Starting a business is a minefield for the unwary. If you don=t know what you are doing, no matter where you put your foot, you are likely to step in an unpleasant surprise. Some are fatal, others merely uncomfortable.

The number one fatal step is to choose an incompatible business. Bright people who are successes in their jobs sometimes make foolish choices when they decide to go into business for themselves because they underestimate what is involved. A good friend left a senior management position at Exxon to run a hardware store in the wilds of rural Minnesota. This fellow had run part of a multi-billion dollar worldwide petrochemical business. How hard could it be to run the only hardware store in a one horse berg on the plains? Harder than he thought. He was back at his desk in Houston within 18 months. He said there were three reasons that he threw in the towel.

The first was that his wife hated the town and the second was that he couldn=t make a go of the hardware business. The skills he learned at Exxon didn=t translate. While he enjoyed tools and tinkering, he had no interest in displays, stocking levels, promotions, advertising, or the many other things a small business person must do.

The third was that when he realized just how many washers, nails and glue sticks he was going to have to sell to be able to save enough to put the kids through college, he knew he couldn=t do it.

Unrealistic expectations are a key reason that many small business owners fail. Those expectations generally come from a faulty business plan. Business plan is an unfortunate misnomer which has encouraged countless would be entrepreneurs to throw thousands of dollars away by purchasing off the shelf Abusiness plans.@ A business plan is an in depth analysis of a particular business run by specific people in a certain location. It is not a generalized blue print or a set of instructions. What a business plan does is attempt to approximate running the envisaged business on paper so that it doesn=t fail in life. It tells the entrepreneur what he will have to do to reach desired goals. How many washers, nails and glue sticks he will have to sell at what price to earn a living? To do that, he will have to know how many customers he can expect, which means he will have to know how much parking will be available. Knowing what the average customer spends is a good thing, but he should also know how long it takes him to spend that much. When customers come. For instance, if he is running a sandwich shop, it is logical to expect that most of his customers will come for lunch. Therefore, his parking requirements may be much bigger than the beauty shop next door which sees a steady stream of customers all day.

Inaccurate sales forecasts have lured unsuspecting people into losing businesses simply because they never asked the key questions:

What has to happen to make this forecast occur?

How probable is it that those events will occur?

For instance:

Is there enough parking for that many customers?
Can that many customers actually fit in the shop?
Does this location serve that many potential customers?

For instance, if you are in the middle of acres and acres of apartment houses, it is not likely that much of your business will involve selling tools other than screw drivers and hammers. You may sell some paint, but not much in the way of plumbing supplies, because the apartment maintenance department will handle the leaky faucets, etc. Knowing that nationally, the average hardware store customer buys 100 pounds a year of fertilizer, two wrenches and three special purpose plumbing tools a year won=t help you at your location.

The three rules of real estate and retail are location, location and location. Don=t be lulled into a false sense of security just because you are buying an existing business which has been at the same location for ever. Neighborhoods change. Kids grow up and move away so if you are planning on selling sounds and videos, you might be in the wrong place. You " gotta know the territory" and a lot more.

In Tulsa, Okla., the Cherry Street Brewery had it made. The company raised $1 million from local investors in three months, which gave it money and a customer base, since investors tend to support the companies they are invested in. The venture died in a year and a half.

For reasons that can only be ascribed to total insanity, management agreed to a ruinous lease agreement. By the time the pub opened, it didn=t have $1 million in cash, but rather had $300,000 of debt. Location is important, but it has to be an affordable location. No matter how much you want a location, negotiate, negotiate, negotiate until your plan says it is possible to pay the rent and costs and make a profit.

Check with Robert Morris Associates, Dunn & Bradstreet, the Department of Commerce, etc. to see what companies in your business typically spend on rent. The financial ratios published by those organizations are useful benchmarks for giggle testing your assumptions.

As the Cherry Street Brewery case shows, it is just as dangerous to have too much money as it is to have too little, but that is only the case when the plan is abandoned, or, as is more often the case, non- existent. While it is true that most successful small companies are started for very little money, it is not true that most successful small businesses are started without any idea of what to do when that money is gone.

Shortsighted financing is like building a bridge in the hope that someone on the other side of the river will build a road to it. Fortunately for the motoring public, that type of public works project seems to occur only in Louisiana: the celebrated Sunshine Bridge. Unfortunately for entrepreneurs, in the excitement of starting a business, planning gets overlooked, and connections are not made.

In point of fact, it is very rare that an entrepreneur has more than a one or two step financial plan. The best that can be hoped is that his company is generating revenues before the money runs out. Once that happens, there are a number of choices of sources for subsequent financing.

Another reason for the untimely demise of an entrepreneurial venture is that it was undertaken with all the management consideration of an Our Gang production. Friends are assigned roles without regard to their skills and abilities. When the time comes to look for additional financing, the finance professionals, be they commercial bankers, angel investors, venture capital companies, Small Business Investment Companies, or anything else, will all evaluate management. If they don=t think the skill and expertise are there, the money won=t be either. It may be your company, but if you don=t have the knowledge and experience to take it to the next level, you had better bring in people who can.

Entrepreneurs tend worry more about the venture=s organizational structure, should it be a partnership, a C corporation, an S corporation, a limited liability company or a sole proprietorship, than they do about staffing the firm. How you structure your undertaking in the beginning doesn=t matter. It can always be changed if necessary. Many times the damage an unskilled management does cannot be fixed.

Fatal managerial blunders include:

Inconsistent management and chaotic management. Nobody likes working for an inconsistent boss, and constant upheavals are wearing. Neither condition is conducive to employee longevity. People who have never managed people cannot be expected to have a definite style, or even a clear set of priorities based on experience. The priorities created by a well thought out business plan can provide consistency and may smooth out potential chaos.

Failure to groom a replacement. Nobody lives forever, and few companies can make the transition from one leader to another cold. Disaffected senior managers tend to leave when a dark horse takes the top spot. Without repositories of corporate culture, the new leader spends too much time reinventing the company and may make serious mistakes.

Failing to identify the target market. This includes failing to understand precisely what business the company is in. People tend to be lulled by generalities. They may think they are in the hardware business, the pizza business, the trucking business and stop there. Unless you know who your market is, you don=t really know what your business is.

Ineffective, or inappropriate advertising. Everybody knows that businesses must advertise, but if you don=t know your market, the chances of an effective advertising campaign are very small.

Marketing identifies the people who are likely to buy your product, advertising converts that likelihood to a sale. It talks to the audience identified by marketing in a way calculated to produce sales by addressing their concerns, desires and fears. The wrong ads in the wrong places, the right ads in the wrong places or the wrong ad in the right places cost money and produce no results. Mistakes occur when you don=t know your customers or when you don=t know what business you are really in. If you are selling RolexJ watches, chances are ads in the subway aren=t going to be as effective as an ad in an up-market magazine. The question is, will the lower cost per thousand views of the subway ad produce enough sales to make it worth while?

Not knowing your customers can also lead to using inappropriate selling techniques. Busy people probably don=t want long presentations. Older people are probably not comfortable on the Internet, whereas younger people might buy something just because it is only available on the Net. People may try a new shop or restaurant on the strength of a flyer slipped under the windshield wiper, but it will have to be easy to get to.

Poor store design is a common problem. Setting up a store is a balance of esthetics and practical considerations. It has to look inviting at the same time it has to be easy for customers to get around and to find what they are looking for. It is possible to design a layout that discourages buying. The easiest way is hide the merchandise, but you can also make aisle so narrow that people don=t want to go down them and stack the shelves so that people are afraid to remove merchandise for fear of causing an avalanche.

Nobody ever pays attention to their introductory course in economics and so misses the magic of supply and demand elasticity. The magic is that somewhere between the highest and the lowest price you can charge for an item is the price at which you will maximize profits. The equation for revenues includes price and number of sales. The end points are easy. If you set the price so high there are no sales, there are no revenues. If you set the price so low that, although you make lots of sales, you lose money on each sale, there are no profits. At some point between is the price level which will maximize profits. Price, the independent variable, is a straight line from some maximum value to zero. Volume at a particular price usually is not a straight line but is described by a higher degree equation. Most people assume a straight line value for volume and price where the lines cross as a first approximation and adjust prices up from there.

Of course, if you are foolish enough to choose to compete on price, you will never maximize profits and will probably go out of business, because there is always someone prepared to sell what ever you are selling for less, for a while.

Maximizing profits involves more than pricing. It also involves knowing at every minute how many of each item have been sold, how many are left and what happened to the difference. Improper, or non-existent accounting controls are deadly to small business. Not only does the business need proper accounting controls, but management has to pay attention to what accounting is telling it.

Ineffective inventory planning. The numbers will tell you what=s selling, how fast and what=s not, and how long items remain in the store. Since new companies generally cannot get vendor financing, inventory is tied up cash. Return rates will tell you if you have a quality control problem and whether it is your problem or your supplier=s. It will also tell you if cash from sales is not getting into the register.

Living off cash flow. In addition, a knowledge of accounting will teach the business owner the difference between cash flow and profits. Companies go into receivership when management tries to live off cash flow.

While the importance of understanding accounting cannot be over-estimated, it would be a serious mistake to let the accountant run the business. If your accountant really had the desire and the drive to run a business like yours, he would probably be doing it.

Expanding for the wrong reasons. Everyone has probably heard the story of the retailer who lost money on every sale, but expected to make it up on volume. Silly as it sounds, there is more than a grain of truth in the story. A number of losing businesses have attempted to expand themselves out of trouble and only succeeded in speeding themselves to insolvency.

Successful companies sometimes expand themselves out of business when they fail to recognize the reasons for their success. In general, small companies succeed because of the boss. Since the same boss cannot be in two places at once, one of the locations loses money. British Isles, a gift and food store in Houston attempted to expand because the rent on the new location was so cheap that it seemed like a no brainer. The problem was that the locations were so close together that they split the same customer base over two overheads. Fortunately, the owner was able to close the expanded location before it was too late.

Expansion does not have to be a new location. It can also be a new line of merchandise or a new service. In choosing a new line or service, fit is important. Girlie magazines sell well at news stands, probably would not move well at beauty shops.

Stewart-Gordon Associates, Inc.
P.O. Box 781992
Dallas TX 75378-1992
voice (972) 620-2489
fax (972) 406-0213
e-mail Tom Stewart-Gordon