The Statistics

The Statistics• Every year two to three million small businesses are

started.• The reality is that about 50% of small business fail within 5

years.• Knowledge of the business, sufficient capital, good

experience, and a unique idea at the right time are just some of the characteristics of a successful business owner.

• Although there are no guarantees that you will be successful, you can greatly improve your odds by becoming well-prepared for the task.

Be Prepared!

• The key point to remember is that you should not start the business before you’ve done all your homework and you’re convinced that you are ready for the challenges, the responsibility, and the time commitment that go into starting your own business.

• This class will take you through the process of starting a new business, from thinking up new business ideas, to evaluating the profit potential of a business concept.

The Pros

1) You have chance to make a lot more money2) You’ll be your own boss and make all the crucial

business decisions3) You may be the boss of other people4) You will have the chance to put your ideas into

practice5) You will learn more about every aspect of a

business and gain experience in a variety of disciplines

The Pros

6) You will have the chance to work directly with your customers

7) You’ll be able to benefit the local economy, such as hiring other people

8) You will have the personal satisfaction of creating and running a successful business

9) You’ll be able to work in a field or area that you really enjoy

The Cons

1) You may have to take a large financial risk2) You may have to work long hours and have little

chance of taking a vacation3) You may end up spending a lot of time

attending the details of running a business and less time on those things you really enjoy

4) You may find your income is not steady and that there are times when you don’t have much income at all

The Cons

5) You may have to undertake tasks you find unpleasant, such as firing someone or refusing to hire friend or relative

6) You may have to learn many new disciplines, such as filing and bookkeeping, inventory control, production planning, advertising and promotion, market research, and general management

Special Pros and Cons of Home-based Busines

1) You startup costs will be lower2) Your operating costs will be lower than if you were renting

space and paying utilities3) Your commute will be shorter4) If your location is unimportant to your business, you can

theoretically live anywhere and still operate your business5) You may have more flexible schedule if your business can

be conducted at your convenience or outside “normal” weekly business hours

6) You may run out of space at home, if your business grows.

Are You Ready?

To be successful ---- to stay in business – you need:• A combination of hard work, skill, perseverance.• You need to understand the responsibilities of

ownership: what’s involved in running a small business, and what are some of the roles you will have to play if you own a business.

• Finally, you need to evaluate your skills and determine whether you have all the important ones you’ll need, or whether you can develop them or hire someone who already has them.

Many Roles of the Small Business Owner

• Tax Collector• Manager/boss• Sales/marketing/advertising executive• Accountant• Lawyer• Business Planner• Bill Collector• Marker Researcher• Technology Expert• Clerk/receptionist/typist/secretary

Tax Collector

• If you sell goods at the retail level, you’re responsible for collecting sales tax for various government entities.

• If you have employees, you’re responsible for collecting payroll taxes from them.

Manager/Boss

• If you have employees, you’ll be responsible for all of the human resources-related functions, including recruiting, hiring, firing, and keeping track of all the insurance forms, answering employee questions and complaints, and making the decisions about whether you should change the benefits package you offer your employees.

Sales/Marketing/Advertising executive

• In addition to having to plan your marketing or advertising campaign, you’ll have to carry it out. You may write advertising copy, do some preliminary market research, visit potential customers, and make sure existing customers stay happy.

• Depending upon the type of business you own, you may have to join business groups, attend various functions, and network with others who could help your business prosper.

Accountant

• Even if you have an accountant, you’ll have to know a lot about accounting, since you’ll have to know which records to keep and how to keep them. If you don’t have an accountant, you’ll also have to prepare all of your tax forms, and you’ll have to know how to prepare and interpret all of your own financial statements.

Lawyer

• Even if you have a lawyer, you’ll have to know a lot about the law. If you don’t have a lawyer, you’ll have to prepare all of your own contracts and other documents, and know what to do if potential lawsuit arises.

Business Planner

• As time passes, you’ll want to make changes, perhaps to expand the business or add a new product line. If you want to make a change, you’ll have to plan it and execute the plan.

Bill Collector

• When customers don’t pay, it’ll be up to you to collect from them. You’ll have to know what you can and can’t do and when to give up.

Market Researcher

• Before you start your business, you’ll have to find out who your customers are and where they’re located. You may also have to conduct market research at various times during the life of your business, such as when you are considering the introduction of a new product.

Technology Expert

• As a small business owner, you will probably come to depend upon your computer. You’ll have to fix it when it breaks, install upgrades, and load software; you’ll also have to keep up with the new products.

Clerk/Receptionist/Typist/Secretary

• Even if you have clerical help, you’ll do some your filing, some of your mailing, and some of your telephone answering. If you hire someone, you’ll have to teach them what to do.

Do you have what it takes?

• Successful small business owners know their own strengths and weaknesses. They build their businesses around their strengths and they compensate for areas where their skills are not so strong.

• Strengths and Weaknesses Checklist

Strengths & Weaknesses

• 20 points or less -- put off opening business for 6 months in the meantime do more research and develop skills.

• Between 20-25 points – Spend more time to improve your weaknesses.

• 25 points or more – You are mentally ready to start your business.

Essential Qualities for Owners

• Willingness to sacrifice• Strong interpersonal skills• Strong leadership skills• Strong organizational skills• Intelligence• Management ability• Business Experience• Optimism

Willingness to sacrifice

• You must be willing to accept the fact that, as a small business owner, you are the last one to be paid, after your vendors, the bank and your employees.

• You must also be willing to sacrifice much of your free time, and may find it hard to take a vacation, at least at first.

Strong interpersonal skills

• If you thought that getting along with your boss was tough, wait until you have to deal with suppliers, customers, employees, lawyers, accountants, government officials, and everybody in between.

• Successful owners are able to work with all personality types, and they’re able to find out from their customers what they like and don’t like.

Strong leadership skills

• Successful owners understand that others may be looking to them to be led to the promised land.

• Others will be constantly looking to you for the answers.

Strong organizational skills

• Successful owners are able to keep track of everything that’s going on in their business and they’re able to set priorities and get things done.

Intelligence

• We’re talking about street smarts and common sense.

• Successful owners are able to anticipate problems before they arise and to take steps to avoid them and they know how to solve crisis if they occur.

Management Ability

• Small business is all about managing relationships, with your customers or clients, with your employees, with your suppliers, with your accountants and lawyers, with your banker, and with your family.

Business Experience

• If you lack experience in your type of business, go get it any way you can: volunteer at an existing business, or try to get a part-time or weekend job in the field.

Optimism

• How will you react when business isn’t going as well as you expected? A pessimist may fold the tent, but an optimist will keep going.

• Successful owners are optimists who are able to weather the rough spots.

Compensating for Undeveloped Skills

• Once you’ve looked at your own strengths and weaknesses, and compare them with the traits you’ll need to have if you’re to be successful, the next step is to figure out what to do if you don’t yet possess all of those traits.

• First of all, don’t despair, your options include hiring someone who can handle tasks you may not be good at, partnering with someone who has the traits you lack, or developing traits or skills yourself.

Compensating for Undeveloped Skills(examples)

• If you don’t like to sell, you can hire a salesperson.• If you don’t like to do accounting work, you can

hire an accountant.• Down the road, as you get farther along in setting

up your new business, you may determine that the convenience of paying someone else to do the work is outweighed by the costs. But for now, all you have to do is identify whether someone else could do the work for you.

Compensating for Undeveloped Skills(examples)

• If your list of things you don’t like to do includes items that you can’t hire someone else to do, such as working with others, the solution is not so easy.

• Your best bet may be to partner up with someone whose skill set compliment yours.

Learning New Skills

Another possibility is to develop the traits and skills yourself. There are at least 3 ways to do this:1) Trial and Error2) Take business classes 3) Locate your business in a small business

incubator

Trial & Error

• Also known as learning from your mistakes.• The downside to this approach is that most

small business won’t give you much time or allow you to make mistakes. If you benefit with trial and error, it’ll usually be with the third and fourth new business you start.

Take business classes

• At Vocational School or Community College• They offer classes at a reasonable price• Many entrepreneurs use THIS class as a

stepping stone to success.• Accounting, Tax, Marketing classes.

Business Incubators

• Locate your business in a small business incubator.• Incubators are programs that provide you with

office space and access to office equipment and services in a nurturing environment, and frequently with personalized advice from the incubator operator as well.

• Most are run by government-sponsored economic development agencies, but there are also some privately operated incubators.

Business Incubators (cont.)

• For more information and location of business incubators near you call the National Business Incubator Association 740-593-4331

• Small Business Administration 800-827-5722

Researching New Business Ideas

• If money were not an issue, you could contact a market research firm and have it analyze your community and find out for you where small business exist.

• But if, as for most of us, money is an issue, you will have to gather the information yourself.


A good place to start looking for new business ideas is with the mainstream press: • Your local newspaper• The New York Times• The Wall Street Journal• Fortune Magazine• Business Week• Forbes• Time


• Look for trends that may be emerging, not just in business, but in our culture at large, that are creating needs for new products or services you could provide.

• Talk to friends, relatives, business associates, and other small business owners about their ideas and their frustrations with existing products and services.

• Look in yourself, you are a consumer, if you’ve wished that a particular service were available, chances are that others have to.

Niche Marketing

• An approach that is more effective than tackling brand-new business ideas head-on is to look for ways that you can perform a service or provide a product that fulfills the special needs of a smaller subset of the customer population.

• By specializing, you may be able to meet these customer’s needs much better than larger competitors.

Niche Marketing

• To develop a niche, you should be looking for anomalies in the market.

• An anomaly, in marketing terms is an unmet need whose time has come to be filled. To support a profitable business, the need must be fairly widespread or growing rapidly.

Niche Example 1

• Although people wanted to be able to send letters and packages overnight anywhere in the country, they didn’t think it was possible.

FedEx

• Enter Federal Express• And presto a $500 million startup business

serving and anomaly!

Niche Example 2

• John Smith was an accountant in a large accounting firm that occasionally did work for film companies that came to town for a shoot. John did some research and found that there weren’t any other accountant who specifically served the film market.

• He also found that there were enough film companies that came to town each year for him to make a nice living serving only them.

Where are today’s anomaly?

• One lies hidden in the social and business trends now underway.

• A lot of working people would like hot delivered, home-cooked meals that vary each night.

• Currently, no one believes that it’s possible….• New Business Ideas Chart

Tips for choosing a new business

• Eliminate any business you don’t believe you will enjoy owning. As a small business owner, you’ll be living, sleeping, and breathing your new business – You’d better enjoy that type of work!

• Don’t forget that you will also spend time on tasks such as dealing with customers, haggling with suppliers, bookkeeping.

Tips for choosing a new business

• If you don’t have a lot of money to start with, look for a business where you get paid up front and you don’t have a lot of startup costs, to avoid cash flow problems.

• Look for businesses where you will have a lot of repeat customers or where people will need to keep buying supplies from you. It’s much easier to keep selling to the same customers than it is to continually be developing new customers.

Start from Scratch or Buying a Business?

• If you think that starting a business from scratch is too difficult but still want to have your own small business, you have choices. You should consider either buying an existing business, perhaps from an owner who wants to retire, or buy a franchise.

Advantages of Buying

1) Immediate Operation – Someone else has gotten the company started, and once you take over, you can usually continue on.

2) Quick Cash Flow – Existing inventory and receivables can generate income from the first day.

3) Existing Customers – Customers and suppliers have already been located, and relationships with them have been established.

Advantages of Buying

4) Easier Financing – Financing is easier to obtain because the business has a track record.

5) Less competition – Buying a business may eliminate a competitor that you would have had if you had started from scratch.

Disadvantages of Buying

1) Cost – Buying a business is more costly than starting one from scratch.

2) Problems – There may be problems in the business, some of which may not be apparent until after the sale. Be sure to find out why the owner is selling.

3) Personality Conflict – You may clash with existing managers and employers.

Disadvantages of Buying

4) Obsolete Goods – inventories and equipment may be obsolete.

5) Uncollectible Receivables – Receivables listed on the Balance Sheet may be stale and uncollectible.

Finding a Good Business to Buy

If you know what type of business you are looking for, trade publications and associations for that industry may be a good place to start your search.• Newspaper• Internet• Business Brokers – One of the benefits of using a broker is

that a broker, at least a good one, will screen businesses that are for sale to determine if there are major problems and to make certain that the business being sold exists. The broker will also guide you through the process and help you deal with snags along the way. There is however a broker’s fee.

Checklist

Checklist of documents you should obtain from any business you are thinking about buying.• Due Diligence Checklist

Considering a Franchise

• “Franchising” is an arrangement in which a party, the franchisee, buys the right to sell a product or service from a seller, the franchisor.

• The right to sell a product or service is the franchise.

• There are 2 types of franchise:1) Product and Tradename franchise2) Business-Format franchise

Product and Trade-name franchise

Involve the distribution of a product through dealers. Example – auto dealerships and some gas stations.

Business-format franchise

• Provide the product, trade-name, operating procedures, quality assurance standards, management consulting support, facility design, generally everything necessary to start and operate the business in one package.

• Many familiar fast food outlets and convenience stores.

Advantage of Franchising

1) Risk minimized – a well-established franchise is a proven business method.

2) Name Recognition – a well-known name can bring customers into the business and provide a competitive advantage for the franchisee.

3) Training- a franchisor can provide training to teach the franchisee about the business operation and industry even if the franchisee has no prior experience.


4) Support – a franchisor can provide managerial support and problem-solving capabilities for its franchisees.

5) Economies of Scale – cost savings on inventory items can be passed on to the franchisee from bulk purchase orders made by franchisor.

6) Advertising – Cooperative advertising programs can provide national exposure at an affordable price.


7) Financing – a franchisor will generally assist the franchisee in obtaining financing for the franchise. In many instances, the franchisor will be the source of financing. Lenders are more inclined to provide financing to franchises because they are less risky than businesses started from scratch.

8) Site Selection – most franchisors will assist the franchisee in selecting a site for the new franchise location.

Disadvantage of Franchising

1) Franchise Fees – franchise fees are required to be paid to the franchisor at the inception of the franchise agreement. These fees can range from a few thousand dollars to hundreds of thousands of dollars, depending on the franchise.

2) Royalties – the cost of many franchises includes a monthly royalty (fee) based on a percentage of the franchisee’s income or sales, and you pay even if the business is not profitable.


3) Loss of Control – franchise agreements usually dictate how the franchise operates. The franchisee must adhere to the standards in the franchise agreement, which thereby leaves the franchisee with little control over the operation.

4) Required Purchases – the franchisor may require the franchisee to purchase certain materials for the purpose of producing uniform franchise products.


5) Termination Clause – the franchisor may require that it retain the right to terminate the franchise agreement if certain conditions are not met. The franchisor may then terminate the agreement and offer the franchise to another.

Buying a Franchise vs. Independent Business

• In deciding whether to buy a franchise or to start an independent business, perhaps the best place to begin is to ask yourself why you want to own a business.

• The answer you give may provide some insight into which path you should choose.


You want to be your own boss –• If your answer is that you want to own a

business because of the freedom it will bring you, you probably should not buy a franchise. If you buy a franchise, the franchisor will dictate much of what you have to do, when you do it, and how you do it. You will have far more control if you start your own business.


You have a business idea that you believe has a lot of promise –• If you want to nurture an idea you have into

full bloom, you probably should not by a franchise. You won’t have much control or be given much of an opportunity to pursue your idea.


You want to make lots of money –• If you want to own your own business because of the

opportunities it presents, you should look long and hard at franchise. Franchises don’t necessary make more money than other types of business, but they do have higher success rates. Of course you will be paying for the higher success rate in the fees you will be paying to the franchisor.

• In many cases you will need to own several franchises to become really wealthy.

Warning• A lot of people in the franchising field will tell you that

franchises have a failure rate of about 5% within the first five years, compared to the 50% failure rate of independent entrepreneurs in the same time frame.

• There are studies done that question the 5% rate. For example – a study done by Dr. Timothy Bates, a professor at Wayne State University in Detroit, found that the franchise failure rate actually exceed 30% and that franchises made lower profits than independent entrepreneurs.

• Also Dr. Bates found that the average capital investment of franchisees was $500,000, compared to $100,000 for independent entrepreneurs.

Finding the Right Franchise

1) If you are not sure which franchise you’re most interested in, a good place to look is at annual franchising trade shows.

2) These trade shows provide an opportunity to talk to many franchisors and industry experts in one location.

3) Often, the shows will have seminars to educate potential franchisees on what they can expect and the advantages and disadvantages of being a franchisee.

4) Details of trade shows can be obtained on the Internet at Trade Show Central www.tsnn.com

Finding the Right Franchise

5) If you have a pretty good idea of which franchise you want to own, contact the franchisor directly. The franchisor can give you all the information you will need about the availability, cost and other details.

6) You can also contact existing franchisee who are looking to sell their franchises. You might save some money because you may be able to avoid some of the initial franchise fees.

Investigate the franchise before buying

1) Buying a franchise, like buying an existing business, should involve a thorough investigation.

2) The time spent investigating the franchise, the industry, and the market will make you confident that your decision to buy (or not to buy).

3) Making the wrong decision can cost you tens of thousands of dollars or more, not to mention the loss of time and energy on your part.

Investigate the franchise before buying

4) Before you buy, you should be convinced that the prospective franchise has an established reputation, sufficient capital, high-quality products or services, and satisfied franchisees.

5) A reference list of current and former franchisees should be available from the franchisor. Talk to as many people as you can, they are the ones who can give you the inside story about the business.

Getting information from franchisor

• Every franchisor must provide “offering documents” to prospective franchisees. According to federal law, the offering documents must be given to the prospective franchisee no later than 10 days before the franchise agreement is signed or before any cash is paid.

Franchise Agreements

• A franchise agreement is a contract between the franchisor and the franchisee.

• The agreement should balance the interests of the parties.

• Have you attorney try to negotiate the best terms you can get.

• Checklist of basic Franchising Agreement Terms

Evaluating your chance for success

Assessing The Market –1) One of the first steps in examining your business

idea is to get to know more about your market.2) You need to know if your market exists or if it is

big enough to support your business.3) You need to know a good deal about the size

and shape of the market in order to forecast your chances for success.

Assessing The Market –

4) The smaller your business, the more important this may be.

5) Example – if Procter & Gamble puts out a product that doesn’t sell, it moves to the next idea. If you put out a product that doesn’t sell, you may be out of business.

Conducting Research

When you conduct research, you will want to find out the following information:1) Who are your likely customers? Will their

identity affect where you need to be? For example, if students are your customers, you may need to be near schools.

2) How much will they pay for your product or service? Are there improvements you can add to increase the price?

Conducting Research

3) How can you reach your customers? Which marketing options will reach the most customers at the lowest cost?

4) Who are your direct competitors? Have you considered those who are not direct competitors but who might nevertheless compete against you?

For example: if you sell an online magazine, you’re competing not just against other online magazines but against other products that occupy someone’s leisure time.

Researching Your Industry

Where can you go to find out more specific information about the costs and risks associated with starting a particular type of business?• Small Business Administration (SBA)• Bureau of the Census• SCORE - free business counseling• Customized Economic Research• State and local government help

Small Business Administration

Business initiatives, education and training –• SBA provides a wide range of publications and

audio-visual materials. This material is geared toward management of a small business and technical assistance.


SBA is the federal government’s main provider of information and counseling to the small and new business person. SBA provides the following:1) Business initiatives, education and training2) International trade3) Veteran’s affairs4) Women’s business ownership


• International tradeSBA is available to provide guidance to a business in the export trade area, in particular to those wishing to take advantage of the new world markets in Mexico, the Pacific Rim, Canada, and Europe.


• Veteran’s affairsSBA provides training conferences specifically for veterans who are prospective or established business owners.


• Women’s business ownershipSBA provide training conferences specifically for women who are prospective or established business owners.• Contact your nearest SBA office at

www.sba.gov

Bureau of the Census

• The Bureau of the Census information is a general term used for a wide variety of information. Most people think of the Census Bureau as just counting people living in each city. Actually this is done only every 10 years.

• The rest of the time, the Bureau is preparing other types of statistics and publications that could be useful to you in researching your new business.


1) Census of retail trade2) Census of Service Industries3) Census of manufacturers4) Statistical abstract of the United States5) State and metropolitan area data book


• Census of retail tradeThis publication lists statistics for more than 100 different types of retail establishments by state, metro area, county, and community. This includes information on the number of outlets, total sales, employment and payroll.Similar information exists for wholesale trade.


• Census of Service IndustriesThis publication is similar to the census of retail trade for retail service organizations, such as auto repair centers and hotels.


• Census of manufacturersThis publication lists statistics for 450 different classes of manufacturing industries. The statistics are compiled by industry and include information on capital expenditures, number of establishments, employment data, material costs, assets, rent, and inventories.


• Statistical abstract of the United StatesThis annual publication is a source for finding current and historical statistics about various aspect of American life. The publication includes statistics on income, prices, education, population, law enforcement, environmental conditions, local government, labor force, manufacturing, and many other topics.


• State and metropolitan area data bookThis is a supplement to the statistical abstract listed above. It provides statistics on states and metropolitan areas in the United States and on subjects such as housing, income, manufacturers, population, retail trade, and wholesale trade.

SCORE

• The Service Corps of Retired Executives, is a national organization sponsored by the SBA. This organization has over 12,000 member volunteers.

• SCORE provides free counseling to new and existing small businesses. It also provides workshops that can give you a general overview of what it takes to start a new business.

SCORE

• SCORE also provides one-on-one counseling and training to existing businesses. The volunteers can help you identify management problems, determine the causes, and propose solutions to the problems.

• To contact SCORE go to www.score.org

Customized Economic Research

• Customized Economic Research covers a wide range of activity. The research can range from sitting in your car and counting the number of people who walk by a specific location, to hiring a professional research firm to do your marketing research and analysis for you.

• Generally the do-it-yourself economic research approach will provide you with necessary information to evaluate your new business.

Case Study

• Researching a Fast Food Business

State and local government help

• Most states and local governments have some type of economic development program. These programs will range from providing economic information to giving low interest loans an even forgivable grants.

• To find out what is available in your state, contact your state department of economic development for eligible requirements

• The city and county governments are also a source of assistance. Look in the local government section of the phone book, under “economic development”.

State and local government help• Loan officers at your bank may also be a valuable

resource in identifying state, local, and agency assistance to the new business person. They may have gone through the steps with other new businesses in your area.

• You can also call the regional or federal HUD office. HUD (the federal Department of Housing & Urban Development) provides job and other grants to startups and small businesses for job creation (e.g. $10,000 per job created) in the form of low interest loans, often in conjunction with the SBA

Assessing your Potential Profitability

• One of the most common reasons small businesses fail is that the owners seriously underestimate how much money they will need to start the business. You need to be extremely careful when determining how much money you need to start.

• Don’t fall into the “rosy forecast” trap in which the new owner over optimistically predicts robust sales in the first year and, as a result, doesn’t have enough money on hand when the cash flow slows down a bit.

Assessing your Potential Profitability

For a complete picture of what it will cost you to start a new business, you need to look very carefully at three key areas:1) Your living expense2) Costs of setting up the business3) Costs of running the business

Your Living Expenses

• You need to know the fixed and variable living expenses your family will face during the startup period. Ideally, you’d have this money in the bank before you even get started, or you’d have another source of income (such as a spouse’s wages, or investment income) to cover the base-bones costs.

Costs of setting up the business

• Next – you will need to add up the costs of everything you need to do before opening your door or making your first sale.

Costs of running the business

• Finally – you need to look at the costs of operating the business for the first 90 days.

• Once you have a handle on these types of costs, you should look at the revenue side, and attempt to forecast your sales for the first 90 days.

• When you have a good, solid estimates of both revenues and sales for the initial period of operations, you’ll be in a position to evaluate the potential profitability of your business.

Budgeting for Personal Living Expense

• Before you start planning for the cash needs of your new business, you must determine how much money you and your family will need to survive for at least the first six to 12 months of your business’s operation. It would be nice to think that your business will support you from the first day you open the door, but that’s not realistic


• Ideally, you should have access to enough cash to cover your living expenses for at least the first six months, without assuming you’ll get any income from your business. If not, consider waiting until you can raise more money or getting a part-time job to bring in some cash until your business gets on its feet


• The best way to start is to prepare a family budget schedule that shows where you spent your money in the last 12 months. Be sure to look over the entire 12-month period because expenses often fluctuate greatly from month to month. When preparing the schedule, be on the watch for expenses that could be reduced or eliminated if necessary.

• Family Monthly Budget Schedule

Costs of setting up the business

• The first time you go through the costs to start your new business, you do not need to be particularly precise. You can just “ball park” the amount to get a rough idea of your expected start-up costs.

• As you refine your business idea and shop around for the various items you need to make it happen, you will be continually narrowing down your estimates and eventually you’ll arrive at the actual dollar figures

Costs of running the business: First 90 Days

• Many new business owners plan only for their cash flow needs up to the day they open for business. But you also need to take a close look at the costs for the first 90 days of operation, since most businesses will take at least that long to build up reliable stream of revenue.

• The amount you need to keep the business running, called working capital, will vary by the type of business you own.

• If you new business is a one-employee firm, you will have a much smaller working capital requirement than a retail establishment that has a large inventory.

• Start-up Costs Worksheet

Forecasting Sales• To get an accurate reading on how much money you’ll

need to keep your business running in the first 90 days, you can’t just look at the costs. You’ll also need to figure out how much revenue your business will produce in those 90 days.

• In an ideal world, your business revenues would take care of all your expenses (and then some), and you wouldn’t have to figure out how much more you’ll have to pay out of your pocket to keep the business going. It might happen, but probably not within the first few months of operation.

Forecasting Sales

• Estimating your sales will be an inexact science. Don’t count too heavily on your projections and, if you are going to err, err on the conservative side in predicting how much business you’ll do in your first 90 days.

• If you have significant experience in the type of business and are familiar with the local economic conditions, your prior knowledge may give you the best estimate, but you may still want to back up your knowledge with outside verification.

Forecasting Sales

• Most libraries have a wide range of information available for specific types of enterprises. The trade publications and trade associates are good source of overall sales information for your specific industry.

• These publications will generally break out sales by geographic region and by business type. The publications may also provide key financial ratios that will be useful in your cash-flow planning.

Forecasting Sales

• Product vendors may be an excellent source of sales data. If your new business is one that will have high inventory levels, product or warehouse facilities may be a potential source of sales data.

• For example – assume that you plan to open a grocery store. You would purchase the majority of your product from a primary grocery distributor. Usually a distributor of any significant size will have access to other grocery stores’ sales in your trade area. This could be your starting point for your sales potential.

Cash-Flow Forecasting

• Cash flow forecasting is a method of comparing your revenues for any given time period with the out-of-pocket expenses you expect to have over the same time period.

• The difference between revenues and expenses is your “cash flow” for the period.

• Hopefully the number is positive, meaning that you have more money coming in than going out; however, for the first few months (or even years), it’s more likely that you’ll experience a negative cash flow.

Cash-Flow Forecasting

• All new businesses should prepare a monthly cash flow forecast for the first year and an annual forecast for the first five years of the business.

• Cash flow forecasting is critical because while your revenues may exceed your expenses for the year, they may greatly lag behind your expenses during any given month. You’ll need to know the size and duration of the potential gaps, so that you can find other ways to cover them.

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Assessing your Financial Options

• Finding the money needed to start a new business is always one of the most difficult hurdles new owners face.

• At this point in the process of analyzing your business idea, you should have examined the costs of starting a business and your sales forecast, with the result that you have a good idea of how much you should budget for expenses and how much you should be able to earn.


• Assuming that the startup costs (including the one-time setup costs, the recurring monthly expenses for the first 90 days, and any family living expenses that aren’t covered by other sources of income) are more than you have on hand and more than you’ll be able to earn right out of the gate, the next step is to figure out whether you can raise the difference.


• It’s important to recognize that most small businesses won’t be able to get a bank loan for their initial startup costs. Banks tend to be very conservative lenders, and want to see a track record before they invest in you. You may have heard that the SBA lends money to small businesses, but this is not strictly true – the SBA merely guarantees loans; they still have to be approved by the bank.


• You initial costs will most likely have to be funded by personal savings, loans from family and friends, home equity loans, or even credit card loans. You might consider partnering up with someone who has money to invest, or searching for other business owners who’d like to invest in another small company. In some cases local governments or community agencies may make small loans available to businesses based on nothing more than the owner’s business plan and good credit, but this is relatively rare.


• Once you have established a track record for your business, you may be able to convince a bank to invest in you.

• One possibility is to start your business part-time, while maintaining another job. If you’re successful at this for a couple of years, you’ll have a compelling story to tell at the bank.

Assessing Your Legal Liability

• In making a legal assessment of your business idea, you need to determine the extent to which the operation of your business might expose you to legal liability.

Save Money

• If all you want is an overview of the types of liabilities your business may be exposed to, ask your insurance agent rather than your lawyer. Your insurance agent will have a good idea of the overall picture – and, unlike the visit to the lawyer, the agent’s advice is free.

Assessing Your Legal Liability

• Once you determine the risks, there are steps that you can take to protect yourself.

• One way is by purchasing insurance.• Another way to protect yourself is by

incorporating your business so that the risks would be borne by the company and not by you.

• But corporations may not be for everyone because they can be expensive to create if you do it yourself and a lot of trouble to maintain.

Limiting Your Risks

• Perhaps your analysis of the available market, your potential profitability, or financing options, or your legal liability has left you with questions as to whether your business idea is really viable. You may not want to jump in with both feet, when you don’t know how deep the water is.

• There are ways to hedge your bets on the success of your new venture.

Limiting Your Risks

• Get advice from other owners –• Talk to others who operate the same or similar

businesses. You may be surprised at how many small business owners will be willing to share their insights with you. The local chamber of commerce or other business association meetings may provide access to business owners that you can talk to.

Limiting Your Risks

• If you don’t make such headway attending such meetings or by directly approaching business owners, you may wish to offer a business owner a consulting fee. If you can find out what you need to know about the day-to-day operation of your prospective business, this one-time expense will probably be money well spent.

Limiting Your Risks

• A time-honored way of learning a business is to work in a similar business as an employee. Not only will you be getting on-the-job training, but you’ll be getting a paycheck.

• If you don’t already have experience in your chosen type of business, look for one that is successful and well run.

Start by Moonlighting

• For those that are unsure about whether they can make a go of a new business, starting out on a part-time basis is probably the best alternative.

• A part-time business will reduce your financial risks significantly while you gain the experience you need.

• Going into a part-time new business will also enable you to get the kinks worked out of your business before operating on a full-time basis.

• Part-time business will not generate a large profit.

Another Idea

• You can start your business full-time – while maintaining a part-time job.

• This can be a way to make sure you can pay the rent and keep food on the table while your new venture is in its red ink stage.

The Statistics

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