Going into 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 chapter, 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.

Say that you are the sort who's beginning new small business. You Have given focus to the overall chances for success, and have
chosen the new business you wish to establish.

What technical issues will you face in starting the business? How Much money will you require for beginning new small business?
Where can you get it? What form of business organization does one own? Where should you locate the company? (start business tips
to follow)

The very first question you need to answer is: Just how much cash will I need? But this question can't be answered until other
questions are answered and many decisions are made.

To decide how much cash is needed to start a business, enter all Of your potential income and all your planned expenses on a work
sheet or kind.

Though you might feel that this kind of planning is more than You need to start a simple small business it's useful to get started
with this particular approach to management which puts figures down in black and white. You'll discover the exact same approach
valuable within an established business.

First, estimate your sales volume. This will depend on the total Quantity of business in the region, the number and ability of
competitors now sharing that business, and your own capability to compete for the consumer's dollar. Obtain assistance in making
your sales estimate from wholesalers, trade associations, your banker, and other business-people. Several business and statistical
publications may be useful in making sales volume estimates.

In reaching your final quote of sales don't be over-enthusiastic. A new business generally develops slowly at the beginning.
Should you overestimate sales you are most likely to invest too much in gear and initial stock, and commit yourself to heavier
operating expenses than your actual sales volume will warrant. Since you are just beginning you may have no sales for the first
couple of months. At any rate you may expect your first few months to be very low.

You must also determine what percentage of your earnings will be cash And what proportion will be sold on credit. If you guess
that a certain portion of the earnings will be on credit then you have to figure whenever you are likely to have the money for
these earnings. 1 month? 2 months? More? Never?

In our guide to starting new small business, estimate how Much money will be paid out. Bear in mind that in starting a company you
might be purchasing equipment, paying fees and licenses, which makes deposits on rent, utilities and so on, several months until
you open the door. Some of those expenses are simple to estimate. If you have opted to rent a building (more about that later)
then you understand what your deposits will be and just how much you'll need to pay out monthly. You are probably able to get the
cost of fees, permits and utility deposits with a few telephone calls.

Other cost figures might take a bit more work for you. 1 way Is to acquire average operating ratios for the kind of company in
which you are interested. One of the resources for such ratios include Dun & Bradstreet, Inc., trade associations, publishers of
trade magazines, specialized accounting firms, industrial companies, and colleges and universities. The normal ratios for your
type of business multiplied by your projected sales volume will serve as bench marks for estimating the various items of
expenditure. But do not rely exclusively on this method for estimating each cost item. Verify and modify these estimates through
evaluation and quotations in the particular market place where you plan to operate.

Do not forget to pay yourself also. You Might Need money to live on if You need to quit your job. If your spouse is working and
can encourage the family for some time you may not have to withdraw money from the business. The longer you can go without taking
money from, the faster you will build up a solid cash position. Now you've estimated your money receipts and expenditures, write
down the quantity of cash you'll put into the business to begin. This goes online 1 in the example below. Next, add lines 2 and 1
for the first month to get line 3. Then add up all of the expenses to find line 5. Subtract line 5 from line 3 to get line 6. This
cash at the end of month 1 then goes to line 1 for the start of the next month, etc.

If you continue this for the entire year, very soon you'll find You have negative amounts or a negative cash flow. About this time
you will also realize that you ought to be working on this kind with a pencil that has a good eraser.

In this overly-simplified case, you notice that by the end of June you're minus $200 in money. Two solutions can be attempted -
reduce your buys at June by $200 or begin with $200 more. You might be unable to reduce costs (they will probably go up as your
business starts). That means you'll need to put in $200 more to begin with. If all you've got is $4000 then the extra $200 you
need is funding you need to get from somewhere else.

Do not be fooled by this very simple illustration. Many small businesses Begin with the 200, and try to get the $4000 from
somewhere else. Since a Major reason for failure in the first phases of a business is Under-capitalization, be very careful on
your planning at this stage. You can Almost always aim on some unexpected expenses and some delays in expected income.

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