Step by Step
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You're tired of being a cubicle dweller; the mere thought of punching someone else's time clock for another day is driving you insane. Or maybe you've just been laid off, and slipping back into the 8-to-5 world seems as appealing as surgery without anesthesia or as unlikely as snow in August. It's time to strike out with your own product or service. You're on the brink of being an entrepreneur, but then...
The thought of actually starting a company stops you. Even the most gung-ho entrepreneurial wannabes often step back from the edge when they realize everything they'll have to do. There are so many intimidating details--from cash flow and business plans to inventory management and finding your first customer--that it can be easy to put off being your own boss.
So how can you get a handle on your start-up "to do" list? We've taken the guesswork out of the process by listing the aspects of startup--from A through Z--with tips for maximizing your chances of success.
A = Advertising. You want to make a big splash, but advertising is expensive. When and where to advertise--and how much to spend--is a big decision. "Be careful how you're using your initial dollars to get the word out," says Sejal Desai, CEO of STARTech, a Richardson, Texas, high-tech business accelerator that helps early-stage startups with seed-stage funding and other startup issues.
Advertising salespeople will call you the minute you hang up your shingle. But don't make promises to customers you can't keep or reveal an idea in the marketplace that you haven't taken steps to protect. With advertising, "timing is everything," Desai says. Don't allocate a big ad budget until you can support it, don't be afraid to negotiate contract rates and ad positioning, and don't obligate yourself to an annual advertising contract before you're ready. Also consider advertising with a one-time cost, such as detailing and magnetic signage for your vehicle.
B = Business plan. Your business plan is your vision for the company. "It puts the prospective entrepreneur in a different league," says Ira Davidson, director of the Small Business Development Center at Pace University in New York City.
Investors prefer concise business plans that are 25 pages maximum and include an executive summary, market summary and projections. "Entrepreneurs spend a lot of time on financials," Desai says. "At such an early stage, that's not important because [a business idea] is based on assumptions." Explain who's on your management team, who your customers are and why your idea can be translated into a real business in the first two pages of your plan, and prepare a 30-second "elevator pitch."
The SBA provides a business plan outline here. Also, visit a local SCORE office for free business plan advice from a retired executive.
Learn More: Read How to Build a Business Plan for in-depth guidance on writing your business plan and to download two sample plans.
C = Cash flow. Cash flow is the lifeblood of any business, and it goes back to your business plan. Think about how you can incorporate your vendors and customers into your cash-flow projections. Persuading customers to pay in advance and talking vendors into giving you 30-day credit terms vs. cash-on-delivery can make a huge difference in your cash flow.
Learn More: Payables is an important part of your cash flow. To find out more about managing your payables, read "Cash In, Cash Out."
D = Distribution. Look for distribution partners, says Jeff Shuman, director of entrepreneurial studies at Bentley College in Waltham, Massachusetts, and co-founder of The Rhythm of Business Inc., a business-relationship consulting firm. "If you can find someone who has a customer-supplier relationship with the same people you want to sell to, you might be able to work a deal where they distribute your product to their customers," he explains. "This will get you to the end-customers faster than if you try to build your own distribution infrastructure."
Learn More: Before you partner up with a distributor, read more about the benefits of alliances in "Gold Bond."
E = Equipment. Don't spend a lot at first. One option is your state's surplus property office, which you should be able to find online. The federal government also lets the public bid on surplus office equipment.
F to K
F = Financing. Financing takes many forms, from bootstrapping to venture capital. But in this market, bank loans and venture capital are harder to come by if you don't have a business track record. Convincing the right people to fund your idea is key. Ask for more money than you'll need, because new entrepreneurs can underestimate how much it takes to get to the next step, Desai says. It's best to aim for "smart money"--funds from investors who also bring their knowledge and connections to the table.
If all you need is an equity line of credit, look to the banking industry, says David Spann, an entrepreneur and director of the MBA program at the Bill and Vieve Gore School of Business at Westminster Collegein Salt Lake City.
And beware a game banks play, warns Davidson: They assume your business will be profitable from day one, even though they know profitability is a year away. In business plans, entrepreneurs "may be so conservative that they make it impossible to get a loan," says Davidson. "Show the ability to repay [a loan] within the first year, even if you won't."
G = Getting insurance. Look into such areas as property, workers' compensation and commercial insurance policies that protect the company if someone is harmed after using your product or service. As you grow, consider directors and officers insurance and employment practice insurance policies that protect you against lawsuits by investors and employees. Talk to established entrepreneurs to see what coverage they have. You'll also find tips here. Asking insurance agents to throw some extras into an insurance package doesn't hurt, either.
Learn More: Visit our Insurance Centerto learn what you need to properly insure your business and how to purchase it without breaking the bank.
H = Hiring. Early on, you might want to outsource projects instead of hiring employees, which can create large payroll expenses and responsibilities you may not be ready for in your first few years of business.
To avoid paperwork, some small employers classify on-site employees as 1099s (independent contractors). But this creates problems if such an employee files for workers' compensation and the IRS finds out and charges you in back taxes and fines because the person is really a W-2 employee.
A Google search can help you tell the difference between a contractor and an employee, and the IRS offers a report here. See your state's home page for regulations on hiring, minimum wage and workers' compensation.
I = Inventory management. Depending on your business model, you'll either order inventory or create it. Many entrepreneurs think of inventory as an asset rather than a cost. Don't make this mistake. "If you're not selling it, you're not making money," Spann says.
Learn to love markdowns, Davidson advises. Otherwise, you're not taking enough risks in your purchasing. "If you've made the wrong purchasing decision, acknowledge it right away or you make matters worse," he says. "It no longer matters what you paid for it. All that matters is what your customer is willing to pay for it."
J = Joining a networking group. There are so many groups to join--from a local chamber of commerce to entrepreneurial associations--that networking can quickly add up to beaucoup bucks in annual dues and monthly meeting fees. "You can get yourself networked out because there's so much going on," Desai says.
Allocate your funds wisely. Are there one or two networking groups that will give you the most bang for your buck? Find entrepreneurs who have joined networking groups, and ask them if a particular networking group is worth the investment. What are they getting out of their memberships? Will they re-up next year?
Also, look for people in your industry who lunch on a regular basis, and ask to join them. Or organize a small lunch group yourself. Ask each "member" to invite a business acquaintance. You'll expand your circle, which could lead to new clients who didn't cost a lot in membership fees to land.
K = Knowing your target market. Many new entrepreneurs work on the "if I build it, they will come" philosophy. You perceive value in your product or service, but will customers? "It's not the fact that you built the better mousetrap; it's that [customers] will buy it," Spann says. "This is the biggest hang-up for entrepreneurs."
Defining your target market is a part of your business plan, and it requires research. Who is your customer? Who are your competitors? What's your competitive advantage? Are there barriers to entry, and if so, how will you overcome them? Try surveying potential customers about your idea. Knowing your target market "will lead you to money, to great opportunities with customers and to greater success as an entrepreneur," Spann says.
L to R
L = Licenses and permits. You may need city, county and state licenses and permits to run your business. One place to start the permit process is with your city licensing bureau or county registrar, where you can find out what's required. Another starting place is your city hall or local chamber of commerce. Check out your state's home page to learn what permits and licenses are required for your type of business. You may need special permits based on your business type. These include building and zoning permits, food and liquor permits, and resale permits that exempt you from paying taxes on wholesale merchandise.
M = Management team. Creating a management team that brings expertise and credibility to your idea is critical. Your access to financing, customers and sought-after vendors could depend on it. When selecting a management team, "think about future financing," Spann says. "It's not just about operations and marketing."
Some entrepreneurs rely on costly executive recruiters to find their management team. Instead, ply your connections. Go to networking events, and scan the newspaper for recently retired executives who have the knowledge you need and who may be interested in your idea. Ask them for a 15-minute meeting to pitch your concept.
Equity can quickly become an issue when you're building a management team. Spann says you shouldn't plan on owning the majority of the company. Think of it this way: Would you rather have 80 percent of a small pie, or 20 percent of a really big pie?
"To get [a management team], you may have to give up a piece of your company. This is the hardest thing for a new startup to think about," Spann says. "Be prepared to give away as much as 70 to 80 percent of your company [in equity], because you're trying to build a company that makes money."
Once you have a management team in place, keep in mind that you'll have to cast your ego aside as well as some control over your business. "It's your baby, and it's hard to have someone say your baby's ugly," Desai says. "But you have to be able to put the company [before] yourself."
N = Negotiating contracts. Negotiating is a challenge for many entrepreneurs. Start by knowing what will break a deal. "If you don't know your bottom line, you won't know when to walk away," Shuman says.
It's better to negotiate face-to-face so you can read body language. "The eyes tell the truth even when the lips lie," Shuman says. And go to their offices instead of having them come to yours. "It's an opportunity to look at their operation," he adds.
It doesn't hurt, either, to have an attorney read any proposed contracts before you sign on the dotted line. You could be obligating yourself to contract terms that last years, so make sure you're getting a good deal.
O = Organizing your office. How will you keep track of everything? Fail to create an organizational system that works, and your office could look like a tornado just blew through. Luckily, there's help for getting your office in order to maximize your productivity. The SBA has tips here. There are consultants who specialize in organizing, too. See the National Association of Professional Organizersfor a consultant in your area.
P = Pricing. Pricing is an art form, and it leads back to your business plan. You can't make sales projections until you know the market, which tells you how you'll price your good or service. The worst thing you can do is rely on a textbook formula. "That's a great way to overprice or underprice," Davidson explains.
Once you've studied the market, Spann suggests finding a break-even pricing level and offering your first customers a low-cost pricing model for a period of time. "Reduce it enough so you get the business instead of somebody else," he says. Let your first customers know that they'll be preferred customers as long as the company exists. Be careful to include preferred price breaks in your projections, or you'll mess up your cash flow.
Learn More: Read "How to Set Prices" for more information on pricing your wares and services.
Q = Quantifying your goals. Projections come down to pricing and understanding the market, Spann says, and your numbers have to be realistic and believable to attract investors. Review your projections with investors on a regular basis to make sure you're on track.
R = Record-keeping and accounting. Someday, you'll hire a full-time accountant or CFO. But early on, when you don't have employees or many clients, do record-keeping yourself. There are lots of accounting software packages, such as Peachtree and QuickBooks, tailored to small businesses. As you grow, you can outsource your accounting and payroll functions. It's wise to get a CPA's advice when setting up your accounting controls so you do it right the first time.
S to Z
S = Structuring your business. Will your business be an S corp, a C corp or a limited liability company (LLC)? It's important to incorporate to protect your personal assets. LLCs--which pass a company's profits and losses through to the owners and don't require quarterly reports--are popular, but many investors prefer C corp status, which requires a company and its shareholders to pay taxes on profits and income, respectively, and requires quarterly reports and meetings.
"You don't want to skip this step," says Paul L. Bittner, an associate in labor and employment law with the Cleveland office of Schottenstein, Zox and Dunn Co. LPA, who works with Fortune 500 companies and startups. He's counseled entrepreneurs who have generated a seven-digit annual cash flow within a few years but still operate under a general partnership agreement or as a sole proprietor, leaving personal assets unprotected.
Legal or accounting advice is highly recommended. Expect to spend $500 to $1,000 for help incorporating your business. Check with your local chamber of commerce, SBA office or entrepreneurial groups for free seminars about incorporating. Also, legal Web sites explain these structures and let you file incorporation papers online.
T = Taxes. There are two aspects to tax planning, explains Guy Gadomski, a senior manager at CBIZ Accounting, Tax & Advisory of Cleveland Inc.The first is complying with tax filing deadlines and dates. The second is deciding on your business structure. Finding an accountant early on is a wise step. You'll also need to get familiar with the Schedule C, which is what small-business owners use to categorize expenses and deductions for the IRS.
At tax time, don't hand time-strapped accountants what they sarcastically refer to as a "business in a box"--a mess of receipts and other papers stuffed into a cardboard box. It's your job to keep track of everything from receipts to expenses for the year and to verify for the IRS that the information in your Schedule C is accurate. Write every business-related expense or transaction in a notebook, or use software like Quicken.
You'll have to make quarterly tax payments to the IRS, so start socking away income for taxes from the start. Also, figure quarterly tax payments into your cash flow to avoid problems.
U = Understanding leases. Landlords will write leases to their advantage. This is another area where legal advice can help. If you go it alone, aim for a two-year lease rather than a 10-year lease. Be aware of extra charges landlords might throw in for security, repairs or heating/air conditioning.
Your location depends on your business type. Consider executive suites and incubator space--where all you need is a computer. You may avoid leases altogether for a few years as a homebased business. If a lease is involved, compare prices, and have an attorney scan the contract before you sign it.
V = Vendors. A soft economy is a good time to land quality vendors. Research prices of potential vendors, and see if your management team recommends certain vendors and suppliers. Think about which vendors best suit your product or service as well as who your competitors rely on.
W = Web commerce. Despite the dotcom bust, e-commerce continues to grow. With Web hosting providers, you can create a "Web store" and accept credit cards over your site. The cost per month for the typical Web store is about $20, plus a monthly fee based on the number of transactions. Services such as PayPal let customers make payments online. Think about shipping, too. FedEx and UPS have small-business experts who will help you create a supply chain tailored to your needs.
X = Exit strategy. When starting a business, think about how it might end. "[Particularly] if there is more than one owner, it's critical to deal with tough issues upfront," says Bittner.
Your exit strategy should be a part of your business plan and should answer--in contract form--all the "what ifs," such as: 1) what to do if a co-founder dies or wants to cash out his or her holdings in the business; 2) how to handle bankruptcy or dissolution; 3) how to divide the company's assets; 4) the details of a succession plan; 5) whether your strategy is to go public, sell to a competitor and so on.
Learn More: Even if you plan on being in business for years, prepare for your exit ahead of time with these 10 steps.
Y = Your business name. PR and advertising firms will help you find a name, but you can also use search engines to research whether your desired name is already being used. Also, get creative with names that incorporate both letters and words, Desai suggests.
Z = Zeroing in on your first customers. Choose a management team with great connections, Spann says. Once they help you get a few good prospects, then it's about pitching the prospects and negotiating terms. If you don't have a management team with long contact lists, find visible leaders who are successful in your community. Offer them a sample of your product or service. "The one thing we don't do as entrepreneurs is ask," Spann says. "Go ask."