Don’t Take Risks—Manage Them!
There is a perception that people who start and run their own businesses are risk takers. This term may accurately describe those individuals whose businesses are driven by unbounded optimism and instinctive knee-jerk reactions to new business opportunities. However, nothing could be further from the truth in describing those people who succeed in their own businesses over the long term. These people don’t take risks— they manage them. Risk management involves eliminating risks or reducing them to a manageable level. The process starts with understanding the risks that you face and taking steps to reduce these risks, if not entirely then at least to a manageable level. Although there are some risks that we cannot control, we can plan our responses to these risks when and if they occur. This means that part of your normal planning involves contingency plans that will allow you to respond effectively to risks beyond your control. Insurance can help reduce if not minimize the risk of some kinds of losses. Property insurance will cover risks of loss to property and third parties. As well, special business provisions can help insure specific kinds of business losses. Life and casualty insurance is good for providing benefits if poor health prevents you from running your business.
What Is Risk Management?
What does managing risks mean? It is not something new, nor is it unique to business. Essentially it means either avoiding or eliminating risks entirely or reducing them to acceptable levels. In living our lives, we don’t blindly expose ourselves to risks that could result in serious injury or even death. We take steps to avoid, eliminate, or reduce the risks we face. Is it not reasonable to follow the same approach in running your own business? Successful business owners do not blindly take risks that could bring their personal and financial world tumbling down around them. They take steps to avoid, eliminate, or reduce the risks they face. And so should you.
So How Can You Manage Risks?
Effective risk management starts with understanding the risks you face. Understanding your risks means researching and gathering information about them. Is it possible that despite your enthusiasm about your goods or services, customers will not buy from you? Of course it is. To address this issue, do your homework to find out if the goods or services are currently being purchased in your marketplace. Who are the customers? Why do they purchase? From whom do they purchase? Why should they purchase from you?
Beyond My Control?
In life and in running a business, we all face risks that are beyond our control. Even if we are wearing our seatbelts, we still risk being involved in a collision with other motor vehicles.
Since these factors are beyond our control does it mean that we stop driving? Or in my case, do I abandon a healthier lifestyle and accept a heart attack as inevitable? Of course not. Having done what you can to reduce the risk to an acceptable level, you get on with running your business, trying not to worry about any risks that still exist.
Assuming that problems are the norm when running a business, what implications does that have for risk management? Essentially it means that as well as planning how you will eliminate or reduce your risks, you must also develop a contingency plan to address different problems as they arise. If your banker declines your loan, what will you do? If your customers don’t buy your goods or services, what will you do? What will you do if your customers buy your goods or services but don’t pay you? What other risks does your business face? What will you do if they occur? By developing a contingency plan outlining how you will handle different risks, then if they arise you can manage them effectively. You will be a double winner if it turns out that you don’t use your contingency plan. First, you can run your business more confidently knowing that you are prepared for most risks. Second, the process of preparing your contingency plan improves problemsolving abilities, adding that type of experience to your current set of skills. As a result, if in the future you face a problem or a risk that you were not anticipating, you will have the confidence and the know-how to manage it effectively.
Property Insurance Is Good
Insurance is one of the most popular ways of protecting yourself against risks. Most insurance companies provide coverage for small and home businesses. These companies have major limitations for coverage on business property, such as stock and equipment, and for liability, such as slip-and-fall injuries. If requested, however, most insurers will extend coverage to provide protection for incidental business use in the home. The premium for this coverage is usually quite nominal. Coverage is also available for assets such as computers and furniture that are used in a home business. You can choose either all risks insurance, which provides very broad coverage, or named peril, which covers only those risks specified. You can choose between replacement cost and actual cash value. You can also add coverage for property, such as portable computers or stock in transit that is away from your main location.
➤ Risks can be managed by eliminating them or reducing them to a tolerable level.
➤ There are some risks that are outside of your control; you can, however, manage your response to these risks.
➤ Good planning includes contingency planning.
➤ Property and also life and casualty insurance can protect against specific named losses.
Sunday, March 25, 2007
Making Sense of Financial Statements
Making Sense of Financial Statements
Whether you love or hate reading them, financial statements are critical elements of your business. Don’t ignore them just because you don’t like preparing them or cannot understand them. Potential lenders or investors will rely on your statements when making their decisions to advance funds to you. And you will use them to monitor your progress and to evaluate your performance. Forward-looking statements—such as sources and uses of funds, and cash flow forecasts—allow you to plan as much as it is possible the money that will flow into and out of your business. Historical statements will allow you to see how your actual results compared with your anticipated or projected results. A good accountant can be a valuable resource as you run your business. However, like choosing any professional advisor, take care in selecting the accountant who is right for you and your business.
Why You Need Financial Statements
The statements you prepare prior to starting your business will show where you will get the money to operate your business and what you will do with this money. They also illustrate how much revenue you hope your business will generate and how much money it will take to generate this revenue. You will use this information to prepare and follow a budget and manage the cash that flows into and out of your business. Third-party lenders or investors will use this information to determine whether or not to lend you money or invest in your business.
The financial statements produced once your business is operational will measure your performance. They will help you assess how successful you have been in achieving the goals that you have set for yourself. Investors will use the statements to decide whether they are prepared to continue to support you or if they want their money back. If you need money to expand your business, potential investors or lenders will use your statements to decide whether or not to help you. And if you are looking to merge or sell your business, your financial statements will be critical elements of the merger or sale discussions.
Sources and Uses of Funds
This statement shows where the money is coming from to start your business (source) and what these funds are purchasing (uses).
Forecasting Statements
These statements are attempts to predict what the financial results of your business will be for a set period of time. Like all attempts to forecast the future, they are subject to a wide range of unknowns. They will, however, serve as indications of what you hope to achieve. They will also serve as budget guidelines to help you control spending. When you start your business, these guesstimates will in effect be the results that you would like to achieve. They usually reflect your hopes and dreams more than actual fact. Once you have run your business for a complete year you will have some actual results, which will be the basis of your forecasting for the coming year.
Projecting revenue for the first time is the most difficult aspect of financial forecasting. Your projections will be based on such factors as how much you charge for your goods and services and what volume of revenue your total services will yield. Unless your past experience enables you to determine your revenue, your financial projections will not be based on reliable information. In this case, the best approach is to work from what is known to what is not known. Thus, before addressing revenue projections, which are difficult to determine for the first time, it is best to start by calculating monthly overhead amounts, which are easily identified. Having determined the monthly overhead, it is a simple task to project revenue to meet or exceed these overhead figures.
The example on the next page details typical expense items. It is likely that not all of them will apply to you and your business. And it is possible that your business will have expense items that are not included in this list. As was the case with startup expenses, customize this list to meet your own needs. Amounts for individual items can be based on estimates provided by suppliers or, alternatively, can be estimated as a percentage of total expenses. Although some of the expenses such as accounting/legal and dues/subscriptions are paid in annual installments, they should be allocated monthly.
Cash Flow Forecast
As its name suggests, a cash flow forecast is a forecast of cash flowing into and out of your business. The forecast is based on your predictions of when you expect to receive payment from your clients and when you expect to make payments to your suppliers and to yourself.
➤ Financial statements are helpful to you in monitoring your progress of where you want your business to be, and are also helpful to potential investors and lenders when making their decisions about advancing funds to you.
➤ Forward-looking statements indicate where you would like your business to go.
➤ Historical statements show your actual operating results.
➤ A good accountant can be a valuable asset: Use care in selecting the right one.
Whether you love or hate reading them, financial statements are critical elements of your business. Don’t ignore them just because you don’t like preparing them or cannot understand them. Potential lenders or investors will rely on your statements when making their decisions to advance funds to you. And you will use them to monitor your progress and to evaluate your performance. Forward-looking statements—such as sources and uses of funds, and cash flow forecasts—allow you to plan as much as it is possible the money that will flow into and out of your business. Historical statements will allow you to see how your actual results compared with your anticipated or projected results. A good accountant can be a valuable resource as you run your business. However, like choosing any professional advisor, take care in selecting the accountant who is right for you and your business.
Why You Need Financial Statements
The statements you prepare prior to starting your business will show where you will get the money to operate your business and what you will do with this money. They also illustrate how much revenue you hope your business will generate and how much money it will take to generate this revenue. You will use this information to prepare and follow a budget and manage the cash that flows into and out of your business. Third-party lenders or investors will use this information to determine whether or not to lend you money or invest in your business.
The financial statements produced once your business is operational will measure your performance. They will help you assess how successful you have been in achieving the goals that you have set for yourself. Investors will use the statements to decide whether they are prepared to continue to support you or if they want their money back. If you need money to expand your business, potential investors or lenders will use your statements to decide whether or not to help you. And if you are looking to merge or sell your business, your financial statements will be critical elements of the merger or sale discussions.
Sources and Uses of Funds
This statement shows where the money is coming from to start your business (source) and what these funds are purchasing (uses).
Forecasting Statements
These statements are attempts to predict what the financial results of your business will be for a set period of time. Like all attempts to forecast the future, they are subject to a wide range of unknowns. They will, however, serve as indications of what you hope to achieve. They will also serve as budget guidelines to help you control spending. When you start your business, these guesstimates will in effect be the results that you would like to achieve. They usually reflect your hopes and dreams more than actual fact. Once you have run your business for a complete year you will have some actual results, which will be the basis of your forecasting for the coming year.
Projecting revenue for the first time is the most difficult aspect of financial forecasting. Your projections will be based on such factors as how much you charge for your goods and services and what volume of revenue your total services will yield. Unless your past experience enables you to determine your revenue, your financial projections will not be based on reliable information. In this case, the best approach is to work from what is known to what is not known. Thus, before addressing revenue projections, which are difficult to determine for the first time, it is best to start by calculating monthly overhead amounts, which are easily identified. Having determined the monthly overhead, it is a simple task to project revenue to meet or exceed these overhead figures.
The example on the next page details typical expense items. It is likely that not all of them will apply to you and your business. And it is possible that your business will have expense items that are not included in this list. As was the case with startup expenses, customize this list to meet your own needs. Amounts for individual items can be based on estimates provided by suppliers or, alternatively, can be estimated as a percentage of total expenses. Although some of the expenses such as accounting/legal and dues/subscriptions are paid in annual installments, they should be allocated monthly.
Cash Flow Forecast
As its name suggests, a cash flow forecast is a forecast of cash flowing into and out of your business. The forecast is based on your predictions of when you expect to receive payment from your clients and when you expect to make payments to your suppliers and to yourself.
➤ Financial statements are helpful to you in monitoring your progress of where you want your business to be, and are also helpful to potential investors and lenders when making their decisions about advancing funds to you.
➤ Forward-looking statements indicate where you would like your business to go.
➤ Historical statements show your actual operating results.
➤ A good accountant can be a valuable asset: Use care in selecting the right one.
Where Will the Money Come From?
Where Will the Money Come From?
One of the biggest challenges that small business owners face is financing their businesses. For most, this challenge first arises when they start their businesses, and continues until they sell or otherwise wind up the business.
When starting your business, the first place to start looking for money is with your own resources. You might have some unused assets you can sell. Among your resources, family and friends might be prepared to help you out. Conventional lenders such as banks and credit unions are always willing to lend money to credit-worthy small businesses. Although all governments claim to support small business, unfortunately, few offer monetary assistance.
There are thousands of stories of business owners who risked everything they had, even their homes, to start and run their businesses. If they ultimately achieve success and live happily ever after, they are often presented to us as models of the determination and commitment required to succeed in one’s own business.
Personal assets also include everything from cash on hand through investments to your home and recreational real estate. Which of these assets are cash or easily converted to cash? As members of a consumer society, most of us have collected things that we no longer use or enjoy. The summer property or ski chalet that no longer holds our interest, or the boat or snowmobile that drains money without yielding any enjoyment could be sold and the proceeds used to finance the business.
How Much Do They Really Love You?
The same report that indicated personal assets as the most frequently used source of startup business financing also showed that financing from family and friends was the second most popular source. This widely used source of financing a business is also the riskiest. Conventional lenders like banks and other financial institutions are in the business of lending money and have procedures in place to minimize their risks and to take action when borrowers default. They can and will continue to function if a small borrower defaults. However, friends and relatives are not as likely to carefully evaluate the risk. They are helping you and expect you to repay them regardless of what happens. Failing to repay relatives or friends can and does jeopardize these relationships. Before taking this approach, ask yourself what would happen to your relative or friend if you cannot repay the money that is advanced to you? Can you live with these consequences?
Can You Lend Me a Few Dollars?
Conventional lenders include banks and other financial institutions that are in the business of lending money. They make their money from the interest they charge on loans. Thus, applying for a loan is a normal business transaction. Do not look upon borrowing money from an institutional lender as being similar to asking a relative or a friend for a favor. Borrowing is a business transaction: You are negotiating the use of the lender’s money to purchase something you need to run your business. Treat it as you would any other business requisition.
This growth in interested lenders may be attributed to the federal Small Business Loan program, which in effect makes qualified term loans to small businesses “government guaranteed.” Some people believe that every small business should have a Small Business Loan at the early stages of its life. Take advantage of the competition among lenders. In order to obtain your business, one lender might be prepared to offer you more favourable terms than competing lenders will. Also, different lenders use different criteria. Just because one account manager is not interested in your business, it doesn’t mean that all other account managers at all other lenders will also turn you down. If you have a good credit history and can offer satisfactory collateral, you can probably arrange a loan with one lender or another.
Who Wants to Invest in My Business?
Realistically, there are only two equity financing options available for small business. One option is asking your friends, relatives, and network contacts to invest in your business. Unlike asking these people to lend you money, this approach involves asking them to buy a share of the business in return for a share of the profits. However, unlike traditional investors, friends, relatives, and network contacts who invest in your business are, in fact, investing in you, and they expect to get their money back, regardless of what happens to your business.
Should you choose to follow this approach, make sure that the investment is properly documented:
This means properly prepared subscriptions, minute book records, and actual share certificates. Also make sure that in your zeal to attract investors, you do not violate the provisions of any applicable securities legislation.
The second option is to take in a partner-shareholder who can inject additional capital into your business startup.
One of the biggest challenges that small business owners face is financing their businesses. For most, this challenge first arises when they start their businesses, and continues until they sell or otherwise wind up the business.
When starting your business, the first place to start looking for money is with your own resources. You might have some unused assets you can sell. Among your resources, family and friends might be prepared to help you out. Conventional lenders such as banks and credit unions are always willing to lend money to credit-worthy small businesses. Although all governments claim to support small business, unfortunately, few offer monetary assistance.
There are thousands of stories of business owners who risked everything they had, even their homes, to start and run their businesses. If they ultimately achieve success and live happily ever after, they are often presented to us as models of the determination and commitment required to succeed in one’s own business.
Personal assets also include everything from cash on hand through investments to your home and recreational real estate. Which of these assets are cash or easily converted to cash? As members of a consumer society, most of us have collected things that we no longer use or enjoy. The summer property or ski chalet that no longer holds our interest, or the boat or snowmobile that drains money without yielding any enjoyment could be sold and the proceeds used to finance the business.
How Much Do They Really Love You?
The same report that indicated personal assets as the most frequently used source of startup business financing also showed that financing from family and friends was the second most popular source. This widely used source of financing a business is also the riskiest. Conventional lenders like banks and other financial institutions are in the business of lending money and have procedures in place to minimize their risks and to take action when borrowers default. They can and will continue to function if a small borrower defaults. However, friends and relatives are not as likely to carefully evaluate the risk. They are helping you and expect you to repay them regardless of what happens. Failing to repay relatives or friends can and does jeopardize these relationships. Before taking this approach, ask yourself what would happen to your relative or friend if you cannot repay the money that is advanced to you? Can you live with these consequences?
Can You Lend Me a Few Dollars?
Conventional lenders include banks and other financial institutions that are in the business of lending money. They make their money from the interest they charge on loans. Thus, applying for a loan is a normal business transaction. Do not look upon borrowing money from an institutional lender as being similar to asking a relative or a friend for a favor. Borrowing is a business transaction: You are negotiating the use of the lender’s money to purchase something you need to run your business. Treat it as you would any other business requisition.
This growth in interested lenders may be attributed to the federal Small Business Loan program, which in effect makes qualified term loans to small businesses “government guaranteed.” Some people believe that every small business should have a Small Business Loan at the early stages of its life. Take advantage of the competition among lenders. In order to obtain your business, one lender might be prepared to offer you more favourable terms than competing lenders will. Also, different lenders use different criteria. Just because one account manager is not interested in your business, it doesn’t mean that all other account managers at all other lenders will also turn you down. If you have a good credit history and can offer satisfactory collateral, you can probably arrange a loan with one lender or another.
Who Wants to Invest in My Business?
Realistically, there are only two equity financing options available for small business. One option is asking your friends, relatives, and network contacts to invest in your business. Unlike asking these people to lend you money, this approach involves asking them to buy a share of the business in return for a share of the profits. However, unlike traditional investors, friends, relatives, and network contacts who invest in your business are, in fact, investing in you, and they expect to get their money back, regardless of what happens to your business.
Should you choose to follow this approach, make sure that the investment is properly documented:
This means properly prepared subscriptions, minute book records, and actual share certificates. Also make sure that in your zeal to attract investors, you do not violate the provisions of any applicable securities legislation.
The second option is to take in a partner-shareholder who can inject additional capital into your business startup.
Friday, March 23, 2007
Plan to Succeed
Success in business is not a lucky happenstance right out of the blue. It starts with a carefully prepared plan that sets out the direction that the business must take in order to achieve the owner’s desired results. The plan identifies ideal customers and how the business will promote itself to these customers and meet their needs. It also identifies the competition and any competitive advantages that the business enjoys. Since business is a commercial activity based on selling something for the purpose of generating a profit, the plan will also include details of how the goods and services will be priced. The plan will address such financial considerations as projected cash flow and income statements.
As an important direction-setting document, the business plan will become a regular reference resource.
Creating Your Plan
There are as many approaches to business planning as there are experts to discuss the topic. Some people emphasize the importance of thorough analysis based on extensive research. The danger to this approach is that the planning process takes on a life and sense of importance far greater than its purpose, which is to set a direction for the business. At the other extreme are those people who honestly believe that less is better and prepare a business plan that is little more than a point-form to-do list.
Who Are Your Competitors?
We live in a very competitive world. If you think that virtually every organization, whether from the public, private, or not-for-profit sector is after your money, you are probably right. As a result of our governments’ deficit-fighting activities, publicly funded organizations such as charities and educational institutions are conducting aggressive fundraising campaigns to balance their budgets. This competition takes place on two levels. First, there is the overall competition for disposable income of your existing and potential customers.
Obviously, money that is donated to charities and not-for-profit organizations represents money that customers do not have available to spend on your goods and services. Second, in order to raise funds, organizations have become very creative, frequently going beyond simple appeals for donations and offering goods and services for sale. Business organizations of all types and sizes compete aggressively for customers’ dollars. Let’s assume, for example, that you have an upcoming family event that you would like to celebrate. You have a virtually limitless choice of how you can celebrate. Depending on your budget, you can do anything from preparing a fancy meal to taking the entire family on an extended round-the-world cruise.
➤ A well-prepared business plan will help you get to where you want to go.
➤ Your plan should describe your customers and what you do for them, and your competition and your competitive advantage over them.
➤ Your plan will also include financial considerations, such as how much you will charge for what you sell and your projected cash low and income.
➤ For your plan to be useful, you must use it
As an important direction-setting document, the business plan will become a regular reference resource.
Creating Your Plan
There are as many approaches to business planning as there are experts to discuss the topic. Some people emphasize the importance of thorough analysis based on extensive research. The danger to this approach is that the planning process takes on a life and sense of importance far greater than its purpose, which is to set a direction for the business. At the other extreme are those people who honestly believe that less is better and prepare a business plan that is little more than a point-form to-do list.
Who Are Your Competitors?
We live in a very competitive world. If you think that virtually every organization, whether from the public, private, or not-for-profit sector is after your money, you are probably right. As a result of our governments’ deficit-fighting activities, publicly funded organizations such as charities and educational institutions are conducting aggressive fundraising campaigns to balance their budgets. This competition takes place on two levels. First, there is the overall competition for disposable income of your existing and potential customers.
Obviously, money that is donated to charities and not-for-profit organizations represents money that customers do not have available to spend on your goods and services. Second, in order to raise funds, organizations have become very creative, frequently going beyond simple appeals for donations and offering goods and services for sale. Business organizations of all types and sizes compete aggressively for customers’ dollars. Let’s assume, for example, that you have an upcoming family event that you would like to celebrate. You have a virtually limitless choice of how you can celebrate. Depending on your budget, you can do anything from preparing a fancy meal to taking the entire family on an extended round-the-world cruise.
➤ A well-prepared business plan will help you get to where you want to go.
➤ Your plan should describe your customers and what you do for them, and your competition and your competitive advantage over them.
➤ Your plan will also include financial considerations, such as how much you will charge for what you sell and your projected cash low and income.
➤ For your plan to be useful, you must use it
Planning your business
Success in a small business depends to a large degree upon the preparation that you do before you start. Obtaining the physical things that you will need is usually the easiest and most enjoyable aspect of starting your business. It’s like shopping for school supplies for the start of a new school year.
Once you have decided upon the type of business that you will run and are satisfied that you will probably be able to attract paying customers for your goods and services, you can go shopping. Provided you stick to a budget, you can buy whatever you need and want to set up your office: furniture, telecommunications services and equipment, computer equipment, and so on. You might even be able to claim some of your home occupancy and automobile expenses against your taxes. And speaking of taxes, make sure that you are registered with appropriate government departments. Just as no two individuals are alike, no two businesses are alike. Before you start shopping for standard items, make sure that you have added any special items or equipment to your list.
Make Sure That You Will Have Customers
Successful businesses are customer driven. This means your business must be based on your ability to meet other people’s needs, not on your own skills and resources, regardless of how impressive they might be. Once you have identified what your customers need and want from you, and satisfied yourself that you can meet these needs and wants, you must determine what you will require to operate your business. The following material outlines some standard requirements. Add to this list any specific requirements that you might have.
Business Name
If you carry on business using just own name, you are not required to register your business name. Thus, if your name is Tas, you can simply call your business “Tas” and use that name on your stationery, promotional material, invoices, and so forth. Obviously you can deposit any cheques payable to you in any bank account bearing your name.
Setting Up Your Office
Regardless of what they sell, all businesses need office space in which the owners can complete and store paperwork and records. Most business premises include some office space, although in many instances, the designated office area would be better suited for use as a broom closet. Because there is limited office space in business premises, or for reasons of security or convenience, or because the business is home based, many owners establish office space in their homes. In deciding where to locate your home office, select the office space that you think will be comfortable for you and those around you.
➤ Before starting to acquire things for your business, double check your plans
to make sure that you can still expect to attract customers.
➤ As part of planning your business, choose an appropriate name and file the
necessary forms with the appropriate government agency.
➤ Select and organize the space for your home office to meet personal and
family considerations.
➤ Select furniture and equipment that meet your specific needs.
➤ Obtain necessary licenses, permits, and tax registrations before you start
your business.
Once you have decided upon the type of business that you will run and are satisfied that you will probably be able to attract paying customers for your goods and services, you can go shopping. Provided you stick to a budget, you can buy whatever you need and want to set up your office: furniture, telecommunications services and equipment, computer equipment, and so on. You might even be able to claim some of your home occupancy and automobile expenses against your taxes. And speaking of taxes, make sure that you are registered with appropriate government departments. Just as no two individuals are alike, no two businesses are alike. Before you start shopping for standard items, make sure that you have added any special items or equipment to your list.
Make Sure That You Will Have Customers
Successful businesses are customer driven. This means your business must be based on your ability to meet other people’s needs, not on your own skills and resources, regardless of how impressive they might be. Once you have identified what your customers need and want from you, and satisfied yourself that you can meet these needs and wants, you must determine what you will require to operate your business. The following material outlines some standard requirements. Add to this list any specific requirements that you might have.
Business Name
If you carry on business using just own name, you are not required to register your business name. Thus, if your name is Tas, you can simply call your business “Tas” and use that name on your stationery, promotional material, invoices, and so forth. Obviously you can deposit any cheques payable to you in any bank account bearing your name.
Setting Up Your Office
Regardless of what they sell, all businesses need office space in which the owners can complete and store paperwork and records. Most business premises include some office space, although in many instances, the designated office area would be better suited for use as a broom closet. Because there is limited office space in business premises, or for reasons of security or convenience, or because the business is home based, many owners establish office space in their homes. In deciding where to locate your home office, select the office space that you think will be comfortable for you and those around you.
➤ Before starting to acquire things for your business, double check your plans
to make sure that you can still expect to attract customers.
➤ As part of planning your business, choose an appropriate name and file the
necessary forms with the appropriate government agency.
➤ Select and organize the space for your home office to meet personal and
family considerations.
➤ Select furniture and equipment that meet your specific needs.
➤ Obtain necessary licenses, permits, and tax registrations before you start
your business.
Thursday, March 22, 2007
What Can You Sell?
Regardless of size, all businesses sell something. There is virtually no limit to the products and services that a small business can sell. At one extreme, people such as artists and craftspeople can produce and sell their own work. At the other end, sales agents and representatives will sell products manufactured by others. Today most businesses supply services, either to families and individuals or to other businesses and organizations.
The production of unique specialty items, on the other hand, is ideally suited to small businesses. This would include such traditional artisan-type work as the design, production, and sale of clothes, jewellery, pottery, and other unique items. In each of these businesses, the quality of the work produced, and not the price, would be the unique selling feature. With effective marketing strategies, producers of these high-quality goods can be very successful.
Advantages of Selling Your Own Product
The big advantage to selling your own product is that you have total control over every step of the process, from design, through production and marketing, to delivery and the ultimate purchaser. This means that you can customize your product to meet your customers’ needs and wants, and that you can do this at almost any stage of the process. It also ensures a higher level of consistency between a product’s actual features and how the product is promoted to customers. Since you are producing and selling your work, the potential discrepancy between promotional claims and real-life features is eliminated.
Disadvantages of Selling Your Own Product
There are three major disadvantages of selling goods that you produce yourself. First, because time is limited, there is a limit to the number of items that you can produce. This in turn restricts your sales and revenue potential. It is, of course, possible to hire help and expand your operation. This involves assuming supervisory and management tasks, responsibilities that might not be a welcome addition to your burden. Further, when other people are involved in the production of your work, some aspects will become standardized in the interests of efficiency. This can reduce the uniqueness of your work.
Selling Items That Other People Produce
Many successful independent businesses distribute products manufactured by others. Typical businesses fit into the distribution chain in a variety of stages
of the process, from purchasing directly from the manufacturer to purchasing from subdistributors and selling to the consumer. Examples of the items produced in these businesses include cosmetics, jewellery, cleaning supplies, and a great variety of
other products. A business can distribute products produced by others through a variety of operating formats. Wholesalers, distributors, and retailers purchase goods for resale. By selling goods at a higher price than their purchase price they generate revenue to cover the cost of goods purchased and to make a profit from their own work.
Advantages of Selling Items Produced by Others
By selling goods produced by others, you can avoid all of the manufacturing, and many marketing, responsibilities. Also, depending upon the agreement with the manufacturer, it might be possible to avoid responsibility for actually handling the goods. Manufactured goods come with a guarantee. At the very least, the manufacturer
guarantees that those goods are suitable for the purposes for which they are intended. Many manufacturers also guarantee the quality and performance of their products. In practice this means that if the goods are defective, they will be repaired or replaced at the manufacturer’s expense. Thus, as reseller of the goods your role is to involve the manufacturer in the process of correcting the defect.
Disadvantages of Selling Items Produced by Others
Although selling goods produced by someone else might free you of legal responsibility for defective or unsuitable products, you will not be totally free of responsibility. If and when there are difficulties with any products that you sell, your customers will look to you for help in correcting the problem. After all, they don’t know the manufacturer; they know you. Not surprisingly, you can find yourself caught in a dispute between your supplier and your customer. Regardless of who is right and who is wrong, this could well be a no-win position for you.
What Business Should You Start?
There really is no single business good for everyone. When considering what business is best for you, consider your interests and abilities. The most successful businesses emerge when customers pay you for what you love to do.
You Need to Know
➤ To succeed in selling goods that you produce yourself, make sure that they are
unique and, whenever possible, personalized for your customers.
➤ If you sell goods produced by others make sure that they are of good quality
and that they carry a suitable manufacturer’s guarantee.
➤ Small businesses can offer more personal, and often better-quality, services
than large business organizations.
➤ To succeed in your business, you must love what you are doing.
➤ Don’t limit yourself to this idea, now when is so much information available you must take someone else’s ideas an improve them, I due the same, I take, improve and create new ideas so that other persons benefit as wheel and create, thing hear are not everlasting, so why shouldn’t take every thing why can and kip it for our self’s. So be free to take the information from where ever can you find it, because you are not the only one.
The production of unique specialty items, on the other hand, is ideally suited to small businesses. This would include such traditional artisan-type work as the design, production, and sale of clothes, jewellery, pottery, and other unique items. In each of these businesses, the quality of the work produced, and not the price, would be the unique selling feature. With effective marketing strategies, producers of these high-quality goods can be very successful.
Advantages of Selling Your Own Product
The big advantage to selling your own product is that you have total control over every step of the process, from design, through production and marketing, to delivery and the ultimate purchaser. This means that you can customize your product to meet your customers’ needs and wants, and that you can do this at almost any stage of the process. It also ensures a higher level of consistency between a product’s actual features and how the product is promoted to customers. Since you are producing and selling your work, the potential discrepancy between promotional claims and real-life features is eliminated.
Disadvantages of Selling Your Own Product
There are three major disadvantages of selling goods that you produce yourself. First, because time is limited, there is a limit to the number of items that you can produce. This in turn restricts your sales and revenue potential. It is, of course, possible to hire help and expand your operation. This involves assuming supervisory and management tasks, responsibilities that might not be a welcome addition to your burden. Further, when other people are involved in the production of your work, some aspects will become standardized in the interests of efficiency. This can reduce the uniqueness of your work.
Selling Items That Other People Produce
Many successful independent businesses distribute products manufactured by others. Typical businesses fit into the distribution chain in a variety of stages
of the process, from purchasing directly from the manufacturer to purchasing from subdistributors and selling to the consumer. Examples of the items produced in these businesses include cosmetics, jewellery, cleaning supplies, and a great variety of
other products. A business can distribute products produced by others through a variety of operating formats. Wholesalers, distributors, and retailers purchase goods for resale. By selling goods at a higher price than their purchase price they generate revenue to cover the cost of goods purchased and to make a profit from their own work.
Advantages of Selling Items Produced by Others
By selling goods produced by others, you can avoid all of the manufacturing, and many marketing, responsibilities. Also, depending upon the agreement with the manufacturer, it might be possible to avoid responsibility for actually handling the goods. Manufactured goods come with a guarantee. At the very least, the manufacturer
guarantees that those goods are suitable for the purposes for which they are intended. Many manufacturers also guarantee the quality and performance of their products. In practice this means that if the goods are defective, they will be repaired or replaced at the manufacturer’s expense. Thus, as reseller of the goods your role is to involve the manufacturer in the process of correcting the defect.
Disadvantages of Selling Items Produced by Others
Although selling goods produced by someone else might free you of legal responsibility for defective or unsuitable products, you will not be totally free of responsibility. If and when there are difficulties with any products that you sell, your customers will look to you for help in correcting the problem. After all, they don’t know the manufacturer; they know you. Not surprisingly, you can find yourself caught in a dispute between your supplier and your customer. Regardless of who is right and who is wrong, this could well be a no-win position for you.
What Business Should You Start?
There really is no single business good for everyone. When considering what business is best for you, consider your interests and abilities. The most successful businesses emerge when customers pay you for what you love to do.
You Need to Know
➤ To succeed in selling goods that you produce yourself, make sure that they are
unique and, whenever possible, personalized for your customers.
➤ If you sell goods produced by others make sure that they are of good quality
and that they carry a suitable manufacturer’s guarantee.
➤ Small businesses can offer more personal, and often better-quality, services
than large business organizations.
➤ To succeed in your business, you must love what you are doing.
➤ Don’t limit yourself to this idea, now when is so much information available you must take someone else’s ideas an improve them, I due the same, I take, improve and create new ideas so that other persons benefit as wheel and create, thing hear are not everlasting, so why shouldn’t take every thing why can and kip it for our self’s. So be free to take the information from where ever can you find it, because you are not the only one.
Family and the Business
How do you plan to finance your business startup? If you are like most new business
owners, you will draw on personal and family savings to pay the startup expenses and
keep the business going until the cash starts to flow in. Although this is a very reasonable and common approach, it will affect your family’s normal activities. In
most cases, this will mean your family having less, rather than more money available, at least for a while. Obviously, it is important to prepare your family for this eventuality and plan accordingly. Your new business will consume more than just money: It will also absorb as much time and energy as you are prepared to devote to it.
Family Money Becomes a Business Asset
Business ventures, like all human endeavours, give rise to numerous clichés. From the business perspective, “it takes money to make money” is particularly annoying because it is so true. Certainly the primary purpose of a business is to generate
revenue. Just as certainly, you must spend money to generate this revenue.
Virtually all owners spend their own, or their family’s, money to start their businesses. Personal or family funds that are allocated for business purposes are
obviously not available for family use until the business is profitable enough to return the owner’s initial startup investment. With fewer funds available for the family, it may be necessary to make a lifestyle change.
Family Members as Employees
When business owners look for help, they frequently look first to members of their own family. This approach yields several benefits. It keeps money in the family. The owner can transfer money to family members and claim the transfer as a deduction for income tax purposes. Further, these related employees can probably be available for as much or as little time as required. Unfortunately, relatives do not always make the best employees. They may lack the requisite skills and interest to perform required tasks.
Obviously, profits that are shared among family members, rather than among nonfamily owners, will yield more income to the family. Family members might also be better at keeping secrets and maintaining confidentiality than nonfamily employees.
It is often difficult for business owners to share control with others. Fiercely independent, they sometimes find it difficult to share or delegate responsibility for making things happen and for keeping things going. In family businesses, with control shared among family members, owners do not really feel that they are giving up control.
Don’t assume that just because you are very excited about your business that your family will share this excitement. Before counting on family members’ participation in the business, make sure that they are genuinely interested and can make valuable
contributions.
Also, when family members work together, there is a tendency for domestic issues to
spill over into the work situation and vice versa. One of the good things about working away from home is that it helps separate home and family. If, for example, you have a dispute with your spouse or partner over something as trivial as leaving the top off the toothpaste tube, a day apart will help both of you forget about the issue. On the other hand, if you spend the day together working, the normal pressures of running a business can help escalate a nonissue into a disagreement. Ordinarily minor work annoyances, can ignite into a major conflict that
would otherwise have been ignored and forgotten. Domestic differences and business
problems can be a very toxic combination.
Divide and Manage
The challenges faced by family businesses go beyond the ownership and operating challenges that face all small businesses. They also go beyond the difficulty of balancing work and family, an issue that anyone who works and also has family responsibilities must face. Family businesses represent the merging and integration of three kinds of critical issues: ownership, operation, and family. To make a family business work, and indeed succeed, family members must consider and resolve these issues.
Ownership Issues
➤ Who actually owns the business?
➤ If ownership is shared, what is the interest of each owner? How is this interest
determined? How is it valued?
➤ How was the ownership interest acquired? Was there an actual contribution of
money? Was the ownership interest a gift? What tax issues arise as a result of making a gift of an ownership interest?
➤ Who has ultimate decision-making authority? What happens if joint owners cannot
reach an agreement?
➤ What restrictions apply in dealing with the owners’ interests? Can they sell their
interests or pledge them as security for loans?
➤ What happens to the owners’ interests in the event of a marriage breakup? What
buy-sell provisions apply?
➤ How will ownership interests be transferred to other family members? When can
these interests be transferred? Will they be transferred on death or on disability?
How will the interest be valued?
➤ How will the owners share the profits? If bonuses will be paid, how will they be calculated and when will they be paid?
owners, you will draw on personal and family savings to pay the startup expenses and
keep the business going until the cash starts to flow in. Although this is a very reasonable and common approach, it will affect your family’s normal activities. In
most cases, this will mean your family having less, rather than more money available, at least for a while. Obviously, it is important to prepare your family for this eventuality and plan accordingly. Your new business will consume more than just money: It will also absorb as much time and energy as you are prepared to devote to it.
Family Money Becomes a Business Asset
Business ventures, like all human endeavours, give rise to numerous clichés. From the business perspective, “it takes money to make money” is particularly annoying because it is so true. Certainly the primary purpose of a business is to generate
revenue. Just as certainly, you must spend money to generate this revenue.
Virtually all owners spend their own, or their family’s, money to start their businesses. Personal or family funds that are allocated for business purposes are
obviously not available for family use until the business is profitable enough to return the owner’s initial startup investment. With fewer funds available for the family, it may be necessary to make a lifestyle change.
Family Members as Employees
When business owners look for help, they frequently look first to members of their own family. This approach yields several benefits. It keeps money in the family. The owner can transfer money to family members and claim the transfer as a deduction for income tax purposes. Further, these related employees can probably be available for as much or as little time as required. Unfortunately, relatives do not always make the best employees. They may lack the requisite skills and interest to perform required tasks.
Obviously, profits that are shared among family members, rather than among nonfamily owners, will yield more income to the family. Family members might also be better at keeping secrets and maintaining confidentiality than nonfamily employees.
It is often difficult for business owners to share control with others. Fiercely independent, they sometimes find it difficult to share or delegate responsibility for making things happen and for keeping things going. In family businesses, with control shared among family members, owners do not really feel that they are giving up control.
Don’t assume that just because you are very excited about your business that your family will share this excitement. Before counting on family members’ participation in the business, make sure that they are genuinely interested and can make valuable
contributions.
Also, when family members work together, there is a tendency for domestic issues to
spill over into the work situation and vice versa. One of the good things about working away from home is that it helps separate home and family. If, for example, you have a dispute with your spouse or partner over something as trivial as leaving the top off the toothpaste tube, a day apart will help both of you forget about the issue. On the other hand, if you spend the day together working, the normal pressures of running a business can help escalate a nonissue into a disagreement. Ordinarily minor work annoyances, can ignite into a major conflict that
would otherwise have been ignored and forgotten. Domestic differences and business
problems can be a very toxic combination.
Divide and Manage
The challenges faced by family businesses go beyond the ownership and operating challenges that face all small businesses. They also go beyond the difficulty of balancing work and family, an issue that anyone who works and also has family responsibilities must face. Family businesses represent the merging and integration of three kinds of critical issues: ownership, operation, and family. To make a family business work, and indeed succeed, family members must consider and resolve these issues.
Ownership Issues
➤ Who actually owns the business?
➤ If ownership is shared, what is the interest of each owner? How is this interest
determined? How is it valued?
➤ How was the ownership interest acquired? Was there an actual contribution of
money? Was the ownership interest a gift? What tax issues arise as a result of making a gift of an ownership interest?
➤ Who has ultimate decision-making authority? What happens if joint owners cannot
reach an agreement?
➤ What restrictions apply in dealing with the owners’ interests? Can they sell their
interests or pledge them as security for loans?
➤ What happens to the owners’ interests in the event of a marriage breakup? What
buy-sell provisions apply?
➤ How will ownership interests be transferred to other family members? When can
these interests be transferred? Will they be transferred on death or on disability?
How will the interest be valued?
➤ How will the owners share the profits? If bonuses will be paid, how will they be calculated and when will they be paid?
Run Your Own Business
Before You Start
Starting a business is not an impulse decision. Obviously you must consider the
predictable issues regarding the business itself. But you must also consider a variety of personal, family, and legal issues before making your decision.
Many employees envy selfemployed people, believing that when you run your own business, you can earn more money. Although earning a livelihood is certainly the primary reason for starting and running a business, most small business owners also have personal reasons for choosing the self-employment option.
Attracted by the benefits that they see arising from eventually being on their own,
many people start a business as a hobby; others make a part-time commitment to their own business. In both cases, they continue to rely on the regular income of their full-time employment. Realistically, not everyone can succeed in running a business. Before starting your own business, it is important to identify what results you hope to achieve. It is also important to assess your entrepreneurial orientation and decide if running your own business is really the best thing for you.
You Need to Earn a Living
Businesses, large or small, exist to generate a profit for their owners. Business owners whether shareholders in the case of large incorporated ventures or owner-operators in the case of small businesses—use these profits as a means of supporting themselves and others for whom they are responsible. Thus, the primary raison d’être for all businesses is to earn a livelihood for their respective owners. If you already do, or think you would like to, run your own small business, you may have various reasons for choosing self-employment as a strategy for earning a iving. Maybe you lost your job as a result of downsizing, reorganization, or merger, and chose running your own business as the best choice for generating an income. Perhaps you find it too confining being an employee in an organization whose way of doing things is inconsistent and even irreconcilable with yours. More independence? Higher earning capability? Whatever. Regardless of an individual’s stated reason for choosing to run a small business, the bottom line is always the same: Small businesses exist primarily to allow their owners to earn a living.
Personal Reasons
Even though all businesses, large and small, exist for the same reason, all businesses are not alike. Small businesses are not miniature versions of their big business cousins. There are many differences, the main one being who actually owns the company.
As noted above, virtually all large businesses are incorporated, which means they are actually owned by their shareholders. In companies with a large number of shareholders, the ownership and management functions are separated. Most shareholders are more than willing to delegate responsibility for actually running or operating the business to paid managers, who may or may not be shareholders. It is the managers who set the direction for the business and look after its day-to-day operations. In discharging these responsibilities, the managers try to do what’s best for the shareholders. For shareholders as owners, their primary interest in the business is their only interest: generating income. Thus, what’s best for the shareholders is, purely and simply, higher profits.
There is no comparable separation of ownership and management in small businesses.
In most cases, the owners do it all, from long-term planning to day-to-day management. In discharging these responsibilities, instead of being guided by what is best for thirdparty shareholders, the owners are influenced by what is best for them. And what is best for owners of small businesses is not always higher profits.
Small businesses can be—and usually are—vehicles by which their owners can experience satisfaction, recognition, and joy, things that we all need if we are to live healthy lives. In practice, this means that as well as existing to allow their owners to earn a living, small businesses also help their owners achieve personal, nonfinancial goals. Essentially these goals represent results or desired outcomes
that the individual owners would like to achieve.
Examples of goals that can be achieved through
running one’s own business include the following:
➤ Earning specific awards or peer recognition;
➤ Showcasing your abilities;
➤ Doing what you love doing;
➤ Making a difference in the community;
➤ Maintaining an enriching relationship with
spouse and family;
➤ Meeting new people;
➤ Improving the quality of service to clients;
➤ Developing new ways of doing things.
If you currently run your own business, thinkabout why you started it. If you are thinking about starting your own business, what goals do you hope to achieve?
The Problem with Business-Hobbyists
Much like a hobby generates pleasure and satisfaction for the person doing it, so does playing business. In most cases, playing business is a harmless activity. There are, however, two areas of difficulty that might arise for businesshobbyists.
At least superficially, the business hobbyist has an unfair advantage over the competition. Unencumbered by the normal economic constraints of running a business, the businesshobbyist is free to do work for no or low cost to customers. For these people, simply doing the work is more important than getting paid for doing it. If they don’t have to support themselves and their families from business activities, there is no urgency in getting paid the market rate for the services.
Providing services at a cost significantly lower than the competition has two problematic side effects. First, it brings into question the cost and value of comparable services provided by other businesses that must build overhead and livelihood expectations into their pricing. Clients are generally more concerned with what something costs them, than with what it costs the supplier to produce it. Thus, when they see one supplier providing a specific service at a price significantly lower than the competition, they assume that the competitors must be overcharging. Based on a totally erroneous interpretation of the data, they develop unwarranted negative perceptions of the business.
Further, in order to stay competitive and protect their market share, the competition might be forced to lower its prices to match those of the business-hobbyist. Although this may be a good thing for customers, price competition by hobbyists seldom benefits suppliers. When prices are cut, profits and customer service also decline. More than one business has been forced to close its doors as a victim of price-cutting wars. Obviously, the presence of a few business-hobbyists in a market segment is unlikely to affect the price of the services of established competitors. However, the appearance of many business-hobbyists will probably reduce the prices, profitability, and service of full-time businesses providing comparable services.
The second area of difficulty involves the liability of the business-hobbyist. Once you start a business, especially providing services, you hold yourself out to the public as having specific skills. In delivering these skills, you are expected to meet the standards of other businesses offering the same skills. If a failure to meet these standards results in a customer suffering loss or damage, you are responsible for the loss or damage. You cannot escape this liability by saying that what you called a business was not really a business but was more like a hobby.
A Part-Time Business and a Full-Time Job
If you are interested in running your own business, but are not yet ready to make a full-time commitment, starting a part-time business is a better approach than starting a business as a hobby. The difference between a part-time business and a full-time business is the extent of the commitment. Starting a part-time business is
different from running a hobby business because you commit to a part-time business whatever resources—time, energy, money, etc.—that you have available and that are necessary to get the business up and running.
Even though you are running a business on a parttime basis, make sure that the rates you charge for your goods and services are comparable to those of your competitors. There are several reasons for this. The quality of these goods and services are at least as good as or even better than your competitors’. If they weren’t, you wouldn’t even consider offering them for sale, would you? Since they are
comparable, why should they be offered at a lower cost? To offer them at a lower cost might suggest that you and your business are not quite as good as
the competition.
The Least You Need to Know
➤ The primary purpose of running your own business is to earn a living.
➤ Personal goals can be as important as earning a living. These reasons have more
to do with personal satisfaction than achieving financial goals.
➤ Playing business is not a good way to get into business. It can pose some risks
for you as well as for full-time competitors in the marketplace.
➤ Running a business is a full-time commitment.
➤ Not everyone has an entrepreneurial orientation. Some people function better
as employees.
Starting a business is not an impulse decision. Obviously you must consider the
predictable issues regarding the business itself. But you must also consider a variety of personal, family, and legal issues before making your decision.
Many employees envy selfemployed people, believing that when you run your own business, you can earn more money. Although earning a livelihood is certainly the primary reason for starting and running a business, most small business owners also have personal reasons for choosing the self-employment option.
Attracted by the benefits that they see arising from eventually being on their own,
many people start a business as a hobby; others make a part-time commitment to their own business. In both cases, they continue to rely on the regular income of their full-time employment. Realistically, not everyone can succeed in running a business. Before starting your own business, it is important to identify what results you hope to achieve. It is also important to assess your entrepreneurial orientation and decide if running your own business is really the best thing for you.
You Need to Earn a Living
Businesses, large or small, exist to generate a profit for their owners. Business owners whether shareholders in the case of large incorporated ventures or owner-operators in the case of small businesses—use these profits as a means of supporting themselves and others for whom they are responsible. Thus, the primary raison d’être for all businesses is to earn a livelihood for their respective owners. If you already do, or think you would like to, run your own small business, you may have various reasons for choosing self-employment as a strategy for earning a iving. Maybe you lost your job as a result of downsizing, reorganization, or merger, and chose running your own business as the best choice for generating an income. Perhaps you find it too confining being an employee in an organization whose way of doing things is inconsistent and even irreconcilable with yours. More independence? Higher earning capability? Whatever. Regardless of an individual’s stated reason for choosing to run a small business, the bottom line is always the same: Small businesses exist primarily to allow their owners to earn a living.
Personal Reasons
Even though all businesses, large and small, exist for the same reason, all businesses are not alike. Small businesses are not miniature versions of their big business cousins. There are many differences, the main one being who actually owns the company.
As noted above, virtually all large businesses are incorporated, which means they are actually owned by their shareholders. In companies with a large number of shareholders, the ownership and management functions are separated. Most shareholders are more than willing to delegate responsibility for actually running or operating the business to paid managers, who may or may not be shareholders. It is the managers who set the direction for the business and look after its day-to-day operations. In discharging these responsibilities, the managers try to do what’s best for the shareholders. For shareholders as owners, their primary interest in the business is their only interest: generating income. Thus, what’s best for the shareholders is, purely and simply, higher profits.
There is no comparable separation of ownership and management in small businesses.
In most cases, the owners do it all, from long-term planning to day-to-day management. In discharging these responsibilities, instead of being guided by what is best for thirdparty shareholders, the owners are influenced by what is best for them. And what is best for owners of small businesses is not always higher profits.
Small businesses can be—and usually are—vehicles by which their owners can experience satisfaction, recognition, and joy, things that we all need if we are to live healthy lives. In practice, this means that as well as existing to allow their owners to earn a living, small businesses also help their owners achieve personal, nonfinancial goals. Essentially these goals represent results or desired outcomes
that the individual owners would like to achieve.
Examples of goals that can be achieved through
running one’s own business include the following:
➤ Earning specific awards or peer recognition;
➤ Showcasing your abilities;
➤ Doing what you love doing;
➤ Making a difference in the community;
➤ Maintaining an enriching relationship with
spouse and family;
➤ Meeting new people;
➤ Improving the quality of service to clients;
➤ Developing new ways of doing things.
If you currently run your own business, thinkabout why you started it. If you are thinking about starting your own business, what goals do you hope to achieve?
The Problem with Business-Hobbyists
Much like a hobby generates pleasure and satisfaction for the person doing it, so does playing business. In most cases, playing business is a harmless activity. There are, however, two areas of difficulty that might arise for businesshobbyists.
At least superficially, the business hobbyist has an unfair advantage over the competition. Unencumbered by the normal economic constraints of running a business, the businesshobbyist is free to do work for no or low cost to customers. For these people, simply doing the work is more important than getting paid for doing it. If they don’t have to support themselves and their families from business activities, there is no urgency in getting paid the market rate for the services.
Providing services at a cost significantly lower than the competition has two problematic side effects. First, it brings into question the cost and value of comparable services provided by other businesses that must build overhead and livelihood expectations into their pricing. Clients are generally more concerned with what something costs them, than with what it costs the supplier to produce it. Thus, when they see one supplier providing a specific service at a price significantly lower than the competition, they assume that the competitors must be overcharging. Based on a totally erroneous interpretation of the data, they develop unwarranted negative perceptions of the business.
Further, in order to stay competitive and protect their market share, the competition might be forced to lower its prices to match those of the business-hobbyist. Although this may be a good thing for customers, price competition by hobbyists seldom benefits suppliers. When prices are cut, profits and customer service also decline. More than one business has been forced to close its doors as a victim of price-cutting wars. Obviously, the presence of a few business-hobbyists in a market segment is unlikely to affect the price of the services of established competitors. However, the appearance of many business-hobbyists will probably reduce the prices, profitability, and service of full-time businesses providing comparable services.
The second area of difficulty involves the liability of the business-hobbyist. Once you start a business, especially providing services, you hold yourself out to the public as having specific skills. In delivering these skills, you are expected to meet the standards of other businesses offering the same skills. If a failure to meet these standards results in a customer suffering loss or damage, you are responsible for the loss or damage. You cannot escape this liability by saying that what you called a business was not really a business but was more like a hobby.
A Part-Time Business and a Full-Time Job
If you are interested in running your own business, but are not yet ready to make a full-time commitment, starting a part-time business is a better approach than starting a business as a hobby. The difference between a part-time business and a full-time business is the extent of the commitment. Starting a part-time business is
different from running a hobby business because you commit to a part-time business whatever resources—time, energy, money, etc.—that you have available and that are necessary to get the business up and running.
Even though you are running a business on a parttime basis, make sure that the rates you charge for your goods and services are comparable to those of your competitors. There are several reasons for this. The quality of these goods and services are at least as good as or even better than your competitors’. If they weren’t, you wouldn’t even consider offering them for sale, would you? Since they are
comparable, why should they be offered at a lower cost? To offer them at a lower cost might suggest that you and your business are not quite as good as
the competition.
The Least You Need to Know
➤ The primary purpose of running your own business is to earn a living.
➤ Personal goals can be as important as earning a living. These reasons have more
to do with personal satisfaction than achieving financial goals.
➤ Playing business is not a good way to get into business. It can pose some risks
for you as well as for full-time competitors in the marketplace.
➤ Running a business is a full-time commitment.
➤ Not everyone has an entrepreneurial orientation. Some people function better
as employees.
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