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Problems in Business

September 11, 2012 by Leave a Comment
I spoke recently to a group of students at Cal State Fullerton. They were preparing sample business plans and we went over the most common business problems each of their proposed businesses would face. I realized after talking with them for some time that most business problems fall into just a few categories.

Understanding the core problems of a small business, may help business owners to know where to focus their energies. So I thought I would make a new series about the core problems that face businesses.
Today’s problem is what I called the “utilization problem” and is a fairly straightforward problem.
Any business that has large capital investments in equipment or facilities faces this problem. If you start a gym, an auto shop, an appliance repair company, anything where you have equipment or facilities that generate your revenue you face the problem of having those facilities lying idle and not generating revenue.
This also applies to a business that relies on a heavy investment in education. Doctors, dentists, lawyers, anyone that bills by their time can also face this problem. Any time a doctor doesn’t have patients in his office, no revenue is being generated.
So, core business problem number one: the utilization problem. If you are going to generate revenue from a significant capital investment, make sure you focus your business planning on how to keep as many “butts in the chair” as you can.
Filed Under: Cool Stuff, Entrepreneur Skills, Series

So You Want to Run Your Own Business – Part 8

June 28, 2012 by 2 Comments

How to Exit Your Business

Ah, the glorious conclusion. It has been quite a ride, hasn’t it? We decided to start a business, we started it, we even made some money! Good times…

For this final installment, I want to bring us back full circle. Let’s talk about why we started this business. It was to escape from cubicle nation, right? But that isn’t the only reason. You did it to make money, right? But how much money? Do you have your number? I hope you do, and I hope that you are close to reaching it.

This is the part of your business life cycle where being responsible, forward-thinking, and organized becomes the MOST critical. More people get screwed in the business exit than anywhere else, particularly with selling a business. People tend to act very dumb when large sums of money are involved. Mostly because no one ever taught us how to handle money properly, so we don’t understand it.

When it comes to exit strategy, there are two types of businesses: a lifestyle business a salable business and.

A Lifestyle Business:

  • is primarily based on your time or the time of others.
  • is not necessarily a sole proprietor, but may not be a scalable business.
  • often has low repeat business or has a low switching cost. Switching cost means the cost to a customer to find a replacement. You might have a lot of repeat business, but if the customer experienced any sort of trouble, they could easily switch and wouldn’t be troubled by it.

A Salable Business:

  • is replicable. This is critical and a MANDATORY part of a salable business. This is why most lifestyle businesses are not salable. No one could recreate what the owner does.
  • has some sort of barrier to entry: a skill set, licensing, capital requirements, patent protection, licensing deal, brand value, etc.
  • usually has a brand (or other intangible asset) and/or systems of production. The less barriers to entry you have, the more you have to rely on branding and systems. You cannot create barriers to entry (usually) but you can create systems and a brand yourself.

Exit Strategies For A Non-Salable Business

This is very easy. Your exit strategy is to stop working. Which means that you have to generate enough profit while the business is operating to cover your living expenses AND provide a substantial amount of profit that you can generate savings. If you have a lifestyle business and you are only producing enough to live on, it is not a viable business.

I’ll say that again, so we are crystal clear:

If you are running a non-salable business and only producing enough profit to live on, it is NOT a viable business.

So it all comes down to saving. If you save $10,000 a year and earn an average of 7% per year, even starting at nothing, you will have close to a million bucks. After 30 years, if you only earn an average of 6%, that end game number drops to about $800k. The point being, you likely need to save a LOT more than $10,000 per year.

This is why I don’t think a ROTH IRA or a Traditional IRA are very effective tools. They are just simply too small to be of much use. I would consider $10,000 your minimum savings goal for a year. Oh, and this assumes you don’t pay any tax on those investment earnings, and you have the $10,000 after you have paid your taxes for the year.

So with that, I made a basic structure to figure out what might be the best retirement plan for you. There are lots of other complexities that will affect this choice, obviously, but I like to use “target savings” as our guideline:

  • Between $5k and $12k use a SIMPLE IRA
  • Between $10k and $20k – $25k use a SEP IRA
  • Between $15k and $50k use a 401(k)
  • Between $75k and $300k use a defined benefit plan

Other complexities will affect this. You need to balance between tax-deferred money (like the accounts above), ROTH money, and taxable money. You could have a ROTH option on your 401(k) for example and in bad years (lower taxable income), put in ROTH contributions and in great years, do traditional contributions. You could fund a SEP IRA and then use life insurance to create a no-income limit, ROTH-like account for yourself outside of the SEP. But these strategies need to be put together with someone who knows you and knows what they are doing.

If you are running a lifestyle business, you need to have a laser-like focus on profitability because profit is the only value your business creates, and it needs to create as much as possible, so you can build your wealth.

Exit Strategies For A Salable Business

A salable business should also generate profit. But you might be building a growth business that doesn’t produce much cash yet, but could be sold for a big pot of money down the road.

A salable business, unlike a lifestyle business, could be generating enterprise value instead of immediate profit. You could be perfecting a system that you will franchise, establishing a brand that someone will want to buy, or even creating a new product that a large company might want to push through their distribution channels. The reality is, most businesses are not 100% salable or not salable. Even with a salable business, you should produce some cash flow that you might shelter using the vehicles above. A lifestyle business might be able to be sold (or at least pieces of it), but not at a high enough price to fully retire on. The wealth your business creates for you will likely come from a combination of savings and exit value.

The number one problem people face when selling their business (at least at the small business level where I live) is no new money. They want to sell to their partner, to their kids, to their friend who works in the business, etc. But the people who are doing the buying don’t have any sort of significant capital to contribute. Business prices are usually based on multiples of profit. So if I sell for 3 times profit, but I only have 1 times profit in cash from the business, how do I pay the purchase price? Maybe I stretch it out over three years, right? Who wants to buy a business that will generate them zero profit for three years? Not many.

If you go this route, you are not truly selling your business, you are likely just retiring with a pension. You will receive a monthly check for many years (usually 10 to 20). This is usually the only way to structure these deals that makes sense. But it carries its own risks: You depend on the continued success of the business for your retirement income.

We could talk forever about the intricacies of a traditional business sale (to an outside or new money buyer) but for our purposes, I just want to cover a few main ideas and some key terms. Businesses are usually priced on multiples or EBITDA (earnings before income tax, depreciation, and amortization) or gross revenue. What that multiple will be is based primarily on what the industry standards are. Most major industries have some typical ranges that businesses sell at. If you are selling a business that is new, or has a non-traditional product, it becomes even easier. It is worth what someone will pay for it. In fact, this is a critical point to understand for ANY sale, so I’ll say it again:

Your business is not worth what you feel it should be worth, or what it was worth sometime in the past, or what it could be worth, or what you need it to do be worth.

Your business is worth what someone will pay for it. Period.

Here are some key terms that you might find in a business purchase:

  • EBITDA: Basically a measure of cash produced by the business operations.
  • Stock Sale: The buyer is buying the actual shares of the company you are selling.
  • Asset Sale: The buyer has agreed to purchase the assets of your company, not the company shares themselves.
  • Gross Revenue: Total income of the business.
  • Multiples: A number that you multiple by the base (usually EBITDA or Gross Revenue) to determine the value of the business.
  • Earn out: A variable payout in the future, generally based on the performance of the company.

The complexity from selling a business comes from having to determine the price at the same time as the deal points. The major deal points that need to be agreed upon are: price, down payment, future payments (earn outs or a note), and any employment contracts if the buyer wants the seller to continue to work. Obviously, as a seller of a business, you want to get as much cash up front, at as high a price as you can. As a buyer, you want to pay as little cash up front as you can and force the seller to participate in the risk of the business by getting paid via earn outs (or variable payments). Somewhere in between these goals, a deal can usually be found.

I hope this outline has been helpful. In another post, I will tackle the problem of deferring taxes on a business sale.

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 7

June 12, 2012 by Leave a Comment

Keep Your Business Running

So, you are making some money and you have money flows smoothed out. You are paying yourself a salary each month (based on the value of your work). You are taking distributions or draws of the remaining profit quarterly to fund other ventures or to save for yourself. You are even paying your quarterly taxes on time, like a BOSS! But these are three different things you have to do each month or multiple times a month. All you did was cover paying yourself; you didn’t touch paying staff, vendors, invoicing clients, keeping client work and orders moving forward, etc. etc.

How do you keep this thing running without the wheels falling off?

When you start your business, running it is simple. It might not feel that way, but it is. I promise. You can keep everything you need to do in your head. And, since you typically are the only one doing stuff, it is easy to figure out who dropped the ball when things go wrong. You are going to think that some of the systems I describe are WAY too complicated for you and your small business. And they might be. But when you need them, you won’t have the time to implement them.

And then wheels fall off.

So now that you have a little cash coming in, we are going to start looking at running a business like a big boy (or girl, as the case may be). This is the tough stuff. This is the stuff that doesn’t seem like it is making you money, but it is. I promise.

Personal Productivity

To start with, you need a personal productivity system. If you personally can’t keep track of stuff, then nothing else will happen that needs to happen, and you will ALWAYS be playing catch up. For the rest of your life. Good news though, you will catch up eventually. Bad news, it will be when you die.

So let’s work on a system to get you there before that, shall we? There are lots and lots of productivity blogs, systems, books, and such. I am not going to tell you to use GTD (which I do, sort of) or a pomodoro technique. I’m not going to recommend specific notebooks (cough … field notes … cough …) or even specific software to use. But there are some major concepts that you NEED to have and understand:

  1. Task List – You need to have one list that you work from each day. You don’t want to waste time spinning wheels during the day figuring out what you should do next. Or worse, working reactively by jumping to whatever grabs your attention at any moment. You need to have ONE location that you can go to when you finish a task. It doesn’t matter if you write it down each day, each week, have expensive software, or use free software. Just have a task list.
  2. Projects vs. Tasks – If something requires more than two tasks to complete, then it is a project, not a task, and it can’t go on your task list. Each project needs to have a dedicated spot where you have ALL the tasks that need to be completed to get the project done. Then just put one or two of those tasks on your task list.
  3. Capture – Always have a capture tool handy. Always. When you get an idea or inspiration, or just remember “Crap, I have to call Joe!” throw it in your capture tool and STAY FOCUSED. Get those ideas and thoughts and mental distractions out of your head quickly.

That is all the detail I am going to go into on that. I have written ad nauseam on personal productivity, so if you want more detail, check out my various posts focused on that.

Business Systems

Ok, so now you know what to do personally, but your business is feeling a little wobbly, right? Well, I will make this easy and tell you everything you need to know about business systems in one sentence:

You need them.

You didn’t think I was going to make it easy, right? Of course not. If it was easy, every Tom, Dick and Harry would be a millionaire entrepreneur.

But seriously, you need them and for one major reason: exit strategy. Remember, you didn’t start this business because you needed an excuse to pursue your forbidden love of QuickBooks (if you did, I have a job for you … but really? yuck.) did you? No, you started it to make money. And, if you want to make real money, you either need to sell your business or become very profitable so that you can save significant amounts of cash during your working years. Or Both. Both is good.

And to stack lots of cash, you need to be profitable.

And to sell your business for stacks of cash, it has to be repeatable.

Guess what the only way to accomplish those two things is? Right, you are getting GOOD at this my friend! BUSINESS SYSTEMS.

But what is a business system? It is a way of doing the work of your business in a consistent and cohesive fashion. Consistent, in that you do it the same way every time, which eliminates the extra costs of figuring how to reinvent the wheel every time tax season comes around or you need to quote a client. Cohesive, in that you aren’t jumping from payroll, to client work, to sales tax, to running to the post office in a random order. You accomplish like tasks together to get them done faster.

You should have an operations manual for your business. It doesn’t need to be formal. Maybe you just get a binder and put a calendar and some instruction pages in it. The overhead tasks are easy and I will give them to you as a gimme:

  • Every Friday morning you pay bills and download the week’s activity from your bank account and credit cards into your accounting software.
  • On the 15th of every month you run payroll for yourself and your staff.
  • On the First Friday of each month you reconcile your bank and credit card accounts with your statements (or you get smart and pay someone like me to do it, since I can do it faster and cheaper than you).
  • Every January you review your annual plan and redraft it as necessary.
  • Every Quarter you review your goals and the progress you made on them so far this year.
  • The First Monday of each month you run your financial statements and review your performance (or, again, you get smart and have someone like me do this with you so you can actually understand them).
  • After reviewing performance, you cut a check for 80% of the profit in a Draw or Distribution to yourself and put it into your personal savings account. You also cut a check and mail in your estimated taxes.

Get the point? Each of these items could be calendared a YEAR in advance and should just happen like clockwork. No thinking, no overworking, no getting behind then having to find three days to do bookkeeping. Little pieces, at the right time, done in a consistent manner, will have you running your business like a true BOSS. In fact, if you just did this list you would be MORE efficient (and likely more profitable) than 80% of businesses out there.

When it comes to operations for your business in particular, it gets a little more complicated. I can’t give such specific advice because everyone has a different business. But you should be standardizing your business as much as possible. I tell people to think about your business from “door to door,” which means, what is the first contact with a customer and what is the last contact? Then walk yourself through every single step it takes to get them through it. You might have multiple versions of this (retail customer, wholesale customer, retainer client, hourly client, etc.) but the idea is that you should be able to identify no more than four to six meta-level clients you have.

Once you have identified each step, just document what you need to do at each for them. Make a checklist, an outline, a timeline, whatever it takes. But at the end of this, you should be able to hand the book to another person, and they can walk through serving your customer without your input because everything they need to know is in the book.

Once you have that tool in place, you will be AMAZED at how powerful it is. When you are cranking through work, you don’t stop to think about how it could be done better. But when you take a step back and document steps you will notice all sorts of ways to improve efficiency, cut costs, or increase revenue. (What if we asked the client about their X while we are working on Y for them? Cross sell baby!) This also allows your brain to focus on the actual work, instead of trying to figure out where to go next.

Automate as much as you can and you will make MORE MONEY. I promise.

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 6

June 5, 2012 by 3 Comments

Controlling Your Money Flows And Paying Yourself

OK, this post is where we are going to get a little technical. But it’s ok, because this is where the magic really happens with owning your own business.

Today we are going to talk about money flows and how, by making some tweaks, we can change how, and even IF money flows, are taxable. I would like to point that I have not yet suggested, or told you, to get a business entity.

This is me telling you to get a business entity.

There are three major types: C-Corp, S-Corp, and LLC. There are a million places to get an explanation of these, so I won’t go into it here. Suffice it to say that C-Corps pay their own tax, and S-Corps and LLCs “pass through” their taxable income to the owner, so it is only taxed once. We also need to understand a few terms:

  • Gross Revenue or Income is the total amount of money your business brought in.
  • Profit is what your company has after paying expenses.
  • Taxable Income (for our purposes) is the same as profit.
  • Payroll, Wages, W-2 is money paid to people (including the owner) that is deducted from the Gross Revenue, which lowers your Profit. This is taxable income to whomever it is paid to.
  • Dividend is paid from a C-Corporation. It is NOT a deduction for the corporation and is taxable income to the payee (this is the double taxation problem).
  • Distribution is taken from an S-Corp and is tax free. It MUST be taken in proportion to ownership.
  • Draw is taken from an LLC and is tax free. It does not necessarily have to be taken in proportion to ownership.

OK! So here we go:

You want to bring is as much gross revenue as you can. Go make your business bigger and make more money!

Once that income is in your business, our goal is to spend as much of it inside your business entity as possible. This is because everything you spend at the corporate level reduces your profit. There are a lot of things that your company can do for you, its valuable employee, to ensure you keep working hard for it. For example, it can provide you with a company car and a cell phone or provide you with money for meals and entertainment expenses. Many of these are considered non-taxable fringe benefits. That means you can deduct them in the company, but you don’t have to declare them as income personally. Once you have spent all of the money you can in the business entity, you have to figure out how to get the money out of the business entity so you can spend it on personal expenses or save it.

If you have a C-Corporation, then you have to pay yourself a Wage to get money out of the entity so you can use it for personal expenses. Or you can pay tax at the corporate level and then take a dividend (which will be taxed again).

If you have an S-Corporation, you can take a Distribution of any profit in the company to yourself personally. Be aware that you will be taxed on the profit of the company, whether you take it in a distribution or not.

If you have an LLC, you can take a Draw of any profit in the company to yourself personally. Be aware that you will be taxed on the profit of the company, whether you take it in a draw or not.

It can get more complicated from here, with non-cash expenses (like depreciation), non-deductible cash expenditures (like federal taxes), accounts receivable and accounts payable. All of these things can disassociate cash from taxable income. I won’t lie to you: You need a professional to help you with this part.

The other money flow you should learn to control is your savings. When (notice I said WHEN not IF) you start generating more profit than you need to pay your bills, you should consider moving money into a qualified retirement plan like a SEP, SIMPLE, IRA, or 401(k). This will allow you to defer paying taxes on the profit until you need the money (like in retirement). Again, you need a professional to help you figure out what kind of plan is best for you.

And it’s THAT SIMPLE folks. Don’t over complicate it!

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 5

May 29, 2012 by Leave a Comment

Track Your Money

Congratulations!

You made a plan and executed on it. Now you are making some money.

You are now running your own business, right?

WRONG!

You are making sales. While that is AWESOME, it’s not running a business. Running a business requires you to measure and benchmark and strategize and analyze and improve and grow.

But we can’t do any of that without some data to analyze. Which is why the next step is to get your records in line.

I know, I know … NO ONE likes accounting. Heck, even I don’t like doing bookkeeping and I’m a CPA. That’s why I don’t think of it as “accounting” or “bookkeeping.” I like to think of that work as “I have an awesome business” time.

Let’s just go with it, ok?

In the beginning, I want to keep this very simple. We are still gathering lots of data from lots of sources, so my goal at this stage is just to make sure that all your information is in one place. We will work on keeping books and charts of accounts and all that good stuff later. But for stage one all you need is one bank account and one credit card.

See? That isn’t so hard, right?

It doesn’t even have to be a business account or a business card, per se. Most of us have more than one credit card. Designate one the “business” card and from now on only put stuff on that card that is going to be written off in the business. Get a new bank account (or designate an existing one) as the business account. All income gets put into that account. Bills get paid out of that account and the credit card gets paid off each month from that account. Any money left over at the end of the month gets transferred to your personal account. This represents your salary and your profit (for now, consider them the same thing) and can be used to pay personal bills.

This is NOT an accounting system. At this point, all we have done is get all your data in one place. At the end of the year when you go see me (your accountant) I will ask you for all your expenses and all your income. You will print the bank statement and credit card statements (or export them to Excel, which will make me fall madly and deeply in love with you) and BAM you will be done.

Yes, it really is that simple. And yes, despite the fact that it is really that simple, people spend hours and hours each year trying to figure this stuff out. All because they couldn’t simply put their business activity in one place.

Excel can then, likely, track everything else you need for your business, until it is time to upgrade to formal accounting software. I made this for you. It’s really simple. If you take 15 minutes each day to update it, you will have all the data you need to run your business. Seriously. 15 minutes. If you can’t find 15 minutes a day to fill this in, you should quit trying to run your own business and go find a job somewhere.

I will show you how to create more complex systems and analyze the numbers in future posts. I am also currently producing an ebook with more detailed instructions for some specific accounting systems. But for now, if you are just getting started, this is seriously all you need. Start using it today!

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 3.5

May 22, 2012 by Leave a Comment

Excuse me while I backtrack a little bit

Board of Advisors

Running your own business does not mean that you work alone. All successful business owners have a team of people that they can go to, to bounce ideas off of or get advice from. There is a great discussion about this on the Home Work podcast that I recommend you listen to. This post is just my two cents on what kind of people you should have and how you should use them.

There are three types of people that you should have to help support your business: advisors, a board of directors, and outside labor.

Advisors

Advisors are the people who have experience with business owners and can help you avoid the pitfalls that so many business owners fall into. The two most notable advisors you need are an accountant and a lawyer. Waiting until you need a lawyer or accountant is not the best time to start looking for one. Have someone in mind already. This does not mean you need to pay them thousands of dollars to look over every step as you launch your business. But having someone that you already know and trust is critical, so when the time comes, you are prepared and know where to go. Having a meeting or two beforehand also allows them to give you better advice, as they already have some familiarity and background on your business.

I would also recommend that you find a good marketing person or firm. Marketing is such a critical part of a business, and it is so easy to spend too much or too little in the wrong places. Get someone who knows marketing to make sure your message is clear and reaching your audience.

The other advisor you may have would be a business coach. I really dislike the term “business coach,” as it has such a poor connotation. There are a lot of BS business coaches out there, but the good ones can give you sound advice on everything from your strategic planning to marketing and sales.

Board of Directors

Having your own personal board of directors is different than having professional advisors. Your directors may or may not have expertise in business. But they should be people that you know and trust, who know you, and who will give you honest feedback. If you can have a professional advisor (a lawyer or an accountant, for example) who also serves this role, all the better. But having a small group of trusted friends or mentors that can reality check you is crucial.

Outside Labor

Outside labor is the other type of person(s) you should have. These are folks that do not necessarily give advice but can perform services that can make your life easier. The Home Work podcast said it best when they said, “You want to say ‘yes’ as much as possible, so find what detracts from your billable time and pay someone to do that.” I couldn’t have said it better myself.

A bookkeeper, a payroll company, even an administrative support or project manager can pay for themselves many times over by decreasing your workload. As a business owner, especially if you own a service-based business, you typically have one core skill that is your value add. Find out how to do that as much as possible so you can say “yes” to more projects and more revenue.

Get your outside advisors lined up before you start your business because when things start to happen, these people will save your bacon. Trust me.

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 4

May 15, 2012 by Leave a Comment

Start Making Money

OK, so you put some solid time into creating a plan for your business. This is an incredibly important first step, but planning will only get you so far. I heavily emphasize the importance of planning when I consult with businesses because so many people skip this step. But I have heard many great business ideas that never got off the ground. This happens for a variety of reasons:

  • They try to make their product or idea perfect before taking it to market.
  • They try to launch their business in a full-scale form out of the gate.
  • They are too scared to commit, and they make half-hearted attempts at launch.

Doing the planning that I laid out last week is important. But like in war, battle plans won’t survive beyond the first contact with the enemy. You can only do so much prep. Nothing will get you better information and allow you to grow your business better than real life responses from customers.

You’ll never get your web page perfect. Your product will never be perfect. Some people won’t like your service. But you will never know if you don’t try! So, here is what you need to do to start making money:

  • Make your plan.
  • Get your best first draft/prototype/idea.
  • Open a bank account.
  • Start selling.
  • Get a good accountant.

Notice what things I have conspicuously left OFF the starting list: Filing a DBA, opening a corporation, talking about start-up capital, finding investors. Money makes a business. All that other stuff is a way to make a business run better. But you don’t have a business until you have cash flow.

I always tell people to try to keep their initial investment as LOW as possible. The sooner you can start paying for start-up costs out of business cash flows, the better. By keeping your costs low, you limit your risk. It keeps more money available to help you pivot your business and make changes as you go along. If you invest all your money in the first pass, you won’t be able to make the necessary adjustments as you go along.

So get out, bootstrap your first pass, but do whatever you can to start making money!

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 3

May 8, 2012 by 1 Comment

Annual Planning

If you are reading this, then I failed in my attempts to scare you off. That is good. That means you have decided to run your own business and have thought long and hard about if you can do it or not. Now it’s time to get to work.

Everyone knows that the first step to running your own business is to make a business plan, right?

Wrong.

Your first step is to do your annual planning. How is that different than a business plan? You got me. It isn’t. The difference is how you think about it. Formal business plans have very little value in the micro-business arena. Annual planning, on the other hand, is your formalized process of taking a step back and looking at your business from the 30,000 foot level. Creating a “business plan” is simply the first time you do this annual planning. In this article, I am going to describe what you should be doing, not only before you start start your business, but every single year.

In fact, you should be looking at pieces of this several times a year, but we won’t get into that now. For now, let’s do our first pass in your business plan. In this article, I will use the terms “annual planning” and “business plan” interchangeably.

Big Picture AKA Strategic Planning

The big picture part of your annual planning can, and should, look very different every year. Sometimes you will want to spend time defining core values. Other times, you will be looking in detail at how you are filling an unmet need. Sometimes it is purely a selfish description of what you want out of life. Most often it is a combination of all these things. Here are the major ideas you want to cover:

Vision Statement, Mission Statement, Value Proposition

These typically don’t have numbers. This is where you start talking about what your business is all about. Write a vision statement to describe what it is you want to do or be. A mission statement is how you will do it.

The most critical piece is your value proposition. This needs to be reviewed at least once a year, if not more often. This defines what makes you special or different. If you can’t describe a clear and concise value proposition, then stop. Do not pass GO. Do not collect $200. You do NOT have a business idea. At best, you are creating your own job.

Here are some questions that will help you get started with this piece of the planning:

  • What do you want your business to do?
  • How do you want to do it?
  • What will it look like when you accomplish those things?
  • Who is your ideal client?
  • What does your ideal business look like?
  • Why are you in business?
  • What is the unmet need you are fulfilling, or what need will you meet better (or cheaper)?

Goal Setting

Goals have numbers but not necessarily researched or supported numbers. This is where you get to make things up. I want to have 10% net profit by year end, I want to have 50 customers by June, or I want to make $100,000 this year are all great examples of goals.

Goals should also be set on several different time frames. This can vary with your business, so do what seems the most appropriate. You should always have one year goals. But depending on the pace of change in your business and how quickly you want to grow you might have 2, 3, and 5 year goals. Or you might have 3, 5 and 10 year goals. Goals beyond 10 years are typically not useful. For goals beyond that point, you are creating your exit strategy. This is another key piece. When is enough enough? When will you be done? How will you profit from your business? How will you exit it? (You can’t work forever!)

The Details AKA Tactical Planning

These items need to have hard numbers supported with research and calculation. They break down into just a few major areas: Marketing, Competitive Analysis, Operations, and Financials.

Marketing

Define your market. I’m not sure how to describe this other than to list all the questions you should be able to answer:

  • Who is your target customer?
  • How do you reach them?
  • Why are they your target customer?
  • Why will they want to buy your product?
  • Why will they pay what you are asking for your product?
  • How will you deliver that product?
  • How will they know about your product?
  • What will your sales cycle look like?
  • How will your prices change over time?

Competitive Analysis

The free market can be a scary beast. As Tyler Durden once said, “You are not a beautiful or unique snowflake!” If you can do it, someone else can too. You need to have as much information on who else is running businesses similar to yours. If you think you can do something better or different than them, why aren’t they doing it that way? Maybe there is a reason you didn’t think of!

Operations Plans

Your operations plan is very simple in concept and very difficult in execution. This is the one area that is the most neglected. How will you create your product and deliver it to customers? Simple concept, but the devil is in the details.

You need to consider scale, and your operations need to tie to your budget. If you expect, say, $200,000 of sales, how many units is that? Will you be able to produce that many? You would be shocked how many business plans I see where the targeted sales means the owner has to BILL 70 hours a week. Even if you can bill that much, you cannot do that and have a successful business. You have to have time for administration, marketing, etc.

I like to tell people to create a draft of their operations manual before the start. Like any good plan, it won’t survive “contact with the enemy.” But the exercise is invaluable. You also need to understand operations on an ongoing basis. How will you supervise staff? When will you know that you need to hire? What will they do, exactly, when you hire them? How your operations will look will also change over time. How will they look when you start? A year from now? Three years from now?

Budgets & Financials

Understanding the numbers is also a critical early step. You need to have a budget for your company AND for you personally. Remember, salary is what you earn for working. Profit is what you receive for being the owner. If you have no profit after paying yourself a salary, then you didn’t create a business, you created a job. I like to keep it simple. After you make your personal budget, your salary should be enough to cover those basic numbers. You should also have profit after that salary is taken out. That profit is how you build wealth.

This is one area where research is important. Do NOT guess at numbers. Pull up your bank statements and look at how much you actually spend. Call your future vendors and get quotes on what it will cost to operate your business. Your first year plan needs to include how you will use start-up funds and how much cash you will need to operate before you get to positive cash flow. Each year, you need to review the prior year’s numbers and redraft your budget for the upcoming year.

There are obviously a million details to doing this entire planning process correctly and well. But it would take a book to cover all the ins and outs. I hope this article will at least make sure you have all the major pieces in place and will get you thinking about some of the parts that you would not have considered.

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 2

May 1, 2012 by 2 Comments

Can You Do It? – The 3 Things You Need to Start a Business

So, you decided to start a business. Good for you! But can you do it?

I don’t mean, “Is the product saleable?” I’m not asking you if your business model is sound. I don’t care (yet) if your competitive advantage gives you a unique advantage or not.

What I mean is can YOU do it? Are you the type of person that can weather the storm of business ownership? Do you have what it takes to fight that battle? Because it will be a battle. It doesn’t matter how amazing your business plan is, I can promise you that at some point you will want to quit. The going will be tougher than you ever imagined and you will question if it is worth it.

You will also have to be the kind of person who can deal with success. You could likely be wildly successful. Are you the kind of person who goes bankrupt within three years of winning the lotto? Or do you take a measured approach to the cycle that is business? (Described the best way possible by Ray Liotta in the movie Blow.)

I have seen hundreds of businesses come and go. I have seen folks that I thought had lousy business ideas make it (and I am pretty good at calling good businesses) and seen brilliant business plans go south quick!

Entrepreneurs are a unique breed. Some people have it and some don’t. If you aren’t sure if you have what it takes or not, I have made this list of three things that I find most successful business owners have in common.

Support

I recently attended a board meeting for the Center for Entrepreneurship at Cal State Fullerton. As the advisors, we were asked to bring a list of the five most important tools a new business needs. A mentor was the first thing on my list. It was also on the list of nearly half the 15 people that made lists. If you want to be successful, you need at least one person who is also successful that you can go to and who will give you honest and insightful feedback, but you have to LISTEN to them. You are the company you keep!

Family support is also critical. Owning a business is infinitely more stressful than having a job. I don’t care what your job is or was; owning a business will put more strain on your personal relationships than almost anything else. If your family and friends aren’t 100% in support of the plan, I would reconsider it. And even if they are in support of it now, you have to think seriously about how supportive they will be when the month comes that you don’t get to pay yourself.

Money

This can be misleading. I don’t think you need lots of money to start a business. You definitely need some. But you also can have too much. You have heard the adage, “work expands to fill the time available,” right? Well the same goes for money. Costs (particularly start-up costs) expand to fill the money available. So you need to have a solid personal budget and reserves.

You also need to know how much you are willing to invest in your business, and there has to be a drop-dead point. That is the point where you aren’t willing to invest any more, and it needs to be defined before you get there. Otherwise “just one more credit card” turns into a downward spiral you will never escape from.

Willpower

This is the hardest one. You have to have a desire to achieve. You have to be dedicated. You also have to know when to push back from the table. Business owners don’t work 9 to 5. You have to have the ability to push yourself and keep working when everyone else is going home to watch TV.

You also have to not let success go to your head. You have to be smart with your money and not let your lifestyle expand with the business. Costs are very easy to grow and VERY hard to shrink.

Most importantly, you have to think about these things ahead of time. Decide now how your lifestyle is going to look, no matter what the success is or isn’t. Have a plan for what to do with your profits when they come, before they get there. Know beforehand at what point you admit defeat and call it quits, and know when you admit success and take your money off the table.

Before starting your own business, think and talk about the reality of what your life will look like with people who have been there, so you have realistic expectations. That is the first and most important step to starting your own business.

Other articles in the So You Want To Run Your Own Business series:

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So You Want to Run Your Own Business – Part 1

April 24, 2012 by 1 Comment

So You Want to Run Your Own Business?

Awesome! That is a great idea. Here is my first piece of advice:

Don’t.

Are you still reading? OK, good. You passed the first test.

If you have any doubt that this is the best idea you ever had, and if you are not extremely excited to do this, you probably shouldn’t. So the first piece of advice is to separate the “wheat from the chaff,” as they say. My second piece of advice is:

Everyone should run their own business; it is the single best way to create wealth ever. So go do it, right now!

This is going to be a series built around giving you real information on what it takes to start a business, as well as some honest information on what to expect. There are many people that promise you will make $100K in 12 months. This is definitely possible (I have seen it done), and I am not trying to bad mouth those folks—most of them are very successful and have awesome businesses. You need people like this and their energy, enthusiasm, and ideas to give you a kick in the ass to make the choice to do it. They also provide some specific ideas for a business (which I will not do). But oftentimes people who don’t know what they are doing get so gung-ho they run right off a cliff and get themselves in trouble, not knowing how or why. I believe a little balance goes a long way.

I’m tired of solving the problems you guys make for yourselves, so I’m hoping you will balance that amazing enthusiasm with a little practical work. For three main reasons:

1. You will likely last longer in your business.

2. You will probably make (or at least keep) more money.

3. Cleaning up messes annoys me, and I would rather help you avoid messes in the first place.

I am not a “location rebel.” I don’t live a “minimalist” life. I am not experimenting with a “technomad” life. I am part of the establishment that most of these folks are trying to overthrow. (Well, sort of.) I went to business school (a couple times, actually) and I learned a lot there. Almost none of it will be in this series. But while you can do amazing things with the internet and technology, and being unconventional is always fun, I think it is critical that you learn to balance being unconventional with some established best practices. Anything worth doing is worth doing right; that’s all I’m saying.

So, if you want to be your own boss, I am very excited for you. There is so much information and support on the internet for you it boggles the mind. In the interest of being as useful as possible, here is a list of what I am going to cover in my series:

- Can you do it? AKA The 3 Things You Need to Start a Business
- Creating a Useful Business Plan AKA Learn all you need to know from business school.
- Start Making Money AKA Sales are pretty important.
- Board of Advisors AKA Find outside help for your business.
- Track Your Money AKA Figure out how the whole “keeping books” thing is supposed to work.
- Paying Yourself AKA Protect yourself from the government and pay as little taxes as possible.
- Keep Your Business Running AKA Run your business like a for-real business.
- Scale And Exit AKA You didn’t plan to do this forever, right?

Filed Under: Entrepreneur Skills, Series Tagged With: , , , , , , , , ,
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