Winning Ideas for Small Business Success

Everyone at one time or another fantasizes about going into business and being his or her own boss. Now a growing number of Americans are making that fantasy a reality. In an economic climate that encourages and nurtures entrepreneurship, hundreds of thousands of corporate executives, MBAs, retirees and individuals interested in a career change are striking off on their own. And as owners of small businesses, they are creating a dynamic force that is revolutionizing business as we have known it in this country.

According to the latest Internal Revenue Service projected figures,
there are 18.6 million small businesses in the United States. And the U.S. Small Business Administration reports that small businesses (including the self-employed) account for 58 percent of the U.S. workforce and 40 percent of the gross national product. Moreover, a National Science Foundation analysis reveals that small business has been a more prolific source of innovation per research and development dollar than large business.

This new age of the entrepreneur is also an age of opportunity. For
example, a substantial number of today’s small business operators are women. They own 3.74 million small businesses and generate more than $65 billion annually in gross receipts. Between 1977 and 1983, women-owned businesses increased at twice the rate of businesses owned by men.

But success isn’t automatic. It isn’t based on luck, although a little luck never hurts. What it does depend on is how you play the game; in other words, making all the right moves. An even then, there are no guarantees.

Starting a small business is risky business, and the odds of succeeding are poor. According to the U.S. Small Business Administration, the majority of small businesses fail in their first year and 95 out of 100 fail within their first five years.

These figures aren’t to scare you; just prepare you for the sometimes rocky path ahead. Underestimating the difficulty of business is one of the biggest obstacles entrepreneurs face.

However, success can be yours if you are patient, willing to work hard and take all the necessary steps. What follows are 10 tips to small business success. The information was gathered from a variety of experts and sources. While we make no promises with this information, we can say that if you heed this advice, your chances for success will be greatly increased.

1. KNOW YOURSELF

Not everyone is cut out to be an entrepreneur. It takes a special talent. Some owners of small businesses have it and some don’t. Before you invest time, energy, money and a piece of your heart, it’s important to do some serious self-analysis. To answer such questions as: Am I prepared to work hard and make sacrifices? Am I self-disciplined? Do I have management ability? Am I experienced enough in this field? What do I want out of life? Are my goals realistic and attainable?

Studies have shown that entrepreneurs are persevering and not easily defeated. They thrive in a challenging environment and have a tremendous need to be in control. They turn diversity into opportunity. They are risk takers. They welcome responsibility, and they are willing and able to make decisions.

Moreover, successful entrepreneurs are patient and able to wait out
the sometimes slow beginnings of a business. They also are able to learn from their mistakes, trust their own judgment and have an optimistic outlook.

Take a good look. Do those traits describe you? “Know yourself and be willing to work 60 hours a week. Starting a business is one of life’s biggest commitments,” advises Roy Nordman, director of Emerging Business Services Practice for the San Francisco office of Coopers & Lybrand.

Small business owner Nancy Wansick, of Wansick Graphics, echoes those sentiments: “My business has become my whole life. Day becomes night and work has become play.”

It’s obvious: you have to love you work. And if you choose a business that meshes with your personality (the answers to the above questions should tell you about your personality), those extra hours spent won’t be as difficult. The key is to identify what you enjoy doing the most and then find a business opportunity that makes use of your skills and interests.

2. PLAN YOUR BUSINESS

The importance of a comprehensive, well thought out business plan cannot be overemphasized. Much hinges on it: outside funding, credit from suppliers, management of both your operation and finances, promotion and marketing of your business, and achievement of your goals and objectives.

“The business plan is a necessity, if the person who wants to start a small business can’t put a business plan together, he or she is in trouble,” says Robert Krummer, Jr., chairman of First Business Bank in Los Angeles.

Despite the critical nature of a business plan, many owners and managers drag their feet when it comes to preparing a written document. They argue that their marketplace changes too fast for a business plan to be useful or that they just don’t have enough time-they are too busy running the business. But just as a builder won’t begin construction without a blueprint, eager business owners shouldn’t rush into new ventures without a business plan. For without a business plan, you will end up going from crisis to crisis, putting out fires, never looking at your operation in the long term.

According to business plan experts, an effective document answers
these questions: Who are you? What do you do? What resources do you have? Where are you going? What do you need to get there? How will you measure performance? Your plan should contain:

– A resume of the background of all the business principals;
– A thorough description of your product or service;
– An analysis of the current marketplace situation;
– Problems and opportunities facing the company;
– A market analysis showing the segment of customers you have targeted;
– Realistic objectives and goals relating to sales, market share and profits;
– 
An explicit statement of marketing strategy (implementation policies are impossible without explicit strategy plans);
– 
 A detailing of action programs or tactical plans for carrying out strategies and accomplishing goals;
– 
Preliminary budgets and projected profit and loss statements;
– 
Integration of manufacturing and financial plans with the marketing plans; and
– 
Intended controls that measure actual versus planned performance.

In other words, the key is not the cost or size of your plan but the content. It is an important management tool for planning your business, setting goals and a time frame, and measuring your business’s performance. All business plans are not the same. They vary depending on the type and size of your business. However, all plans should be organized into distinct sections: an executive summary, a description of product or service, a marketing analysis and plan, a description of the management team, a financial strategy and an appendix.

Your business plan should be thoroughly prepared, because a sloppy, poorly thought out plan minimizes your chances for outside funding. Moreover, the U.S. Small Business Administration and most private lenders require a business plan when making a funding decision. It demonstrates that you have carefully thought about the basics of your business and that you can realistically plan for the future.

In addition, it’s a good exercise for you. Putting your thoughts down on paper helps you to clarify why you are in business, who your customers and competition are, your strengths and weaknesses and your plans for the future. Plus, it helps you to set realistic goals and guide your operation toward meeting those goals.

There are two suggested ways to prepare your business plan. You may
obtain free and confidential assistance from the Service Corps of Retired
Executives (SCORE), an organization of skilled professionals who can
counsel you in your preparation. Or you may decide to hire a consultant to
help you prepare the plan. Even if you turn to outside help, you should be
completely familiar with every detail of your plan, because at some point
you will have to meet with prospective lenders. Your knowledge and
understanding of the plan will influence their decision.

One final word of advice: Before submitting your plan, have at least
two other individuals review it. They should understand lending and
investments and be able to give you constructive suggestions. That way, if
your plan needs work, you can revise it before you submit it to lenders.

3. FINANCE FOR THE LONG TERM

One of the major causes of small business failure is inadequate start-up
financing. Admittedly, it is more difficult for small businesses to obtain
financing than their larger competitors. However, the owner who borrows
too little up-front money may quickly see the business close down because
of lack of capital to keep the operation running.

“The most hazardous period for a new business is the first two years
due to insufficient working capital,” says Bernard Schnitzer, a counselor
at SCORE.
Many over-eager entrepreneurs open their doors without the necessary
funds to keep the business going until the profits begin to roll in. They
have only enough for a couple of months’ rent, some fixtures and minimum
inventory.

Before you open for business, it is critical to plan how much cash you
will need. That amount depends on the type of business you are opening
(sales and manufacturing need more; service businesses need less) and the
type of person you are.

You also should ask yourself what you need the money for; how much you
need; does the amount allow for unexpected developments; how and when you
will repay the money; can you afford the cost of borrowing; and what is the
outlook for business in general and your business in particular? By
carefully planning your financial projections, you can avoid some of the
financial crises that arise from a future shortage of funds.
Hinden/Owen/Engelke, specialists in financing for small businesses,
recommend the following “Ten Commandments of Smart Corporate Financing”;

– Stay in contact with several lenders.
– Anticipate financing needs and make arrangements well ahead of opening
your doors.
– Borrow as much as you can.
– Get all commitments in writing.
– Never assume silence is approval of a loan request.
– Don’t make the interest rate the major consideration in evaluating
financing.
– Don’t surrender or assume that if one lender says “no,” they all will.
– Watch for turning points in the operation of your company.
– Tight money doesn’t mean no money.
– Don’t limit your sources just to banks.

There are a number of sources of financing available to the small
business owner (besides family and friends): private sector financing–
banks, savings and loans and other financial services institutions;
government financing–the U.S. Small Business Administration and local
community groups like the Small Business Investment Companies and the
Minority Enterprise Small Business Investment Companies; and venture
capitalists–wealthy individuals and firms who make their money as
investors.
Before you fill out your loan request–no matter who the prospective
lender is–find out what documentation you will need. For example, banks
and the U.S. Small Business Administration require a resume of the
applicant’s education and work experience with emphasis on experience
related to the particular business; a personal financial statement
detailing net worth and income tax statements for at least the two previous
years; the aforementioned business plan; and credit references.
Finally, borrow carefully. “Having financing is critical at the
growth phases,” says one small business owner; “But be careful not to
overextend yourself.”

4. BALANCE YOUR BOOKS

One small business owner realized that vision, optimism and a willingness
to work hard were vital to the success of her new venture, but the key
requirement was attention to the balance sheets. “It took me a while to
learn it, but you really have to run a business by the numbers.”

And you can’t run a business by the numbers without an adequate
accounting system to use as a management tool. Incomplete records are one
of the most serious errors a small business owner can make. Very few
operators enjoy the number crunching segment of running a business.
However, if you keep your system simple, it can be done with a minimum
amount of time and energy. Besides, accurate and complete financial
records will help you chart the growth of your business and make plans for
the future.

To begin with, your books should include accurate and thorough state-
ments of sales and operating results, fixed and variable costs, profit and
loss, inventory levels, and credit and collection totals; tax returns and
reports to regulatory agencies; and comparisons of current data with prior
years’ operating results and budgeted goals.

In addition, you should also track daily cash receipts and credit
sales, expenses and inventory received, plus employee expenses including
pay and deductions.

A good recordkeeping system should be easy to understand, reliable,
accurate, consistent and designed to provide information on a timely basis.

There are two methods of accounting: cash and accrual. Using the cash
method, income is recorded when the cash is received and expenses are
recorded when paid. With accrual accounting, you record all income and
expenses whether paid or not. Both cash and credit transactions are
recorded when paid. Whether you use the cash or accrual method, both
require four basic types of records:

– Sales records;
– Cash records;
– Cash disbursements;
– Accounts receivable.

To determine which system is best for you, consult with a financial
advisor or public accountant.

5. PRACTICE GOOD MANAGEMENT

“Poor management is the greatest single cause of business failure,” warns
Steve Muhlhauser, California Assistant Regional Administrator for Business
Development for the U.S. Small Business Administration.

Management of a business encompasses a number of activities: planning,
organizing, controlling, directing and communicating. Most business
failures aren’t a result of bad economic times; rather, they stem from
improper management. The cardinal rule of small business management is to
know exactly where you stand at all times.

Some of the more common mistakes managers make include:

– Hiring the wrong people;
– Inadequate employee training;
– Trying to do too much;
– Misuse of time;
– Absentee ownership.

In a big company, a bad month in one division can be offset by other
divisions. In a small company, there’s nothing else to fall back on, so a
bad week can be fatal. Managing a small company means staying on top of
the business so that you can react instantly and decisively when problems
arise.

Bad management isn’t limited to poor economic times; it can happen
even during the best of times. Some management consultants say their
experiences with small businesses confirm that over expanding, hiring weak
personnel and being over confident are frequent management mistakes that
occur when times are good.

Along with those is the inability to handle growth. “If the business
is successful, it takes on a life of its own,” says one owner. You become
a “situation manager” rather than just a people or business manager.
Suddenly, you are balancing opportunities, investments and energy.

Whether the times are good or bad, the successful manager is the one
who remains calm and confident and who turns adversity into opportunity.

And as a successful manager you must also be a good leader. Many
experts believe that leadership is a form of behavior: of persuading and
inducing, of guiding and motivating. They believe that a well-rounded
leader is a master of certain skills, creates a climate that encourages
productivity and directs and controls employees’ activities.

Very often, leadership style reflects an individual’s personality.
However, you should keep in mind that what works well with one group or
individual; may not work as well with the next. As a result, good
leadership requires a flexible approach, one that is based on the people
involved and the situation at hand.

Advises one small business owner, “Surround yourself with competent
people, then train them and learn to delegate.” And when you do delegate,
keep the following tips in mind:

– Don’t constantly check up on employees while they’re working;
– Believe what they say;
– Avoid having to know every single detail at all times; and
– Be sure you know enough to stay on top of things.

“Delegation is an issue of trust,” says another owner. “But it cuts
both ways. You can’t get someone to trust you unless you trust them, too.”

6. KNOW YOUR MARKET

A sound marketing plan is key to the success of your business. It should
include your market your market research, your location, the customer group
you have targeted, your competition, positioning, the product or service
you are selling, pricing, advertising and promotion.

“You’re in business to serve a customer need,” says Derek Hansen,
founder of American Capital Access. “If you’re not sensitive to customers,
don’t know who your customers are, how to reach them and, most of all, what
will convince them to buy your product or service, get help.”

Before developing your plan, you must do your homework. Effective
marketing, planning and promotion begins with factual information about the
marketplace. Visit your local library, talk to customers, study the
advertising of other businesses in your community (including that of your
competition) and consult with any related industry associations.

Once you have all the necessary information, it is time to put your
plan down on paper. It should accomplish the following:

1. Define your business
– Your product or service;
– Your geographic marketing area–neighborhood, regional or national;
– Your competition;
– How you differ from the competition–what makes you special;
– Your price;
– The competition’s promotion methods;
– Your promotion methods;
– Your distribution methods or business location.

2. Define your customers
– Your current customer base: age, sex, income, neighborhood;
– How your customers learn about your product or service–advertising,
direct mail, word of mouth, Yellow Pages;
– Patterns or habits your customers and potential customers share–where
they shop, what they read, watch, listen to;
– Qualities your customers value most about your product or service–
selection, convenience, service, reliability, availability, affordability;
– Qualities your customers like least about your product or service–can
they be adjusted to serve your customers better?
– Prospective customers like least about your product or service but whom
you aren’t currently reaching.

3. Define your plan and budget
– Previous marketing methods you have used to communicate to your
customers;
– Methods that have been most effective;
– Cost compared to sales;
– Cost per customer;
– Possible future marketing methods to attract new customers;
– Percentage of profits you can allocate to your marketing campaign;
– Marketing tools you can implement within your budget–newspaper, magazine
or Yellow Pages advertising; radio or television advertising; direct mail;
tele-marketing; public relations activities such as community involvement,
sponsorship or press releases;
– Methods of testing your marketing ideas;
– Methods for measuring results of your marketing campaign;
– The marketing tool you can implement immediately.

The final component in your marketing plan should be your overall
promotional objectives: to communicate your message, create an awareness
of your product or service, motivate customers to buy and increase sales.
Objectives make it easier to design an effective campaign and help you keep
that campaign on the right track. Plus, once you have defined your
objectives, it is easier to choose the method that will be most effective.

The essential idea is targeted marketing–making sure your message
reaches the people you want to persuade. Today’s marketplace is too
fragmented and diffused to reach everyone without the expenditure of vast
sums of money. This makes the formulation of a specific customer profile
all the more important. “Before, we always tried to get everybody and
their brother to buy from us. Need-less to say, that approach didn’t work.
Then we started a marketing plan that targeted a specific geographic area.”
says one long-time business owner, “and it brought in all the business we
hope for.”

7. DELIVER QUALITY

The quality of your product is vital to the continued success of your
business. A terrific marketing strategy might bring a customer to your
door, but if the product you deliver fails to satisfy, they will never
return. And worse, the best advertising of all, word-of-mouth, will turn
against you.

“Understand your weaknesses and strengths, your product and the
market,” urges Paul Kirschner, Regional Representative, SCORE.

Above all, never underestimate the importance of your customers.
Design your product or service based on what they want. Develop your own
standards for quality and constantly reinforce those values. Once quality
slips, customers notice and the competition inches ever closer.

“Supplying your customers with a desired, needed and valued product or
service will help ensure their satisfaction and your repeat business and
success,” says the owner of a television and radio dealership. “In short,
always give clients what they want and need.”

Still other owners say, “Never lower your standards. Ask for feedback
and make it a way of life. Build it into everything you do so you know if
your quality is as good as it should be.”

To measure how well you are doing, it is critical that you keep an eye
on the competition, consultants say. This means matching what the
competition delivers and then bettering it to hold your ground.

Asking the question, “Are we doing a good job; the best that we can?”
is key to the success of your business. By doing that you will please your
customers and you will set your business apart from competition.

8. HIRE THE RIGHT PEOPLE

Many consultants agree that good employees can play a major role in your
business’s success. Very often the image and reputation of your company
depend on how customers view your employees. An employee’s attitude,
appearance and skills can make or break your business.

“One of the toughest parts of starting my furniture sales business,”
says one owner, “was finding good, trustworthy employees. The other tough
part was managing them. Although good employees are one of a company’s
greatest assets, all employees need to be motivated.”

The hiring process should not be haphazard. Before you begin, you
need to define the job, the experience or education level required and what
you are willing to pay–salary and benefits. If you haven’t formulated a
personnel policy, now is the time. You need to consider the number of
hours to be worked each week, the number of days per week, holiday work and
the time and method for overtime pay; fringe benefits; vacation and sick
leave; time off for personal needs; training; retirement; a grievance
procedure; performance review and promotion; and termination.

Employment and training procedures should be established so that you
have a better chance of hiring the right employee for the right job and
that you hire employees to fill in on those areas where you may be weak.

There are a number of sources to which you can turn for job
candidates: classified advertising, employment agencies, temporary
agencies, state employment agencies, unions, schools, community
organizations, former employees or friends and family.

Rather than making your selection based on intuition, you need to
follow a process that enables you to determine the candidate’s worthiness
for the position. Review the candidate’s resume, application and work
samples; test the applicant if appropriate for the position; interview the
candidate; and check his or her work references.

When interviewing, don’t make the common mistake of asking what the
candidate has done; rather, ask how the candidate did it. Interview the
candidate, not his or her resume. Moreover, don’t neglect to assess three
essential factors you won’t find on anyone’s resume: intellect,
interpersonal skills and motivation level.

When interviewing, it is also important to know the laws related to
job discrimination. According to one expert, there are two simple rules to
test whether or not to ask a question: (1) Is it job related? If it isn’t,
don’t ask. (2) Is the question presented only to a specific type of
candidate? If it is, don’t ask.

When it comes time for the hiring decision, undoubtedly your sense of
people will come into play; your ability to separate “good” employees from
“bad” one. However, a few words of warning: All too often, consultants
say, employers hire people they believe will turn around, only to find a
difficult battle on their hands. Time is too precious to waste on anyone
who cannot contribute 100 percent.

Once you have carefully selected your new employee, it is important to
create a good working relationship. Open-mindedness, patience,
communication skills, willingness to listen and other human relations
skills play a vital role in the development of such relationships. “Be
aware of individual personalities,” says Ed Lohlein, owner of Budget Copy.
“We maintain an ‘open door’ policy by talking to our employees as human
beings.”

Says another owner, “Hiring good people, developing appropriate
relationships and making them part of the operation are the keys to a
successful business.

And although you have been careful to hire the right person for the
job and are working hard to form rewarding relationships with your
employees, you can still be subject to problems. That is the nature of
business. Very often the problems you experience mirror those of society
in general.

Currently, employers are faced with the problem of drug abuse and drug
testing and with adhering to the new regulations set down by the 1986
immigration law.

Substance abuse costs American business about $100 billion a year in
lost production, according to the federal government. In 1980, a
government-sponsored study revealed that about 10 percent of the nation’s
workforce was impaired by alcohol abuse.

While many large businesses have set up substance abuse programs, such
programs are too expensive for the small business owner. One consultant
recommends writing out a policy statement concerning drug and alcohol use
at work and coming to work in a drug or alcohol-induced state. He advises
that the policy should state that the use of drugs or alcohol on the job
are unacceptable and grounds for disciplinary action, including dismissal.

Another consultant suggests that the small business owner investigate
outside employee assistance programs as a way of offering help to troubled
employees at a relatively low cost. If no such provider is available in
the area, you may want to join with other local companies to create an
employee assistance program together.

The other major societal issue–hiring illegal immigrants–can have
significant impact on the operation of a small business. Under the
Immigration Reform and Control Act of 1986, employers must hire only U.S.
citizens and aliens authorized to work in the United States. Violators can
face stiff fines. The Immigration and Naturalization Service (INS)
requires that you ask each new person hired the following questions: Are
you a U.S. citizen? Or, are you an alien lawfully authorized to work in the
United States? Their answers should be noted on your employment records.

The employer must attest under penalty of perjury–on a form provided
by the U.S. Attorney General–that he or she has verified by examining the
documents specified in the law, that each new person hired is authorized to
work in this country.

Documents that satisfy the verification requirements include a U.S.
passport, certificate of U.S. citizenship, certificate of naturalization
and certain foreign pass-ports and resident alien cards. Documents such as
a Social Security card or birth certificate also are acceptable if examined
together with approved identification such as a driver’s license.

Employers must keep the verification forms on file for three years
from the date of hire or for one year following the employee’s separation
from service, whichever is later.

For further information on the new law, the INS has produced a
“Handbook for Employers,” document number M274. Contact your local INS
office to receive a copy.

9. CHOOSE THE RIGHT LOCATION

Just as your product or service and your employees are crucial to your
business’s success, so is your location. Where you want to set up shop is
a decision that should be made early. And when making that decision, you
should select your site based on the type of goods or services to be sold
and your target market, rather than on personal convenience.

If your business is retail, you will want a location that provides a
lot of local traffic, both pedestrian and vehicular. You will also want to
consider parking availability, public transportation, the compatibility of
neighboring businesses and the building itself. If you are renting, try to
talk to former tenants and ask why they moved. Talk to other shopkeepers
in the area and learn as much as you can about the area and its customers.
Be careful if you see several unoccupied buildings for rent. It could mean
the area is undergoing an economic downturn, or a redevelopment
renaissance.

Manufacturing and service businesses have different needs. They must
be close to their suppliers and customers, accessible to transportation, in
compliance with local zoning regulations and have space for future
expansion.

No matter what business you are in, there are certain basic
considerations that must be taken into account. To begin with, the style,
construction and overall exterior appearance of your building play a vital
role in the development of your company image. And inside, be sure your
layout is open and simple and facilitates the flow of people, supplies and
merchandise. In addition, don’t neglect to check the plumbing, air
conditioning and sanitary facilities and whether the building meets fire
and earthquake codes.

Before you sign a lease, you should have your lawyer and insurance
agent review it. Both you and they will want to know:

– How the rent is determined;
– Is the rent high or low compared to other rents in the area;
– Who is responsible for alterations–the tenant or landlord;
– Who owns any improvements made by the tenant;
– The amount of insurance held by the landlord and the degree of coverage
required of the tenant;
– Lease renewal provisions;
– The tenant’s right to sublet;
– Options for expansion;
– Property use restrictions (zoning).

A final consideration in choosing a location is whether you should
rent or buy the facility you are considering. Your decision should be
based on these factors:

– Are your requirements going to change rapidly over the next few years?
If they are, you should probably think about renting.
– Is capital in short supply? Can you use your available money better if
it is not tied up in a building? What return can you expect from your
funds if they are invested elsewhere? If your capital is tight, renting
may be preferable.
– Can you secure a favorable lease from the building owner with an option
to purchase?
– How will renting or purchasing affect your financial picture?
– Will the building be easy to resell?
– What kind of tax forgiveness and other kinds of assistance are available
from the state or the local community?

Before embarking on a search for the perfect location, you should
outline your needs, present and future, and then find a site that meets
those needs. If you need assistance, a business real estate broker can
often be helpful in finding the right location. In addition, your local
chamber of commerce can answer any questions you may have about the
community.

10. DON’T BE AFRAID TO ASK FOR HELP

When considering the assistance of professional consultants, many owners of
small business ask themselves: Is it necessary? Can I afford one? Can I
afford not to get the help of outside experts?

The problem that faces many owners of new small businesses is how to
afford professional help at the point when they will probably need it the
most: usually when it is most difficult to pay for. But professional
advice need not be expensive. Businesses can find assistance through local
attorneys, consultants, accountants, bankers, the U.S. Small Business
Administration, the Service Corps of Retired Executives, chambers of
commerce, trade associations, and business libraries, to name a few.

Most important, consultants say, is knowing what kind of help you
need, and then getting it early enough.

“It’s a shame more small businesses don’t tap into the resources of a
professional to help them realize their full potential,” notes Howard
Cohen, economist and chartered accountant in Tiburon, CA.

Urges Dale Morseman, owner of Industrial Graphic Arts in Concord, CA,
“Gather advice from all available sources, particularly business and trade
associations. When you have questions or problems outside your area of
expertise, seek professional help.”

The owner of a small business consulting firm recommends the
appointment of a board of directors with whom you meet regularly. Your
board should be made up of experienced business professionals who can offer
practical advice and help you solve the kinds of problems new owners face.

You needn’t only turn to professional consultants for assistance.
Newspapers, trade publications, specialty newsletters and magazines, and
business libraries can point you toward the answers you need. Moreover,
your local chamber of commerce and many financial institutions publish how-
to books for a small fee or just for the asking.

The resources don’t end there. Free counseling is available through
the SBA and SCORE, the volunteer organization it supports. SCORE is
staffed by experts who have had successful careers as business owners,
chief executives, manufacturing chiefs, bankers, economists, attorneys,
engineers, and sales and marketing managers. In addition to one-on-one
counseling, they run “Entrepreneur Training” workshops and publish a number
of practical guides and handbooks. SCORE counselors are experts who
appreciate what small business means and who want to share their
experiences and knowledge with any small business owner who needs help.

Do you have what it takes?

Starting a business is risky at best; but your chances of making it will be
better if you understand the problems you’ll encounter and have those
problems worked out before you start. The first question you need to
answer is about you: do you have what it takes? Below are some questions
to help you evaluate whether you do.

1. Are you a self-starter?
( ) I do things on my own. Nobody has to tell me to get going.
( ) If someone gets me started, I keep going all right.
( ) Easy does it. I don’t put myself out until I have to.

2. How do you feel about other people?
( ) I like people. I can get along with just about anyone.
( ) I have plenty of friends; I don’t need anyone else.
( ) Most people irritate me.

3. Can you lead others?
( ) I can get most people to go along when I start something.
( ) I can give the orders if someone tells me what we should do.
( ) I let someone else get things moving; then I go along if I feel like
it.

4. Can you take responsibility?
( ) I like to take charge of things and see them through.
( ) I’ll take over if I have to, but I’d rather let someone else be
responsible.
( ) There’s always some eager beaver around wanting to show how smart he
is. I say let him.

5. How good an organizer are you?
( ) I like to have a plan before I start. I’m usually the one to get
things lined up when the group wants to do something.
( ) I do all right unless things get too confused; then I quit.
( ) I get all set and then something comes along and presents too many
problems. So I just take things as they come.

6. How good a worker are you?
( ) I can keep going as long as I need to. I don’t mind working hard for
something I want.
( ) I’ll work hard for a while, but when I’ve had enough, that’s it.
( ) I can’t see that hard work gets you anywhere.

7. Can you make decisions?
( ) I can make up my mind in a hurry if I have to. It usually turns out
okay, too.
( ) I can if I have plenty of time. If I have to make up my mind fast, I
think later that I should have decided the other way.
( ) I don’t like to be the one to decide things.

8. Can people trust what you say?
( ) You bet they can. I don’t say things I don’t mean.
( ) I try to be on the level most of the time, but sometimes I just say
what is easiest.
( ) Why bother if the other person doesn’t know the difference?

9. Can you stick with it?
( ) If I make up my mind to do something, I don’t let anything stop me.
( ) I usually finish what I start-if it goes well.
( ) If it doesn’t go right immediately, I quit. Why beat my brains out?

10. How good is your health?
( ) I never run down!
( ) I have enough energy for most things I want to do.
( ) I run out of energy sooner than most of my friends.

Now total the number of checks you have next to the first, second and
third answers. If most of your checks are beside the first answers, you
probably have what it takes to run a business. If not, you’re likely to
have more trouble than you can handle by yourself. Better find a partner
who is strong on the points on which you are weak. If many of your checks
are next to third answers, even a good partner will not be able to shore
you up.

Business Plan Checklist

A well prepared business plan serves several purposes:
– It helps the owner of a new business determine the feasibility and
desirability of pursuing the steps necessary to start a business.
– It is an important sales tool for raising capital from outside investors.
– It forms the basis of a more detailed operational plan and becomes an
important management tool for monitoring the growth of the firm and
charting future directions.

Following is a general approach that you can use as a foundation.
However, you should tailor your plan to meet the specific circumstances of
your business, emphasizing its strengths and addressing the potential
problems and challenges to be faced.

Summary
The summary should concisely describe the key elements of the business
plan. For the firm seeking financing, the summary should convince the
lender or venture capitalist that it is worthwhile to review the plan in
detail. The summary should briefly cover at least the following:

– Name of the business;
– Business location and floor plan description;
– Discussion of the product, market and competition;
– Expertise of the management team;
– Summary of financial projections;
– Amount of financial assistance requested (if applicable);
– Form of and purpose for the financial assistance (if applicable);
– Purpose for undertaking the project (if financial assistance is sought);
– Business goals.

The Company
This section provides background information on the company and usually
includes:

* A general description of the business, including the product or service;

* Historical development of the business, including:
-Name date and place (state) of formation;
-Legal structure (proprietorship, partnership, corporation);
-Significant changes, including dates, in ownership, structure, new
products or lines, acquisitions;
-Subsidiaries and degree of ownership, including minority interests;
-Principals and the roles they played in the formation of the company.

The Product or Service
Describe the present or planned product or service lines, including:

* Relative importance of each product or service including sales
projections, if possible;

* Product evaluation (use, quality, performance);

* Comparison to competitors’ products or services and competitive
advantages over other producers;

* Demand for product or service and factors affecting demand other than
price.

The Project
If financing is sought for a specific project, describe the project, the
purpose for which it is undertaken, its cost and the amount, form and use
of the financial assistance.

Management
* Organizational chart;

* Key individuals (include supervisory personnel with special value to the
organization);
-Responsibilities;
-Personnel resumes (describing skills and experience as they relate to
activities of the business);
-Present salaries (include other compensation such as stock options,
bonuses);
-Planned staff additions.

* Other employees:
-Number of employees at year end, total payroll expenses for each of
previous five years (if applicable) broken down by wages, benefits;
-Method of compensation;
-Departmental/divisional breakdown of work force.

* Planned staff additions.

Ownership
* Names, addresses, business affiliations of principal holders of subject’s
common stock and other types of equity securities (include details on
holdings);

* Degree to which principal holders are involved in management;

* Principal non-management holders;

* Names of board of directors, areas of expertise and role of board when
business is operational;

* Amount of stock currently authorized and issued.

Marketing Strategy/Market Analysis

* Description of the industry. Include:
-Current description of industry;
-Industry outlook;
-Principal markets (commercial/industrial, consumer, government,
international);
-Industry size–current as well as anticipated in the next 10 years
(explain sources of projection);
-Major characteristics of the industry. Effects of major social,
economic, technological or regulatory trends on the industry.

* Description of major customers. Include:
-Names, locations, products or services sold to each;
-Percentage of annual sales volume for each customer over previous
five years (if applicable);
-Duration and condition of contracts in place.

* Description of market and its major segments. Include:
-Principal market participants and their performance;
-Target market;
-Customer requirements and ways for filling those requirements;
-Buying habits of customers and impact on customers using your product
or service.

* Description of competition: Companies with which your business competes
and how your business compares with these companies. This section is a
more detailed narrative than the maintained in the description of the
product or service, above.

* Description of prospective customers. Include reaction to your firm and
any of its products or services they have seen or tested.

* Description of firm’s marketing activities. Include:
-Overall marketing strategy;
-Pricing policy;
-Method of selling, distributing and servicing the product;
-Geographic penetration, field/product support, advertising, public
relations and promotion and priorities among these activities.

* Description of selling activities. Include method for identifying
prospective customers and how and in what order you will contact the
relevant decision-makers. Also describe your sales effort–sales channels
and terms, number of salespersons, number of sales contacts, anticipated
time, initial order size–and estimated sales and market share.

Technology
* Describe technical status of your product–idea stage, development stage,
prototype–and the relevant activities, milestones and other steps
necessary to bring the product into production.

* Present patent or copyright position (if applicable). Include how much
is patented and how much can be patented (how comprehensive and effective
the patents or copyrights will be). Include a list of patents, copyrights,
licenses or statements of proprietary interest in the product or product
line.

* Describe new technologies that may become practical in the next five
years that may affect the product.

* Describe new products (derived from first generation products) the firm
plans to develop to meet changing needs.

* Describe regulatory or approved requirements and status, and discuss any
other technical and legal considerations that may be relevant to the
technological development of the product.

* Describe research and development efforts and future plans for research
and development.

Production/Operating Plan
* Explain how the firm will perform production or delivery of service.
Describe in terms of:

* Physical facilities-owned or leased, size and location, expansion
capabilities, types and quantities of equipment needed. Include a
facilities plan and description of planned capital improvements (if any)
and time-table for those improvements.

* Suppliers: name and location, length of lead time required, usual terms
of purchase, contracts (amounts, duration and condition) and
subcontractors.

* Labor supply (current and planned): number of employees, unionization,
stability (seasonal or cyclical) and fringe benefits.

* Technologies/skills required to develop and manufacture the products.

* Cost breakdown for materials, labor and manufacturing overhead for each
product, plus cost versus volume curves for each product or service.

* Manufacturing process.

* Describe production or operating advantages of the firm; discuss whether
they are expected to continue.

* Specify standard product costs at different volume levels.

* Present a schedule of work for the next one to two years.

Financial
* Auditor: name, address;

* Legal counsel: name, address;

* Banker: name, location, contact officer;

* Controls: cost system used and budgets used;

* Describe cash requirements, now and over next five years, and how these
funds will be used;

* Amount to be raised from debt and amount from equity;

* Plans to “go public”–relate this to future value and liquidity of
investments;

* Financial statements and projections for next five years:

* Profit and loss of income statements by month until break even, and then
by quarter;

* Balance sheets as of the end of each year;

* Cash budgets and cash flow projections;

* Capital budgets for equipment and other capital acquisitions;

* Manufacturing/shipping plan.

If financing is sought, most lenders and venture capitalists will require:
* A funding request indicating the desired financing, capitalization, use
of funds and future financing;

* Financial statements for the past three years, if applicable;

* Current financial statements;

* Monthly cash flow financial projection including the proposed financing,
for two years;

* Projected balance sheets, income statement and statement of changes in
financial position for two years including, the proposed financing.

How Much Money Do You Need?
To help you estimate the amount of financing you will need to get your
business off the ground, use the following checklist. For each item,
estimate a monthly amount needed.

Monthly Expenses:
Salary of owner-manager (if applicable)
All other salaries and wages
Rent
Advertising
Delivery expense
Supplies
Telephone
Utilities
Insurance
Taxes, including Social Security
Interest
Maintenance
Legal and other professional fees
Miscellaneous

One-Time Start-Up Costs:
Fixtures and equipment
Decorating and remodeling
Installation of fixtures and equipment
Starting inventory
Deposits with public utilities
Legal and other professional fees
Licenses and permits
Advertising and promotion for opening
Accounts receivable
Cash
Other

TOTAL
Your total will depend on how many
months of preparation you want to allow for.

Small Business Financial Status Checklist
What an owner/manager should know:

Daily

1. Cash on hand.
2. Bank balance (keep business and personal funds separate).
3. Daily summary of sales and cash receipts.
4. Errors corrected in recording collections on accounts.
5. Record of all monies paid out, by cash or check.

Weekly

1. Accounts receivable (take action on slow payers).
2. Accounts payable (take advantage of discounts).
3. Payroll (records should include name and address of employee, Social
Security number, number of exemptions, date ending the pay period, hours
worked, rate of pay, total wages, deductions, net pay, check number).
4. Taxes and reports to state and federal government (sales, withholding,
Social Security).

Monthly

1. That all journal entries are classified according to appropriate account
numbers (these should be generally accepted and standardized for both
income and expense) and posted to general ledger.

2. That a profit and loss statement for the month is available within a
reasonable time, usually 10 to 15 days following the close of the month.
This shows the income for the business for the month, the expense incurred
in obtaining the income, and the profit or loss resulting. From this, take
action to eliminate future loss (adjust mark-up? reduce overhead expense?
pilferage? incorrect tax reporting? failure to take advantage of cash
discounts?).

3. That a balance sheet accompanies the profit and loss statement. This
shows assets (what the business has), liabilities (what the business owes),
and the investment of the owner.

4. The bank statement is reconciles. (That is, the owner’s books are in
agreement with the bank’s record of the cash balance).

5. The petty cash account is in balance. (The actual cash in the petty cash
box plus the total of the paid out slips that have not been charged to
expense should total the amount set aside as petty cash.

6. That all federal tax deposits, withheld income and FICA taxes (form
501) and state taxes are made.

7. That accounts receivable are dated, i.e., 30, 60, 90 days, etc., past
due. (Work all bad and slow accounts.)

8. That inventory control is worked to remove dead stock and order new
stock. (What moves slowly? Reduce. What moves quickly? Increase.)

Common Communication Traps

Open communication is critical if you are going to manage well. Following
is a partial list of communication roadblocks, examples of how they are
used and the problem-solving detours that can result.

1. Ordering: “You must . . .” “You have to . . .”–Make an employee feel
resentful of the manager’s power. Put down or frustrated, the employee
responds with anger, refusal or dissent.

2. Warning: “You’d better . . .” “If you don’t, then . . .”–Place a threat
on the future and make the employee feel humiliated or embarrassed.

3. Moralizing: “You should . . .” “It’s your responsibility . . .”–Attempt
to make employee feel guilty and communicate lack of trust in his or her
judgment.

4. Advising: “What I would do is . . .” “It would be best for you if . .
.”–Imply superiority and can make a person feel inadequate and encourage
dependency. If the manager’s suggestion turns out to be wrong, the
employee can duck responsibility.

5. Persuading with logic: “Here’s why you are wrong . . .” “The facts are
. . .” — Label another person as “wrong” and foster defensiveness as well
as feelings of inadequacy.

6. Judging: “You are acting foolishly . . .” “You aren’t thinking straight
. . .”–Make an employee feel incompetent and stupid and if used often
enough may become incorporated into the employee’s self-image. A defensive
reaction in the future may be to decide not to tell a manager about a
problem.

Serve Your Customers Well

Quality doesn’t only apply to merchandise. It also means good service and
caring about your customers wants and needs. Here are five specific steps
for taking better care of your customers.

1. Conduct your own survey. Profit from the ideas, suggestions and
complaints of your present and former customers. Solicit their ideas for
new products and better service.

2. Meet your customers in person. if your business has grown to the point
where you spend most of your time in the office or traveling, take the time
to talk to the customers who buy and browse. Observe and ask questions.
Think like a customer.

3. Check telephone handling. Bad handling can undermine efforts to build
a profitable enterprise. Rules of good handling, such as prompt answering
and a cheerful attitude of helpfulness, are of critical importance. Check
on telephone manners periodically by having someone whose voice is
unfamiliar play the role of a customer, perhaps a difficult one.

4. Make it a team. Continually drive home the crucial message that
everyone is part of the success machine. Build customer consciousness
throughout your organization. When you hold group meetings, invite ideas
from everyone and discuss those ideas.

5. Take advantage of after-hours influence. This is the time when you
build, in an informal way, the friendly feeling that draws people to you
and your business. Turn friends into customers and reinforce customer
loyalty. Take advantage of the relaxed atmosphere of a golf game or
cocktail party or just a neighborly chat.

Follow Fair Employment Practices

Current state and federal human rights legislation concerning
discrimination in hiring places burden of proof on the employer. In other
words, if questions asked in a pre-employment interview are perceived as
discriminatory, it is up to the employer to prove they are not. Following
are some examples of questions that are acceptable and some that may lead
to charges of discrimination.

Acceptable to Ask

Why are you interested in this job?
Describe your education.
What experience have you had that qualifies you for this job?
Do you have other abilities that will help you perform the job?
Do you have all the necessary licenses and certification?
Are you willing to travel? (Depending on your job relatedness)
What, if any, are your concerns about the job?
What are your salary expectations?
May we inquire of your present employer?
You may also discuss job duties and responsibilities, the organization, its
programs and achievements, career and growth potential, opportunities for
advancement and facilities available.

Unacceptable Questions

How old are you or what is your date of birth?
Have you ever been arrested or convicted of a crime?
How many children do you have? What are their ages? Have you made child
care arrangements? What is your national origin?
What is your credit record?
What is your maiden name?
What is your marital status?
What is your spouse’s name or work?
Do you have any handicaps?

Evaluating Prospective Sites

When choosing a location, a method for evaluating each potential site is
crucial. By using some form of scoresheet, you will be able to carefully
consider a site’s strengths and weaknesses and eliminate the factors that
may be equal in all sites. In addition, as you make your tally, be aware
that some factors may be more important because of your line of business.
Be sure you assign the proper weight to those factors.

Below is a basic checklist to help you rate each site. First, read
through the criteria and weigh them on a scale of 1 to 5 according to their
importance to the success of your business (1 is low, 5 is high). For each
site you are evaluating, make a copy of this list with the weights filled
in. Go through each criterion again and grade it on a scale of 1 to 10
based on how well the site you are rating meets the need. Multiply the
grade times the weight for your site’s points on each factor. Add up the
points to get a total score for the site. Repeat this process for each
site and compare the total scores. The highest one will be the site that
best meets your most important requirements. Happy hunting!

Factors
1. Centrally located to my market
2. Raw materials readily available
3. Quantity of available labor
4. Transportation availability
5. Vehicular and pedestrian traffic (important in retail and small service
operations)
6. Parking availability
7. Labor rates of pay/estimated productivity
8. Adequacy of utilities (sewer, water, power, gas)
9. Local business climate
10. Provision for future expansion
11. Tax burden
12. Topography of site (slop, foundation)
13. Quality of police and fire protection
14. Housing availability for employees
15. Environmental factors (community atmosphere)
16. Estimate of quality of this site in future
17. Estimate of this site in relation to that of my major competitor

Total Score

ARE YOU MAKING A PROFIT?

Making a profit is the most important–objective of a business. Profit can
be simply defined: Revenues – Expenses = Profit. So, to increase profits
you must raise revenues, lower expenses, or both. This checklist is a
series of questions with comments to help you analyze your profits. This
material is not meant to be a definitive presentation on the subject.
However, it may help you identify areas where further study might be, well,
profitable.

Analysis of Revenues and Expenses

Since Profit equals Revenues less Expenses, to determine what your profit
is, you must first identify all revenues and expenses for the period under
study.

1. Have you chosen an appropriate period for profit determination? Yes or
No For accounting purposes firms generally use a twelve month period, such
as January 1 to December 31 or July 1 to June 30. The accounting year you
select doesn’t have to be a calendar year (January to December); a seasonal
business, for example, might close its year after the end of the season.
The selection depends upon the nature of your business, your personal
preference, or possible tax considerations.

2. Have you determined your total revenues for the accounting period? In
order to answer this question, consider the following questions:
– What is the amount of gross revenue from sales of your goods or services?
(Gross Sales)
– What is the amount of goods returned by your customers and credited?
(Returns and Rejects)
– What is the amount of discounts given to your customers and employees?
(Discounts)
– What is the amount of net sales from goods and services? (Net Sales =
Gross Sales – [Returns and Rejects + Discounts])
– What is the amount of income from other sources, such as interest on bank
deposits, dividends from securities, rent on property leased to others?
(Non-operating Income)
– What is the amount of total revenue? (Total Revenue = Net Sales + Non-
operating Income)

3. Do you know what your total expenses are?
Expenses are the cost of goods sold and services used in the process of
selling goods or services. Some common expenses for all businesses are:
– Cost of goods sold (Cost of Goods Sold = Beginning Inventory + Purchases
-Ending Inventory)
– Wages and salaries (Don’t forget to include your own–at the actual rate
you’d have to pay someone else to do your job.)
– Rent
– Utilities (electricity, gas, telephone, water, etc.)
– Supplies (office, cleaning, and the like)
– Delivery expenses
– Insurance
– Advertising and promotional costs
– Maintenance and upkeep
– Depreciation (Here you need to make sure your depreciation policies are
realistic and that all depreciable items are included.)
– Taxes and licenses
– Interest
– Bad debts
– Professional assistance (accountant, attorney, etc.)

There are, of course, many other types of expenses, but the point is
that every expense must be recorded and deducted from your revenues before
you know what your profit is. Understanding your expenses is the first
step toward controlling them and increasing your profit.

Financial Ratios

A financial ratio is an expression of the relationship between two items
selected from the income statement or the balance sheet. Ratio analysis
helps you evaluate the weak and strong points in your financial and
managerial performance.

4. Do you know your current ratio?
The current ratio (current assets divided by current debts) is a measure of
the cash or near cash position (liquidity) of the firm. It tells you if
you have enough cash to pay your firm’s current creditors. The higher the
ratio, the more liquid the firm’s position is and, hence, the higher the
credibility of the firm. Cash, receivables, marketable securities, and
inventory are current assets. Naturally, you need to be realistic in
valuing receivables and inventory for a true picture of your liquidity,
since some debts may be uncollectable and some stock obsolete. Current
liabilities are those which must be paid in one year.

5. Do you know your quick ratio?
Quick assets are current assets minus inventory. The quick ratio (or acid-
test ratio) is found by dividing quick assets by current liabilities. The
purpose, again, is to test the firm’s ability to meet its current
obligations. This test doesn’t include inventory to make it a stiffer test
of the company’s liquidity. It tells you if the business could meet its
current obligations with quickly convertible assets should sales revenues
suddenly cease.

6. Do you know your total debt to net ratio?
This ratio (the result of total debt divided by net worth then multiplied
by 100) is a measure of how the company can meet its total obligations from
equity. The lower the ratio, the higher the proportion of equity relative
to debt and the better the firm’s credit rating will be.

7. Do you know your average collection period?
You find this ratio by dividing accounts receivable by daily credit sales.
(Daily credit sales = annual credit sales divided by 360.) This ratio
tells you the length of time it takes the firm to get its cash after making
a sale on credit. The shorter this period the quicker the cash inflow is.
A longer than normal period may mean over due and uncollectable bills. If
you extend credit for a specific period (say, 30 days), this ratio should
be very close to the same number of days. If it’s much longer than the
established period, you may need to alter your credit policies. It’s wise
to develop an aging schedule to gauge the trend of collections and identify
slow payers. Slow collections (without adequate financing charges) hurt
your profit, since you could be doing something much more useful with your
money, such as taking advantage of discounts on your own payables.

8. Do you know your ratio of net sales to total assets?
This ratio (net sales divided by total assets) measures the efficiency with
which you are using your assets. A higher than normal ratio indicates that
the firm is able to generate sales from its assets faster (and better) than
the average concern.

9. Do you know your operating profit to net sales ratio?
This ratio (the result of dividing operating profit by net sales and
multiplying by 100) is moat often used to determine the profit position
relative to sales. A higher than normal ratio indicates that your sales
are good, that your expenses are low, or both. Interest income and
interest expense should not be included in calculating this ratio.

10. Do you know your net profit to total assets ratio?
This ratio (found by multiplying by 100 the result of dividing net profit
by total assets) is often called return on investment or ROI. it focuses
on the profitability of the overall operation of the firm. Thus, it allows
management to measure the effects of its policies on the firm’s
profitability. The ROI is the single most important measure of a firm’s
financial position. You might say it’s the bottom line for the bottom
line.

11. Do you know your net profit to net worth ratio?
This ratio is found by dividing net profit by net worth and multiplying the
result by 100. It provides information on the productivity of the
resources the owners have committed to the firm’s operations.

All ratios measuring profitability can be computed either before or
after taxes, depending on the purpose of the computations. Ratios have
limitations. Since the information used to derive ratios is itself based
on accounting rules and personal judgments, as well as facts, the ratios
cannot be considered absolute indicators of a firm’s financial position.
Ratios are only one means of assessing the performance of the firm and must
be considered in perspective with many other measures. They should be used
as a point of departure for further analysis and not as an end in
themselves.

Mix Of Profit

The profit and ratio analyses of each major item helps you find out the
strengths and weaknesses in your operations. They can help you make profit
increasing decisions such as to drop a service, product line or to place
particular emphasis behind one or another.

Sufficiency Of Profit

Making a profit is only the first step; making enough profit to survive and
grow is really what business is all about. The following questions are
designed to help you measure the adequacy of the profits your firm is
making.

12. Have you compared your profits with your profit goals?

13. Is it possible your goals are too high or too low?

14. Have you compared your present profits (absolute and ratios)
with the profits made in the last one to three years?

15. Have you compared your profits (absolute and ratios) with profits made
by similar firms in your line? A number of organizations publish financial
ratios for various businesses, among them Dun & Bradstreet, Robert Morris
Associates, the Accounting Corporation of America, NCR Corporation, and the
Bank of America. Your own trade association may also publish such studies.
Remember, these published ratios are only averages. You probably want to
be better than average.

Trend of Profit

16. Have you analyzed the direction your profits have taken?
The preceding analyses, with all their merits, report on a firm only at a
single time in the past. It is not possible to use these isolated moments
to indicate the trend of your firm’s performance. To do a trend analysis,
performance indicators (absolute amounts or ratios) should be computed for
several time periods (yearly for several years, for example) and the
results laid out in columns side by side for easy compar-ison. You then
can evaluate your performance, see the direction it’s taking, and make
initial forecasts of where it will go.

17. Does your firm sell more than one major profit or provide several
distinct services? If it does, a separate profit and ratio analysis of each
should be made:
– To show the relative contribution by each profit line or service;
– To show the relative burden of expenses by each product or service;
– To show which items are most profitable, which are less so, and which are
losing money; and
– To show which are slow and fast moving.

Records

Good records are essential. Without them a firm doesn’t know where it’s
been, where it is, or where it’s heading. Keeping records that are
accurate, up-to-date, and easy to use is one of the most important
functions of the owner-manager, his or her staff, and his or her outside
counselors (lawyer, accountant, banker).

Basic Records

18. Do you have a general journal and/or special journals, such as one for
cash receipts and disbursements? A general journal is the basic record of
the firm. Every monetary event in the life of the firm is entered in the
general journal or in one of the special journals.

19. Do you prepare a sales report or analysis?

(a) Do you have sales goals by product, department,and accounting period
(month, quarter, year)?
(b) Are your goals reasonable?
(c) Are you meeting your goals?

If you aren’t meeting your goals, try to list the likely reasons on a sheet
of paper. Such a study might include areas such as general business
climate, competition, pricing, advertising, sales promotion, credit
policies, and the like. Once you’ve identified the apparent causes you can
take steps to increase sales (and profits).

Buying and Inventory System

20. Do you have a buying and inventory system?
The buying and inventory systems are two critical areas of a firm’s
operation that can effect profitability.

21. Do you keep records on the quality, service, price
and promptness of delivery of your sources of supply?

22. Have you analyzed the advantages and disadvantages of:

(a) Buying from several suppliers,
(b) Buying from a minimum number of suppliers?

23. Have you analyzed the advantages and disadvantages of buying through
cooperatives or other such systems?

24. Do you know:

(a) How long it usually takes to receive each order?
(b) How much inventory cushion should you (usually called safety
stock) have to maintain normal sales while waiting for orders to arrive?

25. Have you ever suffered because you were out of stock?

26. Do you know the optimum order you need for each item you need?

27. Do you (or can you) take advantage of quantity discounts for large-
sized single purchases?

28. Do you know your costs of ordering inventory and carrying inventory?
The more frequently you buy (smaller quantities per order), the higher your
average ordering costs will be, (clerical costs, postage, telephone costs,
etc.) and the lower the average carrying costs (storage, loss through
pilferage, obsolescence, etc.). On the other hand, the larger the quantity
per order, the lower the average ordering cost and the higher the carrying
costs. A balance should be struck so that the minimum cost overall for
ordering and carrying inventory can be achieved.

29. Do you keep records of inventory for each item?
These records should be kept current by making entries whenever items are
added to or removed from inventory. Simple records on 3 x 5 or 5 x 7 cards
can be used with each item being listed on a separate card. Proper records
will show for each item: quantity in stock, quantity on order, date of
order, slow or fast seller, and valuations (which are important for taxes
and your own analyses).

Other Financial Records

Creation of financial records is governed by generally accepted accounting
principles.

30. Do you have an accounts payable ledger?
This ledger will show what, whom, and why you owe. Such records should
help you make your payments on schedule. Any expense not paid on time
could adversely affect your credit, but even more importantly such records
should help you take advantage of discounts which can help boost your
profits.

31. Do you have an accounts receivable ledger?
This ledger will show who owes money to your firm. It shows how much is
owed, how long it has been outstanding, and why the money is owed. Overdue
accounts could indicate that your credit granting policy needs to be
reviewed and that you may not be getting the cash into the firm quickly
enough to pay your own bills at the optimum time.

32. Do you have a cash receipts journal?
This journal records the cash received by source, day and amount.

33. Do you have a cash payments journal?
This journal will be similar to the cash receipts journal but will show
cash paid out instead of cash received. The two cash journals can be
combined, if convenient.

34. Do you prepare an income (profit and loss or P&L) statement and a
balance sheet? These are statements about the condition of your firm at a
specific time and show the income, expenses, assets, and liabilities of the
firm. They are absolutely essential.

35. Do you prepare a budget?
You could think of a budget as a “record in advance,” projecting “future”
inflows and outflows for your business. A budget is usually prepared for
a single year, generally to correspond with the accounting year. It is
then, however, broken down into quarterly and monthly projections. There
are different kinds of budgets: cash, production, sales, etc. A cash
budget, for example, shows the estimate of sales and expenses for a
particular period of time. The cash budget forces the firm to think ahead
by estimating its income and expenses. Once reasonable projections are
made for every important product line or department, the owner-manager sets
sales and expense targets for employees. You must plan to assure a profit.
And you must prepare a budget to plan.

A Guide to Record Retention

Organizing, filing and retaining records can be a burden for the small
business owner. The following checklist is a guide to record retention.
This guide provides a timetable for transferring records from active files
to inactive storage and ultimate destruction.

To maintain up-to-date files, develop a retention schedule that
specifies when certain records are to be destroyed. Be sure your record
retention program contains storage and disposal instructions for multiple
copies, including non-paper media such as film, microfilm, computer disks,
carbon paper and carbon ribbons.

This checklist takes into account the more than 900 federal and state
regulations, State statutes on tax and payroll records vary widely,
however. Check with each tax commissioner in the states you conduct
business for further details. The normal statute of limitations on federal
returns is three years. Under some circumstances it is six years.

The Office of the Federal Register, National Archives and Records
Administration has produced the Guide to Record Retention Requirements in
the Code of Federal Regulations. To obtain a copy, contact the
Superintendent of Documents, U.S. Government Printing Office, Washington,
D.C. 20402-9325.

Classification of Accounts (Sample)

Avoid using too many accounts. Break down sales into enough categories to
show a clear picture of the business. Use different expense accounts
covering frequent or substantial expenditures but avoid minute
distinctions, which will tend to confuse rather than clarify. Use
Miscellaneous Expense for small, unrelated expense items.

Assets
100-Cash in Banks
101-Petty Cash Fund
102-Accounts Receivable
103-Inventory
105-Materials and Supplies
107-Prepaid Expenses
108-Deposits

120-Land
121-Buildings
122-Accumulated Depreciation — Buildings (Credit)
123-Tools and Equipment
124-Accumulated Depreciation — Tools and Equipment (Credit)
125-Automotive Equipment
126-Accumulated Depreciation — Automotive Equipment (Credit)
127-Furniture and Fixtures
128-Accumulated Depreciation — Furniture and Fixtures (Credit)
130-Organization Expenses (to be amortized)

Liabilities
200-Accounts Payable
201-Notes Payable
205-Sales Taxes-Payable
206-FICA Taxes-Payable
207-Federal Withholding Taxes
208-State Withholding Taxes
209-Unemployment Taxes
220-Long-Term Debt-Mortgages Payable
221-Long-Term Debt-SBA Loan
225-Miscellaneous Accruals

Capital Accounts
For Corporations
300-Common Capital Stock
301-Preferred Capital Stock

For Proprietorships
300-Proprietorship Account
301-Proprietor’s Withdrawals

305-Retained Earnings

Sales (Revenue) Accounts (Credits)
400-Retail Sales
401-Wholesale Sales
402-Sales-Service
405-Miscellaneous Income

Expenses (Debit)
500-Salaries and Wages
501-Contract Labor
502-Payroll Taxes
503-Utilities
504-Telephone
505-Rent
506-Office Supplies
507-Postage
508-Maintenance Expense
509-Insurance
510-Interest
511-Depreciation
512-Travel Expense
513-Entertainment
514-Advertising
515-Dues and Contributions
520-Miscellaneous Expenses

RECORDS RETENTION SCHEDULE

Accident reports/claims (settled cases) 7 years
Accounts payable ledgers and schedules 7 years
Accounts receivable ledgers and schedules 7 years
Audit reports Permanently
Bank reconciliations 2 years
Bank statements 3 years
Capital stock and bond records: ledgers, transfer registers, stubs showing
issues, record of interest coupons, options, etc. Permanently
Cash books Permanently
Charts of accounts Permanently
Checks (canceled-see exception below) 7 years
Checks (canceled) for important payments, i.e. taxes, purchases of
property, special contracts, etc. Checks should be filed with the papers
pertaining to the underlying transaction Permanently
Contracts, mortgages, notes, and leases
(expired) 7 years
(still in effect) Permanently
Correspondence (general) 2 years
Correspondence (legal and important matters only) Permanently
Correspondence (routine) with customers and/or vendors 2 years
Deeds, mortgages, and bills of sale Permanently
Depreciation schedules Permanently
Duplicate deposit slips 2 years
Employment applications 3 years
Expense analyses/expense distribution schedules 7 years
Financial statements (year-end, other optional) Permanently
Garnishments 7 years
General/private ledgers, year-end trial balance Permanently
Insurance policies (expired) 3 years
Insurance records, current accident reports, claims, policies, etc.
Permanently
Internal audit reports (longer retention periods may be desirable) 3 years
Internal reports (miscellaneous) 3 years
Inventories of products, materials, and supplies 7 years
Invoices (to customers, from vendors) 7 years
Journals Permanently
Magnetic tape and tab cards 1 year
Minute books of directors, stockholders, bylaws, and charter Permanently
Notes receivable ledgers and schedules 7 years
Option records (expired) 7 years
Patents and related papers Permanently
Payroll records and summaries 7 years
Personnel files (terminated) 7 years
Petty cash vouchers 3 years
Physical inventory tags 3 years
Plant cost ledgers 7 years
Property appraisals by outside appraisers Permanently
Property records, including costs, depreciation reserves, year-end trial
balances, depreciation schedules, blueprints, and plans Permanently
Purchase orders (except purchasing department copy) 1 year
Purchase orders (purchasing department copy) 7 years
Receiving sheets 1 year
Retirement and pension records Permanently
Requisitions 1 year
Sales commission reports 3 years
Sales records 7 years
Scrap and salvage records (inventories, sales, etc.) 7 years
Stenographers’ notebooks 1 year
Stock and bond certificates (canceled) 7 years
Stockroom withdrawal forms 1 year
Subsidiary ledgers 7 years
Tax returns and worksheets, revenue agents’ reports, and other documents
relating to determination of income tax liability Permanently
Time books/cards 7 years
Trademark registrations and copyrights Permanently
Training manuals Permanently
Union agreements Permanently
Voucher register and schedules 7 years
Vouchers for payments to vendors, employees, etc. (includes allowances and
reimbursements of employees, officers etc., for travel and entertainment
expenses) 7 years
Withholding tax statements 7 years

QUIZ FOR SMALL BUSINESS SUCCESS

We conducted a survey of more than 100 California business owners. Their
comments about small business success guided us in creating the following
quiz. Choose the answer you think is best for each question. Use the
sheet at the end to determine your total point score and then see where you
stand in the Success Quotient Ratings. There are no “wrong” answers.
Each answer listed represents a segment of the responses we had to
questions in our survey–and the final rankings correspond with the
importance successful owners gave to different answers.

Questions 1 – 5

1. What is the key to business success:

a. business knowledge
b. market awareness
c. hands on management
d. sufficient capital
e. hard work

2. If a relative ever asks me for advice about starting a business I will
tell them to:

a. work for someone else in the field first
b. write a business plan
c. study marketing
d. give up the idea
e. learn about budgeting

3. Which is the largest potential trouble spot:

a. too much growth
b. too little growth
c. too fast growth
d. too slow growth
e. sporadic growth

4. I trust: (select as many as apply)

a. nobody
b. myself
c. my partner
d. a few key employees
e. my customers

5. I am unhappy when my employees are:

a. late
b. unhappy
c. abrupt with customers
d. resigning
e. less dedicated than me

Questions 6 – 10

6. My customers are: (select as many as apply)

a. always right
b. too fussy
c. demanding
d. worth listening to
e. dumb

7. Rank these in order of importance for small-business marketing success:

a. word-of-mouth
b. advertising
c. signs
d. location
e. community events

8. When it comes to money I am:

a. careful
b. too carefree
c. emotional
d. shrewd
e. hardnosed

9. Financially my firm:

a. has trouble with cash-flow
b. has a good line of credit
c. is financed totally by receipt–no credit
d. is making better profits this year than last
e. knows exactly where it is all the time

10. In hiring people:

a. I take far too long
b. I look for the cheapest person
c. personality is more important than experience
d. I look for the best person, and am willing to pay
e. I only hire at the trainee level

Questions 11 – 15

11. With my employees:
a. I treat everybody the same

b. I try to talk privately to everybody once a week
c. To whatever extent possible I tailor assignments to personalities
d. I encourage them to talk to me about the business
e. I try to work alongside them whenever possible

12. The real key to business success is:

a. hard work and perseverance
b. fine products and service
c. advertising
d. knowing the fundamentals of business
e. employees

13. Competition is:

a. dumb
b. smart
c. cunning
d. everywhere
e. a constant threat

14. The best competitive advantage is:

a. experience
b. understanding what the market wants
c. confidence
d. conducting a business ethically
e. a detailed plan

15. I keep:

a. careful financial records
b. in touch with my customers
c. in touch with my employees
d. trying new techniques
e. wanting to retire

Questions 16 – 20

16. My dream is:

a. to grow the business until someone else can run it
b. to work until I drop
c. to give up these headaches and have more fun at work
d. to try another business
e. to take a vacation

17. I think business plans are:

a. for the birds
b. nice but not necessary
c. something I can do with my accountant
d. useful and informative
e. essential–wouldn’t do business without them

18. What makes a terrific entrepreneur?

a. creativity
b. discipline
c. consumer orientation
d. technical proficiency
e. flexibility

19. What does a business need most?

a. money
b. market research
c. help
d. time
e. a solid business plan

20. What is essential to marketing?

a. “a sixth sense”
b. market research
c. customer awareness
d. experience
e. testing

Quiz Results

Find each question in the scoring box. Write the score for the answer you
selected in the margin next to every question, (If you didn’t select the
highest scoring choice, take a look at that one and try and figure out why
it scored so well.) When you’ve worked through the entire quiz, go back
and add up your points. Then compare your total with the Success Quotient
table to see how you compare with some of California’s most successful
business people.

SCOREBOX

Question Points
1. a = 5, b = 4, c = 3, d = 2, e = 1
2. a = 5, e = 4, b = 3, c = 2, d = 1
3. c = 5, a = 4, b = 3, d = 2, e = 1
4. b = 5, e = 4, d = 3, c = 2, a = 1
5. b = 5, d = 4, c = 3, a = 2, e = 1
6. d = 5, c = 4, a = 3, b = 2, e = 1
7. a = 5, d = 4, c = 3, b = 2, e = 1
8. a = 5, d = 4, e = 3, b = 2, c = 1
9. e = 5, d = 4, b = 3, a = 2, c = 1
10. d = 5, a = 4, c = 3, b = 2, e = 1
11. c = 5, d = 4, e = 3, b = 2, a = 1
12. e = 5, d = 4, a = 3, b = 2, c = 1
13. e = 5, d = 4, c = 3, b = 2, a = 1
14. a = 5, b = 4, c = 3, e = 2, d = 1
15. b = 5, a = 4, c = 3, d = 2, e = 1
16. e = 5, a = 4, b = 3, c = 2, d = 1
17. e = 5, d = 4, c = 3, b = 2, a = 1
18. c = 5, a = 4, b = 3, e = 2, d = 1
19. b = 5, e = 4, a = 3, d = 2, c = 1
20. c = 5, b = 4, e = 3, d = 2, a = 1

Score Your Business Success Quotient

75-100 You are a successful entrepreneur whose operations reflect tried
and true business practices.

50-74 Your business is probably headed for long-term success. But
success will come sooner if you sharpen your awareness of solid management
skills and marketing techniques.

25-49 While you may be enjoying customer loyalty and repeat business,
never forget that savvy competition is always looking for ways to take the
lead. Don’t let comfort lull you into false security. Be creatively
assertive!

0-24 You may well have the right product. But to sell it successfully, you
need to increase your market awareness and improve your operating
philosophy. Reach out for practical classes, seminars and advice from
people who have good business track records. And – keep persevering. It’s
the key ingredient to winning!

INTERNATIONAL TRADE: A GLOBAL OPPORTUNITY

The concept of doing business overseas can be intimidating to owners of
small businesses. Very often they believe such an undertaking is beyond
their reach; one that is open only to larger companies. For many, the
images of McDonald’s Golden Arches piercing the Beijing skyline or of Coca
Cola dispensing machines tucked away in remote African villages symbolize
the magnitude of resources necessary to do business outside the domestic
U.S. market.

But according to recent statistics, that is a misconception, and there
is a vast market out there waiting to be tapped. For example, 95 percent
of the world’s population and two-thirds of its total purchasing power are
located outside the United States. World trade has grown at more than
twice the rate of the U.S. economy since 1960. Further, according to the
U.S. Department of Commerce, 60 present of American firms now exporting
successfully have fewer than 100 employees; in other words, small
businesses.

The returns are obvious. Doing business overseas allows you to
broaden your marketing base, which means greater sales growth; increase
production while reducing per unit production costs; extend the life of
your product; and bottom line, increase your profits.

If up until now international trade has seemed off limits, it is time
for a change in attitude. Because if growth and expansion are your goals,
you need to adopt the views of companies like Coca Cola and McDonald’s and
think of your market as global rather than merely domestic. To help you do
that, we have written this article, drawing on the expertise of many export
specialists. The article was designed to answer some of your questions and
to address many of the considerations involved in successful competition in
overseas markets.

Do Your Homework

Once you have decided international trade is the way to go, the hard work
begins. Just like when you started your business, homework and hard work
will be the keys to your success. The first step in the process is
research, and in most cases, more detailed research than you had imagined.

One expert advises that market research should begin on a macro-
economic basis. “By this, I mean investigating such items as population,
gross national product, climate, trade statistics, political structure and
stability, economic climate, and so on. Such items will allow you to
immediately exclude some countries and save you time.”

After you have a feel for a country’s viability, you can launch into
more targeted market research. It is critical that you identify the
markets with the most potential for your products or services; identify
competitors that currently serve those markets; decide what product or
service modifications, if any, are needed; determine the appropriate market
entry strategy for your chosen market; and decide the most efficient way to
sustain profitable operations there.

As one expert notes, “Foreign trade does not require unique talents.
It calls for evaluating the same basic considerations and risks that you
would prudently apply to your domestic business. The difference is that
you will have to do more research; because of differences in culture,
language, consumer appeal and individual purchasing power, many facets of
the foreign market are far less familiar.”

Just as markets are different, so are the needs of your potential
customers. Variations in climate, physical environment, personal income
and spending habits as well as national traditions and religious beliefs
influence the types of goods and services customers need.

You must also analyze the competition, including the strengths and
weaknesses of your major competitors; their market share; the reasons for
their success; and the methods they use to market, package and distribute
their product or service. You should also try to ascertain whether there
are any market segments that your competition has overlooked. You may find
a relatively untapped market where you can get off to a good start.

Research The Marketing Environment

The next step in the research process is to thoroughly investigate the
marketing environment. If you plan to export merchandise, you need to find
out how products are distributed; the types and availability of
transportation; freight costs; packaging and storage facilities; and the
availability of media and personnel for advertising, sales promotion,
publicity and personal selling. Once you have this information, you can
decide how to market and distribute your product.

Don’t forget to check on tariffs, quotas and non-tariff barriers and
possible government imposed trade restrictions. You should also be
familiar with a country’s legal system and regulatory framework including
contract law, trademark law, patent law, taxation, and corporate and
general commercial law; its currency restrictions; and restrictions on
foreign investment and operations.

And while you are researching the market potential of various foreign
countries, you should also evaluate your company’s potential for expanding
into those markets. This evaluation should include analyses of your
potential product or service, your domestic opportunities versus your
prospective foreign ones and your operation’s abilities to handle problems
that arise in managing an international business.

Experts recommend that in evaluating your product’s compatibility with
a particular foreign market, you should consider:

– The country’s product standards, such as quality, safety and technical;
– Your product’s technical specifications and codes ensure compatibility
with locally manufactured products;
– Product life cycle–understanding where your product fits in that cycle;
a product that has reached maturation level in the United States may find
new life in a foreign market;
– Price–the cost of doing business internationally may cause you to raise
your price in order to realize a profit (this is true of either product or
service exporting); and
– Alternative uses–foreign needs may be quite different than domestic and
may require you to modify your product.

Before you jump head first into overseas markets, you need to fully
investigate the product’s potential uses in the country and assess such
factors as competing and compatible lines of products, brand loyalties,
customs, packaging and marketing techniques, all of which influence
customer preferences.

Once you have looked closely at prospective markets, it is time to
take a good look at your internal operations. To achieve success in the
international marketplace, experts say, you must be willing to commit
yourself to overseas sales for at least three to five years and ideally for
the long run. Just like American customers, foreign customers expect
consistent and continuous products and service. And the products and
services you provide your international customers should be of comparable
quality to those you offer your domestic customers.

Another internal consideration is staffing. In the past, American
companies preferred sending their own employees overseas to handle
operations. That practice is changing as owners of American businesses
increasingly realize the important contribution local nationals can make.
They know the culture, traditions and nuances of their market and may also
have advantageous business connections.

Exporting Versus Foreign Production

The majority of small businesses that trade internationally prefer to
export, at least initially. It involves less risk, requires less
investment and presents minimal expo-sure to the political and economic
environment. It also offers greater flexibility because you can choose
your level of involvement.

The pluses of foreign operation, on the other hand, include lower
production costs such as materials and labor; the elimination of barriers
such as tariffs and import quotas; and incentives such as tax credits and
exemptions, financial assistance and government protection.

Methods Of Export Distribution

Taking into consideration the advantages of both approaches, most small
businesses still find it simpler to export. Once you have decided which
way you want to go, the next decision is method of distribution. Two
channels are available; the indirect and the direct.

Under the indirect method, you hire a foreign sales representative who
acts as your intermediary. This company or individual is responsible for
doing the actual exporting, thus you have no contact with the overseas
buyer. Plus, you usually assume no responsibility for transporting the
product to its destined market.

The direct method, however, requires you to arrange your own overseas
sales, which means you are also responsible for shipping the product.

When using the indirect method, you have a choice of channels. Export
merchants/brokers are usually based domestically and specialize in a
particular type of product. Because they own the merchandise, they usually
control pricing and marketing policy. They also assume the credit risks.

Export management companies (EMCs) serve as the export department for
several manufacturers of non-competing products, offering services that
would not be economical for individual companies to handle on their own.

Their services include researching foreign markets, choosing overseas
distributors, exhibiting your products at trade shows, handling the routine
shipping details, preparing advertising and sales materials and advising on
overseas patent and trademark requirements.

In choosing an EMC, you should consider the number of clients it
serves and sales volume, the type of clients, the reputation and quality of
its management, its financial status and its coverage of world markets.

Trading companies combine some of the qualities of both
merchants/brokers and EMCs. Trading companies purchase merchandise
outright, handle goods on consignment or act as commission agents for
buyers. Trading companies generally pay cash for their purchases and
extend credit to their customers.

You can choose from foreign trading companies such as European, Korean
or Japanese or, as a result of the 1982 Export Trading Company Act, from
the newly developed American trading companies established by some of the
major U.S. banks and corporations.

Direct selling to overseas markets is more difficult and involves
either direct mail, where you send catalogs, brochures or other collateral
materials to foreign retailers; or selling direct to the customer via
advertising and promotion in magazines with overseas circulation, local
publications and other media (billboards, for example).

Or there’s another route. Many exporters prefer to sell their
merchandise abroad using foreign sales representatives or distributors.
These individuals usually work on commission, assume no risk or
responsibility and are under con-tract for a certain period of time. The
foreign distributor purchases goods at a significant discount, acquires
title and then markets the products. The sales representative, on the
other hand, does not purchase goods but places orders.

Working with sales distributors or representatives has distinct
advantages. They can often provide the initial contacts you need in a
foreign country; they have already established relationships with buyers of
related items; and they have knowledge of the local market, which is
important in any marketing effort.

Test The Market

You have chosen your product, your market and your method of distribution.
It is time to do some test marketing. For no matter how much you have
researched your potential market, you still can’t be sure of your product’s
reception abroad. And while there is no substitute for actually bringing
your product to market, there are various testing methods that will allow
you to, if necessary, modify your product, its packaging or your prices
before committing yourself to a full scale program.

The first of these methods–trade missions–is organized by the U.S.
Department of Commerce. There are three types of these events:

– Specialized trade missions, planned and led by the department and which
bring you into contact with potential buyers, agents and distributors;
– Seminar missions, which feature one- or two-day technical presentations
by a team of U.S. industry representatives and are followed by appointments
and sales activities similar to those of the specialized trade missions;
and
– Industry-organized, government-approved trade missions, which are
organized by trade associations, chambers of commerce and other groups with
the assistance of the U.S. Department of Commerce.

Another method for test marketing is trade fairs and exhibitions.
Hundreds of major general and specialized international trade fairs and
exhibitions are held each year. Most of them are open to any firm in the
particular industry. U.S. firms that participate in these events benefit
from a full range of promotional and display assistance. In return, they
pay a specified sum to offset the cost of the services they receive.

To find out about the dates and locations of the various trade
missions and trade fairs and exhibitions, ask the U.S. Department of
Commerce to send you a copy of its latest “Export Promotion Calendar.” The
calendar lists department-supported events in the U.S. and overseas as well
as the officer to contact for further information.

The final testing method is also the least expensive: catalog shows
and video/catalog exhibitions. Participation in a catalog show does not
require that you have a company representative present. Instead, you send
your product catalogs, sales brochures and any other sales materials, which
are displayed at exhibitions held at U.S. embassies and consulates.

At video/catalog exhibitions, visitors can watch video tapes of
products in use. These exhibitions are an excellent method for promoting
machinery, equipment and other products that are expensive to ship.

Pricing And Promotion

Now that you have information upon which to base these decisions, it is
time to establish product or service pricing and develop promotion plans.
When establishing a price overseas, you need to consider most of the
same factors that you do for the domestic market: the competition; costs
including production, packaging, transportation and handling, promotion and
selling expenses; the amount of demand for your product or service and its
relationship to price; and the maximum price the market is willing to pay.

There are three common methods of pricing exports:

– Domestic pricing, using the product or service’s domestic price as a base
and adding export costs including packaging, shipping and insurance;
– Incremental cost pricing, determining a basic unit cost that takes into
account the costs of producing and selling products for export, and then
adding a markup to arrive at the desired profit margin; and
– Cost modification, reducing the quality of an item by using cheaper
materials, simplifying the product or modifying your marketing program.

The rules of pricing are not hard and fast. When making pricing
decisions, you should also consider your company’s objectives, the price
sensitivity of your market and the uniqueness of your product.

Once you have determined a price for your product or service, the next
step is to promote it. Critical to the success of your advertising and
publicity is local assistance. Because the needs and buying habits of
foreign consumers are often very different from those of U.S. buyers,
individuals familiar with the local culture should aid in the design of
your promotion activities.

As in the United States, advertising is a major medium of
communication around the world. You must decide if advertising is
important to the success of your product or service. Chances are good that
if you need it in the domestic market, you will need it even more overseas
where customers are unfamiliar with you and your product or service.

You will also need to decide if you can afford advertising and if your
profit margin can support an effective campaign. An overseas advertising
agency can help you make this decision. It can also help you plan the
campaign, because the available media may differ significantly from those
in the United States. For example, in some countries television and radio
do not carry advertising. In addition, advertising techniques and copy
used in domestic markets may not be successful because of cultural
differences or problems with translating the message from English into a
foreign language. This also may be true of the name of your product.
Before you decide to use the same name for your product overseas as you do
in the domestic market, it is wise to make sure there are no translation
problems.

When investigating advertising alternatives, you also may want to
consider outdoor advertising, such as billboards, posters, streetcar and
bus signs, which tend to reach a wide audience.

Product packaging is another important promotional medium. Like in
the United States, it must attract the buyer’s attention, identify the
product and provide a reason to buy. However, packaging designed for the
domestic market often isn’t appropriate overseas. In addition, when
designing packaging, you should also consider protection for your product
against breakage and spoilage while in transport.

Transport And Distribution

According to the U.S. Department of Commerce, American companies lose more
business in the movement of products overseas than in any other phase of
the export process. Overseas transport involves modes of transportation,
packaging requirements and documentation, all of which are quite different
than those required for domestic shipping.

The methods of moving goods to foreign markets fall into three
categories: sea, air and land transportation. When choosing a mode of
shipping, you should consider product characteristics such as size and
value, destination, required speed of delivery and cost. You should also
take into account compatibility with the other elements of your
distribution system such as packaging, warehousing, inventory control and
handling. The largest tonnage of goods shipped to and from the United
States travels by water. You can choose from three types of ocean
transport:

– Conference lines, associations of carriers that operate in a specific
area (called a “trade”) and which have established common rates and
shipping conditions;
– Independent lines, which operate and quote rates individually and accept
bookings from all shippers depending on space availability; and
– tramp vessels, which operate on charters wherever they can get cargo and
usually carry only bulk cargo.

No matter which carrier you use, your cargo must be insured. Ocean
marine cargo insurance is arranged by either the buyer or seller, according
to the terms of sale, and is a one-time policy insuring a specific
shipment.

Increasingly, air transport is the mode of choice, especially by
manufacturers of valuable high technology products, exporters of perishable
foods and equipment manufacturers replacing broken machinery or parts. The
growth in the use of air transport has been spurred by innovations in the
air cargo industry, which have resulted in more efficient loading and
handling of goods.

For obvious reasons, the uses of land transportation are more limited
in the export distribution process. Companies sending merchandise to
foreign markets use land transportation to move goods to the nearest port
of departure (except for goods bound for Canada, Mexico and Central
America) or as one leg of a sea/land or air/land combination.

Whatever method of transport you use, you must make sure your products
are well packaged to protect them from the often hazardous conditions of
overseas shipping. When designing your packaging, you should consider
breakage, weight and volume, moisture and other climatic conditions, theft
and customer requirements. For advice on packing, talk to your carrier,
marine insurance company or freight forwarder or talk to export packers who
are well informed about all special packing and marking requirements of a
particular country.

The final consideration in the transport and distribution process is
documentation. Without packing lists, bills of lading, export declarations
and export licenses, your shipments will not be permitted to pass through
customs, loaded onto a carrier and transported to a foreign destination.

In addition, many foreign countries require certificates of origin,
which indicate where the goods were produced. These facilitate customs
clearance and are also used to establish preferential rates for import
duties under most favored nation agreements.

Financing Your Overseas Operations

Just like domestic expansion; expansion into international markets requires
capital. You need funds for inventory, receivables and promotional
activities. Plus, if you intend to open foreign branches, you will also
need capital for facilities and related operating costs.

Most owners of small business expanding overseas are unable to
generate the additional funds themselves and must turn to outside
financing. Your first stop should be your own bank. If it is a large one,
it will have its own international department or loan officer responsible
for handling foreign transactions. Banks not involved in foreign trade
usually have correspondent relationships with banks that are.

When choosing a bank, you should ask what international services it
provides. Services such as short-term and medium-term export financing,
foreign credit and business information, commercial letters of credit,
collection or discount export drafts, and purchase and sale of foreign
exchange are very valuable when doing business overseas. In addition, many
banks conduct market surveys and prepare trade reports and lists of
prospective foreign distributors. They may also serve as advisers to
companies contemplating business overseas.

If you are unable to find a bank that meets your needs, the federal
government provides financial assistance through a number of agencies:

The Export-Import Bank of the United States (Eximbank), whose primary
purpose is to facilitate the export of American products and services
through its various financing programs. Those programs include direct
loans, guarantees and discount loans. Eximbank also arranges financing for
the overseas buyer and, consequently, underwrites the transaction.

The U.S. Small Business Administration Export Loan Guarantee Program,
which guarantees up to $500,000 of commercial financing to companies that
want to establish or expand their export operations. To qualify, you must
meet the SBA criteria for a small business. Qualification requirements
vary according to industry. (See your local SBA office for details.) In
addition, the program also offers an Export Revolving Line of Credit, which
can be used to finance pre-export production; purchase labor, supplies,
materials and inventory; and fund marketing development.

The Overseas Private Investment Corporation (OPIC), which provides
medium- to long-range financing for U.S. business ventures in some 100
developing countries through its direct loan and guaranteed loans programs.
OPIC will make direct loans of $100,000 to $400,000 for projects sponsored
by or involving U.S. small businesses (those having annual revenues of less
than $22 million or net worth of less than $4 million). OPIC will also
guarantee loans from U.S. financial institutions for projects with
significant U.S. involvement.

The Private Export funding Corporation (PEFCO), which is a private
corporation owned by a group of commercial banks that works with Eximbank
in using private capital to finance U.S. exports. Their loans are made to
foreign borrowers who need medium- to long-term financing to purchase U.S.
goods and services.

Develop An Export Plan

Once you have all the facts and figures before you, it’s time to tie all
the details you have considered into one neat package: an export strategy
plan. Just as the development of a business plan is critical to the
success of your business domestically, so is an export plan important to
your efforts overseas.

An export plan provides a detailed blueprint of your market and
product, your goals and objectives and your strategy for achieving them.
It should include specific short-, medium- and long-range objectives;
timeframes for implementation; and mileposts for measuring success.

The basic elements of your plan do not have to be elaborate or
detailed. However, your plan should outline:

– The country or countries in which you plan to do business;
– Your strategy for reaching these markets;
– Specific operational steps and scheduled implementation;
– A budget based on the amount of money you will commit to your overseas
operation.

Your export plan should closely resemble that of your business plan.
It should include an executive summary, an export policy commitment
statement, background analysis, market and product selection, marketing
objectives and strategy, budget, controls and procedures, personnel and
organization, and methods of evaluation.

Your export plan should be a management tool, with the objectives in
the plan used to measure results and success. Once you become experienced
and gain new information, you can modify the plan and make it more
specific.

Conclusion

It used to be that doing business overseas was an option available only to
major corporations. But as the marketplace becomes increasingly global and
through an increase in federal assistance programs the U.S. government
works hard to over-come this country’s trade imbalance, the international
opportunities for small business to grow. The export of goods and services
is no longer the complicated undertaking it used to be. And there are
countless organizations and other resources to which you can turn for
information and help. However, like any other business endeavor, it
requires hard work, the ability to plan and commitment. Because if you are
willing to give it your all, your success can be boundless.

The 12 Most Common Mistakes Made By New Exporters

1. Failure to obtain qualified export counseling and to develop a master
international strategy and marketing plan before starting an export
business.

2. Insufficient commitment by top management to overcome the initial
difficulties and financial requirements of exporting.

3. Insufficient care in selecting overseas sales representatives or
distributors.

4. Chasing orders from around the world rather than concentrating on one or
two geographical areas and establishing a basis for profitable operations
and orderly growth.

5. Neglecting export business when the domestic market booms.

6. Failure to treat international distributors and customers on an equal
basis with domestic counterparts.

7. Assuming that a given market technique and product will automatically be
successful in all countries.

8. Unwillingness to modify products to meet regulations or cultural
preferences of other countries.

9. Failure to print service, sale and warranty messages in locally
understood languages.

10. Failure to consider use of an export management company when firm
cannot afford its own export department or has tried one unsuccessfully.

11. Failure to consider licensing or joint venture agreements when import
restrictions, insufficient resources or a limited product line cause
companies to dismiss international marketing as unfeasible.

12. Failure to provide readily available servicing for the product.

Market Research And Assessment Outline

Very often, American firms fail to realize the importance of market
research. Before you decide whether your entrance into the international
marketplace is feasible and desirable, it is critical that you assess a
market’s potential and profitability. Following is an outline that you can
use for making that assessment.

I. Which countries (or regions) offer the best prospective markets
according to the company’s goals? Which offer the highest profits and
largest business potential?

II. What is the political government in each prospective market?

A. System of government;
B. Government stability and continuity of policies;
C. Internal and external (foreign) opposition;
D. Present and historical attitudes toward business and business relation
with the United States; E. National economic and development priorities and
goals.

III. Demographic/Economic Conditions

A. Population size, growth, distribution;
B. Literacy rate and education level, availability of labor, indigenous
management potential;
C. National income, per capita income and distribution;
D. Economic growth, gross national product (GNP), industrial sector growth;
E. Role of foreign trade in the economy, percentage of GNP, balance of
payments, debt service ratio on foreign loans;
F. Currency situation, inflation rate, conversion and currency controls in
the local economy and internationally, credit regulations;
G. Government/business cooperation and priorities.

IV. Development Level and Infrastructure

A. Natural resources;
B. Industrial and technological development;
C. Physical distribution and communication network;
D. Similarities and differences with the U.S. market.

V. Regulatory Market Entry Considerations

A. Limitations on trade: tariff levels, quotas and other non-tariff
barriers to trade such as restrictions on payments and import licenses;
B. Documentation and import regulations of the importing country;
C. U.S. documentation and export regulations;
D. Foreign standards, accepted industrial practices, measuring systems and
certification procedures.

VI. Legal Considerations

A. Code of laws, civil or common law system;
B. Investment and licensing laws;
C. Taxation and capital repatriation laws;
D. Employment laws;
E. Patent, trademark, antitrust, advertising laws;
F. Relevant treaties (signed and enforced) by foreign nations;
G. Reality of the law vs. letter of the law.

VII. Government Assistance

A. U.S. government assistance;
B. Foreign government assistance and attitudes toward the specific
technology being transferred;
C. Bilateral relations, programs and treaties between the United States and
the importing nation;
D. Development incentives, tax “holidays” for foreign investors.

VIII. Competition

A. Host country;
B. Third country.

The Export Decision: Management Issues

When trying to decide whether or not exporting is for you, you need to ask
yourself some questions about the structure of your organization, your
production capacity and your financial capacity. Following are some of the
issues you should consider.

Management And Personnel

Who will be responsible for the export department’s organization and staff?
How much senior management time
Should be allocated?
Could be allocated?
What are management’s expectations for the effort ?
What organizational structure is required to ensure that export sales are
adequately serviced? (Note political implications, if any.)
Who will follow through after the planning is accomplished?

Production Capacity

How is the present capacity being used?
Will filling export orders hurt domestic sales?
What will be the cost of additional production?
Are there fluctuations in the annual workload? When? Why?
What minimum order quantity is required?
What would be required to design and package products specifically for
export?

Financial Capacity

What amount of capital can be tied up in exports?
What level of export department operating costs can be supported?
How are the initial expenses of export efforts to be allocated?
What other new development plans are in the works that may compete with
export plans?
By what date must an export effort pay for itself?

Plan Your Export Strategy

Following is a simple outline you can use in developing your export
strategy plan.

I. Executive Summary (one or two pages maximum)

II. Introduction: Why your company should export

III. An export policy commitment statement

IV. Situation/Background Analysis

A. Product;
B. Operations;
C. Personnel and export organization;
D. Resources of the firm;
E. Industry structure, competition and demand.

V. Marketing Component

A. Identification, evaluation and selection of target markets;
B. Product selection and pricing;
C. Distribution method;
D. Terms and conditions;
E. Internal organization and procedures;
F. Sales goals — profit/loss forecasts.

VI. Action Steps

A. Countries where firm has special advantages (for example, family ties);
B. Primary target countries;
C. Secondary target countries;
D. Indirect marketing efforts.

VII. Export Budget

A. Financial statements — projected sales and expenses
B. Long-term financial forecasts;
C. Export taxes.

VIII. Implementation Schedule

A. Follow-up;
B. Periodic Operational/management review (measuring results against plan).

IX. Addenda — (Background data on target countries and market)

A. Basic market statistics: historical and projected;
B. Background facts;
C. Competitive environment.

About author

SMB Reviews
SMB Reviews 473 posts

SMBReviews is committed to providing small and mid-sized business owners with the information and resources they need to select the best service or product for their company.

You might also like

Articles

The Value in a Mentor, And How To Find One

For most people, their first mentor comes in the form of a parent, caregiver or teacher. While these early mentors are often remembered with fondness and gratitude, this also often

Articles

What Fees Are Required With A Merchant Account?

Opening a merchant account can prove to be a great turnaround for your business. This is so because you will be able to welcome more customers who would like to

Articles

Tame Your Telephone

By Billee Pike Your telephone can be one of your most valuable business tools. Or it can become a time management handicap ó incessantly de manding your attention and be

0 Comments

No Comments Yet!

You can be first to comment this post!