why start a business and what is a business plan?
Reasons for starting up a business or an enterprise
Growth - entrepreneurs who own their own business benefit personally when there is an appreciation in the value of their assets, such as property and land which tend to increase in value over time. This is called capital growth. It is quite common for the capital growth of a business to be worth more than the value of the owner's salaries.
Earnings - potential returns from setting up your own business can easily outweigh the costs, even though the risks are high. It is common that entrepreneurs earn far in excess of salaries from any other occupation that they might pursue.
Transference and inheritance - in many societies it is the cultural norm to pass on assests, including businesses, to the next generation. Many self-employed entrepreneurs view their business as something that they can pass on (transference) to their children (inheritance) to give them a sense of security that might not be possible if they chose to work for someone else.
Challenge - some people might view setting up and running a business as a challenge. It is this that drives them to perform and what gives them personal satisfaction. Being successful in business boosts self-esteem.
Autonomy - working for someone else means exactly that. Employees have to follow the instructions and rules set by the organisation that they work for, such as the conditions of employment, working hours, benefits and holiday entitlement. Conversely, being self-employed means that there is autonomy (independence, freedom of choice and flexibility) in how things are done within the organisation.
Security - similarly, there is usually more job security for someone who is their own boss. By contrast, employees can be dismisses, made redundant or even replaced by technology. Although the risks are great, being self-employed also makes it potentially easier to accumulate personal wealth (financial security) to provide higher funds for (Early) retirement.
Hobbies - some people might want to pursue their passionor or to turn their hobby into a business. Successful entrepreneurs have a passion for what they do and this is made easier is the nature of the work is directly related to their interests.
ALSO...
● Losing a job encourages many people to set up in business by themselves, either providing their former employer’s product or another product, perhaps based on an interest or skill they have.
● Desire for independence – some people do not like the idea of being told what to do! By creating their own business, they have work fl exibility and control over their working lives.
● By talking to friends or family, it might become clear that a business opportunity exists that an entrepreneur could take advantage of.
● A wish to make more money than in the current job – many people setting up their own business believe that they will earn a higher income working for themselves.
Common steps in the process of starting up a business or an enterprise
Step 1: Write a Business Plan - use these tools and resources to create a business plan. This written guide will help you map out how you will start and run your business successfully.
Step 2: Get Business Assistance and Training - take advantage of free training and counseling services, from preparing a business plan and securing financing, to expanding or relocating a business.
Step 3: Choose a Business Location - get advice on how to select a customer-friendly location and comply with zoning laws.
Step 4: Finance Your Business - find government backed loans, venture capital and research grants to help you get started.
Step 5: Determine the Legal Structure of Your Business - decide which form of ownership is best for you: sole proprietorship, partnership, Limited Liability Company (LLC), corporation, S corporation, nonprofit or cooperative.
Step 6: Register a Business Name ("Doing Business As") - register your business name with your state government.
Step 7: Get a Tax Identification Number - learn which tax identification number you'll need to obtain from the IRS and your state revenue agency.
Step 8: Register for State and Local Taxes - register with your state to obtain a tax identification number, workers' compensation, unemployment and disability insurance.
Step 9: Obtain Business Licenses and Permits - get a list of federal, state and local licenses and permits required for your business.
Step 10: Understand Employer Responsibilities - learn the legal steps you need to take to hire employees.
Problems that a new business or enterprise may face
Competition:
This is nearly always a problem for new enterprises unless the business idea is unique. More generally, a newly created business will experience competition from older, established businesses with more resources and market knowledge. The entrepreneur may have to offer better customer service to overcome the cost and pricing advantages of bigger businesses.
Building a customer base:
To survive, a new business must establish itself in the market and build up customer numbers as quickly as possible. The long-term strength of the business will depend on encouraging customers to return to purchase products again and again. Many small businesses try to encourage this by offering a better service than their larger and better-funded competitors. This service might include:
● personal customer service
● knowledgeable pre- and after-sales service
● providing for one-off customer requests that larger firms may be reluctant to offer.
Lack of finance:
All businesses need finance for the purchase of fixed assests, such as premises, buildings, machinery and equipment. However most owners of new or small businesses do not have to credentials to secure external funding without major difficulties.
Cash flow problems:
Financing working capital is a major problem for many new businesses. A business might not have a lot of stock, such as raw materials or semi-finished output, which cannot be easily turned into cash.
Lack of record keeping:
Accurate records are vital to pay taxes and bills and chase up debtors. Many entrepreneurs fail to pay sufficient attention to this as they either believe that it is less important than actually meeting customers’ needs or they think they can remember everything, which they could not possibly do after a period of time. For example, how can the owner of a new, busy florist shop remember:
● when the next delivery of fresh flowers was booked for?
● whether the flowers for last week’s big wedding have been paid for?
● if the cheque received from an important customer has been paid into the bank yet?
● how many hours the shop assistant worked last week?
Lack of working capital:
Running short of capital to run day-to-day business affairs is the single most common reason for the failure of new businesses to survive in the first year. Capital is needed for day-to-day cash, for the holding of stocks and to allow the giving of trade credit to customers, who then become debtors. Without suffi cient working capital, the business may be unable to buy more stocks or pay suppliers or offer credit to important customers. Serious working capital shortages can usually be avoided if businesses take several important steps:
● Construct and update a cash-flow forecast so that the liquidity and working capital needs of the business can be assessed, month by month.
● Inject sufficient capital into the business at start-up for the first few months of operation when cash flow from customers may be slow to build up.
● Establish good relations with the bank so that short term problems may be, at least temporarily, overcome with an overdraft.
● Use effective credit control over customers’ accounts – do not allow a period of credit which is too long, and quickly chase up late payers.
Poor management skills:
Most entrepreneurs have had some form of work experience, but not necessarily at a management level. They may not have gained experience of:
● leadership skills
● cash handling and cash management skills
● planning and coordinating skills
● decision-making skills
● communication skills
● marketing, promotion and selling skills.
Changes in the business environment:
Setting up a new business is risky. Not only are there the problems and challenges referred to above but there is also the risk of change, which can make the original business idea much less successful. New businesses may fail if any of the following changes occur, which turn the venture from a successful one to a loss-making enterprise:
● new competitors
● legal changes, e.g. outlawing the product altogether
● economic changes that leave customers with much less money to spend
● technological changes that make the methods used by the new business old-fashioned and expensive.
This list of changes could, no doubt, be added to, but even these four factors indicate that the business environment is a dynamic one, and this makes owning and running a business enterprise very risky indeed.
Some other issues also making it difficult to start a business include marketing problems, high production costs and poor locations.
The elements of a business plan
A business plan is a formal statement of a set of business goals, the reasons they are believed attainable and the plan for reaching those goals. It may also contain background information about the organization, strategies, target market, financial forecasts or team attempting to reach the goals.
1. The business:
- name and address of the proposed business
- cost of premises and other start-up costs
- details of the owner(s) and past business experience
- type of business organisation e.g. sole trader, partnership
- quantifiable goals and objectives of the proposed business or project
2. The product:
- details of the good(s) and/or service(s) being offered
- supporting evidence showing why customers will pay for the product(s)
- where and how production will take place e.g. the equipment that is needed
- details of the suppliers of resources such as raw materials or components
- costs of production i.e. the expected costs of operating the business
- pricing strategies to be used
3. The market:
- the expected number of customers or the forecast level of sales
- the nature of the market such as customer profiles and market segmentation
- the expected growth of the market in the foreseeable future
- competitor analysis e.g. market share, strengths and weaknesses
4. The finance:
- proposed sources of finance i.e. how the business will be funded
- break-even analysis
- security (financial guarantees) in case the borrower defaults on the loan
- cash flow forecast and steps to deal with cash flow problems
- forecast profit and loss accoount for the first year of trading
- forecast balance sheet showing the firm's financial health
- forecast rate of return for investors of the business venture
5. The personnel:
- number and job roles of the workers likely to be employed
- organisational structure of human resources
- details of payment systems e.g. remuneration such as wage rates
6. The marketing:
- market research and test marketing
- distribution plan, detailing where the products will be sold
- details of the promotional mis used to target customers
- any unique or distinctive selling point to differentiate itself from rivals.
Growth - entrepreneurs who own their own business benefit personally when there is an appreciation in the value of their assets, such as property and land which tend to increase in value over time. This is called capital growth. It is quite common for the capital growth of a business to be worth more than the value of the owner's salaries.
Earnings - potential returns from setting up your own business can easily outweigh the costs, even though the risks are high. It is common that entrepreneurs earn far in excess of salaries from any other occupation that they might pursue.
Transference and inheritance - in many societies it is the cultural norm to pass on assests, including businesses, to the next generation. Many self-employed entrepreneurs view their business as something that they can pass on (transference) to their children (inheritance) to give them a sense of security that might not be possible if they chose to work for someone else.
Challenge - some people might view setting up and running a business as a challenge. It is this that drives them to perform and what gives them personal satisfaction. Being successful in business boosts self-esteem.
Autonomy - working for someone else means exactly that. Employees have to follow the instructions and rules set by the organisation that they work for, such as the conditions of employment, working hours, benefits and holiday entitlement. Conversely, being self-employed means that there is autonomy (independence, freedom of choice and flexibility) in how things are done within the organisation.
Security - similarly, there is usually more job security for someone who is their own boss. By contrast, employees can be dismisses, made redundant or even replaced by technology. Although the risks are great, being self-employed also makes it potentially easier to accumulate personal wealth (financial security) to provide higher funds for (Early) retirement.
Hobbies - some people might want to pursue their passionor or to turn their hobby into a business. Successful entrepreneurs have a passion for what they do and this is made easier is the nature of the work is directly related to their interests.
ALSO...
● Losing a job encourages many people to set up in business by themselves, either providing their former employer’s product or another product, perhaps based on an interest or skill they have.
● Desire for independence – some people do not like the idea of being told what to do! By creating their own business, they have work fl exibility and control over their working lives.
● By talking to friends or family, it might become clear that a business opportunity exists that an entrepreneur could take advantage of.
● A wish to make more money than in the current job – many people setting up their own business believe that they will earn a higher income working for themselves.
Common steps in the process of starting up a business or an enterprise
Step 1: Write a Business Plan - use these tools and resources to create a business plan. This written guide will help you map out how you will start and run your business successfully.
Step 2: Get Business Assistance and Training - take advantage of free training and counseling services, from preparing a business plan and securing financing, to expanding or relocating a business.
Step 3: Choose a Business Location - get advice on how to select a customer-friendly location and comply with zoning laws.
Step 4: Finance Your Business - find government backed loans, venture capital and research grants to help you get started.
Step 5: Determine the Legal Structure of Your Business - decide which form of ownership is best for you: sole proprietorship, partnership, Limited Liability Company (LLC), corporation, S corporation, nonprofit or cooperative.
Step 6: Register a Business Name ("Doing Business As") - register your business name with your state government.
Step 7: Get a Tax Identification Number - learn which tax identification number you'll need to obtain from the IRS and your state revenue agency.
Step 8: Register for State and Local Taxes - register with your state to obtain a tax identification number, workers' compensation, unemployment and disability insurance.
Step 9: Obtain Business Licenses and Permits - get a list of federal, state and local licenses and permits required for your business.
Step 10: Understand Employer Responsibilities - learn the legal steps you need to take to hire employees.
Problems that a new business or enterprise may face
Competition:
This is nearly always a problem for new enterprises unless the business idea is unique. More generally, a newly created business will experience competition from older, established businesses with more resources and market knowledge. The entrepreneur may have to offer better customer service to overcome the cost and pricing advantages of bigger businesses.
Building a customer base:
To survive, a new business must establish itself in the market and build up customer numbers as quickly as possible. The long-term strength of the business will depend on encouraging customers to return to purchase products again and again. Many small businesses try to encourage this by offering a better service than their larger and better-funded competitors. This service might include:
● personal customer service
● knowledgeable pre- and after-sales service
● providing for one-off customer requests that larger firms may be reluctant to offer.
Lack of finance:
All businesses need finance for the purchase of fixed assests, such as premises, buildings, machinery and equipment. However most owners of new or small businesses do not have to credentials to secure external funding without major difficulties.
Cash flow problems:
Financing working capital is a major problem for many new businesses. A business might not have a lot of stock, such as raw materials or semi-finished output, which cannot be easily turned into cash.
Lack of record keeping:
Accurate records are vital to pay taxes and bills and chase up debtors. Many entrepreneurs fail to pay sufficient attention to this as they either believe that it is less important than actually meeting customers’ needs or they think they can remember everything, which they could not possibly do after a period of time. For example, how can the owner of a new, busy florist shop remember:
● when the next delivery of fresh flowers was booked for?
● whether the flowers for last week’s big wedding have been paid for?
● if the cheque received from an important customer has been paid into the bank yet?
● how many hours the shop assistant worked last week?
Lack of working capital:
Running short of capital to run day-to-day business affairs is the single most common reason for the failure of new businesses to survive in the first year. Capital is needed for day-to-day cash, for the holding of stocks and to allow the giving of trade credit to customers, who then become debtors. Without suffi cient working capital, the business may be unable to buy more stocks or pay suppliers or offer credit to important customers. Serious working capital shortages can usually be avoided if businesses take several important steps:
● Construct and update a cash-flow forecast so that the liquidity and working capital needs of the business can be assessed, month by month.
● Inject sufficient capital into the business at start-up for the first few months of operation when cash flow from customers may be slow to build up.
● Establish good relations with the bank so that short term problems may be, at least temporarily, overcome with an overdraft.
● Use effective credit control over customers’ accounts – do not allow a period of credit which is too long, and quickly chase up late payers.
Poor management skills:
Most entrepreneurs have had some form of work experience, but not necessarily at a management level. They may not have gained experience of:
● leadership skills
● cash handling and cash management skills
● planning and coordinating skills
● decision-making skills
● communication skills
● marketing, promotion and selling skills.
Changes in the business environment:
Setting up a new business is risky. Not only are there the problems and challenges referred to above but there is also the risk of change, which can make the original business idea much less successful. New businesses may fail if any of the following changes occur, which turn the venture from a successful one to a loss-making enterprise:
● new competitors
● legal changes, e.g. outlawing the product altogether
● economic changes that leave customers with much less money to spend
● technological changes that make the methods used by the new business old-fashioned and expensive.
This list of changes could, no doubt, be added to, but even these four factors indicate that the business environment is a dynamic one, and this makes owning and running a business enterprise very risky indeed.
Some other issues also making it difficult to start a business include marketing problems, high production costs and poor locations.
The elements of a business plan
A business plan is a formal statement of a set of business goals, the reasons they are believed attainable and the plan for reaching those goals. It may also contain background information about the organization, strategies, target market, financial forecasts or team attempting to reach the goals.
1. The business:
- name and address of the proposed business
- cost of premises and other start-up costs
- details of the owner(s) and past business experience
- type of business organisation e.g. sole trader, partnership
- quantifiable goals and objectives of the proposed business or project
2. The product:
- details of the good(s) and/or service(s) being offered
- supporting evidence showing why customers will pay for the product(s)
- where and how production will take place e.g. the equipment that is needed
- details of the suppliers of resources such as raw materials or components
- costs of production i.e. the expected costs of operating the business
- pricing strategies to be used
3. The market:
- the expected number of customers or the forecast level of sales
- the nature of the market such as customer profiles and market segmentation
- the expected growth of the market in the foreseeable future
- competitor analysis e.g. market share, strengths and weaknesses
4. The finance:
- proposed sources of finance i.e. how the business will be funded
- break-even analysis
- security (financial guarantees) in case the borrower defaults on the loan
- cash flow forecast and steps to deal with cash flow problems
- forecast profit and loss accoount for the first year of trading
- forecast balance sheet showing the firm's financial health
- forecast rate of return for investors of the business venture
5. The personnel:
- number and job roles of the workers likely to be employed
- organisational structure of human resources
- details of payment systems e.g. remuneration such as wage rates
6. The marketing:
- market research and test marketing
- distribution plan, detailing where the products will be sold
- details of the promotional mis used to target customers
- any unique or distinctive selling point to differentiate itself from rivals.