Chapter 13

Assessing Your Appetite for Small Business

In This Chapter

Knowing what it takes to be a successful entrepreneur

Exploring alternatives to starting your own company

Looking at small-business investment options

Mapping out your small-business plans

Many people dream about running their own companies — and for good reason. If you start your own business, you can pursue something that you’re passionate about, and you have more control over how you do things. Plus, successful business owners can reap major economic bounties.

But tales of entrepreneurs becoming multimillionaires focus attention on the financial rewards without revealing the business and personal challenges and costs associated with being in charge. Consider what your company has to do well to survive and succeed in the competitive business world:

• Develop products and services that customers will purchase
• Price your offerings properly and promote them
• Deal with the competition
• Manage the accounting
• Interpret lease contracts and evaluate office space
• Stay current with changes in your field
• Hire, train, and retain good employees

Business owners also face personal and emotional challenges, which rarely get airtime among all the glory of the rags-to-riches tales of multimillionaire entrepreneurs. Major health problems, divorces, fights and lawsuits among family members who are in business together, the loss of friends, and even suicides have been attributed to the passions of business owners who are consumed with winning or become overwhelmed by their failures. I’m not trying to scare you, but I do want you to be realistic about starting your own business.

In this chapter, I help you to assess whether starting a company fits with your goals and aptitude. I also present numerous alternatives that may better fit you and your situation.

Testing Your Entrepreneurial IQ

The keys to success and enjoyment as an entrepreneur vary as much as the businesses do. But if you can answer yes to most of the following questions, you probably have the qualities and perspective needed to succeed as a small-business owner:

• Are you a self-starter? Do you like challenges? Are you persistent? Are you willing to do research to solve problems? Most of the time, running your own business isn’t glamorous, especially in the early years. You have many details to remember and many things to do. Success in business is the result of doing lots of little things well. If you’re accustomed to working for large organizations where much of the day is spent attending meetings and keeping up on office politics and gossip, with little accountability, running your own business may come as a bit of a shock at first.
• Do you value independence and self-control? Particularly in the early days of your business, you need to enjoy working on your own. When you leave a company environment and work on your own, you give up a lot of socializing. Of course, if you work in an unpleasant environment or with people you don’t really enjoy socializing with, venturing out on your own may be a plus.

  If you’re a people person, many businesses offer lots of contact. But you must recognize the difference between socializing for fun with co-workers versus the often more demanding and goal-oriented networking with business contacts and customers.

• Can you develop a commitment to an idea, a product, or a principle? If you work about 50 hours per week over 50 or so weeks per year, you’ll work around 2,500 hours per year. If the product, service, or cause you’re pursuing doesn’t excite you and you can’t motivate others to work hard for you, you’re going to have a long year!

  One of the worst reasons to start your own business is solely for the pursuit of great financial riches. Don’t get me wrong — if you’re good at what you do and you know how to market your services or products, you may make more money working for yourself. But for most people, money isn’t enough of a motivation, and many people make the same or less money on their own than they did working for a company.

• Are you willing to make financial sacrifices and live a reduced lifestyle before and during your early entrepreneurial years? “Live like a student before and during the startup of your small business” was the advice that my best business school professor, James Collins, gave me before I started my business. With most businesses, you expend money during the startup years and likely have a reduced income compared to the income you receive while working for a company. You also have to buy your own benefits.

  To make your entrepreneurial dream a reality, you need to live within your means both before and after you start your business. But if running your own business really makes you happy, sacrificing expensive vacations, overpriced luxury cars, the latest designer clothing, and $4 lattes at the corner cafe shouldn’t be too painful.

• Do you recognize that when you run your own business, you must still report to bosses? Besides the allure of huge profits, the other reason some people mistakenly go into business for themselves is that they’re tired of working for other people. Obnoxious, evil bosses can make anyone want to become an entrepreneur.

  When you run your own business, you may have customers and other people to please who are miserable to deal with. Fortunately, even the worst customers usually can’t make your life anywhere near as miserable as the worst bosses. (And if you have enough customers, you can simply decide not to do business with such misfits.)

• Can you withstand rejection, naysayers, and negative feedback? “I thought every no that I got when trying to raise my funding brought me one step closer to a yes,” says an entrepreneur I know. Unless you come from an entrepreneurial family, don’t expect your parents to endorse your “risky, crazy” behavior. Even other entrepreneurs can ridicule your good ideas. Two of my entrepreneurial friends were critical of each other’s ideas, yet both have succeeded!

  Some people (especially parents) simply think that working for a giant company makes you safer and more secure (which, of course, is a myth, because corporations can lay you off in a snap). It’s also easier for them to say to their friends and neighbors that you’re a big manager at a well-known corporation (such as IBM, GE, Enron, Lehman Brothers, or WorldCom) than to explain that you’re working on some kooky business idea out of a spare bedroom. How secure do you think those former employees of Enron, Lehman Brothers, and WorldCom feel now about having lost their jobs at their former large company?

• Are you able to identify your shortcomings and hire or align yourself with people and organizations that complement your skills and expertise? To be a successful entrepreneur, you need to be a bit of a jack-of-all-trades: marketer, accountant, customer service representative, administrative assistant, and so on. Unless you get lots of investor capital, which is rare for a true startup, you can’t afford to hire help in the early months, or perhaps even years, of your business.

  Partnering with or buying certain services or products rather than trying to do everything yourself may make sense for you. And over time, if your business grows and succeeds, you should be able to afford to hire more help. If you can be honest with yourself and surround and partner yourself with people whose skills and expertise complement yours, you can build a winning team!

• Do you deal well with ambiguity? Do you believe in yourself? When you’re on your own, determining whether you’re on the right track is difficult. Some days, things don’t go well — and such days are much harder to take flying solo. Therefore, being confident, optimistic, and able to work around obstacles are necessary skills.
• Do you understand why you started the business or organization and how you personally define success? Many business entrepreneurs define success by such measures as sales revenue, profits, number of branch offices and employees, and so on. These are fine measures, but other organizations, particularly nonprofits, have other measures. For example, the Jacksonville, Florida–based nonpartisan Wounded Warrior Project was founded by a “group of veterans and friends who took action to help the injured service men and women of this generation.” Money is necessary for the Wounded Warrior Project to accomplish its purpose, but such a cause-focused organization has a “bottom line” that’s very different from that of a for-profit organization.
• Can you accept lack of success in the early years of building your business? A few rare businesses are instant hits, but most businesses take time to build momentum — it may take years, perhaps even decades. Some successful corporate people suffer from anxiety when they go out on their own and encounter the inevitable struggles and lack of tangible success as they build their companies.

Don’t be deterred by the questions that you can’t answer in the affirmative. A perfect entrepreneur doesn’t exist. Part of succeeding in business is knowing what you can and can’t do and then finding creative ways (or people) to help you achieve your goals.

Considering Alternative Routes to Owning a Small Business

Sometimes entrepreneurial advocates imply that running your own business or starting your own nonprofit is the greatest thing in the world and that all people would be happy owning their own businesses if they just set their minds to it.

The reality is that some people won’t be blissful as entrepreneurs. If you didn’t score highly on my ten-question entrepreneur assessment in the preceding section, don’t despair. You can probably be happier and more successful doing something other than starting your own business. Some people are better off working for someone else. If you’re one of these people, consider the options in the following sections.

Being an entrepreneur inside a company

A happy medium is available for people who want the challenge of running their own show without giving up the comforts and security that come with a company environment. For example, you can manage an entrepreneurial venture at a company. That’s what John Kilcullen, president and chief executive officer of IDG Books Worldwide (former publisher of this book), did when he helped launch the book publishing division of IDG in 1990. (IDG Books was subsequently bought by John Wiley & Sons, Inc.)

Kilcullen had publishing industry experience and wanted to take on the responsibility of growing a successful publishing company. But he also knew that being a player in the book publishing industry takes a lot of money and resources. Because he was a member of the founding team of the new IDG Books division, Kilcullen had the best of both worlds.

Kilcullen always had a passion to start his own business but found that most traditional publishers weren’t interested in giving autonomy and money to a division and letting it run with the ball. “I wanted the ability to build a business on my own instincts… . The appeal of IDG was that it was decentralized. IDG was willing to invest and provide the freedom to spend as we saw fit.”

If you’re able to secure an entrepreneurial position inside a larger company, in addition to significant managerial and operational responsibility, you can also negotiate your share of the financial success that you help create. The parent company’s senior management wants you to have the incentive that comes from sharing in the financial success of your endeavors. Bonuses, stock options, and the like are often tied to a division’s performance.

Investing in your career

Some people are happy or content as employees. Companies need and want lots of good employees, so you should be able to find a job if you have skills, a solid work ethic, and the ability to get along with others.

You can improve your income-earning ability and invest in your career in a variety of ways:

• Work: Be willing to work extra hours and take on more responsibility. Those who take extra initiative and then deliver really stand out in a company where many people working on a salary have a time-clock, 9-to-5 mentality. But be careful that the extra effort doesn’t contribute to workaholism, a dangerous addiction that causes too many people to neglect important personal relationships and their own health. Don’t bite off more than you can chew; otherwise, your supervisors won’t have faith that they can count on you to deliver. Find ways to work smarter, not just longer, hours.
• Read: One of the reasons you don’t need a PhD, master’s degree, or even an undergraduate college degree from a top college to succeed in business is that you can find out a lot on your own. You can gain insight by doing, but you can also gain expertise by reading a lot. A good bookstore has no entrance requirements, such as an elevated high school grade point average or high SAT scores. A good book isn’t free, but it costs a heck of lot less than taking college or graduate courses!
• Study: If you haven’t completed your college or graduate degree and the industry you’re in values those who have, consider investing the time and money to finish your education. Speak with others who have taken that path and see what they have to say.

Exploring Small-Business Investment Options

Only your imagination limits the ways you can make money with small businesses. Choosing the option that best meets your needs isn’t unlike choosing other investments, such as in real estate (see Part III) or in the securities markets (see Part II). In the following sections, I discuss the major ways you can invest in small business, including what’s attractive and what isn’t for each option.

Starting your own business

Of all your small-business options, starting your own business involves the greatest amount of work. Although you can perform this work on a part-time basis in the beginning, most people end up working in their business full time.

For most of my working years, I’ve run my own business, and overall, I really like it. In my experience counseling small-business owners, I’ve seen many people of varied backgrounds, interests, and skills achieve success and happiness running their own businesses.

Most people perceive starting their own business as the riskiest of all small-business investment options. But if you get into a business that uses your skills and expertise, the risk isn’t nearly as great as you may think. Suppose, for example, that as a teacher you make $35,000 per year, and now you decide you want to set up your own tutoring service, making a comparable amount of money. If you find through your research that others who perform these services charge $40 per hour, you need to tutor about 20 or so hours per week, assuming that you work 50 weeks per year. Because you can run this business from your home (which can possibly generate small tax breaks) without purchasing new equipment, your expenses should be minimal.

Instead of leaving your job cold turkey and trying to build your business from scratch, you can start moonlighting as a tutor. Over a couple of years, if you can build the tutoring up to ten hours per week, you’re halfway to your goal. If you leave your job and focus all your energies on your tutoring business, getting to 20 hours per week of billable work shouldn’t be a problem. Still think starting a business is risky?

You can start many businesses with little money by leveraging your existing skills and expertise. If you have the time to devote to building “sweat equity,” you can build a valuable company and job. As long as you check out the competition and offer a valued product or service at a reasonable cost, the principal risk with your business is that you won’t do a good job marketing what you have to offer. If you can market your skills, you should succeed. See Chapter 14 for more details on starting and running your own business.

Buying an existing business

If you don’t have a specific idea for a business that you want to start but you have business management skills and an ability to improve existing businesses, consider buying an established business. Although you don’t have to go through the riskier startup period if you take this route, you’ll likely need more capital to buy a going enterprise.

You also need to be able to deal with potentially sticky personnel and management issues. The history of the organization and the way things work predates your ownership of the business. If you don’t like making hard decisions, firing people who don’t fit with your plans, and coercing people into changing the way they did things before you arrived on the scene, buying an existing business likely isn’t for you. Also realize that some of the good employees may be loyal to the old owner and his style of running the business, so they may split when you arrive.

Some people perceive that buying an existing business is safer than starting a new one, but buying someone else’s business can actually be riskier. You have to put out far more money upfront, in the form of a down payment, to buy a business. And if you don’t have the ability to run the business and it does poorly, you may lose much more financially. Another risk is that the business may be for sale for a reason — perhaps it’s not very profitable, it’s in decline, or it’s generally a pain in the posterior to operate.

Good businesses that are for sale don’t come cheaply. If the business is a success, the current owner has removed the startup risk from the business, so the price of the business should include a premium to reflect this lack of risk. If you have the capital to buy an established business and the skills to run it, consider going this route. Chapter 15 discusses how to buy a good business.

Investing in someone else’s business

If you like the idea of profiting from successful small businesses but don’t want the day-to-day headaches of being responsible for managing the enterprise, you may want to invest in someone else’s small business. Although this route may seem easier, fewer people are actually cut out to be investors in other people’s businesses.

Choosing to invest for the right reasons

Consider investing in someone else’s business if you meet the following criteria:

• You have sufficient assets. You need enough assets so that what you invest in small privately held companies is a small portion (20 percent or less) of your total financial assets.
• You can afford to lose what you invest. Unlike investing in a diversified stock fund (see Chapter 8), you may lose all of your investment when you invest in a small, privately held company.
• You’re astute at evaluating financial statements and business strategies. Investing in a small, privately held company has much in common with investing in a publicly traded firm. A main difference is that private firms aren’t required to produce comprehensive, audited financial statements that adhere to certain accounting principles the way that public companies are. Thus, you have a greater risk of not receiving sufficient or accurate information when you evaluate a small private firm. (There are also liquidity differences; with a small, private company, you may not be able to sell out when you want and at a fair current price.)

Putting money into your own business (or someone else’s) can be a high-risk — but potentially high-return — investment. The best options are those that you understand well. If you hear about a great business idea or company from someone you know and trust, do your research and make your best judgment. That company or idea may be a terrific investment.

Before you invest, ask to see a copy of the business plan and compare it with the business plan model that I suggest later in this chapter. Thoroughly check out the people running the business. Talk to others who don’t have a stake in the investment; you can benefit from their comments and concerns. But don’t forget that many a wise person has rained on the parade of what turned out to be a terrific business idea. See the sidebar in this chapter “Wet blankets throughout history” for some amusing rejections that turned out to be huge mistakes.

Avoiding investing mistakes

Although some people are extra careful when they invest other people’s money, others aren’t. For example, many small-business owners seek investors’ money for the wrong reasons, including the following:

• They are impatient and perhaps don’t understand the feasibility of making do with a small amount of capital (a process called bootstrapping, which I discuss in Chapter 14).
• They need money because they’re in financial trouble. A small furniture retailer in my area conducted a stock offering to raise money. On the surface, everything seemed fine, and the company made it onto the Inc. 500 list of fast-growing small companies. But it turns out that the company wanted to issue stock because it expanded too quickly and didn’t sell enough merchandise to cover its high overhead. The company ended up in bankruptcy.

Here’s another problem with small businesses that seek investors: Many small-business owners take more risk and do less upfront planning and homework with other people’s money. In fact, many well-intentioned people fail at their businesses.

An MBA I know from a top business school — I’ll call him Jacob — convinced an investor to put up about $300,000 to purchase a small manufacturing company. Jacob put a small amount of his own money into the business and immediately blew about $100,000 on a fancy computer-scheduling and order-entry system. Jacob wasn’t interested much in sales (a job that the previous owner managed), so he also hired a sales manager. The sales manager he hired was a disaster — many of the front-line salespeople fled to competitors, taking key customers with them. He tried to cut costs, but doing so hurt the quality and timeliness of the company’s products. By the time Jacob came to his senses, it was too late. The business dissolved, and the investor lost everything.

Drawing Up Your Business Plan

If you’re motivated to start your own business, the next step is to figure out what you want to do and how you’re going to do it. In other words, you need a business plan. You need a general plan that helps you define what you think you want to do and the tasks that you need to perform to accomplish your goal. The business plan — which you use to plan your goals, obtain loans, and show potential investors — should be a working document or blueprint for the early days, months, and years of your business.

You don’t need a perfectly detailed plan that spells out all the minutiae. Making such an involved plan is a waste of your time because things change and evolve. The amount of detail that your plan needs depends on your goals and the specifics of your business. A simple, more short-term focused plan (10 pages or so) is fine if you don’t aspire to build an empire. However, if your goal is to grow, hire employees, and open multiple locations, your plan needs to be longer (20 to 50 pages) to cover longer-term issues. If you want to pick up outside investor money, a longer business plan is a necessity.

As you put together your plan and evaluate your opportunities, open your ears and eyes. Expect to do research and speak with other entrepreneurs and people in the industry. Most folks will spend time talking with you as long as they realize that you don’t want to compete with them. For more details on crafting a business plan, check out the latest edition of my book Small Business For Dummies, written with Jim Schell and published by Wiley.

Identifying your business concept

What do you want your business to do? What product or service do you want to offer? Maybe, for example, your business goal is to perform tax-preparation services for small-business owners. Or perhaps you want to start a consulting firm, open a restaurant that sells healthy fast-food, run a gardening service, or design and manufacture toys.

Your concept doesn’t need to be unique to survive in the business world. Consider the legions of self-employed consultants, plumbers, tax preparers, and restaurant owners. The existence of many other people who already do what you want to do validates the potential for your small-business ideas. I know many wage slaves who say they would love to run their own business if they could only come up with “the idea.” Most of these people still dream about their small-business plans as they draw their Social Security checks. Being committed to the idea of running your own business is more important than developing the next great product or service. In the beginning, the business opportunities that you pursue can be quite general to your field of expertise or interest. What you eventually do over time will evolve.

I’m not saying that innovative ideas lack merit. Indeed, a creative idea gives you the chance to hit a big home run, and being the first person to successfully develop a new idea can help you achieve big success.

Even if you aspire to build the next billion-dollar company, you can put a twist on older concepts. Suppose that you’re a veterinarian, but you don’t want a traditional office where people must bring their cats and dogs for treatment. You believe that because many people are starved for free time or have pets that despise a trip to the vet’s office, they want a vet who makes house calls. Thus, you open your Vet on Wheels business. You may also want to franchise the business and open locations around the country. However, you can also succeed by doing what thousands of other vets are now doing and have done over the years with a traditional office.

Outlining your objectives

The reasons for starting and running your own small business are as varied as the entrepreneurs behind their companies. Before you start your firm, it’s useful to think about your objectives, or what you’re seeking to achieve. Your objectives need not be cast in concrete and will surely change over time. If you like, you can write a short and motivating mission statement.

Introductory economics courses teach students that the objective of every for-profit firm is to maximize profits. As with many things taught in economics courses, this theory has one problem: It doesn’t hold up in reality. Most small-business owners I know don’t manage their businesses maniacally in the pursuit of maximum profits. The following list gives you some other possible objectives to consider:

• Working with people you like and respect: Some customers may buy your products and services, and some employees and suppliers may offer you their services for a good price, but what if you can’t stand working with them? If you have sufficient business or just have your own standards, you can choose whom you do business with.
• Educating others: Maybe part of your business goal is to educate the public about something that you’re an expert in. I know that when I started my financial counseling and writing business, I saw education as a core part of my company’s purpose.
• Improving an industry or setting a higher standard: Perhaps part of your goal in starting your business is to show how your industry can better serve its customers. John Bogle, who founded the Vanguard Group of mutual funds, is a good example of someone who wanted to improve an industry. When he started Vanguard, Bogle structured the company so the shareholders (customers) of the company’s individual mutual funds would own the company.

  Because he relinquished ownership of his company, Bogle gave up the opportunity to build a personal net worth that would easily be worth several billion dollars today. But Bogle wanted to build a mutual fund company that kept operating costs to a minimum and returned profits to the customers in the form of lower operating fees, which are deducted from a mutual fund’s returns. He’s also been outspoken about how owners of many mutual fund companies operate their funds too much out of self-interest instead of keeping their customers in mind.

Of course, you can’t accomplish these objectives without profits, and doing these things isn’t inconsistent with generating greater profits. But if your objectives are more than financial or your financial objectives aren’t your number-one concern, don’t worry — that’s usually a good sign. Remember the expression “Do what you love; the money will follow.”

Analyzing the marketplace

The single most important area to understand is the marketplace in which your business competes. To be successful, not only must your business produce a good product or service, but it must also reach customers and convince them to buy your product at a price at which you can make a profit. You should discern what the competition has to offer as well as its strengths and vulnerabilities. In most industries, you also need to understand government regulations that affect the type of business that you’re considering.

Meeting customer needs

If the market analysis is the most important part of the business plan, understanding your potential customers is the most important part of your market analysis. Understanding your desired customers and their needs is one key to having a successful business.

If you’re in a business that sells to consumers, consider your customers’ characteristics, including gender, age, income, geographic location, marital status, number of children, education, living situation (rent or own), and the reasons they want your product or service. In other words, find out who your prospective customers are. Find out where they live and what they care about. If you sell to businesses, you need to understand similar issues. For instance, what types of businesses may buy your product or services? Why?

The best way to get to know your potential customers is to get out and talk to them. Even though live interviews are more time consuming, they allow you to go with the flow of the conversation, improvise questions, and probe more interesting areas. Although you can mail, e-mail, or fax paper-based surveys to many people with a minimal investment of your time, the response rate is usually quite low, and the answers aren’t usually as illuminating. To encourage better response, offer a product or service sample or some other promotional item to those who help you with your research. Doing so attracts people who are interested in your product or service, which helps you define your target customers.

Also try to get a sense of what customers do pay and will pay for the products or services that you offer. Analyzing the competition’s offerings helps, too. Some products or services require follow-up or additional servicing. Understand what customers need and what they’ll pay for your services.

If you want to raise money from investors, include some estimates as to the size of the market for your product or services. Of course, such numbers are ballpark estimates, but sizing the market for your product helps you estimate profitability, the share of the market needed to be profitable, and so on.

Besting the competition

Always examine the products, services, benefits, and prices that competitors offer. Otherwise, you go on blind faith that what you offer stacks up well to the alternatives in the industry.

Examine your competitors’ weaknesses so you can exploit them. Instead of trying to beat them on their terms, maybe you’ve identified a need for a neighborhood pet supply store that offers a more specialized range of pet supplies than the big-selling brands of dog and cat food that warehouse stores sell. Providing knowledgeable customer sales representatives to answer customer questions and make product suggestions can also give you a competitive edge. Thus, you may be able to surpass the warehouse stores on three counts: convenience of location for people in your neighborhood, breadth of product offerings, and customer assistance.

Even if you have a completely innovative product or service that no other business currently offers, don’t make the mistake of thinking that you don’t have competitors. All businesses have competitors. In the event that you’ve developed something truly unique that has little competition, your success will surely breed competition as imitators follow or attempt to leapfrog your lead.

Complying with regulations

Most businesses are subject to some sort of regulation. If you want to start a retail business, for example, few communities permit you to run it out of your home. If you lease or purchase a private location, the zoning laws in that location may restrict you. Therefore, you need to check what you can and can’t sell at that location. Check with your city’s or town’s zoning department — don’t simply believe a real estate broker or property owner who says, “No problem!” That person’s goal, after all, is to sell the property.

If, for instance, you were going to start a veterinary practice, you would quickly discover that special zoning is required to use a piece of real estate for a vet’s office. Convincing a local zoning board to allow a new location to get such special zoning is quite difficult, if not impossible.

Many businesses face other local, state, and even federal regulatory issues, including ordinances, laws, and the need for specific licenses and filings. For example, if you were opening a restaurant, you’d have to heed ordinances and laws that regulate everything from signage to operating hours to your ability to serve alcohol. And you’d be subject to an amazing array of health codes, building codes, and fire codes, to name a few.

If you enter an industry that you’re relatively new to, ask questions and open your ears to find out more about where you should locate and how you should design and run your business. Speak to people who are currently in the field and to your local chamber of commerce to see what, if any, licenses or filings you must complete. Read books and trade magazines that may deal with your questions. Libraries have books and online services that can help you locate specific articles on topics that interest you.

Delivering your service or product

Every business has a product or service to sell. How are you going to provide this product or service to your customers? Suppose, for example, that you want to start a business that delivers groceries and runs errands for busy people or older and disabled people who can’t easily perform daily tasks for themselves. Delineate the steps that you’ll take to provide the service.

When potential customers call to inquire about your business, what kinds of information do you want to record about their situation? Contact software can assist with this task. Also, you can create a pricing sheet and other marketing literature (discussed in the next section) that you can send to curious potential customers.

If you want to manufacture a product, you definitely need to scope out the process that you’re going to use. Otherwise, you have no idea how much time the manufacturing process may take or what the process may cost.

As your business grows and you hire employees to provide services or create your products, the more you codify what you do and the better your employees can replicate your good work.

Marketing your service or product

After you determine more in-depth information about delivering your company’s services or products, you need to decide on specific marketing information. Answer the following questions:

• How much will you charge for your services and products? Look at what competing products and services cost. Estimating your costs helps you figure out what you need to charge to cover your costs and make a reasonable profit.
• How will you position your products and services compared to the competition? Consider, for example, how books position themselves in the book marketplace. I hope, in your mind, that my financial books are down-to-earth, practical, answer-oriented, and educational.
• Where will you sell your product or service? Business consultants call this decision the distribution channel question. For example, if you have a toy to sell, you may consider selling via mail order and the Internet, through toy stores, or through discount warehouse stores. Selling through each of these different distribution channels requires unique marketing and advertising programs. If you market a product or service to companies, you need to find out who the key decision makers are at the company and what will persuade them to buy your product or service.

Having a great product or service isn’t enough if you keep it a secret; you gotta get the word out. You likely won’t have the budget or the desire to reach the same region as television and radio, so start marketing your product to people you know. Develop a punchy, informative one-page letter that announces your company’s inception and the products or services it offers, and then mail it to your contacts. Include an envelope with a reply form that allows recipients to provide the addresses of others who may be interested in what you have to offer. Send these folks a mailing as well, referencing who passed their names along to you.

Finding and retaining customers is vital to any business owner who wants his company to grow and be profitable. One simple, inexpensive way to stay in touch with customers you’ve dealt with or others who have made inquiries and expressed interest in your company’s offerings is via a mailing list. Once a quarter, once a year, or whatever makes sense for your business, send out a simple, professional-looking postcard or newsletter announcing new information about your business and the customer needs you can fulfill. Such mailings allow you to remind people that you’re still in business and that you provide a wonderful product or service. Computer software and websites (for example, Constant Contact) give you fast, efficient ways to keep customer mailing lists up-to-date and to print mailing labels.

E-mailing your marketing information has the attraction of no out-of-pocket expenses. However, due to the deluge of junk e-mail most people get, your e-mail is likely to be deleted without being opened. At least a snail-mailed postcard gets a prospective customer’s attention, even if only for a brief period.

Organizing and staffing your business

Many small businesses are one-person operations. So much the better for you — you have none of the headaches of hiring, payroll, and so on. You only have to worry about you — and that may be a handful in itself!

But if you hope to grow your business and would rather manage the work being done instead of doing all of it yourself, you eventually want to hire people. (I explain the best way to fill your personnel needs in Chapter 14.) Give some thought now to the skills and functional areas of expertise that future hires need. If you want to raise money, the employment section of your business plan is essential to show your investors that you’re planning long-term.

Maybe you want an administrative assistant, researcher, marketing director, or sales representative. What about a training specialist, finance guru, or real estate manager if your company expands? Consider the background that you want in those you hire, and look at the types of people that similar companies select.

You should also consider what legal form of organization — for example, a sole proprietorship, partnership, S corporation, or limited liability company — your business will adopt. The legal form of your organization impacts, among other important issues, how the business is taxed and what its liabilities are in the event of a lawsuit. See Chapter 14 for details.

Projecting finances

An idea may become a business failure if you neglect to consider or are unrealistic about the financial side of the business that you want to start. If you’re a creative or people-person type who hates numbers, the financial side may be the part of the business plan that you most want to avoid. Don’t — doing so can cost you tens of thousands of dollars in avoidable mistakes. Ignoring the financial side can even lead to the bankruptcy of a business founded with a good idea.

Before you launch your business, do enough research so you can come up with some decent financial estimates. Financial projections are mandatory, and knowledgeable investors will scrutinize them if you seek outside money. You also need to think through how and when investors can cash out.

Startup and development costs

Spending money to get your business from the idea stage to an operating enterprise is inevitable. Before the revenue begins to flow in, you incur expenditures as you develop and market your products and services. Therefore, you need to understand what you must spend money on and the approximate timing of the needed purchases.

If you were going to build a house, you’d develop a list of all the required costs. How much are the land, construction, carpeting, landscaping, and so on going to cost? You can try to develop all these cost estimates yourself, or you can speak with local builders and have them help you. Likewise, with your business, you can hire a business consultant who knows something about your type of business. However, I think you’re best served by doing the homework yourself — you discover a lot more, and it’s cheaper.

If you’re going to work in an office setting, whether at home or in outside space, you need furniture (such as a desk, chair, filing cabinets, and so on), a computer, printer, and other office supplies. Don’t forget to factor in the costs of any licenses or government registrations that you may need.

If you run a retailing operation, you also need to estimate your cost for establishing and maintaining an inventory of goods. Remember, selling your inventory takes time, especially when you first start up, and you need to have adequate stock on hand to fulfill reasonable customer orders in a timely fashion. And as a new business, suppliers won’t give you months on end to pay. Be realistic — otherwise, the money that you tie up in inventory can send you to financial ruin.

Income statement

Preparing an estimated income statement that summarizes your expected revenue and expenses is a challenging and important part of your business plan. (I explain the elements of an income statement in Chapter 6.) Many estimates and assumptions go into it. As you prepare your estimated income statement, you may discover that making a decent profit is tougher than you thought. This section of your business plan helps you make pricing decisions.

Consider the Vet on Wheels business idea that I discuss in the “Identifying your business concept” section earlier in this chapter. What range of veterinary services can you provide if you make house calls? You can’t perform all the services that you can in a larger office setting, so decide which ones are feasible. What equipment do you need to perform the services? How much should you charge for the services? You need to estimate all these things to develop a worthwhile income statement. You should be able to answer these questions from the insights and information you pulled together regarding what customers want and what your competitors are offering.

With service businesses in which you or your employees sell your time, be realistic about how many hours you can bill. You may end up being able to bill only a third to half of your time, given the other management activities that you need to perform.

Because building a customer base takes several years, try to prepare estimated income statements for the first three years. In the earlier years, you have more startup costs, so creating income statements more often ensures you have a good handle on this typically lean period. In later years, you reap more profits as your customer rolls expand. Doing income statements over several years is also essential if you’re seeking investor money.

Balance sheet

An income statement measures the profitability of a business over a span of time, such as a year, but it tells you nothing of a business’s resources and obligations. That’s what a balance sheet does. Just as your personal balance sheet itemizes your personal assets (for example, investments) and liabilities (debts you owe), a business balance sheet details a company’s assets and liabilities.

If you operate a cash business — you provide a service and are paid for that service, and you don’t hold any inventory, for example — a balance sheet has limited use. An exception is if you’re trying to get a bank loan for your service business.

A detailed balance sheet isn’t as important as tracking your available cash, which will likely be under pressure in the early years of a business because expenses can continue to exceed revenue for quite some time.

A complete balance sheet is useful for a business that owns significant equipment, furniture, inventory, and so on. The asset side of the balance sheet provides insight into the financial staying power of the company. For example, how much cash does your business have on hand to meet expected short-term bills? Conversely, the liability side of the ledger indicates the obligations, bills, and debts the company has coming due in the short and long term. See Chapter 6 for more information on all the elements of a balance sheet.

Writing an executive summary

An executive summary is a 2- to 3-page summary of your entire business plan that you can share with interested investors who may not want to first wade through a 40- to 50-page plan. The executive summary whets the prospective investor’s appetite by touching on the highlights of your entire plan. Although this summary should go in the front of your plan document, I list this element last because you can’t write an intelligent summary of your plan until you flesh out the body of your business plan.