Do I have what it takes to own/manage a small business?
A great many authors go on at great lengths about how to tell whether an individual has the personality to go into business for himself. That approach is nonsense. The only real questions are, do you have a choice? Can you accomplish what you want to do working for someone else? As to questions of self-discipline, motivation, capability, the prospect of starvation or ruin are marvelous focusers of attention. Unfortunately, the same does not go for accepting instruction. If the choice is between asking for help and failure, all too many will choose to go down in flames rather than ask for help. The real questions are can you ask for help before it is too late? And can you think three or four moves ahead covering several alternatives for each step? The answer to that question must include the ability to recognize when you don’t understand something and the ability to find explanations.
What business should I choose?
It had better be a business you like, since you are going to have to spend a lot of time at it. Beyond that, it helps to know something about the business. It probably isn’t a good idea to worry about which is the best business to be in for the immediate future. If you have no experience in that business, the wave will pass you by while you are learning. If you know enough about a business to run a company in it, you ought to be able to figure out if that business is going away. In this rapidly changing world, it is quite possible to succeed by getting into a business they didn’t know anything about, but that is almost invariably because nobody else knows anything about the business either.
What is a business plan and why do I need one?
The concept behind a business plan is: unless you can explain what you want to do, you don’t understand what you are trying to do. To say, “I know what I want to do, but I can’t explain it” is insulting to your audience and a self delusion. A successful business plan is one which convinces the reader that the author understands the business, has anticipated problems and come up with solutions. Put another way, the reader believes the business will work and the management can make it work. There are no end of books, software packages, consultants and advisors to help create a business plan. Stay well clear of all of them. The business plan has got to be your work. It has to be your thinking and your explanation. You are building your business out of words rather than money, inventory, etc. After you have written the plan, polished it and think it is as good as you can make it, then let someone familiar with your business shoot holes in it.
Why do I need to define my business in detail?
If you don’t understand your business, you probably won’t succeed.
What legal aspects do I need to consider?
Since you are creating a business that you know, you are aware of any licenses needed. You will have to know if zoning ordinances, covenants, etc. will impact where you plan to conduct your business. Taxes are the most important aspect of the business to understand--Not only what they are, but when they are due and to whom, ought to be included in the business plan. The plan should also include a discussion of insurance questions, what coverage and types of insurance are necessary. The nature of your business will probably dictate its structure (i.e. sole proprietorship, partnership, corporation, limited liability concern). Your local Small Business Administration (SBA) office and/or chamber of commerce will provide you with general information, but you will need to consult your attorney for advice specific to your enterprise, location and what you hope to accomplish by going into business (have something to leave the kids, build the business and sell it, etc.) You also must decide about your form of organization (corporation, partnership or sole proprietorship) or tax status (e.g., should you opt for a Subchapter S status?). You must also consider how you are going to raise money in the future. Do you intend, or think you might, go public? If you are going to rely on bank financing, you will probably have\to give personal guarantees. Can you protect your house and the kids’ college fund?
What do I need to succeed in a business?
Only three things are absolutely essential to success: industry experience, determination and the strategic planning. Strategic planning is understanding your resources and how to apply them to the greatest effect. There are three other basics which would be nice to have, but most people don’t start out with sound management practices, technical support and planning ability. Strategic planning will show you where your holes are in terms of managerial experience, if you assess yourself and the others in your company honestly.
Would a partner make it easier to be successful?
In some cases, a business partner guarantees failure, but usually, the operation would have failed anyway. The partners have to be equally determined to make the operation a success. Since everybody’s personal assets are on the line, there has to be a high degree of trust. Four factors have to be weighed in determining if someone should become a partner: Personality and character, as well as ability to give technical or financial assistance.
How can I find qualified employees?
If you know the industry, you should know who you want for key positions. If your business is going to succeed, you are going to have to manage costs closely. Look for versatility, people who can do more than one thing. Check prospects out as much as possible. Will they fit in? Were there problems where they worked before?
How do I set wage levels?
Good people probably aren’t considering you for the wages you can pay. They can probably get more than you can afford working for an established company. Be prepared to discuss stock options, profit sharing, etc. How much is the work worth to you? Can you get it done out of house? At what cost, are some of the questions you should ask yourself. You can get ballpark wage levels from your trade association and accountant. Several services provide industry cost ratios and profit margins for most SIC codes. While there is a minimum wage set by federal law for most jobs, the actual wage paid is entirely between you and your prospective employee. However, remember that what you pay an employee is only a fraction of what that employee costs.
What other financial responsibilities do I have for employees?
When considering how much to pay employees, remember you must withhold federal and state income taxes, contribute to unemployment and workers compensation systems, and match Social Security contributions. You may also wish to take out key employee life or disability insurance. Because laws on these matters vary from state to state, you probably should consult local information sources such as the state employment agency and/or SBA offices.
What kind of security measures must I take?
That, of course, depends on the type of business you are in. Shoplifting, embezzlement and robbery are major concerns for retail operations. Property damage and health are more important to farmers and ranchers. Industrial espionage is important to research and development companies. Aside from the obvious physical security precautions, good doors, windows and locks, the next best security measure is to attempt to hire honest employees and create adequate accounting controls and safeguards. Good housekeeping is a very cost-effective security measure. If you know where everything is and everybody knows you know it, the chances of things going missing are reduced.
Should I hire family members to work for me?
The answer to that depends on the family member. What would he or she bring to the business? Will he or she understand who the boss is? Will the other employees? If it doesn’t work out, how will you fire the family member? A more subtle consideration is that family members tend to want positions and titles. Acceding to those requests could complicate your business. Consider that you son wants to run is own show, so you spin whatever he was doing into a subsidiary in which the son is president. If you want to take the parent public, investment bankers are going to want you to roll the subsidiary back into the company. Depending on how the spin off was done, it could be a deal killer.
Do I need a computer?
Warren Buffet claims he doesn’t, but I am sure there are several computers are Berkshire Hathaway. If you need to keep track of anything, to bill anybody, to order anything, or to write anything, a computer is a good idea. How much computer you may need is another matter. A slightly obsolete machine may serve all your needs at a fraction of the cost of a new one. The key question is what software is available for the machine you are considering. Bookkeeping, check writing, inventory control and word processing are the minimum a computer can do for you.
What about telecommunications?
If you are in retail, being able to deposit credit card purchases electronically is probably useful. If you have more than one location, the ability to share information may be useful. If you travel, being able to get information on product availability, price etc., would be useful. The Internet is an invaluable source of information as well as way of transmitting data among employees and customers.
How much money do I need to get started?
Many businesses never get started because the people who want to start them don’t realize how little money they actually need. There is a tendency, especially among people who have been with large companies to take a large company approach. They think they have to start out with large offices, large salaries, huge staffs, and an full-blown Fortune® 1000 company. Even Alfred Sloan built General Motors one piece at a time. Most of the Inc.® 500 fastest growing private companies in the country were started with less than $10,000. You have to get the biggest bang you can from every buck. Don’t buy if you can rent. Don’t rent if you can hire somebody else to do it for you. Generate revenues as quickly as possible and you will need a lot less cash than you thought you would. There is myth going around that most companies fail for want of capital. That is emphatically not true. They fail because they had a bad strategic plan. They do not understand their resources and they do not deploy them correctly. An investigation of companies that fail will usually discover they spent money on something they shouldn’t have.
What are the alternatives in financing a business?
Wise-sounding frauds counsel, “never use your own money.” It sounds great, but if not you then who is likely to invest in you? Almost every potential investor or lender will want to know that some, if not all your skin is in the game. Once you have invested your money, they know that you are serious about the business The next tranche usually comes from family and friends or partners. Here, you have to start being careful. Make sure your family and friends know that you are running the business. Many will attempt to use their investment as an excuse to second guess you and attempt to run the business. The next level depends on the business and the stage of the company. Banks are a possibility. They supply about two-thirds of all small business finance. If no banks will lend, perhaps the SBA can help. If the company has receivables, commercial finance companies are a possibility. If the company can justify claims to fantastic growth potential, venture capital firms, local development companies and life insurance companies are a possibility. If the loan is to buy equipment, perhaps you don’t need it. Equipment leasing may be a better way. If you need to buy inventory, try to get your suppliers to extend credit. They probably won't do it to start, but as the relationship grows, some help may be forthcoming. These and other financing alternatives are discussed more fully in other portions of this site. See the Do-It-Yourself Capitalist area.
What do I have to do to get a loan?
Initially, the lender will want to know:
- How will you secure the loan
- What is the loan for
- How much do you want to borrow
- How will you repay the loan
You will answer those questions in a loan application supported by:
- A description of the company, its products and services
- A history of the company
- A brief professional biography of you and the other principals of the company.
- Financial statements for the past five years Projections of how the loan will benefit the company.
You will also have to submit the company’s organizational documents, stock book, minutes, and bylaws. In short, you will have to submit a business plan showing what the company has done and how the loan will benefit the company.
What kind of profits can I expect?
There is no way of telling. It depends on your ability, the industry, the location, your competitive position. Rules of thumb, called industry ratios, are available from several sources. Your library should have some of them. They generally give several ratios for companies classified by Standard Industrial Classification (SIC) code and by number of employees. The SBA and trade associations may also help. If you are thinking about buying a franchise, the franchiser should be able to tell you what other operations are doing. If he refuses, save your money.
What should I know about accounting and bookkeeping?
As much as you can. You will have to know how your business is doing almost every day in the beginning. “If you don’t know the numbers, you don’t know the business.” Beyond that, you will have to substantiate everything you say:
1. On your personal and corporate income, property, sales, franchise, business and social security taxes.
2. To potential lenders
3. To potential buyers when you decide to sell.
4. Your claims about the business, should you wish to sell it.
How do I set up the right record keeping system for my business?
Either you or your bookkeeper/accountant ought to set up a system which is easy to use and which provides you with the information you want when you want it. Beyond that, the type of business you are engaged in will dictate what records and information you have to have available. If you are running a liquor store or bar, the alcolholic beverage control authority will have quite a bit to say about how the records are maintained and the form they are to be in.
What financial statements will I need?
At the least, you should prepare and understand two basic financial statements: 1) the balance sheet, which is a record of assets, liabilities and capital; and 2) the income (profit and loss) statement, a summary of your earnings and expenses over a given period of time. Beyond those, a cash flow statement and statements which indicate how efficiently your money is working for you, (inventory and receivables aging statements) would be useful.
What does marketing involve?
Marketing is your most important organizing tool. There are four basic aspects of marketing, often called the "four P's":
- Product: The item or service you sell.
- Price: The amount you charge for your product or service.
- Promote: The ways you inform your market as to who, what and where you are.
- Provide: The channels you use to take the product to the customer.
Marketing encompasses much more than just advertising or selling. Marketing involves identifying potential customers and finding out what will convert them into actual customers. That includes finding out:
- What they want
- What they can afford
- How they decide on one product over another.
What about advertising?
Advertising will either drive your company to success or to ruin. A poorly conceived or executed advertising campaign is a waste of money which would have been better spent in almost any other way. Before spending money on a print and/or radio/tv campaign, explore less expensive alternatives such as flyers to introduce you to the community. Also, see above and figure out the best way of reaching the people your marketing data shows are the most likely to be potential customers. This is one area in which expert advice is useful. Work with someone experienced in writing ad copy and be very selective when it comes to buying media. Make sure your message will reach its intended audience. Don't buy time or space because it is cheap.
How do I set price levels?
In a competitive environment, i.e., when several companies are providing the same product or service, Long term price is determined by production cost, labor costs, overhead costs and acceptable profit margin. The price of a service or item is based on three basic Given those factors, it should be apparent that it is unwise to attempt of compete on price. Bigger companies with deeper pockets and economies of scale will always be able to under price a small company until it goes out of business. Every effort should be made to compete on service and quality--the ability to get the customer what he wants when he wants it. That ability is worth a premium. To find out how much of a premium you will have to find out how much it costs the customer to wait for your product and how much it costs him to have to return unacceptable products. The price you will be able to charge will be between going rate and the customer's actual costs.
Are some locations better than others?
Everyone knows that the secret to retail and real estate is location, location, location. Companies succeed in less than optimal locations when they understand the shortcoming (parking, display area, demographics) and come up with ways of overcoming them. It involves an in depth analysis of the location and the surrounding area.
Is it better to lease or buy the store (plant) and equipment?
To oversimplify what is actually a complex question, it is probably better to ask, "can you use the money you would have to spend on buying the property to increase revenues and profits? Clearly, if there is an opportunity to grow the business, why buy a building you might grow out of soon? Why bet that you have picked the right location without a test drive? As to equipment, the main point is the same. Is buying the best use for limited funds, especially if the equipment has a short life before it becomes obsolete?
Can I operate a business from my home?
Yes. In fact, it is likely that you will at least have to start out working at home Experts estimate that as many as 20 percent of new small business enterprises are operated out of the owner's home. Since you plan to make money with your business, make sure that you understand the tax ramifications of the home-office and how to set one up that meets the IRS's requirements. Local SBA offices and state chambers of commerce can provide pertinent information on how to manage a home-based business. It should also be noted that most deed restrictions and zoning ordnances will not come into play if: you don't have any employees and neither customers nor delivery people make a habit of coming to your door. If your business is something like a beauty parlor or an Amway distributorship, check the zoning and the deed restrictions. Neighbors tend not to like having their street blocked by cars or trucks.
How do I find out about suppliers/manufacturers/ distributors?
Nowadays, the simplest way is to get on the Internet and ask one of the search engines for what you want. Thomas Register is now online (www.thomasregister.com). Most libraries have other directories of manufacturers listed by state. If you know who makes the product line you are interested in, a visit to their website can help you find the local distributor-wholesaler, or may allow you to order directly. Trade shows are a good way to find out how competing products stack up.
Where can I go for help?
For information, the public library is the place to start. If your branch or main library does not have what you want, they may know of other sources and may be able to get you what you want at no or modest cost. Chambers of commerce have access to demographic and other information as do trade associations. The Small Business Administration has offices in nearly every major city in the country. SBA's Office of Business Initiatives operates the toll-free "Answer Desk" at 1- 800-8-ASK-SBA, to give callers direct referral to appropriate sources of information. The SBA also sponsors a variety of counseling, training and information services including the Service Corps of Retired Executives (SCORE), Business Information Centers (BICs) and Small Business Development Centers (SBDC). In addition, procurement center representatives can be found at each major military installation.
What do I do when I'm ready?
Once an acceptable draft of the business plan has been completed, it is time to ask for an objective appraisal of the plan. There are a number of sources for this appraisal. Ideally, it should be by an industry executive whom you admire and respect. Failing that, The Small Business Administration's Service Corps of Retired Executives (SCORE) has people who are prepared to précis your plan. The business department of a local college may also provide that service. Once the plan is fine-tuned, get out there and get going and good luck.

Tom Stewart-Gordon
President, Stewart-Gordon Associates, Inc.
Editor/Publisher, SCOR Report
Dallas, Texas
January, 1996

Last updated July 17, 2000