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SmallBiz Adviser: 10 make-or-break issues for small-business owners
By Stephen Windhaus Bankrate.com

Steve Windhaus

In my 18 years of helping small-business owners get started, most of my clients have failed.

Wait! Don't go!

I really do give good advice. It's just that the majority of startups fail within five years. Although I improve my client's chances for success, many still falter -- and over and over again, it's for the same reasons. The same issues always arise, usually in combination, with most of my clients trying to start a business. I've boiled them down to 10.

If you know these 10 things below, you'll greatly improve your chances of being one of the successes.

  1. Write a business plan.
  2. Learn about income and cash flow statements.
  3. Know when to spend money.
  4. Understand the difference betwen bankers and venture capitalists.
  5. Don't count on government grants of "free" money.
  6. The SBA is not a lender of last resort.
  7. Market research begins with common sense.
  8. Your customers are online -- are you?
  9. Learn where and when to advertise.
  10. Beware of home-based business pitfalls.
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1. Oh, those darn business plans
I don't think I ever met any startup that wanted to go through all the steps required to write a substantive, and thorough business plan. For the most part, the only time most small-business owners develop a business plan is when they need money. Frankly, no commercial lender, venture capitalist or other full-time investor will consider a startup without a plan. Worse yet, existing entrepreneurs generating positive cash flow and profit think they don't need one. They do. I dare say most will learn of lost sales/profit potential and unnecessary waste in expenses if they did put a legitimate plan together.

2. Income and cash flow statements
When I first meet clients, I would venture to say that fewer than one in 10 can interpret, much less comprehend, the full value of financial statements. Most don't know how these monstrosities of bookkeeping and accounting are even put together. They just give their cigar boxes full of receipts to the accountant and pay to have financial statements assembled for a lender or the IRS. Financial statements are numeric, monetary monitors of financial performance, stability and worth, and barometers of impending success and failure. Take the time to find a book that uses simple terminology to explain what the statements represent, how they are put together and how you can read them to measure your financial performance. If you will put in the time to understand them, they become extraordinarily valuable tools that help control budgets and polish marketing strategies.

3. When to spend a buck
A common mistake by some entrepreneurs is to make spending decisions without considering their impact on the company's sales and profit margins. Bottom line: Don't spend a dollar unless you can reasonably expect that it will result in a return of more than a dollar. For example, I recall a client who wanted to purchase certain items for his office because they would look pretty and appealing to clients. He suggested that creating appeal in the minds of clients would better help him to make a sale. The trouble was, the overwhelming majority of clients would be met in the field. The primary reason for his office was to house operations. He was going to spend money on items for the office that he could not even indirectly justify as resulting in increased sales.

To use another example, if hiring a receptionist to answer the phones allows you more time to make sales, then be certain the increase in sales pays for the receptionist's salary, benefits and any other related expenses, and still increases net profit after expenses. Again: Want to spend a buck? Show me more than a buck coming back.

4. Bankers vs. venture capitalists: What's the difference?
I'm amazed at the number of otherwise-bright people who can't understand why they get turned down by commercial lenders. Think of it this way. Most of you deposit money in a bank. The bank uses your money to issue loans. Do you want them to take big risks using your money, and possibly losing a big chunk of it on defaulted loans? If a loan defaults, the bank loses revenue and the cost of its services to you will rise. Simply stated, banks can't take much risk. On the other hand, venture capitalists invest their own funds, take higher risks, but there's a steeper price to pay. VCs expect to make a higher return on their investment (ROI) than a bank, they likely expect a percentage of ownership interest and expect that higher ROI in a shorter period than a typical banker. That's the difference: Higher risk means a higher interest on loan proceeds over a shorter period.

5. Grants aren't free money
In the last few months there have been many inquiries about grants to start small businesses or to finance related expenses. Andrew Klesko's books and late-night TV ads have heightened that awareness and created a perception that the government has tall stacks of money it will hand out to anyone who asks. In fact, two of the most commonly known and used programs relate to hiring specific types of individuals who will learn a new trade on the job. In turn, the employer can receive a refund on a certain portion of the employee's wage during the specified training period. Another federal program offers tax deferments to the employer under similar on-the-job training conditions.

But as far as grants are concerned, nothing comes free. There are strings the size of aircraft carrier ropes to these programs. The grantee has to fulfill certain conditions and milestones to qualify for and receive grant proceeds. In some cases it is likely you will be reimbursed after paying the costs from your company's funds. In other cases, low-interest loans are awarded only if you're willing to set up shop in economically depressed regions. Conditions, goals, milestones and reporting procedures are very precise. In some instances you will not receive the proceeds if these parameters are not met. Government agencies are very careful about these matters. Regarding small business, most grants will likely require job creation, retention, minimal income standards for the jobs created and business location.

6. The SBA is not a last resort.
Since time eternal, many entrepreneurs, when believing a commercial lender will not consider their loan application, have envisioned the Small Business Administration as the place to go to get money. It is one of the most distorted perceptions I continuously address. Only in a few specialized programs do loan proceeds originate with the SBA. The overwhelming majority of programs and loan proceeds sponsored by the SBA come from commercial lending institutions and Certified Development Corporations. For the most part, the SBA serves as a guarantor to the lender. If you go belly up and default on your loan, the SBA will pay the lender back -- somewhere between 75 percent to 90 percent of the loan. That cuts the lender's risk, but the lender is still the bank or other financial institution -- not the SBA.

So when you begin the loan application process, think of the rigid standards of the process imposed by the bank. Gauge the value and worthiness of your application by those standards. If the SBA is brought into the process, that is because the lender perceives some risk, but low enough that the SBA would be willing to issue a guaranty against that loan. In short, you'll still have to jump through all the bank's hoops to get your money, but with the SBA you won't have to jump quite as high.

7. Market research begins with common sense.
If you're in a big metropolitan area, you can get lost in a flood of data when trying to conduct market research. If you're in a small town or rural area, you can die of thirst. That's just the way it is. Big metro areas -- and well-organized industries -- get the most-specific market data. However, there are some common-sense rules of thumb you can use to conduct your own local market research. Gather your data by the type of product or service, the type of customer, the geographic target market, pricing and promotional strategies. Furthermore, examine all your competitors. Look to the successful competitors for the right things to do, and examine the poor competitors to learn what not to do. Readily available sources of data can include demographic and economic census data from the Bureau of the Census, the local Yellow Pages, business directories, colleges, universities, chambers of commerce and economic development agencies.

8. Your customers are online -- are you?
Although the Internet bubble in the economy has burst, don't expect the Web to wither. So make sure to look at the Web in a clear-eyed fashion. It's not the path to sure riches and it's not some fad with the lasting appeal of knickers. It's somewhere in between. Make sure you keep track of the developments in the industry and steer a middle course. Don't get intoxicated by its possibilities if you're a local pizza shop. Don't ignore the possibilities for global growth if you're in the service sector.

9. When and where to advertise.
A common error among startups is to squander money in the wrong advertising media and promotional strategies. I often have had to redirect clients who wanted to throw a large percentage of their precious startup cash into newspaper, radio or TV ads. Of course, there are conditions under which it makes sense to advertise in these media. For example, retail tire outlets can be found advertising in the newspaper. But accountants don't do that. The lawn maintenance trade doesn't advertise on TV, but does rely heavily on referrals from existing clients. Pool maintenance people will often leave flyers at your door if you have a pool, but an accountant won't do that. Use common sense. Where are your typical clients most likely to be found? What kind of budget do you have? What promotional and advertising strategies do your successful competitors use?

10. Home-based businesses -- look out for the pitfalls.
Home-based businesses are sprouting up all over. It's economical, convenient, saves gas, travel time and serves the purpose well if conditions exist in the home for an office that can receive clients if necessary. But beware of the possible pitfalls. Advise spouses, children or significant others that regular business hours at home, barring emergency, do not necessarily make you more available for family or home chores. Keep the family out of the office. It is not an extension of the family environment. If you want to take advantage of tax exemptions, read up on IRS requirements. There are advantages, but they come with obligations. Finally, if you can get your work done in sleepwear, that's fine. But if not, then try and wear some minimally casual clothes that give some sense of orderly responsibility and discipline to the work tasks at hand.

-- Posted: Dec. 27, 2000

Bankrate.com writers base their answers on our editorial content and advice of financial professionals. We make no claims or representations about the accuracy, timeliness or completeness of such content, advice or the answers provided to you. Our content, advice and answers are intended only to assist you with your financial decisions. However, by its nature such information is broad in scope. Your financial situation is unique, and our content, advice and answers may not be appropriate for your situation. Accordingly, we recommend that you get different opinions and seek the advice of your accountant and other financial advisers before making any final decisions or implementing any financial or investment strategy.


See Also
MAIN PAGE: Bankrate's fabulous 50 money tips for 2001
Archive of tips from the SmallBiz Adviser
10 personal finance tips for 2001
10 tax tips for 2001
10 tips for women in 2001 from the Dollar Diva
10 mortgage tips for 2001 from the Dollar Diva


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