This FAQ, based on questions asked by people that plan to
start a small business, suggests the many facets of running
a small concern that each owner/manager must become familiar
Going Into Business FAQ
start and run a small business you must know and be many
things. As one small business owner attending a conference
put it: "When I came here, my business lost the services of
its chief executive, sales manager, controller, advertising
department, personnel director, head bookkeeper, and
This FAQ, based on questions
asked by people in small business or contemplating starting,
suggests the many facets of running a small concern that
each owner/manager must become familiar with. While the
answers to the questions are hardly exhaustive of any of the
subjects, they provide the background for questions you may
need to ask before going into business, as well as
suggesting sources of answers to those questions.
Almost everyone considering it has dozens of questions about
starting a small business. The only foolish questions, of
course, are the questions that aren't asked. Yet, many times
we don't have enough information to ask the right questions.
The questions in this guide
are drawn from participants in training courses for new
entrepreneurs. Most of the questioners didn't own, operate,
or manage small businesses. Their questions are typical of
what's on the minds of potential business owners. You may
have pondered similar questions, as you thought about
becoming your own boss. The questions fell generally into
areas such as the steps in setting up a business, marketing,
and financing a new concern. In this guide the questions
have been grouped by subject.
Answers to the questions came
from experts in the various areas. These experts include a
lawyer, an accountant, a bank loan officer, several small
business owners, and market researchers.
These answers, it is hoped, will help you as you approach
deciding on becoming a small business owner. The questions
may suggest questions that you should find answers to before
you invest your money, time, and effort in a small business.
1. If you have money but no
particular business in mind, how can you get enough
information on the best business to go into?
The best way of choosing your business venture is to look at
your experience and educational background. A thorough
review will provide leads on the business field you should
enter - do what you know best. Even more important, you must
like the business field you are going to enter to bring the
enthusiasm and self-confidence you need to make the business
What are the basic survival skills you need to run a
The basic survival skills include a working knowledge of
basic recordkeeping; financial management; personnel
management; market analysis; break-even analysis; product or
service knowledge; tax knowledge; legal structures; and
What special obstacles do women entering business face, and
how can these obstacles be overcome?
Women are at last making inroads into business, not only as
executives but as owners. There are many obstacles, chief
among them the doubts that lenders, suppliers, and in some
fields, customers have about women's ability to run
businesses. These can be overcome with self confidence and a
strong belief in your ideas. You should not be discouraged
by being rebuffed by people who simply don't understand. As
more and more women enter business and succeed, the process
will become easier and easier.
What are the most important factors that cause small
There are, of course, many reasons for the failure of new
small businesses. One way of looking at the causes is to
remember that a new business is starting at zero momentum;
newly entering a market, having to establish supplier
relations, finding proper financing, and training employees.
To coordinate all these facets and start them simultaneously
is a tremendous job. If you don't have experience and
management capability, success won't be very likely. You'll
also find that undercapitalized businesses, those without
enough cash to carry them through the first six months or so
before the business starts making money, don't have good
survival prospects. In such cases, even businesses with good
management can founder.
5. If you're trying to buy a going
service business, how can you figure a reasonable price for
the business that takes into account goodwill and business
contacts in addition to the value of equipment and
There are many methods, but basically what you're trying to
do is set a value on the assets and earnings record of the
firm. The simplest way is to determine the "payback period,"
usually two or three years.
That is, the net profit for two years would equal the
goodwill value. A more complicated and accurate method
called the "net present value" method, is based on the cost
of capital and a risk factor. For that method an
accountant's help would be valuable.
What kind of a market study should you do before deciding to
buy a radio station?
Determining the price of any business is difficult. For a
radio station specifically, you can get the figures on the
total revenue of all stations in the area (that is,
advertising revenue). You should also get the percentage of
the total market that the station you're considering has.
You must also determine the potential market for the area in
advertising dollars. Finding out the total number of
businesses by line and size in the area covered by the
station and their advertising expenditures would give you
some insight. Really, you'd study the market like this for
buying any business.
How long does it take a new business to establish a good
A good public image takes a long time to establish (and only
minutes to lose). There is no set formula, but a good image
· The service, products, and customer treatment you provide;
· The market you're in;
· How you stack up against your competitors;
· The quality of your public relations and advertising
If you're new to a market - and if you do what you say
you're going to - you may establish an excellent reputation
in 18 to 24 months.
How do you find a good lawyer?
As with most personal services, you must have rapport with
your attorney. The best way to determine this is to talk to
lawyers by phone or visit them before you make a selection.
Get recommendations from friends, or your banker. You're
looking for someone you can trust and who will take an
interest in you and your business.
Do you need a lawyer to start a business?
No, but it's wise to get the best advice possible when
you're starting out. An attorney is one source of the
expertise you'll need to draw on.
Form of Business
10. What form of business do you
recommend for a new business?
Each legal form, sole proprietorship, partnership, or
corporation, has its advantages and disadvantages. The one
you should pick depends on your circumstances, including:
· Your financial condition,
· The line of business you're entering,
· The number of employees,
· The risk involved,
· Your tax situation.
Don't assume, if you plan a one-person business, that sole
proprietorship is the way to go. See your lawyer.
11. How can you find out what the
prevailing costs are for a service business in your market
One way is simply to call competitors and ask their prices.
Their prices will give you a lead. You could ask
competitors' customers for the same information if you
didn't want to go directly to the competition.
How do you go about determining the market for a mail order
The principles of determining market share and market
potential are the same no matter how large the geographical
area. You must first determine a customer profile, the size
of the market, and the number of competitors. You could also
use a readership survey given to you by a magazine in which
you intend to advertise.
13. How do you figure markup and
Markup (markon) is the original amount that the merchandise
is marked up. Markup as a percentage (also called gross
margin rate) is figured as a percentage of sales. For
example, say the cost of merchandise is $10 and you want a
20 percent markup; what is the selling price (SP)? By
definition we know that markup as a percentage is given as a
percentage of sales. Thus, our cost must be 80 percent of
the selling price (100 percent selling price - 20 percent
So, our selling price is $12.50, cost $10.00, and markup
$2.50 or 20 percent of the selling price. Markdown
(discount) is a reduction of selling price below the
original sale price. Assume the item is marked down to
$11.25. The markdown is $1.25 or a 10 percent markdown
($1.25 markdown divided by $12.50 original selling price).
How would you go about establishing price guidelines for a
business renting items to customers?
Pricing is based normally on a combination of cost and
market competition. Trade associations are a prime source of
15. What is the average expected
net profit for small business?
Average net profits vary with the type of business - retail,
wholesale, service, manufacturing, construction. They also
vary for the type of business structure - proprietorship or
corporation. Dun & Bradstreet publish ratios which give you
these figures, as well as lots of very useful cost
Would you explain the meaning of "rate of return on
investment"? How is it different from net profit? Is it
different from return on assets employed?
Net profit (before taxes) is basically total sales for a
specific period less cost of goods and operating expenses
during that period. (For a retail business, cost of goods
would be your cost of merchandise sold.) Net profit is a
function of both rate of return on investment (ROI) and
return on total assets. ROI is net profit divided by capital
invested by the owners of the company.
ROI is used to measure the effectiveness of management in
attaining the owners' desired return on their investment.
Generally, the larger the ROI, the more attractive a company
is to potential investors.
Return on total assets is the net profit divided by total
assets. This measures the net profitability of the use of
all resources of the business. It is another tool for
measuring management effectiveness in the use of all
resources borrowed and equity.
Does a bank require absolute top credit references from loan
The better the credit references the greater the possibility
of loan approval.
If I estimate my start-up cost at $50,000 and can't put up
anywhere near the $25,000 that I've been told is what I
should have for my share, am I wasting my time even filling
out a loan application?
In all probability you would be, although there are some
exceptions. For example, it might be possible to get a loan
under your circumstances if you were buying a business
that's already operating well enough to provide sufficient
profits to cover its obligations and the loan. Furthermore,
if the applicant is the present manager who has made this
business go, the chances of getting such a loan are much
19. Getting money is difficult;
keeping it may be even more difficult. Where can I get
Assistance in managing my business?
Your accountant and bank can provide financial counseling
which can be very helpful in starting and managing your
business. They can also give you invaluable information on
the local area and your market that can be critical in
making decisions in your business.
Reach a Goal Faster
a consequence that really, really hurts!
2. Hire a
short term coach who will help you make it happen.
the goal down into important pieces and enjoy the momentum
as you accomplish each one.
4. Link the
goal to one of your values so that it becomes an
expression of yourself vs just this 'thing' that you're
5. Know the
next goal you want to accomplish, even before you have
fully started on the immediate goal; this creates
perspective and context, making the current goal look much
6. Find a
way to be rewarded as you go; a runner sips water
continually; she doesn't gulp it down at the end.
feeling and acting as if the goal has already been reached
and then just do what it takes to 'finish' it.
Eliminate the consequences of non performance and just
work on taking daily actions instead -- get your juice
from taking the actions vs comparing to the goal.
9. Set an
earlier end point and orient everything around reaching
the goal by then.
the goal so that it CAN be reached easily -- who says you
should pick only the tough goals