Opening A Business
Opening a business is a challenge in the current economic climate and any new business will fail if the owner does not understand the basic fundamentals and fails to plan to be successful.
But just a few simple ideas will change the odds in your favor!
Any new business that you open must have a purpose; but that purpose must be more than "I will make a lot of money" – a rather arrogant and unthinking statement and the reason why 95 out of every 100 new businesses fail within five years.
Once you have a purpose your new business will be more focused. Begin with the end in mind. Know where you are going and you can take every step along with way knowing you are heading in the right direction.
The first thing to do when opening a business is to make a plan. Do you spend your day just doing random things in your current job? Do you want your staff to spend the day doing random things? Do you want your suppliers to supply random things and your customers to contact you without a clue as to what you actually do?
No! You would get nothing done!
Everyone has some sort of plan on how they are going to get through the day. It is the same when opening a small business. Plan how you are going to open your business, what your are going to sell, how much capital you will need, and who are you going to team up with. Success comes to those that plan; failure comes to those that fail to plan.
Once you have a plan it’s time to raise capital. There are several sources for money: you could use your savings, a second mortgage on your home or maybe a loan from your family. Many small businesses can be opened with only a little money. If you are thinking about buying a franchise or other retail business you may need thousands just to get started.
Don't open ANYTHING without the financing.
You should not consider opening a new business if you do not have up front money. Be careful not to run up a bunch of credit card debts or spend your money foolishly. When you do your plan, study your business opportunity and look for possible scams and money pits. Be careful and don't trust what you have not thoroughly investigated.
Now that you have your plan and money it is time to open your new business. Being successful takes time and hard work. Be prepared to work 50 to 60 hours a week for a few years until you get your business going. People want to believe they can just open a business and make millions while they lay by the beach.
Sorry it just is not that easy.
But once you've succeeded there is nothing better than owning and running your own profitable business.
Opening a business is a bit like have a new baby!
- Will I be successful?
- Who has done this before and can advise me?
- Where will I get the financing? What help is available, and how much will it cost?
All those concerns seem to hit at once.
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Most of those who succeed in opening their own businesses have planned for every phase of their success.
To enhance your chances for success, first generate a little bit of that perspiration to eliminate the most common mistakes business owners make when opening a new business. According to the experts, most new business owners should spend a great deal of time researching their potential businesses and the marketplace.
Developing a workable business plan can help smooth over the bumps in the road to your success.
Before you open a business and start your plan, carefully research and answer these basic questions:
- What niche or void will my business fill?
- What services or products will I sell?
- Is my idea practical, and will it fill a need?
- Who is my competition?
- What is my business’s advantage over existing firms?
- Can I deliver a better quality service?
- Can I create a demand for my business?
Once you’ve determined whether your business idea is feasible, answer these questions:
- What skills and experience do I bring to the business?
- What will be my legal structure?
- How will my company’s business records be maintained?
- What insurance coverage will I need?
- What equipment or supplies will I need?
- How will I compensate myself?
- What are my resources?
- What financing will I need?
- Where will my business be located?
- What will I name my business?
If you are opening a home business, you should answer these additional questions:
- Does my home have the space (preferably separate) for a business?
- Can I successfully run the business from my home?
- Can I deal with the isolation of working from home?
Your answers to these questions will help you create a focused, well-researched business plan that should serve as a blueprint. The business plan should detail how the business will be operated, managed and capitalized.
Sources for this information can be found in:
- trade association studies, journal articles and trade shows;
- regional planning organization studies on growth trends;
- banks, realtors and insurance companies; and
- customer surveys in your market area, which you can conduct on your own or which may already exist.
The Business Plan
Your business plan should cover the business basics from goals to management, from marketing to operations. A business plan is a blueprint for success, so don’t scrimp on the details. A good business plan covers the following areas:
- Describe in detail why you are opening a business and its goals.
- Identify the business ownership and the legal structure.
- Discuss skills and experience you and your partners bring to the business.
- Identify advantages you and your business have over your competitors.
- Explain how the business will be managed on a day-to-day basis.
- Discuss hiring and personnel procedures.
- Discuss insurance, lease or rent agreements, and issues pertinent to your business.
- Account for the equipment necessary to produce your products or services.
- Account for production and delivery of products and services.
- Describe your product or service.
- Identify the customer demand for your product or service.
- Identify your market, including its size, location and demographics.
- Explain how your product or service will be advertised and marketed.
- Explain your pricing strategy.
- Explain the source and amount of initial equity capital.
- Estimate start-up costs.
- Project operating expenses.
- Develop a monthly operating budget for the first year.
- Develop an expected return on investment and monthly cash flow for the first year.
- Provide projected income statements and balance sheets for a two-year period.
- Discuss your break-even point.
- Explain your personal balance sheet and method of compensation.
- Discuss who will maintain your accounting records and how the records will be kept.
- Provide "what if" statements that address alternative approaches to problems that may develop.
Businesses must comply with local laws and regulations. You need to know the legal requirements affecting your business.
Opening a Business
Opening a Business
Understanding Your Market
Market evaluation is critical and provides the basic data that will determine if and where you can successfully sell your product or service. This process involves defining your goals, scrutinizing your competition and your customer base, and interviewing potential suppliers. The information collected can help you, if necessary, adapt your product or service to better meet customer needs. Market research can help anyone that is opening a business as it can
- create primary and alternative sales approaches to a given market,
- make profit projections from a more accurate database,
- organize marketing activities,
- develop critical short- and mid-term sales goals and establish the market’s profit boundaries, and
- identify what makes your business different from similar businesses with similar products.
Questions To Ask
Your research should answer these basic questions:
- Who are your customers?
- Where are they located?
- What are their needs and resources?
- Is the service or product essential in their operations or activities?
- Can the customer afford the service or product?
- Where can you create a demand for the service or product?
- Can you compete effectively in price, quality and delivery?
- How many competitors provide the same service or product?
- What is the general economy of your service or product area?
- What areas within your market are declining or growing?
Research on competitors is extremely important. Visit industry trade shows to find out what your competitors are selling and how they are marketing their products. Similarly, stay current on industry magazines and publications.
Market research isn’t a one-time activity. Once you establish your business, you should stay in touch with your customers. You may have to adapt your product or service and alter your marketing strategy to keep up with your customers’ changing needs.
Pricing Your Products and Services
There are several pricing strategies. Select the approach that will make your goods or services the most competitive and will help you reach your profit goals.
- Retail Cost and Pricing - A common pricing practice among small businesses is to follow the manufacturer’s suggested retail price. The suggested retail price is easy to use, but it doesn’t adequately account for the element of competition.
- Pricing Below Competition - This strategy reduces the profit margin per sale. It requires you to reduce your costs and obtain the best prices possible for raw materials or inventory, locate the business in an inexpensive area or facility, closely control inventory, limit product lines to fast-moving items, design advertising to concentrate on price specials, and limit non-essential services. One word of caution: pricing goods below the competition can be difficult to sustain because every cost component must be constantly monitored and adjusted. It also exposes you to pricing wars. A competitor can match the lower price, leaving you out in the cold.
- Pricing Above Competition - This strategy is possible when price is not the customer’s greatest concern. Factors important enough for customers to justify paying higher prices include service considerations, including delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, and helpful, friendly employees; a convenient or exclusive location and exclusive merchandise.
- Price Lining - This strategy targets a precise segment of the buying public by carrying products in a specific price range only. For example, a store may wish to attract customers willing to pay a certain amount for a purse. Price lining has certain advantages including ease of selection for customers and reduced inventory and storage costs.
- Multiple Pricing - This approach involves selling a number of units for a single price, for example, two items for the price of one. This is useful for low-cost consumer products, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.
- Cost Factors and Pricing - Every component of a service or product has a different, specific cost. Many small businesses fail to analyze each component of their commodity’s total cost and, therefore, fail to price profitably. Once you do this analysis, set your prices to maximize profits and eliminate any unprofitable services. Cost components include material, labor and overhead costs. Material costs are the costs of all materials found in the final product, such as the wood, glue and coverings used in manufacturing a chair. Labor costs are the costs of the work that goes into manufacturing a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel hours needed to complete the job. Remember to use not only the hourly wage but also the value of fringe benefits. These include social security, workers’ compensation, unemployment compensation, insurance and retirement benefits. Overhead costs are those not readily identifiable with a particular product. These costs include indirect materials such as supplies, heat and light, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs such as clerical, legal and janitorial services. Be sure to include shipping, handling and/or storage as well as other cost components. Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is also important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It’s best to project the costs semiannually, including increased executive salaries and other costs.
Understanding Cash Flow
Failure to properly plan cash flow is one of the leading causes of small business failures. Under-standing the basics will help you better manage your cash flow.
Your business’s monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.
- The Operating Cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable credit sales, usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, increasing your cash. Now your cash has completed its flow through the operating cycle, and the process is ready to begin again.
- Current Assets - Cash and other balance-sheet items that convert into cash within 12 months are referred to as current assets. Typical current assets include cash, marketable securities, receivables and prepaid expenses.
- Cash-flow Analysis - should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flow and will allow adequate time to plan and prepare for the growth of your business. It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.
Planning a Positive Cash Flow - Your business can increase cash reserves in a number of ways.
- Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. You stand to lose revenues if your collection policies are not aggressive. The longer your customer’s balance remains unpaid, the less likely it is that you will receive full payment.
- Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advan-tageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services. You should measure, however, any consequent increase in sales against a possible increase in bad-debt expenses.
- Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are types of credit used in this situation.
- Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your company’s cash reserves.
Raising Money for a Small Business
One key to opening a business or expansion is your ability to obtain appropriate financing. Raising capital is the most basic of all business activities.
There are several sources to consider when looking for financing. Explore all your options before making a decision.
- personal savings,
- friends and relatives,
- banks and credit unions, and
- venture-capital firms.
To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be aware of the bank’s loan policies. Lending institutions generally require fully secured loans and sufficient commitment of capital by the borrower.
A Great Business was planned that way.
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