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Setting Up Business Ideas - Small Business FAQ

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Small 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 setting up business ideas guide, 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.

Open a Business Advice

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.

Open a Business Advice 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 record keeping; 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 under-capitalized 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.

8. How do you find a good lawyer?

As with most personal services, you must have rapport with your attorney. The best way to determine this is to talk to lawyers by phone or visit them before you make a selection. Get recommendations from friends, or your banker. You're looking for someone you can trust and who will take an interest in you and your business.

9. Do you need a lawyer to start a business?

No, but it's wise to get the best advice possible when you're starting out. An attorney is one source of the expertise you'll need to draw on.

Setting Up Business Form of Business

10. What form of business do you recommend for a new business?

Each legal form, sole proprietorship, partnership, or corporation, has its advantages and disadvantages. The one you should pick depends on your circumstances, including:

  • Your financial condition,

  • The line of business you're entering,

  • The number of employees,

  • The risk involved,

  • Your tax situation.

Don't assume, if you plan a one-person business, that sole proprietorship is the way to go. See your lawyer.

The Market (Open a Business Advice)

11. How can you find out what the prevailing costs are for a service business in your market area?

One way is simply to call competitors and ask their prices. Their prices will give you a lead. You could ask competitors' customers for the same information if you didn't want to go directly to the competition.

12. How do you go about determining the market for a mail order business?

The principles of determining market share and market potential are the same no matter how large the geographical area. You must first determine a customer profile, the size of the market, and the number of competitors. You could also use a readership survey given to you by a magazine in which you intend to advertise.


13. How do you figure markup and markdown?

Markup (markon) is the original amount that the merchandise is marked up. Markup as a percentage (also called gross margin rate) is figured as a percentage of sales. For example, say the cost of merchandise is $10 and you want a 20 percent markup; what is the selling price (SP)? By definition we know that markup as a percentage is given as a percentage of sales. Thus, our

cost must be 80 percent of the selling price (100 percent selling price - 20 percent desired markup).

So, our selling price is $12.50, cost $10.00, and markup $2.50 or 20 percent of the selling price.

Markdown (discount) is a reduction of selling price below the original sale price. Assume the item is marked down to $11.25. The markdown is $1.25 or a 10 percent markdown ($1.25 markdown divided by $12.50 original selling price).

14. How would you go about establishing price guidelines for a business renting items to customers?

Pricing is based normally on a combination of cost and market competition. Trade associations are a prime source of such information.


15. What is the average expected net profit for small business?

Average net profits vary with the type of business - retail, wholesale, service, manufacturing, construction. They also vary for the type of business structure - proprietorship or corporation. Dun & Bradstreet publish ratios which give you these figures, as well as lots of very useful cost information.

16. Would you explain the meaning of "rate of return on investment"? How is it different from net profit? Is it different from return on assets employed?

Net profit (before taxes) is basically total sales for a specific period less cost of goods and operating expenses during that period. (For a retail business, cost of goods would be your cost of merchandise sold.) Net profit is a function of both rate of return on investment (ROI) and return on total assets. ROI is net profit divided by capital invested by the owners of the company.

ROI is used to measure the effectiveness of management in attaining the owners' desired return on their investment. Generally, the larger the ROI, the more attractive a company is to potential investors.

Return on total assets is the net profit divided by total assets. This measures the net profitability of the use of all resources of the business. It is another tool for measuring management effectiveness in the use of all resources borrowed and equity.

17. Does a bank require absolute top credit references from loan applicants?

The better the credit references the greater the possibility of loan approval.

18. If I estimate my start-up cost at $50,000 and can't put up anywhere near the $25,000 that I've been told is what I should have for my share, am I wasting my time even filling out a loan application?

In all probability you would be, although there are some exceptions. For example, it might be possible to get a loan under your circumstances if you were buying a business that's already operating well enough to provide sufficient profits to cover its obligations and the loan. Furthermore, if the applicant is the present manager who has made this business go, the chances of getting such a loan are much better.


19. Getting money is difficult; keeping it may be even more difficult. Where can I get assistance in managing my business?

Your accountant and bank can provide financial counseling which can be very helpful in starting and managing your business. They can also give you in valuable information on the local area and your market that can be critical in making decisions in your business.

Other Topics in the 'Staring a Business' Section

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