Professor Project

Buying/Selling Process

2014-05-07T17:15:00.000-04:00

In an earlier post, I wrote about the sales presentation and proposed a list of questions that a prospect might have and wonder if you are the right person to contract with. I will now submit to you a list of more thought-provoking challenges to help you understand the buying/selling process:

The first sale made is the salesperson. If the prospect doesn't buy you, he's not going to buy your product or service.
How's your online reputation? What's your Google ranking and reputation? Not your company's reputation . . . yours!
What's your social media reputation? Not tweeting is a choice, but a poor one. How about LinkedIn? Do you have a Facebook business page?
Did you offer proof? Did you use "voice-of-customer" testimonials to prove your claims?
Does the buyer have enough peace of mind to purchase from you?

Remember, the only person who counts in your sales conversations: the customer.

What's a Customer Thinking?

2014-05-07T17:04:00.000-04:00

Making presentations can be daunting if you are not sure of your potential customer's mindset and interest and anticipate his questions. Those questions could generate a long list and every customer might not ask every question every time, but since you don't know specifically which ones he'll ask himself, it is better to be prepared. Here's a list:

What do you offer?
What do you offer that no one else has?
How does your product compare to others?
Does it really fill my need?
Is it real-world?
Will it work?
Will my people use it?
How will it impact our people and our success?
Can you deliver?
Will you keep your promises?
Will senior management buy in?
How will we produce as a result of the purchase?
How will it all come together?
What are the risk factors?
Will you be my main contact after purchase or are you going to relegate me to "the service department?"
Do I trust you? Believe you? Have confidence in you?

This comprehensive list of questions addresses both confidence in product and confidence in the salesperson. The customer is seeking validation and wants to believe you. They need what you have and they're going to buy what you offer. The only question is: Buy it from whom?
See my post on "understanding the buying/selling process."

Some Keys for Business Success

2014-05-07T16:42:00.002-04:00

You have heard of the old adage "A word to the wise is sufficient". Well then I will expand on just "a word" and propose to you seven keys to achieve success in your business. To help you become more prepared and continue to learn and innovate you must recognize, distinguish and manage the big stuff from the small stuff. Here are some areas where you could become more prepared and continue to learn and innovate:

Hire correctly and develop your staff
Identify your uniqueness and market it
Manage your cash and your costs
See where the "puck is going"
Embrace change and adapt/migrate
Get good advice
Continuously learn

The big stuff event is one that can challenge a company to its core so, you have to learn something in each case. To do that try to run a high-performance, low stress organization. This means managing for fewer little dramas and being flexible to manage for the bigger stuff as they occur. Adapting should be faster than we would like. There are so many opportunities to learn and if we don't take advantage of those opportunities, our businesses stagnate.

Sample Questionnaire for a Product

2014-02-10T12:15:00.001-05:00

When starting a new business or developing a new product offering, you should find out if the product is marketable to your target market. Will they want to purchase it? How much would they want to pay for it? Where will you advertise your product to inform the potential customer of its benefits and value?

One of the tools that we can use is a Questionnaire. You will see by reading the example below that it contains three main sections:

interest of the consumer for your product with regard to price and utility;
profile of the consumer; and
communications - what materials does the consumer read or what does he watch on television or listen to on the radio.

Whether you are contemplating a product-oriented business or a service, you will find that a questionnaire if very useful in planning your marketing plan. Here is an example of a new board game:

I am developing a new product and am contacting a few people in your neighborhood for an important and quick survey. I hope you will take a moment to tell me how you feel about board games.

1. Do you play any board games? Yes ____ No ____ (If no, please go to #7)

2. What is your favorite board game?

Backgammon ___ Checkers ____ Pictionary _____ Life _____

Clue ____ Monopoly _____ Sorry ____ Other ____

3. On the average, how often do you play board games?

Less than once per month ____ Once per month ____

Twice per month ____ Once per week _____ More than once per week ____

4. Would you consider playing a new board game about the stock market?

Yes ____ No ____ Maybe ____ I don't know

5. How much would you pay for board game about the stock market?

$10 to $15 ____ $15.01 to $20 ____ $20.01 to $25 ____ Over $25 ____

6. What is the first word that comes to mind when you think of the stock market?

________________________________________________________________

7. On the average, how many hours of television to you watch per week?

Less than one hour ____ 1 to 3 hours ____ 3 to 6 hours _____

6 to 9 hours ______ 9 hours or more _____

8. Do you clip coupons from the newspaper? Yes ____ No ____

9. What radio station do you listen to most often? _________________________

10. What is your age group?

18 to 24 years ____ 25 to 34 years ____ 35 to 44 years ____

45 to 54 years ____ Over 55 years ____

11. What is your household income?

Under $40,000 ___$40,000 to $60,000 ___$60,000 to $80,000 __ Over $80,000__

Thank you for your response. The following information is helpful to my study but is optional:

Name:______________________________________________________________

Address: ____________________________________________________________

City/State/Zip: ________________________________________________________

Phone: _____________________________________________________________

THE ENTREPRENEUR AND STARTING A BUSINESS

2014-02-01T20:40:00.000-05:00

Many of us want to start businesses. We dream of the day when we can work for ourselves and own a business and make lots of money. Some of us want a service business where they may want to help others. However, many of us do not realize what is involved in starting a business and what it takes to be profitable. Let me propose several points to consider before you venture out to start that business which may be eye-opening to you:

Do you have the personal experience in a particular business? Having experience in a business that you want to start will help you organize the start-up and be aware of the problems and pitfalls you may encounter. Having experience helps to know how to deal with suppliers and vendors, use negotiation techniques common to that industry, realize the terms of payment typical in that business, and the jargon used. It certainly will make things a lot easier and lend to your success.
Know your weaknesses. Whatever they may be like not being able to read financial statements or understand the income statement, or use QuickBooks, these can be easily remedied by taking a few courses at a local community college. Of course, as time goes by and your business can support it, you can hire a bookkeeper or an accountant to perform the tasks that were originally yours.
Have passion or excitement about the industry. Having passion and the love of the business helps draw people into your idea and they will become excited too. This attitude will help in obtaining financing and increasing your patronage. Imagine going to work every day and being happy about it!
Be able to discuss your business concept in relevant, concise language. This is a key to having people understand what your concept is all about. Especially being able to articulate the “why” of starting the business and having the vision will move you to be a success. Having that sense of purpose will help drive you through the trials and tribulations of a business and keep you going. What is it that you will be achieving in the marketplace?
Think about the other companies which are similar to your business concept. Are they growing and selling more because the economy is good and the industry is in a growth phase? The answers to this question will determine whether you will be able to succeed in it, and you won’t have to be as smart as those trying to survive in a declining market.
Will your business cause a change in the way people do things? Will you be eliminating the middleman in the supply chain? Being able to make a change in the way people do things or do business is a great feat, and one that is a great business idea. Consider Jeff Bezos of Amazon.com. He changed the way people purchase books. No longer will you have to go into a book store to purchase a book, just buy it online. If you can change the world, then the odds are that you have a strong business concept.

If you have considered all of the above and the reaction is positive, then you probably have a good business concept and you should pursue it.

How to Talk to a Venture Capitalist

2014-01-11T15:10:00.000-05:00

Many times I have been asked by my entrepreneur students and those who have small businesses about talking to and impressing a venture capitalist. What questions should I ask them; how I should respond to the questions they ask of me, they ask.

There are a few things you should keep in mind when discussing your business with a venture capitalist. What a venture capitalist wants is to hear the story of how your business is doing, how profitable it is. Telling them how many downloads you have or how many customers visit your site will only generate a “yawn” from them. So make sure that you have read and re-read your business plan and be able to answer the critical questions of what your profit margins and gross margins are.

Other than the above, the following are some things that you should not say to a prospective investor:

“The Market is huge.” Never say this. This merely indicates to the listener that you haven’t done your market research. Be able to indicate how large your target market is for your product or service. You must be able to carve out of the total market your market segment so that you can focus on their wants and needs. Remember, you must know everything about your target market, right down to the size shoes they wear!
“I have no competition.” This also indicates that you haven’t done your competitive analysis well enough to identify your closest competitors and to examine their strengths and weaknesses. There is always competition, whether direct or indirect. What is your strategy to capitalize on your competitors’ weaknesses and gain market share?
“I am going to capture 1% of the market.” This is the kiss of death to the listeners’ ears. A venture capitalist wants to invest in a business that will grow and yield a return on their investment of, say, 10, 20 or even 30 times. These sophisticated investors have to reach their goal or hurdle rate targets and want to invest in a business that will achieve their hurdle rate.
“Our product is viral.” Believing that word of mouth will help the entrepreneur increase his sales is not the way to go. A venture capitalist wants to hear the plan that will take in not only viral marketing but also other forms of communication and advertising.

Ponder this: how are you going to mitigate the risks involved in starting any business. Many students will gloss over this in writing their business plans. They either aren't aware that there are risks or think better of not addressing them. Clearly, different businesses have different risk profiles, but what is yours? Be able to identify the risks or threats involved in starting your business and relate how you will overcome them. By being able to communicate the risks/rewards of your business will offer comfort to a venture capitalist and generate his keen interest.

Need a Commercial Loan? Are You Ready for One?

2013-08-07T11:29:00.000-04:00

In order to be considered for a loan for your business there are several things that you can do to prepare yourself and your business to be a prime candidate for a loan.

Get to know your business banker. Bankers are more likely to advocate for and extend a loan to business owners they know. Develop a relationship with your banker and take some time to work on the relationship. Once you have selected a bank or even a credit union for your business, introduce yourself to the branch manager and other key personnel. Visit the branch periodically to keep in touch. Even invite the banker to your place of business so that he can see your operation and become familiar with the way you do business.

Since 2008 lending has remained tight. Banks have developed and tightened their lending criteria. However, they will pursue business with the right candidates, those with good credit and a history of strong earnings.

What do they review? They will look at your personal credit history in addition to your business’s financial statements. So it is important for you to keep it clean. Check your credit reports for any discrepancies in both your business and personal credit and report them in writing to the appropriate provider. Be prepared to explain any items on the report. Credit reports often contain errors that you can correct before applying for a loan. Sometimes credit reports are out of date, lacking more current information that might make your business look better. If a credit report notes a problem that has since been rectified, be sure to include an explanation when you apply for a loan.

Often a banking institution will want to see your updated business plan and other relevant information. Before you make that loan application, get your paperwork in order – two or three years of financial statements, personal and business tax returns and other relevant information.

The business plan should include what you have accomplished since you created the business and what you plan to do in the next five years. So take the initial business plan you created to start your business, and revise it to include your projected revenue goals and how you plan on getting there. The plan should reflect growth, contraction or other changes to you business.

In considering your loan application, the lender will determine your capacity to repay the loan in addition to the economy, your competition and other factors that may impact your business. They will look at your financial statements and cash flow. Be realistic about how much money you want to borrow and be approved for. So, if the company has annual revenues of $100,000 and you want to borrow $1,000,000, you may have to reconsider and adjust your expectations.

If you do not qualify for a traditional loan your may be able to get approved for a Small Business Administration loan. Because the federal government guarantees a major portion of the loan, lenders may be more willing to extend an SBA loan to you if you are just shy of meeting the criteria for a traditional loan. Lenders want to make sure that they will be paid back, so if you don’t have sufficient business assets to post as collateral, you might have to put up your home or other personal assets.

Is Outside Investment Worth It? Dealing with Angels

2013-07-02T08:56:00.000-04:00

One of the mistakes entrepreneurs make, and there can be many, are that they establish a business for the wrong reasons. One of those reasons is greed.

The entrepreneur will start a business with an investment of his personal savings or money provided by mom and dad, friends and family. Sourcing of money may stop there and the result is that not enough money was raised to viably keep the business going. The entrepreneur bootstraps and scrimps in order to keep his head above water. Why didn’t he raise enough money in the first place to properly run his business?

An entrepreneur may feel that he wants to keep the business all to himself, and doesn’t want any investors involved because his share of the profits or control of the business will be minimized. He wants to keep the equity all to himself with 100% control. I have heard this a lot from entrepreneurs that they do not want to have an investor, loose control of his business and possibly work for someone else.

But let’s think about this. With the entrepreneur’s limited amount of money he is not able to grow the business with any reasonable speed; he is bogged down by the balancing act of getting in revenues and paying bills. He cannot possibly think about growing his business or introducing new products.

With an investment by an angel investor the entrepreneur will be able to grow the business, introduce new products to new customers, and have a mentor within reach to help guide the business to new highs. Angels are the ones who invest in start up businesses. And they are the ones to pursue if you are a pure startup.

Since an angel investor is interested in how his investment is doing, he will periodically sit down with the entrepreneur for a progress report and offer suggestions for improvement. The terms of the investment will require preferred stock issued to the investor paying an annual interest rate for the use of his money.

The typical investment period for the angel investor is five years, and he may invest up to $1 million. Angels frequently like to invest with other angels. After the investment period he will exit the business by either having the entrepreneur return his principal or seeking other investors in the enterprise.

So you see, having an investor is not a bad thing. He can help your business grow, act as a networking source, introduce you to potential customers, new suppliers, and strategic partners they know well from their own business dealings, and help you take the business to the next level where many beautiful things can happen. Without his help the entrepreneur may not be able to achieve this growth.

Why Cash is King

2013-06-25T20:35:00.000-04:00

You have all heard the expression “Cash is King”. Did you ever think that it applies to the way you manage your business? Well read this!

As you manage your business from day-to-day you need liquidity, that is cash. Cash is required to pay your bills from suppliers to your utilities bills and even your employees. So, where is this steady flow of cash coming from? Your customers!

Your accounts receivable levels are important to watch. Bills are usually collected on a 45 day basis. Some customers may even pay sooner than that. Those customers are gold.

You should indicate clearly on your invoices what the terms of payment are. These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due. You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days. This customer is costing you money! You are actually financing this customer to the tune of 36% a year. That is an incredible financing charge. Did you ever realize that you were becoming a bank by not collecting on these invoices? Therefore, it is critical to your cash flow to collect the amounts due you promptly. Hence, the time value of money: A dollar today is worth more than a dollar tomorrow.

A good tool to use that can be provided by your bookkeeper is the Aged Accounts Receivable Report. This report will indicate how long your invoices are outstanding and which ones to watch closely for delinquency. Your current ratio will be improved with monitoring.

Follow-up calls to customers are important to remind them that the invoice is due. These calls will also reveal to you whether the order is received in good order and if the customer is happy with the shipment. Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.

If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away. Making an installment plan with him is beneficial to you and to him. You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.

Now do you understand why “Cash is King”?

A Lesson in Factoring

2013-06-25T20:16:00.000-04:00

Do you have a lot of money your clients owe you in the form of accounts receivable? Do these invoices take time, like 60 days, to get paid? Are you in need of cash to finance your next production line? You are not a good credit and are not able to get a bank loan. What can you do?

Factoring may be the answer. Factoring means that you sell your accounts receivable to a factor or third party?. at a discount to provide funding. It is a short term solution to your working capital problem.

Here is how it works. You sell your invoices to a factor at a discount and these invoices act as collateral. You would typically receive 80% of the invoice value upfront. You will receive the balance remaining less a factor fee once your client pays the factor. The fee can be paid in any number of ways, but it usually nets out to be about three to five percent of the invoice value. Factoring is not a loan and does not show up on your balance sheet. It is the sale of an asset; therefore, you have no liability here.

To qualify for this factoring, your invoices have to be free and clear of any liens. This means that no other company has a claim on payments when they come in. Your customers must also be creditworthy. Why? - Because the factor will rely on their good credit and ability to pay the invoice quickly rather than on your credit history.

Learn how the factor deals with your clients during the collection process. Does he send out dunning notices with an indication that the factor is to be sent the payment? If the client does not pay your invoice, the factor may ask you to pay back the money he paid you on the invoice plus a fee - - something that is called recourse factoring.

If you decide that you want to seek out a factor, do your comparison shopping by looking at factor fees and the amount of the discount on your total invoices, a deposit or application fee, the advance rate and monthly minimums should also be considered. Factors will not work with start-ups; you need to have a large amount of accounts receivable for the factor to work with you. You can find factors in the telephone directory or in industry trade publications. Your banker may be able to refer you to a factor, but decide on a factor that knows your industry, can customize a service package for you, and has the financial resources you need.

Funding your Business

2013-06-20T10:38:00.000-04:00

Have you often wondered what the difference is between an Angel inventor and a Venture Capitalist? There really isn’t much difference except for the size of the investment in your business.

Angels are private investors who are looking for a better investment and return than traditional investment schemes, like in the stock or bond markets. The age of the company and other specifics are on their checklist: early or formation stage and they look for a payback and a return on their investment where revenues are between $2 million and $10 million. They would usually expect preferred stock in return for their money which would pay semi-annual interest for the use of their money. After 5 to 7 years they would expect to be paid back and exit.

Venture Capitals are on a higher plane than Angels and can be private equity funds. They invest in early stage companies expecting a high return for the high risk involved where revenues are in excess of $10 million. Venture Capitalists look for companies with a defensible market position, strong management team, positive EBITD and discernible growth characteristics.

So what do these Angels and Venture Capitalists look for, you may ask? Think about the program Shark Tank seen on ABC-TV on Friday nights. You may have seen Angel investor Kevin O’Leary quizzing the presenting owners of small companies. He asks, “How am I going to increase my investment?” “What are your goals for the business?” “I don’t like your valuation!” “What are your margins?” “What are your sales and in what timeframe?”

What is making him salivate or not over the company’s products? These attractions are not unlike what the Venture Capitalist looks for. Take a look at the following:

1. Unique or proprietary products or services. A patent owned by you is a plus.

2. Existing sales are evidence of consumer demand where revenue growth is greater than 20% to 50% year to year; gross margins are over 40%; and with a lean management team.

3. Increasing sales would be the result of their investment by marketing or hiring additional personnel, which they will oversee.

4. Realistic valuation based on your sales and profits

5. Exit strategy must be included in your plans, like selling the company or merging with another company.

While some of you may say that seeking funding from these people is not worth it. Think of this. If you did not have their investment you would not be able to grow your business faster, gain market share and have the benefit of their expert opinion and management expertise. Their contacts and relationships would help you gain clients and suppliers for increased revenue and growth. So it is worth it, but make sure that you benefit from the relationship as much as the investor would. It is a two way street.

Keeping Your Eyes on the Books

2012-04-26T16:40:00.000-04:00

In teaching entrepreneurship I often tell my students that they should at least understand the accounting and bookkeeping practices involved in their businesses. They should be able to speak the language of their accountant or bookkeeper and be able to ask for periodic reports to enable them to review their business’ financial position at any point in time. The several accounts to be mindful of are the following:

Cash. All of the transactions your business has pass through the cash account whether it is for the receipt of collections or the payment of bills. Some bookkeepers use two journals - cash receipts and cash disbursements – to track activity.

Accounts receivable. If you are a manufacturer or a service provider and you don’t collect payment immediately, you will generate “receivables”, and you must track them by having your bookkeeper generate an aged receivables report indicating which customers owe you money and how long the bill is outstanding. An effort to collect “old” bills is required to get your money. Busy businesses generate an accounts receivable report daily. But it is up to you how often you would want to see this report. But you should review this report weekly for any potential problem accounts.

Inventory. Products you have in stock to sell are your “investment” sitting on the shelf and must be carefully accounted for and tracked. Periodic audits of what you have on the shelves and what you have in your books must be compared and verified. It is important for you to determine what level of inventory is needed in order to satisfy your customers’ demand to avoid any write-downs of obsolete or damaged inventory. An analysis of these accounts will help to determine this level.

Accounts payable. No one likes to pay bills and send money out of the business, but if you have good bookkeeping practices you will have a clear picture of everything if you use your accounts payable feature on your bookkeeping software. You will have timely payments, and you will not pay anyone twice. Paying bills early may qualify you for discounts with your vendors.

Purchases. The purchases account is where you track any raw materials or finished goods you buy for your business. These work- in- process accounts are part of your inventory account, and they can help you calculate your cost of goods sold, which is subtracted from your sales to find your company’s gross profit. Here you will be able to see if you are paying more for your raw materials and take measures to reduce the costs of them and improve your profit margin.

Payroll expenses. One of the largest expenses for all companies is the cost of paying employees. Keep this account up to date for meeting tax and other government reporting requirements.

It is important to note if you cannot hire a bookkeeper that you purchase a good bookkeeping software package, like QuickBooks, to help you organize and track your sales, collections and inventory.

WHAT MAKES A GOOD BUSINESS PLAN?

2012-03-08T15:37:00.000-05:00

At my former job in a major investment banking firm, I had the responsibility of developing new business for the firm. In that position I received about 40 business plans a week from entrepreneurs and senior managers of companies seeking financing, and I reviewed about 25 per week. Why didn’t I read all 40 plans? Here’s why.

The opening section of a business plan is the business description probably written in two paragraphs. Here the writer describes his business and product and indicates what his target market is. If after reading the opening paragraphs I do not know what his business is or what he is talking about, I reject it and move on to the next business plan. A writer has to write his business plan in a way that is easily understood and is simply written. If you are an engineer and cannot relate your business in simple terms, then get someone else to write it. There is no excuse.

I also look at the sentence construction, grammar and spelling. If there are spelling mistakes or grammatical errors, it indicates to me that the writer has exhibited a level of care which is not conducive to managing and growing a company. He is neglectful and pays no attention to detail. If you have a shot at having a professional investor look at your plan, then by all means make sure that you have done your research accurately, use proper grammar and your financial information is added correctly.

When I have a business plan to read I look at the presentation. Is it neat and attractively done so that it would make you want to open it up and begin reading it? Does it indicate what the business is and what the product is, how you are going to make money and what your profit will be? Is what you say in the first section of the plan supported by the financial information in the second section of the plan? Are your profit margins comparable with similar companies in your industry?

When you are constructing your business plan, heed the above and you will be sure to interest an investor in reading your plan.

How to Get to the Next Level - Purchase Order Financing

2012-03-04T15:23:00.001-05:00

You have just received a large sales order for your designs, a great opportunity for you, and you cannot possibly fill it because your small business is low on cash or below water to purchase supplies in order to fill the order. So what are you going to do? Consider the hurdles:

Purchase the goods you will need from your suppliers, with upfront money you don’t have
Get the money you need from a bank, but without a long track record or history of impressive financial statements
Accept not receiving payment from your customer until 30 or 60 days after they received shipment, creating a cash flow gap you can’t manage.

If you turn down the order, you may lose your customer to a competitor and you will lose out on your opportunity to grow the business. You will have to get creative.

There is a way to remedy this situation and that is through purchase order financing. Purchase order financing (or funding) looks to the credit worthiness (and good fashion sense) of your customer. Your creditworthiness or the fact that your business may be underwater is not an issue; your customer’s creditworthiness is. A purchase order financing company works with your supplier or manufacturer to get your garments produced on time. It also works with your customers to ensure payment of the invoice.

Here is how it works. A purchase order loan is a fee-based, short term loan and there is no interest charged. To see if the loan can be made, the purchase order lender investigates the credit history of your customer. If the customer has a good, solid track record of paying its bills and has the cash flow to pay for the goods it has ordered, a loan can be made. But there is some information required on your part. You must know your costs for the product and the gross margin attributed to that product. If you have a gross margin of 25% or more, then it is possible to execute a purchase order transaction. This means that you will have enough room to make a meaningful profit.

If your customer has good credit, the purchase order lender delivers a letter of credit to the manufacturer that guarantees payment for the needed goods. The factory then makes the products, and a third party verifies that the order is complete. The factory gets paid and ships the goods off, usually to a third party warehouse. It is rare that you would take delivery of the goods; they are usually shipped directly to the customer.

When the bill is paid, the funds go to the purchase order lender, which subtracts its fee and sends the remaining profits to you. This fee may amount to 4%.

There may be a hitch to the receivables portion of the transaction. If you have given the customer payment terms of 60 or 90 days, another type of specialty lender, a factor lender, comes into play to provide immediate payment to the purchase order lender. The factor lender buys the outstanding invoice at a discount and then waits and collects the full amount owed later, pocketing a profit in the process. Meanwhile, the purchase order lender and you get paid immediately. Thus, with this good news comes the bad, there is another layer of costs involved with factoring but this may be required by the purchaser order lender.

Here is what you do. You provide a valid purchase order with a credit worthy customer and the expertise to manage the process. The purchase order lender provides payment to your supplier, allowing your goods to be produced and shipped. Payment is typically completed through issuing letters of credit and ultimately the payment of the invoice.

Benefits to using a purchase order lender. While you stand to get 94-97% of the profit (implies a 25% gross margin), you are getting money to help you grow your business. You can use a purchase order lender many times; there is no restriction. The transaction does not show up on your balance sheet (off balance sheet financing) as a liability, thus working capital is not impaired by this transaction and your total debt to equity ratio is not increased.

Who, other than the fashion industry, use purchase order lending? Importers, exporters, wholesalers, assemblers, distributors and manufacturers, who are experiencing rapid sales growth, capital constraints, sales volatility, seasonal sales spikes, high development costs, stretched credit, new product launches can take advantage of this type of financing. Industries that can benefit are electronics, housewares, sporting goods, toys/games, furniture, food products, hardware and industrial goods.

To find a purchase order company you can look at industry information and the yellow pages. Make sure you check references first.

Budgets

2011-08-01T10:32:00.000-04:00

Creating a Budget as the First Step to Establishing Reality -
Do we have enough money to start the business of our dreams? As a first step we will have to determine what the costs and expenses of our business might be before we actually start to move ahead with business planning.

Costs and Expenses
There are expenses that you will incur once at the outset of your business and others that will recur from month to month. These are easy for your to discern: you can collaborate market prices for rent of space and other items such as furniture and fixtures, but how do you compute how much you will be able to sell?
Our market research should have revealed to us what our competition is doing in the way of sales and units sold. If we searched enough and made inquiries, that research will also have an indication of what the cost structure of businesses in the same industry are like. You have also computed what your expenses will be in the first month at least! So we have some information with which we can budget with.

Another issue to address is one of feasibility. Are there enough potential customers in your target market to purchase your product to make sales worthwhile? What happens if your target market is not big enough? What happens if your product is not one that people want to buy? If the answer to these two questions is "No", then don't venture out and start this business.

But if you determine that it is worthwhile after doing extensive market research, how do you figure out Sales? How much can you sell? AND I ask you at what price are you going to sell your product? Remember Sales is a function of Price times Units Sold (Sales = Price x Units Sold). If you look at this equation you have two elements with which to play - - Price (how much to charge in view of your given cost structure), and Units Sold (how much can you sell?). You can arrive at your sales goal in dollars if you lower the price and raise the number of units sold. Or, you can arrive at the same sales goal if you raise the price and reduce the number of units sold.

Take a look at the table below which is used to ascertain the price level and number of units to sell.

This table shows three possibilities whereby the entrepreneur is using varying numbers of units and several price points to determine if his cost structure can be covered with sales. In this budget he will use the average column to expand his budget from month to month. This "flexible budgeting" can be used with your prediction of how the economy will be: worst case, better case, best case to arrive at an average case.

Bottom Up Method
You can also determine a budget by using the Bottom Up Method. Here you would determine what profit you want to have, use your cost structure and then work backwards to determine the Net Sales that would give you the profit you desire. Thus, we are working from the bottom up.

Many people who use the Bottom Up Method have realized that to arrive at the profit that they are seeking they need to expand their business or add on extra help in order to achieve the scale that they desire.

Deviation Analysis
The budget that we have created can be used after we have begun operating for a time. We want to know how well we have done in comparison with what we thought we would do at the initiation of our business. We can take the budget that we have created and compare it do what we have actually done. We can then see how we have deviated from the original plan. Perhaps we have done much better than what we originally planned or maybe we have not done what we aimed for. Take a look at the format below to see how you can use the table above for the Deviation Analysis.

The Comments column is used to explain the variance, which is the differential between Actual and Budget, either up or down. We can write the reasons for the variance, like "we had to lower price to attract consumers and thus didn't achieve the sales level" Or, "due to increasing demand, we raised the price to $xx and achieved greater dollar sales". Or, we achieved greater Gross Profits because the costs of our goods went down". These explanations help management understand how to alter their operations going forward. Feedback enables fine tuning of the operations and makes for a more efficient operation. Thus deviation analysis helps management understand the effects of the economy and supply and demand on its operations.

Distrubution Channels

2011-08-01T10:12:00.000-04:00

The method we use to get our product to the consumer can define our competitive advantage and reputation and add to the quality of our service. It can also mean cost efficiencies.

Direct Marketing
Direct Marketing is where the manufacturer sells directly to the consumer. For example, an Internet company which has its catalogue on the Internet would sell directly to the consumer and ship directly to the consumer either by parcel post, FEDEX or UPS. The advantage here is that the manufacturer has control over shipping and expedites the shipment via his "strategic partners" the U.S. Postal Service, FEDEX or UPS. It is also cost effective. The manufacturer is able to offer the product cheaper than if the product were offered in a retail store or department store. Case in point, you can purchase books and other items from Amazon.com, receive them in 3 to 5 business days and the shipping is FREE. The charge is cheaper than if you were to buy it in a store.

Levels of Channels
The more links you have in your distribution channel the more the costs are added to the product.

One Level - The manufacturer would use a retailer, like Bloomingdale's who would sell to the consumer. Bloomingdale's is going to add their cost to the cost of your product. Therefore, the consumer will be paying more for the product.
Two Levels - The manufacturer would use a wholesaler who would use the retailer who sells to the consumer. The wholesaler, like the retailer, would add on his costs to the cost of the product. The consumer would be paying more for the product.
Three Levels - The manufacturer would use a jobber (used for overseas sales), who would utilize a wholesaler, who would use a retailer who sells to the consumer. Yes, as you are now catching on, there are more costs and the end result is that the consumer pays for the product. The lengthier the channel and the more links in the channel chain the more costs are added to the product!

Designing the Distribution Channel
There are factors to consider when deciding upon the best method of distribution for your product. We must consider the nature and characteristics of our product, the buying habits and patterns of the consumer, the frequency of purchases and the amount spent.

Product characteristics
The nature and characteristics of the product will necessitate certain services offered by an intermediary. Is the product bulky, standardized or understandardized, does it require technical knowledge or increased service, or it is perishable or not? Some of these characteristics will require storage or salespeople who will be able to demonstrate, answer technical questions and sell the product. If your product is ice cream, it will require refrigeration in transit to the local retailer.

If your product is expensive (a large ticket item) then you may need a distribution channel which has the capability of offering financing for its purchase. Some wholesalers will offer advertising and promotion services because they know what the retailer needs and what the consumer wants.

Your business characteristics
The size of your company or business and its financial position will indicate whether you can handle your our distribution. How many products are you selling and are you capable of maintaining your own truck fleet to distribute the products to the retailer? If you can, then you will have little reliance on others to move your product.

Types of Distribution

Intensive Distribution - If you have a product which is inexpensive, may be considered a staple or a necessity, then you may want to have Intensive Distribution where it would be available in as many outlets as possible, like razor blades or batteries. They are almost everywhere you can think of.
Exclusive Distribution - Are you a designer of evening gowns? Maybe you would want to have your gowns sold exclusively -- in only one outlet in a certain area.
Selective Distribution - Perhaps you have a quality product and would want to sell it "Wherever quality products are sold". More than exclusive but not intensive.

Salesforce Distribution
Depending upon the kind and nature of your business, you may consider using your own salesforce. However, management of a salesforce has associated problems and considerations:

Personnel Management. You have to define the profile for selecting and hiring individuals for your sales team. You have to train them, assign them to regions or accounts, and your have to motivate them and hold their hands for them to sell. Once they sell something you have to pay them. How much will you pay them.
Evaluation of Personal Performance. What criteria will you use to evaluate their performance: sales volume, gross margins on product SOLD, call rate, average order size, or orders received vis-a-vis calls made.

Pricing

2011-04-08T16:50:00.000-04:00

The Marketing Mix
Marketers have tools at their disposal with which to control their offerings to consumers. These tools are called the "4 P's of Marketing" or the "Tools of Marketing". Specifically, these are

Price
Product
Place (distribution)
Promotion

With the exception of Price all of the tools are costs. Price is revenues (or sales). We control the formula for the product, its design and purpose. We decide where to sell our product and how to get it to the customer. We also determine how to communicate, advertise and promote our product. Let's discuss Price.

Price
How do you determine the price at which your product will be sold? There are several ways and we can use several formulas to arrive at price. But first, we must understand what the factors are that affect price:

Costs to manufacture, transport, insure, etc. These are costs which we will have to pay for and which contribute to the cost of the product. Therefore, we must recoup them in the price of the product.
Supply and Demand - The two economic variables which we cannot control. These will affect the amount of product we are able to sell. Our competition can generate inventories and supplies of the same product which will mount if the consumer is unwilling to purchase the product due to a slow economy and the danger of being laid off.
Price the customer is willing to pay. If the customer feels that the product is overpriced, he is not willing to pay for it and will look for an alternative product or the product of the competition.
Competition's prices and offerings - If the competition is selling at a lower price for comparable products, then the consumer will go there. If the consumer feels that your product has more value or benefits, then the consumer will purchase the your products.
Other non-controllable variables - The government can place burdens on the manufacturer with additional taxes, excise taxes, export and import duties, etc. and compliance measures for environmental protection, such as chimney scrubbers, All these things add to costs and make our lives more difficult to make a profit.

Strategies
As entrepreneurs and marketers extraordinaire we have certain goals that we set for ourselves in the management of our business. Those goals have to do with the amount of sales and profits we set for our organization. These goals will impact our price for our product.

Survival - Many business owners are satisfied with a minimum profit or breakeven. They are happy with the life style that the company's operations affords them and are not interested in performing better.
Maximize Current Profit - This is the strategy of the low cost manufacturer. His costs are low and pricing provides for a good profit.
Maximize Current Revenues - The owner is looking to gain market share in dollars. He depends on image and quality pricing. Good quality yields a high price.
Maximize Sales Growth - The owner is looking to gain market share in units. The more he sells in units than his competition the greater his market share in units. This does not necessarily mean that he will be profitable or have large profits. He may be selling his product at a low price in order to sell more units.
Product Quality Leadership - The owner knows that he has very good quality in the product he created. Therefore, he will charge for the quality.

Sensible Prices
As you probably realize by now, setting prices is not an easy task in view of the competition's offerings and the fact that we need to cover our own costs. We must determine a profit margin that is respectable and acceptable for us and which achieves our goals and objectives as indicated above. However, our pricing cannot be too high or our competition will benefit from this. Our pricing cannot be too low, or we will suffer for it. What we must do is consider the competitor's price, our cost structure, and what the market will bear. We cannot sell anything if the market, that consumer out there, will not see the benefit in the product and pay for it.
Remember, we must be competitive and promote our competitive advantage: quality, convenience, personalization, guarantees and warranties, etc.

Advertising and Promotion

2011-03-03T16:53:00.000-05:00

Now that you have decided upon your product or service, the pricing and distribution of it, we must be able to inform consumers where you are located and why they should purchase your product. That communication is through advertising. By now we should have identified the competitive advantage or unique selling proposition and how that uniqueness will benefit the consumer. Just as we saw when performing our market research by using the Yellow Pages, an image of the business is portrayed to the reader. Therefore, what we communicate to the consumer must portray that image and be conveyed in our advertising. However, a constraint we may have is that we cannot spend too much on our advertising campaign. Let's take a look firstly at what we want our advertising to convey to our target market.

Three "I's" of Advertising
What you want your advertising to do is

Involve the audience by inviting them to participate, arouse their curiosity, and convince them that they need your product or service.
Inform the customer about the benefits and uniqueness of your product or service in terms that they can understand. You must tell them how, where and when the item or service can be purchased.
Illustrate the benefits through words, images or sounds that get the audience's attention and convey your information.

Where to Advertise
There are several ways to reach our audience. Each way has a certain impact, effect and cost. In our market research we probably discovered what our target market reads and which TV and radio stations they listen to. If we know this, then we will know how to reach our target market.

Newspapers
There are local, regional and national newspapers, and they all reach a large audience. If you are a small business you would want to advertise where your customers are, probably in a local or hometown newspaper. Ads vary in cost and size, and the newspapers will probably offer you a package deal if you advertise for a week or month. What you want to do is to find the circulation of the newspaper the demographics of their readers. Newspapers are probably the most cost effective method of advertising.

Consumer and Trade Magazines
Where should your product be advertised in a consumer magazine or in a trade magazine? If your consumer is the end user, then you would want to advertise in a consumer magazine. If you sell to a business, then your efforts would be better placed in a trade magazine. Magazines take time to put together and go to press. Magazines have a lead time of approximately three months. Therefore, if you want your ad to be included in the next issue or in two weeks time, let's say, then you will be surprised. If you want to change your ad to represent a forthcoming sale, you won't be able to do it. However, you can cut down your costs by using what they call "remnant space". That is space that is left over and available after they have laid out the pages. Magazines are more expensive than newspapers.

Radio
Radio is a very good way to advertise your business. Think of the number of times you have heard an ad for a local business while you are driving to or from work. Therefore, radio has many advantages:

It is usually local
It reaches an identifiable and loyal audience which generally tune in at specific times.
Ads can be changed frequently
Advertising time is relatively inexpensive and can be repeated frequently.

But radio depends on listenership The more people who tune in at certain times of day, the more expensive the advertising time. You have 30 sec. spots or 60 sec. spots which can be read by the host or recorded. Your ad must attract the listener in the first three seconds. So think carefully about what you want to say to catch their attention.

Television
TV reaches a large audience; it can be regional or national. The price of the air time will change depending upon the coverage area reached. TV time is expensive and, of course, you have to create that commercial. The cost of production can also be expensive. But local cable programming is more affordable for small businesses.

Publicity
Something we do not have to pay for! Call the editor of a newspaper and find out if they are going to be doing any articles on your kind of business. You may be able to pose yourself as an expert in that area. If you are a restauranteur, invite the food editor for a meal in exchange for an article. But you must have an angle -- what are they going to write about that is interesting.

Press Release
You can write a press release to announce events related to your business and ask the newspaper editor if he would print it. In my business, we write up press releases to announce vendor partnerships, expansion to new areas, and the taking on a new functional management. See your text for examples of how to write press releases. They have a journalistic style.

Trade Shows
Trade Shows are a great way to meet potential vendors and suppliers, meet the competition and see what they are offering, and test your new product and get customers reactions. There are things that you must do, however, before you commit to a trade show. You must know the cost of trade show booth space -- set-up fees, electrical hook-ups,union fes for workers, etc. It can be expensive. But perhaps you can share the booth space in big shows with other entrepreneurs.

Guerilla Marketing
This is street marketing and one that is very inexpensive and will bring in local area customers to your business. Think about how many times you have returned to your car and found flyers and bumper stickers on it which advertise some local business. How often have you left the subway train (if you are in the NY City area) and have been handed a flyer for a neighborhood store? These are effective, low-cost and simple to make up. You may want to read a book on the subject, one of the more popular ones is Guerrilla Marketing by Jay Conrad Levinson.

Digital or Social Marketing
The development of the computer and all things digital have created a great opportunity for us to market and advertise our product inexpensively and quickly through mobil technology. With the development of Facebook, Twitter, and Linked-In and others, we can market our product directly to a select group. "Be my fan", "follow me" or "connect with me" are the buzz words we so frequently hear. Creating a blog to write about your product and have others contribute their feelings and attitudes about your product is a great way to develop your audience.

Unique Selling Proposition and Positioning

2011-02-14T15:58:00.000-05:00

Now that we have identified our competitors and their strengths and weaknesses, it is necessary for us to determine how we are going to be different. The value proposition that we are going to "hang our hat on" and be different is called our unique selling proposition.

Differentiating Factors

There are several ways we can differentiate ourselves from the competition. They are as follows:

Price
Quality
Service
Location
Filling a special niche
Flexibility and adaptability
Consumer orientation
Reputation and Image
Personnel

Cultural identity
Warranty
Financing
Product range
Convenience
Accessibility
Reliability
Consistency
Perceived value

Positioning for USP

When we determine which characteristic or attribute to use to differentiate ourselves from the competition, we are positioning ourselves against them. These attributes can be called "benefits" to the consumer. How does the consumer benefit when he buys our product? We are advised by those who have studied markets to promote only one differentiating factor or benefit which will be our Unique Selling Proposition (USP) and to stick to it. For example, Crest toothpaste consistently promotes its anticavity protection, and Mercedes promotes its great automotive engineering. The reason to keep to only one USP is because the consumer will only remember one.

The most commonly promoted number-one propositions are "best quality", "best service", "lowest price," "best value", "safest", "fastest", "most customized", "most convenient", and "most advanced technology".

Competition - Who Are They & How to Find Them

2011-02-14T15:53:00.000-05:00

The other part of the market that we must study and explore is the Competition. As I mentioned earlier, "Business is War" and we must know everything we can about our competitors. We must also ask ourselves where would our potential customers go to buy a certain product if they don't buy it from us?

Direct Competition

For that product or service that we are selling we have competitors who are selling relatively the same product to the same market. These are direct competitors. MacDonald's and Burger King are direct competitors as are Home Depot and Lowe's. They sell the same items to the same market.

Some aspiring entrepreneurs when queried by me when they were applying for financing, told me that they had no competition. How naive! Everyone has a competitor, they just didn't look hard enough. The only time that you wouldn't have a competitor is if you have identified a niche with an unfulfilled need!

Indirect Competition

Indirect competitors are those who sell the same product through a different distribution channel and thus to a different market. For example, consider Hallmark Card stores. Their indirect competition are those who sell greeting cards from a different kind of store, like CVS drug stores. They sell a wide array of personal products, pharmaceuticals, and greeting cards. Target Department Stores which sell tires and auto parts are indirect competition for the Pep Boys Auto Centers. Direct merchants or catalogue companies are indirect competition to department stores. L. L. Bean's catalogue business is an indirect competitor to Banana Republic, for example.

How to Find the Competition

You may have a good idea of whom your competition is. But you need to corroborate and substantiate it. For a small business, the first place to look would be the Yellow Pages. There you have all businesses organized by business line. All you have to do is to look up the particular business line and you will find numerous businesses indicated. They are listed in alphabetical order and some of them even have ads on the pages.

From these ads you will perceive a certain kind of image about that advertiser -- whether it is a large business, with many services, or not. To corroborate this information you should visit the businesses and determine if your impression of the business is the same of what you physically see. Can you get any ideas from the sales people or the attitudes of the customers when they are shopping in those stores? Is it a pleasant atmosphere or is the place disorganized and crowded? You can determine how you would fashion your business in view of this competition.

In addition to the Yellow Pages you can go to a business library and search Dun & Bradstreet's for the competition on a wider scale and territory. You will need to know the business line and/or the NAICS or SIC code (North American Industrial Classification System or Standard Industrial Classification) to do a sorted search. There are other resources for you to check, just ask your librarian the best place to look.
Another place to look for competitors is by contacting your Chamber of Commerce. The Chambers have lots of information on the business area. National trade and professional associations publish newsletters and magazines that not only predict trends, but also tell about current businesses.

Market Intelligence/Competitive Intelligence

The gathering of information on your competition can be an exhaustive effort. However, this effort never stops. You are always looking for information from magazine articles, industry newspapers and financial analyst reports about your industry no matter how mature your business is. Not only are you keeping track of the competition and any innovations they may be developing, but you are also keeping track of your targeted consumer. What is he doing now and how are his buying habits changing in view of the happenings in the economy and the environment. Is he nesting because he feels that going to the movies is too expensive and he would rather rent a movie and watch it at home on his wide screen HDTV theatre?

Customer Profile Example

2010-12-08T15:38:00.000-05:00

Target Marketing
Here is a customer profile of Marine Art of California, a start-up company in Newport Beach, marketing the works of California artists through a direct mail-order catalog. The product line is a unique combination of art, gift items and jewelry, all tied together by a marine or nautical theme.

Who are my customers?

1. Profile:
Economic level: middle to upper-class
Psychological makeup: art lover, jewelry lover, fashion conscious, ocean lover, eclectic taste, college educated, discriminating buyer, upwardly mobile life-style.
Age: 35 to 55
Sex: Male/Female
Income level: $75,000 and above.
Habits: high-expense entertainment, travel, marine-oriented hobbies (shell/dolphin collectors, scuba diver, boat/yacht owner, etc.), patrons of performing arts, concerts and museums.
Work: professional, business owners, business executives, middle management, interior designers
Shop: middle to high-profile retail establishments.

2. Location:
Orange County: coastal areas - home value of $500,000 and above.
San Francisco County, San Diego County, San Bernardino County

3. Market size:
Mail list purchased through wholesale mail list companies. The consumer base will range from 20,000 to 100,000 in the first year of operations.

4. Competition:
Minimal due to unique 2-pronged marketing concept of marketing exclusively California marine art, custom-designed jewelry and giftware by way of (1) direct mail-order catalog and (2) retail showroom. No known operation in their category.

5. Other factors:
As acting distributor for several artists, I am able to retain exclusive marketing rights and, in most cases, have contracted to purchase at 10 to 15% below published whole sale price lists.

STP and Feasibility

2010-12-08T15:20:00.001-05:00

Segment, Target & Position ("STP")
Identifying those certain variables which are relevant to our product is called "Consumer Profiling". We indicate the age range, gender, income, educational level, psychographics, hobbies, interests, or other pertinent information identifying your group or market. Can you determine from looking at the U.S. Census how many people fill that profile? (See http://factfinder.census.gov/home/saff/main.html?_lang=en ).

Once you have made the profiling, you can target your efforts on a more focused group within that segment and to winning them as your customers. We need to know what they buy, how they spend their time, and how to reach them and communicate with them. Which marketing vehicle can we use to best reach them: direct marketing, advertising on the TV, radio, newspapers, magazines or what?

Positioning is the act of designing the company's offering and image so that they occupy a meaningful and distinct competitive position in the target customers' minds. We must develop a market-focused value proposition as to why the target market should buy our product. We may consider the proposition on service like quick delivery of the product, or selling tender meats and poultry, or in the case of a car, reliability and safety.

Feasibility
Once we have determined whom our potential customers are, we need to know if it is worthwhile to target this group. Are there enough profiled customers out there to buy enough of our product so that it is feasible to go into this business? We wouldn't want to start a business and find out that the targeted group is not interested in our product or there aren't enough of them when they do buy in order to satisfy our own goals and profit levels.

We must also consider the price at which we expect to sell our product. When all is said and done will the quantity sold at the price offered be enough to make a profit. In order to determine this we must know how much it will cost to open our doors. What will the start-up costs be? Will we need to rent or buy space? Purchase equipment and supplies?

Operating Budget
Once you have established how much you will need to start your business you will have to create an operating budget. Determine from your start up costs those that will recur over time, such as your rent, electricity, salaries, advertising, etc. These recurring expenses are the start of your operating budget. These recurring expenses will mostly be Fixed Costs. These Fixed Costs will be used to determine your breakeven point, that level of sales at which you don't make a profit or a loss -- you come out even. Mathematically the formula is
Breakeven point (units) = Fixed Costs divided by (Selling price minus the Unit Variable Cost)
This means that you have to determine a sales price.

Business Concept based on Trends

2010-11-16T16:32:00.000-05:00

Many of you may have thought about starting a business at some point in time. Many of us have thought about a new invention, process or production improvement that we may be able to patent and call our own. But before we can expect to make some money on our idea and build a business there are some things that we must investigate before we venture out and spend our own money and the money of others to start a business.

We also need to know what makes a business, company or project interesting to an investor. Why would an investor put money into one business and not another. What is the attraction?

Trend Analysis
One of the things we must look at is what are the trends that are happening today? What situation is developing where consumers are buying items that are creating a trend. What are the needs of today's society and what are the characteristics of that society? What is happening in your region or in the United States? If we are catching a trend from the beginning of the trend, then we can be assured that our sales will be growing with that trend as the trend catches on. Trends last for a period of at least 10 years. So we can be assured that our sales will be growing and we will be around for 10 years.

An investor would look at the trends and compare the potential market growth to your sales trend. Are your sales increasing and growing in market share? Are you and your management team capturing the market with your product, and are you capable of maintaining that growth with your expertise and acumen? Would you gain the confidence of an investor or a banker?

Another thing to think about is whether we are able to change the way people do things. Are we making life easier or more convenient for them with our product? Take a look at Amazon.com. Amazon.com changed the way people purchase books. Consumers no longer have to go to a "bricks and mortar" store to select their books. They merely go to the Internet at Amazon.com and put in a title or author and all the books available are listed as a result of that search. The customer orders the book and it is delivered within a week to their door. You don't even have to go outside! After you read the book, you can sell it on Amazon.com, and you can read critiques of the book and offer you own. With this direct mail ordering, Amazon.com can afford to offer their products at a lower price than the competition.

Think about Starbucks, the coffee vendor. Starbucks started in Seattle, Washington where people were developing and acquiring tastes for flavored coffee. Starbucks' management realized the trend was growing in Seattle and grabbed onto it. Now Starbucks locations can be seen in many cities across the United States. Starbucks hit on the fact that Americans were interested in flavored coffees and developing a taste for good coffees. Not only was this taste developing, but Americans were willing to pay the premium prices that Starbucks charges for this richly brewed java! Starbucks provided an environment where patrons could read their daily newspapers, read their email on their lap tops while sitting and enjoying their coffee at their leisure.

Market Research Required
Another consideration that we must think about is whether someone out there would be interested in purchasing our product or even visiting our retail store. We have to do our market research from two perspectives: who is our consumer and who is our competition. Who are the consumers we want to attract? Do they have the right demographic profile: age, gender, income level, education, etc. to be able to purchase our product and even enjoy it? Moreover, what do they buy, what motivates them to buy, and why would they purchase your product? Competition can be fierce or weak. We must know what we are up against in the way of product offerings and also become aware of potential changes to product development which may threaten our own product offerings.

Choosing a Legal Entity

2010-11-12T14:10:00.000-05:00

Before we set up our business, we must think about whether we are acting alone or with partners. We must also examine our purpose in establishing a business. Are we establishing it because we

were downsized
feel we can run a business better than our boss because we are smarter than he is and have more energy
can't take direction from someone else
feel we want to grow something, perhaps a hobby, and make it a megacompany in the future and get rich
want to leave something to our children for them to run and develop further

Whatever our reason we must decide how to establish our business and understand the tax implications of our decision.

A sole proprietorship is merely a company with one owner doing business under his chosen name for the business. It is the simpliest and cheapest business structure to form. Merely decide upon a name for the business, and file it with the Secretary of State in the state in which you will be doing business, and obtain a license for the business.

The beauty of a sole proprietorship is that you are in full control of your business, and you are the sole decision maker and creative presence. All the responsibility is on the owner's shoulders, and once the owner passes away, the entity as registered passes away with him.
What are the tax implications of the sole proprietorship? All the liabilities of the business are the responsibilty of the owner. The owner is exposed to all taxes. How does a sole proprietorship pay its taxes?The profits and losses of the business are entered onto Schedule C (for a sole proprietorship) and "Passed-through" to the owner's 1040 Form.
The ability to raise capital for the business in a sole proprietorship is limited by the amount of money the individual owner can raise based on his own collateral, creditworthiness and capacity.

Another form we can opt for is that of a partnership. Two or more co-owners can come together under a partnership. Usually the partners split the responsibilities and run the business. A Partnership Agreement must be drawn up which indicates the rules and regulations of running the partnership, adding investments, transferring partnership interests, and dissolving the partnership. A partnership has a predetermined life, usually of 40 years. Again, you file your business name and your partnership agreement with the Secretary of State.
The liability for the business is not as great as in the sole proprietorship, however, each partner is responsible for the liabilities of the partnership as a "joint and several" obligation. The profits and losses of the partnership are indicated on Form 1065, and the individual percentage of the partnership profits and losses are reported on Schedule K and K-1. The profits and losses are again passed through to the individual partner's 1040 Form.
The ability to raise capital for the business is not as restricted as in a sole proprietorship. There are more individuals who collectively have more borrowing power and collateral than the sole proprietor.

A corporation is considered an entity or an individual by the state and by the Internal Revenue Service, and thus it files its own tax form, unlike the previous two structures. A corporation can be a corporation of one or of many owner-investors. The evidence of owning a piece of the corporation is in the form of a stock certificate given in exchange for cash. Liabilities for the business are kept in the corporation. The individual owners are not responsible for the liabilities of the corporation. Therefore, there is limited liability and the individual is protected by the corporation.
In setting up a corporation you need to have prepared the Articles of Incorporation and the By-Laws, obtain a Corporate Seal and file with the Secretary of State.
Since the corporation is considered an entity, it must file its own income tax reports, file annual reports and hold shareholders' meetings. It is a more expensive form of business, however, the protection it affords owners in the way of tax liabilities can far outweigh the costs.
Also, a corporation exists forever. There is no limitation on its life. Raising capital is easier than the sole proprietorship and partnership because you merely sell shares of stock to raise additional funds. It is the profits and history of the corporation and its performance in its industry that will govern its creditworthiness and soundness as an investment.

The decision as to which form of organization to choose should not be taken lightly. You should discuss the advantages and disadvantages with an attorney and an accountant.
.
For additional information on choosing a structure for your business, you can refer to the Small Business Administration site www.sba.gov on structuring your business.

Importance of Market Research

2010-09-29T22:14:00.000-04:00

Another consideration we must think about is whether someone out there would be interested in purchasing our product or even visiting our retail store. We have to do our market research from two perspectives: who is our consumer and who are our competitors. Who are the consumers we want to attract? Do they have the right demographic profile: age, gender, income level, education, etc. to be able to purchase our product and even enjoy it? Moreover, what do they buy, what motivates them to buy, and why would they purchase your product? Competition can be fierce or weak. We must know what we are up against in the way of product offerings and also become aware of potential changes to product development which may threaten our own product offerings.

SWOT Analysis

In earlier essays we discussed SWOT analysis as a way of investigating our own personal abilities to become an entrepreneur. We can also use SWOT analysis to investigate the competition. Knowing the competition is critical. After all "Business is War!" General Colin Powell or General Schwartzkoff wouldn't commit our military to battle if they didn't know what they were up against. We must know everything about our competition, especially their strengths and weaknesses. You wouldn't go to war and not know what you are up against!

With competitive SWOT Analysis we look at the competition's strengths from every aspect: product, price, distribution and promotion. We also look at their weaknesses. And then we compare our own strengths and weaknesses to theirs. What makes our product or idea so much better than theirs? If we cannot identify a competitive advantage over the competition, or be able to differentiate our product in a meaningful way, then we should not proceed with our idea.

Our business concept must be fully explored in order to be successful. Why would someone want to purchase your product or venture into your store? The question is "Will the customers come, and will they buy?"