16820833 Finance Grow Your New Business[1]

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SMALL BUSINESS

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FINANCE & GROW YOUR NEW BUSINESS: Get a Grip on the MoneyAngie Mohr, CA, CMA

Self-Counsel Press (a division of) International Self-Counsel Press Ltd. USACanada



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SMALL BUSINESS

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ContentsINTRODUCTION PART 1: FINANCE YOUR BUSINESS1 So, What Kind of Business Should You Start?Introduction Why Do You Want to Be an Entrepreneur? Money Freedom Empire buildingWhat Kind of Business Should I Start? Manufacturing business Retail/Wholesalebusiness Service business Eight Questions to Ask Yourself

xix 1 3 3 4 4 4 4 4 5 5 5 6 9 9 10 11

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Is It a Business or a Hobby?Introduction What Is the Difference Between a Business and a Hobby? It’s NotAlways about the Money

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Build or Buy?Introduction Building a Business from Scratch Buying an Existing BusinessFinancial Considerations in the Build-versus-Buy Decision Considering a start-upbusiness Considering a business purchase What’s Right for You?

13 13 14 15 16 16 18 22 23 23 24 25 25 26 26 28 29 29 29 30 30 33 33 33 35 36 3636 39 41 41 42 42 43 45 46

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Getting Your Personal Finances in Order

Introduction Your Retirement Goals How much will you need at age 60? How much doyou have to put away between now and retirement? The Concept of Net Wealth DebtManagement Your Credit History Insuring Your Assets Life insurance Mortgageinsurance Property and casualty insurance Health insurance

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Setting Your Business GoalsIntroduction Chasing the Almighty Buck What Is the Purpose of Your Business? TheBusiness Plan What Should Your Business Plan Include? The Monthly ManagementOperating Plan Your Exit Strategy

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Putting Your Money Where Your Business Plan IsIntroduction Projecting Your Funding Needs Paying for the start-up costs Providingliquidity to the business Sources of Funding A Bank’s Perspective

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Debt FinancingIntroduction Your Own Resources Credit Cards Suppliers Friends and Family BanksLeasing Companies Private Lenders

49 49 49 50 50 51 51 52 54 55 55 56 56 56 57 58 59 59 59 60 60 61 61 61 63 63 6365 65 65 66 66 69 69 70

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Equity FinancingIntroduction Common Shares Preferred Shares Partnership Joint Ventures Venture

Capitalists

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Risky Business: How to Assess Business RiskIntroduction Secured Loans Personal Guarantees Fixed Price Agreements InterestRate Risk Foreign Exchange Risk Economic Dependence

10 Home Sweet HomeIntroduction Does It Really Save Me Money? How Will It Affect My Personal Life?The neighbors The on-call syndrome The convenience Willpower

11 Choosing Your External Team

Introduction Your Lawyer

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Your Accountant Your Financial Adviser Your Board of Directors

70 72 73 75 75 76 76 77 77 77 78 78 81 81 81 81 82 82 82 83 83 85 85 85 86 86 8686 87 87 87 88 88 91 91 91

12 Assessing the CompetitionIntroduction Identify the Competition What Do They Do Right and Wrong? How AreThey Positioned to Take Advantage of Opportunities? How Vulnerable Are They toChanging Market Conditions? How Do You Stack Up? Competitive Analysis IntelligenceResources

13 Forecasting ProfitIntroduction Keep Your Bookkeeping Up-to-Date Always Forecast a Rolling 12 Months

Tighten Up Billing and Collection Policies Hire Someone to Do It If You Can’t Keepon Top of Changes in the Operating Environment Keep the Work Coming In ContinuallyAssess New Sources of Financing

14 Investing in LaborIntroduction The Cost of an Employee Salary Employer taxes Office space Fringebenefits Calculating the Benefit Direct labor Indirect labor Your BillingMultiplier Five Signs It’s Time to Hire

15 Investing in EquipmentIntroduction To Buy or Not to Buy

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Erosion Financing Risk

92 92 93 95 95 96 96 96 96 97 97 97 97 97 97 98 98 100 103 105 105 106 106 107 108108 109 113 113 113 115 115 116 116

16 Financing ExpansionIntroduction Horizontal Expansion Increase your capacity Expand your geographicarea Develop new products or services Develop a franchise Find new markets foryour existing products and services Vertical Expansion The Dangers of ExpansionLiquidity issues Triggering call provisions Increase in fixed costs Calculatingthe Benefits of Expansion Finding the Money to Expand

PART 2: MANAGE YOUR BUSINESS GROWTH

17 The Successful EntrepreneurWhy Small Businesses Fail Managing versus Doing The Four Foundation WallsEntrepreneurial drive and vision Record keeping Financial management Planning andstrategizing

18 The Life Cycle of a BusinessThe Three Stages of a Business Infancy Maturity Decline At What Stage of the LifeCycle Is Your Business? How Can My Business Use This Information?

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19 A Systems ApproachAnatomy of a Franchise A Real-Life Example Benefits of a Systems Approach YourBusiness as a Machine Becoming the Head Mechanic

119 119 120 120 121 121 125 125 126 126 127 127 128 131 131 132 133 133 133 133134 134 134 135 136 136 141 141 143 145 145 146 146 151 151 153 153

20 Analyzing the Status QuoEntrepreneurial Drive and Vision Record Keeping Financial Management Planning andStrategizing The Busy Entrepreneur Defining Processes and Procedures

21 Growing Your BusinessYour Business Goals Profit Freedom Recognition Peace of mind Planning for Growth

Good versus Bad Growth The Three Ways to Grow Your Business Attracting newcustomers Selling them more Selling to them more often Leverage Revisited

22 Getting a Handle on Your RevenuesHow Many Customers Do You Have? How Often Do Your Customers Come to See You? WhatDo Your Customers Spend? What Kind of Customers Do You Have? Fire Away! The NextStep

23 Your StrategyYour Business’s Vision Statement The Mission Statement Your Operational Plan

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24 Testing ChangeAdvertising Prices Environment

159 159 161 162 167 167 167 168 168 169 169 170 172 175 175 175 177 178 179 181182 185 185 187 188 191 191 192 194 194 196 196 197 197

25 Your Product or ServiceWhy Should Customers Buy from You? Competing on price Competing on value How IsYour Business Different? Selling a Product Up Selling Providing a Service TeachingYour Customers

26 Your Customer InteractionsTelephone Interactions The Art of Closing the Deal Getting more people to call

Increasing your conversion rate Using Scripts A Word about Screening CallersTracking Conversion Rate Changes

27 Your Marketing and PromotionsThe Lifetime Value of a Customer Covering the Cost of the “Dry Holes” CustomersBeget Customers

28 Your PeopleHow Do You Know When It’s Time to Hire? What Will a New Employee Do? The Laws ofthe Land Attracting Quality Employees The Interview Hiring from an EmploymentAgency Goal-Based Compensation So Long, Farewell, Auf Wiedersehen, Adieu

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29 Your SystemsThe Goals of Systemization “How We Do It Here” Continuous Improvement

201 201 202 203 209 209 210 210 210 211 211 211 212 213 213 217 217 217 217 218218 219 219 219 223 224 225 227 229 231 233

30 Business AcquisitionsAnother Way to Grow What Are You Buying? Asset purchase Share purchase GoodwillCustomer lists Valuing the Acquisition Floor price Ceiling price Evaluating theChoices

31 Exit StrategiesYour Personal Goals Heading for the Exits Passing on the business to your children

Selling the business to an outside party Liquidating your business What’s MyBusiness Worth? Getting Ready for the Sale The Mechanics of the Sale

32 What Happens Next?A Last Word

Appendix 1Present Value of $1

Appendix 2Present Value of an Annuity

Appendix 3

Future Value of an Annuity

Appendix 4Resources for the Growing Business

Glossary

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Checklists1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 2 3 4 The Successful Entrepreneur The LifeCycle of a Business A Systems Approach Analyzing the Status Quo Growing YourBusiness Getting a Handle on Your Revenues Your Strategy Testing Change YourProduct or Service Your Customer Interactions Your Marketing and Promotions YourPeople Your Systems Business Acquisitions Exit Strategies The Four FoundationWalls The Life Cycle of a Business Typical Time Chart for a Business OwnerRecommended Time Chart for a Business Owner A Quick Reference to Ratios EquityStatement for a 50/50 Partnership Cash Flows for Grace’s Market Garden DiscountedCash Flows for Grace’s Market Garden Cash Flow Projection for a Start-Up BusinessDiscounted Cash Flows for a Start-Up Business Cash Flow Projection for a BusinessPurchase Discounted Cash Flows for a Business Purchase Business Plan Outline CashFlow Projection Cash Inflows Customer Survey Form Billings by Customer Report

Terminating a Customer 110 117 122 130 138 149 157 164 173 183 189 199 206 212 221107 114 127 128 53 57 99 100 17 19 20 21 37 44 46 143 144 148

Diagrams

Tables1 2 3 4 1 2 3 4 5 6 7 8 9 10

Samples

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11 12 13 14 15 16 17 18 19 1 2

Vision Statements Mission Statement Telephone Interactions Potential CustomerInteraction Review Form Telephone Script Documenting Your Work ProcessesEmployment Advertisement Human Resource Policy Valuing a Business AcquisitionRetirement Planning Competitive Analysis

152 154 176 180 182 193 195 204 212 27 79

Worksheets

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SMALL BUSINESS

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So, What Kind of Business Should You Start?

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ust because you are a hairdresser doesn’t mean you should start a salon. In thischapter, we’ll examine the pros and cons of different types of businesses.

IntroductionStarting a business can be scary, exciting, and fulfilling, all at the same time.Frequently, small businesses are started by people who have been employees in thesame industry. For example, hair stylists often open salons and accountants startaccounting firms. You may feel that because the industry you’ve previously worked

in is familiar to you, you would be successful at starting a business in thisindustry. It’s important to keep in mind, however, that building a business,managing a business, and doing what the business does are three

very different activities requiring different skill sets. You may be interested indoing only one of these three things. For example, you may get great pleasure outof hair styling, but have little patience for managing the day-today operations ofa business. In this case, you will want to reconsider your decision to start abusiness. No matter how much joy it gives you to “be your own boss” while doingthe thing that you do best, you will come to despise all the other tasks that goalong with owning and managing a small business. On the other hand, you may lovebuilding the business: designing the office space, putting together the marketingplan, forecasting, and building the customer base. You may, however, be thoroughly

bored with the management aspect or with doing what the business does.Entrepreneurs who feel this way tend to build a business, get it up and running,sell it,

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and start all over again. The thrill for them is in the creation process. If youplan to build your business, manage it, and be its chief employee, make sure thatyou have the energy and the skills to do all three of those things. If not, youwill have to hire other people in those positions that you do not wish to doyourself, or rethink your business plan entirely. Once you have assessed yourstrengths and weaknesses in terms of building, managing, and operating a business,it’s time to look at your personal goals.

something slightly different to each person, but in general, it representsfinancial independence, prosperity, and security. The more time you spend planningyour business model before you begin, the more likely you will be building aprofitable enterprise that will meet your personal financial goals.

FreedomMany small-business owners like the freedom that comes with not having a boss andbeing able to make their own decisions. However, with this freedom comes ultimateresponsibility for the business, including responsibility for customersatisfaction, working conditions, supplier shortages, product failure, and theeconomic well-being of your employees. Look at whether you are the type of personwho can handle these responsibilities while simultaneously making considered, butquick, decisions on a daily basis.

Why Do You Want to Be an Entrepreneur?Before you jump with both feet into starting a business, take some time to examineyour motivations. What is it that is driving you towards starting and running abusiness? Many small-business owners cite things such as more money, freedom, and

empire building as their motivators.

Empire buildingFor many small-business owners, the most important consideration is that they arebuilding something that will outlive them and perhaps provide income and stabilityto future generations. If this is an important consideration to you, it will becritical to make sure that you are building a business that has value, and thatthe value can be transferred to others through sale of the business orinheritance. The unfortunate reality is that over 80 percent of small businessesdo not survive into the next generation but die with their owners.

MoneyOwning and running a business has the potential for providing you with a higher

level of investment return and remuneration than you would receive working forsomeone else. The profit potential is definitely there, but high profits are atrade-off for high risks. Starting a small business is a risky proposition andyou, as the owner, face the potential for financial loss as well as gain. It’simportant to keep this in mind as you build your business and make sure that younot only have the ability to survive failure, but also the ability to toleraterisk. We will examine business risk in greater detail in Chapter 9. When small-business owners talk about money, though, they often don’t mean that they wantmoney for money’s sake. Money means

What Kind of Business Should I Start?



The three major types of businesses are manufacturing, retail/wholesale, andservice. There are pros and cons to running each type of business, as well asfinancial considerations. Let’s have a look at the characteristics of each one.

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Manufacturing businessManufacturing involves purchasing raw materials and adding labor and specializedmachinery to create a product to be sold to customers. An example is a furnituremanufacturer. This type of business would buy lumber from a sawmill, as well asnails, screws, glue, and varnish from a supplier. It would then have its employeesuse saws, drills, and other tools to turn the lumber into tables, chairs, andother furniture. A manufacturing environment usually requires a hefty upfrontinvestment in the equipment that will be used in the manufacturing process.Manufacturers also tend to need more highly skilled workers than, for example, aretail business. For these reasons, it is very difficult to start up amanufacturing business on a small scale and expand as you go along. One of themain benefits of this type of business is that it can service very large customerswith very specialized products. For example, a manufacturer can supply the entire

North American auto industry with injectionmolded fan vents.

therefore requires incurring the fixed costs of running that space right from thebeginning. For example, if you wanted to run a variety store, you would have torent (or buy) a storefront location where customers can drop in during your openhours. On top of that, you will have to invest in the store’s inventory, which isusually the largest cost to a retailer. The inventory can cost upward of $100,000depending on the size and scope of the store. For these reasons, retail businessesare usually quite capital intensive and need financing from the beginning.Wholesalers, on the other hand, generally don’t have to deal with the headaches ofdisplay spaces, but they do have to maintain an inventory in a warehouse.Therefore, a wholesale business needs to incur the fixed costs associated withoperating a warehouse as well as the cost of purchasing the inventory, which tends

to be in larger quantities than a retailer. This also generally requires financingfrom the beginning.

Service businessA service business encompasses any type of business where the item purchased isnot a tangible good but instead is “something that is done.” Some examples ofservice businesses are law and accounting firms, lawn-care businesses, auto shops,and spas. Service businesses in general require less equipment than manufacturersdo, and practically no inventory. Therefore, these types of businesses aregenerally easier to start on a small scale and require less start-up capital. Infact, service businesses account for the majority of all small businesses in NorthAmerica. Service businesses tend to be smaller and more local than manufacturersor wholesalers, because services are provided by people and are generally not able

to be shipped by parcel post. It can be logistically difficult to provide

Retail/Wholesale businessRetailing and wholesaling involves the purchase and resale of products. A retailersells the products to the final consumer while the wholesaler is simply anintermediary, selling the product to another business that will ultimately sell itto the final consumer. Almost every store that you can think of is a retailer. Forexample, a bookstore will purchase books from the publisher and display them forsale in the store. An example of a wholesaler is an importer that purchasesteapots from Japan and sells them to stores, usually in large quantities.Operating a retail business generally requires rented or purchased display space



and

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services over a wide geographic area. However, business services such as websitedesign, accounting, and data processing are becoming the exception to this rulewith the everexpanding use of email and the Internet.

of business you start will provide you with the money you need for your intendedlifestyle.

Eight Questions to Ask YourselfBefore you make a final decision as to what type of business to open, make surethat your personal goals and business goals are synchronized by asking yourselfthe following questions.

2. Will this business allow me to have the freedom I want to pursue other things?

If you start a business that is based around you being there all the time, you maynot be able to pursue some of your personal goals or even to spend the time toplan and strategize for your business. Having a business that can be systematizedto run without your constant presence will allow you more freedom.

1. What are my personal financial goals?If you want to retire a millionaire in ten years time and you are going to open asmall shoerepair shop, you may not be able to meet your goals. Analyze where youwant to be in five or ten years. Do you want a larger house? Be able to travel theworld? Have your retirement fully funded? You’ll save yourself much grief down theroad if you make sure that the type

3. Is the product or service easily marketable?

Starting a business that has a product or service that is understandable andneeded by a large segment of the population is by far easier than developing a newproduct or service and having to both familiarize potential customers with it and,at the same time, convince them that they need it.

CASE STUDYCraig Sesco knew from the time he was six years old that he wanted to run his ownbusiness some day. His father had owned and operated an Italian bakery sincebefore Craig was born and Craig learned to be an entrepreneur through many yearsof working in the bakery, doing everything from kneading dough to running theovens to ordering from suppliers, and, eventually, bookkeeping and cash flowforecasting. Now Craig was 27 and he felt it was time to strike out on his own. Heknew that his father had started his business by doing something he loved and that

he was lucky that his passion coincided with consumer tastes, but Craig wanted topursue a different model. He wanted to determine his best chance for commercialsuccess and build a successful business around that. The first process that Craigwent through was to determine his personal goals. He had married his long-timelove, Marnie, two years ago and they had just bought a small house for themselvesand their new baby. Craig knew that he didn’t want to work the crazy hours hisfather still put in everyday: up at 4:30 a.m. to start the stone ovens and neverfalling into bed before 11:00 p.m., after reconciling the day’s receipts,preparing the bank deposit, and planning for the next day’s purchases. Craigwanted to balance his work time with family time but still wanted to build and runa financially successful business that he could sell by the time he was 50.



Through his analysis, Craig also determined that he didn’t want to run a businesswith huge start-up costs and large inventory levels to manage. He wanted to startsmall and gear up slowly as he built up more internally generated revenues. Craigstarted to list the types of businesses he thought he might be successful at.




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4. What are the barriers to entry for this industry?Some industries are more difficult than others to “break into.” For an extremeexample, it would be incredibly difficult to start up a new auto manufacturingcompany to compete with Ford or Daimler Chrysler. Likewise, it would be almostimpossible to set up a new company to provide telephone service to the Easternseaboard. In both of these examples, the startup costs are monumental (design,manufacturing equipment, and showrooms in the first instance and switchingstations and telephone cabling in the second). Also, these industries aredominated by a few very large players who have built name recognition and goodwillover many years. Ensure that you choose an industry where there is room for newparticipants to grow.

that. For example, if you start a grocery store in a small town, your customer

base is limited to the residents of the town. You may find it difficult to growsuch a business without offering new products. Ensure that the business has thepotential to grow quickly and expand either the customer base or the range ofproducts or services.

7. Will my product or service endure?The only constant in business is the knowledge that consumer tastes are everchanging. The product that may have been all the rage last month may be passé thismonth. Think back to pet rocks, fruit-flavored potato chips, and Rubik’s Cube.These items sold extremely well for an extremely short period of time. If you hadbuilt your business around one of these fads, however, you would soon have foundrevenues dropping precipitously and you would have been out of business quickly(unless, of course, your business hopped from fad to fad). It’s important to make

sure that your service or product is not a fad and will be needed long into thefuture.

5. Can the business weather downturns?Every industry has up and down times. For example, travel agents book morevacations for their customers when the economy is on an upswing than when it’s inrecession. A business can also be affected by how many new businesses in thatindustry are opening up. A flood of new providers can siphon off some of yourcustomers, at least in the short term. Look at whether the business you arecontemplating will be able to survive external changes to its operatingenvironment. Is your product or service easily adaptable? For example, in pooreconomic times, a spa will focus on advertising the basic services, such ashaircuts. When times are good, it will promote higher-end services, such as

massage, facials, and pedicures.

8. Will I actually be able to make money with this business?If you feel that you have found an underserviced market niche, you need to examinewhy there are no other businesses serving that market. Many small businesses areable to create a toehold in an industry because large corporations would not beable to make enough profit serving that market to satisfy their investors. A smallbusiness has the advantage of lower overhead and more flexibility to move in andout of markets and can often create greater profits than its larger counterparts.However, if you want to do more than simply eke out a living running yourbusiness, make sure that the profit potential is there right from the beginning.



6. How easily can I expand this business?If your goal is to grow your business over several years, it’s critical todetermine upfront whether the business has the potential to do

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Chapter Summary° In order to start and run a small business by yourself, you need to have skillsin business building, business management, and doing what the business does. ➦ There are three main types of businesses: manufacturing, retail/wholesale, andservice. When deciding what type of business to start, it’s important to look atthe pros and cons of running each type of business. Ensure that your personal➦ goals fit with your plans for your business with respect to finances, freedom, andrisk. ° It is critical to examine your choice of potential business to make surethat the product or service is viable and will stand the test of time.


16820833 Finance Grow Your New Business[1]

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