loan, a revolving line of credit or a microloan, the SBA has a financing program to fit your needs.