A small business, also called mom and pop operation by some in the United States, is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of "small" varies by country and by industry, small businesses can also be classified according to other methods such as sales, assets, or net profits.
Starting your own business is like building a new house. Subject to existing laws and regulations, you are free to do whatever you want, wherever you want and however you want to do it; you choose the goods or services to be sold and target your potential customers. You even develop and implement your own marketing strategies and, best of all, get to keep all of the profits that your business generates. Instead of blindly following policies and procedures designed by someone else, you can develop your own that reflect your preferences and personality and once you have succeeded in achieving your goals, you will have the satisfaction of having done it yourself, your way.
Small businesses represent 99 percent of all employers and employ 51 percent of the private sector work force. Small businesses provide from two-thirds to three quarters of all new jobs created.
Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops such as a bakery, deli, hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing, and online business, such as web design and programming, etc.
The legal definition of "small" varies by country and by industry. In the United States the Small Business Administration establishes small business size standards on an industry-by-industry basis, but generally specifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7 million in annual receipts for most nonmanufacturing businesses. The definition can vary by circumstance – for example, a small business having fewer than 25 full-time equivalent employees with average annual wages below $50,000 qualifies for a tax credit under the healthcare reform bill Patient Protection and Affordable Care Act.
In the European Union, a small business generally has under 50 employees. However, in Australia, a small business is defined by the Fair Work Act as one with fewer than 15 employees. By comparison, a medium sized business or mid-sized business has under 500 employees in the US, 250 in the European Union and fewer than 200 in Australia.
In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition. These criteria are followed by the European Union, for instance (headcount, turnover and balance sheet totals). Small businesses are usually not dominant in their field of operation.
Many people dream of starting and managing their own business. Some actually do start a business and achieve their dream; others keep on dreaming. Why is this so? What separates the successful entrepreneur from the unsuccessful? In many cases, it seems to be whether the prospective business owner has access to sufficient funds to turn the dream into reality. You've probably heard stories about how many businesses fail each year. Sometimes their failure can be traced to a lack of financing. It is difficult to guess how many businesses never even start because of that same lack of funding. Just learning where and how to get the funds to start or expand your business can be confusing, frustrating and time consuming. The amount of financing may be as little as $100 or more than $1 million, based on the type of business. Many different businesses can be started with a relatively small amount of money.
Here are the questions every small business owner should ask themselves about their business:
- Do I have a budget for the current year?
- Do I know how much and where my company spent money last year?
- Do I know what my cash flow looks like for the next six months, next year?
- Do I have specific plans for generating new business?
- Do I know where my business came from last year?
- Do I know who my customers are and why they buy from me and not my competition?
- Do my clients regularly refer business to me?
- Do my employees know what is expected of them?
- Do I have written procedures and policies?
- Do I receive regular reports on sales, quality, budget variances, profit, customer satisfaction and employee performance?
Listed below are some tips for marketing your small businesses. Advertising is expensive and these ideas are an inexpensive way to get your name out there.
- Signup sheet to ask customers their birthday month to send out birthday postcards.
- Send out frequent emails to those who have signed up. Be sure to update and change each email so they won't think you are just repeating the one you sent earlier.
- Have an area on your website that allows them to sign up for your emails or an online newsletter. Be sure to update your website frequently to keep it relevant--especially removing old information.
- Offer a free gift for bringing in a new customer.
- Have a coupon available on your website that would only be for your website customers.
- Offer a free gift for your first-time customers.
- Have a customer loyalty card where the 10th or 12th purchase is free.
- If you are sending out postcards, have a featured item or a featured product listed on it. You can also have a featured item or featured product listed on your website.
- Piggyback off events that are taking place locally in your area.
- Piggback off other retailers in your area. have your fliers in antique shops, salons, spas, or alternative health centers or health food stores. You have to be willing to have their fliers in your business in return.
- Try involving other businesses in one of your special events such as a fashion show from a boutique.
- Write thank you notes to any and all that have helped your business. Thank you notes to people who advertise for you or have special events at your establishment.
- Cross promote with non-industry neighbors to bring customers to your neighborhood. Plan a sidewalk event outside a neighbors cafe.
Even as a sole proprietor, without employees, it is important that you know the answers to the above questions. By being able to answer yes and articulate your responses you position your business to succeed.
As a small business you may not think you need a budget. Without some idea of your overhead and expenses you will have no idea how to price your products or services so that you generate a profit, or at least break even. Creating a budget is not complicated. You don’t need expensive software programs. Microsoft Excel comes with a budget template; if you don’t have a computer you can even use paper and pencil.
By creating a budget and reviewing it at least weekly you are able to track your expenses and manage them. Taking it to the next step, reviewing last years budget and looking closely at where you spent your money allows you to make better decisions on this year’s budget items. It is also important for you to know what your cash flow looks like, remember cash flow and profit are two different animals. You can price your products so that you have a 35% profit, but your accounts receivable may be lagging behind your accounts payable. You need to pay close attention to when your customers pay you. If you know your biggest customer always takes 45 days to pay your invoices, without careful planning you may miss a payroll or pay your vendors late.
As your business grows you may find the need to hire additional associates. The best way to get the most out of your investment in human capital is to make sure your employees know what is expected of them. By developing clear and detailed policies and procedures and providing them to your employees you create an environment for success. Providing your employees with written policies and procedures makes it easier for them to do their jobs efficiently. Expectations are clear and when there are questions, it is an easy matter to refer to the policy or procedure. Written policies and procedures give clarity and direction to your managers and supervisors on how to handle specific employment issues fairly and consistently. The relatively small investment of time initially will save you much time in the future.
Every business is different, but it is still possible to get a reasonable idea of how much cash your business is likely to need by considering a few key factors.
Once you start a business, you lay the groundwork for a whole series of new relationships: with other owners (if there are any), customers, suppliers, employees, and the government. Each of these relationships carries its own obligations. As an owner, you can run the business as you see fit, subject to normal business and legal responsibilities.
In dealing with your customers, you have the responsibility to deliver what you promised. As a customer of suppliers, you have the responsibility of paying for goods and services that you purchase. You also have the responsibility for paying your employees for the work that they do. And, of course, you must also file various documents with all levels of government and pay any taxes that may be levied.
Does Your Business Produce a Product or Provide a Service?
Initially, a service business will require less cash because it will not have high material and equipment costs. If you intend to manufacture a product, you must consider the type and amount of direct materials and equipment needed and expenses incurred.
Who Will Provide Labor?
Do you intend to do most of the work yourself or will you hire employees to assist you? Contributing your own time to the business is one way to keep costs down. Later, when your business is firmly established, you may wish to hire employees to take over many of the day-to-day operations.
Do You Have Personal Funds to Invest in Your Business? Almost all investors prefer or require that you contribute some of your money to the business. This contribution of unborrowed funds is called equity. There is no fixed percentage for this equity contribution, but most lenders require at least 25 percent of the total amount needed to establish the business. The amount of equity required is also influenced by other credit factors, such as management experience and adequacy of collateral.
Can You Provide for Your Personal Expenses While the Business Is Getting Started?
It is unusual for a new business to show a profit in the first few years. It's good strategy to plan to cover your personal living expenses for at least six months while your business is getting started. If your business is already operating, it may be necessary to reduce your salary while you try to expand. If you have your own funds set aside for your personal expenses during these periods, you will have one less expense for which you will need borrowed funds. Once you have determined your expenses, you will need to estimate what percentage of the funds you can supply yourself and what percentage you must find elsewhere. At this point, the figure may seem overwhelming. Don't be discouraged. It's far better to have realistically assessed your situation early than to rush into a new venture before you've planned adequately.
Almost all businesses need outside funds and yours probably will not be an exception to the rule. You should prepare a month-by-month cash flow projection for the entire first year, perhaps with the help of your accountant or banker. If the projection is realistic, it will clearly show how much financing you need. Local SBA offices have cash flow projection forms; ask for Form 1100. Yes, starting a new business can be risky, but it can also pay big rewards both in personal satisfaction and in economic return.
You must set specific and measurable standards and goals for your business. You can’t measure success if you don’t know what it looks like. As you were preparing your budget for the year, you should have set sales goals, established quality standards for your products and services, and performance goals for your employees. At a minimum, you should review your sales, budget variances, accounts payable and receivable, and P&L monthly. By constantly reviewing your results and holding yourself and employees accountable you can and will achieve your business goals.
In order to leverage its talent, ideas and energy to create a high performing company, a small business must be focussed and clear on precisely how it intends to conduct its affairs. Small business plans create this clarity and focus. They take the critical issues identified within a company’s strategic thinking and align them with the necessary tasks, then allocate the resources required to achieve the targeted goals.
The following 4 “musts” are the keys to effective small business plans.
Must keep them simple
Effective small business plans embody the following characteristics. They:
- Spell out the goals that need to be achieved
- Establish milestones along the way
- Document the required tasks
- Allocate those tasks
- Transform those tasks into step-by-step processes
- Identify the resources required
- Assign accountabilities and responsibilities
- Create the appropriate deadlines
- Become a measure of progress
- Allow for incorporating emerging opportunities.
Must keep the business on track
Small business plans make sure that all employees are pulling in the same direction, in keeping with the human, technological, physical, time and financial resources that the small business has at its disposal.
They do not have to be overly complicated, but they do have to be clear, understandable and tailored to the needs of the business. In essence, they have to be easy to use by everyone in the organization, and they have to cascade down to the individual level.
Must be applicable to everyone
When a company implements its small business plans in this manner, the plans become the living blueprint for all of its daily activities. The plans are not meant to sit in a nicely bound folder on a shelf somewhere. They ensure that the small business gets its priorities right and that it is tackling the most critical issues, within a structured approach. All the people in the organization are involved and are attending to the right issues and handling them in the right way in their particular part of the business.
Must tell the business how it is traveling
Small business plans facilitate the measurement of results. Business plans that are implemented in this way become the daily measure of all the things that the company is paying attention to.
When cascaded correctly throughout the organization, small business plans create the framework for the body of work that has to be done for the organization to be successful. They enable people to self-manage and self-govern around the company’s priorities and expectations of them, and they give them the tools necessary to do so.
In summary A Small Business Plan must:
- Be clear and simple.
- Keep the business on track.
- Apply to everyone in the company.
- Tell you how the business is progressing.
A Great Small Business was planned that way.
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