Small Business Entrepreneur

Strategic Planning for the Growing Business

2008-05-29T05:31:00.000-07:00

INTRODUCTION

To many people, strategic planning is something
meant only for big businesses, but it is equally
applicable to small businesses. Strategic plan-
ning is matching the strengths of your business
to available opportunities. To do this effective-
ly, you need to collect, screen and analyze in-
formation about the business environment. You
also need to have a clear understanding of your
business - its strenghts and weaknesses - and de-
velop a clear mission, goals an objectives. Ac-
quiring this understanding often involves more
work than expected. You must realistically as-
sess the business you are convinced you know well.
Familiarity can breed contempt for thorough analy-
sis; you cannot properly evaluate your firm's
strengths or shortcomings.

THE BUSINESS ENVIRONMENT
Strategic planning focuses largely on managing
interaction with environmental forces, which
include competitors, government, suppliers,
customers, various interest groups and other
factors that affect your business and its pro-
spects. Your ability as a small business owner-
manager to deal with these groups will vary
widely depending on the group and on the timing.
For example, you may enjoy greater influence
with your local government than with the federal
government. Also, you may be able to get more of
what you want from a supplier than from a compe-
titor (although size, distance, the percentage
of the supplier's business you represent and
your record of dependability as a customer can
affect this relationship). How you manage these
and other relationships is one of the decisions
you will make during the strategic planning pro-
cess.

Because of major changes in the business environ-
ment, your familiarity with strategic planning
and your ability to implement it is critical. At
one time, business owner-managers assessed the
environment on a continuum that ran between very
stable and very unstable. Businesses, such as the
producers of automobiles, furniture and other con-
sumer goods, operated in a relatively stable and
predictable world. This also was true of many ser-
vice firms, such as banks and savings and loans.
Typically, the environment included competition
that was limited to a stable group of competitors,
loyal customers and a relatively slow transfer of
information. Many small businesses could thrive in
this environment. Other small investors entered
fields such as xerography, computers and computer
component production, software design and chemical
research. Some of these grew rapidly, becoming
names with which we all are familiar: Xerox, IBM,
Apple and Microsoft. But many more failed.

Today, experts agree that more businesses face an
unstable business environment. Improvements in in-
formation processing and telecommunications have
made major changes in most industries. Along with
this, improvements in transportation and the grow-
th of foreign economies (specifically in Europe
and Asia) have created a global marketplace and
redefined certain industries. In addition, as con-
sumers are exposed to more choices, loyalty has
become less important than it once was; a slightly
better deal or a temporary shortage of stock can
easily result in the loss of customers. Competi-
tors also can change rapidly, with new ones appear-
ing from out of nowhere (often this means the other
side of the globe). With the instability of the
global market, it is important that you make stra-
tegic planning part of your overall business stra-
tegy.

PROACTIVE VERSUS REACTIVE MANAGEMENT
A few years ago, you could establish and maintain
a business by reacting to and meeting changes in
tastes, costs and prices. This reactive style of
management was often enough to keep the business
going. However, today changes happen fast and come
from many directions. By the time a reactive mana-
ger can make the necessary adjustments, he or she
may lose many customers -- possibly for good.
Proactive planning is the anticipation of future
events. Decisions are based on predictions of fu-
ture states of the environment as opposed to re-
actions to various crises as they occur. Proac-
tive planning in an unstable, technology-driven
business environment is critical to continuing
success in almost any endeavor. Rather than re-
acting to the situation as it changes, proactive
planning requires that you analyze environmental
forces and make resource-allocation decisions.
By doing this you will take your business where
it needs to be in the next month, year and dec-
ade. Barry Worth, a consultant speclalizing in
small business management, puts it this way:
Today's entrepreneur must be a business
architect. Anything built in today's
business environment must have a step-
by-step blueprint or plan on how to
achieve success (Worth December 1989).
The blueprint for today's business owner is a
business plan.

THE NEED FOR A STRATEGIC PLAN
Planning plays an important role in any business
venture. It can make the difference between the
success or failure of your business. You should
plan carefully before investing your time and,
especially, your money in any business venture.
The need for a plan is best illustrated by the
following scenario - "A Tale of Two Businesses."
Two franchises (A and B) were started by individ-
uals who had worked in management in much larger
companies. While Franchise A provided a product
and Franchise B a service, the output of both
franchise systems had been sold exclusively in
the United States before lhe current owners be-
came involved. The output of both was readily
available in other developed countries as well.
The franchises opened about the same time and
neither franchisee had a strong market presence,
nor do they at present. Today Franchise B is bank-
rupt. By contrast, Franchise A is selling products
in the midwestern United States and in Europe.
What was the deciding difference in the two fran-
chises' success? You probably expect it to be
that one had developed a strategic plan and the
other hadn't; however, it isn't this simple. Many
factors can influence the outcome of a business
venture. There were many similarities between the
franchises, but there also were many differences.
Most notably, Franchise A sold a product and Fran-
chise B a service (although this does not clearly
limit options). Another difference was that Fran-
chise A had a carefully thought-out plan. The in-
vestors knew as they looked for a franchise part-
ner that they wanted to find a product that could
satisfy international markets and a franchisor who
would support that kind of sales effort. These in-
vestors were based in thc Midwest, but negotiated
for exclusive rights to export lhc franchisor's
product. Once they had obtained the franchise, and
as they began to establish their business domestic-
ally, they also began to contact government experts
in the U.S. Department of Commerce and the U.S.
Small Business Administration, as well as educators
and local managers with international experience.
Clear plans were developed outlining how they would
position, market and distribute the product and
which foreign markets would be targeted first. Even
as they were building sales in one European market,
they were attending trade shows and planning entry
strategies in others.

By contrast, the second investor (Franchisc B)
started his business strictly because he wanted
to leave a former employer. Of course many small
businesses get started this way; however, in
this case no investigation of franchising alter-
natives was done. The business was located in an
area that, as it turned out, contained virtually
no consumers for the kind of service being offer-
ed. When this mistake was realized, it was too
late to move--the investor simply did not have
the money or the desire to risk starting again.
Other examples further show the need for strate-
gic planning and for developing a clear business
plan. The owner of a business that seemed to be
doing quite well in two locations was about to
open in a third. The authors were called in to
develop a benefits policy and discovered cash-
flow problems that could be found only after op-
erations had begun in the new location. After
analyzing the situation, an expansion and finan-
cial plan was developed for the sound locations
only. In another case, the authors determined
that a business had purchased more equipment than
was necessary to accomplish the current workload.
After careful analysis, plans to make further pur-
chases were put on hold, and the equipment avail-
able was used effectively to meet immediate needs.
A business enterprise is toog complex to assume
that failure to develop a sound business plan
will be the cause for problems Nevertheless,
this failure often counts among thc factors con-
tributing to busincss difficulties. As Worth has
said, "Being a business entrepreneur today takes
constant vigilance in order to be able to take
advantage of new opportunities and the availabil-
ity of new information and technology as they
come into being." The first step in doing this
is to have a plan.

DEVELOPING A STRATEGIC PLAN
Mission Statement
The first step in the strategic planning process
is an assessment of the market. Businesses depend
on consumers for their existence. If you are fac-
ing a rapidly growing consumer base, you probably
will plan differently than if your clientele is
stable or shrinking. If you are lucky enough to
be in a business where brand loyalty still pre-
vails, you may take risks that others cannot af-
ford to take. Before you begin to assess the mar-
ket, it is important that you complete a careful
assessment of your own business and its goals.
The outcome of this self-assessment process is
known as the mission statement. According to
Glueck and Jauch (1984, p 51), "The mission can
be seen as a link between performing some social
function and the more specific targets or objec-
tives of the organization." Another definition
states that the mission statement is a "term that
refers to identifying an organization's current
and future business. It is viewed as the primary
objective of the organization" (Rue and Byars
1983, p. 99).

Because these authors are writing for an audience
of managers or would-be managers of larger busi-
nesses, their definitions may sound a bit lofty.
If, however, you go back to the earlier example
of a successful small business, you can see it
started with a clear direction--what was to be
achieved and, in a broad sense, how best to a-
chieve it. While your own goal may be to survive,
make a profit, be your own boss or even be rich,
your business must first perform a social func-
tion, i.e., I must serve someone. Given this you
must determine (1) the ultimate purpose and (2)
the specific targets or objectives of your busi-
ness.

The investors of Franchise A discussed above
clearly had determined they wanted a business
with the potential for international sales.
With this objective they were able to deter-
mine the kind of franchise they wanted and
the terms. They knew that some goods and ser-
vices were more likely to be marketable over-
seas than others. Early research helped them
determine which areas of the world would be
the best places to start. This, in turn, help-
ed them to further narrow their list of poten-
tial products. Also, they were able to assess
the financial demands of various approaches
to overseas markets. Their financial analysis
enabled them to affirm that a franchise would
be one of the alternatives with a high profit
potential. All of these directions were derived
from an initially vague desire to "go interna-
tional." And, as the investors developed their
ideas into a clearly defined business purpose,
many issues were discovered that were critical
to success.

Defining Your Business
A primary concern in defining a mission state-
ment is addressing the question "What business
are you in?" Answering this may seem fairly
easy: however, it can be a complex task. Deter-
mining the nature of your business should not
be strictly tied to the specific product or ser-
vice you currently produce. Rather, it must be
tied to the result of your output--your social
function--and the competencies you have develop-
ed in producing that output.

Management theorist Peter Drucker suggests that
if the railroad companies of the early 1900s or
the wagonmakers of the 1800s had defined their
business purpose as that of developing a firm
position in the transportation business, rather
than limiting themselves strictly to the rail
or wagon business, they might still enjoy the
market positions they once did (Rue and Byars
1983, p. 101). The obvious concern here is to
ensure that you do not define your busincss too
narrowly, leaving yourself open to economic
changes or competitive challenges that make you
vulnerable. The primary reason the service com-
pany mentioned earlier (Franchise B) failed was
that it lacked a consumer base. These consumers
were already being served by the current market.
In another example, an entrepreneur developed a
device to provide greater security for homes and
vehicles. But, by focusing on the product rather
than the service it was meant to provide, he
failed to consider other services that already
provided essentially the same level of protec-
tion at lower costs.

Your Firm's Philosophy
Once you have defined your mission statement,
the next step is to define the firm's basic
philosophy. Such a statement will help explain
to your employees and associates how you would
like to see the firm operate. Are you a risk
taker, or would you prefer to build your busi-
ness slowly from a solid base? How will you
relate to customers, suppliers and competitors?
What type of community involvement do you plan
for your business, e.g., participation in recyc-
ling and volunteer activities? These questions,
and many more, need clear answers to help your
employees make operational decisions and conduct
themselves in a manner consistent with your
wishes. Much has been written about this concept
in business literature under the term corporate
culture. A clear explanation of your business's
philosophy in the mission statement will provide
a basis for the development of a consistent busi-
ness culture.

Your Firm's Goals
The next step is to set clear goals to guide and
maintain the business on a path consistent with
its mission. Daniel Robey provides an excellent
list of the key functions of business goals
(Robey 1982). To summarize his comments, goals
serve to
- 1. Justify or legitimize the organization's
activities.
- 2. Focus attention and set constraints for
member behavior.
- 3. Identify the nature of the organization
and elicit commitment.
- 4. Reduce uncertainty by clarifying what
the organization is pursuing.
- 5. Help an organization to learn and adapt
by showing discrepancies between goals
and actual progress (providing feedback).
- 6. Serve as a standard of assessment for
organization members.
- 7. Provide a rationale for organization de-
sign.

At one time, it was widely assumed that the
owner of a company set that firm's goals.
Glueck and Jauch refer to this as a "trickle-
down" theory because it was assumed that others
in the organization simply accepted these goals.
Chester Barnard, believing that it was naive to
assume such ready acceptance, suggested that or-
ganizational objectives arose from a consensus
of the employees (Gleuck and Jauch, pp. 78-79).
This "trickle-up" theory, however, is also naive
in assuming that an organization is simply the
sum of individual perspectives, and that it can
achieve direction from an unguided and usually
disparate group of people. Modern theories spring
from combinations of these two approaches, suggest-
ing goal development is a complex goal-bargaining
process that enjoys some advantages of both basic
theories.

Bargaining, while seeming a rather negative and
poorly developed goal-setting approach, has the
advantage of involving most, if not all, employ-
ees in the process. As a result, it is more
likely that key concerns, internal as well as
external, will be taken into account. By involv-
ing employees, you improve their understanding
of and commitment to the firm.
Pierce and Robinson captured the complexity of
goal setting in this statement:
Strategic choice is the simultaneous selection
of long-range objectives and grand strategy....
When strategic planners study their opportuni-
ties, they try to determine which are most
likely to result in achieving various long-
range objectives. Almost simultaneously, they
try to forecast whether an available grand
strategy can take advantage of preferred op-
portunities so that the tentative objectives
can be met. In essence then, three distinct
but highly interdependent choices are being
made at one time. Usually several triads or
sets of possible decisions are considered
(Pierce and Robinson 1985, p. 231).

To improve the structure of this strategic ap-
proach, most experts suggest that a repetitive
method be used in developing goals. This begins
with the owner and perhaps a few key employees
agreeing on a long-term direction for the busi-
ness and suggesting major goals in line with
this direction. Then, other employees are asked
to suggest specific objectives, which are then
reviewed before being implemented. Goals become
the shared purposes of the owner and employees
and thus, it is much easier to get the support
of employees and their clear understanding of
what needs to be accomplished.

Goals are defined as broad, ideal conditions. A
possible goal could be "To become the leading
small-package delivery service in the Kansas City
metropolitan area." In defining goals it is impor-
tant to understand (1) how the goal was derived
and (2) how it provides guidance.
Objectives to Achieve Goals
Accomplishing a goal requires establishing and
achieving several specific objectives, which must
- Be clear, concise and attainable.
- Be measurable.
- Have a target date for completion.
- Include responsibility for taking action.
- Be arranged according to priority.

An objective to the above-stated goal could re-
quire that the dispatcher develop a route struc-
ture capable of providing three-hour service to
any area within 20 miles of the city's center,
with the service beginning within six months.
An objective has to fit within a hierarchical
network of other objectives that together con-
tribute to the firm's ultimate goals and mis-
sion. For example, a subsidiary objective to
the one mentioned above may be "To purchase
three new or late-model used delivery vans
within five months." Another objective could
specify expanding staff to drive the addition-
al vehicles and to handle the expected increase
in dispatching chores. This system of setting
priorities is called a hierarchy of objectives.
Anthony Raia provides a list of guidelines to
help you avoid pitfalls in setting objectives
(Rue and Byars, p. 107). Some of the most im-
portant include
- Adapt your objectives directly to organiza-
tional goals and strategic plans. Do not as-
sume that they support higher level manage-
ment objectives.
- Quantify and target the results whenever
possible. Do not formulate objectives where
attainment cannot be measured or at least
verified.
- Test your objectives for challenge and achiev-
ability. Do not build in cushions to hedge
against accountability for results.
- Adjust the objectives to the available re-
sources and the realities of organizational
life. Do not keep your head either in the
clouds or in the sand.
- Establish performance reports and milestones
that measure progress toward the objective. Do
not rely on instinct or crude benchmarks to ap-
praise perfonnance.
- Put your objectives in writing and express them
in clear, concise and unambiguous statements.
Do not allow them to remain in loose or vague
terms.
- Limit the number of statements of objectives
to the key result areas (for your business).
Do not obscure priorities by slating too many
objectives.
- Review your statements with others to assure
consistency and mutual support. Do not fall
into the trap of setting your objectives in a
vacuum.
- Modify your statements to meet changing condi-
tions and priorities.
- Do not continue to pursue objectives that have
become obsolete.

The formulation of a mission, goals and objectives
is a complex, repetitive and continual process. As
a small business owner-manager, your first reaction
may be that you don't have the time or the re-
sources to accomplish this. This may be true; how-
ever, you must develop a process that you can im-
plement and be comfortable with. You will need to
be aware of this process, the relationship of goals
to ultimate performance and the need to be specific
and consistent. A carefully thought-out set of
goals provides the base on which the rest of stra-
tegic planning will proceed. The time you put into
carefully assessing what you hope to achieve and
how you will measure it will reduce the time re-
quired to assess and control performance.

Environmental and Industry Analysis
In determining appropriate goals, you will need to
consider the position of your business within its
industry and the broader business environment.
Several trends may affect your business prospects.
Examples may include shifts in population (e.g.,
the purchasing status of "baby boomers"), trends
in the economy, technological developments, legis-
lation (e.g., safety or antipollution regulation)
and the activities of special interest groups. As
you clarify your mission and goals, you will find
that some factors are important while others may
not require your attention.

There are several approaches to dealing with fluc-
tuation and change in your business environment.
James Thompson presents a list of general strate-
gies that provides a good "first cut" at the com-
plicated process of making strategic choices re-
lated to the business environment (Miner 1982,
p. 147). He argues that most organizations search
for certainty in an uncertain, fluctuating environ-
ment. Depending on the business' resources and the
specific situation, a business may adopt one of
four approaches to the business environment.
Buffering can be used when you have an abundance
of resources, sometimes referred to as organiza-
tional slack. However, this is a luxury few ef-
ficiently run businesses enjoy. If, for example,
you possess a technological edge, you may be able
to relax your vigilance in the confidence that
you have the resources to adapt to changes that
may occur. You are then able to concentrate on
other environmental factors that may affect areas
of your business in which you don't have such an
advantage.

Smoothing is a useful approach when you enjoy sur-
plus resources in one area but your ability to
meet demand is overtaxed in others. A good example
is a chimney cleaning service that was unable to
meet demands for chimney repair and service during
the winter months, but had to lay off employees
during the spring and summer months. In an attempt
to change the environment, the owner developed ad-
vertising and pricing strategies aimed at attract-
ing more business during slow times. In addition
the owner assessed the skills of his employees. He
found that by doing general masonry jobs in slow
times, he could retain workers while actually in-
creasing the size of his business. This example
also provides a clear illustration of how a small
business can manage, and even change, its environ-
ment.

Forecasting is something, that all businesses must
do. When you don't have the resources to use a buf-
fering strategy or when conditions make smoothing
impossible, you must anticipate environmental
changes. The immediate need of most businesses is
to monitor the competition. Other events that you
can anticipate with an effective forecasting system
include
- Technological breakthroughs.
- New competitors (either a company "purchases
in to" your industry or a new competitor en-
ters from an overseas market).
- Changes in the cost and availability of raw
materials.
- Changes in consumer taste.
Effective forecasting is possible only when prob-
abilities can be predicted; for example, you have
a pretty good idea of what the odds are that short-
ages will occur in a raw material, or what the
chances are that a law will pass providing new
sources of assistance to small businesses. Unfor-
tunately, many trends and changes are very diffi-
cult, if not impossible, to anticipate, even with
the best forecasting system.

As a result you may find that you must resort to
Thompson's fourth approach - rationing. An unanti-
cipated technological breakthrough or a sudden
change in the spending habits of your customers
may force you to reallocate resources. In this
situation, goals may need to be delayed or fore-
gone altogether, and parts of your business may
need to be reduced. All needs of the business will
not be completely met, but you will move to a base
from which you will have the best chance to re-
cover. With time you will rebuild to compensate
for any losses incurred.

Information Needs
The most important consideration in developing an
effective approach to forecasting and planning is
the development of your information system. In the
world of personal computers, you may equate infor-
mation systems with microchips and programming,
but the concept as used here is much broader, re-
ferring to the way you gather, screen, analyze and
use information that may affect your business. This
publication is part of your information system. You
are using it to inform yourself of modern approach-
es to managing, improving and possibly enlarging
your business.

Too many businesses still have information systems
that might be described as "shoebox" systems. In-
formation about the business and its environment
are collected in various documents that are stored
in shoeboxes, or it is picked up through contacts
between the owner and customers. The owner "analy-
zes" this information and the results are used to
make further decisions.

The problems with this system are obvious. First,
no effort has been made to determine what critical
elements--internal or external to the business--
should be assessed. Second, assessment is based en-
tirely on what strikes the owner as memorable or
important. Unfortunately, what is remembered is not
necessarily what is important. Memory is influenced
by preconceptions and perceptions, and by how busy,
tired or distracted the owner was at the time an
event occurred. An additional problem with this in-
formal approach is that, should the owner want to
verify his or her impressions of some series of
events, it would be time consuming--if not impossi-
ble--to locate the records that would allow a full
analysis. While "seat-of-the-pants" decision making
based on this type of information system sometimes
works remarkably well, much is left to chance.
Setting up an effective information system is inte-
grally related to your mission and goals and to the
specific environmental factors defined in your stra-
tegic purpose. Collect enough information, but
don't collect too much-- this leads to information
overload, where decision makers are so swamped they
become incapable of making sense of the informa-
tion, or of using it to make good decisions.

Developing a good system is a dynamic process. It
is easy to determine what information you need to
collect and how to obtain it. However, as the en-
vironment and your situation change, the informa-
tion you need also changes. Items that were once
important now are not. Other considerations, im-
possible to anticipate at the time you developed
your system, have become critical.

Employees should be involved in determining what
information is needed and where to obtain it. They
are often the first line for data collection. They
can provide insights and perspectives that you may
not have considered. Together, you will be able to
develop a reasonably thorough list of concerns
that the information system should address.

In any information system, a variety of sources
should always be used. You already collect much
information in the documents you use to conduct
everyday business. Other sources may include peri-
odicals (particularly those published specifically
for your industry), newspapers (or clipping ser-
vices), books and experts in areas of concern.
Once you have collected the data, you will need to
condense and analyze it. This is the information
reporting system. You already produce reports for
various government agencies and banks, which are
nothing more than a presentation of the data you
collect in a way that is useful to the particular
agency. A good information system will provide in-
formation to employees in your business in a form
that they need to make effective decisions and
carry out their jobs. It will provide enough infor-
mation, but not more than is necessary and useful.
As the type of data collected changes over time,
so will the reports needed. As a result, report re-
quirements must be periodically reassessed so time
is not spent producing useless reports.

Finally, information should be stored for easy re-
trieval to accommodate new situations that may re-
quire different analyses. In data processing, this
system of storage is referred to as the company's
data base. Whether you rely on an electronic or a
manual system, storing information so it is easily
retrievable requires considerable forethought.
Much of the business software available today
focuses on storing data in ways that allow it to
be retrieved in many different forms and later com-
bined for analyses that were not originally anti-
cipatcd or nccessary.

Internal Business Analysis
Once you've begun to collect the necessary informa-
tion about your external environment, you will be
able to consider how to best fit your business in-
to the situations that surface. To do this you must
clearly understand the strengths and weaknesses of
your firm. For a long time, people assumed that
small businesses were always at a disadvantage be-
cause they were small. Today, there are few com-
mercial areas that don't have room for smaller com-
petitors if they are focused and efficient.

The primary task in the business analysis phase is
to identify those factors that may give you a com-
petitive advantage. If you hold a patent or an ex-
clusive license on a particular product or service,
you may enjoy a competitive advantage. Flexibility
is a major advantage that small businesses often
enjoy over larger rivals. You may be able to re-
spond more quickly and with less cost to mood
swings or taste changes in the market. Also, small
businesses can often move into new product or ser-
vice lines more quickly than larger firms.

The nature of the technology used to make your
product may often yield competitive advantages.
If you employ individuals skilled in areas unique
to your business, their skills will often yield
cost advantages that may offset disadvantages in
other areas. For example, your competitor may be
further ahead in using computer-aided scheduling,
but you are able to rely on specialists in your
own firm and can market your product as a unique
value while you move to minimize the technologi-
cal differential. Once you are clear about the
areas in which you are ahead, assess your weak-
nesses. Having done this, you can develop a stra-
tegy that has the best chance of succeeding. In-
stead of simply trying to compete for customers
on a single dimension, such as price, or to catch
up in one area of technology, you are now able to
consider alternatives derived from a combination
of factors. You may, for example, see that a tra-
ditional competitor has an apparently insurmount-
able cost advantage from adopting a technology
that yielded unforeseen benefits. An effort to
compete strictly on thc basis of price while at-
tempting to catch up technologically is probably
doomed to failure. On the other hand, a move into
other product lines that take advantage of the
skills used by your firm may give you a better
chance for survival. Eventually, this strategy
may give you the time needed to acquire the tech-
nology to compete in your original product area.

Finalizing a Plan
When you have a clear grasp of the competitors,
customers, suppliers and situations you face,
and you combine this with a realistic understand-
ing of your own strengths and weaknesses, you can
develop a strategic plan with a strong chance of
success. You may decide that you have the strengths
to compete with other businesses "head-to-head" in
their best markets. You may choose to target a mar-
ket that has not been touched by your competitors.
You may see opportunities to influence local or
state legislation in a way favorable to your needs.
Or you may realize that you are constrained by a
combination of circumstances that severely restrict
your opportunities and leave you only limited
chances for success. You should, however, under any
of these scenarios, be able to make better choices.
Before you develop a detailed plan to implement,
attempt to identify several possible alternative
approaches. Frequently, when an individual or or-
ganization faces a problem or opportunity, solu-
tions will appear to "pop up." You've faced simi-
lar situations before, you have a "gut feeling
that the way to solve the problem is to.... "
While your first idea may, in fact, work, the odds
are it won't be as effective as other possibili-
ties. The reason that this obvious choice may not
be the best option is that it is usually based on
experiences that, while appearing similar, are
actually very different. You may struggle a bit to
identify other possible approaches. No alternative
will be perfect. But once you have considered
several and listed the advantages, disadvantages
and overall chances of success for each alterna-
tive, you will be in a better position to settle
on a plan with greater potential.

THE BUSINESS PLAN
The business plan is a succinct document that
specifies the components of a strategy with re-
gard to the business mission, external and in-
ternal environments and problems identified in
earlier analyses. A business plan is not writ-
ten each time a modification to a strategy is
made. It should be written when you develop a
new venture or launch a major new initiative.
The business plan serves several important pur-
poses:
- It helps determine the viability of the
venture in a designated market.
- It provides guidance to the entrepreneur
in organizing his or her planning activi-
ties.
- It serves as an important tool in helping
to obtain financing
(Hisrich and Peters 1989, p. 126).
A well-written business plan also will pro-
vide broad parameters upon which progress
toward goals can be assessed and control de-
cisions made at a later time.
A typical business plan begins with a brief
introduction followed by an executive summary.
The executive summary is prepared after the
total plan has been written. Its purpose is
to communicate the plan in a convincing way
to important audiences, such as potential in-
vestors, so they will read further.

An industry analysis usually follows the execu-
tive summary. This section communicates key in-
formation--thc collection of which was discussed
earlier--that puts the venture or plan into the
proper context.

The marketing plan is the first step in develop-
ing any new strategy. It is developed within the
context of the company's goals and should be
based on a realistic assessment of the external
environment, as discussed earlier. The marketing
plan is written first because marketing decisions
typically determine resource needs in other areas.
Obviously, a decision to seek a large share of a
market will require a significant commitment of
resources of various kinds. How you choose to pro-
mote and distribute your product or service will
have clear ramifications for your organizational,
production, human resource and financial plans.
The organizational plan details how your business
is to be configured to most effectively support
the marketing objectives. What kinds of skills are
needed to carry out your plan? What sorts of
skills do you have among managers and employees?
What tasks will be done by which employees? What
tasks will be contracted out? Many businesses, for
example, hire the services of an advertising firm
to improve their product promotions but handle
their customer relations internally. Roles and re-
sponsibilities of each employee need to be clearly
specified, as discussed in the section on goal set-
ting.

Develop the production plan and human resources
plan along with the organizational plan. Again,
you must decide whether or not you will handle
all production internally or contract all or part
of it to other firms. What equipment will you
need to meet the marketing plan? What will be
the costs of manufacturing the product? What will
be the future capital needs of the enterprise?
Human resource needs are clearly affected by de-
cisions made in production planning. What human
resources do you have? Will they be adequate to
handle new or changed plans? What additional
skills are needed? Will you seek employees who
are already trained, or will you hire less
skilled individuals and train them? If the lat-
ter, what resources will be needed for training,
and how long will it take to obtain the desired
levels of productivity?

The financial plan underpins this entire system
of plans. Three financial areas are generally
discussed (Hisrich and Peters, pp 126-7). First,
forecasted sales and related expenses need to be
summarized. Monthly figures generally need to be
estimated for a period exceeding one year, al-
though the appropriate period will vary depend-
ing on the nature of the product and the stabil-
ity of the market. Second, cash flow figures need
to be estimated over the same period. A business
needs to pay its bills in a timely fashion; many
successful ventures end when suppliers refuse to
extend additional credit to a business that hasn't
paid its bills. Finally, a projected balance sheet
that shows the financial condition of your busi-
ness at a specific time needs to be prepared.
Usually an appendix is included in a business
plan. This generally contains supporting infor-
mation, documents and details that would inter-
fere with clear communiution in the body of the
plan. Examples of this type of information in-
clude price lists, economic forecasts, demo-
graphic data and market analyses.

IMPLEMENTING THE STRATEGY
Implementation is usually thought of as something
you do at the end of the strategic planning pro-
cess. "Okay, now we have this strategic plan; let's
do it." If you think about what has been discussed
in this publication, it becomes apparent that you
will be considering the practical problems of im-
plementation throughout the planning process. Fre-
quently, a suggested alternative will be rejected
because it would be difficult to implement. Or a
preferred approach to marketing or production
would be beyond the financial means of you or your
investors.

The two primary issues that need to be considered
in the final implementation process are communica-
tion and scheduling. Successfully implementing a
plan depends on effective communication. Employee
resistance often can be reduced, if not elimina-
ted, if plans are openly presented and concerns
are dealt with up front. In addition, to carry
out new policies and procedures effectively, em-
ployees need to have a clear understanding of
what is happening and what is expected of them.
Better informed employees are more likely to do
as you instruct them, thereby reducing the need
for complex and costly control systems.

One key element in effective communication is
involving your employees--those who must carry
out the plan--as much as possible in the actual
planning process. People who are involved in
planning will have a solid grasp of the plan
and their part in it when it is implemented.
If employees are genuinely involved in the pro-
cess, they are more likely to accept the result
as a plan they helped develop. This result is
often referred to as "ownership."

Successful implementation also depends on a
realistic schedule for the transition. It is
too easy to assume away the difficulties of
a major change and to anticipate that every-
thing will be on track and running smoothly.
How many times have you seen a news report
about schedule and cost overruns on a govern-
ment project? This kind of error can be disas-
trous if you are working within tight margins
that can be quickly eradicated when costs and
sales don't reach expectations on time. Real-
istic schedules require that you factor in
training time, periods of low productivity,
increased error rates and slowdowns as you
correct organizational oversights. Schedules
also should include planned checkpoints for
carefully assessing progress toward full im-
plementation.

Every business needs to develop systems for
measuring and controlling progress toward stra-
tegic goals; no matter how loyal your employees
or how strong the camaraderie, individual and
organizational goals are not always the same.
Three features distinguish effective control
systems from ineffective systems.
- Standards--These are your specific operative
goals. The need to carefully set clear and
measurable goals was emphasized earlier. (The
processes of planning and controlling are most
closely related for this reason.) Cautiously
interpret how well your business performs rel-
ative to your goals. It is too easy to assume
that, if you are not meeting your goals, the
business simply is falling short. You also
must reassess your original goals. Are the
goals reasonable? Is it possible that you
overestimated the firm's capabilities? Has
something changed in the environment--a new
law, a new competitor, an economic downturn-
that has completely changed the playing
field? If, for whatever reason, your goals
are now too high, your employees, if forced
to continue to pursue them, will bccome ex-
asperated rather than motivated.
- Measurement-control systems must include quan-
tifiable measures for monitoring performance.
The lack of effective measurement systems is
where control systems often fail. If you can
set performance standards for profits and
units produced, if you can tie standards di-
rectly to the goals of the plan, then build-
ing an effective measurement system is less
difficult. Unfortunately, there are many tasks,
particularly in management, that are difficult
to assess. The output of these tasks, while
critical to the overall success of the plan,
is not usually measurable in clear units. Pay-
offs often only come after a long interval.
- Corrective measures-corrective actions must be
carefully directed at the cause of discrepan-
cies between planned and actual results, and
the cause of problems is often very difficult
to identify. It is fairly easy, for example,
to blame an individual worker for goal fail-
ures. However, in complex business systems,
where labor and sophisticated technology inter-
act, production systems require careful coordi-
nation by managers who must deal with vast
amounts of information. In the modern business
world, it is becoming harder to identify the
source of problems with one agent.
In setting up an effective control system, you
need to make five key design decisions:
- Will you use behavior or output controls? As
noted earlier, output controls are easier to
develop if they can be directly related to
the goal. Unfortunately, for many jobs, out-
put controls don't make sense because of the
indirect link between day-to-day work and
long-term output.
- Do you have adequate means of measuring pro-
gress? Frequently, it is wise to use multiple
measures of job and organization performance.
Too many standards, however, can become cum-
bersome and costly.
- Have you properly focused your controls? As
noted earlier, interdependencies between
various tasks, technologies and phases of the
production system can be quite significant.
If your target of control is too narrow (e.g.,
"The guy just isn't willing to make a reason-
able effort."), you may be missing a more com-
plex situation and find that your remedies
don't really work.
- Have you determined proper intervals between
assessments? You need to find a happy medium
in this area. It might seem ideal to continu-
ally monitor fulfillment of the plan--and in-
formation technologies do, in fact, enable
you to do this in some situations. The cost
of frequent measurements can, nevertheless,
become prohibitive.
- Should you reward or punish to correct dis-
crepancies? Both of these usually are used. How-
ever, overuse of punishment can lead to negative
feelings and, eventually, failure to meet goals.
Additionally, negative controls--punishment sys-
tems--require much more time to administer. This
is because you constantly need to watch for de-
viations from desired behaviors if you are to
catch and effectively punish offenders. A reward
system, on the other hand, links appropriate
actions to rewards, increasing the likelihood
that you will observe positive contributions
without the need for careful or frequent moni-
toring of day-to-day activities.

As you can see, control, like implementation, can-
not be treated as an afterthought if you are to be
successful in whatever strategy you choose. The
standards are determined early in the strategic
planning process as you set clear operative goals.
Effective measurement and correction systems are
crucial if you hope to encourage consistent per-
formance that will lead to the realization of your
strategic goals.

SUMMARY
Strategic planning has become more important to
business managers because technology and competi-
tion have made the business environment less
stable and less predictable. If you are to sur-
vive and prosper, you should take the time to
identify the niches in which you are most likely
to succeed and to identify the resource demands
that must be met. In larger businesses the steps
outlined in this publication may be carried out
by teams of experts or may involve the interplay
of ideas among hundreds, even thousands, of mana-
gers. These guidelines are equally applicable to
the entrepreneur sitting down with several key
employees to discuss what can be achieved in the
next two to three years, and what it will cost.
The amount of time spent on each step and the
resources devoted to this process will vary
greatly from business to business, but it is
vital to understand and employ these steps. The
questions in Appendix A will help you recall the
steps involved in developing a strategic plan.

REFERENCES
Glueck, William, and Lawrence Jauch. Business
Policy and Strategic Management. New York:
McGraw-Hill, 1984.
Hisrich, Robert D., and Michael P. Peters.
Entrepreneurship: Starting, Developing, and
Managing a New Enterprise. Homewood, IL:
BPI/Irwin, 1989.
Miner, John B. Theories of Organizational
Structure and Process. Chicago, IL: Dryden,
1982.
Pierce, John A., and Richard B. Robinson, Jr.
Strategic Management: Strategy Formulation
and Implementation. Homewood, IL: Richard D.
Irwin, 1985.
Robey, Daniel. Designing Organizations: A
Macro Perspective. Homewood, IL: Richard D.
Irwin, 1982.
Rue, Leslie, and Lloyd L. Byars. Management:
Theory and Application. Homewood, IL: Richard
D. Irwin, 1983.
Worth, Barry. "Being an Entrepreneur in Today's
Sophisticated Environment," St. Louis Business
Journal (Dec. 25-31, 1989):5A.

APPENDIX A: SELF-ASSESSMENT QUESTIONNAIRE
--- Have you developed a clear sense of direction
or mission?
--- Have you clearly defined the nature of your
business?
--- Do you have a clear philosophy for conducting
your business affairs?
--- Are your business goals obtainable?
--- Are your objectives logically related in a
hierarchy that will lead to goal achievement?
--- Are your objectives clear, measurable and
tied to goal achievement?
--- Do you periodically reevaluate your ob-
jectives to be sure they have not grown
obsolete?
--- Have you developed a logical and planned ap-
proach for collecting data on your environ-
ment?
--- Are data stored or filed in ways that allow
easy retrieval of useful information?
--- Are reports produced that are seldom or never
used?
--- Do you periodically review your information
system to make certain it is useful and up-
to-date?
--- Can you list four or five key strengths of
your business?
--- Are you aware of key weaknesses in your
business?
--- In developing your final strategy, did you
consider three or four possible alternatives?
--- Are you involving your employees in planning
decisions?
--- Did you take time to communicate the final
plan to employees and deal with their con-
cerns?
--- Is your timetable for implementation of the
plan realistic?
--- Have you scheduled definite checkpoints for
assessing progress toward goals?
--- Have you developed effective ways of measuring
progress?

APPENDIX B: HOW TO WRITE A BUSINESS PLAN
The following pages provide a suggested outline of
the material that should be included in your busi-
ness plan. Your final plan may vary according to
your needs or because of the individual require-
ments of your lender.

What Are the Benefits?
Every business can benefit from the preparation of
a carefully written plan. There are two main pur-
poses for writing that plan:
- 1. To serve as a guide during the lifetime of
the business. It is the blueprint of your
business and will provide you with the
tools for analysis and change.
- 2. A business plan is a requirement if you are
planning to seek a loan. It will provide
potential lenders with detailed information
on all aspects of your company's past and
current operations and provide future pro-
jections.

Business Plan Outline
I. Cover sheet
Serves as the title page of your business
plan. It should contain the following:
- Name of the company
- Company address
- Company phone number (include area code)
- Logo (if you have one)
- Names, titles, addresses, phone numbers
(include area code) of owners
- Month and year your plan was issued
- Name of preparer
II. Statement of purpose (Same as executive
summary.) This is the thesis statement
and includes business plan objectives.
Use the key words (who, what, where,
when, why, how, and how much) to briefly
tell about the following:
- What your company is (also who, what,
where and when).
- What your objectives are.
- If you need a loan, why you need it.
- How much you need.
- Why you will be successful.
- How and when you plan to repay your loan.
III. Table of contents
A page listing the major topics and
references.
IV. The business
Covers the details of your business. In-
clude inforrnation about your industry
in general, and your business in partic-
ular. Address the following:
- Legal structure--Tell what legal struc-
ture you have chosen and state reasons
for your choice.
- Description of the business--Detail your
business. Tell about your history, present
status and future projections. Outline
your product or service in terms of market-
ability. Project a sense of what you expect
to accomplish in the next few years.
- Products or services--give a detailed de-
scription of your products from raw ma-
terials to finished items. Tell about your
manufacturing process. If you provide a
service, tell what it is, how it is pro-
vided and why it is unique. List future
products or services you plan to provide.
- Location--Describe site and why it was
chosen. (If location is important to your
marketing plan, focus on this in the mar-
keting section below.)
- Management--Describe who is behind the
business. For each owner, tell about re-
sponsibilities and abilities. Support with
resumes.
- Personnel--Who will be doing the work, why
are they qualified, what is their wage,
what are their responsibilities?
- Methods of record keeping--What accounting
system will you use? Who will do your
record keeping? Do you have a plan to help
you use your records in analyzing your
business?
- Insurance--What kinds of insurance will
you need? What will these cost and who
will you use for a carrier?
- Security--Address security in terms of in-
ventory control and theft of information.
V. Marketing
Covers the details of your marketing plan.
Include information about the total market
with emphasis on your target market. Iden-
tify your customers and tell about the
means to make your product or service
available to them.
- Target market--Identify characteristics of
your customers. Tell how you arrived at
your results. Back up information with demo-
graphics, questionnaires and surveys. Pro-
ject size of your market.
- Competition--Evaluate indirect and direct
competition. Show how you can compete. Eval-
uate competition in terms of location, mar-
ket and business history.
- Methods of distribution--Tell about the man-
ner in which products and services will be
made available to the customer. Back up de-
cisions with statistical reports, rate
sheets, etc.
- Advertising--How will your advertising be
tailored to your target market? Include rate
sheets, promotional material and time lines
for your advertising campaign.
- Pricing--Pricing will be determined as a re-
sult of market research and costing your
product or service. Tell how you arrived at
your pricing structure and back it up with
materials from your research.
- Product design--Answer key questions regard-
ing product design and packaging. Include
graphics and proprietary rights information.
- Timing of market entry--Tell when you plan to
enter the market and how you arrived at your
decision.
- Location--If your choice of location is re-
lated to target market, cover it in this
section of your business plan. (See location
in the business section of this outline.)
- Industry trends--give current trends, pro-
ject how the market may change and what
you plan to do to keep up.
VI. Financial documents
These are the records used to show past, cur-
rent and projected finances. The following are
the major documents you will want to include
in your business plan. The work is easier if
these are done in the order presented.
- Summary of financial needs--This is an out-
line indicating why you are applying for a
loan and how much you need.
- Sources and uses of funds statement--It will
be necessary for you to tell how you intend
to disperse the loan funds. Back up your
statement with supporting data.
- Cashflow statement (budget)--This document
projects what your business plan means in
terms of dollars. It shows cash inflow and
outflow over a period of time and is used
for internal planning. Cash flow statements
show both how much and when cash must flow
in and out of your business.
- Three-year income projection--A pro forma
income statement showing your projections
for your company for the next three years.
Use the pro forma cash flow statement for
the first year's figures and project the
next according to economic and industry
trends.
- Break-even analysis--The break-even point
is when a company's expenses exactly match
the sales or service volume. It can be ex-
pressed in total dollars or revenue exactly
offset by total expenses or total units of
production (cost of which exactly equals
the income derived by their sales). This
analysis can be done either mathematically
or graphically.
NOTE: The following are actual performance state-
ments reflecting the activity of your busi-
ness in the past. If you are a new business
owner, your financial section will end here
and you will add a personal financial his-
tory. If you are an established business,
you will include the actual performance
statements that follow.
- Balance sheet--Shows the condition of the
business as of a fixed date. It is a pic-
ture of your firm's financial condition at
a particular moment and will show you
whether your financial position is strong
or weak. It is usually done at the close
of an accounting period, and contains as-
sets, liabilities and net worth.
- Income (profit and loss) statement--Shows
your business financial activity over a
period of time (monthly, annually). It is
a moving picture showing what has happened
in your business and is an excellent tool
for assessing your business. Your ledger
is closed and balanced and the revenue and
expense totals transferred to this statement.
- Business financial history--This is a sum-
mary of financial information about your
company from its start to the present. The
business financial history and loan appli-
cation are usually the same. If you have
completed the rest of the financial sec-
tion, you should be able to transfer all
the needed information to this doeument.
VII. Supporting documents
These are the records that back up the
statements and decisions made in the three
main parts of your business plan. Those
most commonly included are as follows:
- Personal resumes--should be limited to one
page and include work history, educational
background, professional affiliations and
honors and special skills.
- Personal financial statement--A statement
of personal assets and liabilities. For a
new business owner, this will be part of
your financial section.
- Credit reports--Business and personal from
suppliers or wholesalers, credit bureaus
and banks.
- Copies of leases--All agreements currently
in force between your company and a leasing
agency.
- Letters of reference--letters recommending
you as being a reputable and reliable busi-
nessperson worthy of being considered a
good risk. (Include both business and per-
sonal references.)
- Contracts--Include all business contracts,
both completed and currently in force.
- Legal documents--All legal papers pertain-
ing to your legal structure, proprietary
rights, insurance, titles, etc.
- Miscellaneous documents--All other docu-
ments that have been referred to, but are
not included in the main body of the plan
(e.g., location plans, demographies, adver-
tising plan, etc.).
Putting Your Plan Together
When you are finished: Your business plan should
look professional, but the lender needs to know
that it was done by you. A business plan will be
the best indicator he or she has to judge your
potential for success. It should be no more than
30 to 40 pages long. Include only the supporting
documents that will be of immediate interest to
your potential lender. Keep the others in your
own copy where they will be available on short
notice. Have copies of your plan bound at your
local print shop, or with a blue, black or brown
cover purchased from the stationery store. Make
copies for yourself and each lender you wish to
approach. Do not give out too many copies at
once, and keep track of each copy. If your loan
is refused, be sure to retrieve your business
plan. For a more detailed explanation of each
section of the business plan outline, see SBA's
publication, How To Write a Business Plan, which
includes step-by-step directions and sample sec-
tions of actual business plans. Also available
from the SBA is a VHS videotape and workbook,
"The Business Plan: Your Roadmap for Success."

You can use this article in your blog or website given that you include this link - http://smlbusiness.blogspot.com

Human Resource Management

2008-05-21T06:09:00.000-07:00

INTRODUCTION

All small businesses must staff their opera-
tions. This involves bringing new people into
the business and making sure they are produc-
tive additions to the enterprise. Effective
human resource management matches and develops
the abilities of job candidates and employees
with the needs of the firm. A responsive per-
sonnel system will assist you in this process
and is a key ingredient for growth.

Human resource management is a balancing act.
At one extreme, you hire only qualified people
who are well suited to the firm's needs. At
the other extreme, you train and develop employ-
ees to meet the firm's needs. Most expanding
small businesses fall between the two extremes-
i.e., they hire the best people they can find
and afford, and they also recognize the need
to train and develop both current and new em-
ployees as the firm grows.

The first section of this article explains
how to hire and train the right people and ad-
dresses the characteristics of an effective per-
sonnel system, such as
- Assessing personnel needs.
- Recruiting personnel.
- Screening personnel.
- Selecting and hiring personnel.
- Orienting new employees to the business.
- Deciding compensation issues.

The second section of this article addresses
the training and development side of human re-
source management. The third section discusses
how the personnel system and the training and de-
velopment functions come together to build employ-
ee trust and productivity. These three sections
stress the importance of a good human resource
management climate and provide specific guidelines
for creating such a climate. The appendixes include
a self-assessment questionnaire to assist you in
evaluating the effectiveness of your personnel sys-
tem and a list of general information resources.

DEVELOPING A RESPONSIVE PERSONNEL SYSTEM

Assessing Personnel Needs
The small business owner should base the firm's
personnel policies on explicit, well-proven prin-
ciples. Small businesses that follow these prin-
ciples have higher performance and growth rates
than those that do not follow them. The most im-
portant of these principles are
- All positions should be filled with people
who are both willing and able to do the job.
- The more accurate and realistic the specifi-
cations of and skill requirements for each
job, the more likely it is that workers
will be matched to the right job and, there-
fore, be more competent in that job.
- A written job description and definition are
the keys to communicating job expectations
to people. Do the best job you can! is ter-
rible job guidance.
- Employees chosen on the basis of the best
person available are more effective than
those chosen on the basis of friendship or
expediency.
- If specific job expectations are clearly
spelled out, and if performance appraisals
are based on these expectations,
performance is higher. Also, employee train-
ing results in higher performance if it is
based on measurable learning objectives.

The first step in assessing personnel needs for
the small business is to conduct an audit of fu-
ture personnel needs. Ask yourself
- Can the workload you visualize be accomplished
by the present work force? Will more or fewer
employees be needed? Consider seasonal patterns
of demand and probable turnover rates.
- Can any jobs be eliminated to free people for
other work?
- What balance of full-time or part-time, tempo-
rary or permanent, hourly or salaried personnel
do you need?
- What does the labor supply look like in the
future?
- Will you be able to fill some of the jobs
you've identified? How easily?
- What qualifications are needed in your
personnel?

Develop a method to forecast labor demand based
on your answers to these questions. Once your
needs are estimated, determine strategies to
meet them.

The process of selecting a competent person for
each position is best accomplished through a
systematic definition of the requirements for
each job, including the skills, knowledge and
other qualifications that employees must pos-
sess to perform each task. To guarantee that
personnel needs are adequately specified,
(1) conduct a job analysis, (2) develop a
written job description and (3) prepare a
job specification.

Job Analysis
Job analysis is a systematic investigation
that collects all information pertinent to
each task performed by an employee. From
this analysis, you identify the skills, know-
ledge and abilities required of that employee,
and determine the duties, responsibilities and
requirements of each job. Job analysis should
provide information such as
- Job title.
- Department.
- Supervision required.
- Job description-major and implied duties
and responsibilities.
- Unique characteristics of the job including
location and physical setting.
- Types of material used.
- Types of equipment used.
- Qualifications.
- Experience requirements.
- Education requirements.
- Mental and physical requirements.
- Manual dexterity required.
- Working conditions (inside, outside, hot,
cold, dry, wet, noisy, dirty, etc.).

Job Description
The job analysis is used to generate a job
description, which defines the duties of
each task, and other responsibilities of
the position. The description covers the
various task requirements, such as mental
or physical activities; working conditions
and job hazards. The approximate percentage
of time the employee should spend on each
activity is also specified. Job descriptions
focus on the what, why, where and how of the
job.

There are two excellent resources the small
business owner can use to develop job descrip-
tions. First, ask employees themselves to de-
scribe their jobs. A good employee may know
more about the job than anyone else. Second,
consult the Dictionary of Occupational Titles,
published by the Government Printing Office,
which contains over 20,000 job descriptions.

Job Specification
The job specification describes the person
expected to fill a job. It details the knowl-
edge (both educational and experiential), qua-
lities, skills and abilities needed to perform
the job satisfactorily. The job specification
provides a standard against which to measure
how well an applicant matches a job opening
and should be used as the basis for recruiting.

Recruiting
As a small business owner-manager, you should
be aware of the legal environment in which you
operate. This is especially true when it comes
to recruitment. Being aware of legislation that
will affect your business is extremely important
to efficient recruiting.

Congress has passed several laws that deal with
discrimination in the workplace. The Civil Rights
Act of 1964 and the Equal Employment Act of 1972
are two that small businesses owners should be
especially aware of. The Equal Employment Oppor-
tunity Commission (EEOC), is charged with enforc-
ing federal law against discrimination based on
- Race.
- Color.
- National origin.
- Sex.
- Age (between 40 and 70).
- Disability.
- Veteran status.
- Handicap.
- Religion.
Another law to be aware of is the 1963 Equal Pay
Act, which requires that men and women receive
equal pay for equal work.
Box 1 is a list of illegal questions that are
often asked during the recruitment process.
Review them carefully to ensure that you avoid
asking them when interviewing applicants.
+--------------------------------------------------+
¦ Box 1 - Often Asked (but illegal) ¦
¦ Questions in the Recruitment Process ¦
¦ ¦
¦ - How old are you? ¦
¦ - Are you married? ¦
¦ - Do you have any children? ¦
¦ - How will you care for your children ¦
¦ during work hours? ¦
¦ - Where do you attend church/synagogue? ¦
¦ - How old are your children? ¦
¦ - Do you receive alimony or child support? ¦
¦ - Are you Puerto Rican? (etc.) ¦
¦ - Are you pregnant? ¦
¦ - Send in a picture with your job application. ¦
¦ - How much do you weigh? ¦
¦ - What is your maiden name? ¦
¦ - What is your father's surname? ¦
¦ - Where were you born? ¦
¦ - What clubs do you belong to? ¦
+--------------------------------------------------+
Sources of Employees
Effective recruiting requires that you know where
and how to obtain qualified applicants. It is dif-
ficult to generalize about the best source for
each business, but a description of the major
sources follows.
- Present employees - Promotion from within tends
to keep employee morale high. Whenever possible,
current employees should be given first consid-
eration for any job openings. This practice sig-
nals your support of current employees.
- Unsolicited applicants - Small businesses re-
ceive many unsolicited applications from quali-
fied and unqualified individuals. The former
should be kept on file for future reference.
Good business practice suggests that all appli-
cants be treated courteously whether or not
they are offered jobs.
- Schools - High schools, trade schools, voca-
tional schools, colleges and universities are
sources for certain types of employees, espe-
cially if prior work experience is not a major
factor in the job specification. Schools also
are excellent sources for part-time employees.
- Public employment offices - The Employment Ser-
vice of the U.S. Department of Labor works with
state employment offices to provide no-cost
brokerage of applicants who are seeking employ-
ment. Local offices will provide small busines-
ses with applicants who have been screened on
the basis of workexperience, education and some
psychological testing. They also have an up-to-
date file on potential employees who possess a
wide range of skills.
- Private employment agencies - These firms pro-
vide a service for employers and applicants by
matching people to jobs in exchange for a fee.
Some fees are paid by the applicants, and there
is no cost to the employer; for highly quali-
fied applicants in short supply, the employer
sometimes pays the fee.
- Employee referrals - References by current em-
ployees may provide excellent prospects for
the business. Evidence suggests that current
employees hesitate to recommend applicants
with below average ability. Word of mouth is
one of the most commonly used recruiting
sources in the small business community.
- "Help Wanted" advertising - Letting people
know that the business is hiring is a key
element in gaining access to the pool of
potential employees. At its simplest, this
type of advertising may take the form of a
Help Wanted sign in the window. More sophis-
ticated methods involve using local media,
primarily print sources such as daily and
weekly newspapers. The classified pages of
newspapers are frequently consulted by ac-
tive job seekers, including currently em-
ployed individuals who may be tempted by a
more attractive position. Other advertising
media include radio and television. These
tend to have a wider appeal than the news-
paper; however, the price of an advertise-
ment is correspondingly higher.

Specialty media publications, such as trade as-
sociation magazines and newsletters, may also
produce quality job applicants. There are ef-
forts in some parts of the country to offer
small business employers access to cable tele-
vision community bulletin boards. Another high-
tech opportunity is to list positions on compu-
ter network bulletin boards.

Prices for help wanted advertising vary and the
small business owner approaches them with cau-
tion. A well-placed, high-quality advertisement
will attract good people, whereas, an expensive
advertisement in the wrong medium may get no
results. Some experimentation is worthwhile to
most small businesses. Another suggestion is
to ask other small business people in the area
about their success with help wanted advertising.
Learn from others' successes and mistakes.

Screening
The screening process provides information about
an individual's skills, knowledge and attitudes,
enabling a potential employer to determine whe-
ther that person is suited to, and qualified for,
the position. Experience has shown that hiring
an overqualified person can be as harmful as hir-
ing an underqualified person.

The application form is the place to begin screen-
ing candidates for a job. It provides information
on the person's background and training and is the
first means of comparing the applicant with the
job description. This will ensure that you don't
waste time on applicants who clearly do not meet
the minimum requirements for the job.

Generally, the following information is asked on
an employment application form: name, address,
telephone number, social security number, kind of
work desired, work experience, military service,
education and references. See the sample applica-
tion form in Box 2.
+-------------------------------------------------------+
¦ Box 2 - Sample Application Form ¦
¦ ¦
¦ Date: ¦
¦ Name: ¦
¦ Social security number: ¦
¦ Address: ¦
¦ Telephone number: ¦
¦ Position desired: ¦
¦ Education: ¦
¦ ¦
¦ ¦
¦ EMPLOYMENT RECORD: ¦
¦ Name and address of company, position, dates employed ¦
¦ and reason for leaving: ¦
¦ ¦
¦ ¦
¦ ¦
¦ MILITARY SERVICE: ¦
¦ Branch: from: to: ¦
¦ Rank achieved: Type of discharge: ¦
¦ REFERENCES: ¦
+-------------------------------------------------------+
The personal interview is the second step in the
screening process. During the interview, the man-
ager learns more about the applicant through
face-to-face contact, including observation of
personal appearance. The interview should be
guided, but not dominated, by the manager as it
is important to let the candidate speak freely.
Whenever possible, the interviewer should ask
questions that are directly related to the job.
Devise a list of questions that will adequately
assess the applicant's qualifications while meet-
ing the specifications for the job. Three major
errors often committed in the personal interview
are
- Failure to analyze the requirements of the
job in sufficient detail to generate valid
questions.
- Failure to ask candidates the right ques-
tions to determine their strengths and weak-
nesses, and their fit with the job.
- Too much reliance on gut reaction instead of
objective evaluation of candidates based on
criteria established in the job specification.
Interviewing makes the selection process more
personal and gives the interviewer an overall
idea of whether the applicant is appropriate
for the job. The following list of techniques
in Box 3 will help you select the right appli-
cant for the job.
+-------------------------------------------+
¦ Box 3 - Interviews ¦
¦ ¦
¦ 1. Review the job description before ¦
¦ the interview. ¦
¦ 2. Break the ice - establish a friendly ¦
¦ atmosphere. ¦
¦ 3. Develop an interview time plan and ¦
¦ stick to it. ¦
¦ 4. Keep an open mind, i.e., don't form ¦
¦ an opinion too early. ¦
¦ 5. Give the candidate time to tell his ¦
¦ or her story; don't talk too much. ¦
¦ 6. Present a truthful picture of the ¦
¦ company and the job. ¦
¦ 7. Listen carefully, concentrate and ¦
¦ take notes. ¦
¦ 8. Avoid detailed discussion of salary ¦
¦ too early in the interview. ¦
¦ 9. Be courteous. ¦
¦ 10. Don't leave the candidate hanging - ¦
¦ discuss the next step in the hiring ¦
¦ process and the timing. ¦
+-------------------------------------------+
Other screening techniques include employment
tests and physical examinations. Some employ-
ment tests measure aptitude, achievement, in-
telligence, personality and honesty. A physi-
cal examination determines if the applicant
meets the health standards and physical de-
mands of the job.

Selecting and Hiring
If the screening process is thorough, select-
ing the best applicants for the job is easy.
However, before making the final selection,
one last step should be taken: the top candi-
date's references should be checked for accu-
racy and input. You should be aware of the ten-
dency of references to give a rose-colored pic-
ture of applicant's character and ability. De-
spite this potential bias, a careful check with
former employers, schools and other references
can be most constructive. At a minimum, check-
ing can determine whether or not the applicant
was truthful about his or her employment his-
tory.

Orienting New Employees to Your Business
An employee handbook communicates important in-
formation about the company to the employee. The
handbook should cover topics such as company ex-
pectations, pay policies, working conditions,
fringe benefits and the company philosophy toward
customers (see Box 4).
+--------------------------------------------------+
¦ Box 4 - Employee Handbook Topics ¦
¦ ¦
¦ Welcome from the Personal appearance ¦
¦ owner ¦
¦ Use of telephones ¦
¦ History of the company ¦
¦ Prohibited acts ¦
¦ Introduction to the ¦
¦ company Absence from work ¦
¦ and reporting policies ¦
¦ Company products and ¦
¦ services Weather emergencies ¦
¦ ¦
¦ Hours of work Pay policies ¦
¦ ¦
¦ Holidays Safety ¦
¦ ¦
¦ Insurance Disciplinary procedures¦
¦ and appeals ¦
¦ On-the-job injury ¦
¦ Termination ¦
¦ Jury duty ¦
¦ Vacation policy ¦
¦ Military leave ¦
¦ Sick leave ¦
¦ Parking rules ¦
¦ Parental leave ¦
+--------------------------------------------------+
Once an individual is hired, he or she should
receive a comprehensive orientation on the gen-
eral policies of the company and on the speci-
fic nature of the job. Rules should be explain-
ed in detail, job expectations agreed upon and
any questions answered before the new employee
begins work. New employees should be introduced
to other employees and made to feel welcome.

Compensation Issues
Compensation takes two forms: (1) direct com-
pensation (wages and salaries) and (2) indi-
rect compensation (fringe benefits).

Direct Compensation
Wages and salaries are the compensation people
receive on a regular basis (monthly, biweekly
or weekly). Workers are paid on the basis of
time (by the hour, day, week or month) or on
the basis of output (an incentive plan).
Some of the legal issues regarding wage and
salary compensation include
- Wages and hours - The Fair Labor Standards
Act of 1938 introduced the minimum wage
and the 40-hour work week. As of April 1,
1991, the minimum wage is $4.25 an hour.
The law also specifies that workers must
receive time-and-a-half pay for time spent
on the job in excess of 40 hours. (Not all
employees are covered by this act; mana-
gers, professionals and sales personnel may
be excluded.)
- Eligibility to work - The Immigration Re-
form Control Act of 1986 was intended to
reduce the number of illegal immigrants
seeking jobs in the United States. Under
the law, employees hired after November 6,
1986, must show proof of their identity and
eligibility to work. There are sanctions
against employers who do not comply with
this act.
- Child labor - The minimum age for children
in most jobs is 16 years old. Fourteen- and
15-year-olds are restricted to a few jobs,
such as filing and sales. Persons under 14
years of age may work only under certain
conditions.
- Social Security - The Social Security Act
passed in 1935 provides a minimum guaranteed
income to retired and disabled persons. This
system is funded by a tax on both employees
and employers. In 1990 employees were re-
quired to pay the system an amount equal to
7.65 percent of the first $51,300 earned.
Employers are required to match that amount.
- Unemployment benefits - Each state has a
program for providing protection for those
who lose their jobs (usually through no fault
of their own). While programs vary from state
to state, each program must comply with cer-
tain federal guidelines. Employers pay a tax
to the state, which maintains these funds for
use by the unemployed.

Indirect Compensation
Fringe benefits are an important part of the over-
all compensation package in most small businesses.
Employee benefits now account for about 40 per-
cent of payroll costs. The profitability of the
small firm is one of the primary determinants of
what benefits are offered by the firm.

Box 5 is a list of options to consider when decid-
ing which fringe benefits to offer employees.
+---------------------------------------------------------+
¦ Box 5 - Fringe Benefits ¦
¦ ¦
¦ Old age payments Paid vacations ¦
¦ ¦
¦ Survivor payments Payment for jury duty, ¦
¦ National Guard or ¦
¦ Disability and health reserve duty ¦
¦ insurance ¦
¦ Profit sharing ¦
¦ Pension plans ¦
¦ Bonuses ¦
¦ Life insurance ¦
¦ Education payments ¦
¦ Dental insurance ¦
¦ Worker's compensation ¦
¦ Accident insurance ¦
¦ Unemployment compensation¦
¦ Discounts on goods/ ¦
¦ services purchased Child care ¦
¦ from the company ¦
¦ ¦
¦ Employee meals ¦
+---------------------------------------------------------+
Cafeteria Planning
One successful approach to providing benefits
to employees of a small business is to allo-
cate a certain amount of money per employee
for benefits. Each employee then chooses the
package of benefits that suits his or her cur-
rent needs. This approach is called cafeteria
planning because it is similar to going down a
cafeteria line, where each customer chooses
what he or she wants to eat. It has been sug-
gested that employees perceive this approach as
highly equitable because it (1) allows freedom
of choice and (2) does not impose a single pack-
age of benefits on all employees.

For example, a young employee with several small
children may be interested in dental insurance
for his family. He is not really interested in
or motivated by a pension plan at this time in
his life. Another employee in this same company
is in her late forties, has no dependent child-
ren and is planning for retirement. To force the
same benefit on these two employees is not an ef-
fective use of benefit money. To allow some choice
on the part of participants is a major advantage
of the cafeteria approach to benefit planning.
Small businesses face difficult challenges when
they try to match benefits with big firms. Never-
theless, the small firm can enjoy the benefits of
greater flexibility and innovativeness by offer-
ing a cafeteria plan.

EMPLOYEE TRAINING AND DEVELOPMENT

An Effective Training Program
The quality of employees and their development
through training and education are major fac-
tors in determining long-term profitability of
a small business. Hiring and keeping good em-
ployees is the key to the first factor. (Hiring
has been discussed in the first section and re-
taining employees will be discussed in the third
section.) If you hire and keep good employees,
it is good policy to invest in the development
of their skills, so they can increase their pro-
ductivity.

Training often is considered for new employees
only. This is a mistake because ongoing training
for current employees helps them adjust to rapid-
ly changing job requirements.

Purpose of Training and Development
Reasons for emphasizing the growth and develop-
ment of personnel include
- Creating a pool of readily available and
adequate replacements for personnel who
may leave or move up in the organization.
- Enhancing the company's ability to adopt
and use advances in technology because of
a sufficiently knowledgeable staff.
- Building a more efficient, effective and
highly motivated team, which enhances the
company's competitive position and improves
employee morale.
- Ensuring adequate human resources for ex-
pansion into new programs.
Research has shown specific benefits that a
small business receives from training and de-
veloping its workers, including:
- Increased productivity.
- Reduced employee turnover.
- Increased efficiency resulting in finan-
cial gains.
- Decreased need for supervision.
Employees frequently develop a greater sense
of self-worth, dignity and well-being as they
become more valuable to the firm and to soci-
ety. Generally they will receive a greater
share of the material gains that result from
their increased productivity. These factors
give them a sense of satisfaction through the
achievement of personal and company goals.

The Training Process
The model in Chart 1 traces the steps neces-
sary in the training process.
+---------------------------------------------------------------+
¦ Chart 1 - Steps in the Training Process ¦
¦ ¦
¦ +----------------------------+ ¦
¦ ¦ Organizational Objectives ¦ ¦
¦ +----------------------------+ ¦
¦ ¦
¦ ¦
¦ +------------------+ ¦
¦ ¦ Needs Assessment ¦ ¦
¦ +------------------+ ¦
¦ +---------------+ ¦
¦ ¦Is There a Gap?¦ ¦
¦ -----------------+---------------+ ¦
¦ ¦
¦ +---------------------+ ¦
¦ ¦ Training Objectives ¦ ¦
¦ +---------------------+ ¦
¦ ¦
¦ +------------+ ¦
¦ ¦ Select the ¦------------ ¦
¦ ¦ Trainees ¦ ¦
¦ +------------+ ¦
¦ +-----------------------------+ ¦
¦ ¦ Select the Training Methods ¦ ¦
¦ ¦ and Mode ¦ ¦
¦ +-----------------------------+ ¦
¦ ¦
¦ +----------------+¦
¦ -------------------¦ Choose a Means ¦¦
¦ ¦ of Evaluating ¦¦
¦ +----------------+¦
¦ +---------------------+ ¦
¦ ¦ Administer Training ¦ ¦
¦ +---------------------+ ¦
¦ ¦
¦ ¦
¦ +-----------------------+ ¦
¦ ¦ Evaluate the Training ¦ ¦
¦ +-----------------------+ ¦
¦ ¦
+---------------------------------------------------------------+
Your business should have a clearly defined
strategy and set of objectives that direct
and drive all the decisions madeespecially
training decisions. Firms that plan their
training process are more successful than
those that do not. Most business owners want
to succeed, but do not engage in training de-
signs that promise to improve their chances
of success. Why? The five reasons most often
identified are
- Time - Small businesses managers find
that time demands do not allow them to
train employees.
- Getting started - Most small business
managers have not practiced training
employees. The training process is un-
familiar.
- Broad expertise - Managers tend to have
broad expertise rather than the special-
ized skills needed for training and de-
velopment activities.
- Lack of trust and openness - Many mana-
gers prefer to keep information to them-
selves. By doing so they keep information
from subordinates and others who could be
useful in the training and development
process.
- Skepticism as to the value of the train-
ing - Some small business owners believe
the future cannot be predicted or control-
led and their efforts, therefore, are best
centered on current activities i.e., mak-
ing money today.

A well-conceived training program can help your
firm succeed. A program structured with the com-
pany's strategy and objectives in mind has a
high probability of improving productivity and
other goals that are set in the training mission.
For any business, formulating a training strate-
gy requires addressing a series of questions.
- Who are your customers? Why do they buy
from you?
- Who are your competitors? How do they
serve the market? What competitive ad-
vantages do they enjoy? What parts of
the market have they ignored?
- What strengths does the company have?
What weaknesses?
- What social trends are emerging that
will affect the firm?

The purpose of formulating a training strategy
is to answer two relatively simple but vitally
important questions: (1) What is our business?
and (2) What should our business be? Armed with
the answers to these questions and a clear vi-
sion of its mission, strategy and objectives,
a company can identify its training needs.

Identifying Training Needs
Training needs can be assessed by analyzing
three major human resource areas: the organ-
ization as a whole, the job characteristics
and the needs of the individuals. This analy-
sis will provide answers to the following
questions:
- Where is training needed?
- What specifically must an employee learn
in order to be more productive?
- Who needs to be trained?

Begin by assessing the current status of the
company how it does what it does best and the
abilities of your employees to do these tasks.
This analysis will provide some benchmarks
against which the effectiveness of a training
program can be evaluated. Your firm should
know where it wants to be in five years from
its long-range strategic plan. What you need
is a training program to take your firm from
here to there.

Second, consider whether the organization is
financially committed to supporting the train-
ing efforts. If not, any attempt to develop a
solid training program will fail.

Next, determine exactly where training is need-
ed. It is foolish to implement a companywide
training effort without concentrating resources
where they are needed most. An internal audit
will help point out areas that may benefit from
training. Also, a skills inventory can help de-
termine the skills possessed by the employees in
general. This inventory will help the organiza-
tion determine what skills are available now and
what skills are needed for future development.
Also, in today's market-driven economy, you
would be remiss not to ask your customers what
they like about your business and what areas
they think should be improved. In summary, the
analysis should focus on the total organiza-
tion and should tell you (1) where training is
needed and (2) where it will work within the
organization.

Once you have determined where training is
needed, concentrate on the content of the
program. Analyze the characteristics of the
job based on its description, the written
narrative of what the employee actually does.
Training based on job descriptions should
go into detail about how the job is performed
on a task-by-task basis. Actually doing the
job will enable you to get a better feel for
what is done.

Individual employees can be evaluated by com-
paring their current skill levels or perfor-
mance to the organization's performance stand-
ards or anticipated needs. Any discrepancies
between actual and anticipated skill levels
identifies a training need.

Selection of Trainees
Once you have decided what training is neces-
sary and where it is needed, the next decision
is who should be trained? For a small business,
this question is crucial. Training an employee
is expensive, especially when he or she leaves
your firm for a better job. Therefore, it is im-
portant to carefully select who will be trained.
Training programs should be designed to consider
the ability of the employee to learn the material
and to use it effectively, and to make the most
efficient use of resources possible. It is also
important that employees be motivated by the
training experience. Employee failure in the pro-
gram is not only damaging to the employee but a
waste of money as well. Selecting the right train-
ees is important to the success of the program.

Training Goals
The goals of the training program should relate
directly to the needs determined by the assessment
process outlined above. Course objectives should
clearly state what behavior or skill will be
changed as a result of the training and should re-
late to the mission and strategic plan of the com-
pany. Goals should include milestones to help take
the employee from where he or she is today to where
the firm wants him or her in the future. Setting
goals helps to evaluate the training program and
also to motivate employees. Allowing employees to
participate in setting goals increases the proba-
bility of success.

Training Methods
There are two broad types of training available
to small businesses: on-the-job and off-the-job
techniques. Individual circumstances and the
"who," "what" and "why" of your training program
determine which method to use (see Box 6).
+-------------------------------------------------------------------------+
¦ Box 6 - Training Techniques and Activities ¦
¦ ¦
¦ Creative Sales ¦
¦ technical administrative, ¦
¦ Orienting Special and supervisory ¦
¦ new skill professional and managerial ¦
¦ employees training education education ¦
¦ ----------------------------------------------------------------------- ¦
¦ On-the-job ¦
¦ Orientation X ¦
¦ Apprentice X X X X ¦
¦ Internship X X X ¦
¦ Job rotation X X ¦
¦ ¦
¦ Off-the-job ¦
¦ Lecture X X X X ¦
¦ Films X X X X ¦
¦ Television X X X X ¦
¦ Conferences X X ¦
¦ Role playing X ¦
¦ Simulation X X X ¦
¦ Programmed X X X X ¦
¦ Laboratory X ¦
¦ ----------------------------------------------------------------------- ¦
¦ Source:Adapted from B. M. Bass and J. A. Vaughan, Training in ¦
¦ Industry: The Management of Learning, Copyright 1966. ¦
+-------------------------------------------------------------------------+
On-the-job training is delivered to employees
while they perform their regular jobs. In this
way, they do not lose time while they are learn-
ing. After a plan is developed for what should
be taught, employees should be informed of the
details. A timetable should be established with
periodic evaluations to inform employees about
their progress. On-the-job techniques include
orientations, job instruction training, appren-
ticeships, internships and assistantships, job
rotation and coaching.

Off-the-job techniques include lectures, special
study, films, television conferences or discus-
sions, case studies, role playing, simulation,
programmed instruction and laboratory training.
Most of these techniques can be used by small
businesses although, some may be too costly.
Box 7 shows the range of costs for different
types of training. Choose the techniques that
meet your needs and fit your budget.
+------------------------------------------------------+
¦ Box 7 Relative Expense of ¦
¦ Various Training Techniques ¦
¦ (from least to most expensive) ¦
¦------------------------------------------------------¦
¦ Range* ¦
¦ ---------------- ¦
¦ Low High ¦
¦------------------------------------------------------¦
¦ Orientation $0 $5 ¦
¦ Lecture (in house) 0 10 ¦
¦ Role playing 0 25 ¦
¦ Films 5 25 ¦
¦ Television 5 50 ¦
¦ Job rotation 25 500 ¦
¦ Simulations (computer) 125 1000 ¦
¦ Apprenticeships 350 1500 ¦
¦ Internships 350 2500 ¦
¦ Programmed instruction (computer) 100 3500 ¦
¦ Conferences (off site) 500 3500 ¦
¦ Laboratory training 1000 5000+ ¦
¦------------------------------------------------------¦
¦ ¦
¦ *Per participant per period. ¦
¦ Note:The range of expenses should be taken as ¦
¦ examples only and were obtained by a telephone ¦
¦ survey of small businesses and trainers in a ¦
¦ large metropolitan area. Costs vary widely by ¦
¦ the content of the training, the location and ¦
¦ the source. ¦
+------------------------------------------------------+
Orientations are for new employees. The first
several days on the job are crucial in the suc-
cess of new employees. This point is illustra-
ted by the fact that 60 percent of all employ-
ees who quit do so in the first ten days. Orien-
tation training should emphasize the following
topics:
- The company's history and mission.
- The key members in the organization.
- The key members in the department,
and how the department helps fulfill
the mission of the company.
- Personnel rules and regulations.

Some companies use verbal presentations while
others have written presentations. Many small
businesses convey these topics in one-on-one
orientations. No matter what method is used,
it is important that the newcomer understand
his or her new place of employment. The impor-
tance of an employee handbook for imparting
rules and culture was discussed earlier, with
specific suggestions for what should be inclu-
ded in the employee handbook.

Lectures present training material verbally
and are used when the goal is to present a
great deal of material to many people. It is
more cost effective to lecture to a group
than to train people individually. Lecturing
is one-way communication and as such may not
be the most effective way to train. Also, it
is hard to ensure that the entire audience
understands a topic on the same level; by tar-
geting the average attendee you may undertrain
some and lose others. Despite these drawbacks,
lecturing is the most cost-effective way of
reaching large audiences.

Role playing and simulation are training tech-
niques that attempt to bring realistic decision-
making situations to the trainee. Likely prob-
lems and alternative solutions are presented for
discussion. The adage there is no better trainer
than experience is exemplified with this type of
training. Experienced employees can describe
real world experiences, and can help in and learn
from developing the solutions to these simula-
tions. This method is cost effective and is used
in marketing and management training.
Audiovisual methods such as television, video-
tapes and films are the most effective means of
providing real world conditions and situations
in a short time. One advantage is that the pre-
sentation is the same no matter how many times
it's played. This is not true with lectures,
which can change as the speaker is changed or
can be influenced by outside constraints. The
major flaw with the audiovisual method is that
it does not allow for questions and interac-
tions with the speaker, nor does it allow for
changes in the presentation for different audi-
ences.

Job rotation involves moving an employee through
a series of jobs so he or she can get a good
feel for the tasks that are associated with dif-
ferent jobs. It is usually used in training for
supervisory positions. The employee learns a
little about everything. This is a good strategy
for small businesses because of the many jobs an
employee may be asked to do.

Apprenticeships develop employees who can do
many different tasks. They usually involve sev-
eral related groups of skills that allow the
apprentice to practice a particular trade, and
they take place over a long period of time in
which the apprentice works for, and with, the
senior skilled worker. Apprenticeships are es-
pecially appropriate for jobs requiring produc-
tion skills.

Internships and assistantships are usually a
combination of classroom and on-the-job train-
ing. They are often used to train prospective
managers or marketing personnel.

Programmed learning, computer-aided instruc-
tion and interactive video all have one thing
in common: they allow the trainee to learn at
his or her own pace. Also, they allow material
already learned to be bypassed in favor of ma-
terial with which a trainee is having difficul-
ty. After the introductory period, the instruc-
tor need not be present, and the trainee can
learn as his or her time allows. These methods
sound good, but may be beyond the resources of
some small businesses.

Laboratory training is conducted for groups by
skilled trainers. It usually is conducted at a
neutral site and is used by upper- and middle-
management trainees to develop a spirit of team-
work and an increased ability to deal with man-
agement and peers. It can be costly and usually
is offered by larger small businesses.

Trainers
Who actually conducts the training depends on
the type of training needed and who will be
receiving it. On-the-job training is conducted
mostly by supervisors; off-the-job training, by
either in-house personnel or outside instructors.
In-house training is the daily responsibility
of supervisors and employees. Supervisors are
ultimately responsible for the productivity
and, therefore, the training of their subordi-
nates. These supervisors should be taught the
techniques of good training. They must be aware
of the knowledge and skills necessary to make a
productive employee. Trainers should be taught
to establish goals and objectives for their
training and to determine how these objectives
can be used to influence the productivity of
their departments. They also must be aware of
how adults learn and how best to communicate
with adults. Small businesses need to develop
their supervisors' training capabilities by
sending them to courses on training methods.
The investment will pay off in increased pro-
ductivity.

There are several ways to select training per-
sonnel for off-the-job training programs. Many
small businesses use in-house personnel to de-
velop formal training programs to be delivered
to employees off line from their normal work
activities, during company meetings or indivi-
dually at prearranged training sessions.

There are many outside training sources, in-
cluding consultants, technical and vocational
schools, continuing education programs, cham-
bers of commerce and economic development
groups. Selecting an outside source for train-
ing has advantages and disadvantages. The big-
gest advantage is that these organizations are
well versed in training techniques, which is
often not the case with in-house personnel.

The disadvantage of using outside training
specialists is their limited knowledge of
the company's product or service and custo-
mer needs. These trainers have a more general
knowledge of customer satisfaction and needs.
In many cases, the outside trainer can develop
this knowledge quickly by immersing himself or
herself in the company prior to training the
employees. Another disadvantage of using out-
side trainers is the relatively high cost com-
pared to in-house training, although the higher
cost may be offset by the increased effective-
ness of the training.

Whoever is selected to conduct the training,
either outside or in-house trainers, it is
important that the company's goals and values
be carefully explained.

Training Administration
Having planned the training program properly,
you must now administer the training to the
selected employees. It is important to follow
through to make sure the goals are being met.
Questions to consider before training begins
include
- Location.
- Facilities.
- Accessibility.
- Comfort.
- Equipment.
- Timing.

Careful attention to these operational details
will contribute to the success of the training
program.

An effective training program administrator
should follow these steps:
- Define the organizational objectives.
- Determine the needs of the training program.
- Define training goals.
- Develop training methods.
- Decide whom to train.
- Decide who should do the training.
- Administer the training.
- Evaluate the training program.

Following these steps will help an administra-
tor develop an effective training program to
ensure that the firm keeps qualified employees
who are productive, happy workers. This will
contribute positively to the bottom line.

Evaluation of Training
Training should be evaluated several times
during the process. Determine these mile-
stones when you develop the training. Em-
ployees should be evaluated by comparing
their newly acquired skills with the skills
defined by the goals of the training pro-
gram. Any discrepancies should be noted and
adjustments made to the training program to
enable it to meet specified goals. Many
training programs fall short of their ex-
pectations simply because the administrator
failed to evaluate its progress until it was
too late. Timely evaluation will prevent the
training from straying from its goals.

BUILDING EMPLOYEE TRUST AND PRODUCTIVITY

The most effective way to build trust in the
workplace is to work together. There are no
magic gimmicks or other simple solutions.
Trust cannot be created by excessive wages,
great company picnics or wonderful working
conditions; it can only be generated through
teamwork, honesty and fairness. Although trust
and productivity are complex issues and repre-
sent only part of the total fabric of inter-
personal relationships in small businesses,
three attributes appear to have a positive ef-
fect on trust in successful small businesses:
- The owner-manager of the small business
is open and honest about the day-to-day
business operations.
- The owner-manager of the small business
is consistent and fair about personnel
policies.
- The owner-manager spends a great deal of
his or her time concentrating on good
communications with those working in the
firm.

Honesty
Secrecy breeds suspicion. Whenever information
is kept on close hold, the context becomes open
to misinterpretation. Total quality improvement
is based on the concept that workers care as
much about the success of the small business as
the owners do. Studies of small businesses indi-
cate that employees tend to overestimate profits
by substantial amounts. These same studies indi-
cate that when true financial information is
shared with employees, substantial cost controls
are voluntarily initiated by all members of the
work force.

Whenever in doubt concerning the amount of in-
formation to share with employees, experience
indicates that too much is better than not
enough. Never lie to workers about human rela-
tions issues. Institutional memory is long
term; any deceit will be remembered for many
years. Note that employees talk with each other
and inconsistencies will be quickly detected
and brought to the surface frequently to your
embarrassment. The following are suggestions
on how to avoid this dilemma:
- Take time to talk with your workers.
- Find out what they're thinking.
- Find out what they'd like to know and
tell them whenever possible.
- Don't tell only good things.
- Allow employees an opportunity to
provide you, the owner, with infor-
mation, questions and suggestions.
In this way, communications are two way.

Fairness
Fairness ranges from consistency in personnel
actions and fair market practices to adherence
to the various laws governing the workplace.
The concept of due process requires that a small
business follow its own rules and policies. Em-
ployees must be treated the same when it comes
to personnel issues.

Each worker should have an equal chance to per-
form at his or her best. Decisions concerning
rewards, promotions and advancement should al-
ways be based on performance, and good perfor-
mance should be spelled out in the job descrip-
tion. When performance is equal among employees,
seniority should be used to break ties.

The key to healthy work relations is managing
communications within the firm. Most of the
communication will flow as orders and instruc-
tions to employees. Nevertheless, communicating
(and honesty and fairness) is a two-way process.
It is difficult for employees to be intelligent
and enthusiastic teamworkers if they do not know
the reasons behind orders and instructions. Per-
haps even more important is giving employees the
opportunity to contribute ideas and opinions be-
fore the manager-owner makes a decision. This
adds dignity and meaning to the job in the eyes
of most employees and their families.

Communicating includes telling employees where
they stand, how the business is doing and what
future plans are being developed. Negative feed-
back may be necessary at times, but positive
feedback should be the primary tool for estab-
lishing good human relations. Never forget that
employees are people, and that they will quickly
detect insincerity. They also will respond to
honest efforts to treat them as mature, respon-
sible adults. Some practical human relations
techniques that stimulate two-way communications
include
- Periodic performance review sessions
(every three months).
- Bulletin boards.
- Suggestion boxes.
- Newsletters.
- Regular open meetings.

The Legal Environment
Small businesses operate in a complex legal
environment that places many constraints on
recruitment, selection, placement and other
personnel practices. Laws may specify what
is required, what is acceptable or what is
prohibited. Every personnel system must con-
sider the statutes relating to these issues.
One of the most important laws the small
business owner should be aware of is the
Occupational Safety and Health Act (OSHA
1970). This law is aimed at reducing the
number of safety and health hazards in the
American workplace. Businesses must comply
with health and safety standards set by
the U.S. Department of Labor for individual
industries.

The past sixty years have been characterized
by laws that encourage collective bargaining
and that try to bring about a better balance
between management and labor. Many of these
laws apply to small businesses:
- Norris-LaGuardia Act (1932) - Protects
the rights of unions to organize. It
also prohibits "yellow-dog contracts"
an employment practice where the firm
requires employees to promise they will
not join a union if hired by the company.
- Wagner Act (1935) - Guarantees workers
the right to engage in union activities,
to organize and to bargain collectively
without interference from employers. A
small business manager may not prohibit
employees from union activity.
See the discussion of other applicable laws in
the first section under Recruiting and Compen-
sation Issues.

The Personnel Manager
Many small businesses cannot afford a full-
time specialist to deal with human resource
problems. However, as a business grows, its
structure becomes more complex and personnel
problems increase in number and potential
cost. At a certain point in the typical small
business, it becomes apparent that a full-time
or part-time personnel manager is needed. Con-
ditions that indicate the necessity of a per-
sonnel manager include
- The firm has more than 100 employees.
- Employees are represented by a union.
- Turnover is very high (and costly).
- The need for skilled or semiskilled
labor creates problems in recruitment
or selection.
- Employee morale is low.
- Competition for good personnel is es-
pecially keen in the market area.

CONCLUSION

All small businesses must staff their operations, by bringing in
new people and by training new and current employees. Effective
human resource management matches and develops the abilities of
job candidates and employees with the needs of the firm. A
responsive personnel system will help you manage this process and
is a key ingredient for your business's growth.

Human resource management is a balancing act: hiring qualified
personnel who are well suited to the firm's needs and training
and developing employees to meet the firm's needs are the
endpoints of the continuum. Most expanding small businesses fall
in the middle of this continuumi.e., they hire the best people
they can afford, but they also recognize the need to train and
develop current employees as the firm grows.

This publication should provide you with an increased awareness
of the importance of creating a good human resource management
climate within the firm, and specific guidelines on how to create
such a climate.

REFERENCES
Leap, Terry and Michael Crino. Personnel/Human Resource
Management. New York: Macmillan Publishing Co., 1989.
Longenecker, Justin and Carlos Moore. Small Business Management.
Cincinnati: South-Western Publishing Co., 1987.
Roxe, Linda, A. Personnel Management for the Smaller Company. New
York: AMACOM, 1979.
Tate, Curtis, et al. Successful Small Business Management. Plano,
TX: Business Publications, Inc., 1985.
Wexley, Kenneth and Gary P. Latham. Developing and Training Human
Resources in Organizations. Glenview, IL: Scott Foresman and Co.,
1981.
Johnston, William B, et al. Workforce 2000: Work and Workers for
the 21st Century. Indianapolis, IN: Hudson Institute, 1987.
APPENDIX A: HUMAN RESOURCE MANAGEMENT AUDIT QUESTIONNAIRE
1. Does the business have a plan for fore-
casting long-term personnel needs?
2. Are there guidelines for hiring person-
nel, or are employees hired based on gut
feelings?
3. Are there job descriptions for all posi-
tions?
4. What do employees like about their jobs?
5. What do employees dislike about their jobs?
6. Why do employees leave the organization?
7. Is there an active training program? Is it
based on an assessment of where the firm
is now or where it should be in the future?
8. Are a variety of training programs avail-
able?
9. How is morale in the firm?
10. Do employees really believe what you have
to say?
11. Are all employees treated fairly?

You can use this article in your website or blog or you can email it to friends BUT with this link intact - http://smlbusiness.blogspot.com/

2008-05-20T02:34:00.001-07:00

A Venture Capital Primer for Small Business

2008-05-20T01:59:00.000-07:00

"A Venture Capital Primer for Small Business" was written by LaRue Tone
Hosmer, Professor and Chairman of the Corporate Strategy Department,
Graduate School of Business Administration, University of Michigan.

Introduction

Venture capital financing is a method used for raising money, but less
popular than borrowing. Venture capital firms, like banks, supply you
with the funds necessary to operate your business, but they do it
differently.

Banks are creditors; they expect you to repay the borrowed money. Venture
capital firms are owners; they hold stock in the company, adding their
invested capital to its equity base. While banks may concentrate on cash
flow, venture capital firms invest for long-term capital. Commonly,
these firms look for their investment to appreciate three to five times
in five or seven years.

One way of explaining the different ways in which banks and venture capital
firms evaluate a small business seeking funds is: Banks look at its
immediate future, but are most heavily influenced by its past; venture
capitalists look to its longer run future.

To be sure, venture capital firms and individuals are interested in many
of the same factors that influence bankers in their analysis of loan
applications from smaller companies. All financial people want to know
the results and ratios of past operations, the amount and intended use
of the needed funds, and the earnings and financial condition of future
projections.

But venture capitalists look much more closely at the features of the
product and the size of the market than do commercial banks.

What Venture Capital Firms Look For

Banks are creditors. They're interested in the product/market position of
the company for assurance that this product or service can provide steady
sales and generate sufficient cash flow to repay the loan. They look at
projections to be certain that owners/managers have done their homework.

Venture capital firms are owners. They hold stock in the company, adding
their invested capital to its equity base. Therefore, they examine
existing or planned products or services and the potential markets for
them with extreme care. They invest only in firms they believe can
rapidly increase sales and generate substantial profits. The reason for
this is that venture capital firms invest for long-term capital, not for
interest income.

A common estimate is that they look for three to five times their
investment in five or seven years.

Of course, venture capitalists don't realize capital gains on all their
investments. Certainly they don't make capital gains of 300 to 500 %
except on a very limited portion of their total investments.

But their intent is to find venture projects with this appreciation
potential to make up for investments that aren't successful.

Venture capital is risky due to the difficulty of judging the worth of a
business in its early stages. Therefore, most venture capital firms set
rigorous policies for venture proposal size, maturity of the seeking
company, management of the seeking company, and "something special" in
the plan that is submitted. They also have rigorous evaluation procedures
to reduce risks, since their investments are unprotected in the event
of failure.

Size of the Venture Proposal.

Most venture capital firms are interested in investment projects requiring
an investment of $250,000 to $1,500,000. Projects requiring under
$250,000 are of limited interest because of the high cost of investigation
and administration; however, some venture capital firms will consider
smaller proposals if the investment is intriguing enough.

The typical venture capital firm receives over 1,000 proposals a year.
Probably 900f these will be rejected quickly because they don't fit the
established geographical, technical or market area policies of the firm -
or because they have been poorly prepared.

The remaining 10are carefully investigated. These investigations are
expensive. Firms may hire consultants to evaluate the product,
particularly when it is the result of innovation or is technologically
complex. The market size and competitive position of the company are
analyzed by contacts with present and potential customers, suppliers,
and others.

Production costs are reviewed. The financial condition of the company
is confirmed by an auditor. The legal form and registration of the
business are checked.

Most importantly, the character and competence of the management are
evaluated by the venture capital firm, normally via a thorough
background check.

These preliminary investigations may cost a venture firm between $2,000
and $3,000 per company investigated. They result in perhaps ten to
fifteen proposals of interest. Then, second investigations, more
thorough and more expensive than the first, reduce the number of
proposals under consideration to only three or four.

Eventually, the firm invests in one or two of these.

Maturity of the Firm Making the Proposal.

Most venture capital firms' investment interest is limited to projects
proposed by companies with some operating history, even though they
may not yet have shown a profit. Companies that can expand into a
new product line or a new market with additional funds are particularly
interesting.

The venture capital firm can provide funds to enable such companies to
grow in a spurt rather than gradually as they would on retained earnings.

Companies that are just starting or that have serious financial
difficulties may interest some venture capitalists, if the potential
for significant gain over the long run can be identified and assessed.

If the venture firm has already extended its portfolio to a large risk
concentration, they may be reluctant to invest in these areas because of
increased risk of loss.

Although most venture capital firms will not consider a great many
proposals from start-up companies, there are a small number of venture
firms that will do "start-up" financing. The small firm that has a
well thought-out plan and can demonstrate that its management group
has an outstanding record (even if it is with other companies) has a
decided edge in acquiring this kind of seed capital.

Management of the Proposing Firm.

Most venture capital firms concentrate primarily on the competence and
character of the management. They feel that even mediocre products can
be successfully manufactured, promoted, and distributed by an experienced,
energetic management group.

They look for a group that is able to work together easily and
productively, especially under conditions of stress from temporary
reversals and competition problems. Obviously, analysis of managerial
skill is difficult.

A partner or senior executive of a venture capital firm normally spends at
least a week at the offices of a company being considered, talking with and
observing the management to estimate their competence and character.

Venture capital firms usually require that the company under consideration
have a complete management group. Each of the important functional areas
- product design,
- marketing,
- production,
- finance,
- and control

. . . must be under the direction of a trained, experienced member of
the group.

Responsibilities must be clearly assigned. And, in addition to a thorough
understanding of the industry, each member of the management team must be
firmly committed to the company and its future.

The "Something Special" in the Plan.

Next in importance to the excellence of the management group, most venture
capital firms seek a distinctive element in the strategy or
product/market/process position of the company. This distinctive element
may be a new feature of the product or process or a particular skill or
technical competence of the management. But it must exist.

It must provide a competitive advantage.

Elements of a Venture Proposal

Purpose and Objectives

Include a summary of the what and why of the project.

Proposed Financing

You must state the amount of money you will need from the beginning to
the maturity of the project proposed, how the proceeds will be used,
how you plan to structure the financing, and why the amount designated
is required.

Marketing

Describe the market segment you've got or plan to get, the competition,
the characteristics of the market, and your plans (with costs) for getting
or holding the market segment you're aiming at.

History of the Firm

Summarize the significant financial and organizational milestones,
description of employees and employee relations, explanations of banking
relationships, recounting of major services or products your firm has
offered during its existence, and the like.

Description of the Product or Service

Include a full description of the product (process) or service offered
by the firm and the costs associated with it in detail.

Financial Statements

Include statements for both the past few years and pro forma projections
(balance sheets, income statements, and cash flows) for the next three to
five years, showing the effect anticipated if the project is undertaken
and if the financing is secured. (This should include an analysis of key
variables affecting financial performance, showing what could happen if
the projected level of revenue is not attained.)

Capitalization

Provide a list of shareholders, how much is invested to date, and in what
form (equity/debt).

Biographical Sketches

Describe the work histories and qualifications of key owners and employees.

Principal Suppliers and Customers, Problems Anticipated and Other Pertinent
Information

Provide a candid discussion of any contingent liabilities, pending
litigation, tax or patent difficulties, and any other contingencies that
might affect the project you're proposing. List the names, addresses and
the telephone numbers of suppliers and customers; they will be contacted
to verify your statement about payments (suppliers) and products
(customers).

Provisions of the Investment Proposal

What happens when, after the exhaustive investigation and analysis, the
venture capital firms decides to invest in a company? Most venture firms
prepare an equity financing proposal that details the amount of money to
be provided, the percentage of common stock to be surrendered in
exchange for these funds, the interim financing method to be used and
the protective covenants to be included.

This proposal will be discussed with the management of the company. The
final financing agreement will be negotiated and generally represents a
compromise between the management of the company and the partners or senior
executives of the venture capital firm. The important elements of this
compromise are: ownership, control, annual charges, and final objectives.

Ownership.

Venture capital financing is not inexpensive for the owners of a small
business. The partners of the venture firm buy a portion of the business'
equity in exchange for their investment.

This percentage of equity varies, of course, and depends on the amount of
money provided, the success and worth of the business, and the anticipated
investment return. It can range from perhaps 10 % in the case of an
established, profitable company to as much as 80 or 90 % for beginning or
financially troubled firms.

Most venture capital firms, at least initially, don't want a position of
more than 30 to 40 % because they want the owner to have the incentive to
keep building the business. If additional financing is required to support
business growth, the outsiders' stake may exceed 50 % but investors realize
that small business owner/managers can lose their entrepreneurial zeal
under those circumstances.

In the final analysis, however, the venture firm, regardless of its
percentage of ownership, really wants to leave control in the hands of
the company's managers because it is really investing in that
management team in the first place.

Most venture firms determine the ratio of funds provided to equity
requested by a comparison of the present financial worth of the
contributions made by each of the parties to the agreement. The present
value of the contribution by the owner of a starting or financially
troubled company is obviously rated low.

Often it is estimated as just the existing value of his or her idea and
the competitive costs of the owner's time. The contribution by the owners
of a thriving business is valued much higher. Generally, it is capitalized
at a multiple of the current earnings and/or net worth.

Financial valuation is not an exact science. The final compromise on the
worth of the owner's contribution in the equity financing agreement is
likely to be much lower than the owner thinks it should be and
considerably higher than the partners of the capital firm think it
might be.

In the ideal situation, of course, the two parties to the agreement are
able to do together what neither could do separately:

1) the company is able to grow fast enough with the additional funds
to do more than overcome the owner's loss of equity;

and

2) the investment grows at a sufficient rate to compensate the venture
capitalists for assuming the risk.

An equity financing agreement with an outcome in five to seven years which
pleases both parties is ideal. Since the parties cannot see this outcome
in the present, neither will be perfectly satisfied with the compromise
reached.

It is important, though, for the business owner to look at the future.
He or she should carefully consider the impact of the ratio of funds
invested to the ownership given up, not only for the present, but for
the years to come.

Control.

Control is a much simpler issue to resolve. Unlike the division of
ownership over which the venture firm and management are likely to
disagree, control is an issue in which they have a common interest.

While it is understandable that the management of a small company will
have some anxiety in this area, the partners of a venture firm have
little interest in assuming control of the business. They have neither
the technical nor the managerial personnel to run a number of small
companies in diverse industries.

They much prefer to leave operating control to the existing management.

The venture capital firm does, however, want to participate in any
strategic decisions that might change the basic product/market character
of the company and in any major investment decisions that might divert
or deplete the financial resources of the company. They will, therefore,
generally ask that at least one partner be made a director of the company.

They also want to be able to assume control and attempt to rescue their
investment if severe financial, operating or marketing problems
develop. Thus, they will usually include protective covenants in their
equity financing agreements to permit them to take control and appoint new
officers if financial performance is very poor.

Annual Charges.

The investment of the venture capital firm may be in the final form of
direct stock ownership which does not impose fixed charges. More likely,
it will be in an interim form - convertible subordinated debentures or
preferred stock.

Financings may also be straight loans with options or warrants that can be
converted to a future equity position at a pre-established price.

The convertible debenture form of financing is like a loan. The debentures
can be converted at an established ratio to the common stock of the company
within a given period, so that the venture capital firm can prepare to
realize their capital gains at their option in the future. These
instruments are often subordinated to existing and planned debt to permit
the company invested in to obtain additional bank financing.

Debentures also provide additional security and control for the venture firm
and impose a fixed charge for interest (and possibly principal) on the
company. The owner/manager of a small company seeking equity financing
should consider the burden of any fixed annual charges resulting from the
financing agreement.

Final Objectives.

Venture capital firms generally intend to realize capital gains on their
investments by providing for a stock buy-back by the small firm,
by arranging a public offering of stock of the company invested in or by
providing for a merger with a larger firm that has publicly traded stock.

They usually hope to do this within five to seven years of their initial
investment. (It should be noted that several additional stages of
financing may be required over this period of time.)

Most equity financing agreements include provisions guaranteeing that the
venture capital firm may participate in any stock sale or approve any
merger, regardless of their percentage of stock ownership. Sometimes the
agreement will require that the management work toward an eventual stock
sale or merger.

Clearly, the owner/manager of a small company seeking equity financing
must consider the future impact upon his or her own stock holdings
and personal ambition of the venture firm's aims, since taking in a
venture capitalist as a partner may be virtually a commitment to
eventually sell out or go public.

Types of Venture Capital Firms

Traditional Partnerships are often established by wealthy families to
aggressively manage a portion of their funds by investing in small
companies.

Professionally Managed Pools are made up of institutional money and
which operate like the traditional partnerships.

Investment Banking Firms usually trade in more established securities,
but occasionally form investor syndicates for venture proposals.

Insurance Companies often have required a portion of equity as a
condition of their loans to smaller companies as protection against
inflation.

Manufacturing Companies have sometimes looked upon investing in smaller
companies as a means of supplementing their research and development
programs.

Small Business Investment Corporations (SBIC's) are licensed by the
Small Business Administration (SBA) and may provide management assistance
as well as venture capital. When dealing with SBIC's, the small business
owner/manager should initially determine if the SBIC is primarily
interested in an equity position, as venture capital, or merely in
long-term lending on a fully secured basis.

In addition to these venture capital firms, there are individual private
investors and finders. Finders, which can be firms or individuals, often
know the capital industry and may be able to help the small company seeking
capital to locate it, though they are generally not sources of capital
themselves.

Care should be exercised so that a small business owner deals with
reputable, professional finders whose fees are in line with industry
practice. Further, it should be noted that venture capitalists generally
prefer working directly with principals in making investments, though
finders may provide useful introductions.

The Importance of Formal Financial Planning

In case there is any doubt about the implications of the previous sections,
it should be noted that it is extremely difficult for any small firm -
especially the starting or struggling company - to get venture capital.

There is one thing, however, that owner/managers of small businesses can do
to improve the chances of their venture proposals at least escaping the 90
which are almost immediately rejected. In a word - plan.

Having financial plans demonstrates to venture capital firms that you are a
competent manager, that you may have that special managerial edge over
other small business owners looking for equity money. You may gain a
decided advantage through well-prepared plans and projections that
include:
- cash
- budgets,
- pro forma statements,
- and capital investment analysis and capital source studies.

Cash budgets should be projected for one year and prepared monthly.
They should combine expected sales revenues, cash receipts, material, labor
and overhead expenses, and cash disbursements on a monthly basis. This
permits anticipation of fluctuations in the level of cash and planning for
short term borrowing and investment.

Pro forma statements should be prepared for planning up to three years
ahead. They should include both income statements and balance sheets.
Again, these should be prepared quarterly to combine expected sales
revenues; production, marketing and administrative expenses; profits;
product, market or process investments; and supplier, bank or investment
company borrowings.

Pro forma statements permit you to anticipate the financial results of
your operations and to plan intermediate term borrowings and investments.

Capital investment analyses and capital source studies should be
prepared for planning up to five years ahead. The investment analyses
should compare rate of return for product, market, or process investment,
while the source alternatives should compare the cost and availability of
debt and equity and the expected level of retained earnings, which
together will support the selected investments.

These analyses and source studies should be prepared quarterly so you may
anticipate the financial consequences of changes in your company's
strategy. They will allow you to plan long term borrowings, equity
placements, and major investments.

There is a bonus in making such projections. They force you to consider
the results of your actions. Your estimates must be explicit; you have
to examine and evaluate your managerial records; disagreements must be
resolved - or at least discussed and understood.

Financial planning may be burdensome but it is one of the keys to business
success.

Now, making these financial plans will not guarantee that you'll be able to
get venture capital. Not making them will virtually assure that you won't
receive favorable consideration from venture capitalists.

You can use this article in your blog or website or you can email it to friends BUT with this link intact – http://smlbusiness.blogspot.com

Record Keeping in a Small Business

2008-05-18T23:35:00.000-07:00

INTRODUCTION
An appropriate record-keeping system can determine the survival
or failure of a new business. For those already in business, good
record-keeping systems can increase the chances of staying in
business and the opportunity to earn larger profits. Complete
records will keep you in touch with your business's operations
and obligations and help you see problems before they occur.
This publication explains the characteristics of and procedure
for establishing a good record-keeping system.

THE NEED FOR GOOD RECORDS
Accounting records furnish substantial information about your
volume of business, such as how present and prior volumes
compare, the amount of cash versus credit sales and the level and
status of accounts receivable. In addition, good accounting
records help to accomplish the following tasks.

Monitor Inventory
While a large inventory allows goods to be delivered when they
are ordered, too large an inventory represents an excess
investment. If your inventory does not turn over quickly, your
business may lose profits due to obsolescence, deterioration or
excess investment.

Any items removed from inventory for personal use should be set
aside in a special account for two reasons: first, they need to
be recognized separately for tax purposes and, second, including
these items in business gross profit calculations can be
misleading.

Control Expenses
Accounting records detail the amounts owed to suppliers and other
creditors so that you can plan the availability of cash to meet
your obligations. Such records also provide information regarding
expenditures and allow you to establish controls over them. At
all times, you must be aware of your individual expense
requirements and how they relate to the overall picture.

Fulfill Payroll Requirements
Payroll is one of the largest expenses in a small business.
Adequate payroll records should meet the requirements of the
- Internal Revenue Service.
- State department of revenue.
- Local department of revenue.
- Workers' compensation laws.
- Wage and hour laws.
- Social security requirements.
- Unemployment insurance requirements.

For each of these categories you are required to provide annual
reports and summaries. In addition, you must provide employees
with the W-2 forms needed to file federal and other income tax
returns. In order to provide this detailed information, it is
essential for you to maintain good accounting records.

Determine Profit Margin
Good accounting records will indicate a business's level of
profit, and provide specific information on the profitability of
certain departments or lines of goods within your business. Such
analysis is important to avoid continuing product lines far
beyond their profitability. In most cases, you can avoid losses
if you maintain current records and analyze the information from
your records on an ongoing basis.

Improve Cash Flow
Good accounting records provide detailed reports of cash
availability, both on hand and in the bank, and of cash shortages
or the diversion of cash. Since cash is your most liquid asset,
you must carefully account for it.

Use Supplier Discounts
A cash budget will provide the business owner with a projection
of the availability of cash that may be used to pay invoices as
they become due. Discounts from suppliers for prompt payment can
amount to substantial savings. A 2 percent discount is common if
you pay the bill in full within 10 days; if not, full payment is
due within 30 days. In business, this is commonly referred to as
2/10, n/30 where n = the net sum due. It means you pay 2 percent
less if you pay within 10 days or you pay full price within
30 days. Take into account that this discount is cumulative. If
you make timely payments for each month of the year you will gain
a 24 percent benefit (2 percent 12 months).

Measure Performance
Finally, good business records help you measure your business's
performance by comparing your actual results with the figures in
your budget and those of other similar businesses.

REQUIREMENTS OF A GOOD SYSTEM

The following criteria are essential to a good record-keeping
system:
- Simplicity
- Accuracy
- Timeliness
- Consistency
- Understandability
- Reliability and completeness

There are several copyrighted accounting systems that can be
purchased and adapted to the individual business, or you may find
it is better to use a system specifically designed for your
business and one that meets the above-mentioned criteria.

Commercial Record-Keeping Systems
Record-keeping systems are currently available from various
sources in the marketplace: stationery stores, publishers and
business advisory services. These systems either are specifically
designed for a certain type of business or are general enough to
be used by many different types of businesses. Systems are
available for cash basis recording, accrual basis recording and
for both single and double entry.

Computerized Record Keeping
Consider using a computer for your business operations. Compare
different software systems and make sure that the system you
choose provides accurate and timely information and offers more
than adequate presentation of accounting information for small
businesses.

Low-cost computer programs are available that can handle many of
the book entries that are necessary in a system that is
maintained by hand. Appropriate hardware and a good general
ledger software program can offer you substantial assistance in
recording business transactions and summarizing the information
into appropriate accounting presentations.

Currently available software allows you to enter transactions
individually; these transactions are posted directly to the
general ledger. A printout at the end of a given period shows the
individual account activity, and also includes a balance and
total of the accounts and provides a trial balance presentation.
If the software is designed properly, it will provide
appropriately prepared financial statements (balance sheet,
income statements).

METHODS OF ACCOUNTING

There are two basic methods of accounting: cash basis and accrual
basis. The method you choose will depend on your type of
business. Cash basis is the simpler method. It is mainly used by
service businesses that do not maintain inventory or startup
businesses that do not offer credit. The accrual method is used
by businesses that provide for credit sales or maintain an
inventory.

Cash Basis Method
In cash basis accounting, you record sales when cash is received
and expenses when they are actually paid. Using the cash basis
method is like maintaining a checkbook. Under this method,
accounts receivable are not recorded as sales until they are
collected. Accounts payable are not recorded as expenses until
the account is paid. Bad debt, accruals and deferrals are not
appropriately recorded under cash basis because they are examples
of outstanding credit (business notes). The cash basis method is
not appropriate for businesses that extend credit.

Accrual Basis Method
In accrual basis accounting, you report income or expenses as
they are earned or incurred rather than when they are collected
or paid. Record credit sales as accounts receivable that have not
yet been collected.

The accrual basis also provides a method for recording
expenditures paid in a single installment but covering more than
one period. For example, interest may be paid semiannually or
annually, but it is recorded on a monthly basis.

The accrual method satisfies the matching concept, i.e., matching
income with related expenditures. Consequently, it can provide a
clear and accurate view of business operations for a given
period.

THE ACCOUNTING CYCLE

The accounting cycle can be described as follows:
1. A business transaction occurs, giving rise to an original
document that is recorded in a book of original entries called a
journal.
2. The totals from the journal are summarized and reported in a
book of accounts, known as a general ledger.
3. The general ledger contains the individual accounts maintained
by the business.
4. The individual accounts are listed in the form of debits and
credits, known as the trial balance of the general ledger.
5. From this trial balance, after making certain adjustments, you
prepare the business's financial statements.

Journals
You derive the information for each journal entry from original
source documents, such as, sales slips, cash register tapes,
check stubs, purchase invoices and other items that record your
business transactions. You may need to create subsidiary journals
for specific, frequently occurring types of transactions, such as
sales and expenses.

General Ledgers
The summary and totals from all journals are entered into the
general ledger. A general ledger is a summary book that records
transactions and balances of individual accounts, and is
organized into five classes of individual accounts, as follows:
1. Assets - A record of all items that the business owns.
2. Liabilities - A record of all debts the business owes.
3. Capital - A record of all ownership or equity.
4. Sales - A record of all income earned for a specific period.
5. Expenses - A record of all expenditures incurred during a given
period.

When the trial balance is prepared, these classifications are
easily recognized.

Trial Balance
At the end of the fiscal year or accounting period, the
individual accounts in the general ledger are totaled and closed.
The balances of the individual accounts are summarized in the
financial statements.

Financial Statements
The main types of financial statements are the balance sheet and
the income statement, also known as the profit and loss
statement. The balance sheet is a report of a business's
financial condition (assets, liabilities and capital) at a
specific moment in time (see Example 1) and the income statement
is a summary of profit and loss for a specific period of time,
generally a month, quarter or year (see Example 2).
Other statements may be prepared. For example, a cash flow
statement identifies the sources and applications of cash.
Statements may also be prepared to indicate manufacturing
expenses or other special areas that are of interest to you.

Percentages
Percentages are used in financial statements to show the part of
each sales dollar used by the various expenses. Percentages are
especially helpful for comparing current year financial
statements with those of prior years to determine business
trends. Percentages are also helpful for comparing your figures
with those of other firms in the same line of business (see
Example 3).
-------------------------------------------------------------------------
Example 3 Appliance Repair Company
Income Statement Showing Expenses as Percentage of Sales
Total Parts Service
--------------- ------------------------
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------
Gross Sales $70,000 100.00 $25,000 100.00 $45,000 100.00
-------------------------------------------------------------------------
Cost of sales
Opening inventory 13,000 13,000
Purchases 25,000 25,000
Total 38,000 38,000
Ending inventory 14,000 14,000
Total cost of sales 24,000 34.29 24,000 96.00
Gross Profit 46,000 65.71 1,000 4.00
Operating expenses
Payroll 26,000 37.14 26,000 57.78
Rent 3,000 4.29 1,500 6.00 1,500 3.33
Payroll taxes 1,500 2.14 1,500 3.33
Interest 600 .86 300 1.20 300 .67
Depreciation 1,400 2.00 1,400 3.11
Truck expense 5,500 7.86 5,500 12.22
Telephone 2,400 3.43 1,200 4.80 1,200 2.67
Insurance 1,000 1.43 400 1.60 600 1.33
Miscellaneous 1,000 1.43 500 2.00 500 1.11
-------------------------------------------------------------------------
Total Expenses 42,400 60.58 3,900 15.60 38,500 85.55
-------------------------------------------------------------------------
Net Profit (Loss)
(Exclusive of owner's salary)
3,600 5.14 (2,900) (11.60) 6,500 14.44
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Example 1
ABC SALES CO.
BALANCE SHEET
December 31,199-
Assets
Current assets
Cash.................................. $23,590
Notes receivable........................ 10,000
Accounts receivable..................... 20,880
Merchandise receivable.................. 62,150
Store supplies.......................... 960
Office supplies......................... 480
Prepaid insurance....................... 1,650
------
Total Current Assets................ $119,710
Plant assets
Land.................................. $20,000
Building.............................. $140,000
Less accumulated depreciation....... 33,900 106,100
Office equipment...................... 15,570
Less accumulated depreciation....... 8,720 6,850
Store equipment....................... 27,100
Less accumulated depreciation....... 15,700 11,400
Total plant assets.................. 144,350
-------
Total assets............................ $264,060
Liabilities
Current liabilities
Accounts Payable...................... $22,420
Mortgage note payable (current portion) 5,000
Salaries payable...................... 1,152
-------
Total current liabilities $28,572
Long-term liabilities
Mortgage note payable 20,000
-------
Total liabilities $48,572
Stockholders' Equity
Capital Stock........................... $100,000
Retained earnings....................... 115,488
--------
Total stockholders' equity............ $215,488
--------
Total liabilities and stockholders' equity $264,060
----------------------------------------------------------------------------
---------------------------------------------------------------------------
Example 2
ABC SALES CO.
INCOME STATEMENT
December 31,199-
Revenue from Sales
Sales $732,163
Less: Sales returns and allowances... $6,140
Less: Sales discount................. 5,822 11,962
------ -------
Net sales............................ 720,201
Cost of merchandise
Merchandise inventory Jan. 1 purchases 530,280
Less purchases discount............ 2,525
-------
Net purchases........................ 527,755
-------
Merchandise available for sale....... 587,455
Less merchandise inventory Dec. 31. 62,150
Cost of merchandise sold............. 525,305
-------
Gross Profit........................... 194,896
Operating Expenses
Selling expenses
Sales salaries....................... $60,044
Advertising.......................... 10,460
Depreciation-store equipment......... 3,100
Insurance-selling.................... 2,080
Store supplies....................... 2,010
Miscellaneous (selling).............. 630
-------
Total selling expenses............. 78,324
General expenses
Office salaries...................... 21,032
Heating and lighting................. 8,100
Taxes................................ 6,810
Depreciation-building................ 4,500
Depreciation-office equipment........ 1,490
Insurance-general.................... 830
Office supplies...................... 610
Miscellaneous........................ 760
-------
Total general expenses............. 44,132
-------
Total operating expenses........... 122,456
-------
Net income from operations......... 72,440
Other Income-interest income....... 3,600
Other expense-interest expense..... 2,440 1,160
------- -------
Net Income........................... 73,600
---------------------------------------------------------------------------
HOW TO ANALYZE YOUR RECORDS
To chart the progress of your business, you should become
familiar with various forms of financial statements analysis and
measurement.

Financial statements indicate which items need more attention.
For example, profits may be too low or rent unnecessarily high.
Perhaps there is a way to use the business vehicles more
efficiently, to increase inventory turnover or to reduce long
distance telephone bills.

In analyzing financial statements, carefully examine all items
that do not seem realistic. Answer the following questions:
- Why are certain expenses at a particular level?
- Are there any ways to reduce or avoid certain expenses?
- Should you incur all of your expenses?
- Does the level of profit justify your investment, time and
effort?

Financially significant items should be analyzed regularly. For
example, examine payroll as a percentage of total administrative
expenses. Keep in mind that, if your business is a
proprietorship, your salary is not a payroll expense; however, if
your business is a corporation, your salary should be a payroll
expense.

Analyzing Payroll Expenses
In justifying payroll and other expenses, answer the following
questions:
- Are accurate records maintained for time spent on various jobs
and functions?
- Is the eight-hour day of each employee accounted for
appropriately?
- When employees are paid overtime, is the additional expense
reflected in charges to the customer?
- Is the level of payroll expense appropriate for your type of
business?
- Are you billing on a guaranteed price basis or on an hourly
basis?
- When using guaranteed price basis for billing, does actual time
spent exceed time estimated for the job?
- Do employees work with a minimum of wasted effort and time?
- Are you operating at maximum efficiency? What strategies can be
implemented to maximize efficiency?
Ratios
Accountants use various ratios to evaluate financial statements,
such as ratios that assess liquidity, solvency and profitability.

Liquidity
These ratios indicate the availability of cash and the firm's
ability to pay liabilities.
Current ratio: Current assets
-------------------
Current liabilities
Acid test Cash, cash equivalents
(liquidity ratio): and receivables
----------------------
Current liabilites
Day's sales Accounts receivable
in receivables: ---------------------------
Credit sales divided by 360
Inventory Cost of sales
turnover: -------------
Average inventory
Capital and Long-term Solvency
These ratios indicate the firm's ability to meet debts when due.
Equity/debt Total equity
ratio: ------------
Total debt
Total equity to Total equity
fixed assets ------------
Net fixed assets
Profitability
These ratios indicate your firm's performance.
Gross profit Gross profit
margin ------------
Sales
Net income Net income
to sales ----------
Sales
Operating Income before income taxes
income to sales --------------------------
Total assets
Return on Net income and interest expenses
total assets --------------------------------
Total assets
Return on total Net income
------------
Total equity

OTHER IMPORTANT RECORDS

In addition to accounting records, you will need to keep separate
records for accounts receivable, payroll and taxes, petty cash,
insurance, business equipment and perhaps other items.

Accounts Receivable
A good record-keeping system should provide you with a detailed
report of accounts receivable, including current information on
customers and a running balance of their accounts. To maintain a
good accounts receivable system, record credit charges on a
regular basis. It is essential that you follow up on all late
paying and delinquent customers.

Accounts receivable should be aged at the end of each month. This
means organizing the accounts into those that are current; 30-,
60-, and 90-days old and older. This arrangement helps you to
take appropriate, timely actions.

One example of a timely action is to transfer delinquent accounts
to a notes receivable account. Notes receivable are loans the
business makes to others, either inside or outside the business.
Each note receivable should contain specific terms of credit and
interest and should be signed by the customer. An additional
timely action to decrease the number of bad accounts and avoid
the effort of collecting payments from slow-paying customers is
to issue a formal complaint with your local credit bureau.

Payroll and Taxes
Current Internal Revenue Service (IRS) regulations require that
you withhold federal income tax and social security (FICA) from
each employee. You must remit the amount for taxes to the IRS on
a quarterly, monthly or more frequent basis. A detailed reporting
system for payroll will help you make timely tax payments.
Gather specific information about each employee on individual
employee record cards. All employees should fill out federal Form
W-4, which indicates their filing status and the number of
exemptions they claim. Use this information to compute the
federal withholding and social security (FICA) deductions for
each payroll check.

Prepare Employees Quarterly Federal Tax Return (Form 941) by
totaling each employee's withholding for federal taxes and social
security. File Form 941 with the IRS.

Each payroll period, total the accumulated withholdings of both
federal taxes and social security for all employees. If this
total exceeds $500 for any month, you must deposit this amount by
the 15th day of the following month in a depository bank (an
authorized financial institution or a federal reserve bank).
Generally, when the total exceeds $3,000, you must deposit this
amount within three business days. Any overpayment in taxes is
paid back to you quarterly.

At the year's end, you are required to prepare not only the
information normally required for that quarter, but also
summaries of each employee's total earnings and withholdings for
the year (Form W-2). Provide this form to each employee and the
IRS.

A Word of Caution
It is very easy to fall behind in making tax payments. If you
find yourself short of cash, do not be tempted to delay payment
of taxes. The IRS will not bill your business for taxes due nor
will it notify you of late payments. Delayed payments can easily
add up to a large sum; the debt may impede the growth of your
business and may even force you to close your business, to say
nothing of the federal penalties incurred for late payments.
With a good record-keeping system, you can simplify the process
of filing taxes to the point where the information needed to
complete the forms is automatically generated. Setting up such a
system is a rather technical task and you may need to seek
guidance.

Petty Cash
Sometimes a petty cash fund is needed to purchase small items
required on a day-to-day basis. If this is necessary, draw a
check to petty cash for a nominal amount.

Problems often arise when cash is easily available; therefore, if
possible, avoid a petty cash fund. However, very often the
convenience of having a small amount of cash available will
facilitate the smooth operation of your business. Be sure to
balance this fund monthly, based on the cash balance plus
receipts for all expenditures.

Insurance
Most businesses have several types of insurance. For each policy,
you should have the following information:
- Clear statement of the type of coverage.
- Names of individuals covered.
- Effective dates and expiration date.
- Annual premium.

Review your insurance policies on a regular basis. In addition,
annually consult an insurance specialist, who will review the
total insurance package to determine what coverage is appropriate
and ensure that premiums remain in line with prior quotations.

Business Equipment
Keep an accurate list of permanent business equipment used on
both a regular and stand-by basis. The list should describe the
equipment and provide serial numbers, date of purchase and
original cost. Keep the list available for insurance or other
purposes. You will also need this information to prepare accurate
depreciation schedules.

ACCOUNTING SERVICES

You have several choices in who should maintain your accounting
system. You can
- Maintain the books yourself.
- Hire a bookkeeper on a full-time or part-time basis.
- Hire the accountant who set up your books.
- Set up a hybrid system in which you maintain the day-to-day
reports, while an accountant does the period-end record
preparation, summaries and reconciliations and the returns for
sales tax, excise tax and payroll taxes.

In making the choice, you must decide whether you have the
ability and time to set up and maintain good records or if you
should engage an outside accounting service. It is usually
suggested that you hire an accountant to do the final year-end
preparations and to advise you. No matter what you choose, you
should remain familiar with your books and participate in the
record-keeping process. This will maximize the services provided
by the accountant and allow you to keep track of your business

Selecting the Accounting Service
If you decide to hire an outside service, find an accounting firm
that will work closely with your business and provide you with
the information necessary to develop a successful operation.
Interview several accounting professionals and compare their
level of accounting knowledge, computer literacy, knowledge of
and experience with small business accounting and any specialized
knowledge required in your business.

There are many types of professionals you may consider, such as a
certified public accountant, an enrolled agent or an accredited
accountant.

- Certified Public Accountant (CPA)A person who has passed the
American Institute of CPAs' national examination, which tests an
individual's ability in accounting, auditing, law and related
areas.
- Enrolled Agent (EA)An individual who has passed a two-day exam
prepared by the IRS, covering many areas of federal taxation.
This person is generally considered a tax specialist.
- Accredited AccountantAn individual who has passed a rigorous
examination prepared by the Accreditation Council of Accountancy
and Taxation, a national accounting accreditation board
affiliated with the National Society of Public Accountants and
the College for Financial Planning in Denver, Colorado.
Accredited accountants specialize in small business accounting.
Other accountants in public practice perform various levels of
accounting and write-up services.

When selecting an accountant, the cost of the accountant's fees
must be weighed against the benefits received. Frequently, the
accountant's professional advice can increase profits to more
than cover the expense. Monthly services by an accounting firm
will provide you with complete and timely information and also
will allow the accountant to develop knowledge of your business
and be in a more comfortable position to render professional
advice as the business grows.

Advice and Assistance
In addition to bookkeeping, an accountant can advise you on
financial management. He or she can assist with cash flow
requirements and budget forecasts, business borrowing, choosing a
legal structure for your business and preparation and advice on
tax matters.

Cash Flow Requirements
An accountant can help you work out the amount of cash needed to
operate the business during a certain periodfor example, a
three-month, six-month or one-year projection. The accountant
considers how much cash you will need to carry your accounts
receivable, to increase inventory, to cover current invoices, to
acquire needed equipment and to retire outstanding debts.

Additionally, the accountant can determine how much cash will
come from collection of accounts receivable and how much will
have to be borrowed or provided from other sources.

In determining cash requirements, the accountant may notice and
call attention to danger spots, such as accounts that are in
arrears or delinquent areas or areas of excess expenditure.

Business Borrowing
An accountant can assist you in compiling the information
necessary to secure a loan: the assets the business will offer
for collateral, the present debt obligations, a summary of how
the money will be used and repayment schedules. Such data show
the lender the financial condition of the business and your
ability to repay the loan. Remember, lenders have two very
definite requirements: (1) that the business have adequate
collateral to secure the loan and (2) that the business will be
able to repay the loan. An accountant can advise on whether you
need a short- or long-term loan. In addition, your accountant may
introduce you to a banker who knows and respects his or her
financial judgment.

Legal Structure
It is wise to discuss the type of business organization that best
fits your needs with an accountant and an attorney. They can
point out the advantages and disadvantages of the various forms
of business organization, such as a
- Proprietorship - An extension of individual ownership.
- Partnership - Multiple proprietors.
- Corporation - A completely separate legal entity.
In addition, they can advise you on immediate plans regarding
management, financing, long-range plans to bring others into the
business and estate planning, all of which affect the type of
business you choose.

Tax Considerations
This is an area in which an accountant can provide much advice
and assistance. Your accountant can suggest methods to record and
document the various types of information necessary for taxes.

APPENDIX A: FINANCIAL STATUS CHECKLIST

What You Should Know

Daily
- 1. The balance of cash on hand.
- 2. The bank balance.
- 3. Daily summaries of sales and cash receipts.
- 4. Any errors or problems that have occurred in collections.
- 5. A record of monies paid out, both by cash and by check.

Weekly
- 1. Accounts receivable (particularly those accounts that appear to
be slow paying).
- 2. Accounts payable (be aware of the discount period mentioned
above).
- 3. Payroll (be aware of the accumulation of hours and the
development of the payroll liability).
- 4. Taxes (be aware of any tax items that are due and reports that
might be required by government agencies).

Monthly
- 1. If you engage an outside accounting service, provide records of
receipts, disbursements, bank accounts and journals to the
accounting firm. This will allow the firm to maintain good
records and present them to you for review, consideration and
support in decision making.
- 2. Make sure that income statements are available on a monthly
basis, and certainly within 15 days of the close of the month.
- 3. Review a balance sheet that indicates the balance of business
assets and the total current liability.
- 4. Reconcile your bank account each month so that any variations
are recognized and necessary adjustments made.
- 5. Balance the petty cash account on a monthly basis. If you allow
this account to extend for a longer period, it may create
substantial problems.
- 6. Review federal tax requirements and make deposits.
- 7. Review and age accounts receivable so that slow and bad
accounts are recognized and handled.

You can use this article in your blog or website or you can email it to friends BUT with this link intact - http://smlbusiness.blogspot.com

Financing for the Small Business

2008-05-17T01:41:00.000-07:00

WHY FINANCING IS IMPORTANT TO YOUR BUSINESS

Many people dream of starting and managing their own business.
Some actually do start a business and achieve their dream; others
keep on dreaming. Why is this so? What separates the successful
entrepreneur from the unsuccessful?

In many cases, it seems to be whether the prospective business
owner has access to sufficient funds to turn the dream into
reality. You've probably heard stories about how many businesses
fail each year. Sometimes their failure can be traced to a lack
of financing. It is difficult to guess how many businesses never
even start because of that same lack of funding.

Just learning where and how to get the funds to start or expand
your business can be confusing, frustrating and time consuming.
The amount of financing may be as little as $100 or more than $1
million, based on the type of business. Many different businesses
can be started with a relatively small amount of money.

This guide will explain how, when and where to secure the capital
your business needs to be a success and will give you
step-by-step instructions on how to finance your business in the
most profitable ways possible. Finding money may be difficult at
times, but the economy depends heavily on small businesses like
yours. It is possible to get the money that your business needs,
and the first step to success is knowing how and where to look.

WHO CAN GET FINANCING TO START OR EXPAND A BUSINESS?

You can. Almost every valid business idea can be funded; it's a
matter of knowing where to look. When a new business is a
success, everyone involved wins too. You as the owner certainly
benefit. So does the economy, since your business helps it to
grow. A successful business also creates new jobs and adds an
important product or service to the community. It is for all
these reasons that organizations and individuals may be willing
to invest in your business; as your business profits so do your
investors.

HOW MUCH MONEY WILL YOU NEED?

Every business is different, but it is still possible to get a
reasonable idea of how much cash your business is likely to need
by considering a few key factors.

Does Your Business Produce a Product or Provide a Service?
Initially, a service business will require less cash because it
will not have high material and equipment costs. If you intend to
manufacture a product, you must consider the type and amount of
direct materials and equipment needed and expenses incurred.

Who Will Provide Labor?
Do you intend to do most of the work yourself or will you hire
employees to assist you? Contributing your own time to the
business is one way to keep costs down. Later, when your business
is firmly established, you may wish to hire employees to take
over many of the day-to-day operations.

Do You Have Personal Funds to Invest in Your Business?
Almost all investors prefer or require that you contribute some
of your money to the business. This contribution of unborrowed
funds is called equity. There is no fixed percentage for this
equity contribution, but most lenders require at least 25 percent
of the total amount needed to establish the business. The amount
of equity required is also influenced by other credit factors,
such as management experience and adequacy of collateral.

Can You Provide for Your Personal Expenses While the Business Is
Getting Started?
It is unusual for a beginning business to show a profit in the
first few years. It's good strategy to plan to cover your
personal living expenses for at least six months while your
business is getting started. If your business is already
operating, it may be necessary to reduce your salary while you
try to expand. If you have your own funds set aside for your
personal expenses during these periods, you will have one less
expense for which you will need borrowed funds.

ESTIMATING YOUR EXPENSES

There are certain expenses that virtually all businesses must
incur. The following chart will help you estimate your typical
expenses. (This is not an all inclusive list. It provides some of
the more typical expenses.)
Office space rental $---------------
Office equipment $---------------
Office supplies $---------------
Insurance $---------------
Utilities (phone, electricity,
heat, water) $---------------
Maintenance $---------------
Advertising $---------------
Labor $---------------
Business licenses $---------------
A manufacturing business will also have specific expenses related
to production. Therefore, the following expenses should also be
considered:
Raw materials $---------------
Machinery and equipment rental $---------------
Warehouse or factory space rental $---------------
Total estimated costs $---------------

ASSESSING YOUR FINANCIAL NEEDS

Once you have determined your expenses, you will need to estimate
what percentage of the funds you can supply yourself and what
percentage you must find elsewhere. At this point, the figure may
seem overwhelming. Don't be discouraged. It's far better to have
realistically assessed your situation early than to rush into a
new venture before you've planned adequately. Almost all
businesses need outside funds and yours probably will not be an
exception to the rule. You should prepare a month-by-month cash
flow projection for the entire first year, perhaps with the help
of your accountant or banker. If the projection is realistic, it
will clearly show how much financing you need.
Yes, starting a new business can be risky, but it can also pay
big rewards both in personal satisfaction and in economic return.

TYPES OF FUNDING DEBT OR EQUITY?
In deciding how to finance your business, you need to consider
certain questions:
- How much control of your new business can you comfortably
give up?
- Which facts will debt and equity financiers be interested
in? How do debt and equity requirements differ?
- How highly leveraged do you want your company to be? (The
higher the amount borrowed compared to the amount of
equity, the higher the leverage.)
In order to answer these questions, it is important that you
clearly understand how debt financing and equity financing work
and that you be aware of the advantages and disadvantages of each.

DEBT FINANCING

Debt is a direct obligation to pay something (cash) to someone
(an investor or lender). In exchange for having lent you the
money, an investor will expect to be paid interest. Obviously,
this means that you will repay more money than you have borrowed.
Therefore, an important feature of debt financing is the interest
rate you will be charged.

Interest Rate and Risk
The interest rate usually reflects the level of risk the investor
is undertaking by lending you money. Investors will charge you
lower interest rates if they feel there is a low risk of the
debt's not being repaid. Investors will raise interest rates if
they are concerned about your ability to repay the debt or if you
have a history of slow payments to lenders as shown on your
personal or business credit reports.

It is important to realize a new business is likely to be charged
a higher interest rate than a well-established business because
the lender will feel a new business represents a greater risk.
Here's an example of how interest rates can affect your loan
repayment amount:
Example 1: A ten-year loan for $50,000 at 12 percent interest
requires monthly payments of $717.
Example 2: A ten-year loan for $50,000 at 15 percent interest
requires monthly payments of $807.
A payment difference of $90 each month, over 120 months, makes
the loan in Example 2 almost $11,000 more expensive over the life
of the loan.

What Do Debt Lenders Look For?
A debt lender will evaluate your loan request by considering
answers to several key questions:
- Can you offer reasonable evidence of repayment ability-
either established earnings (for an existing business)
or income (profit and loss) projections (for a new
business)?
- Do you have sufficient management experience to operate
the business?
- Do you have enough equity in the business? Equity
provides what lenders call a cushion for creditors.
- Do you have a reasonable amount of collateral (assets
to be acquired, residential property equity, etc.)?

Advantages of Debt Financing
The biggest advantage of debt financing is that it allows you,
the business owner, to retain control of your company. You are
therefore entitled to all company profits and have ultimate
decision-making authority. Since many entrepreneurs start a
business for exactly these reasons, a critical advantage of debt
financing is that it provides you with some financial freedom;
your debt is limited to the loan repayment period. After you have
repaid the borrowed money, the lender has no further claim on
your business.

Disadvantages of Debt Financing
The biggest disadvantage of debt financing is having to make
monthly payments on a loan. Cash may be scarce and expenses may
be higher than estimated during the early years of a new
business. Even so, the lender must be paid on time and there are
severe penalties for late or missed payments, such as additional
fees, a poor credit rating and the possibility that the lender
may call the loan due.

Another disadvantage of borrowing funds is the difficulty in
obtaining them. In general, lenders prefer to invest in proven
businesses. If your business is new, a lender may charge you a
high interest rate or may refuse to make the loan entirely. In
contrast, if you have been in business for a significant period
of time, you may find debt lenders very happy to extend loans.

EQUITY FINANCING

Equity financing involves no direct obligation to repay any
funds. It does, however, involve selling a partial interest in
your company. In effect, an equity investor becomes your business
partner and will have a degree of control over how your business
is run. For example, the sale of stock, one type of equity
financing arrangement, typically works as follows:
Step 1 - You determine from your analysis that your business will
need more funds than you can provide.
Step 2 - You consider financing options and decide that you prefer
to sell an interest in your company rather than borrow
money.
Step 3 - You arrange to offer a sale of stock. This can be much
more complicated than it sounds because you must comply
with an array of legal and reporting requirements for
the life of your business. After shares of your stock
are purchased, investors own a portion of your company,
which they can keep or sell to others.

What Do Equity Investors Look For?
Equity investors buy part of your company by supplying some of
the capital your business requires. Because they will own a share
of your business, equity investors are interested in the
business's long-term success and future profitability.
Equity investors can resell their interest in your company to
other investors. If your business is doing well, they will be
able to sell their stake at a higher price than they paid and
make a profit. Legally, equity investors are more exposed to risk
than are debt investors. If your business fails, equity investors
stand to lose more money than debt investors, since creditors are
typically paid before owners in the event of business failure.
Since equity investors are taking the greater risk, they expect
to earn more on their investment than do debt investors.

Advantages of Equity Financing
With equity financing, you do not repay the money invested by
others (unless a payoff agreement is made at the time of
investment). This can be important when cash is at a premium.
Also, your ideas for making your business successful may carry
more weight with a potential equity investor than with a debt
investor. Since it is in an equity investor's best interest for
your business to grow and expand, he or she will be more likely
to consider sound business ideas than will a debt investor, who
is more concerned with the security of the deal proposed.
Many people who are interested in starting or expanding a
business have more ideas than money; this can be an important
factor in favor of equity financing. In addition, equity
investors, with their genuine interest in your success, can be a
good source of advice and contacts for your business.

Disadvantages of Equity Financing
The biggest drawback of equity financing is that you give up some
control over your business. You may or may not find this
acceptable. Remember, when you accept equity partners, you are
selling part of your business. It may be very difficult to retain
control in the future.

Also, you may find your equity investors do not always agree with
your plans for the business. However, since they own part of your
business, you will have to consider their point of view, even if
you do not agree with their choices.

Finally, equity financing tends to be very complicated and
invariably will require the advice of attorneys and accountants.
A great deal of paperwork must be prepared and filed. For
example, public companies must comply with specific legal
regulations that govern their ways of doing business.

POSSIBLE SOURCES OF FINANCING

Most new small businesses start out by borrowing money rather
than by selling stock. If your business does well, you may at
some point combine both types of financing as your needs change.
Because knowing how, when and where to borrow is so important to
the success of your business, you should be aware of the variety
of possible funding sources. These fall into two basic
categories: private sources, such as your local bank, and public
sources, such as the federal government.

PRIVATE SOURCES

Private sources of financing are either personal sources (savings
or loans from friends and relatives) or external sources (debt
lenders, equity lenders and arrangements that combine debt and
equity).

Savings
Personal funds are the most likely, and the most typically used,
source of funds for a new business. Most lenders require that a
reasonable percentage of your own funds be invested in your
business, as an indication that you will work hard to make the
business a success. You will find most investors unwilling to
consider your request for funding if you have not contributed
cash. This can present a problem, though. Most entrepreneurs do
not have the personal resources to provide all of their initial
financing. They are not alone. Almost all business owners must
borrow money from outside sources.

It is helpful if you, as an owner, provide some of the funds from
your own savings. You may also want to consider such personal
sources as the cash value of a life insurance policy, a home
equity loan or even a credit card. Combining personal savings
with external sources of debt and equity will permit you to
benefit from the effects of leverage, i.e., using other people's
money to earn a profit for yourself.

One of the biggest advantages of using personal savings to fund
your business is your easy access to those funds. There are no
loan applications to complete, no lenders to visit, no paperwork
to prepare and no interest payments to make. If available,
personal savings are a valuable source of capital for your
business.

Finally, a big advantage of having your own start-up capital is
that it ensures that you retain ultimate control of and
responsibility for your business.

Friends and Relatives
Friends and relatives are often an important source of capital
for your business. Since they know you well, the terms of
repayment are likely to be more flexible than those of strangers.

Keep it formal. It's a good idea to prepare a formal agreement
when a friend or relative is willing to invest money in your
business. This will make the relationship professional and will
help to avoid future misunderstandings about how much was
borrowed or when it should be repaid.

The investment can take the form of a direct loan or an equity
investment. Review the previous section on debt versus equity
financing to determine which arrangement will be best in your
particular circumstances.

Based on their personal relationship and their impression of your
business judgment, friends and relatives may be willing to invest
in your business even when others may not. Beware, however.
Because they know you well, they may wish to be more involved in
the day-to-day operations of the business than you would like.
Friends or relatives may feel their investment entitles them to a
routine say in how the business is run, even though you intend to
repay the loan.

Debt Financing
When it is necessary to look to someone other than yourself or a
close friend or relative for business funds, it helps to be aware
of other sources.

Banks
Banks are financial institutions that accept deposits and make
loans. They fall into several categories, such as savings and
loans, thrift institutions and commercial banks. Knowing the
category in which they include themselves can tell you a lot
about the kinds of loans these banks are interested in making.
Savings banks are more experienced in dealing with consumer
loans, such as home mortgages and automobile loans. Commercial
banks have more experience and interest in business loans. This
doesn't mean that you can't go to a savings bank for a business
loan. It may be a good choice. Just be sure to consider that
bank's primary focus and level of experience with your type of
request. Probably the most important point to keep in mind when
dealing with a bank is that bankers don't like risk. Their
primary concern is always the safety of their funds.

How do they operate? Banks may be one of the first sources that
come to mind when you begin searching for additional business
capital. Certainly, they will meet your most basic condition:
they have money available to lend. However, it may be difficult
for a new business to borrow from a bank since lenders usually
prefer to lend to established businesses. Keep in mind, the first
responsibility of a bank is to protect its depositors. As a
result, bankers tend to be very cautious about lending money.
Banks come in all shapes and sizes and there are some real
differences among them. Small community banks with two or three
branches may operate quite differently from large commercial
banks with hundreds of loan offices. You will want to carefully
review the differences among banks before you select a particular
one. Each type offers certain advantages. A commercial bank may
be more experienced and familiar with a business loan request,
but a community bank may know you personally and have more
confidence in your ability to repay your debt.

Where can you get more information? Chances are you're already
familiar with several banks in your area. It's extremely helpful
to approach a bank with which you already have a savings or
checking account or a personal loan. For banks outside your area,
you may want to consult a banking directory, such as Rand
McNally's Bankers Directory or Polk's World Bank Directory. Most
libraries have copies. Directories list the name, location,
assets, liabilities and officers of banks.

Debt Financing
Credit Unions
Credit unions are financial institutions developed by the members
or employees of a company, labor union or other group. Their
overall goal is service to their members, as opposed to profit
making. As a result, their interest rates and other terms may be
more favorable than those offered by a bank. Credit unions are
regulated by the National Credit Union Administration.

What are the advantages of a credit union? The company for which
you or another family member works may have a credit union. If
you decide to start your business while you are still working for
a large company, you may be able to borrow some of the capital
you will need from the credit union. As your business becomes
more profitable and better able to support you financially, you
may decide to concentrate all your energies and time on your
business.

Credit union interest rates are often lower than the rates
charged by other lenders. The amount you will be able to borrow
from a credit union may not be large, but this source of funds
may be helpful in making initial purchases for your business.
Also, a loan application through a credit union may be more
likely to be approved as you may be known to the individual
evaluating your loan request.

Where can you get more information? If you're employed, ask the
human resources department of the company where you work about
your eligibility to join a credit union. There are directories
available at your local library listing all of the credit unions
in the United States.

Debt Financing
Consumer Finance Companies
Consumer finance companies make small personal loans secured by
collateral. Unlike banks, they do not accept deposits and they
lend under the jurisdiction of each state's small loan
regulations. Consumer finance companies will often consider loans
with 100 percent financing because the loans are secured by an
asset.

How do they operate? Consumer finance companies charge higher
interest rates and processing fees than banks and credit unions
but can be more flexible about approving requests. Loans from
this source are more expensive because they are considered to be
more risky. In some cases, the interest rate you will be charged
will be the highest allowed by law for your state.

Consumer finance companies are often approached by people who
have poor credit ratings. Certainly, if you want to start a
business and your credit rating is questionable, you will find
consumer finance companies a more likely source of funds.
However, this does not mean that you should only borrow from a
consumer finance company if you have credit problems.
You should be aware that loans from this source will usually not
exceed several thousand dollars. Also, keep in mind that if you
can't repay your debt, the item that you purchased with the funds
will be seized.

Where can you get more information? The classified advertising
section of your telephone directory lists consumer finance
companies under the heading of Loans. Call and request a meeting,
or ask them to send you written information.

Debt Financing
Commercial Finance Companies
The primary purpose of a commercial finance company is to provide
loans to purchase inventory and equipment. This can be a useful
resource, particularly if your business will manufacture a
product or act as a wholesaler. Commercial finance companies are
similar to consumer finance companies but concentrate on business
loans rather than consumer purchases.

How do they operate? Like consumer finance companies, commercial
finance companies charge higher rates of interest than banks.
They also may be more willing than banks to approve your loan
request. Commercial finance companies will require your debt be
collateralized. This means if you purchase a computer with the
funds you have borrowed, they will have a direct claim on your
computer. If you can't make your monthly payments, the commercial
finance company will be entitled to take your computer and sell
it to recover its investment.

Where can you get more information? Check the telephone directory
for a list of commercial finance companies in your area. You
should research your rights when borrowing from a loan company by
reading your state's laws concerning debt repayment.

Debt Financing
Trade Credit
When a vendor allows you to buy a product and to delay paying for
it, this is known as trade or vendor credit. Vendors offer this
service to help make their products more attractive and to induce
you to buy from them rather than elsewhere. Offering easy credit
terms encourages sales. Keep in mind that the vendor is in
business to make money. There may be a hidden cost for flexible
credit terms in the form of slightly higher prices.

How does it work? Trade credit is one of the most readily
available sources of financing for your business. In many
situations, you will be able to purchase supplies and equipment
directly from a vendor and spread your payments over several
months or years. Often it is possible to make no or a minimal
down payment and to avoid interest charges as well. Even
suppliers who will not extend credit in the beginning of your
relationship may be very willing to do so after you have placed
several orders.

When you are trying to pay for equipment and/or supplies that
your business needs, trade credit can be invaluable. Office
furniture, computers, certain raw materials and manufacturing
equipment are examples of products that can be purchased with
trade credit.

Where can you get more information? Discuss payment terms with
vendors with whom you deal or plan to deal. There may be dramatic
differences in terms among different suppliers. Talk to several
suppliers before making a decision. Remember to ask what types of
credit they offer and if they grant a discount for prompt
payment. Also, be sure to compare prices. Vendor financing is not
desirable if you are being charged substantially more for the
same product you can purchase elsewhere more cheaply with cash.

Debt Financing
Insurance Companies
Insurance companies are a possible source of financing for your
business because they make commercial loans as a means of
investing unused portions of their income. Generally, insurance
companies make term loans and mortgage loans.

How do they operate? If you borrow from an insurance company, you
can expect terms and interest rates similar to those available
from a commercial bank. Insurance companies can provide your
business with a large amount of capital at market interest rates,
but you must have assets sufficient to cover the debt, plus 20-30
percent extra. In effect, you mortgage your property to free cash
for your business. This allows you to retain title to the
property while freeing cash invested in it. Insurance companies
usually have high loan limits; this makes them a good source of
funds if you need a large supply of capital.

Where can you get more information? Speak with your insurance
agent or ask friends to make recommendations. You may also wish
to request information packets from insurance companies' loan
offices.

Debt Financing
Factor Companies
A factor company can be a useful source of funds if you are
already in business and have made sales to customers. Factor
companies purchase your accounts receivable at a discount,
thereby freeing cash for you sooner than if you had to collect
the money yourself. You transfer title of your accounts
receivable to the factor company in exchange for a cash payment.
How do they operate? Factor companies provide two types of
financing alternatives: recourse factoring and nonrecourse
factoring.

In recourse factoring, you retain part of the risk for ultimately
collecting the debts owed to you. The factor company assists you
by speeding up the process. For example, the factor company
purchases your receivables and advances you cash while the
accounts are being collected. However, if your customers do not
pay, you will be held responsible for repayment to the factor
company.

In nonrecourse factoring, you sell all rights and obligations
concerning your accounts receivable. The factor company purchases
your receivables and collects the debts owed. If a customer does
not pay, you will be under no obligation to the factor company.
Factor companies can be a useful source of funds for a new or
existing business. They are not appropriate as a means of seed
capital to start a business because they require that you have
accounts receivable to sell.

Where can you get more information? Factor companies often
advertise in the business sections of newspapers. Usually the
advertisement will say We buy accounts receivable or something
similar. Make sure you work with a reputable company that will
not alienate your customers by harassing them for payment.

Debt Financing
Leasing Companies
A leasing company is a business that rents various types of
equipment to businesses and individuals. By renting rather than
buying the equipment your business will need, you will be able to
avoid many capital expenditures associated with the purchase of
equipment.

How do they operate? Many leasing companies require a down
payment or several months' prepaid rent. Some, however, may allow
you to lease equipment without requiring any prepayment. This
depends upon the relative size or worth of the asset leased. The
small amount of cash needed to secure the use of equipment for
your business makes leasing very attractive to many business
owners. However, since you do not actually own the equipment, the
leasing company may repossess it if you miss a payment.

An advantage provided by leasing is that you will need little or
no cash to secure equipment and you will be able to upgrade your
equipment more easily than if you purchased it. If your industry
experiences rapid changes in technology, leasing may help you to
avoid the expense of purchasing quickly outdated equipment.
Obviously, you will not be able to meet all of the financing
needs of your business by leasing. You will still need additional
funds for ongoing expenses, such as employee salaries. Leasing,
however, can allow you to hold on to the cash you may otherwise
have spent on equipment, and this cash savings can be used in
other, less easily financed, areas.

Where can you get more information? Many equipment suppliers
offer leasing arrangements in addition to actual sales. Discuss
with suppliers and vendors what types of items they lease and
what terms they offer. A service contract can usually be
purchased for an additional charge.

Equity Financing
Venture Capital Firms
Basically, venture capital is an investment in an unproven
business. Venture capital firms provide equity funds to new and
young companies. This immediately separates venture capital firms
from investment firms, which prefer to invest in existing,
financially secure businesses. Venture capital firms do not make
outright loans. Instead, they buy an equity interest in the
business that gives them the same advantages and disadvantages
associated with equity arrangements.

How do they operate? Venture capitalists are looking for two
basic things when considering whether to invest in your business:
- High return - Because venture capitalists are willing to
take unusual risks by investing in a new business, they
require unusual returns as well, perhaps seven to ten
times their original investment within five to seven years.
- Easy exit - Venture capital firms will realize a profit by
selling their interest in your business at some future
point.

In general, venture capital firms are most interested in
investing in new technology and can typically supply large sums
of money. Venture capitalists are not passive investors. They
play an active role in the strategic planning phase of your
business and seek continuing involvement. They will also expect
to be fully informed about operations, problems and whether your
joint goals are being met.

Where can you get more information? Keep in mind that venture
capitalists have extremely rigid investment standards and
relatively few businesses qualify. Still, this capital source is
worth pursuing because venture capitalists specialize in start-up
financing and have access to large sums of money. There are many
books on venture capital in your local library.

Equity Financing
Closed-end Investment Companies
A closed-end investment company is similar to a venture capital
firm but has smaller sums of money available to invest.
Closed-end investment companies are most likely to invest in a
proven business, but some specialize in new businesses.

How do they operate? Like venture capital firms, closed-end
investment companies are interested in purchasing the stock of
your business. Keep in mind what this means: you will be selling
a portion of your business and giving up some control as well.
Closed-end investment companies are called closed because they
have a fixed amount of money available to invest. The investment
company has sold shares of stock to private investors, and these
funds are available to invest in your business. As with other
types of stock purchases, if you make a profit, the stockholders
make money on their investment.

Because closed-end investment companies have limited amounts of
funds available to lend, they may or may not be looking for new
investments. It depends upon whether they have cash available at
a particular time.

Where can you get more information? Legitimate closed-end
investment companies are registered with the federal government.
Your banker, accountant or attorney may be able to recommend
reputable companies.

Equity Financing
Corporate Capital Sources
In order to generate additional profits, corporations sometimes
establish corporate venture capital firms, which operate within
the overall corporation. These firms differ substantially from
traditional venture capital firms. One of the biggest differences
is that they are not motivated purely by profit, at least not in
the immediate sense. A corporate capitalist firm typically seeks
access to new markets in addition to realizing a financial gain.
How do they operate? Corporate capital firms operate in much the
same way as traditional venture capital firms. The corporation
makes an investment in your business in exchange for an ownership
interest. In this way, the needs of both the corporate investor
and the entrepreneur are met. The corporation benefits by
accessing new markets; the business owner benefits by receiving
additional capital.

In addition, associating your business with a corporate capital
source can add credibility when you seek funds elsewhere. The
expertise of the corporation can also be useful in marketing,
manufacturing, product development, etc. Its experience
represents a valuable asset for your business. Corporate
investment in your business will probably take one of several
forms:
- Complete purchase - An outside corporation buys your
business in its entirety, and you forfeit all rights
and control.
- Partial purchase - An outside corporation purchases
part of your business's stock.
- Joint venture - You and an outside corporation create
a partnership, typically one in which you run the
business and the corporation provides capital and
business advice.
- Licensing agreement - As the business owner you retain
control of your business but receive cash for work
performed on contract. Sometimes entering into a
licensing agreement means giving up the rights to
products developed under this agreement.

Where can you get more information? A useful source of further
information on corporate capital suppliers is Corporate Venturing
News, published by Venture Economics, Inc., 16 Laurel Avenue,
Wellesley Hills, MA 02181. You can also contact large
corporations in your area to inquire if they invest in new
businesses.

Equity Financing
Investment Clubs
In many communities, groups of business people form organizations
to invest in new and existing businesses, usually on the local
level. These clubs are typically less formal than a professional
organization might be.

How do they operate? Private investors pool resources to make a
business investment. Because the group invests together, small
investors are able to make funds available to your business on a
scale that would be difficult or impossible if they were
operating independently.

Investment conditions and standards vary from club to club. As
with other equity arrangements, you will give up a percentage of
your business in exchange for funds received from the investment
club.

Where can you get more information? For additional information
contact the National Association of Investors Corporation, 1515
East 11 Mile Road, Royal Oak, MI 48067, (313) 543-0612.
Investment clubs are often informally structured; contact a local
attorney or broker to find a club in your area.

Equity Financing
Employee Stock Ownership Plans (ESOPs)
If your business has employees, it may be possible for you to
sell stock in your business directly to them. Like other equity
arrangements, you will give up a degree of control. But with an
ESOP, you will share control with your employees rather than with
outside investors. This can be beneficial because your employees
will have a vested interest in making your business successfuland
employees can have a large impact on operations.

How do they operate? An ESOP operates in a similar fashion to
other equity sales. Employees purchase shares of stock and
thereby gain an ownership interest in your business. You gain
capital to be used for expansion. Employees may also offer to
take a reduction in salary or benefits in exchange for partial
ownership in the company. This is a good point to consider if you
anticipate problems in meeting a payroll but cannot reduce staff.
One obvious drawback to an ESOP is that a plan of this type is
workable only after you have hired employees. It is not an option
when your business is in the very early stages.

Where can you get more information? Both your attorney and
accountant can provide information on how to structure an ESOP.
They will be very useful in helping you consider all relevant
aspects and potential advantages and disadvantages of the
decision. More information is available from the ESOP
Association, 1100 17th Street, NW, Suite 1207, Washington, DC
20036.

Equity Financing
Private Investment Partnerships
A private investment partnership is an arrangement in which one
or more individuals agree to provide funding for another
individual's business. The role of the partner(s) providing the
funding is limited to supplying capital. Partners are not
responsible for any debts your business incurs and will typically
not play a role in managing the day-to-day operations of your
business.

How do they operate? Private limited partnerships with 35 or
fewer members are not required to register with the Securities
and Exchange Commission. The typical investment is $20,000 or
more per partner. The general partner (you) is responsible for
overseeing operations and for making decisions that will have an
impact on the business and its performance. The limited or
passive partners provide you with funds and expect a substantial
return on the investment. However, the return they will require
may be less than that required by a venture capital firm.

Where can you get more information? Several computer data bases
exist to match entrepreneurs with investors. In this case, your
banker, attorney and accountant may be useful sources of
referrals.

It is also possible to find investors by joining local business
organizations and clubs, where you may meet individuals with
money available to invest.

Combining Debt and Equity Financing
Customers as a Source of Funds
In some industries, potential purchasers of your service may be
interested in offering financial help as you start or expand your
business. They are interested because an additional supplier
(you) provides them with another source for a product or service
they need. The addition of your business to the market may also
increase price competition, resulting in lower prices for the
customer. Each of these aspects translates into important
benefits for the customer, just as the customer's funds translate
into important benefits for you.

How does it work? Both direct loans and equity interests are
possible. Again, a direct loan must be repaid, while an equity
sale diminishes your control. It is a good idea to consider the
advantages and disadvantages of each and prepare a tentative
proposal.

You may need to approach potential customers yourself, or the
customer may come directly to you with an offer. Be wary if the
customer proposes that you sell your product or service
exclusively to him or her in exchange for financial help.
Securing exclusive rights to your products will give the customer
more control over your business operations and pricing than you
may wish. This type of arrangement will shrink your potential
market tremendously. If the customer stops buying from you for
any reason, your business may be in serious jeopardy because you
have not cultivated other customer relationships.

Where can you get more information? Ask the customer directly.
You may find a customer more willing to supply you with financing
than you would expect. The customer receives a return on his or
her investment and gains a supplier. These are very strong
incentives for most businesspeople.

Government Sources
In addition to the private sources we've discussed, there are a
number of government financing sources that may be available to
you and your business. A government agency may be interested in
financing new businesses that will have a direct impact on the
agency or the client population it serves.

If your business produces a product or service you feel would be
of interest to a government agency, contact the agency directly
and request information and applications for grants and other
possible business development resources the agency may control.
It may be helpful to investigate some or all of the following
general sources of assistance available through the government.

ALTERNATIVE WAYS TO OWN A BUSINESS
In addition to the possibilities already mentioned, you may want
to consider two slightly different ways of owning and operating
your own business: purchasing either a franchise or an existing
business.

Franchises
Buying a franchise gives you the right to sell a particular
product or service. You retain a portion of your profits and a
portion is paid to the overall organization that sold you the
franchise.

How do they operate? One of the easiest methods of becoming a
sole proprietor and acquiring the needed capital at the same time
is to purchase a franchise. It is possible to start some
franchises with relatively little money and to obtain start-up
financing directly from the company selling the franchise. If a
direct loan is not possible, the seller of the franchise may be
willing to cosign a loan with another lender.

The seller of the franchise supplies you with materials, a
recognized brand name and sales and marketing assistance. Some
franchises are fairly inexpensive while others may cost hundreds
of thousands of dollars.

Strict limits on innovation. The relative ease with which you can
become the owner of a franchise is not without its price. By
purchasing a franchise, you give up a high degree of control over
your business. Most often the product and operations of a
franchise are strictly regulated and there is little room for new
ideas.

Purchasing a franchise is a sort of middle ground between working
for someone else and being an independent business owner. You
should, of course, evaluate franchise opportunities as carefully
as you would any other type of business. Profit potential, as
well as the cash needed to get started, should be considered in
your choice.

Where can you get more information? Directories of every
franchise in the United States can be found in your local
library. Information on franchises is also heavily promoted at
trade shows and in business magazines. Virtually every type of
business imaginable can be purchased through a franchise.

Alternative Ways to Own a Business
Purchasing an Existing Business
One path to becoming an entrepreneur is to buy an already
operating business from its present owner. Especially with regard
to financing, buying an existing business may have certain
benefits over starting a business from scratch. In many cases,
the current owner will finance the sale of the business.
For example, you read a newspaper advertisement of a small
restaurant for sale in a good location. The owner is willing to
sell his or her interest in the business for $15,000 if the buyer
takes over existing business obligations, e.g., space rental,
employee wages, etc. After visiting the restaurant and carefully
analyzing the business potential, you decide you are interested
in owning this business and decide to purchase it.

How can you pay for the business? Let's assume that you don't
have $15,000. You have calculated that by using the money you
have saved, you can offer the owner $3,000. But this still leaves
you $12,000 short. What are your alternatives?
1. Ask the owner to finance the $12,000.
2. Try to find a way to borrow the money using the methods
and sources outlined above.
3. Offer the owner less than the asking price, thereby
reducing or eliminating the amount of cash needed.
No matter which alternative you choose, remember that the owner
of an existing business often will help you to find financing. An
owner who wants or needs to sell a business will be anxious to
help you find a way to make the purchase possible.

Why is it being sold? Learn why the owner is selling the
business. Make certain that the reasons do not spell disaster for
the next owner. You may have nothing to worry about if the
present owner is selling in order to retire; however, if he or
she is selling because the business is not profitable due to few
customers and/or poor location, you will need to realistically
assess your ability to improve the situation. If you do not have
a carefully researched plan, you may soon find yourself repeating
the mistakes of the previous owner.

Where can I get more information? The classified section of your
newspaper is a good source of information on businesses for sale.
You may also want to contact a business broker who, like a real
estate broker, sells businesses and properties for a commission.
The commission is paid by the seller of the business, which means
that the broker is being paid to represent the seller rather than
you, the buyer.

HOW DO YOU ACTUALLY RECEIVE FUNDS FROM FINANCING SOURCES?

All of the sources of financing discussed have one critical point
in common: they all require that you sell your ideas and plans to
someone who controls the money you need. In this sense, you
shouldn't underestimate the importance of being a good
salesperson. The responsibility is on your shoulders to share a
sense of excitement about your business with the person or
organization evaluating your request. This remains true
regardless of whether you decide on debt financing, equity
financing or a combination of the two.

Negotiating Financing
If you plan to borrow money, there are certain elements of the
borrowing process that are critical to your success.

You and the investor have different goals. If you are starting or
have already started a business, chances are you strongly believe
you will be successful. The investor, however, will not have this
same degree of confidence in you and needs to be convinced of
your sincerity and of the validity of your ideas. The lender's
goal is protection of his or her investment, while yours is more
likely financial growth.

The investor will need documentation of virtually every statement
that you make. If you say your business will grow by 10 percent
per year for five years, be prepared to support your claim with
facts and figures.

You and the investor need each other. Clearly, you need the
investor, because he or she controls whether you will have access
to funds integral to the success of your business. Without
financing, your ideas may remain just that. But there's another
side to the coin: the investor needs your business. He or she
makes money from interest, fee income and/or profit generated
from your business. Keep this point in mind: the investor cannot
thrive without you anymore than you can thrive without the
investment.

Getting financing takes time. Be prepared to wait weeks or months
before any money actually changes hands. Don't approach a lender
when you are desperate for cash. You'll greatly harm your chances
of having your request approved. Instead, plan for your financial
needs well in advance.

Getting financing takes persistence. You may be turned down many
times before someone agrees to provide funds. Don't be
discouraged; there are many sources who may be willing to help
finance your business. Remain determined and don't give up after
just a few tries. If your business ideas are good ones, you will
eventually be successful in obtaining financing.

Ten Rules of Negotiating for Financing
1. Prepare a comprehensive business plan.
2. Be prepared to explain uses and benefits of the
proposed loan.
3. Speak to the appropriate person.
4. Do not overstate your financial strength.
Be realistic.
5. Give complete information about your business.
6. Seek a lender with whom you feel comfortable.
7. Negotiate interest rates and fees.
8. Give an impression of confidence and competence.
9. Carefully check all terms of the agreement.
10. Dress conservatively.

1. Prepare a comprehensive business plan, including an income
(profit and loss) projection for one year and a cash flow
projection. An overview of competition, composition of man-
agement and staffing, marketing plans and pricing strategy
are also important. Lenders respond favorably to applicants
who know where they are going and who have done their home-
work. If your strategy can be adjusted to alternative amounts of
financing, request the preferred amount first and be prepared
to submit the alternative plan if you meet obstacles.
2. Be prepared to explain uses and benefits of the porposed
loan.
Summarize the information in the Sources and Funds Statement
in your business plan, and provide specific examples and
supporting data for uses of the funds (e.g., estimates, list
prices for equipment, etc.).
3. Speak to the appropriate person. With banks, as well as with
all other sources, find out who will make the ultimate
decision about your financing request, and then deal with
this person directly. It is a waste of time to present your
loan request to an individual who does not have the personal
authority to lend you funds.
In banking, most commercial lenders have what is commonly
referred to as a lending limit. This is the amount of money
they are able to lend on their own authority, without having
the request approved by any other parties. It is perfectly
acceptable to ask the amount of the lending limit even before
setting up an appointment and, what's more, it's advisable.
4. Do not overstate your financial strength. Be realistic! Guard
your credibility like the very real asset it is. Remember,
the investor will almost certainly verify everything you say.
If you tell him your first quarter sales were $4,500, be sure
that this is true. Once your integrity and honesty are called
into question, it will be difficult, if not impossible, to
regain your lost reputation.
Even if your misstatements are the result of a legitimate
error rather than a deliberate attempt to make your business
appear more profitable, the investor may feel that this is a
good reason to question your overall business judgment. It's
a very good policy to never say anything you can't support
with data.
5. Give complete information about your business. It is wise to
present all the information the investor requests. Most
investors are required to have certain documents on hand to
invest. Some are requested just as a formality and some are
thoroughly analyzed. Unfortunately, there is no way for you
to tell the difference between the two. Prepare all documents
carefully and double check all facts and figures before
turning over the information. It will be far better for a
negative aspect of your business to be handled openly than
for it to come up later under less favorable circumstances.
This does not mean that you are under obligation to reveal
all your fears and concerns about the business and its
operations. It does mean, however, that you have an
obligation to disclose material or relevant facts about
your business.
6. Seek a lender with whom you feel comfortable. There can be
wide variations among investors. Because you are turned down
by one source does not mean that you will be turned down by
the next. Avoid putting all of your eggs in one basket.
Carefully scrutinize potential investors in the same way that
you investigate any other major business decision. Investors
and lenders are just like everyone else! You will feel
good about working with some and not with others. Be sure to
settle on one who can give adequate attention to your account
and who explains all aspects of the financing relationship
clearly and thoroughly.
7. Negotiate interest rates and fees. We've already noted how a
small difference in interest rates can have a big impact on
your payments. Fees, too, can drastically alter the total
amount you are paying for financing. Typically, you will be
asked to pay points, which are a percentage of the total
loan, due at the time the loan is originated. If, for
example, you borrow $20,000 and are told that there is a 2
percent origination or commitment fee, you can expect to pay
$400 in fees to borrow from this source. The length of the
loan is also important. The shorter the term, the less total
interest you will pay.
All lenders charge different rates and fees. Be aware of what
you are paying. If the lender seems receptive, attempt to
reduce the charges you will incur. In the worst case, the
lender will tell you that the lending conditions cannot be
changed. You've lost nothing by trying to minimize your
costs.
8. Give an impression of confidence and competence. No one likes
to borrow money. It is perfectly reasonable for you to feel
a little nervous when applying for financing, but be careful
not to let your nervousness cloud your judgment. The investor
needs to have a high degree of confidence in your ability to
repay the debt or generate a profit. Be sure of your facts
and rehearse what you will say. Give some thought to the
types of questions you may be asked and consider the best
responses.
Again, remember that the investor is dependent upon you, just
as your business is dependent upon the investor. You are both
in a position to help one another.
9. Carefully check all terms of the agreement. Be sure you know
what you are signing. It is perfectly appropriate to ask that
your attorney or accountant review the conditions of the
agreement. If you or your advisors do not feel comfortable
with some aspect of the agreement, don't hesitate to raise it
as an issue. The time to discuss alternatives is before the
deal is finalized. Once you have signed an agreement, you are
legally bound by it.
The investor will prepare the agreement for self-protection.
Given this, it is not unreasonable to expect the terms to
favor the investor. To a certain extent, this is inevitable,
but try to prevent the insertion of any clauses or conditions
that may present a serious hardship for you.
10. Dress conservatively. Like almost everyone, investors and
lenders feel most comfortable around people like themselves.
For this reason, it is a good idea to dress carefully when
meeting with an investor, even if you do not normally do so
when running your business. A suit and tie are recommended
for men, a jacket and skirt for women. Avoid overly elaborate
accessories. Remember, you are trying to give an impression
of conservative good judgment. Dress to fit the environment.

SOME FINAL POINTS

No one ever said that starting a business would be easy. Without
a doubt, finding the money to start or expand your business
requires hard work and determination. It may be the largest
obstacle you will face when planning to own or expand a business.
Don't despair; financing is available. It's all a matter of
knowing where to look, and now you know!
Perseverance makes all the difference. Most successful
entrepreneurs have been turned down many times for financing.
Remember, it is your job to sell your ideas and to pursue every
possible means of securing capital. If you truly wish to finance
your business, and if your ideas are good ones, you will be
successful.

Don't hesitate to consider a variety of financing alternatives.
Most of the sources described will not alone meet all of your
needs, nor are they intended to. It is far more likely that you
will find a number of sources interesting and you may be able to
borrow successfully from all of them. Most businesses use a
combination of financial sources to adequately fulfill their
changing needs for capital. Be aware of the advantages and
disadvantages of each approach and determine which ones seem most
relevant to your situation. Above all, remain determined. If you
persistently seek financing you will eventually obtain it.
Good luck!

If you find this article useful, you can use it in your blog or website or email it to friends BUT with this link intact - http://smlbusiness.blogspot.com

Computerizing your Business

2008-05-16T04:08:00.000-07:00

INTRODUCTION

Micro- or personal computers (PCs) make it economically possible
for small businesses to acquire electronic data processing
equipment. With its business applications, a microcomputer system
provides professional management planning and control
capabilities that can help you reach your goals for growth and
profit. To take advantage of this opportunity, you must use your
best analysis and judgement when choosing a computer for your
small business.

WHAT CAN COMPUTERIZATION DO FOR YOU?

To answer this question, you must have a clear understanding of
your firm's long- and short-range goals, the advantages and
disadvantages of all of the alternatives to a computer and,
specifically, what you want to accomplish with a computer.
Compare the best manual (noncomputerized) system you can develop
with the computer system you hope to get. It may be possible to
improve your existing manual system enough to accomplish your
goals. In any event, one cannot automate a business without first
creating and improving manual systems.

BUSINESS APPLICATIONS

A computer's multiple capabilities can solve many business
problems. Some of the most common applications are keeping
transaction records (such as a cash receipts journal, receivables
ledger, and general journal) and preparing statements and reports
(such as a balance sheet, income statement or inventory status
report). Other equally important tasks include maintaining
customer and lead lists, creating brochures and paying your
staff.

A business that handles large volumes of detailed or repetitious
information in short periods of time will benefit from
computerization. A complete computer system can

1. Organize and store many similarly structured pieces of
information (i.e., addresses including name, street, city, state
and zip code).

2. Retrieve a single piece of information from many stored records
(i.e., the address of John Smith).

3. Perform complicated mathematical computations quickly and
accurately (i.e., the terms of a loan amortized over many years).

4. Print information quickly and accurately (i.e., a sales
report).

5. Perform the same activity almost indefinitely, in precisely the
same way each time (i.e., print a hundred copies of the same form
letter).

6. Facilitate communications among individuals, departments and
branches (i.e., quickly transmit messages and/or documents that
require review or editing).

7. Link the office to many sources of data available through
larger networks.

IMPROVING BUSINESS OPERATIONS

Consider the following manual operations that can be streamlined
by computerization.

- Accounts Receivable - Even if properly organized and maintained,
a large volume of active accounts can require many hours of posting
sales and receipts and, especially, of preparing statements.

Unfortunately, as the volume of information to be handled
increases, the number of errors often also increases. Don't
forget, too, that if your customer isn't billed on time, you'll
wait longer to be paid.

- Advertising - Using only manual systems, it is costly and
complicated to have special sales programs directed toward
particular customers. Manually prepared mass mailings are time
consuming and expensive.

- Inventory - A large number of items or high-volume turnover can
cause major errors in tracking inventory. Errors in inventory
control can result in lost sales and in the maintenance of
unnecessarily high quantities of slow-moving products.

- Payroll - Calculating and writing checks are tedious operations in
payroll administration. It can also be difficult to effectively
implement an employee incentive plan using manual procedures.

- Planning - Manual systems or procedures make planning for the future time consuming and difficult. What if situationssuch as If sales
increase, to what extent will expenses increase?are not easy to
simulate with a manual system.

COMPUTER BUSINESS APPLICATIONS

Computers also can perform more complicated operations, such as
the following:

- Financial modeling programs prepare and analyze financial
statements.

- Spreadsheet and accounting programs compile statistics, plot
trends and markets and do market analysis, modeling, graphs and
forms. They can combine all these functions and can interchange
and evaluate data from four programs simultaneously.

- Word processing programs produce typewritten documents and
provide text editing functions. Many offer options such as a
thesaurus, a speller, and punctuation and style checkers.

- Desktop publishing programs enable you to create good quality
print materials on your computer.

- Critical path analysis programs divide large projects into
smaller, more easily managed segments or steps. This helps to
target goals and set dates for completion.

- Legal programs track cases and tap information from data bases.

- Payroll system programs keep all payroll records; calculate pay,
benefits and taxes; and prepare paychecks.

- File management programs enable you to create and design forms,
then store and retrieve the forms and the information on them.

The business applications for PCs are available in packaged
software programs that enable you to interact with the computer
through entering, manipulating and processing complex evaluations
and computations of voluminous quantities of data.

REALISTIC EXPECTATIONS

After analyzing your application needs, consider (1) the
investment decision (pay-back period, depreciation, tax impact,
etc.) and (2) the potential increase in your management
capability.

There are, however, some things you should not expect your
computer to do.

- Don't expect a computer to clean up a mess in the office. The
mess must be organized before you can attempt to computerize, or
you will wind up with a computerized mess.

- Don't install a computer because you don't have the right people
to do the jobs in your organization. Initially, at least, the
computer will make more, not fewer, demands on your organization.

- Don't install a computer with the idea that any information you
want will be instantly available. Computers require structured,
formal processing that may not produce some information as fast
as an informal system could.

- Don't expect the installation of a computer to help define the
jobs that must be done. The computer is a tool to get those jobs
done, but the jobs must first be well-defined.

- Don't expect computer installation to occur like magic. Computer
selection and installation will be successful only through
methodical work.

- Don't expect any computer system to exactly fit your present
methods of completing jobs. If you are not willing to listen to
new ideas for solving problems, you will not be able to install a
computer successfully or at a reasonable cost.

- Don't acquire a computer to generate information you will not
use. Growing companies may benefit from structured management
information systems, but many owner-managers of small companies
already have their fingers on the pulse of their businesses and
do not need a formal, electronic system.

SELECTING A SUITABLE COMPUTER SYSTEM

Two options for your own in-house computer system are the
minicomputer and the microcomputer.

A Minicomputer is a general purpose computer that links a number
of dumb terminals, i.e., display units that can only function if
connected to the minicomputer. It can be programmed to do a
variety of tasks and is generally designed so data can be
inputted directly into the system. For example, data on a sales
order are put into the computer at the same time the order is
written. A minicomputer can be operated by users who don't have
special computer knowledge. Minicomputers cost ten or more times
as much as micro (or personal) computers; sophisticated systems
may cost well over a hundred times more. The computer power/cost
ratio is relative, however, and may be readily justified by the
application required. Don't forget to include monthly costs for
system administration and maintenance of both hardware and
software. Minicomputer costs are decreasing rapidly, so inquire
for the latest estimates.

The microcomputer or personal computer is a household word, if
not quite yet a universal household item. It can operate
independently of a network, is relatively inexpensive, and is
compact enough to sit on a desk. These computers run programs
that do an astonishing variety of tasks and can be operated
without special computer knowledge. Microcomputers can satisfy
the needs of many small business owners. They usually handle one
task at a time, although some may have modest capabilities for
multitasking and multiuser applications (more than one program
and terminal at one time). Personal computers are easily
affordable by virtually any business, although prices may vary
widely depending upon the manufacturer. There are supermicros
equipped with multitasking operating systems and networking
capabilities. These may cost five times as much as a personal
computer, or more, but they can be used by multidepartmented
companies, sharing and using the same data on a daily basis.

CHOOSING THE RIGHT COMPUTER

To computerize your business you will have to choose the right
programs, select the right equipment and implement the various
applications. This involves training personnel, establishing and
maintaining security procedures, and maintaining equipment,
supplies and day-to-day operations. If you follow a well-laid
plan and make well-informed choices, your computer system should
provide the information and control intended.

COMPUTER COMPONENTS

Table 1 lists the main computer components.

Table 1 Main Computer Components

Component Function

Hardware
Central
processing
unit The CPU performs logic calculations, manages the
(CPU) flow of data within the computer and executes the
program instructions. CPUs are either XT (8088),
AT (80286) or 80386. The AT is a good choice for
businesses looking to link their PCs in a LAN
(local area network).

Main memory Memory is measured in the K you'll often hear
mentioned - for example,32K (or 32 1,024 bits).
It is simply a storage area readily accessible
to the CPU.

Mass storage This storage is simply permanent. There are a
number of mass storage devices available, such
as disk, diskette and magnetic tape.

Input device(s) These units are used to enter data into the
system for processing. One type of input device
is a keyboard. Scanners are a new way to input
data.

Output device(s) These display the data. The most common output
device is a printer.

Software

Operating system This is software that tells the hardware how
software to run. MS-DOS is a common operating system for PCs.

Applications programs

These are programs written to perform a particu-
lar function such as word processing, accounts
receivable, payroll or inventory control
applications.

Compilers and This type of special software translates programs
interpreters into machine language that the CPU can execute. As
a user of PCs, you won't be required to work much
with this type of software.

CHOOSING THE RIGHT PROGRAMS (SOFTWARE)

A program, usually referred to as software, is a set of
instructions that tells the computer to do a particular task.
Programs are written in a computer language (such as FORTRAN,
COBOL, BASIC). The software determines what information is to be
entered into the computer and what output or report is to be
returned by the computer after it has performed as instructed by
the program. The act of entering information into a computer is
called inputting the data.

Generally, there are three types of software:

- 1. Compilers and interpreters - This is special software that
translates programs written in programming language that people
can use (such as FORTRAN, COBOL, BASIC) into machine language
that the CPU can execute.

- 2. Operating system software - These are the programs that control
all the separate components of the computer, such as the printer
and disk drives, and how they work together. System software
generally comes with the computer and must be present (or loaded
into memory) before the application software can work.

- 3. Application software - This is software composed of programs that make the computer perform particular functions, such as payroll
check writing, accounts receivable, posting or inventory
reporting. Application software programs, particularly the more
specialized ones, are normally purchased separately from the
computer hardware. Before beginning your search for the
application software that is right for you, identify what the
software must accomplish. Your time will be well spent if you
research and write down your requirements before visiting your
software vendor.

DETERMINE YOUR REQUIREMENTS

To determine your requirements, prepare a list of all functions
in your business in which speed and accuracy are needed for
handling volumes of information. These are called applications.

For each of these applications make a list of all reports that
are currently (or will need to be) produced. You should also
include any preprinted forms such as checks, billing statements
or vouchers. If such forms don't exist, develop a good idea of
what you want - a hand-drawn version will help. For each report
list the frequency with which it is to be generated, who will
generate it and the number of copies needed.

In addition to printed matter, make a list of information you
want displayed on the computer video screen (CRT). Again, design
a hand-drawn version. List the circumstances under which you want
this information displayed.

For each application make a list of all materials used as input
into your manual system. These may include items such as time
cards, work orders, receipts, etc. Describe the time period in
which these items are created, who creates them and how they get
into the system. Also, describe the maximum and average expected
number of these items generated in the appropriate time period.
As with the reports, include copies of the input items or drawn
drafts.

For all files you are keeping manually or expect to computerize
(such as customer files or employee files), list the maximum and
average expected number of entries in a specific time period,
such as 10 employees per year, 680 customers per year. Normally,
a file, manual or otherwise, is cleaned out after a specified
time and the inactive entries are removed.

Identify how you retrieve a particular entry. Do you use account
numbers or are they organized alphabetically by name? What other
methods would you like to use to retrieve a particular entry? Zip
code? Product purchased?

Note which of your requirements are a must and those on which you
can compromise. The more detailed you are, the better your chance
of finding programs compatible with your business. It is also
true that the more detailed you are, the more time it will take
to research and evaluate each alternative application software
package.

EVALUATE YOUR CHOICES

If, after compiling all of your information, you find your needs
are fairly complex, you may wish to engage the services of a
small business consultant to help evaluate your software
requirements. Or you can submit your requirements to software
retailers, custom software vendors or mail order software houses.
They will propose software packages that meet as many of your
requirements as possible.

At this point you should review and compare the software packages
and verify the extent to which each meets your needs. Ask
yourself these questions: Does it cover all of my musts? How many
of my other requirements does it fulfill? Does it provide
additional features I had not thought of earlier but now believe
to be important?

After you have identified one or more software packages fitting
your needs, examine other general features of the software.

- Does it come with effective documentation? Do you understand it?
Is the operating manual written for the novice? Is the
information organized so you can use it effectively after you
gain experience?

- How easy is the software to use? Does the information displayed
on the computer screen make sense? Is there a help facility?

- How flexible is the software package? Can you change data that
have already been processed? Can you change the program
instructions, such as payroll withholding rates, or will you have
to pay the vendor to change these for you? If you must pay a
vendor, what will it cost?

- Will you be required to change any of your business practices? If
so, are these changes you should make anyway? Will the software
provide the accounting and management information you need?

- How well is the software documented? You should be able to
understand the general flow of information, i.e., which program
does what and when.

- Does the software have security features, such as passwords or
user identification codes? Can it prevent unauthorized access to
private information?

- Is it easy to increase the size of files?

- Will the software vendor support the software? Does the vendor
have a good track record? Will the vendor make changes and, if
so, how much will the changes cost?

- How long has the vendor been in business? What are the vendor's
prospects for staying in business?

READY-MADE SOFTWARE

If you find a ready-made software package that fits your
business's needs and price range, take it. You may still have to
do a lot of work adapting your procedure, but generally you will
be better off than if you design your own software system.

Although different brands of software and hardware can be adapted
to work together compatibly, such standardization is not yet
prevalent. For this reason, it is important that you first find
the right software and then select the hardware that can handle
it.

PREPARING A REQUEST FOR PROPOSAL

If you are unable to find a software package that fits your
needs, send a request for proposal (RFP) to selected hardware
vendors and turnkey systems houses. (The latter are companies
that put together complete, ready-to-use hardware and software
systems.) The form of your RFP depends on the kind of proposals
you are soliciting - a turnkey system with customized software, a
turnkey system with packaged software, or hardware and/or
software in separate packages.

Because most first time users get turnkey systems, the following
guidelines apply to RFPs for this method:

- 1. Give a brief description of your company.

- 2. Describe the business operation to be computerized.

- 3. Submit the materials you designed and accumulated earlier.

- 4. Describe the criteria that will be used to evaluate proposals
and request a response to each criterion (i.e., maintenance,
technical support, training, etc.).

- 5. Specify which of your requirements must be met exactly and
which must be met only in substance. This is important when
dealing with software packages.

- 6. Request a detailed price quotation that includes all charges to
meet your needs, including one-time charges, such as for
equipment, training, applications and systems software, and
ongoing charges, such as maintenance and technical support.

Request financing alternatives such as lease-purchase and direct
or third-party lease.

CHOOSING THE RIGHT EQUIPMENT - HARDWARE

Choosing the software is by far the most difficult part of
deciding on the computer system that is right for you. Because
most software is written for one or more specific computers, you
will probably have narrowed your equipment choices down
considerably by the time you have selected your software.

Review the choices and ask the same questions about potential
computer hardware vendors that you asked when evaluating software
vendors. Don't forget to check the cost of shipping, installation
and equipment maintenance.

The computer and associated equipment known as hardware consist
of a number of components that do different jobs. They include

- Processor - The thinking part of the computer is known as the
processor or central processing unit (CPU) and is designed to
execute software instructions, perform calculations, control the
flow of data to and from the memory and control other hardware
components. The faster the CPU, the quicker you can work with
your data.

- Computer memory - Computer memory usually is measured in bytes
(which is a grouping of binary digits or bits). Roughly speaking,
each byte of memory holds one character of data, either a letter
or a number. A 2K (2,048 bytes) memory in practical terms holds
about one double-spaced, typed page. There are two kinds of
memory: ROM (read-only memory) and RAM (random access memory). We
are only concerned with RAM.

- ROM - Read-only memory is a program stored in the computer memory
that cannot be changed by the user or an externally entered
program.

- RAM - Random access memory is located in the CPU and is normally
measured in Ks or 1024s (64K = approximately 65,536 characters or
about 32 pages of information). RAM is used to store all the
information necessary for the CPU to do its job: the program
running the portion of data that is currently being processed and
some portion of the system software. Information stored in RAM
lasts only as long as the power is on. Once the power is turned
off, all RAM information is erased. Store your RAM-based data on
more permanent storage media, such as diskettes.

- DOS - The disk operating system (DOS) is software that controls
the interactions among the CPU, disk drive, keyboard, video monitor
and printer. ROM, RAM, DOS and the applications program may need
about 55K, depending upon your version of DOS.

- Storage - Just as a company retains its relatively permanent
records in a file cabinet, a computer most commonly retains
relatively permanent information on disks. These resemble small
phonograph records and may be floppy or hard. A floppy disk is
made of soft, thin plastic encased in a stiff paper envelope and
comes in 3 1/2- 5 1/4- and 8-inch diameters. Hard disks are encased
in metal and have faster access and more storage capacity than
floppy disks. Hard disks are also much more expensive than
floppies, but their greater storage capacity and speed usually
make up for the difference in cost. Information on a disk is
recorded, retrieved and erased through a disk drive, which is
controlled by the system and application software.

- Terminal - In order for a computer to perform useful work, you must
be able to communicate with it. Most often this two-way
communication is carried out through a keyboard, used to enter
data into the computer, and a display monitor. The monitor
(screen) should be able to display 24 lines of 80 characters at
one time. Some monitors can handle color and graphics. Color
graphics quality is determined by pixels or picture elements. If
a display is 280 by 192 pixels, the screen is divided into 280
rows and 192 columns. The larger the number of pixels, the finer
or more precise the picture display will be. EGA or VGA monitors
are your best choice for color monitors.

- Printer - The main output of a computer system is usually printed
material - reports, checks, invoices, etc. As with all other
hardware choices you make, choose a printer that can accomplish
your specific jobs. The print quality of various printers ranges
from dot matrix to letter quality. Laser printers have surged in
use because of their high quality print and speed and because of
lowering prices and increasing interest in desktop publishing.

- Drives - Disk drives are single- or double-sided. Diskettes, either
3 1/2 inch or 5 1/4 inch, are loaded into these drives. You store
and retrieve data from diskettes. You may find it helpful to
configure your PC with both size diskette drives. Diskettes are
also high and low density, referring to the quantity of data that
can be stored on them. A high-density diskette, although it costs
more, will store more data than a low-density diskette.

- Warmware - Warmware are the critical services and support you will
require after your purchase. If you choose wisely, the combined
software and hardware packages can become an invaluable tool to
enable you to better manage your business. However, without
qualified people to train your staff, install the system and be
available to answer questions, your system may never get off the
ground. Once your computer system is up and running, you will
need support to help you solve any problems that may arise.

EVALUATING THE COMPUTER SYSTEM

The most important sources of feedback in judging a computer
system are companies using the computer system you think you will
buy. Try to find companies with configurations and applications
as close to yours as possible and visit them, without the
computer sales representative.

Use the following criteria, listed in order of importance, to
evaluate a computer system.

- 1. Software developer's past performance record - software developer should have prior experience with similar applications for the same equipment configuration as the one you are considering.

- 2. Commitment of hardware vendor - Where will your commission sales
representative be after the contract is signed? How many systems
engineers does the vendor have in your area?

- 3. Hardware capacity - Does the hardware have adequate processing
capability to meet your requirements within acceptable time
frames?

- 4. Quality of systems software - The quality of the system software
(operating systems and utilities) dramatically affects how
difficult the system is to program and use.

- 5. Systems documentation - What kind of systems documentation does
the vendor provide and how is it updated? Can it be understood at
some basic level by the user? Is it designed so other experts can
understand how things were done and change them when necessary?

- 6. Service and maintenance support - When your system breaks down,
how long will it take to get it fixed? Who will do it? Will it be
subcontracted? Are there any provisions for backup during downtime?

- 7. Expandability and compatibilities - What are the technical limits of your system and how close to those limits is your current
configuration? Is there software compatibility among the vendor's
product lines?

- 8. Security - What security features will your system have to prevent unauthorized use of the system or unauthorized program modifications?

- 9. Financial stability of vendors - Satisfy yourself about the
financial stability of your vendor.

- 10. Environmental Requirements - Mini and microcomputers do not
usually require special environments such as raised floors,
special wiring or special air-conditioning. Some may, however,
and it pays to find out in advance. Local area networks (LANs)
require cabling.

- 11. Price - With computers, as with anything else, you generally get what you pay for. Low price alone should not be a prime evaluation
criterion.

CONTRACTING FOR A TURNKEY SYSTEM

If you decide to purchase a complete hardware and software system
(turnkey system) rather than buying the software and hardware
separately, you should have a contract or agreement. Examine the
standard contract supplied by the vendor. Be aware it may not
protect your interests. If you have any questions, have your
lawyer review the contract and suggest changes to help you
implement the system.

An important part of the contract is the payment schedule. Do you
pay before or after installation? Will you pay for the
installation periodically on a draw schedule? The more money held
back until the installation is complete, the more power you will
have to ensure that the vendor satisfactorily completes all that
has been promised and contracted.

The contract should include detailed references to the following:

- Description of equipment and software.

- Installation responsibilities.

- Provisions for additional equipment.

- Performance guarantees.

- Responsibility for training.

- Software rights.

- Provisions for default, bankruptcy of vendor or termination of
contract.

- Software documentation.

- Systems documentation.

- Responsibility for hardware freight charges and sales tax.

- Acceptance testing.

- Conversion responsibilities (from manual system to computer).

- Upgrading privileges and trade-in rights.

- Restart (what is required to restart system from failure).

If the contract is for software developed especially for you, the
contract should specifically refer to your RFP and the vendor's
responding proposal. A good contract will help you prepare for
the system's installation and ensure a more satisfactory business
transaction.

Points to consider when selecting your computer system include

- Reliability - How qualified are the manufacturer and the vendor?
What is their reputation? What is the incidence of repair on the
system equipment?

- Resources - How long have the manufacturer and vendor been in
business? How strong are their financial positions and credit
ratings?

- Services - Are ongoing consulting, training, supply and repair
available?

- Rates - Are charges competitive? What terms are offered?

- Backup - What happens if your system fails?

IMPLEMENTATION

IMMEDIATE CONCERNS

As was suggested before, successful computer applications for
your business depend heavily on the implementation process.
Problems are inevitable but proper planning can help avoid some
of them and mitigate the effects of others.

- Employee Involvement - The success of a new computer system will
depend on the cooperation of your employees; therefore, it is
important to involve them as early as possible in the
implementation. Explain to each affected employee how his or her
position will change. To those unaffected, explain why their jobs
will remain unchanged.

- Schedule for implementation - Set target dates for key phases of
the implementation, especially the last date for format changes.

- Installation site - Prepare the installation site. Check the
hardware manual to be sure the location for your new computer
meets the system's requirements for temperature, humidity and
electrical power.

- Converting applications - Prepare a prioritized list of applications to be converted from manual to computer systems. It is important to convert them one at a time, not all at once. Prepare a list of all business procedures that will be changed so the computer
system will fit into the regular work flow. Develop new manual
procedures to interface with the computer system.

- Training - Train, or have the vendors train, everyone who will be
using the system.

When these steps are complete, the computer system can be
installed. Each application on the conversion list should be
entered (files set up, historical data entered and the system
prepared for new transactions) and run parallel with the
preexisting, corresponding manual system for a number of
processing periods. This means that two complete systems will be
running, placing a great deal of pressure on your employees and
on you. However, until you have verified that the new system
works, it will be worth the effort.

Be sure to insist on progress reports from everyone involved in
the changeover.

LONG-TERM CONCERNS

At the same time you are converting each application, you must
begin dealing with the long term issues that will keep your
computer operation successful.

- System security - If you will have confidential information in
your system, you will want safeguards to keep unauthorized users
from stealing, modifying or destroying the data. You can simply
lock up the equipment, or you can install user identification and
password software. You can also

- Control access to your computer, disks and reports.

- Label all disks to identify their contents and verify correct
labeling.

- Initiate original accounting transactions, adjustments or
corrections yourself.

- Rotate computer employees or schedule their vacations to expose
possible unauthorized practices.

- Require dual signature authorizations to control software
modifications.

- Data Safety - Data, confidential or otherwise, can be destroyed by
unexpected disasters (fire, water, power fluctuations, magnetic
fields, etc.) or through employee tampering, resulting in high
replacement costs. The best and cheapest insurance against lost
data is to back-up information on each diskette regularly. Copies
should be kept in a safe place away from the business site. Also,
it is useful to

- Have and test a disaster recovery plan.

- Identify all data, programs and documents needed for essential
tasks during recovery from a disaster.

- Employee cross-training - Just as with a manual system, it is
important to have more than one employee who knows how to operate
the system. Once your business relies on the computer system, the
absence (sickness, termination, etc.) of a computer operator can
be devastating unless another person is prepared to fill in.

- Management controls - Although computer systems allow small
businesses to process more data more accurately than ever before,
there is a chance that the same system can cause greater problems
if left unsupervised. All systems, manual or otherwise, must be
continually monitored to ensure the quality of the input and
output data.

SUMMARY

If all this seems like a lot of work, it is. The computer, like
any tool, requires learned skills in order to fulfill its
purpose. If you believe that you and your business need a
computer, plan to spend the time and the money it takes to make
its installation and operation of the system successful.

With no prior knowledge of computers, you can buy a personal
computer with applications for your business. With some guidance,
study and experience, you can develop computer-based management
planning and control expertise. By taking advantage of the speed
and complex capabilities of a computer, you can tap the potential
for growth and profit in yourself and your business.

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Advertising your Business

2008-05-14T08:32:00.000-07:00

Advertising Your Business

Advertising is an investment in your business, similar to other
investments to improve and expand your business. The return you receive depends on the planning and thought that precede the actual commitment and expenditure of advertising dollars. By first developing an effective advertising plan you increase the likelihood of a positive return on your advertising investment, regardless of the amount of money you spend.

Four Basic Questions

The basic premise of an advertising plan requires you to thoroughly analyze the answers to key questions before you can make effective advertising decisions.

There are four key questions to ask yourself:

1. What do I want my advertising to accomplish?
2. Who should my advertising speak to?
3. What should my advertising say?
4. What advertising medium should I use?

In a specific business situation, each question has any number of
potential answers. As you think about each question do not accept any answer until you have considered and explored the full range
of possibilities.

What Do I Want My Advertising To Accomplish?

The first step in developing your advertising plan is to specify
your advertising goals. Be as precise as you can as to why you are
advertising and what you want to achieve. Everyone wants advertising to increase business, but for your advertising plan to work it requires you to be more precise.

Some possible goals for your advertising are:
- Increase awareness of your business.
- Attract competitors' customers.
- Increase the likelihood of keeping current customers and
developing their loyalty.
- Generate immediate sales or sales leads.

It is possible you may want your advertising to achieve all of
these goals plus some others. What is important is that you
prioritize your goals. Advertising works best when it is developed to meet one specific goal at a time.

Who Should My Advertising Speak To?

Once you determine your advertising goals you can then select the target audience for your message. Advertising that tries to reach
"everyone" rarely succeeds. Successful advertising is written with a specific customer in mind. Try to picture the person you must reach in order to achieve your advertising goals. Try to describe your target consumers in each of the following:
- Demographics: such as gender, age, income, location of residence or business, etc.
- Behaviors: such as current awareness of your business; the
products, services or vendors they currently use; loyalty to
either you or your competitor's business, etc.
- Needs or desires: such as what benefits consumers look for,
the basis on which they will decide whether to use your product
or service, and how your business can fulfill those needs, etc.

What Should My Advertising Say?

Once you know who your target audience is and what they are looking for in terms of the product or service you offer, you can decide what your advertising will say.
Advertising should always be written to communicate a message that will be seen as important by your target customer. Your advertising should clearly and convincingly "speak" to your target audience, explaining the important benefits your product or service offers.

In deciding how to discuss the major benefits of your product or
service in your advertising keep "AIDA" in mind:
- attract Attention,
- hold Interest,
- arouse Desire,
- and motivate Action.

Where Should I Place My Advertising?

Every month new advertising options become available. Beyond
"traditional" media you can place ads in airports, on ski lifts
and on television monitors in the front of grocery carts.
Where you place your advertising should be guided by a simple
principle:
- go where your target audience will have the highest likelihood
of seeing or hearing it.
Many advertising media work well to reach a diverse range of target consumers. There is no single medium inherently good or bad. A good medium for one product or service may be a poor medium for a another.
As you consider media choices look for one that fits your advertising goals, reaches your target efficiently and cost-effectively and is with your advertising budget.
Based on, these considerations, the following summarizes the relative advantages and disadvantages of the advertising media most frequently used by small businesses:

Television

Television provides a means for reaching a great number of people in a short period of time. Small businesses will typically use either spot television or cable television. A spot television ad is placed on one station in one market. The number of target audience who see your ad depends upon how many viewers are tuned into the television station at a specific time.
Cable advertising is placed either on a local cable television channel or on a cable network. The number of people reached by cable advertising depends upon the cable penetration and cable
channel/program viewership in a given market.
Beyond television's reach, an additional advantage is its ability to
convey your message with sight, sound and motion.

The disadvantages of television advertising are:
- relatively higher cost - both the terms of airtime and production, - limited length of exposure,
- short airtime (making it difficult to present a complex or
detailed message)
- and the clutter of many other ads.

Television ads may require multiple exposures to achieve message retention and consumer action. Also, many commercials are considered intrusive, prompting viewers to switch channels to avoid them.

Radio

Radio, like television, has the ability to quickly reach a large
number of consumers. The major advantage of radio lies in its ability to efficiently target narrowly defined segments of consumers. The vast array of radio program formats lets an advertiser gear ads to almost any target audience.
Beyond this advantage, radio is commonly used by small businesses because it is relatively inexpensive (both in terms of airtime and production costs) and because deadlines for placing radio advertising are relatively short, providing an advertiser with increased flexibility.

The disadvantages of radio are: an advertiser is limited to an audio message so there is no visual product or service identification, ad clutter can be high and exposure to the message is short and fleeting.
Finally, similar to television, multiple exposures may be required for message retention and consumer action. Also, listeners may change stations to avoid commercials.

Newspapers

Newspapers permit an advertiser to reach a large number of people within a specified geographic area. Newspaper advertising has several advantages for the small business. An advertiser has flexibility in terms of ad size and placement within the newspaper. Exposure to the ad is not limited, so readers can take their time with your message.
Short deadlines permit quick response to changing market conditions.

Disadvantages of newspaper advertising include:
- declining readership and market penetration,
- ad space can be expensive,
- clutter of competitive advertising
- and a relatively short lifespan (newspapers are typically read
once, then discarded), thus requiring multiple insertions.

Magazines

Magazines provide an advertiser with the means to reach highly
targeted audiences. Specific groups can be reached by placing an
ad in a magazine whose editorial content specializes in topics of
interest to that target.
This is true of both consumer and business publications. Audiences can be reached by placing ads in magazines which have well-defined geographic, demographic or lifestyle focus. Beyond the ability to reach specific audiences, the advantages of magazines include . . .
- relatively long ad life and re-peated ad exposure (magazines are
typically looked through several times before discarded),
- excellent reproduction quality and pass-along value.

The disadvantages of magazines include:
- long lead time,
- limited flexibility in terms of ad placement and format,
- and the potential for high costs in production and placement.

Outdoor (Billboards)

Outdoor advertising is typically used to reinforce or remind the
consumer of the advertising messages communicated through other media. The advantages of outdoor advertising are:
- ability to completely cover a market and high levels of viewing
frequency.

The disadvantages of outdoor advertising are related to viewing
time. Because target consumers are typically moving, an outdoor
advertisement must communicate with a minimum of words. Messages must be simple, direct and easily understood.

Direct Mail

Direct mail advertisers use targeted mailing lists to reach highly
specialized audiences. In addition to low waste in ad exposure,
direct mail provides an advertiser with great flexibility in the
message presentation.

The disadvantages of direct mail include:
- relatively high cost per contact,
- obtaining updated, accurate mailing lists,
- and difficulty in getting the audience's attention (direct mail is
often considered "junk mail").

Yellow Pages

The Yellow Pages are an advertising medium that share many of the strengths of other advertising media while at the same time avoiding some of the limitations or disadvantages. As such, the Yellow Pages are best used to complement or extend the effects of advertising placed in other media.
Like other media, the Yellow Pages permit an advertiser to select
a well-defined geographic area, ranging from a neighborhood to an entire metropolitan area.
Once the geography is defined, a Yellow Pages ad has permanence:
Yellow Pages are kept as a regular reference. In addition, Yellow
Pages support your other advertising by providing a convenient way for consumers to contact sources and obtain information on the products or services they desire at the time they are ready to
"take action."
Also, the Yellow Pages are relatively low in cost in terms of both
ad production and placement.

The disadvantages of the Yellow Pages include:
- lack of timeliness (ads can be changed only once per year and,
as a result, there is no opportunity for "price advertising"),
- potential clutter in some classifications,
- and not as much creative flexibility as other print media.

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Avoiding Patent, Copyright and Trademark Problems

2008-05-14T08:24:00.000-07:00

INTRODUCTION

Patents, copyrights and trademarks, as well as know-how or trade secrets, are often collectively referred to as intellectual
property. Many firms have such property without even being aware of it or of the need to take measures to protect it.

Many people's notions of intellectual property are unrealistic. Some believe, for example, that having a patent on a product will enable one to succeed in the marketplace. Consequently, they may spend thousands of dollars to obtain the exclusive rights to market something that no one wants or can afford to buy. Others may conclude that intellectual property protection is not worth the expense and bother.

People who may not be interested in protecting their own rights still must take precautions to avoid infringing on the rights of others. This calls for more than the avoidance of copying. Copying is unavoidable; it is a way of life and one way in which we learn. But, one can easily infringe on the rights of others without deliberately imitating specific features of goods or services.

This article addresses the steps newcomers to a market should take to avoid infringement and when they should take them.

PATENTS

Most people have heard variations on a remark attributed to Ralph Waldo Emerson: If a man can make a better mousetrap than his
neighbor, though he builds his house in the woods the world will beat a path to his door. To keep the discussion concrete, let's
imagine a present day inventor of a new mousetrap who not only invents a better mousetrap but is also successful in marketing it. The higher the inventor's profit margin, the more others will
want to copy his invention. Let's assume that the inventor selects Figaro as the brand name and actively promotes the
product. However, he does not legally protect his invention, but relies on the consumers' loyalty, goodwill and brand
identification to ensure future sales.

Taking measures to develop loyalty and goodwill may be sufficient until a larger and better known competitor turns up. For example, what if economies of scale and lack of development costs mean that the competitor can sell the same mousetrap for 20 percent less? Goodwill may not be enough to ensure customer loyalty at a higher price. A patent would be much more helpful, because it would prevent the competitor from selling the new trap until well after the original firm had a chance to get on its feet. This situation illustrates that it is the smaller firm that often has the most to gain from protecting intellectual property.

As bad as the situation is without patent protection, it could be worse. Let's assume that customers are so taken by the Figaro
promotion that they are willing to pay the 25 percent premium the firm charges in order to stay in business. Imagine what would
happen if the company had to stop using that name or had to face an expensive lawsuit. Imagine what would happen if it turns out
that someone else actually has a current patent on one or more features of the better mousetrap. By failing to consider the
intellectual property of others, the new firm would not only be forced to stop selling under the name Figaro, but might be forced to stop selling the mousetrap altogether.

AVOIDING PATENT INFRINGEMENT

Utility patents - what people usually mean when they use the term patents - provide 17 years of exclusive rights for inventions that deal with the way things work. Design patents afford 14 years of protection for significant improvement in the appearance of
useful items, such as car bodies or furniture. Both of these patents do more than prevent copying; they forbid the making, using or selling of an invention similar to or the same as the protected invention, even though the second invention was independently created. (Plant patents, which will not be covered in this discussion, may not give the same protection.)

Copying may actually be a way to avoid infringement. The inventor of the mousetrap might have avoided potential problems by using technology that was described in a printed publication, publicly used or on sale. Products that are on sale and give no notice of patent coverage are relatively free from the risk of infringement.

Any person trying to market fairly new technology that doesn't appear to be patented should keep in mind that an inventor has one year from public sale or disclosure within which to file a patent application. In addition, because patents often take two or more years to obtain, there is still a chance that a patent could
be issued at a later time. Although there is no liability for infringement prior to issuance of a patent, a competitor would
have to cease making, using or selling the technology once the patent was issued, thus risking the loss of both start-up costs and inventory.

Of course, if our inventor was determined to make a better mousetrap, there would be no interest in copying something else in the market. Still, before spending too much time and money on research, the inventor should ensure that others do not have exclusive rights in the area being explored. The inventor certainly should not assume that, because a product is not on the market, it is unpatented. As many independent inventors have learned to their chagrin, it is usually easier to patent something than to market it profitably.

A PATENT SEARCH

The inventor should hire a patent attorney or agent to conduct an infringement search. A patent agent is a technically trained
person who has passed a special examination given by the U.S.
Patent and Trademark Office; a patent lawyer is one permitted to draft contracts and provide other general legal services. Patent
searches can be expensive if one must consult foreign records; it is much less costly to determine whether technology is currently patented in the United States. Yet, as we will see, there is value in going somewhat beyond that point.

A search might reveal that (1) someone else had a patent that has since expired, i.e., the information patented is now in the public domain; (2) no current or expired patents cover the area of proposed research or (3) someone else has a current patent
covering all or part of the proposed design. Let's consider these potential results in order.

THE INVENTION IS IN THE PUBLIC DOMAIN

If the mousetrap (or an obvious variation) was disclosed in an expired patent, the inventor is free to manufacture and market it without concern for the patent laws. Also, even if the inventor didn't find exactly what he or she originally had in mind, a host of good and freely used ideas that are even better might have been discovered. These alone could be worth several times the price of the search in saving research and development time.

ONE OR MORE ELEMENTS OF THE PROPOSED MOUSETRAP APPEAR TO BE NEW

If, after a thorough search, our inventor's proposed improvements to the mousetrap seem not only to be novel but also to offer
significant advantages over the prior design, the inventor may seek a patent and/or begin selling the mousetrap without further ado. If, however, the inventor begins selling without first filing
a patent application, he immediately forfeits possible protection in many other countries and also forfeits any possibility of patent rights in the United States after one year.

ASPECTS OF THE PROPOSED DESIGN ARE COVERED BY A CURRENT PATENT

If an unexpired patent is found to cover any part of the proposed mousetrap design, the inventor knows that he is not free to use it
without a license. Infringing on a current patent exposes one to a suit for damages as well as an injunction against future use.
Even an injunction might mean substantial costs, including the loss of current inventory, and a patent covering even a small feature of the new mousetrap might give rise to the need to retool. Although deliberate infringement is more serious,
ignorance of others' patents is no defense.

TRADEMARKS

Trademarks (or brand names) indicate commercial source. Trademarks may be words, logos or other symbols indicating that
goods come from a particular company. They may even be sounds, three-dimensional symbols (such as the well-known McDonald's
golden arches) or colors. There are also service marks, which indicate the source of services, and other kinds of marks that
will not be considered here.

As with patents, one can infringe on another's marks without copying them or even being in direct competition with their
owner. All that is necessary is to use the same or a similar mark under circumstances in which consumers may be confused as to the
source or sponsorship of the goods or services.

A TRADEMARK SEARCH

A trademark search is the only way to find out whether Figaro or something confusingly similar is being used by others as a mark
for a mousetrap (or perhaps such things as rodenticides) in the proposed market area. It is also necessary to determine whether
the mark has been registered in the U.S. Patent and Trademark Office, which could give the registrant rights well beyond the market areas currently occupied.

There are two reasons why a search may not be sufficient. First, in the United States, it is unnecessary for a firm to do more than
use a good mark to have trademark rights in its market area. Consequently, a search may not locate all such prior users. Second,
people may be able to prevent the use of a potential mark without having used it as a mark themselves; for example, when a trademark can be associated with others in such a way that consumers might presume that some kind of relationship might exist. This is where the mark Figaro would run into trouble.

As you may recall, Figaro is the name of the cat in the Disney film Pinocchio. Although the Walt Disney Company does not have a monopoly on the use of the name, it might nevertheless be able to prevent it from being used on a mousetrap. If that seems too
farfetched, consider the company's concern if "Mickey" had somehow been part of the mousetrap name!

COPYRIGHTS

A copyright provides an owner with the exclusive rights to reproduce a certain work for a specified period, subject to some basic limits. The term of a copyright is the lifetime of the author plus 50 years in the case of identifiable, living authors.
Copyrights arise automatically and are inexpensive to register.

Searching for a prior copyright is probably unnecessary. Copyright infringement can be avoided by establishing that a work was independently created. Therefore, records showing independent creation are helpful to avoid liability. Even with such records,
establishing independent creation may be difficult if the original work was widely disseminated or otherwise available to
the alleged infringer. In one such case, the court held that, although copying may have been unconscious, the original was nevertheless infringed.

One of the limits to copyright protection is that ideas (compared to expressions) and technology (computer software aside) are
generally not protected. This means that our inventor is free, at least as far as copyright laws are concerned, to use any
information that can be found in books on mousetrap designs and to make and sell working copies of anything shown or described. Copyright gives the owner only the right to prevent reproduction of the text or drawings themselves.

What if the inventor wants to use some of that text, for example, in an advertisement? There is a remote possibility that such use
might be protected under the "fair use" defense, but it would be very unwise to proceed without getting permission from the
copyright holder or seeking expert advice.

TRADE SECRETS

Trade secrets overlap the subject matter of copyrights and patents. As long as efforts have been made to preserve secrecy, a
suit may be brought to redress the misappropriation (or wrongful taking) of almost any kind of information of competitive value. Misappropriation includes industrial espionage and breaches of
confidential relationships (for example, by former employees), but it does not include reverse engineering. Thus, a trade secret suit will not succeed if an aspect of a product's design or construction was obtained by examining an item purchased in the marketplace. Nor will a suit be useful against those who independently discover a secret process or recompile commercially
valuable information.

The risk of being accused of misappropriating a trade secret is never very high, particularly if one seeks competent legal advice before using unlicensed information that has not been obtained through reverse engineering.

THE NEED FOR EXPERIENCED COUNSEL

Any attorney admitted to practice in any state in the country is technically qualified to register trademarks with the U.S. Patent and Trademark Office or copyrights with the U.S. Copyright Office
in Washington D.C. Unlike the situation with patents, no special
examination is given to determine whether the attorney is familiar with the copyright or trademark law or registration
procedures, for example. Clients are advised to seek an attorney who specializes in such matters.

SUMMARY

Whether or not our mousetrap inventor takes measures to preserve the intellectual property, he or she certainly should avoid
infringing on the rights of others. Although this is not difficult in the case of copyrights and trade secrets, patents and
trademarks are another matter altogether.

Unquestionably, it costs precious start-up capital to have patent and trademark searches performed; however, proceeding in a new venture without doing so is equivalent to erecting a building or signing a long-term lease without checking the real estate title. Searches will not make the product appeal to the public, but they will ensure enjoyment of any hard-won market success. A patent search is comparatively cheap insurance against the possible need
to retool or to absorb inventory losses. Moreover, a close look before adopting a trademark is cheaper in the long run than the cost of advertising and new promotions designed to advise customers to seek the mousetrap under a new name.

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Software Computer Piracy

2008-05-14T07:16:00.000-07:00

The personal computer (PC) has become a necessity for today's successful small business operations. These increasingly powerful machines use sophisticated software programs for a variety of applications. Software can help a small business correspond with its customers, keep track of inventory and even answer the phone and process orders.

Unfortunately many computer users make illegal copies of computer software. Called "piracy" in the computer industry, this theft is a violation of
federal copyright law. Software pirates hurt themselves as well as others through their actions. They sacrifice the long term benefits of legitimate
software ownership for a cheap, short term fix. This fact sheet identifies the hazards of illegal copying and the benefits for small businesses in
becoming "software legal."

Software is developed by publishers, including many small businesses relying upon steady sales not only to survive but also to improve their products and invest for the future. The creative teams who develop software -- programmers, writers, graphic artists and others -- also deserve fair compensation for their efforts. Without the protection given by our copyright laws, they would be unable to produce the valuable programs that have become so important in our daily lives: educational software that teaches us much
needed skills; business software that allows us to save time, effort and money, making us more competitive, and entertainment and personal productivity software that enhances our leisure time.

The fact sheet you are holding was produced using a licensed word processor on a personal computer.

What is Software Piracy?

Computer software is protected under the federal copyright law which states that, "Users may not make a copy of a piece of software for any other reason than as an archival back-up without permission of the copyright holder." The unauthorized reproduction of a computer program is considered theft. In 1990, the PC software industry lost $2.4 billion in the United States alone and
over $10 billion worldwide, according to estimates by the Software Publishers Association.

Computer piracy is different from copying other recorded media, such as videotapes and compact disks, because there is no degradation in the quality of the copy. The computer industry is the only industry that empowers the end user to become a manufacturing subsidiary. Trust and responsibility is placed in the hands of the computer user. A computer program copied over and over again will work exactly like the original. A program that took years to develop can be copied in a few seconds. And, although software is expensive
to develop, almost any PC can be used to generate a cheap copy.

Why Is It Important?

Why should a computer user be concerned with software compliance? First and foremost, computer piracy is illegal and there are stiff penalties for
breaking the law. Companies and individuals who break the law can be penalized as much as $100,000 for every instance of software copyright violation. A 75-employee Colorado embroidery and monogramming
company paid $30,000 in penalties, and a 200-person New Jersey commodities business paid $46,000. These small businesses were caught and paid the price
for illegal software use.

There are also valuable benefits for becoming software legal. By using original versions of computer software, users receive upgrade notifications, usually at discounted prices. They are also investing in the quality assurance and reliability of the product. Legal compliance means that the business relationship does not end when the buyer walks out of the store. Full documentation, technical support and product change notices await the rightful owner of computer software. The user also enjoys efficient business
functions due to fully operational and productive employees, computer systems and virus protection.

Who Pirates Software?

There is no one type of person who misuses computer software. Many people do not even realize that what they are doing is illegal. People who would never think of stealing a candy bar from a drug store may have no qualms about duplicating a $500 software package. In a small busines environment, resources may be limited and an owner may even think that such a small infraction can have any serious consequences. After all, a small business is very different from a large corporation. But piracy is theft and theft is
against the law.

What Types of Piracy Exist?

Computer piracy comes in many forms. Software counterfeiting is the illegal duplication and sale of copyrighted software in a form designed to make it appear legitimate. Hard disk loading takes place when computer dealers or consultants load unauthorized copies of computer software onto the hard disks of personal computers, often as an incentive for the user to purchase from
that particular person. Electronic bulletin board services (BBS) may offer the illegal opportunity to download copied software using a modem connected
to a telephone. Finally, there is the all too common practice of copying software within companies for use in the home or office, or "sharing" software among friends.

This last type of piracy accounts for over half the total revenues lost by the industry. The reasons for piracy differ widely. A small business person may copy one piece of software to trim costs. Another user may feel that
"everyone else is doing it" and they do not wish to stand out. Finally, there are those who believe that piracy "doesn't hurt anyone" or "isn't really
stealing." They are wrong.

Who Must Obey the Copyright Law?

Many people do not realize that the copyright law applies to organizations, both large and small, as well as individuals. More and more businesses have
written policies against illegal duplication of software. In a small business, there is a unique opportunity to initiate and oversee a
comprehensive software policy. In a smaller environment, software purchases, installations and access can all be easily monitored to help the small
business become "software legal." But compliance does not stop when a small business person leaves his or her job. Employees may face disciplinary action if they make extra copies of the company's software for use at home or on
additional computers in the office. A good rule to remember is that there must be one authorized copy of a software program for every computer upon
which it is run.

What About Upgrades?

Generally speaking, upgrading of software does not give a small business the right to give away the earlier version. The upgrade is an improvement of the original software and not a new copy. The earlier version and the upgrade should be treated as elements of the same software product and not
distributed.

What Can I Do?

Because the software industry is relatively new, and because copying is so
easy, many people are either unaware of the laws governing personal computer software use or choose to ignore them. It is the responsibility of each and every software user, big or small, to understand and adhere to copyright law.
Small business owners can take the initiative to make software compliance an integral part of their daily procedures. If you are part of a small business, see what you can do to initiate a policy or procedure that everyone respects.
Also, suggest that you or your management consider conducting a software audit. You can also help spread the word that users should be "software
legal."

Finally, free educational materials, including a Self-Audit Kit, are available. The Self-Audit Kit includes SPAudit, which helps as a software
inventory program. Using these tools a small business can find out what software they have on their computers' hard drives and what they must do to become "software legal." The benefits of becoming "software legal" far outweigh the disadvantages. The Self-Audit Kit and SPAudit may be obtained from: Software Publishers Association, 1730 M Street, N.W. Washington, D.C.
20036 phone: (202) 452-1600.

How to Get More Information

Information is power! - Make it your business to know what business information is available, where to get it and most importantly, how to use
it.

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Cash Flow Analysis

2008-05-13T07:41:00.000-07:00

Understanding Cash Flow

To be competitive, small business owners must plan and prepare for all future
events and market changes. Possibly the most important aspect of preparation
is effective cash-flow planning. Failure to properly plan cash flow is one
of the leading causes for small business failures in the United States.
Experience has shown that many small business owners lack a general
understanding of accounting principles. For this reason, a few of the basic
principles will be covered. There also are self-instructional guides from
which you can obtain a better understanding of accounting.

The Basics

Cash in business serves several purposes. First, it is used for meeting
normal cash obligations (i.e., paying bills). Second, it is held as a
precautionary measure for unanticipated problems. Third, it is held for
potential investment purposes. The term "cash" refers to:
- Cash
- Checks
- Checking Accounts

The Operating Cycle

The operating cycle can be defined as the system through which cash flows,
from the purchase of inventory through the collection of accounts receivable.
It measures the flow of assets into cash and is, in effect, a "business
stopwatch."

For example, the operating cycle may begin with both cash and inventory on
hand. Additional inventory is purchased on account to work as a cushion for
future sales to guarantee that you will not deplete your stock. Except for
cash sales, when some of your inventory is sold, accounts receivable
increase, but your cash doesn't. Typically, you pay for the inventory you
have purchased thirty days after it is received. When the payment for
inventory is made, both cash and accounts payable are reduced. Thirty days
after the sale of inventory, receivables are usually collected, which
increases cash. Now your cash has completed its flow through the operating
cycle and is ready to begin again.

Current Assets

Cash and other balance sheet items which convert into cash within twelve
months are referred to as current assets. Typical current assets are:
- Cash
- Marketable Securities
- Receivables
- Pre-Paid Expenses

A Plan is Necessary

Cash-flow analysis shows whether your daily operations have generated enough
cash to meet your obligations, and it shows how major outflows relate to
major inflows. As a result, you can tell if inflows and outflows from your
operation combine to result in a positive cash-flow from operations or in a
net drain. Any significant changes over time will also appear.
Understanding this will lead to better control of cash-flows and will allow
adequate time to plan and prepare for the growth of your business.
It is best to have enough cash on hand each month to pay the cash obligations
of the following month. A monthly cash-flow projection helps to project
funds and compare actual figures to past months. It is important to project
your monthly cash-flow to identify and eliminate deficiencies or surpluses in
cash. When cash-flow deficiencies are found, business financial plans must
be altered to provide more cash. When excess cash is revealed, it might
indicate excessive borrowing or idle money that could be invested. The
objective is to develop a plan which will provide a well-balanced cash flow.

Planning a Positive Cash Flow

To achieve a positive cash flow, you must have a sound plan. Cash reserves
can be increased by:
- Collection of receivables
- Tightened credit requirements
- Price of products
- Loans
- Increased sales

Collection of Receivables

Actively manage accounts receivable and quickly collect overdue accounts.
Revenues are lost when a firm's collection policies are not aggressive. The
longer your customer's balance remains unpaid, the less likely it is that you
will receive full payment.

Tightened Credit Requirements

As credit and terms are tightened, more customers must pay cash for their
purchases, thereby increasing the cash on hand and reducing the bad debt
expense.
While tightening credit is helpful in the short run, it may not be
advantageous in the long run. Looser credit allows more customers the
opportunity to purchase your products or services. But, be certain that the
increase in sales is greater than the increase in bad-debt expenses.

Pricing of Products

The primary goal of business is to make a profit. Many small businesses fail
to do so because they do not know how to price their products or services.
Pricing is the critical element in achieving a profit as well as in
maintaining positive cash flow, and is a factor all firms can control.
Before setting your prices, you must understand your product's market,
distribution costs, and competition. Remember, the marketplace responds
rapidly to technological advances and international competition. You must
keep abreast of the factors that affect pricing and be ready to adjust.

Loans

Loans from various financial institutions are often necessary for covering
short-term cash-flow problems. Revolving credit lines and equity loans are
common types of credit used in this situation.

Increased Sales

Increased sales would appear to increase cash flow, but be careful. For many
companies, a large portion of sales are purchased on credit. Therefore, when
sales increase, accounts receivable increases, not cash. Collection of
receivables is usually 30 days after the purchase date, and sales expenses
are most often incurred befor e receivables are collected. When sales rise,
inventory is depleted and must be replaced. Because receivables have not yet
been collected, a substantial increase in sales can quickly deplete a firm's
cash reserves. Again, by using a computer, you can maintain this critical
data, as well as speed the time required to consider the "what if" concept.

Other Helpful Tips

Cash Reserve

You should always keep enough cash, as an added cushion for security, on hand
to cover expenses. But, it is unwise to keep more money on hand than is
necessary to cover your obligations. Excess cash should be invested in an
accessible, interest bearing, low-risk account, such as a savings account,
short-term CD or T-bill. Keeping excess cash on hand reduces both the growth
and the return on investment.

Projections

Good accounting records and projections are important tools for a small
business. Qualified accountants are necessary to help keep your records
accurate and current. However, you can reduce your accounting expenses by
producing your own summary statistics and projections.

Using A Personal Computer

With a personal computer, your business can have the added advantage of quick
cash-flow projections as well as many other useful financial planning tools.
A good financial-management package and computer will enable you to review
projected inflows and outflows of cash from month-to-month or year-to-year.
By analyzing these projections you can see the fluctuations in cash flow and
create management policies to avoid potential shortfalls.
There are numerous computer programs for making projections and keeping
records and many advantages to having a personal computer for your business.
The capabilities of modern computers are almost unlimited--they can aid in
nearly every situation, from basic bookkeeping and "what if" analysis to
inventory control or market demand projections. While a computer is not a
specific requirement to success for a small business, it is a business tool
which in the future will separate the competitive from the mediocre.

How to Get More Information

Other helpful sources include:
- State Economic Development Agencies
- Chambers of Commerce
- Colleges and Universities
- Public Libraries

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The Importance of Good Record Keeping

2008-05-13T07:09:00.000-07:00

You arrive at work this morning and look around with a sense of
accomplishment. This business is yours! From the start, you've
done everything right.

- You conducted meaningful market research.
- Your product is in demand.
- You understand the competition and have identified your
competitive advantage (i.e., cost, service, and/or quality).
- You've established the optimum price.
- Business flows steadily through the doors.

Yet, this bright sense of accomplishment begins to fade slowly as you
acknowledge those little nagging questions that ever seem to disturb
your great dream.

"Why is my cash flow always a problem? How much real profit is in my
business, anyway? I'll deposit the payroll taxes well enough . . .
but, why is it going to be tight again this quarter?"

What's really happening in your business? If you're not exactly sure,
then it's time to return to the basics -- the basics of good record
keeping.

Why?

Bluntly, a small business that fails to keep complete and accurate
financial records places its long term success and continuance in
grave, grave doubt.

The following three points discuss some of the major reasons that
good (i.e. complete and accurate) financial record keeping is
crucial to the success of your business.

1. Good records provide the financial data that help you operate
more efficiently, thus increasing the profitability of your
enterprise.
This is because accurate and complete records enable you, or
your accountant, to identify all your business assets,
liabilities, income, and expenses, which, when compared to
appropriate industry averages help you pinpoint the strong and
weak phases of your business operations.

2. Good records are essential for the preparation of current
financial statements, such as the Income Statement
(Profit and Loss) and the Cash Flow Projection.
These, in turn, are critical for maintaining good relations
with your banker. They also will present a complete picture
of your total business operation which will benefit you as
well.

3. Good records are required for the preparation of complete and
accurate tax documents. For example, poor records often lead
to the preparation of income tax returns that result in
underpayment or overpayment of taxes. In addition, good records
are essential in an IRS audit situation, if you hope to answer
questions accurately and to the satisfaction of the IRS.

The Key to Success is Information
Think back to the steps you went through to open your business.
First, you invested a tremendous amount of time in gathering
information . . . about your abilities, finances, market, customers
and competitors.
You understood why you wanted to go into business . . . the
opportunity to be your own boss, a desire for financial
independence, the freedom to set your own course.
Then you chose the business "right" for you. And, more importantly,
your market research showed that your particular "business dream"
was in demand.
You then took all this information and developed a business plan
-- the same business plan that helped you get the loan you needed
to open the doors.
You demonstrated your business skills to the bank when you stated
precisely how much money you needed, why you needed it, and how
you were going to pay it back.

What Went Wrong?

While it's true that success often begets success, it's equally true
that success often breeds failure -- in a small business as well.
That's because as a business begins to grow rapidly, the owners often
work frantically to simply meet demand, minimizing the time they devote
to keeping good records.
If one of your reasons for starting a business was to get away from
paperwork, it is critical that you hire someone to perform the
necessary task of keeping your financial records.
Although you must pay for the services of a public accountant,
bear in mind that their professional advice frequently can increase
your profits, more than covering the professional fees.

What Exactly Will The Records Tell You?

The following checklist highlights the type of information your
financial records should provide in assuring your success:

- How much income are you generating now and how much income can
expect to generate in the future?
- How much cash is tied up in accounts receivable (and thus not
available)
- How much do you owe for merchandise? Rent? Equipment?
- What are your expenses, including payroll, payroll taxes,
merchandise and benefit plans for yourself and employees
(such as health insurance, retirement, etc.)?
- How much cash do you have on hand? How much cash is tied up in
inventory? What is your actual working capital budget?
- How frequently do you turn over your inventory?
- Which of your product lines, departments or services are making a
profit, which are breaking even, and which are financial drains?
- What is your gross profit? What is your net profit?
- How does all of the financial data listed above compare with last
year -- or last quarter? How does it compare with the projections
in your business plan?
- How does all of the financial data compare with that of your
competitors? With that of the industry?

While your review of this checklist may have uncovered some glaring
deficiencies, it's never too late to correct problems related to poor
record-keeping habits.
It may take you a bit of time and effort to analyze the company
checkbook, take inventory, review bank statements and, in general,
just catch up on your paperwork.
It is essential that you make the effort to determine the precise
financial condition of your business at present. It is just as
critical as maintaining good customer relations.

What to Look for in an Accountant

How do you find an accountant who is knowledgeable, capable and
discreet?
You will be seeking an individual with high ethical standards who will
be a respected member of the community. Due to the ever-changing
complexities of the tax laws and development in the methods and
practices of accounting, the accountant must be alert to the value
of continuing professional education. Look for an accountant who takes
advantage of educational seminars, professional publications and other
study opportunities.
You will probably want your accountant to assist you in many ways,
as a consultant, financial advisor, counselor, etc., who understands
your business affairs as well as you. So, seek out broad experience,
as well as education, in selecting your accountant.
Professional accountants have year-around offices and are listed in
telephone directories under accountants, public accountants,
bookkeepers and tax preparers.
Look for references or recommendations from local business associates,
your banker or attorney. Look for memberships in state and national
professional accounting societies. This generally proves a commitment
to continuing professional education and the profession. Additionally,
in most all cases, membership requires adherence to a strict code of
ethics and high standards for professional performance.

The Basic System

A basic record keeping system should be simple to use, easy to
understand, reliable, accurate, consistent and designed to provide
information on a timely basis. It needs:

- A basic journal to record transactions (receipts, disbursements,
sales, purchases, etc.)
- Accounts receivable
- Accounts payable
- Payroll records
- Petty Cash records
- Inventory: Equipment & Goods

Without knowing where your business is financially, you may be forced
to close or sell, despite an excellent customer base. You could find
yourself in this trap . . .
- if your cash flow is desperate, or
- if you are unable to pay creditors, or
- if too much of your cash is tied up in old inventory and
accounts receivable.

Make a vow now to maintain your records and assure your success!
If yours is a small firm just starting out in the exciting world of
business, resolve now that you will not fall into the trap of letting
the books wait until . . .
-- you are less busy
-- you are more rested
-- you have more time available to start and finish the job
all in one sitting
-- or whatever excuse you use at the time.

Remember, too, there are experts available to help you in all aspects
of your new business. There are people who can assist you with market
research and advertising/promotion, there are those who can help you
with your real estate needs, transportation and shipping, tele-
communications needs and more.
But most important of all, there are professionals available to help
you maintain and manage your financial records. They are public
accountants, and they are ready to serve you and your business.

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Small Business Health Insurance

2008-05-09T07:17:00.000-07:00

Structuring Your First Benefits Plan

Health insurance is the second most-coveted fringe benefit in America today-- behind only paid vacation. Yet only half of employers with fewer than 10 employees offer it, some because of the price tag.

Cost, of course, is a major consideration. But in today's environment of managed care plans and increase cost-sharing with employees, it doesn't have to be an overriding issue.

Structuring your benefits plan properly -- with an eye on the quality and cost of care -- can help you attract and retain qualified employees.

Where to Start

When considering your first benefits plan, begin by determining the needs of your employees/ You may want to sit down with them to discuss options,
making it clear that you may not be able to afford all of what they want and that some costs may have to be shared.

Armed with this information, you should contact an independent insurance agent or broker who:

-Can explain the different coverage options available,
-Present you with alternative plans and quotes and
-Sell and service your policy.

Because you will have an ongoing relationship with your agent, consider the agent’s reputation, personal dynamics and responsiveness when making your selection.

Your agent will explain to you the major categories of insurance plans, including:

Indemnity

This is a traditional pay-as-you go health insurance plan. The employee pays a set deductible, then a coinsurance percentage (usually 20 percent) of covered expenses. After he or she has paid a certain amount out of pocket, the plan pays 100 percent of the expenses. The employee can use any doctor or hospital, and simply files claims for reimbursement.

Some indemnity plans have "managed care" features, which control costs by monitoring care to make sure it is appropriate and cost-effective. Pre-admission review of hospital stays or medical treatment is one popular and effective managed care feature.

Another method of controlling costs with an indemnity plan is raising the deductible and/or increasing the employee's portion of the coinsurance. The higher the deductible and employee coinsurance, the lower the cost to the employer and employee.

Managed Care

Managed care plans, which are becoming increasingly popular, encourage employees to avail themselves of quality, cost-effective care offering
them financial incentive -- usually higher coinsurance -- to use certain doctors and hospitals. The provides in a managed care network agree to limit their fees in return for a guaranteed number of patients. The provides also
handle all claims of quality reviews.

One type of managed care network is a Health Maintenance Organization (HMO), which generally provides 100 percent reimbursement for most services, but provides little or very limited benefits if the employee chooses to see doctors outside of the network for care. In a Preferred Provider Organization (PPO), the employee receives higher reimbursement (often 90 percent) when using a network provider, but benefits are lower (sometimes 70 percent) when the employee receives care from a physician outside the network. However, many plans reimburse emergency care at the 90 percent level, regardless of whether the services is provided by a physician within
or outside of the network.

Self Insurance

Some employers self-fund their own plans, but contract with an insurance company for claims administration. This option is generally for larger businesses with more sophisticated insurance administration capabilities and financial resources to absorb the higher risk involved.

Selecting a Plan

Your agent or broker will probably provide you with several different proposals and quotes from insurance companies. Since each quote may provide
for different coverages, don't just compare prices. Ask to see the entire proposal from the insurer, including customer service and claims paying
capabilities.

In reviewing the proposals, ask your agent the following questions:

- Is the insurance carrier reputable and financially strong?

- Will the policy be renewed every six months or annually?

- Is the plan easy to administer? Is there a toll-free 800 number to call to make changes or have questions answered?

- Does the insurer process and pay claims quickly?

- What are the penalties employees should know about? Are there any "hidden" deductibles, such as a separate inpatient hospital deductible?

- Will the insurer underwrite the policy as a group, as individuals or both?

- Does the managed care plan provide enough of a financial incentive to encourage employees to select network providers?

Once you decide on a benefits plan, your insurance company will provide follow-up information for employees that details plan specifics, enrollment
periods and claims procedures. Once the program is operational, you will soon become aware of the importance of accurate, responsive service. And,
keep the lines of communication open between you and your insurer. Only through continued dialogue can the benefits program be fine-tuned to provide
the highest level of service to you and your employees.

In today's benefits environment, providing employee health insurance coverage does not have to be an all-or-nothing proposition. Understanding your employees' needs, researching the options available and selecting a reputable insurer can give you a competitive advantage in recruiting and retaining a skilled workforce.

How To Get More Information

Information is power! Make it your business to know what business information is available, where to get it and most importantly, how to use it.

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Planning the Most Important Ingredient

2008-05-09T04:23:00.000-07:00

Unless you know how to get where you are going, you will end up somewhere else. Think about that! Suppose you lived in Sydney and decided to drive to Melbourne, would you use a map? Of course you would. But what would if you didn't? It would be a very long trip and if you didn't know your geography, you probably would not make to Wagga, never mind Melbourne.

Starting or running a business without proper planning is like driving from Sydney to Melbourne without a map. Planning will show you your destination and the best road to get you there. This information summary will provide you with an overview of planning and discuss how and why to prepare a business plan.

Why Planning Is Critical

- Planning gives you a path to follow. It makes your future what you want it to be.
- It is the most important guide to starting, building and managing a successful business.
- It is the best tool available to help a small business raise money.
- A business plan can be a communications tool for investors, suppliers, employees and others interested in understanding the operations and goals of your business.
- If you don't plan for the success of your business -- you will fail. It is that simple!

Planning Can Be Difficult

Although planning is critical to your success, it is often overlooked in favour of intuition or "gut feeling." There are other obstacles that hinder planning, including:
- Lack of know-how -- it is sometimes difficult to know how to plan and what to plan for.
- Fear of the unknown -- it is hard enough dealing with the problems of today without worrying about what's going to happen in the future.
- Inexactness -- the best set plans have a funny way of not working out exactly the way they should.

These obstacles are very real. However, they must be overcome if you are to be successful. While we may find it difficult to face the future, heading into it without any direction is much worse.

The Business Plan

The business plan is a written document that clearly defines the goals of a business and outlines the methods for achieving them. A business plan describes what a business does, how it will be done, who has to do it, where it will be done, why it's being done and when it has to be completed. Dreams and ambitions are great and important. But what really counts in the business world are results. Therefore, it is important to establish realistic goals with a sound methodology for achieving them.

A business plan:
- Is the management and financial "blueprint" for a business start-up and profitable operation.
- Is written by the business owner with outside help as needed.
- Explains how the business will function and depicts its operational characteristics.
- Details how the business will be capitalized and managed.

Elements Of A Business Plan

1. Business Description
- Business name, address and owner identification
- Identifies goals and objectives. Clarifies why you are or why you want to be in business.

2. Products and Services
- Very descriptive explanation of all products and services.
- Describes what you are selling and why.

3. Sales and Marketing
- Sales and marketing are the core of your business rationale.

Your plan should address several basic questions.

- Who and how large is your market?
- How will you be competitive?
- What pricing and sales terms are you planning?
- How will you market your products and services?

4. Operating Requirements

- The plan should identify and describe the equipment, facilities and people necessary to generate your products and services.
- How will your products and services be produced and made available to the customer?

5. Financial Management

This is the most critical part of your business plan. You will establish vital schedules that will guide the financial health of your business. If you are just starting a business, your plan should include:

- Projected "start-up costs."
- Your expected profit or return on investment (ROI) for the first year.
- Projected income state and balance sheet for two years.
- Projected monthly cash flow statement for 12 months.

If you have a young or established business, your plan should include:

- Income statement and balance sheet for the last two years.
- Projected income statement and balance sheet for the next two years.
- Projected monthly cash flow statement for 12 months.

Your plan should include an explanation of all projections. If you feel that your finance or accounting knowledge is not sufficient to prepare these statements, get professional assistance. The bottom line is: will, or does your company make a profit?

6. Concluding Narrative

- This segment of your plan should summarize your business goals and objectives and send a message that your are committed to the success of your business.

Put Your Best Foot Forward

Your business plan should be complete, clear, neat and accurate. It will be an extension of you and your business. The length of a good plan will vary from a few pages to well over a hundred pages. The plan should provide a sound "blueprint"for your business and entice any reader to want to know more.

A Final Word On Planning

Planning is the most important part of starting and running a successful business. It is a fact...unless you know where you are going, you will end up somewhere else.

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How to Price your Products and Services

2008-05-09T01:29:00.000-07:00

The primary goal of business is to make a profit.

Many small businesses fail to do so because they do not know how to price their products or services.

Pricing is the critical element in achieving a profit and is a factor that all firms can control.

Before setting your prices, you must understand your product's market,distribution costs, and competition. Remember, the marketplace responds rapidly to technological advances and international
competition. You must keep abreast of the factors that affect pricing, and be ready to adjust.

Retail Cost and Pricing

A common pricing practice among small businesses is to follow the manufacturer's suggested retail prices. The suggested retail price is easy to use, but it can cause problems. It may create an undesirable price image, and it doesn't consider the competition.

Competitive Position

Another approach is a strategy in which a firm bases its price on those of its competitors. A small retailer should compare prices with a similar store. Do not try to compete with a large store's
prices, because they can buy in larger volumes and their cost per unit will be less.

Instead, highlight other factors, like customer service. Customers will often pay more for merchandise if they get courteous service.

Pricing Below Competition

Many vendors have been very successful using this pricing strategy. Since this strategy reduces the profit margin per sale, a firm needs to reduce its costs and:

- Obtain the best prices possible for the merchandise;

- Locate the business in an inexpensive location or facility;

- Closely control inventory;

- Limit the lines to fast moving items;

- Design advertising to concentrate on "price specials;"

- Offer no or limited services.

Pricing goods below the competition can be difficult to maintain.

Why?

Because every cost component must be constantly monitored and adjusted. It also exposes a business to pricing wars. Competitors can match the lower price, leaving both parties out in the cold.

Pricing Above The Competition

This strategy is possible when price is not the customer's greatest concern. Nonprice considerations important enough for customers to justify paying higher prices include:

- Service considerations: delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, helpful and friendly employees,

- A convenient or exclusive location,

- Exclusive merchandise.

Price Lining

This strategy targets a specific segment of the buying public by carrying products only in a specific price range. For example, a store may wish to attract customers willing to pay over $50 for a purse.

Price lining has many advantages:

- Reduced errors by sales personnel;

- Ease of selection for customers;

- Reduced inventory;

- Reduced storage costs, due to smaller inventory.

Multiple Pricing

This strategy involves selling a number of units for a single price. For example, two items for $1.98. This is useful for low cost, consumable products like shampoo or toothpaste. Many stores
find this a desirable pricing strategy for sales and year-end clearances.

Service Costs And Pricing

Every service has different costs. Many small service firms fail to analyze their services' total cost, and therefore, fail to price them profitably. By analyzing the cost of each service, prices can be set to maximize profits and eliminate unprofitable services.

Service Cost Components

Material, labor and overhead make up the total cost of any product or service.

Material Costs

This is the cost of materials found in the final product. For example, the wood and other materials used in the manufacturing of a chair are direct materials.

Labor Costs

This is the cost of the work that goes into the manufacturing of a product. An example is the wages of all production line workers.
The direct labor costs are derived by multiplying the cost of labor per hour by the number of man-hours needed to complete the job.

Remember to use not only the hourly wage, but also include fringe benefits. These include:
- social security,
- workers compensation,
- unemployment compensation,
- insurance,
- and retirement benefits.

Overhead Costs

Any cost not readily identifiable with a particular product is overhead.

These include indirect materials and indirect labor, such as maintenance, supplies, repairs, heat and light, depreciation and insurance. These are not charged to direct labor, but must be included as a cost. Examples are . . .
- clerical,
- legal
- janitorial services & supplies,
- Insurance
- taxes,
- rent,
- advertising
- transportation

Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate.

Adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It is best to project the costs semi-annually, including increased executive salaries and other projected costs.

A cost lid must always be used in preparing a bid or quoting a job. Include shipping, handling or storage in the total material cost.

Figuring Costs And Profits For A Consultant Service

Pricing services where your own labor or expertise is used is different from pricing services that use materials and other labor.

For instance, most consultants price their services by the hour. Senior consultants charge more for their time than do their less experienced counterparts.

Remember to charge for an adequate number of hours. Travel time is usually listed as an extra charge.

It is unlikely that all of your time will be billed to clients. Therefore, hourly or contract fees must be set high enough to cover expenses during slow periods. That is why one-half of the total
normal working hours for a given year are used in figuring overhead rates. Try to obtain long term, monthly, or contract assignments when possible.

Summary

Your pricing structure and policy are major components of your public image and are crucial to securing and keeping your clientele.

Pricing for service businesses may be more complex than retail pricing. However, the result is the same: cost, plus operating expenses, plus desired profit, equals the services price.

The key to success is to have a well-planned strategy. Establish your policies, constantly monitor prices and operating costs to insure profit.

Accuracy increases profits!

How To Get More Information

Information is power! Make it your business to know what business information is available, where to get it and most importantly, how to use it.

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How to Prepare a Business Plan

2008-05-09T00:39:00.000-07:00

Success in business comes as a result of planning. You have to have a detailed, written plan that shows you what the ultimate goal is, the reason for the goal, and each milestone that must be passed in order to reach your goal.

A business plan is a written definition of, and an operational plan for achieving your goal. You need a complete business tool in order to define your basic product, income objectives and specific operating procedures. YOU HAVE TO HAVE A BUSINESS PLAN to attract investors, obtain financing and hold onto the confidence of your creditors, particularly in times of cash flow shortages - in this instance, the amount of money you have on hand compared with the expenses that must be met...

Aside from an overall directional policy for the production, sales efforts and profit goals of your product - your basic "travel guide" to business success - the most important purpose your business plan will serve, will be the basis or foundation of any financial proposals you submit. Many entrepreneurs are under the mistaken impression that a business plan is the same as a financial proposal, or that a financial proposal constitutes a business plan. This is just a misunderstanding of the uses of these two separate and different business success aids.

The business plan is a long range "map" to guide your business to the goal you've set for it. This plan details the what, why, where, how and when, of your business - the success planning of your company.

Your financial proposal is a request for money based upon your business plan - your business history and objectives.

Understand the differences. They are closely related, but they are not interchangeable.

Writing and putting together a "winning" business plan takes study, research and time, so don't try to do it all in just one or two days.

The easiest way is to start with a loose leaf notebook, plenty of paper, pencils, pencil sharpener, and several erasers. Once you get your mind "in gear" and begin thinking about your business plan, "10,000 thoughts and ideas per minute" will begin racing through your mind... So, it's a good idea when you aren't actually working on your business plan, to carry a pocket notebook and jot down those business ideas as they come to you - ideas for sales promotion, recruiting distributors, and any other thoughts on how to operate and/or build your business.

Later, when you're actually working on your business plan, you can take out this "idea notebook" - evaluate your ideas, rework them, refine them, and integrate them into the overall "big picture" of your business plan.

The best business plans for even the smallest businesses run 25 to 30 pages or more, so you'll need to "title" each page and arrange the different aspects of your business plan into "chapters." The format should pretty much run as follows:

Title Page
Statement of Purpose
Table of Contents
Business Description
Market Analysis
Business Location
Management
Current Financial Records
Explanation of Plans For Growth
Explanation of Financing for Growth
Documentation
Summary of Business & Outlook for The
Future
Listing of Business & Personal References

This is a logical organization of the information every business plan should cover. I'll explain each of these chapter titles in greater detail, but first, let me elaborate upon the reasons for proper organization of your business plan.

Having a set of "questions to answer" about your business forces you to take an objective and critical look at your ideas. Putting it all down on paper allows you to change, erase and refine everything to function in the manner of a smoothly oiled machine. You'll be able to spot weaknesses and strengthen them before they develop into major problems. Overall, you'll be developing an operating manual for your business - a valuable tool which will keep your business on track, and guide you in the profitable management of your business.

Because it's your idea, and your business, it's very important that YOU do the planning. This is YOUR business plan, so YOU develop it, and put it all down on paper just the way YOU want it to read. Seek out the advice of other people; talk with, listen to, and observe, other people running similar businesses; enlist the advice of your accountant and attorney - but at the bottom line, don't ever forget that it has to be YOUR BUSINESS PLAN!

Remember too, that statistics show the greatest causes of business failure to be poor management and lack of planning - without a plan by which to operate, no one can manage; and without a direction in which to aim its efforts, no business can attain any real success.

On the very first page, which is the title page, put down the name of your business - ABC ACTION - with your business address underneath. Now, skip a couple of lines, and write in all capital letters: PRINCIPAL OWNER - followed by your name if you're the principal owner. On your finished report, you would want to center this information on the page, with the words "principal owner" offset to the left about five spaces.

Example: ABC ACTION
1234 SW 5th Ave. Anywhere, USA 00000

PRINCIPAL OWNER: Your Name

That's all you'll have on that page, except the page number...
-1-

Following your title page is the page for your statement of purpose. This should be a simple statement of your primary business function, such as: We are a service business engaged in the business of selling business success manuals and other information by mail.

The title of the page should be in all capital letters across the top of the page, centered on your final draft - skip a few lines and write the statement of purpose. This should be direct, clear and short - never more than two (2) sentences in length.

Then you should skip a few lines, and from the left hand margin of the paper, write out a subheading in all capital letters, such as: EXPLANATION OF PURPOSE.
From, and within this subheading, you can briefly explain your statement of purpose, such as: Our surveys have found most entrepreneurs to be "sadly" lacking in basic information that will enable them to achieve success. This market is estimated at more than 100 million persons, with at least half of these people actively "searching" for sources that provide the kind of information they want, and need.

With our business, advertising and publishing experience, it is our goal to capture at least half of this market of information seekers, with our publication, MONEY MAKING MAGIC! Our market research indicates we can achieve this goal, and realize a profit of $1,000,000 per year within the next 5 years...

The above example is generally the way you should write your "explanation of purpose," and in subtle definition, why you need such an explanation. Point to remember: Keep it short. Very few business purpose explanations are justifiably more than a half page long.

Next comes your table of contents page. Don't really worry about this one until you've got the entire plan completed and ready for final typing. It's a good idea though, to list the subjects (chapter titles) as I have, and then check off each one as you complete that part of your plan. By having a list of the points you want to cover, you'll also be able to skip around and work on each phase of your business plan as the idea or the interest in organizing that particular phase, stimulates you. In other words, you won't have to make your thinking or your planning conform to the chronological order of the "chapters" of your business plan - another reason for the loose leaf notebook...

In describing your business, it's best to begin where your statement of purpose leaves off. Describe your product, the production process, who has responsibility for what, and most importantly, what makes you product or service unique - what gives it an edge in your market. You can briefly summarize your business beginnings, present position and potential for future success, as well.

Next, describe the buyers you're trying to reach - why they need and want or will buy your product - and the results of any tests or surveys you may have conducted. Once you've defined your market, go on to explain how you intend to reach that market - howyou'll alert these prospects to your product or service and induce them to buy. You might want to break this chapter down into sections such as... publicity and promotions, advertising plans, direct sales force, and dealer/distributor programs. Each section would then be an outline of your plans and policies.

Moving into the chapter on competition, identify who your competitors are their weaknesses and strong points - explain how you intend to capitalize on those weaknesses and match or better the strong points. Talk to as many of your "indirect" competitors as possible - those operating in different cities and states.

One of the easiest ways of gathering a lot of useful information about your competitors is by developing a series of survey questions and sending these questionnaires out to each of them. Later on, you might want to compile the answers to these questionnaires into some form of directory or report on this type of business.

It's also advisable to contact the trade associations and publications serving your proposed type of, business. For information on trade associations and specific trade publications, visit your public library, and after explaining what you want, ask for the librarian's help.

The chapter on management should be an elaboration on the people operating the business. Those people that actually run the business - their job titles, duties, responsibilities and backfilled resume's. It's important that you "paint" a strong picture of your top management people because the people coming to work for you or investing in your business, will be "investing in these people" as much as your product ideas. Individual tenacity, mature judgement under fire, and innovative problem-solving have "won over" more people than all the AAA Credit Ratings and astronomical sales figures put together.

People becoming involved with any new venture want to know that the person in charge - the guy running the business knows what he's doing, will not lose his cool when problems arise, and has what it takes to make money for all of them. After showing the "muscle" of this person, go on to outline the other key positions within your business; who the persons are you've selected to handle those jobs and the sources as well as availability of any other help you might need.

If you've been in business on any kind of scale, the next chapter is a picture of your financial status - a review of your operating costs and income from the business to date. Generally, this is a listing of your profit & loss statements for the past six months, plus copies of your business income tax: records for each of the previous three years the business has been an entity.

The chapter on the explanation of your plans for the future growth of your business is just that - an explanation of how you plan to keep your business growing - a detailed guide of what you're going to do, and how you're going to increase your profits.
These plans should show your goals for the coming year, two years, and three years. By breaking your objectives down into annual milestones, your plans will be accepted as more realistic and, be more understandable as a part of your ultimate success.

Following this explanation, you'll need to itemize the projected cost and income figures of your three year plan. It'll take a lot of research, and undoubtedly a good deal of erasing, but it's very important that you list these figures based upon thorough investigation. You may have to adjust some of your plans downward, but once you've got these two chapters on paper, your whole business plan will fall into line and begin to make sense. You'll have a precise "map" of where you're headed, how much it's going to cost, when you can expect to start making money, and how much.

Now that you know where you're going, how much it's going to cost and how long it's going to be before you begin to recoup your investment, you're ready to talk about how and where you're going to get the money to finance your journey. Unless you're independently wealthy, you'll want to use this chapter to list the possibilities and alternatives.

Make a list of friends you can approach, and perhaps induce to put up some money as silent partners. Make a list of those people you might be able to sell as stockholders in your company - in many cases you can sell up to $300,000 worth of stock on a "private issue" basis without filing papers with the Securities and Exchange Commission. Check with a corporate or tax attorney in your area for more details. Make a list of relatives and
friends that might help you with an outright loan to furnish money for the development of your business.

Then search out and make a list of venture capital organizations. Visit the Small Business Administration office in your area - pick up the loan application papers they have - read them, study them, and even fill them out on a preliminary basis - and finally, check the costs, determine which business publications would be best to advertise in, if you were to advertise for a partner or investor, and write an ad you'd want to use if you did decide to advertise for monetary help.

With a listing of all the options available to your needs, all that's left is the arranging of these options in the order you would want to use them when the time comes to ask for money. When you're researching these money sources, you'll save time by noting the "contact" to deal with when you want money, and whenever possible, by developing a working relationship with these people.

In your documentation section, you should have a credit report on yourself. Use the yellow pages or check at the credit department in your bank for the nearest credit reporting office. When, you get your credit report, look it over and take whatever steps are necessary to eliminate any negative comments. Once these have been taken care of, ask for a revised copy of your report and include a copy of that in your business plan.

If you own any patents or copyrights, include copies of these. Any licenses to use someone else's patent or copyright should also be included. If you own the distribution, wholesale or exclusive sales rights to a product, include copies of this documentation. You should also include copies of any leases, special agreements or other legal papers that might be pertinent to your business.

In conclusion, write out a brief, overall summary of your business - when the business was started, the purpose of the business, what makes your business different, how you're going to gain a profitable share of the market, and your expected success during the coming 5-years...

The last page of your business plan is a "courtesy page" listing the names, addresses and phone numbers of personal and business references - persons who have known you closely for the past five years or longer - and companies or firms you've had business or credit dealings with during the past five years.

And, that's it - your complete business plan. Before you send it out for formal typing, read it over once a day for a week or ten days. Take care of any changes or corrections, and then have it reviewed by an attorney and then, an accountant. It would also be a good idea to have it reviewed by a business consultant serving the business community to which your business will be related. After these reviews, and any last-minute changes you want to make, it'll be ready for formal typing.

Hire a professional typist to type the entire plan on ordinary white bond paper. Make sure you proofread it against the original. Check for and correct any typographical errors then one more time - read it through for clarity and the perfection you want of it.

Now you're ready to have it printed and published for whatever use you have planned for it - distribution amongst your partners or stockholders, as the business plan for putting together a winning financial proposal, or as a business operating manual.

Take it to a quality printed in your area, and have three copies printed. Don't settle for photocopying... Have it printed! Photocopying leaves a slight film on the paper, and will detract from the overall professionalism of your business plan, when presented to someone you're trying to impress. So, after going to all this work to put it together properly, go all the way and have it duplicated properly.

Next, stop by a stationery store, variety store or even a dimestore, and pick up an ordinary, inexpensive bind-in theme cover for each copy of your business plan. Have the holes punched in the pages of your business report to fit these binders and then slip each copy into a binder of its own.

Now you can relax, take a break ant feel good about yourself... You have a complete and detailed business plan with which to operate a successful business of your own... A plan you can use as a basis for any financing proposal you may want to submit... And a precise road-map for the attainment of real success...

Congratulations, and my best wishes for the complete fulfillment of all your dreams of success!!!

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Having Vision

2008-05-08T20:52:00.000-07:00

During an interview with the great author and entrepreneur Helen Keller (she became blind, deaf and mute), the interviewer asked, “Miss Keller, is there anything worse than being blind?”. She paused for a moment, then replied, “What’s worse than being blind is having sight without vision!”. What a perspective woman, huh! This woman, who could not see physically, had more vision and accomplishments in her lifetime than the majority in her generation who had sight!

What was the main reason for her success? Yeah, right, you guessed it right! It was vision. Vision is the greatest force in life and the greatest gift ever given to mankind. Vision is the driving force that inspires you to be PASSIONATE, and when you are passionate about something, you are willing to put all your energy into it. The end-result of being passionate is that you will accomplish great results. Without vision, life has no sense of direction or purpose, and you have no values to guide your life. You require an internal motivation (Vision) to help you stay in the race and compete with the best of them rather than becoming a quitter. Vision inspires you to persist and persevere until you reach the finishing line. With vision, it is possible to accomplish the impossible. Yes, vision is the greatest power on earth because it is the essence of true faith!

Charlotte Linda Tu'ulakitau is an online marketer who runs various online businesses. She is also a postgraduate student and an inspiring writer who writes various types of articles ranging from business, to relationship, health, motivational etc.

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How to Start a Home-based Business

2008-04-29T05:21:00.000-07:00

According to IDC, a top national research firm, there are between 34.3 million and 36.6 million home-based businesses in the United States alone. The Home-based Business Institute estimates that about 70% of home-based businesses will last over a 3 year period compared to 29% of other business ventures. Home-based business is a $427 billion a year industry as estimated by Entrepreneur Magazine.

Nowadays, more and more people are working from home. They do some or all of their work at home. Many people find that working at home is the “ideal working arrangement” and decide to formally set up businesses in their homes.

People are striking out and achieving economic independence by turning their skills and interests into dollars. With the technological advancement of the internet, the opportunities seem to be endless.

Getting Started

Before getting started, it is essential to know why you are doing it. To be successful, you have to know the reason(s), and it should be more than just a desire to be your own boss. It is also important for you to understand what this home-based venture involves.

Ask yourself these questions:

- Can I work under the same roof that my family lives in?
- Am I self-motivated to work on my own?
- Am I a self-starter?
- Can I deal with the isolation of working on my own from home?
- Do I have the self-discipline to maintain schedules?
- Can I easily switch from home responsibilities to serious business work?

Finding Your Niche

Choosing a home business is a very important decision. You must make your decision with great care and concern for the future.

Before you invest your time and money, first ask yourself these questions:

- Do you have what it takes to run a business successfully from home?
- Do you have the talents and skills needed to compete successfully?
- Can you identify and describe the business you plan on establishing?
- Is there a demand for your service or product?
- Can you successfully market your service or product?
- What advantages do you have over your competitors?
- Does your home have a space for a business?
- Does your family support your business goals/vision?

Legal Requirements

A home-based business is subject to the same laws and regulations affecting other businesses. Here are some of the general areas to watch out for:

- Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or asked to close down.
- Certain products cannot be produced in the home. Most states outlaw the home production of fireworks, poisons, explosives, drugs, sanitary or medical products and toys. Some states also prohibit home-based businesses from making food, drink or clothing.

In addition, there are registration and accounting requirements to consider:

- Your business name may need to be registered with the state.
- Your business may need an A.C.N and A.B.N and business tax file number.
- You may need to obtain a work certificate or licence from the state.
- You may need to register with some of the tax requirements.
- A separate business telephone and bank account normally are required.
- If you have employees, then you need to comply with minimum wage and employee health and safety laws.

Once you have thought about the pros and cons of a home-based business, it is time to start working on your business plan.

Feel free to use this article in your blog or website or you can even email it to friends BUT with this link intact http://smlbusiness.blogspot.com

Clever Marketing

2008-04-28T06:32:00.000-07:00

You will not be successful in your new business venture just because you want it to succeed. Clever marketing will bring customers to your door. It alerts people that your business is there and gives them reasons to choose your product or service over those of your competitors, or over not buying at all.

Determining if there is a market for your product or service is the most important item of planning. Once you decide on your product or service, you must start analyzing your market—a process that involves interviewing your competitors, suppliers and customers. Before you start researching your market, you should ask yourself the following questions:

- Is there a constant demand for this product or service?
- How many competitors are there providing the same service or product?
- How can I best adapt my product or service to the market I want and promoting it so it appeals to the market?
- What are my competitive advantage?
- Can I compete effectively in price, quality and delivery?
- Can I price my product or service to give me the projected profit?

Once you are satisfied with your answers to these questions, start working on your market research. Conducting a research on the market you intend to penetrate will prepare you to target real and potential customers or prospects. It will also tell you whether your product or service appeals to your target market. Without market research, you will never know how your product or service is likely to be accepted by your target market. Furthermore, you will waste your time and money advertising to the wrong group of people.

Market Research

- Ascertain whether a product should be produced (if you are a manufacturer) or stocked (if you are a retailer).
- Ascertain whether there is a gap in the market for your product or service
- Tells you what consumers think about your competitors’ products or services.
- Tells you what consumers think about your own product or service.
- Shows alternative approaches to your market.
- Provides a more accurate profile of your marketplace and your best target consumers.
- Provides a more accurate base for making profit assumptions.
- Assists in the development of short-term and long-term business goals.

Questions To Ask

In order to gain more specific information concerning your market, you will need to make up a questionnaire to be filled in by your existing customers and your potential customers.

Your research should ask these questions:

- Who are your real and potential customers or prospects?
- Where are they located?
- What are their needs and resources?
- Is there a day to day demand for your product or service?
- Does your product or service appeals to your target market?
- Is there a gap in the market for your product or service?
- Can the customer afford your service or product?
- What does consumers think about your competitors’ product or service?
- What does consumers think about your own product or service?
- What areas within your market are declining or growing?
- What is the general economy of your service or product area?

Market Data

Knowing your market not only requires an understanding of your product and service, but also an understanding of your customers' socio-economic conditions. Your market data will serve as a map in guiding you and letting you know what is ahead so that you will be well equipped. It is important to have a great product or service before launching into an advertising campaign. You will run yourself out of business if you give misleading information and false promises. An inadequate market research can have costly ramifications for your business.

More market information can be found in:

- Government publications
- Customer surveys in your market area
- Library listings of trade associations and journals
- Banks, Realtors and Insurance Companies
- Competitors
- Regional planning organisations’ studies on growth trends
- State Economic Development Agencies
- Chambers of Commerce
- Local Colleges

Summary

A business owner must know the market in order to be successful. Strategic marketing should play a leading role in your business venture. Market research is simply an orderly and objective way of learning about your real and potential customers. Every aspect of your marketing should be built around convincing your real and potential customers that you offer more than your competitors.

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