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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
- Veröffentlichungsjahr: 2011
The leading resource for starting and running any smallbusiness Want to start the small business of your dreams? Want to breathenew life into the one you already have? Small Business ForDummies provides authoritative guidance on every aspect ofstarting and growing your business, from financing and budgeting tomarketing, management and beyond. This completely practical, no-nonsense guide gives you expertadvice on everything from generating ideas and locating start-upmoney to hiring the right people, balancing the books, and planningfor growth. You'll get plenty of help in ramping up your managementskills, developing a marketing strategy, keeping your customersloyal, and much more. You'll also find out to use the latesttechnology to improve your business's performance at everylevel. * How start-up and established small businesses can use the SmallBusiness Jobs Act to their advantage * Enhanced and expanded coverage on using technology in yoursmall business * Hiring employees using online resources including LinkedIn,Facebook, and other social media sites * New coverage of the recent health care bill, health savingsaccounts, and their implications for small business * Updated coverage of the best places to get small businessloans * What it takes to achieve and maintain success in anever-changing economic landscape You have the energy, drive, passion, and smarts to make yoursmall business a huge success. Small Business For Dummiesprovides the rest.
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Small Business For Dummies®, 4th Edition
Table of Contents
Eric & Jim’s 20 Tips for Small-Business Success
1. Not everyone is cut out to be a small-business owner. Take the time to explore whether you’re compatible with running your own business. Some people are happier (and better off financially) on the other end of a paycheck.
2. Get your personal finances in order. Before you jump into the entrepreneurial fray, get your own money matters squared away.
3. Pick your niche. Take stock of your skills, interests, and employment history to select the business best suited to you. Choosing a niche that you can be passionate about will also help improve your chances of succeeding. Remember: Many small-business owners succeed in businesses that are hardly unique or innovative.
4. Benefit from your business plan. The exercise of creating your business plan pays dividends. Answer the tough questions now, before the meter is running.
5. Don’t think you need bankers and investors at the outset. The vast majority of small-business start-ups are bootstrapped (self-financed).
6. Know the hats you wear best. In the early months and years of your business, you’ll have to acquire many skills. Gain the background you need to oversee all facets of your business well, but determine what tasks you should outsource or hire employees to manage.
7. Remember that “nothing happens until a sale is made.” How many good products go nowhere because they don’t reach the shelves? Sales are what will drive your business. You need a crackerjack marketing plan that details how you intend to package, promote, distribute, price, and sell your product or service.
8. You have to see a customer to know one. No matter how busy you are, especially in the early years of your business, be sure to spend at least 25 percent of your time with customers. You can’t make the right business decisions without understanding the customer’s viewpoint.
9. Solve your customers’ problems. The best way to satisfy your customers is not by selling them products or services but by providing solutions to their problems. Understand the difference.
10. Keep in mind that quality takes only moments to lose and years to regain. Quality isn’t a destination but rather a never-ending journey. After you’ve strayed from quality’s path, your journey may be sidetracked forever.
11. Put profitability first and rewards second. Beware of the small business that treats itself to hefty salaries, high-priced consultants, and waterfalls in the lobby. In small business, profitability must come first. In order to understand profitability, you must first learn how to measure your cash flow and understand your key financial ratios.
12. Hire superstars. If you intend to create a growing business, your number-one duty is to assemble a team of superstar employees in your gamebreaker positions.
13. Don’t go it alone. Tap into resources such as small-business peers, mentors, and trade associations that can help take some of the energy-draining trial and error out of starting and running your business.
14. Remember that vendors are partners, too. A good vendor is as important to your business as a good customer. Treat your vendors like customers and watch the partnerships grow.
15. Make use of benefits. The most valuable long-term benefit you can offer yourself and your employees is a retirement savings plan. Also learn how to provide insurance and other benefits and cut your tax bill at the same time.
16. Ignore regulatory issues at your peril. Federal, state, and local government agencies require an array of licenses, registrations, and permits. Obey them or face stiff penalties, including possible closure of your business.
17. Know the tax laws. Invest in understanding tax issues that affect your small business. You can avoid trouble and, at the same time, legally slice thousands of dollars off your tax bill if you know the right moves.
18. It’s the people, stupid! Whatever happens to a small business happens at the hands of the people who work it and work for it.
19. Fast, good, or cheap — pick any two. Serious trouble awaits those who attempt to be all things to the marketplace. Focus on what you do best.
20. Develop a passion for learning. As your business changes and grows, you need to change and grow along with it — particularly as you transition to manager. One common denominator can be found in all successful business owners — a passion for learning.
Small Business For Dummies®, 4th Edition
by Eric Tyson and Jim Schell
Small Business For Dummies®, 4th Edition
Published byJohn Wiley & Sons, Inc.111 River St.Hoboken, NJ 07030-5774
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Copyright © 2012 by John Wiley & Sons, Inc.
Published simultaneously in Canada
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About the Authors
Eric Tyson, MBA, has been a personal financial writer, lecturer, and counselor for the past 25 years. As his own boss, Eric has worked with and taught people from a myriad of income levels and backgrounds, so he knows the small-business ownership concerns and questions of real folks just like you.
After toiling away for too many years as a management consultant to behemoth financial-service firms, Eric decided to take his knowledge of the industry and commit himself to making personal financial management accessible to everyone. Despite being handicapped by a joint BS in Economics and Biology from Yale and an MBA from Stanford, Eric remains a master at “keeping it simple.”
An accomplished freelance personal-finance writer, Eric is the author or coauthor of numerous other For Dummies national bestsellers on personal finance, investing, for seniors, and home buying and is a syndicated columnist. His Personal Finance For Dummies won the Benjamin Franklin Award for Best Business Book.
Eric’s work has been critically acclaimed in hundreds of publications and programs, including Newsweek, The Los Angeles Times, The Chicago Tribune, Kiplinger’s Personal Finance Magazine, The Wall Street Journal, Bottom Line Personal, as well as NBC’s Today show, ABC, CNBC, PBS’s Nightly Business Report, CNN, FOX-TV, CBS national radio, Bloomberg Business Radio, and Business Radio Network. His website is www.erictyson.com.
Jim Schell has not always been a grizzled veteran of the small-business wars, contrary to what some people may think. Raised in Des Moines, Iowa, and earning a BA in Economics at the University of Colorado, Jim served in the U.S. Air Force in Klamath Falls, Oregon. Jim’s entrepreneurial genes eventually surfaced when he and three Minneapolis friends started The Kings Court, at the time the nation’s first racquetball club. Two years later, Jim bought General Sports, Inc., a struggling sporting-goods retailer and wholesaler. After another two years, he started National Screenprint, and, finally, he partnered with an ex-employee in Fitness and Weight Training Corp. Each of the start-ups was bootstrapped, and each was privately held. For a period of exhausting years, Jim involved himself in the management of all four businesses at the same time. His third business, National Screenprint, ultimately grew to $25 million in sales and 200 employees.
Relocating to San Diego, Jim began a long-simmering writing career, authoring four books (The Brass Tacks Entrepreneur, Small Business Management Guide, The Small Business Answer Book, and Understanding Your Financial Statements) and numerous columns for business and trade magazines.
Citing culture shock, Jim and his wife, Mary — a sales trainer and longtime business partner — relocated to Bend, Oregon, where he continued his writing career. In 1996, he kicked off his fifth start-up, Opportunity Knocks (OK), a nonprofit that uses volunteers to organize, administrate, and facilitate the formation of small-business owners into teams that will serve as a member’s board of advisors. In the last five years, Jim has also founded three additional nonprofits and participated in the turnaround of two more. Jim has three grown sons — Jim, Todd, and Mike — and five grandchildren.
Dedications
From Eric: To my wife, Judy; to my family, especially my parents, Charles and Paulina; to my friends; and to my counseling clients and students of my courses, for teaching me how to teach them about managing their finances.
From Jim: This book is dedicated to The Rocky Road, and to all those friends, employees, and customers who have traversed it with me. Most of all, it is dedicated to my wife, Mary, without whom The Rocky Road would have been The Dead End.
Authors’ Acknowledgments
Many people contribute to the birth of a book, and this book is no exception. First, Eric would like to express his deep debt of gratitude to James Collins, who inspired him when he was a young and impressionable business school student. Jim encouraged Eric to try to improve some small part of the business world by being an entrepreneur and focusing solely on what customers needed rather than on what made the quickest buck.
The technical reviewer for this book, Lindsay Stevens, helped improve our book, and we are thankful for that.
Thanks to all the good people in the media and other fields who have taken the time to critique and praise our previous writing so that others may know that it exists and is worth reading. And to those who may not open the book because of its bright yellow color and low-brow title, “You can’t judge a book by its cover!” Now that we’ve got your attention, flip through the pages and find out why readers everywhere know and trust books For Dummies.
And a final and heartfelt thanks to all the people on the front lines and behind the scenes who helped to make this book and Eric’s others a success. A big round of applause, please, for Elizabeth Rea as project editor and Amanda Langferman as copy editor. Their attention to detail and ability to ask good questions helped make this book the best that it could be. Thanks also to the Composition, Graphics, Proofreading, and Indexing staffs for their great efforts in producing this book.
P.S. Thanks to you, dear reader, for buying this book.
Publisher’s Acknowledgments
We’re proud of this book; please send us your comments at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.
Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and Vertical Websites
Project Editor: Elizabeth Rea
(Previous Edition: Alissa Schwipps)
Acquisitions Editor: Erin Calligan Mooney
Copy Editor: Amanda M. Langferman
(Previous Edition: Josh Dials, Kelly Ewing)
Assistant Editor: David Lutton
Editorial Program Coordinator: Joe Niesen
Technical Editor: Lindsay Stevens
Editorial Manager: Michelle Hacker
Editorial Assistant: Alexa Koschier
Cover Photo: © iStockphoto.com/Ivan Kmit
Cartoons: Rich Tennant (www.the5thwave.com)
Composition Services
Project Coordinator: Patrick Redmond
Layout and Graphics: Carl Byers, Julie Trippetti
Proofreader: Laura Bowman
Indexer: Palmer Publishing Services
Special Help:
Publishing and Editorial for Consumer Dummies
Kathleen Nebenhaus, Vice President and Executive Publisher
Kristin Ferguson-Wagstaffe, Product Development Director
Ensley Eikenburg, Associate Publisher, Travel
Kelly Regan, Editorial Director, Travel
Publishing for Technology Dummies
Andy Cummings, Vice President and Publisher
Composition Services
Debbie Stailey, Director of Composition Services
Introduction
Small business is many things to those of us who have participated in it or have dreamed about participating in it. Without a doubt, the concept of “being your own boss” is an alluring one.
But not everyone can be his or her own boss — at least not a good or successful one. If you’re currently someone’s employee (not a boss), fantasizing about owning a business of your own is perfectly natural on those days when you’re fed up with your current boss or job. Your fantasy is made even more attractive by the rags-to-riches stories you hear about entrepreneurs who’ve turned their visions into millions or even billions of dollars.
Please know, however, that small-business ownership has some not-so-appealing aspects as well. Most often, you have to spend many years working hard and making tough choices before the risks you take turn into rewards. Furthermore, a significant percentage of small businesses don’t survive to enjoy the long-term rewards. And perhaps most difficult of all, the entrepreneurial career can be lonely at the top.
Of course, the thrill of being the ultimate decision-maker may be exactly what attracts you to small business in the first place. But you need to realize that this attraction also has its downsides, the most prominent of which is that it breeds trial and error, and trial and error begets mistakes. Mistakes are the most expensive (and most dangerous) way for the small-business owner to learn.
But wait! Before you plod back to your day job, we have some good news for you: The mistakes that you’re likely to make have already been made by those who have gone before you — including us. If you can somehow avoid the trial and error that leads to mistakes (which is what we’re here to help you do), your chances for success multiply many times over.
Despite the previously mentioned downsides, it’s impossible to describe the sense of accomplishment you’ll get from starting and running your own successful business. Like so many before you, you’ll know the thrill of creation, you’ll feel the pride of watching that creation grow, and you’ll realize that your work and your vision have filled an identifiable void for your customers, for your employees, and, of course, for you and your family. And for those of you who rise to the top of the small-business pyramid, you’ll enjoy the greatest upside of them all — unlimited upside. Ask Bill Gates about how this reward feels.
Although you can find plenty of small-business books out there, most of them aren’t worthy of your time or dollars. Forbes magazine once said of the marketplace for small-business books, “Warning: Most how-to books on entrepreneurship aren’t worth a dime.” The marketplace apparently agrees — the vast majority of small-business books don’t sell after their first year or two. We’re proud to say that this updated and revised fourth edition launches the 14th year of this book’s history! We’re grateful for reviewers’ kind words, such as the praise from Hattie Bryant, creator of the PBS series Small Business School, who said of our book, “No one should try to start a business without this book.”
Michael Gerber, author of The E-Myth series of business books(HarperCollins), makes the point that “the one common denominator in every successful entrepreneur is an insatiable appetite to learn.” If Michael is right, and we believe that he is, you’ve passed the first test of the successful entrepreneur: By purchasing this book, you’ve displayed a desire to learn. Keep it up — you’re on the right track.
Small business isn’t rocket science. You don’t need to be a genius to start and run a successful small business. What you do need is help, which is exactly why we wrote this book. We’re pleased that you chose us as your guides into the stimulating world of small business.
About This Book
The following backgrounds and philosophies serve as a guide to the advice we provide — advice from the field that makes our small-business book stand out from the rest:
We’re small-business experienced, and we share the benefits of that experience with you. Between us, we have six decades of experience in starting and running seven successful small businesses. In addition, we’ve worked with thousands of small-business owners. Jim has led numerous small-business peer-networking groups and has provided volunteer counseling services to small-business owners. Eric has conducted financial counseling for small-business owners, taught financial-management courses, and worked as a management consultant.
Throughout this book, we share the experience we’ve gained, in the hopes that you’ll use our advice to purge the trial and error from your inventory of management tools. We also share an ample collection of straight-from-the-horse’s-mouth anecdotes, each one based on a true story.
We take an objective view of small-business ownership. Although we firmly believe in the creative power of small business, we’re not here to be its pitchmen.
Sadly, too many small-business books are written by folks with an agenda: a franchise to sell, a multilevel marketing scheme to promote, or a high-priced seminar to foist on the reader. Free of conflicts of interest, we’re here to pass on the truth and let you decide. If you’re the type of person who wants to get into this competitive career field, we’d like you to enter the race informed as well as inspired.
We take a holistic approach. Because small business can at times be both demanding and intoxicating, running your own shop can threaten to consume your life. Although everyone knows that life is more than just business, striking a balance and staying in control can represent a colossal challenge. With that in mind, we take particular care to present the realities of running a small business within the larger (and more important) framework of maintaining a happy personal and financial life.
We’re committed to updating this book so that you have the best and latest information and advice at your fingertips. Tax laws change, benefits change, technology changes, and so do many other facets of the small-business world. That’s why we’ve remained on top of these changes and revised this book.
Conventions Used in This Book
Every book has its own conventions, and this one is no different. To make the most of the information we provide, keep your eye out for these conventions:
Italics highlight new terms that we define.
Boldfaced text indicates the keywords in explanatory bulleted lists and action steps in how-to numbered lists.
Monofont sets web addresses apart.
What You’re Not to Read
Of course, we’d love for you to read every word of this book, but we’re realistic. We know you have important things to do. So if you’re in a hurry (or if you’re just not into reading the extra, nonessential information), you can safely skip text highlighted with the Technical Stuff icon or formatted in gray-shaded sidebars. This text provides plenty of helpful information, but the information isn’t crucial to your understanding of the topic at hand.
Foolish Assumptions
Many small-business books assume that their readers are ready to make the leap into small business and are cognizant of the risks and pitfalls. We don’t make that assumption here, and neither should you. That’s why we include sections designed to help you decide whether small business is really for you. We spell out the terms of starting your own business, break down the tasks, and point out the dangers. We don’t think that you’re incapable of making the decision yourself; we just know that time is your most precious resource, and we think we can help you save it. You’ll lose too many years of your career if you make the wrong choice.
Much of this book is targeted to running and managing your existing small business intelligently. Even if you have a great idea, operating a small business is much harder than it appears, so we show you the best ways to manage and grow your enterprise.
How This Book Is Organized
We’ve organized this book to satisfy different reading and personal styles. Some of you may read it from cover to cover, while others may refer to it to answer a specific question or address an immediate concern. For this reason, each chapter of the book is designed to stand on its own. We’re flexible — read it as an all-in-one project or use it as a reference guide.
Much like every small-business owner, this book must wear a number of hats. We’ve organized those hats into five parts. Here’s what each part covers.
Part I: Becoming an Entrepreneur
Your first small-business decision may be to admit that you’re not ready for this career — at least not yet. If you’re straddling the fence, Chapter 1 is here to help you dismount onto one side or the other. We help you make the right choice by presenting you with an aptitude test that helps you determine whether this career works for you.
If you decide that small-business ownership is right for you, you’re ready for the rest of this part. Make no mistake about it; no matter how creatively you and your lawyer attempt to structure the incorporation of your start-up, the business of small business involves risk. Therefore, before exposing yourself to such risk, we suggest that you get your personal finances in order. Enter Chapter 2, which covers personal money management.
As you move past your personal finances to the business you hope to start, take heart: The road in the early stages of a small business has so many detours and forks that you’re bound to lose sight of the road itself. Chapters 3, 4, and 5 provide you with the map you need to reach your destination. In these chapters, we overturn all the stones of a typical small-business start-up, from choosing the right niche for you to writing a gangbuster business plan to creating the right legal framework to locating the financing that suits your needs.
Part II: Buying an Existing Business
So you say you’re considering buying an existing business as opposed to starting one from scratch? That’s all well and good, but you need to ask some finely tuned questions prior to making that decision. “What are the advantages of buying an existing business over starting a new one? What kind of business should I buy? How should I determine the price I can pay? What are the tax implications? What are the first things I should do after the sale is completed?” You find the answers to these questions (and many more) in Chapters 6 through 9.
Part III: Running a Successful Small Business
You’ll soon discover that small-business ownership is really one never-ending exercise in problem solving. Lucky for you, we’ve designed Chapters 10 through 15 to help you solve small business’s most compelling problems. Here’s a partial list of those problems:
Sales creation: No sales, no income, no business survival. Period.
Marketing: Although such small-business functions as sales, accounting, and operations are primarily black-and-white issues, that isn’t the case with marketing. Marketing is gray, fuzzy, and hard to define (go ahead, try defining the word marketing right now in one easy sentence). To make matters worse, it’s one of those aspects of doing business that doesn’t come naturally to most people.
Operational issues: Operational issues are everything on that long list of day-to-day responsibilities, beginning with how you spend your day from the time you walk in the office or store in the morning until the time you go home at night. These issues include everything from collecting accounts receivable to understanding financial statements to taking good care of your customers. And don’t forget the foremost operational issue: managing the lifeblood of your business — cash.
Long-range planning: Small-business owners recognize that long-range planning is important, but unfortunately, they’re often too busy dealing with day-to-day business minutiae to get around to it. They say they’ll focus on planning tomorrow, but alas, tomorrow never comes.
Accounting and bookkeeping issues: Double-entry accounting systems? Cash flow projections? Current ratios and inventory turns? You’re probably saying, “Give me a break. What does all this have to do with my chocolate-chip cookie business?” You’ll see!
Technology issues: Today, new telecommunications and information-gathering tools are appearing faster than politicians promising to cut taxes and improve government services. Keeping up is sometimes challenging, but you must do it.
Financing issues: Capital is the food that feeds every small business. If you lack money, you may not be able to get your business headed in the desired direction. No capital equals no fuel to make your business go.
Everything else: This category includes but isn’t limited to such issues as product development, pricing, budgeting, customer service, ownership issues, and lifestyle issues.
Part IV: Keeping Your Business in Business
After your company is underway, your focus shifts from getting started to staying in (and growing your) business. Here are just some of the issues we address in this part to help you delve deeper into the world of small-business ownership:
Employees: Deciding when and whom to hire is a vital but difficult decision. Then, even when you’ve hired the right employees for the right jobs, you’re faced with the never-ending task of motivating and retaining them — and sometimes replacing them.
Government regulations: Because you’ll likely have to deal with several layers of government regulators during the life of your small business, you need to know how to do so without breaking the bank or your sanity.
Taxes: You have to understand the tax laws so that you can best position your small business to minimize your legally required taxes.
Growth: All businesses want to grow, but you need to recognize the downsides and risks you’ll encounter if you grow too rapidly or without proper controls in place.
Part V: The Part of Tens
There ought to be a rule that says every small-business owner should have his or her own mentor. Sadly, too few do. Meanwhile, the small-business owner’s Fortune 500 cousins learned the mentorship lesson long ago, which is why every new management employee today has a mentor lurking somewhere nearby. Mentors typically are business veterans — people who’ve learned business’s lessons the hard way. Mentors guide and teach, and that’s exactly what certain chapters in this book are intended to do.
Chapters 21 and 22 act as the mentor you need to assist you in building your business. These chapters share a collection of suggestions, advice, and tips on subjects designed to make the difference between maintaining a stagnant or mediocre business and growing a healthy one. Included in these chapters are tips on such topics as how to succeed in your small business and how to avoid common small-business management mistakes.
Icons Used in This Book
To help you find the information you need to assist you on your entrepreneurial path, we’ve placed icons throughout the text to highlight important points.
This symbol indicates time-tested tips to make your small-business journey more profitable and easier. Often straight from the heart of experience, we clue you in on what works for us as we navigate the oft-troubled waters of small-business life.
We present tales from our own experiences to save you some trial and error. Enjoy the company of your fellow entrepreneurs and benefit from the lessons we’ve learned.
The path of small-business ownership can be fraught with peril. Some deals may be too good to be true, and some people may have their own interests at heart, not yours. This icon points out the dangers and helps you steer clear of them.
This icon points out stuff too good (and too important) to forget.
This icon asks you to do some thinking and checking before you take the plunge. You have a lot of important choices to make when running a small business, so don’t rush in.
If you like to sweat the dull stuff, this icon points out the inner workings of the business world that you’re likely to ignore as you get down to the real work.
Where to Go from Here
Where you go from here is up to you, but if you’re just beginning to think about small business, we recommend that you read straight through, cover to cover, to maximize your small-business intelligence. But the A-to-Z approach isn’t necessary. If you feel confident in your knowledge of certain areas, pick the topics that you’re most interested in by skimming the table of contents or by relying on the well-crafted index at the back of the book.
Part I
Becoming an Entrepreneur
In this part . . .
Do you have the right stuff to start and run your own business? In Part I, you can test your entrepreneurial aptitude, ensure that your personal finances can withstand the strain of starting a small business, figure out which business niche is right for you, and then start making your dream a reality with a well-designed business plan and a survey of financial and ownership options.
Chapter 1
Is Small Business for You?
In This Chapter
Understanding the role of small business
Determining whether you have what it takes to successfully run a small business
Reviewing the reasons to own (and not to own) a small business
Identifying alternatives to starting a business
An old friend of ours, who has been a small-business owner for more years than most of us have been alive, says, “Small business is a place where you can take your dog to the office whenever you choose.” That’s one way of looking at it, but we offer several other viewpoints as well.
Owning and running a small business can be rewarding — personally and financially — but only if you have what it takes to succeed. This chapter gives you all the know-how you need to be sure that you’re making the right decision. In it, we pose a set of 20 questions to ask yourself about your skills, talents, and abilities. If you’re honest with yourself — don’t worry, there are no right or wrong answers — this test can give you the information you need to determine whether running a small business is the right move for you. If you find that running a small business isn’t for you, we provide several alternatives, which may give you exactly what you’re looking for.
Lots of important issues — from your financial situation to your desire to create a needed product or provide a needed service to your ability to be a jack-of-all-trades — should influence your decision to become an entrepreneur. This chapter helps you understand the realities of starting and running a small business so that you can figure out how and why it may or may not work for you.
Defining Small Business
The lingo of the business world — cash flow, profit and loss statements, accounts receivable, debt-to-equity ratio, and so on — makes small-business ownership appear far more complicated than it really is. Don’t be fooled. You’re probably more acquainted with the basic concepts of doing business than you think. If you’ve ever participated in a bake sale, been paid for a musical performance, or operated a baby-sitting, painting, or lawn-mowing service, you’ve been involved in a small business.
Being a small-business owner doesn’t mean that you have to work 70 hours a week, make a six-figure income, or offer a unique product or service. We know many successful small-business owners who work at their craft 40 hours a week or less and some who work part-time at their business in addition to holding a regular job. The vast majority of small-business owners we know provide products or services quite similar to what’s already in the marketplace and make reasonable but not extraordinary sums of money — and, thanks largely to the independence that small-business ownership offers, are perfectly happy doing so!
Small (and large) business basics
Imagine back to your childhood . . . it’s a hot summer afternoon, and you’re sweating it out under the shade of an elm tree in your front yard. “Boy, it’s hot,” you say to yourself, sighing. “I could sure go for a glass of lemonade.” Eureka! With no lemonade stand in sight, you seize upon your business idea.
You start by asking some of your neighbors if they’d buy lemonade from you, and you quickly discover that the quality, service, and location of your proposed business may attract a fair number of customers. You’ve just conducted your first market research.
After you determine that your community has a need for your business, you also have to determine a potential location. Although you could set up in front of your house, you decide that your street doesn’t get enough traffic. To maximize sales, you decide to set up your stand on the corner down the road. Luckily, Mrs. Ormsby gives you permission to set up in front of her house, provided that she gets a free glass of lemonade. You’ve just negotiated your first lease (and you’ve just had your first experience at bartering).
With a tiny bit of creativity and ego, you determine the name of your business: The World’s Best Lemonade Stand. After some transactions with the grocery store, you have your lemonade stand (your store), your cash box, a table, a pitcher (your furniture and fixtures), and the lemonade (your inventory). The World’s Best Lemonade Stand (your brand) is now ready for business!
From the moment you first realized that you weren’t the only one who might be interested in buying some lemonade, you faced the same business challenges and issues that all small-business owners face. As a matter of fact, the business challenges and issues that a lemonade stand faces are the same that American Express, Boeing, Costco, Disney, and every other big company faces. The basics of doing business are the same, no matter what size the business is:
Sales: Boeing manufactures and sells airplanes; you sell lemonade. A sale is a sale no matter what the product or service is or how large or small the ticket price is.
Cost of goods: Boeing buys parts for its vendors and suppliers; you buy lemons, sugar, and paper cups from the grocery store.
Expenses: Boeing has employee wages and pension plans (or employee benefits; see Chapter 17); you have sign-making costs and bubble-gum expenditures to keep your employees happy (also a form of employee benefits).
Profit: Profit is what’s left over after Boeing subtracts the cost of its goods and expenses from its sales; the same is true for your lemonade stand.
Financial basics: The same whether you’re big or small
Not only are the concepts of Business 101 — sales, cost of goods, expenses, and profit — the same for all businesses, regardless of size or product offering, but many associated financial basics are the same, too. Here’s what we mean:
Accounts payable: Boeing owes money to its vendors who provide it with parts; you owe money to your local grocery store for supplies.
Accounts receivable: Boeing has money due from its customers (major airlines and governments) that buy the company’s airplanes. You have money due to you from Mrs. Huxtable, who wandered by thirsty without her purse.
Cash flow: Boeing has money coming in and going out through various transactions with customers and vendors (sometimes cash flows positively, sometimes negatively), and so do you. (See Chapter 14 for much, much more on this important, but sometimes murky, concept.)
Assets: Boeing has its manufacturing plants and equipment, inventory, office buildings, and the like; you have your lemonade stand and cash box.
Liabilities: Boeing owes suppliers money; you owe money to your local grocery store.
Net worth: Net worth is what’s left over after Boeing subtracts what it owes (its liabilities) from what it owns (its assets). Ditto for your small-business enterprise.
This comparison between The World’s Best Lemonade Stand and Boeing could go much deeper and longer. After all, the basics of the two businesses are the same; the differences are primarily due to size. In business, size is a synonym for complexity.
So you may be thinking, if business is so simple, why isn’t everyone doing it — and succeeding at it? The reason is that even though the basics of business are simple, the details are not. Consider the various ways in which you grant your customers credit, collect the resulting accounts receivable, and, unfortunately, sometimes write them off when you’re not paid. Consider the simple concept of sales: How do you pay the people who make those sales, where and how do you deploy them, and how do you organize, supervise, and motivate them? Think about all the money issues: How do you compile and make sense of your financial figures? How much should you pay your vendors for their products? And when you need money, should you consider taking in shareholders or should you borrow from the bank? And, lest we forget, how should you deal with the Internal Revenue Service (IRS), the Occupational Safety and Health Administration (OSHA), and your state’s workers’ compensation department? These are but a few of the complex details that muddy the waters of business.
Small business: Role model for big business
While working as CEO of General Electric, Jack Welch once said in a speech to his division managers, “Think small. What General Electric is trying relentlessly to do is to get that small-company soul . . . and small-company speed . . . inside our big-company body.”
Think small? What’s happening here? Why would the CEO of a gigantic company like GE want his employees to think small? Because Jack Welch knew that small can be beautiful and because success and survival in the business arena always favor the agile over the cumbersome, the small over the big. Thanks to this “small is beautiful” trend — and thanks to increasing technological advances — you no longer have to be big to appear big; you can be small and still compete in most of today’s marketplaces.
Different people and businesses, similar issues
Okay, so you know what small business means and you can identify the people who create and run one, but what about your particular small business? After all, in your eyes anyway, the business you have in mind or the one you’re already running is different from anyone else’s. Different products, different services, different legal entity — the list goes on.
Small business by the numbers
The Small Business Administration defines small business as any business with fewer than 500 employees. To us, that seems a bit large. Consider this: Coauthor Jim’s fourth small business had 200 employees. With 200 employees, you have, say, 400 dependents, maybe 1,000 customers, and 100 or so of the business’s vendors all depending on you, trusting in you, and waiting for the mail to deliver their next check. That certainly isn’t small by our standards — not if you measure size in terms of responsibility anyway.
For those of you who like to work with numbers, our definition of small business is any business with 100 employees or fewer, a category that includes more than 98 percent of all U.S. businesses.
The latest year’s U.S. government figures show that the country is home to 27 million small businesses. Of those, approximately 21 million have no employees. Meanwhile, hundreds of thousands of new businesses open their doors each year. This kind of growth is an indicator of the appeal of owning a small business. (Or maybe it’s an indicator of the lack of appeal of working for someone else.)
Not only do small businesses create opportunities for their owners, but they also create jobs. In fact, small firms create about three-quarters of the new jobs in the United States.
What all these numbers mean is that small business isn’t really small — it’s large, diverse, and growing. Not only is small business not small when speaking in terms of the sheer numbers of small businesses and their employees, it’s also not small when talking about the tenacity and knowledge required to start and run a small business, which is where the remainder of this book comes in. You provide the tenacity part of the equation; we provide the knowledge.
The term small business covers a wide range of product and service offerings. A ten-person law practice is a small business. A doctor’s office is a small business. Architects, surveyors, and dentists are also in the business of owning and operating small businesses. How about a Subway franchisee? You guessed it — small business. The same goes for freelance writers (hence, we, your humble authors, are both small-business owners), consultants, and the dry cleaner on the corner of Main and Elm Streets. Each one is a small business.
Small business also covers all legal business entities. So small businesses can be sole proprietorships, C Corporations, nonprofits, or limited liability corporations, as long as they have fewer than 100 employees. (We define these various business entities in Chapter 5.)
After all, each of the businesses and entities we list here has the same basic needs:
Marketing to make its products or services known
Sales to get its products or services in the hands of the customer
Varying degrees of administration and financial accounting to satisfy a number of internal informational needs, as well as the needs of the IRS
Beyond the similarities in this list, each business is significantly different. Some need employees; some don’t. Some require vast investments in real estate, equipment, and elaborate information systems; some can get by with a desk, computer, and phone. Some may need to borrow money to get the business up and running; many others get by with what’s in the owner’s savings account. These differences are what make owning a small business exciting because you should be able to find a good fit for your desires and resources.
Our definition of a small-business owner
A small-business owner (or entrepreneur), by our definition, is anyone who owns a business that has 100 or fewer employees, period. Everyone who hangs out a shingle qualifies for the title no matter whether the business is private, public, barely surviving, or soaring off the charts.
You’re a small-business owner whether you’ve been in the saddle one day, one week, or one decade; whether you’re male or female and have a college degree or not; whether you work out of your home or on a fishing boat somewhere off the coast of Alaska.
Everyone has his or her own definition of the small-business owner. We find these four of particular interest; pick one or combine them all:
Webster’s Dictionary: A person who organizes and manages a business undertaking, assuming the risk for sake of profit.
Peter Drucker: Someone who gets something new done. (The late Peter Drucker is the Father of Modern Management. His books, primarily written for large companies, have virtually defined contemporary U.S. management theory.)
Jim Collins: Best-selling author and business expert Jim Collins takes a broad view of the small-business owner. The traditional definition — someone who founds an entity designed to make money — is too narrow for him. He sees entrepreneurship as more of a life concept. Everyone makes choices about how to live life. You can take a paint-by-numbers approach, or you can start with a blank canvas. When you paint by numbers, the end result is guaranteed. You know what it’s going to be, and though it might be good, it will never be a masterpiece. Starting with a blank canvas is the only way to get a masterpiece, but in doing so, you could also blow up. So are you going to pick the paint-by-numbers kit or the blank canvas? That’s a life question, not a business question.
Us: A person who is motivated by independence, creativity, and growth rather than by the security of an employer’s paycheck.
All people have their own collection of unique characteristics that determine who they are, what makes them happy, and where they belong in this world. On those not-as-frequent-as-they-should-be occasions when our characteristics align snugly with the kind of work we’re doing, we know how Cinderella felt when her foot slipped effortlessly into the glass slipper offered by the Prince.
In all fairness, we must warn those of you who are considering a future in small-business ownership that owning your own business can be addictive. We love it usually, hate it occasionally, and need it always, and we wouldn’t trade professions with anybody — except for maybe a professional athlete.
Do You Have the Right Stuff?
To discover whether you have the right stuff to run your own small business, take the test we offer in this section. Don’t close this book just because we said the word test! Tests don’t have to be a pain in the posterior. In fact, they can be relatively painless (and useful) when you don’t have to study for them, there are no right or wrong answers, and you’re the only one who will find out the outcome.
Some words of caution here: This Small-Business Owner’s Aptitude Test isn’t scientific, but we think it’s potentially useful because it’s based on our combined six decades of experience working as entrepreneurs, as well as alongside them. The purpose of this test is to provide a guideline, not to cast in concrete your choice to start or buy a business. The results will be most meaningful when it comes time to make your decision if you’re in the highest- or lowest-scoring groups. If you fall somewhere in the middle, we recommend more serious soul searching, consultation with friends and other small-business owners, and a large grain of salt.
Getting started with the instructions
Score each of the following 20 questions with a number from 1 (the entrepreneurially unfriendly response) to 5 (the entrepreneurially friendly response). Determine the appropriate numerical score for each question by assessing the relative difference between the two options presented and by how fervently you feel about the answer.
For example, one question asks, “Do you daydream about business opportunities while commuting to work, flying on an airplane, or waiting in the doctor’s office, or during other quiet times?” Give yourself a 5 if you find yourself doing this a lot, a 1 if you never do this, or a 2, 3, or 4, depending on the degree of work-related daydreaming you do. A business, especially one that you own yourself, can be downright fun and all-consuming. For most successful entrepreneurs, their minds are rarely far away from their businesses; they’re often thinking of new products, new marketing plans, and new ways to find customers.
To make the test even more meaningful, have someone who doesn’t have a vested interest in or a strong opinion about your decision — such as a good friend or coworker — also independently take the test with you as the subject. We seldom have unbiased opinions of ourselves, and having an unrelated third party take the test on your behalf can give you a more accurate view. Then compare the two scores — the score you arrived at when you took the test compared to the score your friend or peer compiled for you. Our guess is that your true entrepreneurial aptitude, at least according to our experience, lies somewhere between the two scores.
Answering the questions
After reading each question, write your response from 1 to 5 on a separate sheet of paper.
1. In the games that you play, do you play harder when you fall behind, or do you have a tendency to fold your cards and cut your losses? (5 if you play harder, 1 if you wilt under pressure)
2. When you go to a sports event or concert, do you try to figure out the promoter’s or the owner’s gross revenues? (5 if you often do, 1 if you never do)
3. When things take a serious turn for the worse, is your first impulse to look for someone to blame, or is it to look for alternatives and solutions? (5 if you look for alternatives and solutions, 1 if you look for someone to blame)
