Finance & Grow Your New Business: Get a grip on the money
By Angie Mohr
()
About this ebook
Raise capital for your small business
Measure risk and plan for profitability
Grow your small business profitably
Angie Mohr
Angie Mohr CPA, CA, CMA is a chartered accountant and certified management accountant who has previously written four books in the Self-Counsel Press Numbers 101 for Small Business series. She is the managing director of Mohr & Company Chartered Accountants and Business Consultants. Mohr can be heard regularly on radio with small-business survival tips, and she is also a newspaper business columnist. Angie is the author of these books from Self-Counsel Press: * Bookkeepers’ Boot Camp * Financial Management 101 * Finance & Grow Your New Business * Start & Run a Bookkeeping Business
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Finance & Grow Your New Business - Angie Mohr
FINANCE & GROW YOUR NEW BUSINESS
Get a Grip on the Money
Angie Mohr, CA, CMA
Self-Counsel Press
(a division of)
International Self-Counsel Press Ltd.
USA Canada
Copyright © 2012
International Self-Counsel Press
All rights reserved.
Introduction
Entrepreneurs are people with a dream. They build on their skills and abilities and try to provide a stable income for themselves and their families.
There are as many reasons for starting a business as there are entrepreneurs. For some, it’s about the money. For others, it’s security and stability that are most important. Many entrepreneurs find satisfaction and fulfillment in building something from nothing and witnessing the quickening; that point where the business takes on a life of its own.
The freedom that comes from running your own business, and your successes and failures, is an irresistible pull for most entrepreneurs. This drive is what fuels them and keeps them going even when money is tight and business is bad. This sets them apart from others and makes them a special breed of individuals.
Entrepreneurs quickly learn that starting your own business is incredibly hard work, and it requires great commitment with little financial reward in the beginning. This book will help explain how you, as an entrepreneur, can get the money you need to finance your business, and how you can manage it on an ongoing basis.
Part One of this book, Finance Your Business,
will cover questions such as—
• What kind of business should I start?
• Should I buy an existing business or start one from scratch?
• What’s a business plan?
• Where will I find money to start up?
• How do I find my external advisers?
• How will I know how I stack up against my competition?
• How do I know when it’s time to hire people?
• Should I invest in new equipment?
• Where do I get money to expand?
Part Two of this book, Grow Your Business,
will delve deeper into the ongoing process of running your business. Businesses are like machines, and they need monitoring, maintenance and the occasional rebuild. This section will help you look at critical financial processes that separate successful businesses from failures, and teach you how to apply those processes to your growing business.
Part 1
INTRODUCTION
1
So, What Kind of Business Should You Start?
Just because you are a hairdresser doesn’t mean you should start a salon. In this chapter, we’ll examine the pros and cons of different types of businesses.
Introduction
Starting a business can be scary, exciting, and fulfilling, all at the same time. Frequently, small businesses are started by people who have been employees in the same industry. For example, hair stylists often open salons and accountants start accounting firms. You may feel that because the industry you’ve previously worked in is familiar to you, you would be successful at starting a business in this industry.
It’s important to keep in mind, however, that building a business, managing a business, and doing what the business does are three very different activities requiring different skill sets. You may be interested in doing only one of these three things. For example, you may get great pleasure out of hair styling, but have little patience for managing the day-to-day operations of a business. In this case, you will want to reconsider your decision to start a business. No matter how much joy it gives you to be your own boss
while doing the thing that you do best, you will come to despise all the other tasks that go along with owning and managing a small business. On the other hand, you may love building the business: designing the office space, putting together the marketing plan, forecasting, and building the customer base. You may, however, be thoroughly bored with the management aspect or with doing what the business does. Entrepreneurs who feel this way tend to build a business, get it up and running, sell it, and start all over again. The thrill for them is in the creation process.
If you plan to build your business, manage it, and be its chief employee, make sure that you have the energy and the skills to do all three of those things. If not, you will have to hire other people in those positions that you do not wish to do yourself, or rethink your business plan entirely.
Once you have assessed your strengths and weaknesses in terms of building, managing, and operating a business, it’s time to look at your personal goals.
Why Do You Want to Be an Entrepreneur?
Before you jump with both feet into starting a business, take some time to examine your motivations. What is it that is driving you towards starting and running a business? Many small-business owners cite things such as more money, freedom, and empire building as their motivators.
Money
Owning and running a business has the potential for providing you with a higher level of investment return and remuneration than you would receive working for someone else. The profit potential is definitely there, but high profits are a trade-off for high risks. Starting a small business is a risky proposition and you, as the owner, face the potential for financial loss as well as gain. It’s important to keep this in mind as you build your business and make sure that you not only have the ability to survive failure, but also the ability to tolerate risk. We will examine business risk in greater detail in Chapter 9.
When small-business owners talk about money, though, they often don’t mean that they want money for money’s sake. Money means something slightly different to each person, but in general, it represents financial independence, prosperity, and security. The more time you spend planning your business model before you begin, the more likely you will be building a profitable enterprise that will meet your personal financial goals.
Freedom
Many small-business owners like the freedom that comes with not having a boss and being able to make their own decisions. However, with this freedom comes ultimate responsibility for the business, including responsibility for customer satisfaction, working conditions, supplier shortages, product failure, and the economic well-being of your employees. Look at whether you are the type of person who can handle these responsibilities while simultaneously making considered, but quick, decisions on a daily basis.
Empire building
For many small-business owners, the most important consideration is that they are building something that will outlive them and perhaps provide income and stability to future generations. If this is an important consideration to you, it will be critical to make sure that you are building a business that has value, and that the value can be transferred to others through sale of the business or inheritance. The unfortunate reality is that over 80 percent of small businesses do not survive into the next generation but die with their owners.
What Kind of Business Should I Start?
The three major types of businesses are manufacturing, retail/wholesale, and service. There are pros and cons to running each type of business, as well as financial considerations. Let’s have a look at the characteristics of each one.
Manufacturing business
Manufacturing involves purchasing raw materials and adding labor and specialized machinery to create a product to be sold to customers. An example is a furniture manufacturer. This type of business would buy lumber from a sawmill, as well as nails, screws, glue, and varnish from a supplier. It would then have its employees use saws, drills, and other tools to turn the lumber into tables, chairs, and other furniture.
A manufacturing environment usually requires a hefty upfront investment in the equipment that will be used in the manufacturing process. Manufacturers also tend to need more highly skilled workers than, for example, a retail business. For these reasons, it is very difficult to start up a manufacturing business on a small scale and expand as you go along.
One of the main benefits of this type of business is that it can service very large customers with very specialized products. For example, a manufacturer can supply the entire North American auto industry with injection-molded fan vents.
Retail/Wholesale business
Retailing and wholesaling involves the purchase and resale of products. A retailer sells the products to the final consumer while the wholesaler is simply an intermediary, selling the product to another business that will ultimately sell it to the final consumer.
Almost every store that you can think of is a retailer. For example, a bookstore will purchase books from the publisher and display them for sale in the store. An example of a wholesaler is an importer that purchases teapots from Japan and sells them to stores, usually in large quantities.
Operating a retail business generally requires rented or purchased display space and therefore requires incurring the fixed costs of running that space right from the beginning. For example, if you wanted to run a variety store, you would have to rent (or buy) a storefront location where customers can drop in during your open hours. On top of that, you will have to invest in the store’s inventory, which is usually the largest cost to a retailer. The inventory can cost upward of $100,000 depending on the size and scope of the store. For these reasons, retail businesses are usually quite capital intensive and need financing from the beginning.
Wholesalers, on the other hand, generally don’t have to deal with the headaches of display spaces, but they do have to maintain an inventory in a warehouse. Therefore, a wholesale business needs to incur the fixed costs associated with operating a warehouse as well as the cost of purchasing the inventory, which tends to be in larger quantities than a retailer. This also generally requires financing from the beginning.
Service business
A service business encompasses any type of business where the item purchased is not a tangible good but instead is something that is done.
Some examples of service businesses are law and accounting firms, lawn-care businesses, auto shops, and spas.
Service businesses in general require less equipment than manufacturers do, and practically no inventory. Therefore, these types of businesses are generally easier to start on a small scale and require less start-up capital. In fact, service businesses account for the majority of all small businesses in North America.
Service businesses tend to be smaller and more local than manufacturers or wholesalers, because services are provided by people and are generally not able to be shipped by parcel post. It can be logistically difficult to provide services over a wide geographic area. However, business services such as website design, accounting, and data processing are becoming the exception to this rule with the ever-expanding use of email and the Internet.
Case Study
Craig Sesco knew from the time he was six years old that he wanted to run his own business some day. His father had owned and operated an Italian bakery since before Craig was born and Craig learned to be an entrepreneur through many years of working in the bakery, doing everything from kneading dough to running the ovens to ordering from suppliers, and, eventually, bookkeeping and cash flow forecasting.
Now Craig was 27 and he felt it was time to strike out on his own. He knew that his father had started his business by doing something he loved and that he was lucky that his passion coincided with consumer tastes, but Craig wanted to pursue a different model. He wanted to determine his best chance for commercial success and build a successful business around that.
The first process that Craig went through was to determine his personal goals. He had married his long-time love, Marnie, two years ago and they had just bought a small house for themselves and their new baby. Craig knew that he didn’t want to work the crazy hours his father still put in everyday: up at 4:30 a.m. to start the stone ovens and never falling into bed before 11:00 p.m., after reconciling the day’s receipts, preparing the bank deposit, and planning for the next day’s purchases. Craig wanted to balance his work time with family time but still wanted to build and run a financially successful business that he could sell by the time he was 50.
Through his analysis, Craig also determined that he didn’t want to run a business with huge start-up costs and large inventory levels to manage. He wanted to start small and gear up slowly as he built up more internally generated revenues.
Craig started to list the types of businesses he thought he might be successful at.
Eight Questions to Ask Yourself
Before you make a final decision as to what type of business to open, make sure that your personal goals and business goals are synchronized by asking yourself the following questions.
1. What are my personal financial goals?
If you want to retire a millionaire in ten years time and you are going to open a small shoe-repair shop, you may not be able to meet your goals. Analyze where you want to be in five or ten years. Do you want a larger house? Be able to travel the world? Have your retirement fully funded? You’ll save yourself much grief down the road if you make sure that the type of business you start will provide you with the money you need for your intended lifestyle.
2. Will this business allow me to have the freedom I want to pursue other things?
If you start a business that is based around you being there all the time, you may not be able to pursue some of your personal goals or even to spend the time to plan and strategize for your business. Having a business that can be systematized to run without your constant presence will allow you more freedom.
3. Is the product or service easily marketable?
Starting a business that has a product or service that is understandable and needed by a large segment of the population is by far easier than developing a new product or service and having to both familiarize potential customers with it and, at the same time, convince them that they need it.
4. What are the barriers to entry for this industry?
Some industries are more difficult than others to break into.
For an extreme example, it would be incredibly difficult to start up a new auto manufacturing company to compete with Ford or Daimler Chrysler. Likewise, it would be almost impossible to set up a new company to provide telephone service to the Eastern seaboard. In both of these examples, the start-up costs are monumental (design, manufacturing equipment, and showrooms in the first instance and switching stations and telephone cabling in the second). Also, these industries are dominated by a few very large players who have built name recognition and goodwill over many years.
Ensure that you choose an industry where there is room for new participants to grow.
5. Can the business weather downturns?
Every industry has up and down times. For example, travel agents book more vacations for their customers when the economy is on an upswing than when it’s in recession. A business can also be affected by how many new businesses in that industry are opening up. A flood of new providers can siphon off some of your customers, at least in the short term.
Look at whether the business you are contemplating will be able to survive external changes to its operating environment. Is your product or service easily adaptable? For example, in poor economic times, a spa will focus on advertising the basic services, such as haircuts. When times are good, it will promote higher-end services, such as massage, facials, and pedicures.
6. How easily can I expand this business?
If your goal is to grow your business over several years, it’s critical to determine upfront whether the business has the potential to do that. For example, if you start a grocery store in a small town, your customer base is limited to the residents of the town. You may find it difficult to grow such a business without offering new products.
Ensure that the business has the potential to grow quickly and expand either the customer base or the range of products or services.
7. Will my product or service endure?
The only constant in business is the knowledge that consumer tastes are ever changing. The product that may have been all the rage last month may be passé this month. Think back to pet rocks, fruit-flavored potato chips, and Rubik’s Cube. These items sold extremely well for an extremely short period of time. If you had built your business around one of these fads, however, you would soon have found revenues dropping precipitously and you would have been out of business quickly (unless, of course, your business hopped from fad to fad).
It’s important to make sure that your service or product is not a fad and will be needed long into the future.
8. Will I actually be able to make money with this business?
If you feel that you have found an under-serviced market niche, you need to examine why there are no other businesses serving that market. Many small businesses are able to create a toehold in an industry because large corporations would not be able to make enough profit serving that market to satisfy their investors. A small business has the advantage of lower overhead and more flexibility to move in and out of markets and can often create greater profits than its larger counterparts. However, if you want to do more than simply eke out a living running your business, make sure that the profit potential is there right from the beginning.
Chapter Summary
• In order to start and run a small business by yourself, you need to have skills in business building, business management, and doing what the business does.
• There are three main types of businesses: manufacturing, retail/wholesale, and service. When deciding what type of business to start, it’s important to look at the pros and cons of running each type of business.
• Ensure that your personal goals fit with your plans for your business with respect to finances, freedom, and risk.
• It is critical to examine your choice of potential business to make sure that the product or service is viable and will stand the test of time.
2
Is It a Business or a Hobby?
How do you know whether your interests will produce monetary returns? We look at decision planning for your great idea.
Introduction
It’s inevitable. If you’re a true entrepreneur, you will eventually begin to analyze every possible venture to see if it would make a viable business. You will look at your spouse’s scrapbooking project and think about the possibility of opening a scrapbooking store. You will think about ways to leverage your son’s after-school lawn-cutting venture to provide service to twice the customers at half the price. When a kind-hearted jogger in the park comments on how she wishes she had a dog, you will mentally calculate how many times you would have to rent out Fido to dogless
people to break even.
Entrepreneurs are always thinking about business. It’s what sets them apart from other people and makes them visionary. There is, however, the dark side of the moon where ventures that are pure hobby are turned into businesses that are doomed to fail. It’s critical to be able to tell the difference between a business and a hobby. Just because you love to go fly-fishing doesn’t mean that you can make money at it.
Many highly successful entrepreneurs build and invest in businesses without having any personal interest in what the business does. They are only concerned about what growth potential the business has and its profitability. Think about Warren Buffett and Donald Trump. But there are other small-business owners who have parlayed a personal interest or hobby into a highly successful business. These business owners have, however, conducted the same analysis of the business potential as have the Buffetts and Trumps of the world. They have realized that something they enjoy doing has the potential to be a thriving business enterprise. That is not so, however, with all hobbies.
Case Study
The first idea Craig came up with for his new business was operating a taxi service. He had driven a taxi part time when he was in college and he knew a lot about the business. He had even helped the taxi service’s owner develop new routing procedures to lessen the drivers’ down time. After drawing up some preliminary plans, however, Craig realized that owning a taxi service would violate two of his personal goals: having a balanced work/family life and not having a huge upfront investment. A taxi service would require a strong hands-on manager and he would have to fill that role until he could find someone to replace him. It also would require the purchase or lease of a central dispatch office as well as several cars. His estimates showed that he would be working approximately 60 hours per week on average and would have to find an initial investment of $120,000. He decided to leave the taxi business to someone else.
The next business opportunity Craig investigated was cheese-making. Craig had a passion for cheese-making that dated back to his days at his father’s bakery. His father’s brother, his Uncle Nino, had