Flashcards: Starting a business

not choosing the right business from the very beginning.

Guts

Brains

Capital

"Guts" mean you must have an entrepreneurial instinct, which includes an overwhelming desire to have your own business. You must have the guts and dedication to be completely devoted to your goal. Incidentally, devotion to your goal is much more likely if you have a love for your intended business. Life is too short to be starting a small business that doesn't give you satisfaction and joy. And, through good times and bad times, you will stick with something you love.

Every business needs money of your own plus sufficient cash to maintain a positive cash flow for at least a year. In a future session, operating entrepreneurs will learn how to forecast future cash requirements through cash flow control. Many businesses can be started on a very small scale with a small investment. Then, as the business grows and you gain experience, cash flow from your business can be used for growth. In some cases, you don't need starting capital to hire other people because you might start by doing everything yourself. The "do it yourself" start is a good way to learn everything about your business and also makes you better qualified in to delegate work to others in the future.

You are putting some (not all, hopefully) of your net worth at risk. You may run the risk of becoming eccentric, meaning creating a life that is out of balance, with working hours taking away from other family or pleasurable activities. There may be levels of stress you have not experienced as an employee.

Once you are satisfied you have the characteristics of a successful entrepreneur and that you definitely want to be in business, then you must decide which business is best for you and where to locate that business. Selection strategy is covered later on in this session. Also, see our home-based business session for those considering operating a business from their home.

More often than not, the advantages of starting as a moonlighter outweigh the risks:

You avoid burning your bridges of earnings including retirement, health and fringe benefits and vacations.

Your full-time job won't suffer if you maintain certain conflict of interest disciplines, including compartmentalizing your job and business into completely separate worlds.

You can avoid conflict of interest with your job by choosing a business that is appropriate for moonlighting, such as single products, real estate, specialized food, e-commerce, direct marketing or family-run operations.

You have a built-in organizational structure. You can teach your kids the benefits of being in business.

There is a temptation to spend time at your job working on your moonlight business. That is unfair to your employer and should not be done under any circumstances. (You may need a family member or some trusted person to cover emergencies when you are at your job.)

Another problem may be competing with your employer, which is not right. Think of how you would feel or handle this employee if you were the boss.

Any kind of conflict with your regular work can jeopardize your job and your moonlight business.

Overwork and mental and physical exhaustion can also become a very real problem for moonlight entrepreneurs.

A common problem is not having much money to start a business. Surprisingly, there are a number of businesses that require no money at all.

Try to identify a business that has long-term economic potential. Follow Wayne Gretzky's advice, "Go to where the puck is going, not to where it is."

Keep in mind that as a general rule specialists do better than non-specialists. Wouldn't you be more inclined to take your sick cat to a veterinarian whose practice is limited to cats rather than to a general practitioner?

Operate a business that will grow in today's and tomorrow's markets. Many small retail stores are no longer in business because huge stores such as Walmart and Home Depot provide more choices to the customer and often at a cheaper price.

Businesses to avoid are "commodity" businesses where you must compete entirely on price and in which you must have the lowest cost to survive. As Mr. Buffett has said, "In a commodity type business you're only as smart as your dumbest competitor."

Should you bet on a business you don't know when you can bet on a business you do know?

If your business is based on marketing an invention or patent, keep these ideas in mind:

First check to determine if there are any issued patents similar to your idea. You can secure information from the U.S. Patent office at www.uspto.gov.

Be cautious about getting involved with firms that ask for up-front fees to market an invention.

No matter what you hope for, you will need a product to test, to show and to solicit feedback.

Impatience

Do not let over confidence short-circuit you from analyzing your business carefully. You must not fear hearing the negative aspects; it is much better to be aware of them and face them early on.

The lure of high rewards. They will come if you have selected the right business and if you understand every aspect of the business before you open its doors.

For a laid-off worker who doesn't have bright prospects for replacing his or her job, there is a possibility not to be overlooked - Why not go into business for yourself? For those still in jobs but fearful of losing them (the signs are usually evident), there is the possibility of starting a moonlight business now while still working.

On the top of a blank sheet of paper, write an activity you like to perform (make this the heading). Do a separate page for each activity or interest you have.

On those same sheets list as many businesses you can think of that are related to that activity.

On the same sheets, list all the products or services you can think of that are related to that activity. Use your imagination and think of every possible product or service you could perform.

Make a list of businesses that do better in bad times (one may be appropriate for you). Some examples might be pawn shops, auto repairs, and fabric stores.

Grade the potential business ideas by answering the following questions:

Can I do what I love to do?

Will I fill an expanding need?

Can I specialize?

Can I learn it and test it first?

Is it something I will enjoy doing? As Harvey McKay has said, "Find something you love to do and you'll never have to work a day in your life."

Also, if you're doing something you love, you're much more likely to stick with it through thick and thin times.

My favorite activities are __________________________

I like to serve people by ________________________________

Will it serve an expanding need for which there is no close substitute?

Can I be so good at a specialized, targeted need that customers will think there is no close substitute? For example, in California, nobody comes close to See's Candies.

Could I operate as a hollow corporation, without a factory and with a minimum number of employees? For example, if you have in mind marketing a line of furniture, you might consider outsourcing to a manufacturing vendor in China. Cost savings is often the prime objective, but you also free up your time and capital. The major risk is the performance of the vendor and your success in developing good relationships that provide mutual benefits.

Is this a product or service that I can test first? Your concept of a successful product or service may not be in harmony with the reality of the marketplace. On a small scale, prove it out first. As Wolfgang Puck states: "I learned more from the one restaurant that didn't work than from all the ones that were successes."

Should I consider a partner who has complementary skills or who could help finance the business?

Make a "for" and "against" list regarding characteristics of the business. On a blank piece of paper, draw a vertical line down the middle of the page and list on one side all the "fors" and on the other all the "againsts." Sometimes this will help clarify your thinking. We have provided a Template to Evaluate a Business for you to use.

Write down the names of at least five successful businesses in your chosen field. Analyze what these five businesses have in common and make a list of reasons for their success.

Talk to several people in your intended business. Don't be afraid of the negative aspects of your intended business. Instead, seek out the pitfalls of your new business ideas — better now than after you open your doors. Take notes if possible. Write down the information as soon as you can.

Analyze the competition that are not doing well and write down the reasons.

Before you proceed further in your business, get completely qualified: The best way to become qualified is to go to work for someone in the same business.

Attend all classes you can on the skills you need: for example, accounting, computing, and selling.

Read all the "How To" books you can.

Don't be afraid to ask questions or seek help from the most successful people in your intended business.

To get the most benefit out of the remaining sessions of this course, you should either:

a. have decided on a business to start, or,

b. be operating the business that you think is best for you!

Live frugally and begin saving up money for operating your business.

Learn your business by working for someone else in the same business first.

Consider the benefits of starting a moonlight business.

Consider the advantages of operating a family business.

Objectively measure your skills and training against potential competition.

Consider subcontracting to low-cost suppliers if you're manufacturing a product.

Test market your product or service before starting or expanding.

Make a "for" and "against" list describing the business, you are in or considering.

Talk to lots of people for advice.

Make a comparative analysis of all opportunities you are considering.

Quit your job before you have completed start-up plans.

Consider operating a business in a field you do not enjoy.

Risk all the family assets. Limit your liabilities to a predetermined amount.

Compete with your employer in a moonlight business.

Be in a hurry to select a business. There is no penalty for missed opportunities.

Select a business that is too high a risk or hurdle. Go for the 2-foot hurdle.

Operate a business in which you must have the lowest price to succeed.

Neglect to learn the negative aspects of an intended business.

Permit entrepreneurial self-confidence to outweigh careful diligence.

Allow the promise of a conceptual high reward to deter reality-testing first.

Here are some suggested topics you can tailor into your plan:

This will be a concise outline of your business purpose and goals.

By far, the most important ingredient for your success will be yourself. Focus on how your prior experiences will be applicable to your new business. Prepare your résumé and one for each person who will be involved in starting the business. Be factual and avoid hype. This part of your Business Plan will be read very carefully by those with whom you will be having relationships, including lenders, investors and vendors. Templates for preparing résumés are available online. 

However, you cannot be someone who you are not. If you lack the ability to perform a key function, include this in your business plan. For example, if you lack the ability to train staff, include an explanation how you will compensate for this deficiency. You could add a partner to your plan (discussed in Session 5 Business Organization) or plan to hire key people who will provide skills you don't have. Include biographies of all your intended management.

Define and describe your intended business and exactly how you plan to go about it. Try to stay focused on the specialized market you intend to serve. As a rule, specialists do better than non-specialists.

Provide a complete assessment of the economic environment in which your business will become a part. Explain how your business will be appropriate for the regulatory agencies and demographics with which you will be dealing. If appropriate, provide demographic studies and traffic flow data normally available from local planning departments.

Include a one-year cash flow that will incorporate your capital requirements. Include your assessment of what could go wrong and how you would plan to handle problems.

Your expansion plan should describe how you plan to test markets and products before rolling out. SCORE offers a great marketing plan guide:

All businesses will experience episodes of distress. Survival will depend on how well you are prepared to cope with them. Your damage control plan should anticipate potential threats to your business and how you plan to overcome them. Here are three examples:

During economic downturns, your survival will depend on your ability to maintain liquidity for a period of at least 12 months. Can your Damage Control cash flow plan show how to avoid running out of cash?

If your business is in a rapidly changing technology area such as Netflix's home delivered DVDs, you will need to plan now to keep a step ahead of technical changes or advancements.

Set time aside to prepare your business plan as you work through the MOBI courses.

Focus and refine your concept based on the information you have collected.

Gather all the data you can on the feasibility and the specifics of your business concept.

You may wish to enhance your presentation with bar charts, pie charts and graphics.

Share a draft of your plan with trusted advisers.  Use their feedback to improve the plan. (Resource: Key People to Review My Business Plan)

The single most common mistake made by entrepreneurs is not selecting the right business initially. The best way to learn about your prospective business is to work for someone else in that business before beginning your own. There can be a huge gap between your concept of a fine business and reality.

A good way to test your understanding is to test market your product or service before your start. Do you think you have a great kite that will capture the imagination of kite fliers throughout the world? Then craft some kites and try selling them first.

Remember that some of the great inventions of all time, like airplanes and cars, did not result in economic benefit for many of those who tried to exploit these great advances. For example, the cumulative earnings of all airlines since Wilber Wright flew that first plane are less than zero. Success comes to those who find businesses with great economics and not necessarily great inventions or advances to mankind.

Look for people you like and admire, who have good ethical values, have complementary skills and are smarter than you. Plan to hire people who have the skills that you lack. Define your unique ability and seek out others who turn your weaknesses into strengths.

You will learn later the importance of becoming qualified in accounting, computer software and cash flow management. Most entrepreneurs do not come from accounting backgrounds and must go back to school to learn these skills. Would you bet your savings in a game where you don't know how to keep score? People mistakenly do it in business all the time.

Build a qualified team to evaluate the best options for utilizing retained earnings. This information is contained in Session 6 Alternatives for Capital Allocation of our Business Expansion course.

As a rule, people who specialize in a product or service will do better than people who do not specialize. Focus your efforts on something that you can do so well that you will not be competing solely on the basis of price.

Don't commit yourself too early. Your first plan should be written in pencil, not in ink. Keep a fluid mindset and be aggressive in making revisions as warranted by changing circumstances and expanding knowledge.

Here is a capsulation of his suggestions on how to formulate (and reformulate) your business plan:

Ask yourself if your experience or expertise gives you the right to an opinion on your specific opportunity.

Clearly identify what you see as the key drivers of success. What are you betting on here?

Delay hiring key managers until initial rounds of experimentation have produced a stable business model.

Test and refine your business model before expanding your operations.

Submit your business plan to experts in your intended business for their advice.

Spell out your strategies on how you intend to handle adversities.

Spell out the strengths and weaknesses of your management team.

Include a monthly one-year cash flow projection.

Freely and frequently modify your business plans to account for changing conditions.

Project yourself as someone you're not. Be brutally realistic.

Be everything to everybody. Highly focused specialists usually do best.

Proceed without adequate financial and accounting know-how.

Base your business plan on a wonderful concept. Test it first.

Pursue a business not substantiated by your business plan analysis.