Question? Leave a message!

How to start your own Business legal steps

simple steps for starting your business workbook and how to succeed starting your own business | download free pdf
Welcome Dear Entrepreneur, Dear Entrepreneur, As mentors for America’s small businesses, SCORE, in partnership with We are pleased to partner with SCORE to Bank of America, is proud to bring you this practical workbook to help you bring you a useful and informative guide to pursue your business dreams, ideas and goals and put them into action. starting your own business. At Bank of America we understand the vital role small SCORE and Bank of America are dedicated to helping entrepreneurs businesses have in the U.S. economy and in succeed. As part of that common goal, we offer this educational resource to our communities. Our hope is that the in- help you plan for that success. This workbook serves as a primer, offering formation provided in this booklet will be a practical information and exercises that will help you know whether starting resource you will use often as you develop a small business is right for you. your idea into a successful small business. But you don’t have to go it alone. SCORE provides other great resources like Bank of America shares SCORE’s goal to mentoring and workshops, including the Simple Steps for Starting Your foster the success of small businesses and Business workshop series on which this workbook is based. Attending this supports SCORE’s mission to provide valu- workshop, which includes one-on-one mentoring with a SCORE expert, will able information and guidance to new en- provide you with a solid foundation for pursuing your business idea. It’s all trepreneurs and established business about helping you live your dream. owners. Through our relationship with nearly 4 million small businesses, we work Every day, SCORE’s 13,000 mentors volunteer their time and expertise with our customers every day to offer guid- to help small business owners like you with confidential, free business ance and the financial tools to help small mentoring. Founded in1964, the SCORE Association has helped more business owners achieve their goals. than 9 million entrepreneurs start, build, expand and protect their small businesses. I applaud your entrepreneurial spirit and wish you success in starting your business. Use this workbook as the first step to making your startup dreams come true. Then, take the next step and contact your local SCORE office to be matched with a SCORE mentor who can help you every step of the way. You can find the SCORE office nearest you by going to We wish you prosperity and success. Regards, Robert Hilson Bank of America Small Business Executive Bank of America makes no express or implied warranties with respect to any aspect of this booklet, nor does it guaranty any success or promise any results, and hereby disclaims the same to the extent allowed by law. You are not bound by any recommendations provided herein and retain full responsibility W. Kenneth Yancey, Jr. for the results achieved by your business. Bank of America is a Chief Executive Officer registered trademark of Bank of America Corporation. SCORE Association I simple steps for starting your businessTable of Contents 2 INTRODUCTION I I 3-14 SECTION 1: READY TO START? I I 3 myths and realities of entrepreneurship The truth about business ownership 4 do you have what it takes? Assessing your skills and experience 5 know your options: different types of businesses A closer look at various ways of starting a business 8 components of business ownership Understanding the many roles you’ll play as a business owner 9 making it legal The nuts and bolts of launching a new business 12 business plan basics Why you need a business plan 15-30 SECTION 2: GREAT IDEA I I 15 getting your business idea Steps to develop and fine-tune your business concept 20 doing market research Steps to identify your target audience and learn how they buy 23 doing competitive research How to know what your competitors are up to 27 pricing your product or service Learning to properly price your product or service for business success 31-39 SECTION 3: MARKETING YOUR BUSINESS I I 31 branding your business Steps to creating your brand 35 developing your marketing plan Crafting a plan to communicate your marketing message 38 marketing your business with social media What you need to know to use social media effectively 40-57 SECTION 4: FINANCIAL MATTERS I I 40 financial planning: why you need it How to forecast your sales, costs, profits and assets 45 understanding and using financial statements Three primary financial statements you need to know about 53 finding financing for your business How and where to start your search for capital 59-60 SECTION 5: THE GO OR NO-GO DECISION I I 59 go or no-go? Making the big decision about your business idea Copyright 2011 The SCORE Foundation 1 simple steps for starting your business IIntroduction EDITORIAL TEAM I DREAM BIG vice president of education: K. Jai Hokimi Do you dream about starting director, marketing and Communications: Bridget Weston Pollack project managers: Candice Stennett & Heather Hendy a business? You’re not VOLUNTEER CONTRIBUTORS: austin SCORE James Binnabose, Richard Jozwiakowski, Carleton Smith alone—millions of baton rouge area SCORE Harold Allison Sr. bergen county SCORE Peter Loder, John Sanchez Americans share that dream. chester county SCORE James Schoonover colorado springs SCORE Ric Denton, Jerry Musselman, Gerald Smith And yet, not everyone has dayton SCORE Arnold Sandness fairfield county SCORE Michael Allocca, Lesley Apt, Elliot Baritz, Preston the courage to get started. Carnes, Jr., Patricia Duncan, Thomas Greenbaum, Ruth Kelley, France LaFlamme, Patricia Muncy, Jonathan  Naiman, Becca  Nell, E. Michael But if you’re reading this, O’Malley, Rebecca Ryan, Norman Sylvester, Diane Winston ft. lauderdale SCORE Carlos Ayala, Tapan Chakrabarty, Arthur Donovan, you have already taken the Michael Greenberg, Jack Hardy, Edward Joffee, Tom Petersen, Kendrick Pierre, Eric Thompson, Neil Tortorella first steps toward turning greater bridgeport SCORE Michael Conway greater cincinnati SCORE Richard Johnston, Thomas Moon your dream into reality. greater phoenix SCORE Mary Ann Weiss, Andrew Beran, Neil Feola houston SCORE Donald Doggett, George Holland, William Krause, Oliver Mann, Raj Mashruwala, Bob Meisel, Irwin Miller, Al Reed, Dolores Zamora Too many criticize dreamers like you proclaiming, lancaster SCORE Louis Davenport, Gerard Glenn “Dreamers only dream, doers do.” But that’s louisville SCORE Joseph Hatfield wrong. You can’t become a doer without first manasota SCORE Douglas Barber, Gregory Hoffmann, Tom Latimer, Joseph having been a dreamer. Pfeiffer, Jeanette Watling Mills minneapolis SCORE Bruce Becker, Mort Harris, Edward Hennen, Loren Herbst, Dreams are the stuff entrepreneurs are made of. Marshall Jones, Randi Luoto, Thomas Schaefer, Daniel Shidla, William Wise Think about Steve Jobs, Bill Gates, Richard Branson, monmouth SCORE R. Michael Sullivan, Robert Sullivan Oprah Winfrey, Sam Walton, Walt Disney, Mary Kay Ash. What do they have in common? They all northern nevada SCORE Judy Haar started with nothing but a dream, and built princeton SCORE Marc Binder, William S. Litchman, Leon Petelle, Saleem Sufi multimillion-dollar businesses. san antonio SCORE Carter Crews san diego SCORE Jack Philbin Obviously, dreaming alone isn’t enough. You have to santa cruz county SCORE David Harken do your homework, create a plan and take action. SCORE naples George Ahearn, Robert Anderson, Joseph Binder, Becky You will have good days and bad ones. But don’t get Bokrand, Frank Friend, Jeri Glueck, Chick Heithaus, Vincent Izzi, Carol discouraged. As Walt Disney said, “If you can dream Marlow, James Underwood, Karl Williams it, you can do it. Always remember this whole thing SCORE santa fe & northern new mexico Nancy Geddes, William Moffett, was started by a dream and a mouse.” Richard Stranger southern arizona SCORE Charles Higgins Simple Steps for Starting Your Business is more than st. paul SCORE Gregory Boettner just a guide to business ownership. It’s really a treasure valley SCORE C. Norman Beckert, Jeffrey Weeks blueprint for helping make your dreams come true. williamsburg SCORE Alan Wonsowski design & layout Mark Kozak editorial services GrowBiz Media SCOREMentors inquiries: All images are used under license from 2 I simple steps for starting your business% 67% section 1: Ready to Start? Myths and Realities of Entrepreneurship Do you really know what it means to be an entrepreneur? Here are some common myths about business ownership. A good idea is a myth: As an entrepreneur, you won’t have to reality: Entrepreneurs do get to subtract great start, but it work so hard or put in such long hours. business expenses from their gross income— takes hard work, reality: On average, entrepreneurs work far longer but they still have to pay taxes on their hours than employees do—but you’ll likely enjoy it net income. research, planning more because you’re building something of your own. myth: As a business owner, you won’t and successful myth: My product/service is unique and there is have a boss. implementation no competition. reality: You don’t have a boss—you have reality: There is always competition. It may be in a many: Your clients and customers. strategies to turn different form or delivered in a different manner, but it exists and you need to recognize and deal myth: Business owners get to do what they your idea into a with it. want to do. business. reality: Sure, you’ll do some of what you myth: Business owners can deduct everything, enjoy—but some of your time will be spent on so you won’t have to pay taxes. tasks you find difficult or boring. reality: business success I One big myth is that the majority of startup businesses fail. In fact, according to data from the SBA, 67 percent of new businesses are 33% successful after 67% four years; only 33 percent fail. FAILED SUCCESSFUL simple steps for starting your business I 3 33% 67%section 1: Ready to Start? Do You Have What It Takes? Lots of people have good business ideas—but not all of them have the characteristics needed to make their businesses succeed. Successful entrepreneurs have the qualities listed below in common. Some of these factors are inborn traits, others can be learned, and still others are external and harder to control. The more of these factors you have on your side, the greater your chances of success. Entrepreneurial qualities DO YOU HAVE THE FINANCIAL RESOURCES? Personal traits aren’t the only factor in business suc- Education or work experience in your cess. Starting a business costs money. To assess how chosen industry realistic startup is for you, begin by considering Strong work ethic your personal budget. Add up: Effective time management skills Your total monthly cost of living Ability to multitask Areas where you can cut back Management skills Outstanding debt Willing to ask for help and advice Amount in savings from others Amount needed to cover 6 to 18 months of Self-motivated Lots of people expenses (the average time before a new Resourceful business makes a profit). have good Responsible Also add up your startup costs, including: business ideas— Organized Tools or equipment but not all of Persistent Leasehold improvements Decisive them have the Licenses and permits Good health characteristics Professional fees A supportive family Initial inventory needed to make Working capital reserve fund their businesses Inadequate capital is a key reason busi- succeed. nesses fail. We’ll discuss how to estimate your startup costs and ways to obtain the capital you need in more detail in Sec- tion 4. 4 I simple steps for starting your businesssection 1: Ready to Start? Know Your Options: Different Types of Businesses Starting a new business from scratch is what most people think of when they consider becoming entrepreneurs. But this isn’t the only way to get into business for yourself. Here’s a closer look at various ways of starting a business. 1 starting a new business I I advantages disadvantages You’re not hampered by the previous image or You have no existing customer base to build on. equipment of an existing business. You’re taking a bigger risk than if you were buying an You can choose your own location, name and logo, and existing business. build your own business relationships. Because your business has no track record, it will be You can explore new markets and directions. harder to find financing. 2 buying an existing business I I advantages disadvantages You gain an established customer base, location and Hidden problems with the business could come back to supplier relationships. haunt you—such as debts, liens or misrepresentations about profitability. The business is a known entity with a proven formula and name recognition. The business has a reputation, but is it always a good one? You can review the business’s records before buying to make sure it’s profitable. The business’s inventory could be obsolete; its assets and/or goodwill could be inflated. Since the business has a track record, it may be easier to obtain financing. Employees may be loyal to the former owner, causing management issues. There’s no guarantee the business’s success will continue under your ownership. simple steps for starting your business I 5section 1: Ready to Start? Know Your Options: Different Types of Businesses 3 buying a franchise I I advantages disadvantages As a franchisee you become part of a system with a You don’t have as much freedom as an independent well-known image and proven products or services. business owner. You have the marketing and sales power of the You must pay ongoing royalties and other fees. franchisor behind you. You must sign a binding contract that limits your You get training and guidance from the franchisor. ability to exit the business. You’re part of a network and can turn to other The franchisor’s problems—whether financial, image or franchisees for help. otherwise—are your problems, too. 4 home-based business I I advantages disadvantages Working from home is convenient. Zoning or deed restrictions may prohibit home-based businesses. You save money on commuting, dry cleaning, lunches out and other daily expenses. Working from home can be isolating and lonely. You have a flexible schedule and can work when As a home-based business, you will have more you want. difficulty finding financing. You could gain tax advantages since you could deduct Distractions from family or neighbors may make it the portion of your home used for business. hard to work. Home-based businesses are often subject to IRS scrutiny. 6 I simple steps for starting your businesssection 1: Ready to Start? Know Your Options: Different Types of Businesses 5 nonprofit organization I I advantages disadvantages A nonprofit may qualify for government or foundation A nonprofit must focus on educational or charitable grants. purposes and cannot profit those who created the organization. Nonprofit status offers protection from liability for directors and employees of the business. All profits remain within the organization. You can pay salaries to employees and consulting fees You must apply and qualify for 501c3 status or sales tax to contractors. exemption. 6 online business I I advantages disadvantages Startup costs are lower than with a brick-and-mortar Low conversion rates—on average, only 2 percent of business. visitors to an e-commerce site make purchases. You can do business with customers all over the Low barriers to entry for an online business mean there country—or world. is more competition. Customers appreciate the convenience of accessing Visitors have high expectations for online businesses your business 24/7. and less tolerance for problems. You have the flexibility to do business from anywhere, Being unable to touch merchandise can make anytime. customers less likely to buy. simple steps for starting your business I 7section 1: Ready to Start? Components of Business Ownership If you are currently an employee, you’re probably responsible for one area of business—say, sales or accounting. As an entrepreneur, however, you’ll wear many hats and be responsible for making sure all the components of your business run smoothly. NOT ONLY ARE YOU THE CEO OR PRESIDENT, BUT YOU’LL ALSO BE IN CHARGE OF: administration – answering phones, handling paperwork, office management and insurance issues accounting – bookkeeping, taxes, payables and receivables human resources – hiring, firing and managing employees marketing – creating and promoting your company’s image via advertising, PR and more sales – prospecting for new leads, cold calling, making sales presentations and closing customer service – taking orders, handling Even if you were complaints, building relationships skilled in all these production and fulfillment – manufacturing your product or arranging to have it made; shipping and roles, you wouldn’t warehousing have time to information technology – choosing, purchasing handle all of and troubleshooting technology them. Which are physical plant – selecting your location, negotiating leases, maintaining site most important to your business? Which will you THINK ABOUT THE AREAS ABOVE AND CONSIDER: focus on and Do you have weaknesses in any of these areas? which will you Can you take a course to improve your skills in the delegate? In what areas where you’re weak? order of priority? If there are duties that don’t fit your skills, can you hire employees, take on a partner or outsource these tasks? Even if you were skilled in all these roles, you wouldn’t have time to handle all of them. Which are most important to your business? Which will you focus on and which will you delegate? In what order of priority? 8 I simple steps for starting your businesssection 1: Ready to Start? Making It Legal When it comes to the nuts and bolts of launching your new business, there are three primary considerations: Choosing a legal business structure Understanding government rules and regulations affecting your business % Buying business insurance CHOOSING A LEGAL BUSINESS STRUCTURE You have several options for the legal structure of your business. A written agreement reviewed by an attorney is essential. Here’s an overview: " sole proprietorship: In this form of doing business, one person (you) owns and operates the business. On the plus side, your business earnings are taxed just once, and you alone are in charge of all business decisions. On the downside, sole proprietors are personally liable for any claims against their businesses, and often have more trouble getting financing. Many businesses start out as sole proprietorships, then switch to more complex structures. " partnership: In a general partnership, both partners manage the business and are responsible for its debts. In a limited partnership, certain (limited) partners are investors but do not manage the business. One advantage of partnerships: The partnership doesn’t pay tax; partners report profits or losses on their personal tax returns. The disadvantage: Partners are personally liable for any debts of the business. " “C” corporation (conventional): Incorporating protects you from liability for the company’s debts or claims against it. A corporation can sell stock, enabling you to raise money. However, corporations are strictly regulated and are taxed twice—the corporation pays income tax, and shareholders pay taxes on any dividends. simple steps for starting your business I 9 Learn more about government regulations at these websites: Department of Labor: WWW.DOL.GOV IRS: WWW.IRS.GOV SCORE: WWW.SCORE.ORGsection 1: Ready to Start? Making It Legal " “S” corporation (subchapter): An S corporation protects owners against liability and provides more tax benefits than a corporation. The corporation doesn’t pay federal income taxes; profits and losses are reported on shareholders’ individual tax returns. But complying with regulations can be costly and time-consuming, and you’re limited to a set amount of shareholders, which may be restrictive if you’re seeking to raise lots of capital. As a startup " limited liability company (LLC): An entrepreneur, you’ll LLC offers liability protection like a corporation, but without double taxation need these key because earnings and losses are reported on the owners’ personal taxes. There is no limit players on your team: on the number of members. Owners or • BANKER members in a multiple-member LLC should have a written membership agreement reviewed by • LAWYER an attorney. • ACCOUNTANT Always discuss your legal options with your • INSURANCE AGENT attorney and accountant before making a decision. SCORE mentors are also available to help you • BUSINESS MENTOR understand your options. Find them by asking friends, relatives and GOVERNMENT REGULATIONS AND YOUR BUSINESS colleagues for To keep your new business on the right side of the law, understand the government regulations recommendations— you must comply with. then checking out business registration, licenses and references. zoning approval: All businesses need to be registered either in the state where they will be Find a mentor at doing business (LLCs and corporations) or SCORE ( their county of residence (sole proprietors). Wherever registered, the company needs a physical address (not a P.O. Box). Registration fees are usually under 200; there are also annual fees, which vary. Companies can be registered in one state as a “domestic” company and in other states as a “foreign” company. Depending upon the nature of the business, some companies also need to obtain state, county and/or municipal licenses. Contact your city and county for more information, and discuss your legal options with your attorney. 10 I simple steps for starting your businesssection 1: Ready to Start? Making It Legal labor and immigration laws: If you hire employees, you need to comply with state and federal labor laws regulating work hours, breaks, safety and many other factors. There are also laws governing the hiring of immigrants. IRS and social security withholding and payments: Even if the only person you pay is yourself, you are considered an “employer.” You must follow Internal Revenue Service (IRS), state and local guidelines for mandatory withholdings (taxes, Social Security, etc.), and either use a payroll service or set up bank accounts to deposit those funds. INSURING YOUR BUSINESS It may not be the first thing you think about when starting a business, but if you don’t purchase proper insurance, all your hard work could disappear in the blink of an eye. Consult an insurance broker to determine what types of insurance you need. These may include: property: Covers fire and other loss to buildings, building contents, inventory and home-based businesses. Add-ons such as business interruption insurance can expand this coverage. liability: Covers bodily injury and property damage to others caused by accidents on your property, such as if a customer slips and falls at your place of business. motor vehicle: Covers bodily injury and property damage resulting from the business use of your motor vehicles, such as if an employee drives a company van to make deliveries. umbrella liability: Provides additional liability insurance above the limits in your basic automobile and general liability policies. worker’s compensation: Covers injuries, death and loss of wages to workers injured on the job, including the owner, and protects you against employee lawsuits for damages. health: If you rely on your current job to receive health insurance, you’ll need to look into private health insurance options before starting your business. life: Many business partners buy “key man” life insurance on the partners in the business. If one owner dies, the proceeds enable the surviving partners to buy his or her share from the heirs. simple steps for starting your business I 11 It may not be the first thing you think about when starting a business, but if you don’t purchase proper insurance, all your hard work could disappear in the blink of an eye. section 1: Ready to Start? Business Plan Basics Why do you need a business plan? Some entrepreneurs think a business plan is only used to get financing. In reality, there are many more uses for a business plan. A well-written business plan: " Gives you an objective view of your business idea so you can enhance its strengths and shore up its weaknesses " Communicates your ideas to the rest of the team " Becomes the foundation for future planning as your business grows WHAT’S IN A BUSINESS PLAN? THE BASICS ARE SIMPLE: " Table of Contents " Executive Summary " Section One: The Business " Section Two: Financial Forecasts " Section Three: Supporting Data Let’s take a closer look at each section of a business plan. EXECUTIVE SUMMARY: The executive summary is an overview of the business plan. It briefly explains the com- pany’s inception, the business idea, the man- agement experience of the executive team and how the company plans to achieve success. It contains: " A brief description of the business " Whether you will seek a loan or investors " How much money you need " How the money will be used " When loans will be repaid " Revenue model and return on investment 12 I simple steps for starting your business The executive summary is an overview of the business plan. It briefly explains the company’s inception, the business idea, the management experience of the executive team and how the company plans to achieve success.section 1: Ready to Start? Business Plan Basics Although the executive summary is the first part of the business plan—and, often, the only part potential investors read—you should write it last, after you have thought through all the other elements of your plan. SECTION ONE: THE BUSINESS This part of your plan explains what your business does and how it will operate. Include: " A description of the business " A description of the product or service " An assessment of the market need for what you’re selling " Your location and why you selected it " An assessment of the competition and how you will beat them " A description of key management and personnel, their experience and backgrounds " How you will use new funds (if you’re seeking financing) SECTION TWO: FINANCIAL FORECASTS SECTION THREE: SUPPORTING DATA This section is a detailed plan of where the money In this section, you show that you’ve done to start your business will come from, how it will your due diligence by providing backup be spent and projected growth. It includes: for the information you provided elsewhere. Prove what the facts are and " A capital equipment list where you got your data. " Projected income and expenses " Assets, liabilities and equity " Sources and uses of funds (cash flow) " A break-even calculation Write a vision statement for your business. It should contain: the overall purpose of your business: What are you trying to achieve? Why are you in business? what your business does: Describe the products and services it provides. % what’s important to your business: What are the values your business lives by? Start now to think about your business plan. Turn the page to create your vision statement for your business. simple steps for starting your business I 13 Although the executive summary is the first part of the business plan— and, often, the only part potential investors read—you should write it last, after you have thought through all the other elements of your plan.section 1: Ready to Start? Vision Statement: Worksheet the purpose of my business is: I the business will provide the following products and/or services: I the things that are important and the values my business will live by include: I Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 14 I simple steps for starting your businesssection 2: Great Idea Getting Your Business Idea You’re reading this book because you have an idea for a business. Maybe you have ideas for more than one business Or maybe you just know that you want to start a business, but don’t have a concrete concept in mind. Use the steps below to develop or fine-tune your business concept. A good business STEP 1: idea fills a need Define a Market Need that exists in the A good business idea fills a need that exists in the market. You may market. You may have come up with your business idea because you, your friends or your family saw a have come up need for a product or service you couldn’t find. Maybe the product or service exists, but you think with your business you can do it better. Here are some questions to ask: idea because you, your friends What need does my product or service fill? What problem does it solve? or your family saw What are the features and benefits of my a need for a product or service? (“Features” are the product or service components of your product. For instance, a bicycle’s features might include a high-tech you couldn’t find. braking system and puncture-proof tires. The “benefits” of those features are safety and a smoother ride.) What is my competitive advantage? (How is your idea different from, or better than, the competition?) What is my business model? (How will you produce, deliver and market the product or service, and how will you make money?) 15 simple steps for starting your business Isection 2: Great Idea Getting Your Business Idea STEP 2: Examine Your Personal Background If you don’t yet have a firm business idea in mind, assessing your life and work experience can help you come up with one. If you do have a business idea, review your past experience to see how well it supports your concept. CONSIDER: how do my skills and experience fit with my idea? Suppose you want to open a Get input on your bakery. If you have worked in business idea by food service or retailing, those skills will help you in running your new business. If you giving a SCORE haven’t, you may need to learn more about these industries and gain experience before you move forward. Mentor, friend or family member an how risk-tolerant am I? How does my experience “elevator pitch” (two affect my startup risk? Past experience can minimize minutes or less) the risk of starting a business. explaining your Many people dream of opening restaurants, but this industry has business concept. a high failure rate. If you have no restaurant experience, your risk Have them ask you will be even greater. Taking into questions and offer account your experience and the potential risk of your startup, honest feedback. assess how comfortable you feel with moving forward. Hearing what someone else thinks how can I modify my idea to fit my experience? of your idea will help If your idea seems too risky given your experience, consider an you clarify your alternative. Using the example ideas. above, for instance, a person with no restaurant experience might consider a lower-risk business such as catering or a cupcake shop. do i h ave the passion to sell this idea to others? You need to be able to convince customers, investors and potential partners that your business idea is worthwhile. 16 I simple steps for starting your businessDisc Discour ouraging aging R Rapid Decline apid Decline Rap pi id d G Gr ro ow wt th h h Sl Slow Decline ow Decline section 2: Great Idea Getting Your Business Idea STEP 3: Research Your Industry Another way to fine-tune your business idea is by researching the industry you want to enter. You’ll want to know: " growth trends: How fast can a business in this industry Another way to fine- expect to grow? tune your business " profitability: What kind of profit can you expect to make? What are average margins in the industry? idea is by researching " trends: What current and future trends (demographic, economic, global) are affecting the industry? the industry you want " life cycle: The chart below illustrates the concept of life to enter. cycle. Ideally, you want to choose an industry that’s either at an early stage in its life cycle or in the reinvention stage. Choosing an industry in the mature or declining stages makes it harder to compete. Maturity Startup SOURCES OF INDUSTRY DATA I Use these tools to research your industry: The North American Industry Classification System (NAICS) is the standard system federal agencies use to classify businesses. Search it online or go to to find your industry description. Trade associations also have valuable industry information. Search for associations online or consult the National Trade and Professional Associations (NTPA) Directory, available at libraries or online at Risk Management Association (RMA) Annual Statement Studies, available at libraries or online at, provide benchmark financial ratios for businesses in over 370 industries. 17 simple steps for starting your business I R Rein einv ve en ntion tion Enc Encour ouraging agingsection 2: Great Idea Getting Your Business Idea STEP 4: Consider Your Target Market Who will your business serve? You can’t be all things to all people. To create a winning concept, you need to narrow your market focus. Ask yourself these questions: Who will your business " channel position: Where in the sales chain serve? will your customers fall? In other words, are you You can’t be all selling to retailers, wholesalers, consumers or other businesses? things to all people. " number: How big is your potential market? To create a winning " income level/ability to pay: Are your concept, you need to customers upscale or bargain hunters? narrow your " demographics: What are the demographic market focus. characteristics of your market (location, company size, sex, age, marital status and education level)? " lifestyle: Are your target customers urban or rural? How do they spend their work, leisure and personal time? " habits: What are the spending habits of your target market? Where do they shop and how do they buy? On page 20, we’ll discuss researching your target market in more detail. AND DON’T FORGET... I Other key factors to think about when assessing a business idea include: competition: How many competitors are there? How big are they? What product or service features and benefits do they offer? suppliers: What kinds of suppliers will you need? Are sources of supply readily available? How reliable are they? business risk: Is the product or service you’re considering a short-lived fad, or does it have long-term potential? Are there legal or environmental factors that could threaten your business, such as pending legislation that might restrict your operations? Complete the Business Concept Outline Worksheet on the next page. 18 I simple steps for starting your businesssection 2: Great Idea Business Concept Outline: Worksheet BUSINESS IDEA I Describe your product or service idea, including features, benefits and business model. PERSONAL BACKGROUND I What aspects of your skills and work experience will translate to your business? INDUSTRY PROFILE I Note key facts about the industry you are entering, including growth trends, profitability and life cycle. TARGET MARKETS I Describe who will purchase your product or service, including the market size and their demographics, lifestyle and buying habits. OTHER KEY FACTORS I Describe any other factors that could affect your business. Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 19 simple steps for starting your business Isection 2: Great Idea Doing Market Research On the previous pages, we asked you to think about your target market’s demographics, income, lifestyle and habits. Now it’s time to drill deeper by doing some in-depth market research. Go beyond identifying your target audience to learn about You might how they buy, what matters to them and where think you don’t need they spend their time. market research because you have You might think you don’t need market research because you such a great have such a great business idea. In reality, failing to do market research can doom your business to failure. business idea. In RESEARCH YOUR TARGET MARKETS reality, failing to do Once you have identified potential target markets, market research you need to gather data on the following: can doom your " channel position: Which possible sales channels business to failure. will your business use? Are certain channels more profitable than others, easier to enter or simpler to work with? Are some channels growing while others are shrinking? Carefully research the costs and potential profit of each channel. " geographic location: If you’re starting a local business such as a restaurant or retail store, you’ll be targeting customers in a specific geographic area. If you’re starting an e- commerce business, you may be selling to customers nationwide and even globally. Wherever your customers will be, gather information about that location. What local, regional, national and global factors will affect the target market in that location? SOURCES OF CUSTOMER DATA I Where can you get data about customer groups? trade associations: Trade groups typically maintain data about market trends. Search for trade associations online. reference library: A good business reference librarian can be immensely helpful in finding what you’re looking for. government websites: You’ll find a wealth of information at,,, and focus groups: Get a group that represents your target market—whether that’s college students or moms—together for a short focus group. survey: Online tools like and offer free options for conducting surveys to ask potential customers questions. 20 I simple steps for starting your businesssection 2: Great Idea Doing Market Research " customer demographics: Drill down into your customer demographic by researching the following: spending: Income is important, but you also Businesses once want to know how your target market spends targeted consumers by that income. What percentage of their income goes to your type of product or service? How age, such as TV shows much discretionary income do they have? for the “18-to-49-year- gender, age, race and marital status: Targeting “women” as a market is too broad, old” audience. Today, because not all women behave the same way. You’ll it’s more effective to need to research specific niches within broader categories. For example, married women behave focus on consumers’ differently than single women; moms behave differently than childless women. psychographics or life stages. For instance, a buying habits and behavior: What makes your target market buy? Where do they 55-year-old man might buy? (Online? In boutiques? In superstores?) What marketing tactics work best on them? be a single urbanite, a How often do they buy your product or service retiree with three grown and how much do they spend? children, or father of a " market size: How big is your target market? Is it growing, or is it in decline? Find data for the past three 3-year-old. Each of years plus future projections. Targeting a market that’s shrinking is generally not a good idea. these men will make very different " realistic market penetration: Just as important as the market size is how much of that market you can realistically purchasing decisions. hope to capture. This is where researching your competition comes in. TRACKING TRENDS I What factors are shaping your customers' behavior? The following sources will help you keep on top of trends. newspapers: Since trends typically start in big cities and trickle down to other areas, read the leading newspapers from urban areas, such as The New York Times. periodicals: Read the magazines your target market reads—whether that’s Road & Track or Tiger Beat—to keep up with what matters to them. television: Popular shows are often good indicators of consumer trends. For example, the growth of cooking shows in the past decade has been matched by consumer spending on gourmet foods, home entertaining and tools for home cooking. internet: Set up Google Alerts for topics you’re interested in, or visit Google Trends ( to see what the most popular searches are at any given time. Fill out the Target Market Worksheet on the next page. 21 simple steps for starting your business Isection 2: Great Idea Target Market: Worksheet Example Ann’s Nursery BUSINESS Local TARGET MARKETS gardeners CHANNEL Consumer POSITION KEY High-end DEMOGRAPHICS Local reputation, BUYING pricing, HABITS availability 500K, MARKET SIZE AND SHARE 5% share Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 22 I simple steps for starting your businesssection 2: Great Idea Doing Competitive Research Just as important as understanding your target market is understanding your competition. You need to know what your competitors are up to so that you can better position your products and services. RESEARCHING YOUR COMPETITION Here’s what you need to find out about your competitors. business model: What sales channels do your competitors use and how do they make money? size: How big are your competitors? Will you be competing against other small businesses, national corporations or regional chains? location: Are your competitors local, regional, national or overseas? Are they brick-and-mortar locations, or do they sell only online? profitability: How profitable are your competitors? What are the average margins in your industry and among your specific competitors? market strategy: How do your competitors position themselves? Are they businesslike or informal? Low-price leaders or premium products? Do they offer hand-holding service, or a do-it- yourself atmosphere? features/benefits: What are the features and benefits of your competitors’ products or services? How do they compare to yours? price: What prices do your competitors charge? Do they offer discounting, bundling or subscription plans? efficiency: How are your competitors staffed? How many employees do they have? Do they outsource work or work virtually? What kinds of overhead costs do they have? Make copies of the Competitor Data Collection Plan on the next page and fill out a copy for each competitor. 23 simple steps for starting your business I How do your competitors position themselves? Are they businesslike or informal? Low- price leaders or premium products? Do they offer hand-holding service, or a do-it- yourself atmosphere?section 2: Great Idea Competitor Data Collection Plan: Worksheet Example Cindy’s Garden BUSINESS Supply PRICE High FEATURES Upscale Local, SIZE/ PROFITABILITY high margins Premium MARKET STRATEGY products SOURCES OF COMPETITOR DATA I Try the following resources for useful data on competitors: SCORE Trade associations Reference USA (available at libraries) Risk Management Association (RMA) Annual Statement Studies (available at libraries or at Bureau of Economic Analysis Bureau of Labor Statistics D&B Hoovers NAICS SEC U.S. Census Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 24 I simple steps for starting your businesssection 2: Great Idea Doing Competitive Research I Spy You can’t learn everything you need to know about competitors from publicly available sources. Collecting critical information also requires some sleuthing. Here’s where to get the scoop: " the competitor: Sometimes you can get information directly from the competitor. Call their business or visit their website or location pretending to be a customer seeking information. Sign up for their e-mail newsletters, or follow them on Facebook or Twitter to see what marketing methods they’re using. Sometimes, geographically distant competitors will be willing to give you advice and ideas if they feel you aren’t going to be competing for the same customer base. " suppliers: You’ll need to contact potential suppliers to research your costs and product availability. While you’re at it, see if you can get information about competitors. " competitors’ customers: Social media has made it easier to contact your competitors’ customers and ask what they like (and don’t like) about the competition. You can also see what the competitors’ customers are saying about them online. " trade associations: Trade associations will not reveal information about specific companies, but they do have general information about benchmarks, trends and averages in your industry. " the internet: Set up a Google Alert on your competitors to receive news and information about them. Search online articles to learn about their growth strategies and future plans. Complete the Competitive Comparison Worksheet on the next page to see how your business concept compares with your key competitors. 25 simple steps for starting your business I You can’t learn everything you need to know about competitors from publicly available sources. Collecting critical information also requires some sleuthing.section 2: Great Idea Competitive Comparison: Worksheet my business competitor 1 competitor 2 competitor 3 NAME BENEFITS/ FEATURES PRICING SALES SIZE/MIX MARKET STRATEGY BUSINESS MODEL LOCATION " Rate each characteristic for your business and for your competitors. " Use plus (+), neutral (0) or negative (- ) for each characteristic based on how you think your customers would perceive them. " Ratings estimate should compare all the businesses, with “average” receiving a rating of “0.” Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 26 I simple steps for starting your businesssection 2: Great Idea Pricing Your Product or Service Properly pricing your product or service is key to your business’ success or failure. Smart pricing strategy starts with understanding the market price, which is the average price charged by all your competitors, and the price at which their product or service is generally valued in the marketplace. You can then choose to charge a premium price (if you have a superior, value-added product or service), a discount price (which is generally hard for small companies to sustain), or a price similar to the competition’s (market price). Here are some other pricing considerations: " channel: You may need to vary prices depending on your sales channel (see “Understanding Channels” on page 28). For example, if you sell directly to consumers as well as to retailers/resellers, you’ll have to charge the retailers less so they can charge the same retail price you do and still make a profit. If you’re selling to businesses, consider the type of business and price accordingly. Small businesses have lower budgets, while big corporations have more to spend. " markup on cost: Some companies calculate pricing based on a markup on their cost to produce the product or service. Your market research should show you average markups for your industry. " bundling: “Bundling” means charge lower prices when customers buy more than one product or service. For instance, if you offer website design, Web hosting and e-mail marketing services, you might charge less when customers sign up for all three of your services. " target market: Consider your target market in setting prices. For example, if your target market is a sophisticated buyer, then you will probably need to include some costs (reflected in the price) to deal with a higher level of customer service than other customers. 27 simple steps for starting your business I You can choose to charge a premium price (if you have a superior, value- added product or service), a discount price (which is generally hard for small companies to sustain), or a price similar to the competition’s (market price).section 2: Great Idea Pricing Your Product or Service " promotional pricing: Many businesses offer sales or promotional prices to entice new customers or to encourage customers to buy more. Setting and Your price is the Adjusting Prices strongest signal to the Pricing isn’t a one-time task, but an ongoing effort. customer of your As your new business gets off the ground, you’ll probably have to tinker with your prices until you product or service’s find the right formula that increases both sales and profits. You’ll also need to adjust perceived value and prices as market conditions change position in the market. A and as your business grows. Here are the steps to follow at each stage higher price leads of the game. customers to have SET YOUR INITIAL PRICE: higher expectations. A Consider the costs of making your lower price could lessen product or providing your service, plus profit. your product or service’s Know the competition’s price and whether perceived value. you will match it, beat it or charge more. UNDERSTANDING CHANNELS I Channels are how products and services are distributed to the customer. Below are common channels businesses use: direct sale to business (b2b): You may sell products or services directly to businesses. direct sale to consumer (b2c): You may sell products or services directly to individuals. sale to distributor who sells to retailer: If you manufacture or import a product, you may sell it to an agent or middleman, who then sells it to retail outlets. internet sales: You may sell to either businesses or consumers online (e-commerce). associate or affiliate networks: You may sell your product through a network of associates (offline) or affiliates (online) who keep part of the profits in return for facilitating the sale. Understanding the various channels helps you see market segments you might have missed, identifies multiple market segments you can target, helps you set prices in such a way as to avoid channel conflicts, and helps you develop your marketing communication strategy. 28 I simple steps for starting your businesssection 2: Great Idea Pricing Your Product or Service ADJUST YOUR PRICE AS NEEDED: Monitor customer demand. Is your product or service selling? If not, rethink your pricing. Compare your sales to the competition. Are your sales similar to, better than or worse than theirs? Ensure you’re providing value commensurate with your price. Consider using credit terms or bundling products/services to make your offerings more attractive. Setting your prices too Before increasing prices, look for ways to low may sound like a reduce your costs. great way to boost sales. In reality, prices Target Market Comparison that are too low and Selection disrupt the A market segment is a subset of a market that has similar needs and characteristics. For marketplace by instance, if you are targeting mothers as leading to a price customers, market segments to consider include pregnant women, mothers of infants war. Unnaturally low and mothers of toddlers. To determine whether or not a market segment is a good target market prices can’t be for you, test it against the following criteria: sustained—and in a Does your product or service fill unmet price war, the new market/customer needs? business suffers the How profitable is the market segment? most. This is one war What level of sales can you expect you can’t win, so don’t from the segment? even start. What are the potential channel conflicts? How favorable or unfavorable is the competitive environment? Does this market segment really fit your business vision and skills? To compare potential market segments, fill out the Target Market Comparison Worksheet on the next page. 29 simple steps for starting your business Isection 2: Great Idea Target Market Comparison: Worksheet Example Upscale Local MARKET SEGMENT Gardeners Unique plants, high NEED level of service PROFIT High profit potential Potential for high, SALES steady sales Possible conflict with CHANNEL CONFLICT online sales COMPETITION Limited FITS ME Yes " Rate each market segment that you are thinking about targeting. " Use plus (+), neutral (0) or negative (- ) for each factor. " Use the results to determine which markets have the most promise (that is, positives) for your business. Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 30 I simple steps for starting your businesssection 3: Marketing Your Business Branding Your Business The first step to marketing your business is creating your brand. What is a brand? Simply put, it’s the image of your business—what people think of when they hear your business’s name. Your brand identity is crucial because all of your marketing activities will work to promote and enhance your brand, building brand recognition. To create your brand, begin by thinking about what you want your business to be known for. Do you want to be the low-price leader? The premium lux- ury product? The company with the fastest service? The company with the friendliest employees? Next, fill out the Product and Service Description Worksheet on the next page. List anything that To create makes your products or services stand out from the competition, including: your brand, Special benefits (How your product/service fills a begin by need or solves a problem) Unique features (Physical attributes of the thinking about product/service) Limits and liabilities (What kinds of guarantees what you or return policies do you offer?) want your Production and delivery methods (One-day delivery? Hand-made products?) business to be Suppliers (Are you an authorized reseller of a well-known brand?) known for. Intellectual property, special permits (Is your product/service one-of-a-kind?) Fill out the Product and Service Description Worksheet on the next page. 31 simple steps for starting your business Isection 3: Marketing Your Business Product and Service Description: Worksheet BUSINESS NAME PRODUCT/SERVICE IDEA SPECIAL BENEFITS UNIQUE FEATURES LIMITS AND LIABILITIES PRODUCTION AND DELIVERY SUPPLIERS INTELLECTUAL PROPERTY/ SPECIAL PERMITS Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 32 I simple steps for starting your businesssection 3: Marketing Your Business Branding Your Business YOUR MARKETING MESSAGE Completing the Product and Service Description Worksheet will help you in crafting your marketing message. Your marketing message sums up all the elements of your brand in one paragraph. Here is a sample marketing message for a fictional business: “Ann’s Nursery (business) offers to discerning growers and gardeners (target markets) high-quality ornamental trees, shrubs and vines (products) backed by well-known horticulturalist Dr. Ann Murphy; a ‘guarantee to grow’; and extended plant care documentation (unique features).” It is important to craft your marketing message well because it will be used in It is important almost every form of communication to potential customers. to craft your marketing message well, because it will be used in almost every form of communication to potential customers. Use the Marketing Message Worksheet on the next page to write your marketing message. 33 simple steps for starting your business Isection 3: Marketing Your Business Marketing Message: Worksheet Using the marketing message for Ann’s Nursery on page 33 as an example, fill in the elements below that apply to your business. BUSINESS NAME PRODUCT/SERVICE OFFERED TARGET MARKETS UNIQUE FEATURES CUSTOMER BENEFITS MESSAGE: " Write your marketing message, incorporating the elements mentioned above. Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 34 I simple steps for starting your businesssection 3: Marketing Your Business Developing Your Marketing Plan In the same way your business plan explains your business idea, strategy and operations, your marketing plan lays out your marketing message and how you plan to communicate it. Here’s a breakdown of what your marketing plan should include. 1) YOUR TARGET MARKET Using the research you compiled in You already gathered Section 2 of this book, explain your much of the data you target market, including size, spending habits, demographics need for your marketing and location. plan during your market 2) YOUR PRODUCT OR SERVICE research phase. If you How is your product or service different from and better than the competition’s? What need does need more information, it fill or what problem does it solve? here are some sources 3) WHICH MARKETING to try: COMMUNICATION METHODS YOU WILL USE • Banks Common marketing methods include: Advertising: radio, TV, • Civic organizations newspaper, magazine, direct mail, Yellow Pages, online • Census data Public relations (print, radio, • Internet TV, blogs) • Library reference sections Collateral (print marketing materials such as business cards, brochures, stationery, flyers) • Trade associations Internet (websites, e-mail, social networks, blogs, newsletters) Product samples, special offers Presentation material, signage 35 simple steps for starting your business Isection 3: Marketing Your Business Developing Your Marketing Plan 4) YOUR MARKETING STRATEGY This part of your marketing plan outlines a road map for how you will market your business throughout the year. Include: Marketing message (which you created in the worksheet on page 34) Different marketing methods work best Channel choice/sales approach (direct sales, for different target markets and types Internet sales, etc.) of businesses. When planning your Methods used and related cost. Include one- time costs (such as a booth at a trade show, or the marketing mix, take into account who you cost of designing your website), periodic expenses are selling to and how you sell. (website maintenance, monthly ads, annual listings), how much staff time will be spent on • Business to Business (B2B) for a product marketing and how much that will cost, and any other promotional activity. • Business to Business (B2B) for a service Measure the effectiveness of each marketing strategy and adjust accordingly. • Business to Consumer (B2C) for a product • Business to Consumer (B2C) for a service MARKETING STRATEGY CHART Below is an example of a marketing strategy chart • Internet sales created for a fictional business, Ann’s Nursery. ann’s nursery: marketing strategy chart LOCAL RETAILER DISTANT RETAILER INTERNET CUSTOMER 1,000 3,000 2,000 ONE-TIME EXPENSES for samples for displays for website 2,000 100 MONTHLY/ANNUAL 150 per month for per year per month EXPENSES transportation for travel for Web hosting 0.5 0.25 0.25 LABOR COSTS staff person staff person staff person Create your own Marketing Strategy Chart by filling in the worksheet on the next page. 36 I simple steps for starting your businesssection 3: Marketing Your Business Marketing Strategy Chart: Worksheet Example TARGET MARKET BY Local Retailer CHANNEL 1,000 for ONE-TIME EXPENSES samples 150 per month MONTHLY/ ANNUAL for EXPENSES transportation 0.5 staff LABOR COSTS person Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 37 simple steps for starting your business Isection 3: Marketing Your Business Marketing Your Business With Social Media Social media (also called social networking) has become one of the most important methods of marketing for small businesses. Because social media tools are free—with no cost but your time— they’re ideally suited for small business owners and startups on a budget. Whether it’s LinkedIn, Twitter or Facebook, social networking sites work the same way: You create a personal profile and build up a network of contacts that you can interact with online. Here’s an overview of the three most popular social networking sites and how you can use them to market your business. linkedin ( is the most popular general business networking site. Use it to connect with potential customers, partners, suppliers and even new employees; to research prospects before you approach them; or to get introduced to people you want to know. Less consumer-oriented, LinkedIn works best for business-to-business marketing. Looking to establish yourself as an industry expert? Use LinkedIn Answers to answer users’ questions related to your field, and join or start an industry-related group. facebook ( is more informal than LinkedIn and works best for consumer- focused businesses whose products or services could develop a “fan” base. Restaurants, consumer products and retailers have benefited from Facebook. Start by creating a Facebook page for your company so users can “like” your company and check its page for news. The more you post on Facebook, the better, so fill your page with updates, photos and videos. Special offers like short-term discounts or promotions are popular on Facebook. 38 I simple steps for starting your business In addition to Facebook, LinkedIn and Twitter, there are many smaller social networking sites for specific industries. Search online or ask your industry contacts for recommendations about the best sites.section 3: Marketing Your Business Marketing Your Business With Social Media twitter ( is a microblogging service where users send out short messages (up to 140 characters, including spaces) called “tweets.” Forwarding a tweet is called “retweeting”; users “follow” each other to see what’s being said. To start on Twitter, import your e-mail contacts and follow them. As you see who they follow, your network will build naturally. Start by listening first; when you begin tweeting, make sure you’re offering something of value—not just promoting yourself. Help others out by retweeting tweets you find valuable. Many businesses “tweet” special offers or discounts to draw in more customers. SOCIAL MADE SIMPLE Social networking can seem overwhelming at first. Whichever social networking tool you try, use these tips to maximize your efforts: link your social networking profile/s to your business’s website. don’t be too promotional. If all you do is post or tweet about your newest projects, people will start to tune you out. Be helpful and share things you think are interesting. be real. Social networking isn’t about a fake corporate image; it’s a way to let the “real you” show through. As an entrepreneur, the personal touch you bring to your business is one of your core advantages—so let it shine in your social networking efforts. try them all. Give each of the big social networking sites a chance. Set up profiles, then spend half an hour a day on each. use tools. Do an Internet search for Facebook, Twitter or LinkedIn tools and you’ll find lots of applications that can streamline your social networking and save you time. know your goals. Set measurable goals and track your results from the sites. You’ll soon find out which social networking tools give you the best return on investment. 39 simple steps for starting your business I The latest trend in social networking: “LOCATION-BASED” mobile applications that users can access on their smartphones. Businesses use these tools to send users special offers, coupons and alerts tied to where the user happens to be at the moment. Facebook Places, Foursquare and Gowalla are three location-based tools to check out. section 4: Financial Matters Financial Planning: Why You Need It With your marketing plan in place, your next step is financial planning. Financial planning is essential to a startup business because it helps you: Figure out how much money you will need to start and run your business. Create a plan to guide future business decisions and monitor results. Communicate with stakeholders (investors, lenders, employees, etc.) about the business’s finances. Better understand the financial risks and rewards A financial of entrepreneurship. plan is your A financial plan is your forecast of sales, costs, profits and assets for the first year or more after you start forecast of your business. You will use it to predict how sales, costs, successful your new business might be, and to understand where your money will be allocated and profits and where it will come from. As your business grows, go over your financial plan with your accountant assets for the periodically to review and update your forecast based first year or on your past business history and your business plan. more after you Components of start your business. Your Financial Plan There are five elements that make up a financial plan: 1. REQUIRED STARTUP FUNDS 2. SALARIES AND WAGES 3. FIXED OPERATING EXPENSES 4. PROJECTED SALES FORECAST 5. CASH RECEIPTS AND DISBURSEMENTS In the following pages, we’ll take a closer look at each of these elements. 40 I simple steps for starting your businesssection 4: Financial Matters Financial Planning: Why You Need It 1. REQUIRED STARTUP FUNDS Here are some factors to consider as you calculate your required startup funds. How much money do you need to get your business up and running? What will it be used for? What are your expected sources of capital? How much will be financed by you/your partner/s, and how much by other sources? Be as detailed as you can in estimating startup costs. Include equipment, inventory and business services such as insurance or legal costs. Don’t forget, you’ll also need enough working capital to get you through the period before your business begins making a profit (typically 6 to 18 months). Last, but not least, be sure that you add in some extra capital for contingencies. To prepare your startup for success, you need to ensure your available capital and funding exceed your startup costs. 2. SALARIES AND WAGES Include wages for employees and the business owner/s. Remember to include taxes on wages. As a rule of thumb, mandatory and voluntary fringe benefits should total about 15 percent of wages. 3. FIXED OPERATING EXPENSES Fixed operating expenses are the administrative expenses necessary to run the business. These include costs such as insurance, rent, utilities, sales commissions, advertising, taxes and licenses. To get a better idea of your startup expenses, complete the Estimated Startup Costs Worksheet on the next page. 41 simple steps for starting your business I You can find free, downloadable tools and templates on SCORE’s website, www.score.orgsection 4: Financial Matters Estimated Startup Costs: Worksheet startup expenses estimated amount notes buildings/real estate estimate the costs to get Purchase / Lease your business up and running Construction and to sustain you until it Remodeling reaches profitability Leasehold Improvements (typically 6 to 18 months). Other TOTAL BUILDINGS/REAL ESTATE capital equipment list Furniture Equipment Fixtures Machinery Technology Other TOTAL CAPITAL EQUIPMENT administrative expenses Corporate Fees, Permits and Taxes Real Estate and Utility Deposits Legal and Accounting Fees Insurance Salaries and Wages Payroll Taxes Benefits Website Maintenance Office Supplies Other TOTAL ADMINISTRATIVE EXPENSES opening inventory Category 1 Category 2 Category 3 TOTAL INVENTORY advertising/promotional expenses Advertising Website Development Signage Printing Travel, Meals and Entertainment Other/Additional Categories TOTAL ADVERTISING/PROMOTIONAL EXPENSES other expenses Other Expense 1 Other Expense 2 TOTAL OTHER EXPENSES reserve for contingencies working capital Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 42 I simple steps for starting your businesssection 4: Financial Matters Financial Planning: Why You Need It 4. PROJECTED SALES FORECAST A) forecasting sales units: The first step in projecting your sales units is figuring out in what units your products or services will be sold. Are you selling products, services or hours? Different businesses sell their products or services in different types of units. For example: Retailer (products) Hairdresser (service) Computer repair (hours) Of course, a single business may also have multiple categories. For example, you might open a store that offers computer repair (which is sold in hours) but also sell computer hardware and peripherals (which are products). Try to figure out what average unit of sales or package of goods and services customers will buy. If you sell your product or service in different ways or have more than one type of customer, you may need to break this down into three or four different types of transactions. Suppose you will be selling computer equipment and IT services, for example. You need to figure out what your average customer is likely to purchase. Will your average customer be an individual (perhaps buying one computer) or a business (probably buying several computers)? The average IT consulting or service job might take two hours (for an individual) or two days (for a business). Once you have your average unit sale, you can then calculate: Your direct cost per unit Your price per unit 43 simple steps for starting your business I As a startup, forecasting sales units means making some guesses—but they should be educated guesses. Use the data you gathered in your market research, competitive research and business plan. Be sure to write down the basis for your assumptions so you can remember how you came up with the numbers when you revisit your financial plan later. section 4: Financial Matters Financial Planning: Why You Need It B) gross profit margin: The next step in your projected sales forecast is figuring out your gross profit margin. Gross profit margin is the dollar amount of your sales, minus the direct cost of those sales. Direct costs are those that vary based on sales volume— such as shipping products—as compared to indirect costs (also called overhead) that are fixed, such as rent and wages. Figuring your gross profit margin is important because it requires you to estimate the costs of what you’re selling, and helps you determine if your price is adequate. If your gross profit margin, calculated as a percentage of sales, is higher than the industry norm, it will be hard for your business to sustain. Know your industry norms and use them in your financial projections. (See the list of websites mentioned in Section 2 for sources of industry data.) Once you have forecast sales units and determined your gross profit margin, you’re ready to do your projected sales forecast. 5. CASH RECEIPTS AND DISBURSEMENTS You don’t always get paid at the time a sale is made, so in addition to projecting sales, you also need to project when you will receive payment and when you will have to make payments. Payment terms vary by industry. Common payment terms include: 0 to 30 days 31 to 60 days 60 or more days Know what your industry norms are, and be realistic about when you can expect to get paid. Sometimes you can speed up payment by offering discounts or credit card payments, but if you are dealing with government or cor- porate clients, this may not be possible. 44 I simple steps for starting your business Understanding financial matters can be one of the most difficult parts of starting a business, but you don’t have to go it alone. SCORE has thousands of mentors across the country who can work with you one-on-one, free of charge, to help you plan and start your business. Visit today to find a mentor.section 4: Financial Matters Understanding and Using Financial Statements In addition to creating a financial plan as you start your business, you will need to understand and use financial statements on a regular basis as your business grows. Even if you have an accountant, it’s important that you have at least a basic knowledge of these financial statements and how to use them. A good accountant does far more There are three primary financial statements than just keep your that are used by all types of business, large or small, and are governed by GAAP (Generally books and prepare Accepted Accounting Principles) rules. Taken together, these financial statements create a your tax returns. picture of your business’s financial situation at Look for an any moment in time, and also help you project into the future. accountant who 1. income statement: Showing how much can be an ongoing profit or loss is generated, the income advisor. A good statement helps you manage overhead expenses and shows you how long it will take to reach working relationship profitability. with your 2. balance sheet: Showing assets (what is owned), liabilities (what is owed) and your accountant will equity or net worth, the balance sheet helps you help you build a manage inventory, accounts receivable and accounts payable. successful business. 3. cash flow statement: Showing the funds coming into and going out of your business, the cash flow statement shows whether you have adequate funds to run and grow the business. 45 simple steps for starting your business Isection 4: Financial Matters Understanding and Using Financial Statements Here’s a closer look at each. 1. INCOME STATEMENT Also called the income and expense statement or profit and loss (P&L) statement, the income statement is the financial picture of business results over a period of time. The income statement is required annually, but usually prepared monthly or quarterly, with the final report for the year being the annual summary that is filed as part of the business’s tax return. Businesses are required to pay taxes in quarterly installments, based on the proportion of total annual profit earned in each quarter. The top line on the income statement shows the incoming revenue predicted from sales to customers. From that is subtracted the cost of goods sold. Next, subtract the forecasted operating expenses, broken down by category: salaries and wages, rent, insurance, travel, office expense, etc. What is left over is operating income. Operating income is then modified to account for any non- operational income or expenses (such as interest collected or paid). The final result is called income before taxes or profit before taxes, and is used to determine the business’s taxable income. Start working on the Income Statement on the next page. 46 I simple steps for starting your business The income statement is required annually, but usually prepared monthly or quarterly, with the final report for the year being the annual summary that is filed as part of the business’s tax return. Businesses are required to pay taxes in quarterly installments, based on the proportion of total annual profit earned in each quarter. section section 4 4: : F Fi in na an nc ci ia al l M Ma at tt te er rs s Income Statement: Worksheet Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 47 simple steps for starting your business I Revenue (Sales) Category 1 Category 2 Category 3 Category 4 Category 5 Category 6 Category 7 Total Revenue (Sales) Cost of Sales Category 1 Category 2 Category 3 Category 4 Category 5 Category 6 Category 7 Total Cost of Sales Gross Profit Expenses Salary expenses Payroll expenses Outside services Supplies (office and operating) Repairs and maintenance Advertising Car, delivery and travel Accounting and legal Rent Telephone Utilities Insurance Taxes (real estate, etc.) Interest Depreciation Other expenses (specify) Other expenses (specify) Other expenses (specify) Misc. (unspecified) Total Expenses Net Profit IND. % Jan- % Feb- % Mar- % Apr- % May- % Jun- % July- % Aug- % Sep- % Oct- % Nov- % Dec- % YEARYL %section 4: Financial Matters Understanding and Using Financial Statements 2. BALANCE SHEET The balance sheet is a crucial tool in your company’s financial management. By looking at your balance sheet, you are able to see a snapshot of your company’s finances at a single point in time. The balance sheet highlights: What you own (assets) What you owe (liabilities) Your net worth (assets minus liabilities) The simple formula is: Assets minus Liabilities equals Owner’s Equity or Net Worth. Assets include: current or short-term assets – These include those assets that will be used up or changed into cash within a year. In this category, you can include assets such as cash, accounts receivable, prepaid expenses and inventory. fixed assets – These include assets for long-term use. In this category, you can include assets such as buildings and equipment. Liabilities include: debt (money owed to others) a) Current or short-term debt (such as lines of credit) is expected to be paid off within a year. b) Long-term debt (such as mortgages or loans) will take more than one year to pay off. owner’s equity or net worth (the proportion of asset value that represents money invested by the business owner/s). Begin filling in the sample Balance Sheet on the next page. 48 I simple steps for starting your business Tap into your business banker’s small business expertise. By forging a relationship with your banker, you’ll have a partner who can work with you to help your business grow. Your banker can suggest products and services such as payroll processing, online banking, online invoicing, merchant credit card processing and more. These tools can simplify your business operations and boost your bottom line.section section 4 4: : F Fi in na an nc ci ia al l M Ma at tt te er rs s Balance Sheet Projected: Worksheet Beginning Projected as of / / as of / / Assets Current Assets Cash in bank Accounts receivable Inventory Prepaid expenses Other current assets Total Current Assets Fixed Assets Machinery & equipment Furniture & fixtures Leasehold improvements Land & buildings Other fixed assets (LESS accumulated depreciation on fixed assets) Total Fixed Assets (net of depreciation) Other Assets Intangibles (intellectual property, trade secrets) Deposits Goodwill Other Total Other Assets TOTAL Assets Liabilities and Equity Current Liabilities Accounts payable Interest payable Taxes payable Notes, short-term (due within 12 months) Current part, long-term debt Other current liabilities Total Current Liabilities Long-term Debt Bank loans payable Notes payable to stockholders LESS: Short-term portion (due within 1 year) Other long-term debt Total Long-term Debt Total Liabilities Owners' Equity Invested capital Retained earnings - beginning Retained earnings - current Total Owners' Equity Total Liabilities & Equity Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 49 simple steps for starting your business Isection 4: Financial Matters Understanding and Using Financial Statements 3. CASH FLOW STATEMENT Where the income statement reports billings and accrued expenses, the cash flow statement reports collections and payments—cash inflow and out- flow. The cash flow statement differs from the in- come statement in that it does not show non-cash items like depreciation expense, but does contain cash outlays like loan principal repayment that aren’t shown in the income statement. The cash flow statement is a crucial benchmark for your business. Use it each month to determine whether your financial projections are accurate. You must monitor cash flow constantly to make sure your checking account always has a positive balance and that you’re bringing in more cash than you’re spending. If not, you need to revise your plans. Think of your cash flow statement like a checkbook register. In fact, the cash flow statement format most commonly used for small businesses mimics the format of a monthly checking account statement. It shows the opening balance, anticipated cash deposits, anticipated cash withdrawals, and the end balance for each month, which becomes the opening balance for the next month. Take a look at the Cash Flow Statement on the next page. Anticipated cash deposits are broken down by category, including income from sales and accounts receivable. Anticipated cash withdrawals are also broken down by category, including tax payments, interest payments and loan repayments. If the business has a line of credit, “Line of Credit Drawdowns” reflects the amounts taken from the line of credit; “Line of Credit Balance” reflects the available credit remaining. Start filling in the Cash Flow Statement on the next page. 50 I simple steps for starting your business If you plan to seek financing, you should know the cash flow statement is the most important document in your loan package. Lenders will assess it carefully to see if your anticipated collections and payments seem accurate and realistic.section section 4 4: : F Fi in na an nc ci ia al l M Ma at tt te er rs s Cash Flow Statement: Worksheet jan feb mar apr may jun jul aug sep oct nov dec t o tals beginning cash balance cash inflows Income From Sales Accounts Receivable total cash inflows cash outflows Investing Activities New Fixed Assets Purchases Inventory Addition to Bal. Sheet Cost of Sales operating activities Salaries and Wages Fixed Business Expenses Taxes financing activities Loan Payments Line of Credit Interest Line of Credit Repayments Dividends Paid total cash outflows cash flow operating cash balance line of credit drawdowns ending cash balance line of credit balance Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 51 simple steps for starting your business Isection 4: Financial Matters Understanding and Using Financial Statements Other Important Financial Tools In addition to financial statements, two other key financial tools can help you assess how well your business is doing financially. 1. BREAKEVEN ANALYSIS The breakeven point is the point at which your gross margin (sales minus cost of sales) equals your fixed operating expenses. You can calculate your breakeven by dividing Total Operating Expense by Gross Margin (as a percentage of sales). Here is the formula: Breakeven Sales = Total Operating Expense / Gross Margin Percent Think of this as an algebra problem and solve for X (breakeven sales). If actual sales are less than the breakeven amount, you may need to recalculate how you plan to run the business. Most startups expect to reach the breakeven point in the first 6 to 18 months of operation. 2. BENCHMARKING AND FINANCIAL RATIOS Benchmarking means comparing your company’s financial information to the same information from similar companies or to industry norms or ratios. Benchmarking is a great way to test the feasibility of your financial plan. Sources of financial ratios include: BizStats ( D&B ( Risk Management Association (RMA) Annual Statement Studies (available at libraries or online at Your reference librarian, banker or SCORE mentor can also help you find the appropriate financial ratios, benchmarks and statistics. If you’re seeking financing, know that lenders and investors will compare certain items on your income statement and balance sheet with your industry ratios. 52 I simple steps for starting your business Financial planning can be intimidating. A SCORE mentor can guide you through the process. GET ADVICE ONLINE: FIND A SCORE OFFICE NEAR YOU: E-MAIL SCORE: SEARCH THE SCORE WEBSITE: www.score.orgsection 4: Financial Matters Finding Financing for Your Business Keeping accurate financial records and understanding your financial statements are essential steps in obtaining financing for your business. FINANCIAL ANALYSIS Before you approach lenders and investors, you should be performing regular analysis of your financial statements. Prepare monthly financial statements (within 10 days after the end of the month) and review them. Perform a monthly ratio analysis. Perform a monthly accounts receivable and accounts payable analysis. Perform a monthly comparative benchmark analysis. Perform a monthly analysis of profit and loss. Depending on your industry, there may be other key measurements you’ll want to track, such as inventory turnover, the average days accounts payable are outstanding (A/P DPO) or the average days accounts receivable are outstanding (A/R DSO). Analyzing your finances monthly enables you to spot trends and make necessary changes. FINANCIAL RECORDKEEPING Whether you are seeking financing now or plan to do so in the future, your financial records need to be in order. Lenders and investors want facts, research and accurate projections—monthly for the first year of your business plan and annually for the remainder. Start keeping track of all your expenses now. There are many software programs available to simplify small business recordkeeping, bookkeeping and accounting. It’s a good idea to choose your accountant first, then use the bookkeeping system he or she recommends. Also have your accountant help you set up the system and the chart of accounts. 53 simple steps for starting your business I If you’re not comfortable interpreting your business’s financial statements, consider taking a class. Even with an accountant and bookkeeper on your team, you need to understand the basics of your business’s finances.section 4: Financial Matters Finding Financing for Your Business Today’s accounting software is simple to use, but if you don’t have the time or patience to handle bookkeeping yourself, a part-time bookkeeper can be a smart option. Bank Loans: What You Need to Know When reviewing your loan application, lenders look for good credit, a feasible business plan, adequate owner equity and sufficient collateral. Perhaps most important, they look for management Your credit score is crucial expertise and commitment. What real- to your startup’s financial world experience do you and your key partners or employees have in managing success. Since your new this type of business? business does not yet have Here is what you’ll need for a bank a track record, banks will loan application: consider your personal Cover letter of introduction Summary of financial needs credit score in making Business financial statements (3 years) lending decisions or opening Business tax returns (3 years) business accounts. Vendors, Projected cash flow statement (12 months) suppliers and potential Collateral (both business and personal) partners will also assess Personal tax returns (3 years) your personal credit score Personal financial statements before extending credit Résumé or doing business with you. The lender will also ask: A FICO score of 700 or Are there any legal claims, liens or judgments against you or your business? greater is desirable. You Are any assets pledged? can get a free personal Are your tax returns and payments up to date? credit report from Do you have any life insurance? If so, what is the face value or the cash value? What are your monthly household income and expenses? 54 I simple steps for starting your businesssection 4: Financial Matters Finding Financing for Your Business THE SIX C’S OF CREDIT Once they have your loan application in hand, bankers look for “the six C’s of credit.” 1. CHARACTER Trustworthiness Personal and business credit history Integrity Quality of references Experience in the business Impression you make on the lender or investors 2. CAPACITY Ability to repay the amount borrowed How soon you can generate positive cash flow When you will show a profit How large the profit will be Whether the profit can be sustained 3. CAPITAL The money you have personally invested Your ability to save money and accumulate growth in owner’s equity 4. COLLATERAL Secondary source of repayment Third-party guarantee Tangible assets Property Equipment Accounts receivable Inventory 5. CONDITIONS Terms of the loan, including: –Intended purpose –Amount requested –Length of loan Local economic climate of industry Local economic climate of business 6. CASH FLOW Where the money to repay the debt will come from How the loan proceeds will be used 55 simple steps for starting your business I How much money will lenders expect you to put into your business? A good rule of thumb is that owners should contribute a minimum of 25 to 30 percent of the required capital. Banks won’t finance 100 percent of your business; they seek a risk cushion and want to know that you, too, have skin in the game. section 4: Financial Matters Finding Financing for Your Business Sources of Capital Although bank loans are typically the first form of financing most new business owners think of, they are not the only way to fund your startup. Here’s an overview of your options. TYPES OF FINANCING EQUITY DEBT Does not signify ownership; it is Signifies ownership and includes: borrowed money that must be paid back, and includes: Loans from banks and credit unions Personal savings (typically guaranteed by the SBA) Investments from family and friends Community Express Micro Loans Partners’ contributions Credit cards (not recommended) As a rule of thumb, Profits retained in the business banks want to see Let’s take a closer look at different ways to fund annual “free cash flow” your business using those two types of financing. equal to 1.3 times annual TRADITIONAL FORMS OF FINANCING debt service 0wner’s equity investment: requirements. (Debt As a rule of thumb, 25 to 30 percent of the business’s capital service means principal needs should be funded by its plus interest payments.) owner/s. This can come from savings, cashing in investments or Because cash flow the cash surrender value of an insurance policy. forecasts are uncertain, partners: If you don’t have banks prefer a cushion adequate capital yourself, consider of one-third more than taking on a business partner who can put money into your startup. projected debt service friends and family: This can be in requirements. the form of debt (a loan) or equity (giving the friend or family member ownership in the business in return for their investment). 56 I simple steps for starting your businesssection 4: Financial Matters Finding Financing for Your Business loans: These could be from banks or credit unions and could include home equity loans. credit cards: If you pay off the balance in full every month, credit cards can work, but if you don’t, this method of financing can become expensive very quickly. sale of capital stock: Depending on the legal form of your business, you may be able to raise capital by selling stock. Be aware this means giving up some ownership. grants: For most for-profit businesses, grants are not available. If you are starting a nonprofit organization, however, grants may be an option. OTHER FORMS OF FINANCING sba guaranteed loans: These loans are made by banks, but a percentage of the loan is guaranteed by the Small Business Administration, making banks more willing to take a risk on your business. department of community and economic development: Local economic development programs may offer financing assistance. department of agriculture and rural development service: If you are located in a rural area or starting an agricultural- related business, there may be special loan programs available to help you. The SBA also has loans targeting rural entrepreneurs. angel investors: Angels are individual investors, often former entrepreneurs, who invest in promising companies. They may form angel groups and invest together. venture capitalists: Venture capital companies invest in companies that have potential for high growth and a rapid return on investment. They often focus on tech companies and seek large investment opportunities with multiple rounds of funding. 57 simple steps for starting your business I Community Development Financial Institutions (CDFIs) can be an option for small business financing. CDFIs are private-sector financial intermediaries that promote economic development in areas underserved by traditional financial institutions. The Small Business Administration’s Community Advantage Loan pilot program offers streamlined applications for loans up to 250,000 made through CDFIs. Several major banks, including Bank of America, have committed grant money to CDFIs to lend to small businesses. Your SCORE Mentor can help you find a CDFI near you. section 4: Financial Matters Finding Financing for Your Business peer-to-peer loans: At sites such as ( or Lending Club (, individuals can connect to ask for and lend each other money. FINANCING FROM THE BALANCE SHEET Sometimes you can get financing based on No matter how impressive your the value of assets in your business or the value of items you are using the loan to buy. business looks on paper, your face- These include: to-face meeting with a lender or accounts receivable financing: Also investor can make or break the called factoring, this is a means of obtaining financing based on the value of your deal. Be prepared to impress accounts receivable. Know your financial SWOT bank line of credit: This is a pre- (Strengths, Weaknesses, established amount of credit that you can use as needed. A line of credit can offer Opportunities and Threats). Focus more flexibility than a loan and is simpler to obtain. It on your strengths in your “elevator is typically based on 75 pitch” and your presentation. percent of your current accounts receivable or 50 percent of the value of your inventory. equipment leasing: Instead of buying business equipment, consider leasing to conserve cash. Many leasing companies offer financing. chattel mortgages: In a chattel Visit these websites for more mortgage, you obtain a loan to buy an item and use the item itself as information about loans and other collateral for the loan. types of financing: plant improvement loans: You FEDERAL GOVERNMENT GRANTS: may get a loan to improve your building or facility by putting up the property itself as collateral. The loan will typically be SBA GUARANTEED LOANS: limited to 75 to 80 percent of the property’s market value. conditional sales contract: This SCORE: allows you to finance the purchase of an item; the vendor still owns the item until you have paid the full amount. 58 I simple steps for starting your businesssection 5: The Go or No-Go Decision Go or No-Go? You’ve found a business idea you’re excited about, researched its feasibility, and run some numbers to assess the financial realities of startup. Now it’s time to make the big decision: GO OR NO-GO? Do you move on to the next step of launching your business? Do you need to do additional research first? Once your Do you need to fine-tune your business idea business is up and some more? running, keep Do you go back to the drawing board and come up with a different business concept? turning to SCORE for help growing NO MATTER WHAT STAGE your business OF YOUR DECISION YOU ARE IN, SCORE CAN HELP YOU: Further research your idea Complete your feasibility plan Finalize your financial forecast Develop your business plan Prepare your loan package Launch your business And remember, once your business is up and running, keep turning to SCORE for help growing your business Complete the Business Concept Feasibility Worksheet on the next page to help you make your “Go or No-Go” decision. 59 simple steps for starting your business Isection 5: The Go or No-Go Decision Business Concept Feasibility: Worksheet business concept feasibility assessment Now that you have completed the Simple Steps for Starting Your Business workbook, you are ready to evaluate whether you’d like to move forward with your business idea or take some additional time to research your plan. Please read the following statements and assign 0-5 points based on your level of agreement with each statement. The more you agree with a statement, the more points you assign to it. If you do not agree with a statement, then you can give it 0 points. Calculate the total and see your results. topic statement point I know that my idea is serving an unmet need and solving an unserviced need. idea feasibility I know that my product / service could be expanded to gain additional customer groups. I know who my potential buyers are. market identification I have a clear value proposition for my potential buyers. I know what it will take to start my business. implementation I know what it will take to run my business. I understand what it will take to obtain funding. funding I have a plan to fund my business startup. I am ready to work hard to achieve my business goals. personal readiness I understand the challenges lying ahead and have a plan to tackle them. total score total score recommendation Congratulations It seems that you feel ready to move forward. You know your product/service can sell, you understand what it will take to start, and you feel ready to tackle the challenge. SCORE can help you 40-50 turn your entrepreneurial dream into reality. So make sure to schedule your next meeting to start with the right advice. You are in luck It seems that you are very close to making a decision, and SCORE can help you fill the gaps. 20-39 Think about the topics you have the lowest points in. Make sure to discuss your results with a SCORE 0-19 mentor so you can get some additional advice. NOTES Get help from SCORE mentors. Visit to find a mentor near you or get advice online. 60 I simple steps for starting your business
Website URL