Financing Your Small Business

Developing Strategy

If you go to the Business and Economics Department at any large book­store, you may find hundreds of books written on strategy. Many of them are well-written and effective. A few such titles are listed in the recom­mended reading list in this book. The following ideas originate with Jay Winokur, a financial management consultant and chief financial officer for hire. His unique perspective comes from extensive work with large, multi­national corporations and with emerging companies.

Business Vision

You can describe what the business is that you want to build, but you must also understand what makes it the right business for you. Determine the skills and experience it takes to make the business successful. Which of those critical factors are among your greatest talents? Which of those fac­tors are also the tasks you love to do, twenty-four hours a day, seven days a week? The business that is right for you fits your individual expertise and your personal motivators.

Personal Values

Examine your personal values in order to set meaningful goals and objec­tives for your business. High-growth, high-reward, high-risk enterprises are not for people who value security, stability, and tranquility. The prospect of working eighty-hour weeks may not appeal to those who have lifestyle and family considerations. Issues concerning political, religious, philosophical, and economic beliefs will have a major impact on company policies, goals, and strategies. Acknowledge what is important to you so that you can build your values into your business.

Goals

When you understand what your business is and how you fit with it, you can set goals. Given the market opportunities and your personal values, how large could your company become? How profitable? What is the time frame for accomplishing all this? How will you and the company's other stake­holders benefit from these accomplishments?

Market Definition

Market issues make the difference between success and disaster. Identify a problem and identify the specific groups of people who have the problem. How much pain do they feel? The greater the pain, the greater the value of an effective solution. How does the market currently solve this problem? Every possible solution—including ignoring the problem—represents your competition.

Business Model

This business model does not refer to the wheelbarrow-sized pile of finan­cial projection spreadsheets that your favorite number cruncher produces. Instead, it refers to how your company operates. It includes the extent to which the people on your management team are full-time employees, part­time employees, or consultants. It includes whether you manufacture your own products—domestically or elsewhere—or contract it out. It includes whether your salespeople are employees or outside representatives. It includes your marketing approach—how you advertise, attend trade shows, and use direct mail and email, infomercials, telemarketers, and other aspects of your business. Not all of these decisions are made at start-up; however, the issues and possible alternative solutions should be identified.

F N

Figure 2.1: FACTORS THAT INDICATE SUCCESS

Experience shows that there is a list of fifteen specific economic factors that lead toward strong business models. Few, if any, businesses incorpo­rate all fifteen, but observation suggests that the more you incorporate, the better your chances for success.

1. An established, identifiable, segmental market.

2. The market perceives its need for your proprietary benefits, providing you with a true strategic advantage.

3. Repeat buyers who generate continuous revenue.

4. Penetrable distribution channels, so you can easily build the bridge to your end users.

5. Dependable supplies of inputs (material, labor, capital, etc.) and a reli­able production process.

6. High margins to absorb operating expenses and provide profit.

7. Good cash flow, such as customer deposits or supplier trade terms.

8. Limited product liability. (You do not want product mistakes to bankrupt y°u0

9. Slow product obsolescence. (You want to avoid high rates of techno­logical change, physical perishability, or fashion fad.)

10. Limited entrenched direct competition. (Would you really want to go head-to-head against IBM, Microsoft, General Motors, or Exxon/Mobil?)

11. Intellectual property protection to build a secure wall around your market.

12. Exit potential or other wealth creation. (Very few companies have suc­cessful IPOs. Select a wealth creation strategy that is prevalent in the industry.)

13. Legal simplicity.

14. Minimal government interference. (Avoid highly regulated situations.)

15. Build a company that requires appropriate levels of investment. (Be responsive to investors' sweet spots.)

Resources

So far, you have articulated your vision, acknowledged your values, set your goals, defined your market, and determined your economic and business model. The next strategic focus is on the resources you require to put the enterprise in motion and grow it through each of your milestones.

There are three types of resources—people, facilities and equipment, and capital. You already know the skills and experience sets that are necessary to make your business successful. Your management team and board of advisors will guide you in determining the methods of staffing your start­up. They will plan the growth of your organization so that you have the appropriate quantity of skilled and experienced managers and employees to support your growth. Your team will also determine the selection and timing of facilities, production equipment, office equipment, computer systems, and other assets necessary for everyone in your organization to do their part. Finally, your financial advisors will help you determine the amount and types of funding you need to finance your growth.

Organizational Structure

As part of the planning process, you will need to determine which type of entity best supports the achievement of your goals. Input from your management team, as well as legal and other advisors, will help in the decision-making process. See Chapter 1 for more guidance on choosing the best type of entity to form.

Financing Your Small Business

Limited Liability Company Formation Documents

If, after consultation with your professional team, you decide to form a lim­ited liability company, you will need to file Articles of Organization with the state and draft an internal …

Corporation Formation Documents

After consulting with your professionals, you will most likely need to form an entity to raise capital. Most entrepreneurs will form either a corporation or a limited liability company. This …

Business Plan

As part of your business strategy, planning, and feasibility analysis, you will commit your plan to paper. The document produced is typically called a business plan. The purpose of a …

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