Starting a Business 101

Building the next “big thing”. Being your own boss. Getting the full rewards for your work. There are a lot of reasons to start a business, but taking the plunge is a step entrepreneurs have to face if they plan on striking out on their own.

Why Do People Start Their Own Business?

Every business starts with someone who wants to do something and then took the steps to make it happen. People usually start a business for one of the following reasons.

To be your own boss. If you start your own business, you get to make all the decisions – What will your work environment include? How many hours a day do you have to work? Will you work during your holidays? What product changes do you want to make? Do you need to hire employees? Being your own boss is a huge motivation for some people to succeed.
To get the full reward for your work. When you own a business, you get to keep all the profits. Entrepreneurs often see that the number of hours they work is closely tied to the success of the business. Many people with a strong work ethic are drawn to starting their own businesses.
Exploiting a “hole in the market.” People who start a business see something missing in their local economy. They believe they can provide something of value that others will pay for.

There is no magic formula for setting up a successful business. You may have a great product that fills a need in the market, but if you aren’t organized and have a poor work ethic, you might not be able to get the product out the door. Conversely, you might be extremely organized and highly motivated, but if your product isn’t selling, your business could fail. According to the Bureau of Labor Statistics, about 20% of small businesses fail in their first year, and about 50% fail in their fifth. Why? Because business is uncertain and risky. However, if you take the time to create a solid business plan, your chances of success increase.

Formal and Informal Businesses

New entrepreneurs can choose to operate in either the formal economy or the informal economy. Businesses in the formal economy are legally registered, follow government regulations, pay applicable taxes, and maintain required business records. Businesses in the informal economy often operate for cash or without full legal registration.

Many new business owners are tempted to remain informal because it requires less paperwork and lower upfront costs. However, operating informally also carries significant risks. Informal businesses may have limited legal protection in disputes, face difficulty obtaining business loans or lines of credit, be subject to tax penalties and back taxes if income is not properly reported, and appear less credible to customers, suppliers, and business partners.

Registering a business, obtaining any required licenses, and maintaining accurate financial records moves a business into the formal economy and makes it easier to access financing, government assistance programs, and other resources that support long-term growth.

Your Business Plan

What Should A Good Business Plan Include?

A business plan is a written document that explains your goals, strategy, and the implementation plan for your business idea. It should be realistic and simple to understand. This document is often used to secure venture capital or to convince a financial institution to provide you a loan or financing. Therefore, you will need to have clearly defined costs, milestones, and a projection of how your product or service will go to market.

(See What is Entrepreneurship to learn why people start businesses and how entrepreneurs develop new business ideas. This lesson focuses on creating a business plan, estimating costs, and securing the funding needed to launch.)

The Problem Your Business Addresses

Every business exists to address a problem. Your product or service was designed to fill a void in the market, to give consumers a solution to a problem they have. Some businesses offer entirely new products, giving consumers something they want or need which they did not have before. Others improve on existing products by introducing new features or lowering prices. Some businesses innovate in entirely new ways. When you think about how your business will make money, think of what it has to offer and why people would be willing to purchase it.

It doesn’t matter whether your idea is in an established industry or a new and emerging one, all business plans include the same components. Here is a brief overview of the elements that should be in your business plan.

Executive Summary

A one-page high-level summary that encapsulates the rest of your report. You want to wow your reader with as little fluff and as much market research, (think data) to prove that you know what you’re talking about.

Company Summary

This section helps outsiders understand what kind of a business you’re starting. This section includes;

The name of your company
The type of ownership – sole proprietor, partnership, corporation etc.
The business location(s) – if there are multiple locations, explain the function of each location.
The business proposition – what value will you offer and at what price compared to your competitors.
Competitive advantage – how are you better than the competition? What will set you apart?
Company history – This can be short if you’re just starting out, however, this is where you can include past business performance should you have some experience under your belt. Start-ups should estimate the startup costs required to launch the business or product and cover initial expenses while operations are being established before steady sales begin. Startup costs often include one-time expenses such as legal fees, incorporation and licensing fees, equipment purchases required before opening, and other costs associated with bringing the business idea to market.

Products and Services

A description of all your products and/or services, which specific markets they cater to, their benefits, and an analysis of how each product compares against others available. Keep in mind, readers don’t know the business as well as you do. So this helps them position what you offer to other products they’re already familiar with.

Market Analysis

When performing a market analysis, an entrepreneur looks at potential competitors in the market, These are the other companies that are doing what you intend to do. For example, if you want to open an Italian restaurant, part of your market analysis would be researching the other Italian restaurants in the area that customers already have access to. The information you uncover will help you build a SWOT analysis. A SWOT analysis describes the strengths, weaknesses, opportunities, and threats of your company. You should be able to outline several advantages that your restaurant will have over the local competition. If you can’t find those advantages, then you will have a hard time attracting customers.

This is one, if not the most important sections of your business plan. Without a thorough understanding of your market, your potential customers, and the other businesses already serving them, you could fail even before you get started. By conducting market research you should be able to provide clear answers to the following aspects of your industry.

Industry Overview – details the current state of the industry. Is it young and yet-to-be-defined, or more mature and established? Are there any major changes coming soon?
Market or Industry Size – the number of potential customers, or the total transactions per year. You’ll want to include projections for 3-5 years based on the geographic regions you will serve.
Market Value – focuses on how much the market is worth. Even if you have a lot of potential buyers, if you’re selling organic toilet paper you won’t be able to charge as much as a self-driving car.
Target Market – defines your core audience, the customer persona or market segments that you will be catering to. Here you outline their buying habits, their wants, and needs and how you will fulfill them.
Competitive Analysis – outlines the strengths and weaknesses of your main competitors. This should provide you a roadmap of what areas you will need to improve on, and where you can serve your market better than they can. The goal is to explain the challenges of joining this industry.
Forecasting – many young entrepreneurs are overly ambitious with how quickly their company will grow. Be realistic with your projections for how your market share will change over time. This includes the number of customers who will buy from you, and what prices and discounts you will offer them.

Business Strategy and Implementation

This section is all about HOW you will bring your unique value proposition to market. There are three main components of this section.

Marketing Strategy – What tactics will you use to create awareness for your company? How are you going to position yourself compared to the competition? This is about clearly defining your brand, and how you will get it seen and recognized by your target market.
Sales Strategy – How will you convert potential buyers (prospects) into customers? This section is about developing your sales team and initiatives to persuade your prospects to not only buy from you but to become loyal customers.
Implementation Plan – Your business plan should outline several goals you have for your company and its planned growth. Each goal needs to be specific and measurable, with a definite timeframe. Goals should build on each other, and they need to be attainable.

For example, these three goals would allow you to track your business’s progress:

Open for business by July 15
Serve our 100th customer by October 15
Earn $15,000 in revenue by December 15

Reviewing your goals regularly will help you get a clear picture of how well your business is doing. You can update these milestones as time goes on to be more realistic. Keeping sight of your goals is both an important motivation tool and a good way to show potential investors that you can hit your targets. These goals will inform your marketing and sales strategies so that all aspects of your business are moving in the same direction.

Management Overview

Here you identify the key functions in your start-up and assign each core responsibility or role to someone on your team. Provide background information like their qualifications, experience, and skills. If your company is large enough, you could include organizational charts to explain who reports to whom. Lastly, you’ll want to have personnel cost projections that are needed to support the growth of your company. This should link back to the Forecasting section, so that you have enough manpower to serve your growing customers.

Financial Summary

This is where outsiders get the chance to “look under the hood” to see if your great business idea has a strong foundation to support it. You could have all the ambition and vision in the world, but if your business is not profitable you just have yourself an expensive hobby. Startup planning should also account for expenses that continue after the business opens. These ongoing operating expenses may include rent or lease payments, research and development, marketing, insurance, and purchasing or producing inventory. While these costs are considered during startup planning, they become regular operating expenses once the business begins serving customers. Here are the core components:

Cashflow Statement – How does money move in and out of your company? This is not the same as your profit. The sources of cash can be from operations, investment or financing.
Business Ratios – This gauges how you’re performing compared to the competition, and the overall soundness of your company. This can include, liquidity ratios (how easy it is to repay short-term and long-term obligations), efficiency ratios (how well you’re using your assets and resources) or profitability ratios (are you making more money than you spend).
Break-even Analysis – Entrepreneurs compare the amount of personal funding available to their total startup costs and expected early operating expenses. They then calculate how many units (or customers) must be sold during a given period to cover all costs for that period. Reaching this point is known as breaking even, meaning the business has generated enough revenue to cover its expenses but has not yet earned a profit.

Many entrepreneurs begin by bootstrapping their business, using personal savings, personal bank loans, credit cards, or personal lines of credit before seeking outside funding. If personal resources are not sufficient to cover startup costs and operating expenses until the business reaches break-even, entrepreneurs may seek external financial capital from lenders or investors. For more information about debt, equity, and other financing options used by established businesses, see Short-Term and Long-Term Financing for Business.

Risks Versus Reward

Starting a business is risky. Entrepreneurs often invest their personal savings and may also use personal bank loans, credit cards, or personal lines of credit as part of their initial funding strategy. Many businesses that are less than two years old also rely on loans from friends and family or raise equity financing by selling ownership shares to friends, relatives, or outside investors. Equity financing means exchanging partial ownership of the business for cash. Outside financing through loans or investors helps fill the funding gap when personal resources are not enough to support the business until it reaches break-even. Despite these risks, many entrepreneurs begin their business as a side job, keeping the stability of full-time employment until the business generates enough income to become their primary source of work.

The following video shows different funding options entrepreneurs have when beginning a new business.

Help for New Entrepreneurs

New business owners do not have to build their businesses alone. Many organizations provide free or low-cost resources to help entrepreneurs plan, launch, and grow their businesses.

U.S. Small Business Administration (SBA): Offers business planning resources, loan programs, educational materials, and local assistance offices.
SCORE: Provides free mentoring from experienced business professionals, many of whom are retired executives or entrepreneurs.
Local Chambers of Commerce: Help business owners build professional networks, understand local regulations, and connect with community resources.

Think About It: If you planned to start a business next year, what organization in your city or state could you contact for guidance?

Starting a Business 101