Building a successful small business requires self-evaluation of your strengths and weaknesses. A clear vision of the business, and what you are planning, to achieve is essential. The most important steps, that anyone planning to start a business must take, are proper research and planning. A thorough, workable business plan is crucial and will become an invaluable tool. The financing, legalities, licensing, insurance and taxes also need proper consideration. According to information provided by SCORE (Service Corps of Retired Executives), only a small percentage of new businesses succeed, with a daunting number failing within the first one to five years (SBA).
The first question you should ask yourself is; what business should I choose? The best business for you is one that utilizes your interests, skills and background. Consulting local experts and business owners about the growth potential of businesses in your area will increase your chances of success. The type of business and an appropriate location should be determined before taking any further steps. Buying or leasing property is something you will need to consider. Leasing is a good way to reduce start up costs. Before signing a lease, you will need to consult an attorney.
The next step is a self-evaluation. There are four basics of success in small business; sound management practices, industry experience, technical support, and planning ability. Unfortunately, very few people start their business with all of these areas well thought-out. You must honestly assess your strengths and weakness and try to employ people who can compensate for your deficiencies (Center for Entrepreneurial Assistance 4-12).
A business plan is necessary for all businesses, no matter how small or large. The plan forces you to look at the business in its entirety and is a good instrument to manage the business. A good plan creates a tool to measure and evaluate changes in the business. The business plan defines your business, identifies your goals, and serves as your firm’s resume. A good business plan is a crucial part of any loan application package, and is a selling document to potential backers. According to a handout used in a Pre-Business Workshop, hosted by SCORE, there is no specific format used for a business plan. Consult the lending institution that you are planning to work with and obtain information regarding their requirements. SCORE provides a sample outline to assist in writing a business plan.
There are seven sections to the outline provided by SCORE:
1. Title Page, including the new businesses name. Choose a name that is partially arbitrary or non-descriptive in conjunction with a name that is descriptive of goods or services provided. You should obtain a patent or trademark for the name. The business address and telephone number (if available) and the owner’s name and date of the plan’s preparation.
2. Table of Contents, prepared after all other sections.
3. Executive Summary, this is the heart of the business plan and is prepared after all other sections. The executive summary will include items such as; business structure and proposed business goals, products, services and production processes, marketing strategy, the financing needed, and terms of payment, and who will be on the management team and their skills.
4. The Company, this is the place to specify the organization as a proprietorship, partnership, corporation, etc. The management team is also described in this section, as well as their experience. Address the opportunities and potential threats in this section, e.g.; hazardous waste, patents, copyrights, etc. Detail products and services in this part of the business plan. In addition, the facility requirements would be outlined in this section.
5. The Market, including industry trends and an extensive marketing plan. Market components to consider when preparing a marketing plan, according to SBA, are the four P’s; product (items or services you sell), price (the amount you charge for products or services), promote (the ways you inform the market as to who, what and where you are), provide (the channels you use to take the product to the customers). In addition, a complete market analysis, along with the findings, must be explained in this section. The public library has a center with regional analysis data that would be helpful.
6. The Financial plan, this section shows projected profit and loss for the first 3 years of operation, balance sheets for opening day (and projected for three years), projected cash flows, (monthly and annually for the first three years).
7. Appendix, resumes of owners and key employees, owner’s financial statement, and any pertinent reports, contracts, leases, etc.
The business owner should write the business plan, and follow the plan that has written. There are software packages available to assist in writing a business plan (Gumpert 17-25).
The term for financing the new business is venture capital. Venture capital is the term used to describe the financing for any new untried business (Williams and Sloat 83). The lender will ask three major questions; how will you use the money? , how much do you need? , and how do you plan to repay the money? A thorough business plan will be the key to securing financing. Banks are not in the habit of lending venture capital, so you may need to be creative to secure funding. Additional funding resources may include personal funds, friends and relatives, state programs, home equity loans, and various business loan organizations. Although, there are very few grants available for the typical small business start up, you may be able to get a financial backer. A financial backer may be a person with the available funding, who believes in your idea and plan. Placing an advertisement in a local paper, for financial backing, is also an option. Consider that you may need to acquire loans with high interest rates. When attracting venture capital, be aware that lenders will not accept minimal interest, but will instead require high interest or even a percentage of the new business. Partnerships often occur because one person may have the new business idea and wants to manage the operation, while another may have the money for start up and associated expenses. A silent partner, one with no direct day- to-day operational contact, may be a viable option (Williams and Sloat 83-98).
In choosing a location, you may want to consider a small business incubator. Some incubators offer fledgling companies space to lease at a lower than current market value rate. Most of these facilities offer tenants either free or low-cost business counseling or training and shared office equipment and services. Access to capital and other start up resources make this an especially attractive opportunity. In most cases, the small business incubator is only available for 3-5 years.
In addition, various licenses may be required for your business to legally operate. The Business License Division has applications for the business license. The fee will vary based on location, type of business, and anticipated income. Additionally, locating your new business in a commercial-zoned area may require various clearance procedures. Depending upon your business type and location, you may need to consider contacting the Zoning Department, Building Inspector, Fire Marshal and possibly the local and state health departments (SBA).
Insurance coverage for your new business should include fire, theft, robbery, vandalism, and liability. Any one of these situations could be catastrophic to a new company without the proper coverage. In addition, many lenders require specific coverage (SBA).
The appropriate tax forms are automatically sent to you when you register your business and file for an employer identification number. Contacting the IRS is the best way to ensure that you comply with all required taxes. Several of the taxes to consider are income tax, state and federal unemployment tax, social security and employment tax (SBA).
Planning a business without taking advantage of the numerous resources that are easily available to assist anyone considering a new business is foolish. The SBA (Small Business Association) sponsors a variety of counseling, training, and information services including SCORE, BICs (Business Information Centers), SBDCs (Small Business Development Centers), and WBCs (Woman’s Business Centers)(SBA).
As an example, a dear friend of mine had a small business seven years ago. She offered homemade baked goods, a variety of coffee and homemade chocolates. I recall that she mentioned how she visualized her business growing. I questioned her as to how she would ever achieve her goals. She had virtually little or no parking (at her present and affordable location), and the problems associated with the making of homemade candy in large quantities without compromising the quality and taste. At the time, I thought her goals were a bit too lofty for what she had to work with. Unfortunately, her business closed after a few years of her working grueling hours and making very little money.
I think that many small business owners would have reconsidered their business endeavors if they had taken the time to do a business plan and research the proposed business thoroughly. According to SCORE, the latest estimate is that one-third of small business fail in the first year, while 50% fail within five years. The major causes of business failure are poor management, poor financing and poor marketing. Starting a new small business can prove to be a very rewarding and profitable experience, when planned and executed well.
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