SmallBizU ™ eLearning University. Starting A New Business Presented By SmallBizU Online eLearning Classroom © copyright 2005 SmallBizU

SmallBizU™

eLearning University

Starting A New Business

Presented BySmallBizU Online eLearning Classroom

© copyright 2005 SmallBizU

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Objectives of this course…

To assist in the development of a mission, vision and set of goals for starting a new venture.

To present the necessary tasks you must accomplish and what aspects of risk you need to consider.

To understand the management trinity: money, marketing, and management.

To present the legal aspects of obtaining licenses and permits and how to hire employees.

To show how to protect your business ideas. To demonstrate how successful entrepreneurs grow their

businesses by adaptation and experimentation.

Starting A New BusinessSmallBizU™

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Course Outline

2. Understanding the management trinity3. Determining feasibility and risk4. Marketing products and services5. Managing and operating the business6. Handling the money and the finances7. Hiring and managing employees8. Getting licenses and permits9. Protecting your ideas

10. Growing by adaptation and experimentation

1. Defining the mission, vision, and goals


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1Defining The Mission,Vision, And Goals


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Begin at the beginning…

When starting a business people often express how overwhelmed they are at the daunting task of starting a business.

One way to approach the problem is by stating what is not the beginning.

A business plan is not the beginning, nor is money in the bank, a rented space, or the merchandise inside.

To find the beginning, reduce your business idea to its apparent essence. Then reduce it again.


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Finding your best idea…

Once you have reduced your idea down to its bare essence, the question usually arises, “How do I know if this is a good idea?”

Success entrepreneur Paul Hawken, of Smith & Hawken, had this advice to share:– “Your best idea for a business will be something that is deep

within you, something that can’t be stolen because it is uniquely yours, and anyone else trying to execute it without the thought you have given the subject will fail. It’s not basically different from writing a novel. A good business and a good novel are faithful and uncluttered expressions of yourself.”


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Another caution…

Don’t start two businesses. One idea is sufficient, and bringing it into existence is hard enough.

The person who wants to write novels and print them on her own letterpress is starting two businesses.

The person who buys a farm to raise beef and at the same time opens a butcher shop is starting two businesses.

He would have a much better chance of survival if he got the farm on a steady footing before venturing into a retail business.


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“Being” rather than “doing”…

Royal Dutch Shell recently undertook a study on business longevity. Shell wanted to find out why some companies had endured for centuries, especially when their main business had changed or yanked out from under them by external events.

The study concluded that these venerable companies had “being” goals instead of “doing” goals.

Said another way, their business was centered on a way of interacting with the world, not on providing one specific product or service.

And this way of interacting is brought about through having a clearly defined set of mission, vision, and principles.


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The Art of the Start…

In his book, The Art of the Start, entrepreneur, author, and venture capitalist Guy Kawasaki listed five things that an entrepreneur must accomplish when starting any business. They are…

– Make Meaning

– Make A Mantra

– Get Going

– Define Your Business Model

– Weave A MAT (Milestones, Assumptions, Tasks)

We’ll take a look at each of these tasks.


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Make meaning…

The best reason to start an organization is to make meaning—to create a product or service that makes the world a better place. So your first task is to decide how you can make meaning.

Meaning is not about money, power, or prestige. It 's not even about creating a fun place to work. Among the meanings of “meaning ” are to– Make the world a better place.

– Increase the quality of life.

– Right a terrible wrong.

– Prevent the end of something good.

As Kawasaki recommends, complete this sentence: If your organization never existed, the world would be worse off because…


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Make a mantra…

Instead of a mission statement and all the baggage that comes with it, craft a mantra for your business.

The beauty of a mantra is that everyone expects it to be short and sweet. You may never have to write your mantra down, publish it in your annual report, or print it on posters. Indeed, if you do have to “enforce” your mantra in these ways, it’s not the right mantra.

Following are some examples that illustrate the power of a good mantra:– Authentic athletic performance (Nike).– Fun family entertainment (Disney).– Rewarding everyday moments (Starbucks).– Better than driving (Southwest Airlines).– Healthy fast food (Subway).


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Get going…

The third step is not to fire up Word to write a business plan, launch PowerPoint to craft a pitch, or boot Excel to build a financial projection. Instead, it’s get going.

This means building a prototype, writing software, launching a website, or offering your services. The hardest thing about getting started is getting started. (This is as true for a writer as it is for an entrepreneur.) Remember: No one ever achieved success by “planning” for gold.

You should always be selling—not strategizing about selling. Don 't test, test, test —that 's a game for big companies. Don 't wait to develop the perfect product or service. Good enough is good enough. There will be plenty of time for refinement later. It 's not how great you start—it 's how great you end up.


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Define your business model…

The fourth step is to define a business model. To do this you need to answer two questions:– Who has your money in their pockets?– How are you going to get it into your pocket?

In defining your business model…– Be specific. The more precisely you can describe your customer, the

better.– Keep it simple. If you can't describe your business model in ten words or

less, you don 't have a business model.– Copy somebody. Commerce has been around a long time,and by now

clever people have pretty much invented every business model that 's possible. You can innovate in technology, markets,and customers,but inventing a new business model is a bad bet. Try to relate your business model to one that 's already successful and understood.


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Weave a MAT…

MAT stands for milestones, assumptions, and tasks. For most people a startup looks as if it must achieve a seemingly

unlimited number of goals. However, out of these goals are some that stand head and shoulders above the others.

These are the organization 's milestones —they mark significant progress along the road to success. According to Kawasaki, there are seven milestones that every startup must focus on:

– Prove your concept.– Complete design specifications.– Finish a prototype.– Raise capital.– Ship a testable version to customers.– Ship the final version to customers.– Achieve break-even.


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Assumptions…

Second, create a comprehensive list of the major assumptions that you are making about the business. These include factors such as:

– product or service performance metrics– market size – gross margin– sales calls per salesperson– conversion rate of prospects to customers– length of sales cycle– technical support calls per unit shipped– payment cycle for receivables and payables– compensation requirements– prices of parts and supplies

Continuously track these assumptions, and when they prove false, react to them quickly. Ideally, you can link these assumptions to one of the seven milestones discussed previously. Thus, as you reach a milestone, you can test an assumption.


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Tasks…

Third, create another comprehensive list—this time of the major tasks that are necessary to design, manufacture, sell, ship, and support your product or service.

These are necessary to build an organization, though they are not as critical as the seven milestones. They include:– renting office space

– finding key vendors

– setting up accounting and payroll systems

– filing legal documents

– purchasing insurance policies


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Forming a mission…

Successful entrepreneur Bo Peabody, who founded the internet company Tripod, had this to say about the importance of mission:– “Much of what makes a company fundamentally innovative,

morally compelling, and philosophically positive is not what the company’s business model is, but how the entrepreneur communicates the mission of the company. A company’s mission, communicated by the entrepreneur with passion is what creates the environment that attracts smart people and gets them inspired in the first place. Which is exactly what gets the luck rolling.”


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Tripod’s mission…

As Peabody wrote in his book, Lucky or Smart:– “Tripod made what money it did by selling advertising

to clients such as Ford and Visa. That was our business model. But Tripod’s mission, as I described it to my colleagues, was to revolutionize consumer media, allowing anyone to publish his or her views to the entire world using the Tripod Homepage Builder. ‘Tripod isn’t here to just make money. We are here to fight the most important battles on the frontier of the First Amendment,’ I would tell them.”


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Mezze’s mission…

Bo Peabody later went on to form a restaurant called Mezze, of which he stated:– “Mezze, which I co-founded in the Bershire Hills of

Massachusetts, serves food and drink to locals and tourist from New York City and Boston. That’s our business model. But the mission of Mezze is larger: to set an example quality and service for all the Berkshires’ retail establishments. I tell our staff that by working hard to refine Mezze, we raise the bar for everyone. And that by doing so, we will together attract more visitors to our small part of the world.”


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Finally, there’s Village Ventures…

Peabody also co-founded Village Ventures of which he commented:– “Village Ventures makes money by taking advantage of the supply

and demand imbalance that results from the concentration of venture capital in only a few large cities. That’s our business model. But the mission of Village Ventures is different: to enable entrepreneurs to start companies in the towns where they want to live. Rather than having to flee to Boston or San Francisco to find venture capital, entrepreneurs in Boise, Idaho and Providence, Rhode Island, can get capital right in their own hometowns and build their companies in the same place they’d like to raise their families.”


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Pursuing a greater goal…

Missions such as those of Tripod, Mezze, and Village Ventures create an aura of authenticity, which is the elixir that attracts smart people and inspires them.

That’s because the primary goal of these companies is not to make money but “to defend the First Amendment and create jobs in places where there aren’t many.” And people love that.

No matter what anyone may tell you, all but the most hardened human beings want to believe that they get up in the morning to pursue a goal greater than simply padding their pockets.


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Knowing your primary aim…

Before you start any business, you have to understand what your primary objective is.

This decision will affect the formulation of your business recipe as much as any decision you will make.

Your primary objective is a very, high-level goal of what you want to the business to accomplish.

It’s really quite amazing how many entrepreneurs have trouble answering this basic question.

So the first decision you have to make is to ask yourself, “What is the primary objective of my business?”


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Determining your primary objective…

While there is obviously no right or wrong answer to the primary objective question, some possible responses include:– To carve out a small, but profitable niche– To create a high-growth company– To create a large, enduring enterprise– To create a lifestyle business for yourself– To turn a profit and sell the venture

As you continue through with the rest of the decisions in this course, you should continually come back to the answer to this question to make sure that your strategy and organization are in alignment with this goal.


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The purpose of your business…

Your primary objective should not be confused with the purpose of your organization.

While your primary objective is a goal of what you want to accomplish, your purpose explains why the goal is important.

Performance of an organization requires a clear focus and a narrow concentration. Whenever a business goes beyond a narrow focus, it ceases to perform.

Performance therefore requires purpose and this is defined by your mission.


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What is mission?

Mission is the purpose or reason for existence of your business.

It is a general heading or direction—it is abstract. A mission is what you stand for. A mission should be timeless. It should rarely, if

ever, change. It should stand the test of time. Example: “To increase man’s capability to

explore the heavens.”


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The ground-rules of mission…

Paradoxically, if an organization’s mission is truly motivating it is never really achieved.

Mission provides an orientation, not a checklist of accomplishments.

It defines a direction, not a destination. It tells the members of an organization why they are

working together and how they intend to contribute to the world.

Without a sense of mission, there is no foundation for establishing why some intended results are more important than others.


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The missions of enduring companies…

Company Core Purpose

3M To solve unsolved problems innovatively

Fannie Mae To strengthen the social fabric by continually democratizing home ownership

Hewlett-Packard To make technical contributions for the advancement and welfare of humanity

Mary Kay To give unlimited opportunity to women

McKinsey To help leading corporations and governments be more successful

Merck To preserve and improve human life

Nike To experience the emotion of competition, winning, and crushing competitors.

Wal-Mart To give ordinary people the chance to buy the same things as rich people.


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Now, write down your mission…

Right now on a piece of paper, write down your mission statement.

Remember, a mission is the reason or purpose for the business.

Write it as simply and honestly as you can. A worksheet is provided to help you with this

exercise. Example: The mission of CEDC is to increase the

entrepreneurial capacity of our clients.


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Deciding upon your vision…

Mission provides a guiding star, a long-term purpose that allows you to balance the inevitable pressures between the short-term and the long-term.

While mission is foundational, it is also insufficient because, by its nature, it is extraordinarily difficult to assess how we are doing by looking only at the mission.

For this we need to stick our necks out and articulate a vision: an image of the future we seek to create. Vision translates mission into truly meaningful intended results—and guides the allocation of time, energy, and resources.

Results-oriented leaders, therefore, must have both a mission and a vision. Results mean little without purpose.


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What is vision?

A vision is a specific future destination—it is concrete.

A vision is a dream with a deadline. It should change over time. It must say “yes” to some ideas and “no” to others. It’s about what the future might be, could be, and

shouldn’t be. Example: “To put a man on the moon before the

end of the 1960’s.”


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The ground-rules of vision…

Vision is a practical tool, not an abstract concept. Visions can be long-term or intermediate term. While an organization should exist for one, single

purpose, multiple visions can coexist, capturing complimentary facets of what people seek to create and encompassing different time frames.


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Now lets define your vision…

Remember, a vision is a specific, future destination.

It’s your dream with a deadline. Therefore, the first thing we need to do is establish

a time frame that we want to look ahead. You will obviously choose the timeframe(s) that

best fits your specific vision, but for the sake of this exercise, we are going to look out 5 years into the future.


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Ask yourself such questions as…

What big, audacious goal(s) do you want to try to achieve in five years from now?

What does success look like in five years? In five years time, how should your business be different

than it is now? Using your own metrics of success, what must you

accomplish in five years for you to consider yourself successful?

Right now, on a sheet of paper, write down your vision.


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The tests of a good vision…

A good vision describes a very specific future destination. It doesn’t sound like, “Our vision is to sell high-quality

products to our customers through excellent service.” This isn’t even a really good mission or purpose. It just restates the rules of the game of business.

Instead, a good vision sounds like, “Our vision is to create the largest online business college by 2010” or “By 2010, we have 100 franchises in operation.”

With a great vision, it’s very easy to tell whether or not its been achieved. If it’s not a true dream with a deadline, then it’s not a vision.


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Your goals for this year…

Goals are your definition of what success looks like.

Goals are your vision in miniature—they are your bridge from the present to your future vision.

They specify what work of your vision will get done, by who, and by when.

In effect, goals pose the question, “What will I have to accomplish by the end of this year to consider myself a success?”


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Why create goals and objectives?

Objectives clarify what it is you are trying to accomplish in specific, measurable goals.

For an objective to be effective, it needs to be a well-defined target with quantifiable elements that are measurable.

Whereas your vision statement is expansive and idealistic, and the mission short, powerful, and memorable, your objectives are designed to focus your resources on achieving specific results.

The purpose of well-defined objectives is to cause meaningful action.


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Developing your goals…

Think back to your vision statement once again. If you recall, your vision statement looked five years into

the future toward a specific destination that you want to arrive at.

Now think about the activities you need to accomplish this year in order to move from your current situation toward that destination.

Create 5 to 6 goals that are critical to arriving at your envisioned future. A worksheet is provided to help you.


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Be SMART when creating your goals… The SMART formula is a good framework to help

you when creating your goals and objectives. SMART helps to ensure that your goals are:

– Sensible,

– Measurable,

– Achievable,

– Realistic, and

– Time Specific.


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2Understanding TheManagement Trinity


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People not plans…

The most important thing that you have to learn about starting a business is that many entrepreneurs fail even though they had successfully completed well-written business plans.

The perfect business plan is totally useless if the people who have to implement it are incapable of doing so.

In fact, a survey of 220 "INC 500" businesses (relatively small, but among the fastest growing businesses nationwide) revealed that 66% did not have formal business plans when they started. Of the 34% that did have plans, an overwhelming majority (70%) generated them, for the most part, simply to get external financing. Furthermore, those businesses without formal plans tended to be more profitable.


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Management, not money…

Usually, small business owners want something that they don’t have, and money is often what they believe they lack, but 90% of the time, this belief is wrong.

It’s bad management kills companies, not the lack of money.

No matter how much money you place into a badly managed business, the chances of it succeeding are slim, whereas if you infuse good management into a financially troubled company, you can expect it to turn around.

This is to say that people, not money, run businesses.


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The management trinity…

No matter how big or small a business is, three areas of activity need to be taken care of:– The technical skills necessary to produce the goods or

services one wishes to sell,

– The ability to market one’s goods and services, and

– The ability to financially manage one’s affairs.

If any one of the above is missing, the business is not a business, it shouldn’t be called one, and it will never succeed.


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Find the people, form the team…

In the beginning, there is one person with an idea. Before you can have a business, one has to

become three. No body on earth is equally passionate about

producing a product, marketing it, and keeping good financial records.

Therefore, your first role in starting a business is to assemble the team that will help you to manage the business.


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How to initially use the business plan… A great place to begin thinking about your management

trinity is to look at an outline of a business plan and start thinking about which parts of it you feel excited to complete.

Is it the description of the product, the marketing strategy, or the financial projections that you feel competent about and ready to put into words or numbers?

The bottom line is that you should never attempt to become what you are not. If you hate financial management, then experience shows that you will be a bad financial manager no matter how many training manuals you read.


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How to convince team members…

At this point, the usual question that arises is, “How do you convince people into a nonexistent business that is often lacking resources and funding?”

Basically, you have to package your dream and sell it. It may sound too simple to be true, but the following strategies can work:– Beg. Ask a friendly accountant or marketing person to help for

free at least for the first few months.– Promise something you don’t have. Offer to reward them by

sharing future profits.– Give shares in your worthless company. Form a company and

allocate chares to those who come on board. Remember to keep enough shares to allocate to future investors.


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Once the team is formed, then plan…

Once you have considered which roles of the management trinity you feel passionate about and are capable of doing, you should then form the team that will perform the other necessary management tasks.

It is the team that writes the business plan, not you as the individual entrepreneur. In fact, if you find yourself writing a business plan by yourself or find that you are recommended to do so, know that you are potentially setting yourself up for failure right from the beginning.

People only do well what they love, and in business this is not enough.


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Why form the team first?

When a team that fulfills the management trinity prepares the business plan, the document they produce is “bankable,” that is, it can attract the necessary finances from institutional or private lenders.

No large- or medium-size company could operate without the separation of management roles just described. The fact that small business and entrepreneurial training still insists on one individual doing it all is puzzling.

This false belief in a “team-of-one” could be the cause for the massive failure rate of small businesses in the first five years. This fact may explain why business failures do not diminish even though small business counseling and training increases.


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Team-builders succeed. Period.

There are many personality tests out there to help you in determining whether or not you’ll make a good entrepreneur.

First, know that successful entrepreneurs come from every walk of life and possess just about every type of personality you can imagine. In fact, most personality tests only agree on one factor that entrepreneurs have in common and that is risk-taking. However, most good entrepreneurs will tell you that they are not big risk takers so this empirical evidence refutes even these findings.

If you want to maximize your chances of success in starting a business there is probably only one significant factor to leverage: the person who is most capable of enlisting the support of others, the team-builder, is the most likely to succeed.


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Getting help and assistance…

Starting a new venture is often an overwhelming task for most people. The thing you need to know is that there is a vast array of assistance out there to help you—and most of it is free or provided at a minimal cost.

One of the best places to start is to locate your local Small Business Development Center or Chapter of SCORE. Both organizations provide free counseling and start-up assistance to new business. To find your local SBDC or SCORE Chapter, use the following internet addresses:– Find an SBDC– Find a SCORE Chapter

Also check out the Tools section of this course for many other helpful resources and sources of assistance.


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3Determining Feasibility and Risk


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Seeing opportunity and not risk…

Entrepreneurship, it is commonly believed, is enormously risky. But why should this be so?

Indeed, nothing could be as risky as optimizing resources in areas where the proper and profitable path is innovation.

Of course innovation is risky. But so is stepping into the car to drive to the supermarket for a loaf of bread. All economic activity is by definition “high-risk.” And defending yesterday—that is, not innovating—is far more risky than making tomorrow.

The fact is successful innovators are conservative. They have to be. They are not “risk-focused,” they are “opportunity-focused.”


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Determining risk and feasibility…

Based on the very definition of economics there will always be inherent risk in an entrepreneurial venture. If there were no risk, then there could be no reward—there would be no opportunity.

The result of conducting a feasibility and risk analysis is not to eliminate risk, but to give you the ability to take greater risks.

There is no “one-size-fits-all” test for feasibility for a new venture as suggested by most books or consultants. The feasibility approach you use is dependent on the entrepreneurial strategy that you will employ.


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Is their a recipe for success already?

Many people starting small business have, in fact, seen an existing working model of the business they want to start and emulate. It’s just a matter of copying and implementing that recipe.

If you are not doing anything fundamentally new or different (which is the case for most new ventures) then proving feasibility is somewhat simple. Chances are there already is a successful recipe formulated for the your business.

Feasibility then gets boiled down to three questions: (1) Have you identified the recipe and specifically what is it? (2) Do you have what it takes to execute it? and (3) Is there any proof that the recipe transfers successfully from one market to another? A franchise would be a good example of such proof.


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The entrepreneurial strategies…

If you are doing something fundamentally new or different, then the feasibility test to apply depends on the entrepreneurial strategy that you have committed to.

The available strategies are reasonably clear, and there are only a few of them. According to management author Peter Drucker, there are four specifically entrepreneurial strategies:– Being first with the most– Hitting them where they ain’t– Occupying a specialized niche– Changing the economic characteristics of a product, market, or

industry.


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Being first with the most…

Being “First with the Most” does not necessarily aim at creating a big business right away, though often this is indeed the aim. For this entrepreneurial strategy the entrepreneur aims at leadership, if not at dominance of a new market or a new industry.

If you are choosing the “First With The Most” leadership strategy, then feasibility is often determined by the capital markets since this strategy requires a massive mobilization of resources.

If angels, venture capitalists, or investment bankers don’t bite at your business plan, then the feasibility is instantly known.


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Hitting them where they ain’t…

The second type of entrepreneurial strategy waits until somebody else has established the new, but only “approximately.” Then it goes to work. And within a short time it comes out with what the new really should be to satisfy the customer. The creative imitator does not invent a product or service; he perfects and positions it.

If you are choosing “Creative Imitation” as your chosen strategy then the concept has already been proven in the market. But in this case, you need to understand what the innovation represents better than the people who made it and who innovated.

In other words, you must be able to answer the question, “What’s the new value proposition I’m offering to the customer?”


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Occupying a niche…

If you are choosing to “Occupy a Niche” in the marketplace, then there is the opportunity to prove feasibility by conducting small, low-cost experiments.

These might include running small newspaper or classified ads, small-scale market tests, selling a prototype on eBay to gauge interest, or attending regional trade shows and talking with potential industry buyers and customers.

Since the niche is small, the investment in it can be small as well to determine market interest.

Think about and write down any small experiments you could conduct to test for basic feasibility of your idea.


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Change the economic characteristics… If you are choosing to “Change the Economic

Characteristics” by offering new uses for a product, or changing its pricing, or distribution model, then the customer must be able to tell that economically there is something different and new.

Do you know what this is and does the potential customer recognize it as new and different as well?

That is the fundamental test. While physically there is no change, economically there is something different and new valued by your customer.


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Assessing the personal risks…

While so far we have examined the risk factors concerning the business itself, you have to also consider the personal risks as well.

Any new business is intimately entwined with the life of its founder. For this very reason, a personal risk assessment is as important as the business risk assessment.

Being an entrepreneur is not for everyone and price it can place on your personal life is immense.

The following questions help you to gauge your personal orientation toward risk.


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Considering personal finances…

Ask yourself:– Can you handle not knowing where your next paycheck is coming

from? Is Job Security important to you?

– How much are you willing to risk financially? Most entrepreneurs put it all on the line (savings, credit, home) and many will lose it all. What can you lose? Are you willing to lose it?

– Do you have the cash reserves to pay your (personal) bills for the next 2 years without any salary taken from your business?

– In 5 years, how much do you want to be making a year from your business (personal salary)?


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Concerning your lifestyle…

Ask yourself:– What type of personal lifestyle do you want?

– Will your business allow for the hours and personal rewards that are important to you?

– How does your age affect your business decision? The younger you are the better you may be able to handle risk, but how will a business failure or success affect the rest of your life plans?

– Do you have the physical stamina to handle the stress and demands that a business venture will place on you? Business owners tend to need a lot of energy, do you have the reserves?


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Concerning your strengths and goals… Ask yourself:

– Have you been in the "power position" before? Are you a better leader or follower?

– Do you love (or at least like) your current physical location? As a business owner, you will become part of the community for years to come. Is this where you want to be?

– List the top 5 reasons why you want to start this business. Then take a look at your personal life goals. What conflicts do you see? Can you make changes so that your personal and professional goals are closer to each other?


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4Marketing Products and Services


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Finding your niche…

Most small businesses cannot afford to market to the general, mass-market customer—resources are just too limited.

Instead, it must focus it efforts, communications, and resources on those segments of the market that offer the most promise for the business and that have been neglected by larger competitors.

The niche strategy aims at making its successful practitioners immune to competition and unlikely to be challenged. Successful practitioners of market segmenting take the cash and let the credit go. They wallow in their anonymity.


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What is market segmentation?

The division of a market into different homogeneous groups of consumers is known as market segmentation.

Rather than offer the same marketing mix (product, price, place, and promotion) to vastly different customers, market segmentation makes it possible for firms to tailor the marketing mix for specific target markets, thus better satisfying customer needs.

Not all elements of the marketing mix are necessarily changed from one segment to the next. For example, in some cases only the promotional campaigns would differ.


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Who are they?

Think about your customer and answer this question:– Who is your targeted customer and how were they selected? Or

said another way:

– The customers we serve can be described as…what?

An example: The targeted customer for Audio BizBooks is executives and sales professionals who have a need to keep up with current management practice yet travel many weeks within a year and must multitask in order to be effective.


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How many targets do you have?

It is possible and, in many cases necessary, to have several target markets that are separate and distinct from one another.

For instance, an errand service may target busy professionals as one market and elderly senior citizens as another.

Each of these markets would make good customers for such a service, but each is unique in response to the marketing mix you would offer.

Ask yourself, “Do I have several different target markets and if so, what are they?”


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What defines a market segment…

A market segment should be:– Measurable

– Accessible by communication and distribution channels

– Different in its response to a marketing mix

– Durable and not changing too quickly

– Substantial enough to be profitable

Using the above criteria, ask yourself whether or not each target market you defined meets the above definition?


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Where are they located?

Ask yourself, “Where do my customers reside geographically?”

Geographic segmentation is based on regional variables such as:– Region (international, national, regional, state, county, city…)– Climate,– Population density (rural, urban, suburban), and– Population growth rates.

An example: The targeted market segment for Reynold’s Bakery resides primarily in the suburban neighborhoods of northern Hamilton county located in Indiana.


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What job is your product hired to do?

Knowing what job a product gets hired to do (and knowing what jobs are out there that aren’t getting done very well) can give entrepreneurs a much clearer road map for improving their products to beat the competition from the customer’s perspective.

When launching a business into the marketplace it’s not a good idea to assume that just because you show up the market gets bigger. Most of your business will have to be taken from the competition—and they won’t give it up easily.

Ask yourself, “My customers will hire my products to complete what specific kind of job? What are they trying to get done? What’s their circumstance?”


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How many customers are there?

What do you know about the size of the market(s) you are targeting? Anything? If so what?

Things to consider include:– Roughly, how many of them are there?

– Are their numbers growing or shrinking?

– How much do they spend annually on your kind of product and services?

– Is that amount increasing or decreasing?


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How competitive is the market?

When thinking about your competition you need to consider the following questions:– How easy or hard is it to get into this business?

– How competitive is the business?

– Is your product considered a commodity in the market or is there a price war going on?

– What substitutes are available for your products or services?


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In what stage is the market?

Every strategy is somewhat influenced by the age of the market and the stage of the life-cycle it’s in.

Pricing, profits, and even promotions all change as a product moves through this life-cycle.

Ask yourself, “Is the market itself new, growing, mature, or in decline?”

For instance, the market for nanotechnology is new, for high-definition televisions it’s growing, for diesel engines it’s mature, and for VHS tapes and players it in decline.


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Where’s the puck going to be?

Money is always moving in a market. What was new yesterday quickly becomes a commodity today as profits move and shift to areas where the product is not yet good enough.

Hockey great Wayne Gretzky was famous for saying “I don’t skate to where the puck is, I skate to where the puck is going to be.”

So how about it? Ask yourself, “Today, the money to be made in the market is…(where?) But in the near future, the profits will shift to…(where?)”


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Developing a core marketing message… Central to effective marketing is a message that speaks powerfully to

the needs of prospective customers. This message becomes the foundation of all of your marketing efforts.

This message is developed by first answering the following questions:– Target market: What clients do you serve?

– Problem: What problem are your customers facing that would make them seek assistance?

– Solution: What results do you produce when working with customers?

– Proof: What do you have that can prove you can in fact deliver that solution? (references, testimonials, case studies)

– Differentiation: What makes you stand apart from your competitors? What is it about your business that offers a true advantage to your customers?


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A marketing message example…

When someone asks, “What do you do?” Here’s how you might respond…– Target market—Say who you work with first: “I work with IT

executives in Fortune 1000 companies…”– Problem—Articulate the problem that is meaningful to them: “…who

are having difficulties getting their top talent to stay around.”– Problem Stories—Tell them more about the problem of those you have

worked with before: “Many IT managers are losing people because they are so bad at managing people. For instance, a client we worked with was losing 30% of their best technical people,every year…”

– Solution/Proof—Tell them your solution and what makes you different: “We’ve had very good results in turning around the attrition problem for clients. Typically, we can cut their attrition in half in less than six months.”


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Getting your message in writing…

Every business needs some kind of written materials whether it be in the form of letters, brochures, websites, and so forth.

To begin your written materials, begin with your core solution statement—a simple phrase that communicates the essence of your solution.

Example: “We help IT companies retain their best talent.”


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Describe the problem…

After stating your core solution statement, you should write down your problem description.

For this section, discuss the problem, pain, or predicament as to make it crystal clear that you both understand the problem and your understand their situation or industry.

Problem Example: “These days the biggest challenge in big IT departments is keeping talented staff. In a survey of the 20 largest IT departments in banking, for instance, the average attrition rate is 27% per year, costing each organization over 3.8 million in recruitment costs annually.”


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State the solution…

Next, discuss the solution you provide and discuss what’s possible if you solve the problem.

Solution Example: “Research also proves that the top reason for attrition is not poor compensation or lack of challenging work, but poor management by those directly above them. The good news is that when management approaches change, people stay, saving companies hundreds of thousands, if not millions each year.”


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How come?

Next, discuss why companies are stuck in the problem and why they are not performing the solution.

How Come? Example: “Highly competent technical people are the ones most often promoted to management positions, however, they only receive in-depth management training 16% of the time. This leaves 84% of those in technical management positions with few skills in the area of people or project management.”


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What needs to be done…

Now, discuss the steps necessary to resolve the issue. Example: “The best investment IT departments can make

is providing in-depth management training and coaching. It is the number one defense against attrition, low productivity, and declining morale. Such training needs to be seen as an investment, not as an expense as it can show a return of 500% or more.”


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Finally, tell the customer, “Why us?”

The final statement should declare why you are qualified to provide the proposed solution.

Why us? Example: “Since 1987, IT Management Solutions has been helping some of the largest IT departments in America attract and retain top talent by developing top management and teams through our guaranteed consulting and training services.”


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Your overall marketing strategy…

Your overall marketing strategy needs to be rooted in one of three generic strategies as they are called.

The best known and most used set of competitive strategies are those developed by Michael Porter, author of Competitive Advantage.

These strategies include:– Cost Leadership Strategy

– Differentiation Strategy

– Focus Strategy


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Visualizing the different strategies…

Marketing ScopeAdvantage

Low Cost Uniqueness

Broad

(Industry Wide)Cost Leadership

StrategyDifferentiation

Strategy

Narrow

(Market Segment)Focus Strategy

(Low Cost)Focus Strategy

(Differentiation)


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Cost leadership strategy…

The cost leadership strategy calls for you to produce and market a good quality product at a lower cost than your competitors.

By doing this your company should have higher profit margins than the industry average.

A firm may acquire cost advantages through improving process efficiencies, gaining access to lower cost materials, utilizing outsourcing options, or avoiding some costs completely.


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Differentiation strategy…

Differentiation strategy involves creating a product that is perceived as unique.

It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. The unique features or benefits should provide superior value for the customer if this strategy is to be successful.

However there are usually additional costs associated with the differentiating product features and this could require a premium pricing strategy.


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Focus strategy…

The focus strategy, also known as niche strategy, is when a company focuses its resources and efforts on a narrow, defined segment of a market.

Although, it focuses on a narrow market segment, you still must choose to either compete on the basis of cost leadership or product differentiation.

It focuses on serving a particular niche so well that others cannot compete.

Because of minimal competition, profit margins can be very high.

Customer loyalty is usually also high with this strategy.


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What is a marketing mix?

After choosing which primary generic strategy your business will pursue it’s time to set your “marketing mix.”

A marketing mix is the way in which you go to market. Your marketing mix consists of four equal elements:

– The product,– Its promotion,– Its distribution, and – Its pricing.

The first three elements, product, promotion, and distribution, are a company’s attempt to create value.

The last element—pricing—is the company’s attempt to capture some of that value in the form of profits.


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Product decisions…

What product or service will you provide?– Is there anything new or innovative about the product

itself or the way that it is sold? Specifically, what is unique, if anything?

– Are there any suppliers? If so, who are they?– Can the product be protected through intellectual

property?• Copyrights for creative works• Trademarks for name and service marks• Patents for technical inventions

– What future products or services are being planned?


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Promotional decisions…

Promotion decisions are those related to communicating and selling to potential consumers.

Promotion decisions involve:– advertising,– public relations,– sales promotions, and– personal selling.

What marketing weapons will you use in your advertising and promotional efforts?


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Pricing decisions…

Pricing is the moment of truth—all of marketing comes to focus in the pricing decision.

Many entrepreneurs use a cost-plus system for determining prices. Others use something known as value-based pricing. The purpose of value-based pricing is to price more profitability by capturing more value, not necessarily by making more sales.

How will the product or service be priced? If distributors or retailers will be used, what prices will be extended to them?


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Place decisions…

Place (or placement) decisions are those associated with channels of distribution that serve as the means for getting the product to the target customers. The distribution system performs transactional, logistical, and facilitating functions.

Distribution decisions include market coverage, channel member selection, logistics, and levels of service.

How will the product or service be delivered to the customer?


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The marketing mix and target market… For each target market you define, there should a different

and unique marketing mix. In other words, one or more of your four Ps should be different.

If this is not the case, then one of your target markets was not defined correctly.

How is your marketing mix different for each target market that you have?


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5Managing The Business


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Learning how to manage…

The practice of entrepreneurship is based on same principles, whether the entrepreneur is an existing large institution or an individual starting his or her new venture single-handed.

Yet the existing businesses faces different problems, limitations, and constraints from the solo entrepreneur and needs to learn different things. The existing business knows how to manage but needs to learn how to be an entrepreneur and innovate.

The new venture needs to learn how to be an entrepreneur and how to innovate, but above all else, it needs to learn how to manage.


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The inventor and the manager… Unless a new venture develops into a new business and makes sure it is

“managed,” it will not survive no matter how brilliant the entrepreneurial idea, how much money it attracts, how good it products, or even how great the demand for them.

Consider this piece of history:– Refusal to accept these facts destroyed every single venture started by

inventor Thomas Edison. He should have succeeded for he was a superb business planner. He knew how to set up an electric power company. He knew how to get all the money he needed. His products were immediate successes and demand for them was practically insatiable. But Edison remained an entrepreneur and thought “managing” meant being the boss. He refused to build a management team. And so every one of his five companies collapsed once it got to middle sized, and was saved only by booting Edison himself out and replacing him with professional management.


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The requirements of a new venture…

According to management pioneer, Peter F. Drucker, entrepreneurial management in the new venture has four requirements:– It requires, first, a focus on the market.

– It requires, second, financial foresight, and especially planning for cash flow and capital needs ahead.

– It requires, third, building a management team long before the venture actually needs one and long before it can actually afford one.

– And finally, it requires of the founding entrepreneur a decision in respect to his or her role, area of work, and relationships.


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The need for market focus…

When a new venture does succeed, more often than not:– it is in a market other than the it was originally intended to serve,– with products and services not quite those with which it had set

out,– bought in large part by customers it did not even think of when it

started, and– used for a host of purposes besides the ones for which the products

were first designed. If a new venture does not anticipate this, organizing itself to

take advantage of the unexpected and unseen markets—if it is not totally market-focused, if not market-driven, then it will succeed only in creating an opportunity for a competitor.


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How to be market-focused…

Being market focused requires, first, that the venture systematically hunt out both the unexpected success and the unexpected failures.

To be market-driven also requires that the new venture be willing to experiment.

It does not require a great deal of money to find out whether an unexpected interest from an unexpected market is an indication of genuine potential or a fluke. It requires sensitivity and a little systematic work.


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The customer defines your product…

Above all, the people who are running a new venture need to spend time outside: in the marketplace with customers looking and listening.

The new venture needs to build in systematic practices to remind itself that a “product” or “service” is defined by the customer, not by the producer.

The greatest danger for the new venture is to “know better” than the customer what the product or service should be, how it should be bought, and what it should be used for.

Businesses are not paid to reform customers. They are paid to satisfy them.


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Financial foresight…

The lack of adequate financial focus and the right financial policies is, by contrast, the greatest threat to the new venture in the next stage of its growth.

Initially, entrepreneurs tend to focus on profit. But this is the wrong focus for a new venture.

Cash flow, capital, and controls come much earlier. Without them, the profit figures are fiction.

A rule of thumb with a good deal of empirical evidence to support it says that a new venture outgrows it capital base with every increase in sales of the order of 40 to 50 percent. After such growth, a new venture also needs a new and different capital structure, as a rule.


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Building a management team…

Just when a new venture appears to be on the threshold of becoming an “adult”—a successful and going concern, it gets into trouble nobody seems to understand.

The reason is always the same: a lack of top management. The remedy is simple: to build a management team before the venture reaches the point where it must have one.

Teams cannot be formed overnight. They require long periods before they can function. Teams are based on mutual trust and understanding, and this takes years to build.


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How to build the team…

The first task in building a management team requires the will of the owner to build a team rather than to keep on running everything themselves.

The next step is for each member of the group, beginning with the founder, to ask: “What are the activities that I am doing well? And what are the activities that each of my key associates in this business is actually doing well?”

Then the work on the team can begin. The founder starts to discipline himself (or herself) not to handle people and their problems, if this is not the key activity that fits best.

Finally, goals and objectives for each area are set. Everyone must be asked, “What can this enterprise expect of you?”


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Your legal structure…

All businesses have to be structured legally, but there are various options and choices you have on how to do this.

Your basic decisions include:– The Sole Proprietorship

– The General Partnership

– The C Corporation

– The S Corporation

– The Limited Liability Corporation

The following discussion briefly profiles each structure.


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Sole proprietorship…

A sole proprietorship is a business owned by one individual.

It is not considered a legal entity under law, but an extension of the individual that owns it.

As a sole proprietorship, you are merely considered as a self-employed individual carrying on a trade or practice.

The owner is directly and personally responsible for all debts and liabilities of the business.


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The general partnership…

A partnership is where two or more individuals join together to run a business venture.

Each individual has ownership in the company as well as responsibility for its debts and other liabilities.

Authority and the way in which profits and losses are to be shared is usually controlled by the partnership agreement.


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‘C’ corporation…

A corporation is a separate, legal entity which exists apart from its owners.

A corporation has all the legal rights of an individual and is responsible for its own debts.

Owners are typically protected from the liabilities of the company.

This type of protection is known as limited liability.


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‘S’ corporation…

An ‘S’ Corporation is very similar to a ‘C’ Corporation in terms of ownership and liability issues.

It differs however when determining the number of owners allowed, who those owners can be, and how the business will be taxed.

Usually, this structure provides limited liability to its owners while the business itself is not taxed itself. Instead, all earnings “pass-through” to the owners who report such amounts on their personal income tax returns.


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Limited liability company…

There are two hybrid-type entities apart from the sole proprietorship, partnership, and corporation.

These hybrid entities share some of the attributes of the above pure entities. They are… – The Limited Liability Company (LLC) - which is a hybrid entity

that has many characteristics of a partnership and a corporation, and

– The Limited Liability Partnership (LLP) – which is a general partnership that offers limited liability to all investors while preserving certain opportunities that may exist in that general partnership.


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Choosing a legal structure…

Choosing a legal structure may seem like a daunting task, but try not to worry too much.

An attorney (who checks for issues of liability) and an accountant (who checks for issues of taxation) can be extremely helpful when deciding which legal structure is right for your company.

Either one of these professionals can usually complete and submit the required forms for you or at least point you in the right direction.

Incorporation service providers, such as BizFilings, can also complete and submit the required forms for you.


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Ownership and management…

Apart from the legal structure of the business, some ownership questions to address include:– How will the ownership structure of the venture be

designed?– Who will own what percentage of the company?– Which owners are responsible for the management of

the company and which might be silent partners?– Who will make up the management team of the

business?– What professional service providers will be necessary?


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Insurance and risk management…

Finally, you’ll want to consider what insurance coverage will be necessary. Some categories of coverage include:– Property Insurance: Fire and Theft, Renters Insurance,

Inventory Coverage – Casualty Insurance: General Liability, Product Liability,

Professional Liability, Errors and Omissions, Surety Bonding

– Time Element: Business Income Interruption, Extra Expense Coverage (from interruption), Automobile Insurance, Commercial Auto Policy, Motor Carriers Policy

– Employee Insurance: Personal Disability, Life Insurance, Medical Insurance, Worker's Compensation


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Getting insurance for your business…

In order to get insurance for your business you simply need to crack open the Yellow Pages.

Look under insurance paying special attention to agents who have the word “commercial” in their ads or phone listings.

Only commercial insurance agents are licensed to sell and represent types of business insurance. Such a licensed professional can help you assess what kinds of insurance you might be required to have by law and other types of supplemental insurance that you might consider.

Because each policy needs to created by an insurance underwriter, the only way to really get a handle on the premium amounts to just ask for a quotation.


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6Handling The Money andThe Finances


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The language of business…

Money is how your business will keep score—it’s the language of business.

While there are many money issues that come into play when starting a new business, there a few fundamental decisions, however, that must be addressed before you start.

This section examines those decisions and questions in detail


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How much money it will take…

When thinking about how much money you should use to start your business, consider entrepreneur Paul Hawken’s advice:– “Let your relationship with money determine the amount of money

you use to start your business. I started Erewhon, my first business, with $500, and Smith & Hawken with $100,000. In 1967 I would have felt uncomfortable with more than $500, but a little over a decade later I would have been uncomfortable with less than the $100,000. The difference was not a result of the different nature of the two businesses, but the nature of my attitude toward money.”

You should start a business with just as much capital as makes you feel comfortable, and you should obtain it from the sources you are most comfortable with.


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How much money do you need?

The first question to therefore consider is: “How much money, in total, do you need to get started?”

A worksheet is provided to help you calculate this amount. The bottom line is that you need enough money to get to

market. And the amount of money needed will determine who is interested in the deal if you need outside financing assistance.

While a bank or private investor may look at a deal of $100,000 or less, most venture capital firms would consider this to be too small as even a seed capital deal.


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Too much can be worse than too little… For the small business, too much money is worse than too little. The major problem affecting businesses, large or small, is lack

of imagination, not capital. A ready supply of too much money in start-ups tends to replace creativity.

If money could solve problems, there would be no small businesses because the big businesses with plenty of money would run everything.

Small businesses, at entrepreneurial ones, are formed in order to address problems that money alone cannot solve. With low overhead and fragile budgets you can’t buy your way out of problems. You have to learn your way out.


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What will the money be used for…

How much of the total money is for fixed assets or property that usually has some sort of long-term value?

How much of it is for working capital or money that will be used to finance the short-term operations of the business?

Banks like deals where there are a lot of hard assets to secure as collateral and tend to shy away from pure cash-only deals.

Investors are the usual option when the money will be used to pay for the day-to-day operating expenses of the business or in the case of more risky activities such as new product launches.


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Is outside financing required?

Once you determine how much money you require and what type of assets or expenses it be used for, the next question to address concerns your personal investment.

Ask yourself, “How much money will I or other owners put into this business?”

Therefore, how much outside financing do you require? This determined simply by taking the total amount of money you need and subtracting any money placed into the business by the owner(s).


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The right money…

The following questions can help you determine what kind of money may be best for your business:– Is the money you are trying to secure patient for

growth, but impatient for profit? This has been proven to be a good thing in new ventures?

– Are you prepared to give up partial ownership of the business in order to secure outside investment?

– What is the cost of this outside capital? What are the terms, rates, and conditions?


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What’s the right kind of money?

As a business moves through its lifecycle, the type of money it requires changes. Having the wrong type of money at the wrong stage of the business can prove to be a fatal management mistake.

There are basically two kinds of money:– Debt: a liability or obligation owed to another person or institution and

legally required to be paid by a specific date.– Equity: money raised from the owners of a business.

Both of these types of capital operate in completely different ways and each can have an entirely different effect on a business. Even the business plan you write needs to be tailored to the appropriate type of capital you are seeking since each is a unique audience.


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What is debt capital?

Debt is a liability or obligation owed to another person or institution and legally required to be paid by a specific date.

Examples of debt capital include bank loans, government guaranteed loans, lines of credit, credit cards, mortgages, notes payable, bonds, accounts payable, trade credit, home equity, leasing contracts, etc.


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Who provides debt capital?

Banks and other financial lending institutions are the chief providers of debt capital.

Also, owners or other outside persons may lend money to a business in the form of debt.


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The advantages of debt capital…

Debt can be less costly than equity capital since most interest rates are less than what an investor would require as a rate of return.

Also, with debt capital, you don't have to give up any ownership in your business.


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The disadvantages of debt capital…

Debt capital can be rough on the cash flow of your business since you are usually required to make constant and periodic principal and interest payments similar to a home mortgage.

If your business is cyclical or seasonal or experiences a sudden downturn in sales, the inflexibility of debt repayment can cause a sudden cash crunch.


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When should debt be used?

Debt capital is best when the money you require will be used mainly for fixed assets. Banks and other debt-based lenders require enough collateral to secure the amount of principal being borrowed so they like loans that involve equipment, real estate, buildings, etc.

If you own a house, a home equity loan is a great source of capital. Home equity loans can be tax-deductible and the interest rates charged are usually much lower than traditional commercial loans.


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When should debt be used?

Also consider debt capital when your business needs a line of credit.

A line of credit is similar to a credit card in that it's a short-term money solution. The main advantage of a line of credit is that you only pay interest on the balance of money that you have drawn down.

Say, for instance, that you have drawn down $10,000 of a $30,000 line of credit. You only owe interest on the $10,000 not the total amount of credit available. Most lines of credit have a limit of available capital and their interest rates are about the same as most commercial loans.


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Now let’s look at equity capital…

Equity is money raised from the owners of a business.

Examples of equity capital include common stock, partnership interests, and other ownership-based interests.


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Who provides equity capital?

Equity is generally provided by the owners of the business who may include partners, private investors, customers, suppliers, angels, investment bankers, and venture capitalists.


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The advantages of equity…

Equity capital can be much more flexible than debt. There are no collateral requirements for equity capital and repayment terms and conditions can be tailored to the needs of the business.

Usually, payments to investors can be put off until the business exceeds breakeven or reaches a certain level of profitability. Needless to say, this can really help the cash flow of an emerging business.

Also, equity capital can be a great way of raising large amounts of money for your business.


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The disadvantages of equity…

Equity can come at a very steep price. While a debt-based bank loan might run you say 10%, an investor or venture capitalist seeks much higher rates of return say around 20% to 40%.

Also, equity investors generally want a share of the business so you will have to give up some ownership.

While these investors don't want to run the day-to-day operations of your business, they usually want a seat on the board of directors where they can influence the decisions of the management team.


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When should equity be used?

Equity capital is well suited for start-up businesses that require large amounts of working capital or involve a new product launch.

Banks are not fond of lending cash and working capital to a business, especially if they are in the start-up phase. Once a dollar is spent on payroll or advertising, it is gone forever and cannot be liquidated by the bank should the borrower default on the loan.

This is the domain of the equity investor. The investor is willing to take on more risk for more reward. They fund high-risk start-ups, new product launches, new marketing initiatives, and major growth and expansion phases of a business.


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Creating financial projections…

Once you have determined your start-up expenses, made the determination of whether you require any outside financing, and what the best sources for that financing might be you are not finished.

You (or someone on your management team) should construct a basic set of financial projections looking out about one to two years into the future. Although the projections are concerned with the future don’t think of the projections as merely a prediction.

Instead, the projections should be thought of as goal-setting with respect to revenues and expenses. We cannot predict the future—this is precisely why planning is necessary—but we can make plans, set expectations, and set goals.


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The different kinds of assumptions…

Financial projections are really just a set of considered assumptions. These assumptions fall into basic categories which provide a framework for capturing such important reference points.

These categories include:– Start-up cost assumptions (uses of money)– Financing assumptions (sources of money)– Fixed expense assumptions (costs of being in business)– Variable expense assumptions (costs of doing business)– Projected sales assumptions (anticipated income earned)– Cash flow assumptions (anticipated income received)


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Start-up cost assumptions…

Start-up costs are all of those expenses that you will incur up to the point before you open for business.

These assumptions list all of the uses of any money describing exactly how it will be spent.

You should break these costs down into two categories: fixed assets and working capital.

Fixed assets are property that usually have some sort of long-term value such as buildings, land, or equipment.

Working capital is money that will be used to finance the short-term operations of the business such as deposits, insurance, advertising, etc.


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Financing assumptions…

Financing assumptions show from what sources the money you require will come from.

Such sources might include:– the owner’s injection,

– the proceeds from a bank loan,

– the debt from an owner or outside creditor, or

– the equity capital from an investor.

Each source of financing should include the amount, the terms of repayment in months, and the rate of interest or return expected.


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Fixed expense assumptions…

Fixed expenses are the costs of being in business. They usually do not vary with the sales level of your business.

For instance, whether you decide to open for business or not today, you still owe rent.

You normally present your fixed costs in the form of a monthly operating budget. They usually require the most amount of research of any part of the projection since they involve receiving quotes and estimates from a large number of outside vendors.

Just make sure that you record the source and amount from each vendor since these are what your assumptions are based upon.


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Variable expense assumptions…

Variable expenses are the costs of doing business. They usually vary with sales since they are the direct costs

of delivering your product or services. The usual components of your variable costs might include

direct labor, materials, and shipping. In other words, they are those expenses incurred with producing the next unit of your product or service.

These expenses are usually expressed as a percent of the sales price and help you to determine the gross margins for your business (sales minus variable costs equals your gross margins).


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Projected sales assumptions…

All businesses sell units of something. It may be numbers of products, services, hours, or so forth.

You cannot just state you plan on selling $400,000 worth of “stuff” next year.

A lender or investor will want to know precisely what your forecasted number of units might be for each major product category or sales driver.

The number of units you plan on selling times the average selling price equals your total sales forecast in dollars.


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Cash flow assumptions…

Your cash flow assumptions detail when you expect your sales to actually be collected and in your hand.

For many retail operations, you would collect the sales at the time of purchase. For many types of business transactions, however, you will be expected to extend credit to your customers for payment at a later date.

For these assumptions, you must consider what percent of your sales will be collected every 30 days or so.

Questions that you need to address include: Does the customer prepay? If so, when is the remainder of the payment due? What are the terms of the payment? C.O.D.? Net 30 days? Are there any payment penalties for late payments?


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Some worksheets to help you…

The following worksheets have been provided to help you create your financial assumptions and develop your projections.

The first set of worksheets can be printed and used to write in your assumptions by hand. The second file is for those who have Microsoft Excel and feel comfortable using spreadsheets.

– Financial Projection Worksheets (Adobe Acrobat)

– Financial Projection Model (Microsoft Excel)


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Managing your money…

Once you’ve got money, it needs to be managed. Today, many computerized accounting systems such as

QuickBooks and PeachTree allow you to keep your financial records in a simple, “single entry’ system.

Not only can you track inventory and prepare payroll using such software, but the learning curve is fairly short and the costs associated with purchasing and operating the software are relatively low.

Best of all, most accounting firms can use your data “as is” right off of these systems to prepare all necessary tax reporting documents and both software titles provide free trial versions for you to try out.


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7Hiring And Managing Employees


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The responsibility of employees…

Employees are a great asset to any business and, at the same time, they are a great responsibility for an employer.

As an employer, you are generally required to withhold federal and state income tax from the wages of your employees. You may be subject to social security and Medicare taxes under the Federal Insurance Contributions Act (FICA), federal and state unemployment tax, and worker's compensation insurance.

Known as an agency or trust tax, you as an owner of a business will be held personally liable for these tax withholdings whether or not you have the limited liability protection of a corporation or declare bankruptcy. Please see an accountant for assistance.


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Employee decisions…

The decisions you need to consider regarding hiring employees include:– How many employees do you require and what skill sets must they

have?

– How will they be compensated?

– Will any of the employees be independent contractors?

There is also an immense amount of taxation and labor regulations with which you must comply. The following discussion presents some of these issues.


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Requirements of an employer…

As an employer…– You are generally required to withhold federal and state

income taxes.

– You may be subject to social security and Medicare taxes.

– You may also be subject to federal and state unemployment tax.

– You may also be required to have a worker’s compensation insurance policy.


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Initial employer forms…

You will need to file with the IRS to set up your account for employment taxes and to receive your federal tax number.– SS-4 Application for Employer Identification Number

The next form you will need to file is a state business tax application. This form is to set up your state account for employee withholding taxes.– Check with you department of revenue within your

state for this form.


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Be sure to keep these forms on file…

The Employee’s Withholding form tells you how many exemptions the employee is claiming when figuring out the amount of income tax to withhold.– W-4 Employee’s Withholding Allowance

The Immigration and Naturalization Service (INS) requires that you ask each new employee to complete the employee section of this form. You will then complete the employer section and file it.– I-9 Employment Eligibility Verification


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Withholding taxes for employees…

Federal income, social security, and Medicare taxes should be sent to the IRS on a monthly or quarterly basis based on the size of your business.

This form should be sent to you after you complete the SS-4.– 8109 Federal Tax Deposit Coupon

The quarterly payments made with the coupon above are calculated and reported using this form.– 941 Employer’s Quarterly Federal Tax Return


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State withholding taxes forms…

State taxes that you withhold from your employees salary are paid with a state quarterly employment tax form.

This form should be sent to you by the department of revenue after you have completed the business tax application form.


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Unemployment taxes…

Form 940 should be filed once a year with the IRS. This form is used to report any federal unemployment payments that you have made.– 940 Employer’s Annual Federal Unemployment Tax Return

Businesses are required by the state to pay unemployment insurance tax if the company has one or more employees for 20 weeks in a calendar year, or it has paid gross wages of $1,500 or more in a calendar year.

The taxes are payable at a rate of 2.7 percent on the first $8,500 in annual wages of an employee. Go to your state home page to check the figures for your state. Unemployment insurance must be reported and returns made to the state.


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Worker’s compensation…

In most states worker’s compensation is mandatory.

You can obtain this insurance coverage for employees from a private insurance carrier.

To determine if worker’s compensation is mandatory in your state, contact the state information center or workforce development office.


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Managing your employees…

When dealing with employees, there are many more complexities than can be covered in just one section that come into play in your business.

A great resource to use when walking through this complex regulatory maze can be found at business.gov.

This website covers hiring issues, wage laws, hour laws, minors, taxes, health and safety, discrimination, privacy issues, required posters, termination, health benefits, and employee handbooks.


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8Getting Licenses and Permits


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Complying with regulations…

This section provides a checklist of the most common requirements that affect small businesses, but it is by no means exhaustive.

The following licenses and permits are presented by federal and state requirements.

Bear in mind that regulations vary by industry. If you're in the food service business, for example, you will have to deal with the health department. If you use chemical solvents, you will have environmental compliance to meet.

Carefully investigate the regulations that affect your industry. Being out of compliance could leave you unprotected legally, lead to expensive penalties, and jeopardize your business.


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Federal: Employer ID Number...

With the exception of sole proprietors, most business types must apply for an EIN regardless of whether they have employees.

Visit the IRS site to find out if you need an EIN, and if so, whether you are eligible to apply through the IRS' online application.


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Federal: Licenses and Permits

Most businesses do not require a federal license or permit. However, if you are engaged in one of the following

activities, you should contact the responsible federal agency to determine the requirements for doing business:– Investment advising: http://www.sec.gov/

– Drug manufacturing: http://www.fda.gov/

– Preparation of meat products: http://www.fda.gov/

– Broadcasting: http://www.ftc.gov

– Ground transportation: http://www.dot.gov

– Selling alcohol, tobacco, or firearms: http://www.atf.treas.gov/


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Federal: Intellectual Property

Federal registration of intellectual property, including patents, trademarks, trade names, and copyrights, provide business owners with exclusive use of intellectual property in the U.S. as well as in a large number of foreign countries.

Visit the US Patent and Trademark Office website at www.uspto.gov or the Copyright Office website at www.copyright.gov for more information.


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State: Business Licenses

A state business license is the main document required for tax purposes and conducting other basic business functions.

Many states have established small business assistance agencies to help small businesses comply with state requirements.

See http://www.business.gov for state specific information.


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State: Name Registrations...

If your business will only be operated in your local community, registering your company name with the state may be sufficient.

However, some cities and towns do require “Doing Business As (DBA)” certificates for business name filings.

See http://www.business.gov/regions/states for state specific information.

You may also use a service such as BizFilings to complete and submit the required DBA forms.


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State: Occupations and Professions...

State licenses are frequently required for occupations as varied as building contractors, physicians, appraisers, accountants, barbers, real estate agents, auctioneers, private investigators, private security guards, funeral directors, bill collectors, and cosmetologists.

Since you can't always guess which occupations and professions are licensed by your state, you should always check with your state licensing authorities.

See http://www.business.gov/regions/states for state specific information.


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State: Licenses on Products Sold

Some state licensing requirements are based on the product sold.

For example, most states require special licenses to sell liquor, lottery tickets, gasoline, or firearms.

Contact your state licensing authorities to determine the licensing requirements of your business.



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State: Tax Registration

If the state in which you operate has a state income tax, you'll have to register and obtain an employer identification number from your state Department of Revenue or Treasury Department.

If you're engaging in retail sales, you will need to obtain a sales tax license.



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State: Employer Registrations

If you have any employees, you'll probably be required to make unemployment insurance contributions.

For more information, contact your state Department of Revenue or Department of Labor.



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9Protecting Your Ideas


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What is intellectual property?

Intellectual property is any product of the human intellect that is unique, novel, and unobvious.

It has some value in the marketplace. Examples include…

– An idea

– Invention

– Literary work

– Unique name

– Industrial process

– Business Method


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Intellectual property law…

Intellectual property law aims at safeguarding creators and other producers of intellectual goods and services.

It does so by granting them certain time-limited rights to control the use of those products or services.

These rights do not apply to the physical object itself, but rather to the intellectual creation or idea itself.


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Classifying intellectual property…

There are several ways to protect intellectual property.

The three most common types of intellectual property protection are:

1. Trademarks

2. Patents

3. Copyrights


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Intellectual property can be confusing…

Some people confuse trademarks, patents, and copyrights.

There are some similarities among these types of protection.

However, for the most part they are different from one another and serve different purposes.


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A trademark is… A trademark is any word, combination of words, or

symbol attached to a product or service. This can be one of the most valuable forms of intellectual

property. Trademarks are used to prevent others from using a

confusingly similar mark, but not to prevent others from making or selling the same goods or service under a different mark

For assistance with trademarks visit www.uspto.gov.


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A patent is… A patent for an invention is the grant of a property

right to the inventor issued by the U.S. Patent and Trademark Office.

Typically the term of a new patent is 20 years from the date on which the application is filed.

There are several types of patents. However, the most common types are utility patents and design patents.

For assistance with patents visit www.uspto.gov.


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A copyright is…

A copyright is a form of legal protection for “original works of authorship.”

With a copyright, the owner is given the exclusive right to reproduce, distribute, publicly perform and display their work.

Examples of copyright eligible works include screenplays, music, commercial brochures, and literary works.

For assistance with copyrights visit www.copyright.gov


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A trade secret is…

A trade secret is another type of intellectual property.

A trade secret is information that a company keeps secret to give them an advantage over their competitors.

Trade secrets can include formulas, business plans, designs and procedures.


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International intellectual property…

Intellectual property laws vary from country to country.

However, there are organizations and treaties that help bridge IP laws from country to country.

One of these organizations is the World Intellectual Property Organization (WIPO) found on the web at www.wipo.int


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10Growing By Adaptation and Experimentation


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The proper way to grow…

The proper way to grow a business is by releasing growth. The worst way is to push growth.

Every business has a natural rate of growth. If that rate is not reached, a business can shrivel. If it is surpassed, the business struggles to keep pace.

One of the most important functions of the owner of any business is sensing what the “inherent” growth rate should be, and adhering to it.

The founder’s job is not to lead the “troops” to new heights. Rather, it is to draw out and moderate the changes that will be required of everyone as the business grows.


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Don’t outgrow your employees’ skills… There can be two main obstacles to rapid business growth. One can be economic, usually a shortage of capital funds. The

second is often overlooked. Businesses that grow too fast or in the wrong way overwhelm the adaptive capacity of the people who work there.

Just as your business can outstrip your ability to raise capital, you can outstrip your employees’ ability to learn and develop.

To avoid this sit down with them and explain how you think the business is going to grow in the next year, and how you believe this will affect the different jobs or departments.


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Entrepreneurship is a practice…

At its heart, entrepreneurship is a practice—it’s not an art and its not a science.

Of course, every practice rests of theory—even if the practitioners themselves are unaware of it.

The theory of entrepreneurship sees change as normal and indeed as healthy.

The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.


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A portfolio of experiments…

Apparently, instead of committing to technology, customer, product line, and other such basic choices, entrepreneurs start with a set of tentative hypotheses.

Then, as the venture unfolds, they revise their hypotheses rapidly through a series of experiments and adaptive responses to unforeseen problems and opportunities.

Common events that trigger a change of strategy includes the failure to generate sales, declining profitability, stalled growth, or unexpected opportunities.

An entrepreneur’s “experiments” have little in common with scientific experiments. In contrast, entrepreneurs experiment to solve a problem. They have little interest in validating general truths or principles.


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How Starbucks experiments…

Many people are indeed familiar with the successful Starbucks Coffee chain of Italian-influenced coffee bars.

But what many people don’t know is that Starbucks started out only selling roasted coffee by the bag through a small retail–based business model.

Howard Schultz, who went on to be the CEO of the coffee chain, discovered the “third place” concept (it’s not work, it’s not home) upon visiting Italy and experiencing the country’s many street-side coffee bars.

Through a series of small experiments, he tested whether the idea of the Italian coffee bar could be successfully imported into the United States.


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The great Starbuck’s experiment…

Howard Schultz recalled his great experiment in his book, Pour Your Heart Into It:– “It took me nearly a year to convince Jerry (my boss) to test the idea

of serving espresso. Finally, Jerry agreed to test an espresso bar when Starbucks opened its sixth store in April of 1984. I asked for half the 1,500 square-foot space to set up a full Italian-style espresso bar, but I got only 300 square feet. Although I was forced to realize my dream on a far smaller scale than I had planned, I was sure that the results would bear out the soundness of my instincts. We didn’t plan any pre-opening marketing blitz, and didn’t even put up a sign announcing Now Serving Espresso. We decided to just open the doors and see what happened. Customers jammed into that small space on the right while the retail counter stood empty. If that store had been a ship, it would have capsized. Within two months, the store was serving 800 customers per day.”


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Meeting flexible and market-driven…

Although Starbuck’s initial small experiment was indeed successful, one of the important aspects of their success was also their ability to be extremely flexible and market-driven. As Schultz, himself recalled:– “Our primary vision was to be authentic. We didn’t want to do anything

to dilute the integrity of the espresso and Italian coffee bar experience. For music, we played only Italian opera. The baristas wore white shirts and bow ties. All service was stand-up, with no seating. We hung national and international newspapers on rods on the wall. The menu was covered with Italian words. We gradually accepted the fact that we had to adapt the store to our customer’s needs. We quickly fixed a lot of he mistakes, adding chairs, varying the music. But we were careful, even early on, not to make so many compromises that we would sacrifice our style and elegance.”


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Instilling the mission early on…

Schultz also spoke to the importance of establishing the mission and values as early as possible:– “A couple with a newborn child doesn’t usually sit down and think: What

is our mission as parents? What values do we want to give this child? Most new parents are preoccupied with merely wondering how to get through the night. Similarly, most entrepreneurs can’t afford to be that farsighted, either. They’re too absorbed with the problems directly in front of their noses to have the luxury of pondering values. But as a parent, or entrepreneur, you begin imprinting your beliefs from Day One, whether you realize it or not. Once the children, or the people of the company, have absorbed those values, you can’t suddenly change their world view with a lecture on ethics. It’s difficult, if not impossible, to reinvent a company’s culture. If you have made the mistake of doing business one way for five years, you can’t suddenly impose a layer of different values upon it.”


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Starbucks continued experiments…

Even after establishing itself as a successful large company, Starbucks continued to innovate through a portfolio of small experiments. After the successful launch of their popular Frappuccino drink, Schultz commented:– “Perhaps the most remarkable thing about the Frappuccino story is

that we didn’t do any heavy-duty financial analysis on the product beforehand. We didn’t hire a blue-chip establishment consultant who could provide 10,000 pages of support material. We didn’t even conduct what major companies would consider a thorough test. It was a totally entrepreneurial project—It was experimental and adventurous.”


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Creating the discipline to experiment… A desire to try many small experiments, coupled with a

market-driven focus, and an early concentration on mission, culture, and values add up to a wildly successful entrepreneurial company regardless of size. As Schultz concluded:– “However warily, I began to recognize that in building discipline

into a company, it’s possible to not only honor the creative process but also make it stronger and more dynamic. By strengthening the foundation and structure of the company, we can stop wasting time reacting to small problems and instead devote our attention and resources to new products and new ideas—with clearer strategic direction, we can focus our creativity on issues that matter.”


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Deliberate and emergent strategy…

In every venture, there are two simultaneous processes through which strategy comes to be defined—deliberate and emergent.

Few, if any, strategies are purely deliberate or purely emergent—one means no learning, the other means no control.

Deliberate strategy is what you intend to do. It’s conscious and analytical. It is often based on rigorous analysis of data on market trends and customer needs. It is usually “top-down” in its design. Deliberate strategy comes from an improved understanding of what works and what doesn’t.


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Emergent strategy…

Emergent strategy “bubbles up” from within the organization. It is the cumulative effect of day-to-day decisions made by an entrepreneur.

In fact, entrepreneurs typically do not frame these decisions as strategic at all at the time they are being made. The concept of emergent strategy opens the door to strategic learning, because it acknowledges the organization’s capacity to experiment.

Entrepreneurs are extremely talented at finding emerging strategies—they know in many cases the solution just emerges if you are paying attention to the details. They know that order doesn’t always require a master plan or grand design.


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Losing memory of the process…

In the world at large, it’s deliberate strategy that gets all of the attention. Some see it as the only kind of strategy. Academics and consultants love to analyze a series of decisions in reverse, in hindsight, and say, “Isn’t that a beautiful strategy?”

Entrepreneurs themselves often suffer amnesia and selectively remember only their success in deliberately implementing the successful strategy. They lose memory of the emergent process through which the successful strategy was discovered.

In their eyes, when they turn around and look, they see a cleanly cut path. But in many cases, the intuitive thinking that went into the creation of the path is very different from the logical thinking that analyzed the path in hindsight.


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Being open to emergent strategy…

Research suggests that in over 90 percent of all successful new businesses, the strategy that the founders had deliberately decided to pursue was not the strategy that ultimately led to the business’s success.

Entrepreneurs rarely get their strategies exactly right the first time.

Openness to emergent strategy enables the entrepreneur to act before everything is fully understood—to respond to an evolving reality rather than having to focus on a stable fantasy.


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Managing the strategy process…

Simply seeking to have the right strategy doesn’t go deep enough. The key is to manage the process by which strategy is developed.

Emergent processes should dominate in circumstances in which the future is hard to read and in which it is not clear what the right strategy should be.

Many new venture’s fail because they spend their money aggressively implementing a deliberate strategy in the early stages when the right strategy cannot be known.


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Switching to a deliberate strategy…

There comes a time in successful companies’ start-up histories when the viable pattern has emerged.

At this point, an entrepreneur needs to reverse the flow of strategy-making toward the intended direction.

Rather than continuing to feel their way into the marketplace, they need to boldly execute the deliberate strategy that they have learned will work.

The entrepreneur needs to stop funding any emerging opportunities that might divert the company from its focus on the winning plan.


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