A Beginner’s Guide to Planning a Small Business

Author: Rochelle Sanchirico

A small business typically begins with an idea, which develops into a full-fledged dream. Once a business idea begins to take shape, it’s time to plan the endeavor to make sure it succeeds. Some people create a business from the ground up, while others explore options for buying a franchise or an existing business. A business plan outlines all of the important facets of the business operation. Entrepreneurs will also need to calculate their start-up costs and find funding to pay for their expenses.

Market Research and Competitive Analysis

To ensure that a business idea will succeed, an entrepreneur needs to understand their target consumers. Market research is the study of consumer behavior and economic trends. Careful market research helps an entrepreneur reduce potential risks. Market research must answer important questions, such as:

• Do consumers want the product or service?
• What is the market size of interested consumers?
• What are the economic positions of these consumers (income and employment)?
• Where do the target consumers live?
• What other similar businesses are already functioning in the market?
• What do consumers pay for comparable products and services?

Market research can be performed by examining trends and existing sources. This research method is fast and simple, but it may not always be accurate and concise. Results may be generalized. Entrepreneurs can also conduct personal research by contacting consumers directly with surveys, questionnaires, and interviews. This type of research can take time and resources, but it generally yields specific results. Competitive analysis is crucial because it enables entrepreneurs to learn about competing businesses. Sometimes more than one industry is engaged in market competition. When exploring competitive analysis, information such as market shares, current strengths and weaknesses, competitors’ target markets, potential barriers, and indirect competition will come to light.

Writing Your Business Plan

A business plan becomes the foundation of a business. Writing the business plan enables the entrepreneur to plan each stage of starting and managing a business. Business plans also help business owners attract funding and potential partners or investors. Business plans can be created in a variety of formats, but generally, they will either be very detailed or abbreviated to only include the most important elements. A traditional business plan contains many details and is usually submitted to lenders or investors. Sections include the executive summary, company description, market analysis, organization and management, service or product line, marketing and sales, funding requests, financial projections, and appendix. These plans are typically many pages long, and they project at least one year in the future. A lean start-up business plan is simple, including only a few of the most important business elements. This format is useful for sharing basic facts about a business. The lean business plan format includes mention of any key partnerships, activities, resources, a value proposition, customer relationships, customer segments, channels, cost structure, and revenue streams.

Calculate Your Start-Up Costs

Having a clear idea of start-up costs is an integral part of the business process. By calculating start-up costs, an entrepreneur will be able to estimate profits and know when the breakeven point is reached. This calculation is also crucial for attracting investors and securing loans. Knowing start-up costs also helps with planning tax deductions. Three different business categories exist: brick-and-mortar businesses, online companies, and service-oriented companies. Some typical start-up expenses that a business may incur include:

• Licensing and permits
• Insurance
• Business space
• Equipment
• Utilities
• Communications
• Inventory
• Advertising and marketing
• Market research
• Employee salaries
• Lawyer and/or accountant

After listing expenses, it’s time to estimate the actual costs. Some expenses will be clearly set, while others may fluctuate. Other expenses may need to be estimated because these amounts will be uncertain. After adding up all of the expenses, the next step is to determine which expenses will be ongoing and which ones will be one-time things. Many start-up expenses are tax deductible. With a clear picture of start-up and monthly expenses, it will be possible to determine the capital needed to make a profit.

Fund Your Business

Finding funding is the next step after calculating start-up costs. Funding can happen in a variety of ways. Some entrepreneurs decide to fund their own businesses with their personal resources. Others ask friends or family for a loan. Some people may tap into their retirement savings to fund a business. It’s also possible to approach investors for funding. Venture capital is a type of investment that offers investors an ownership share in exchange for funding. This involves the owner giving up some control and ownership of the business in exchange for help with financing. To find investors, an entrepreneur will have to share the business plan. Investors will generally review the plan and the company carefully to determine whether they want to invest. Agreeing to terms and conditions between the parties will be the next step. Once the agreement is made, the venture fund goes live. The investor becomes involved with the company, and the entrepreneur gets the funding. Crowdfunding is another way to fund a new business. This type of fundraising involves approaching a large number of people who are willing to invest in the company in exchange for a gift of thanks. The gift may be a product or service, or it could be a special perk. Business owners tend to like crowdfunding because they don’t have to give up control of their companies. A small business loan is another option for financing. To get a loan, an entrepreneur would have to submit a business plan and expense sheet to a lender. The lender will review the information to determine whether financing is possible. With approval, the bank will issue the loan, which the entrepreneur will need to repay according to the set terms. Entrepreneurs who have trouble qualifying for a traditional business loan might qualify for an SBA guaranteed loan. With this type of financing, the Small Business Administration guarantees the loan, which reduces the risk for the lender.

Buy an Existing Business or Franchise

Instead of starting a business from the ground up, some people opt to buy a franchise or an existing business. A franchise is a business model that involves the use of a business name and logo. The franchisor owns the name and business trademark, selling the right to use it to the franchisee. The relationship may involve supplying products for the franchisee to sell, or it may be an ongoing relationship with full business management. Buying an existing business involves taking over a business and its customer base. Typically, the new owner assumes the existing customer base and the employees. The new owner can then make any changes desired. Before buying a business or a franchise, it’s crucial to decide on a budget, find a business that fits personal interests and skills, and research everything involved with the business. Researching involves looking into a franchise’s history, learning applicable rules and regulations, and examining any contracts. For a private business, it’s important to research licensing and permits, zoning requirements, and the value of the business. Hiring an attorney and an accountant is wise when researching and exploring the potential purchase of a franchise or business. These professionals can examine tax rules, operating expenses, and potential profits. They can also help with drawing up purchase documents such as the letter of intent, confidentiality agreement, contracts, financial statements, sales agreements, tax returns, and purchase price adjustments.

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