Small
Buisness Advice: How to Start New Buisness FAQ
Starting
a Small Business FAQ
To start and run a small business you must know and be
many things. As one small business owner attending a conference put it:
"When I came here, my business lost the services of its chief executive,
sales manager, controller, advertising department, personnel director,
head bookkeeper, and janitor."
This guide, based on questions asked by people in small business or
contemplating starting, suggests the many facets of running a small
concern that each owner/manager must become familiar with. While the
answers to the questions are hardly exhaustive of any of the subjects,
they provide the background for questions you may need to ask before going
into business, as well as suggesting sources of answers to those
questions.
Introduction
Almost everyone considering it has dozens of questions about starting a
small business. The only foolish questions, of course, are the questions
that aren't asked. Yet, many times we don't have enough information to ask
the right questions.
The questions in this guide are drawn from participants in training
courses for new entrepreneurs. Most of the questioners didn't own,
operate, or manage small businesses. Their questions are typical of what's
on the minds of potential business owners. You may have pondered similar
questions, as you thought about becoming your own boss.
The questions fell generally into areas such as the steps in setting up
a business, marketing, and financing a new concern. In this guide the
questions have been grouped by subject.
Answers to the questions came from experts in the various areas. These
experts include a lawyer, an accountant, a bank loan officer, several
small business owners, and market researchers.
These answers, it is hoped, will help you as you approach deciding on
becoming a small business owner.
The questions may suggest questions that you should find answers to
before you invest your money, time, and effort in a small business.
Starting Out
1. If you have money but no particular business in mind, how can you
get enough information on the best business to go into?
The best way of choosing your business venture is to look at your
experience and educational background. A thorough review will provide
leads on the business field you should enter - do what you know best. Even
more important, you must like the business field you are going to enter to
bring the enthusiasm and self-confidence you need to make the business go.
2. What are the basic survival skills you need to run a business?
The basic survival skills include a working knowledge of basic
recordkeeping; financial management; personnel management; market
analysis; break-even analysis; product or service knowledge; tax
knowledge; legal structures; and communication skills.
3. What special obstacles do women entering business face, and how can
these obstacles be overcome?
Women are at last making inroads into business, not only as executives
but as owners. There are many obstacles, chief among them the doubts that
lenders, suppliers, and in some fields, customers have about women's
ability to run businesses. These can be overcome with self confidence and
a strong belief in your ideas. You should not be discouraged by being
rebuffed by people who simply don't understand. As more and more women
enter business and succeed, the process will become easier and easier.
4. What are the most important factors that cause small business
failure?
There are, of course, many reasons for the failure of new small
businesses. One way of looking at the causes is to remember that a new
business is starting at zero momentum; newly entering a market, having to
establish supplier relations, finding proper financing, and training
employees. To coordinate all these facets and start them simultaneously is
a tremendous job. If you don't have experience and management capability,
success won't be very likely. You'll also find that undercapitalized
businesses, those without enough cash to carry them through the first six
months or so before the business starts making money, don't have good
survival prospects. In such cases, even businesses with good management
can founder.
5. If you're trying to buy a going service business, how can you figure
a reasonable price for the business that takes into account goodwill and
business contacts in addition to the value of equipment and inventory?
There are many methods, but basically what you're trying to do is set a
value on the assets and earnings record of the firm. The simplest way is
to determine the "payback period," usually two or three years. That is,
the net profit for two years would equal the goodwill value. A more
complicated and accurate method called the "net present value" method, is
based on the cost of capital and a risk factor. For that method an
accountant's help would be valuable.
6. What kind of a market study should you do before deciding to buy a
radio station?
Determining the price of any business is difficult. For a radio station
specifically, you can get the figures on the total revenue of all stations
in the area (that is, advertising revenue). You should also get the
percentage of the total market that the station you're considering has.
You must also determine the potential market for the area in advertising
dollars. Finding out the total number of businesses by line and size in
the area covered by the station and their advertising expenditures would
give you some insight. Really, you'd study the market like this for buying
any business.
7. How long does it take a new business to establish a good public
image?
A good public image takes a long time to establish (and only minutes to
lose). There is no set formula, but a good image depends on:
- The service, products, and customer treatment you provide;
- The market you're in;
- How you stack up against your competitors;
- The quality of your public relations and advertising programs.
If you're new to a market - and if you do what you say you're going to
- you may establish an excellent reputation in 18 to 24 months.
8. How do you find a good lawyer?
As with most personal services, you must have rapport with your
attorney. The best way to determine this is to talk to lawyers by phone or
visit them before you make a selection. Get recommendations from friends,
or your banker. You're looking for someone you can trust and who will take
an interest in you and your business.
9. Do you need a lawyer to start a business?
No, but it's wise to get the best advice possible when you're starting
out. An attorney is one source of the expertise you'll need to draw on.
Form of Business
10. What form of business do you recommend for a new business?
Each legal form, sole proprietorship, partnership, or corporation, has
its advantages and disadvantages. The one you should pick depends on your
circumstances, including:
- Your financial condition,
- The line of business you're entering,
- The number of employees,
- The risk involved,
- Your tax situation.
Don't assume, if you plan a one-person business, that sole
proprietorship is the way to go. See your lawyer.
The Market
11. How can you find out what the prevailing costs are for a service
business in your market area?
One way is simply to call competitors and ask their prices. Their
prices will give you a lead. You could ask competitors' customers for the
same information if you didn't want to go directly to the competition.
12. How do you go about determining the market for a mail order
business?
The principles of determining market share and market potential are the
same no matter how large the geographical area. You must first determine a
customer profile, the size of the market, and the number of competitors.
You could also use a readership survey given to you by a magazine in which
you intend to advertise.
Pricing
13. How do you figure markup and markdown?
Markup (markon) is the original amount that the merchandise is marked
up. Markup as a percentage (also called gross margin rate) is figured as a
percentage of sales. For example, say the cost of merchandise is $10 and
you want a 20 percent markup; what is the selling price (SP)? By
definition we know that markup as a percentage is given as a percentage of
sales. Thus, our
cost must be 80 percent of the selling price (100 percent selling price
- 20 percent desired markup).
So, our selling price is $12.50, cost $10.00, and markup $2.50 or 20
percent of the selling price.
Markdown (discount) is a reduction of selling price below the original
sale price. Assume the item is marked down to $11.25. The markdown is
$1.25 or a 10 percent markdown ($1.25 markdown divided by $12.50 original
selling price).
14. How would you go about establishing price guidelines for a business
renting items to customers?
Pricing is based normally on a combination of cost and market
competition. Trade associations are a prime source of such information.
Finances
15. What is the average expected net profit for small business?
Average net profits vary with the type of business - retail, wholesale,
service, manufacturing, construction. They also vary for the type of
business structure - proprietorship or corporation. Dun & Bradstreet
publish ratios which give you these figures, as well as lots of very
useful cost information.
16. Would you explain the meaning of "rate of return on investment"?
How is it different from net profit? Is it different from return on assets
employed?
Net profit (before taxes) is basically total sales for a specific
period less cost of goods and operating expenses during that period. (For
a retail business, cost of goods would be your cost of merchandise sold.)
Net profit is a function of both rate of return on investment (ROI) and
return on total assets. ROI is net profit divided by capital invested by
the owners of the company.
ROI is used to measure the effectiveness of management in attaining the
owners' desired return on their investment. Generally, the larger the ROI,
the more attractive a company is to potential investors.
Return on total assets is the net profit divided by total assets. This
measures the net profitability of the use of all resources of the
business. It is another tool for measuring management effectiveness in the
use of all resources borrowed and equity.
17. Does a bank require absolute top credit references from loan
applicants?
The better the credit references the greater the possibility of loan
approval.
18. If I estimate my start-up cost at $50,000 and can't put up anywhere
near the $25,000 that I've been told is what I should have for my share,
am I wasting my time even filling out a loan application?
In all probability you would be, although there are some exceptions.
For example, it might be possible to get a loan under your circumstances
if you were buying a business that's already operating well enough to
provide sufficient profits to cover its obligations and the loan.
Furthermore, if the applicant is the present manager who has made this
business go, the chances of getting such a loan are much better.
Help!
19. Getting money is difficult; keeping it may be even more difficult.
Where can I get assistance in managing my business?
Your accountant and bank can provide financial counseling which can be
very helpful in starting and managing your business. They can also give
you in valuable information on the local area and your market that can be
critical in making decisions in your business.
Food For Thought
The world is full of people who will be
happy to tell you why your ideas will not work. People who will laugh
at you for daring to dream big dreams. People who will call you crazy
for pursuing your goals.
Just ignore them. Their pettiness and mean spiritedness is their
problem, not yours. Sadly, some people take delight in destructive
criticism. Constructive, caring criticism is very useful and
necessary. But criticism for its own sake is something to simply
ignore.
Small minded people think that somehow they can improve their own lot
by putting down others. Small minded people have a zero-sum mentality
-- they believe that people gain success only at the expense of
others.
Nothing could be further from the truth.
True success comes only from providing something of value to the
world. Your dreams, your ambitions do not diminish the lives of
others. When you improve your own life, you cannot help but improve
the lives of those around you.
What is life for, if not to reach for the stars?
Have you ever tried to drive a car with only three tires? You won't
get very far. No matter how strong each of those three tires is, the
car cannot function if it is not balanced on all four tires. The
corner with the missing tire will drag the ground and prevent the car
from moving.
Similarly, the different aspects of our lives must be kept in balance
if we're planning to get very far. Ignore one part of your life, and
it will drag you down. Work toward balance, and all the different
areas of your life will serve to support and reinforce each other.
There are at least seven areas of life that we should strive to keep
in balance with each other. None is really more important than the
other, and none of them can stand alone.
1. Work - The productive, creative, activity of providing value to
yourself and others. A job, a business, volunteer work, training,
study -- these all fall under the category of work. Producing,
creating and serving others is something that is absolutely essential
to a meaningful life.
2. Play - This is "down time." Time when you can relax and enjoy
yourself, doing whatever you most enjoy. Often called recreation, play
time is a vital part of re-energizing and re-charging, literally
re-creation.
3. Mind - Regular exercise and stretching for the mind can make it
powerful and supple.
4. Body - Regular exercise and stretching for the body can make it
powerful and supple. (Hmmm, sounds familiar!) Your body is your home
for life. Respect it, enjoy it, and take care of it.
5. Spiritual - The part of yourself that transcends the material
world. Your spirit has no limitations and can take you anywhere you
want to go. Stay in touch with it and you'll develop a strong sense of
perspective.
6. Family - Including blood relatives and all the other people you
live with and closely identify with. Your family and your home give
you a sense of sanctuary, a place where you will always be welcomed
and accepted.
7. Social & Community - Interaction with others in our world. A
healthy social life will expose you to an endless stream of concepts,
ideas, experiences and opportunities.
Keep it all in a healthy balance, and life will flow.
Nothing succeeds like success. The best way to insure success in one
area is to have success in another area. When you're in the habit of
setting goals, and then achieving them, it gives you the confidence
and positive focus needed to reach even higher. And how do you start
the ball rolling?
A great way to bootstrap yourself into the momentum of success is with
micro goals. Get in the habit of setting small goals and achieving
them. Something like, "I will concentrate on this project until I
finish the next three sections" or "I will answer all my e-mail by
9:30." Make them realistic, yet challenging. Write them down, and then
check them off when they're done.
A detailed, prioritized "to-do" list is nothing but a collection of
micro goals. As you check each one off, you feel good. Soon, you get
to where you look forward to that good feeling. And that desire drives
you to set and accomplish more small goals. It's called a positive
feedback loop. And as your successful behavior reinforces itself, the
goals get bigger, more challenging and more meaningful. Your
confidence grows, along with your competence and discipline. You
literally get addicted to success. You demand more and more of
yourself. And you develop the habits and belief system that enables
you to achieve whatever you want.
It all starts with the smallest, 15-minute goal. Anybody can do that.
Just keep on doing it, hour after hour, day after day. Before long,
you're habitually successful.
|
|
