What financial statements will I need?
You should prepare and understand two basic financial statements: 1. the
balance sheet, which is a record of assets, liabilities and capital; and 2.
the income (profit and loss) statement, a summary of your earnings and
expenses over a given period of time.
What pricing strategy should I use?
The price of a service or item is based on value to the client or costs.
There are several pricing strategies. Select the strategy that will make
your goods or services the most competitive and/or the one that will help
you maximize your profit goals. Some of the strategies to consider are:
Standard Retail Pricing
A common pricing strategy for small businesses is to simply follow
the manufacturer's suggested retail price. The suggested retail price is
easy to use, but it doesn't adequately account for the element of
competition.
Pricing Below Competition
This strategy reduces the profit margin per sale. It requires you to
reduce your overall costs and:
- obtain the best prices possible for raw materials or inventory,
- locate the business in an inexpensive area or facility,
- closely monitor and control inventory,
- limit product lines to fast-moving items,
- design advertising to concentrate on price specials, and
- limit non-essential, low value-added services.
Pricing below the competition can be difficult to sustain because every
cost component must be constantly monitored and adjusted. It also exposes
you to pricing wars. A well financed competitor can match, and perhaps beat,
the lower price for a long period of time, leaving you out in the cold or
worse.
Pricing Above Competition
This strategy is possible when price is not the customer's greatest
concern. Factors important enough for customers to justify paying higher
prices include:
- additional services considerations, such as including delivery,
- speed of service,
- satisfaction in handling returns or customer complaints,
- knowledge of product or service,
- helpful, friendly employees,
- a convenient or exclusive location; and
- exclusive merchandise.
Price Lining
This pricing strategy targets a precise segment of the buying public
by carrying products in a specific price range only. For example, a store
may wish to attract customers willing to pay more than $50 for a purse.
Price lining has certain advantages: ease of selection for customers, and reduced volume inventory and storage costs.
Multiple Pricing
This approach involves selling a number of units for a single price,
for example, two items for $1.98. This is useful for low-cost consumer
products, such as shampoo or toothpaste. Many stores find this an attractive
pricing strategy for sales and year-end clearances.
Cost Factors and Pricing
Every component of a service or product has a different, specific
cost. Many small businesses fail to analyze each component of their
commodity's total cost, and therefore fail to price profitably. Once you do
this analysis, set your prices to maximize profits and eliminate any
unprofitable services. Cost components include material, labor and overhead
costs. Material costs are the costs of all materials found in the final
product, such as the wood, glue and coverings used in manufacturing a chair.
Labor costs are the costs of the work that goes into manufacturing a
product. An example would be the wages of all production-line workers
producing a certain commodity. The direct labor costs are derived by
multiplying the cost of labor per hour by the number of personnel hours
needed to complete the job. Remember to use not only the hourly wage but
also the dollar value of fringe benefits. These include social security,
workers' compensation, unemployment compensation, insurance and retirement
benefits. Additionally, there should be a cost allocation for the
administrative staff, management and facilities.
Overhead costs are those not readily identifiable with a particular
product. These costs include indirect materials, such as supplies, heat and
light, depreciation, taxes, rent, advertising, transportation and insurance.
Overhead costs also cover indirect labor costs, such as clerical, legal and
janitorial services. Be sure to include shipping, handling and/or storage as
well as other cost components. Part of the overhead costs must be allocated
to each service performed or product produced. The overhead rate can be
expressed as a percentage or an hourly rate. It is also important to adjust
your overhead costs annually. Charges must be revised to reflect inflation
and higher benefit rates. It's best to project the costs semiannually,
including increased executive salaries and other costs.
Because pricing can be a complicated process, you may wish to seek help
from an expert.
How do I get Capital to start my business?
Finding the capital you need to finance your business can be a confusing
and complicated process. Many great ideas stumble at this stage of business
building. Yet, moving through this stage breathes life into your business -
giving it forward momentum like a roller coaster barreling down the first
big hill. Finding money is just a matter of being informed and choosing the
right path for money to enter the business. There are several options
available to you when searching for financing. Some methods of raising funds
are less difficult than others, but all require some planning. Basic
planning requires that you know the answer to these three questions:
- What will you use the money for? You must know exactly where
the money will be used. You must be specific, as generalities
are recipes for disaster. Carefully identify the areas where
money should flow into your business. Your detailed business
plan will be a great assistance on this issue.
- How much money do you need? You should calculate your needs
to carry you through initial startup and into your first several
months of operation. It's necessary to have a realistic picture
of your needs. Many businesses fail because the money runs out
before the business reaches profitability. Again, your business
plan should outline the capital requirements versus the sales
revenue inflow.
- How will you pay back the money? You must have adequate cash
flow from your business to repay the money to your source. Use
realistic financial projections to pinpoint your expected cash
flow. Your business plan's financial projections should be for a
long enough time frame that would reflect the time that a
positive cash flow will allow payback of the loan. You do this
with financial information as found in an income statement, a
balance sheet, and a projected cash flow statement.
Sources of Money For Your Business
Start-ups often find it easier to get money from individuals or groups
of individuals, while companies who have a track record of success are more
apt to find an audience with institutional lenders. That said, here are some
options for funding your small business.
Personal Debt
One form of personal debt is getting cash advances on your credit cards.
It's very tempting and very easy to get cash this way. This option is very
expensive and extremely risky. Credit cards should only be used for
short-term expenses, and not as a means to entirely fund a start-up
business.
Use your personal savings or assets that can be converted to cash. If
your savings are already low, put off that vacation, drive your old car a
bit longer, stop eating out -- be thrifty in all areas and you can save
faster for your business. Keep in mind that most lenders won't finance 100
percent of your business, so you'll need to invest some money yourself.
Borrowing from your friends and family, especially the rich ones, is a
way for new businesses to get money. It's not uncommon for relatives to make
low interest or no interest loans to family members. However, you risk
alienating your family if the business falls on hard times and you have
trouble repaying the loan.
Angels
An angel, or private investor, is a person looking for good investment
vehicles. This person could be your next door neighbor, your dentist, or a
local business owner. Overall, angels are not loan-makers, they are
investors. As such, the degree of control and terms under which you receive
seed money for your business will depend on the arrangement brokered between
you and your angel.
The key to finding an angel in your area is networking. While you may not
have an angel in your personal pool of contacts, by networking with others
you can create a word of mouth campaign that reaches the ears of private
investors. You can begin the search for a private investor at http://www.BusinessFinance.com.
They maintain a list of thousands of potential investors.
Bank or Credit Union
If you have good credit, you may be able secure a
line of credit from your bank or credit union. This can be handy in
providing you with a source of working capital in the opening round of your
business. Using collateral, such as the equity in your home, you can
approach your bank for a loan against your business. This may or may not be
an option for you, since many banks prefer to separate personal equity from
business debt.
Business Incubators
Business Incubators help build new businesses. They
can provide help in all phases of start-up, including funding. Investigate
whether or not an incubator exists in your area with the Chamber of
Commerce, local universities, SBA, and your local municipality.
Customers
Your future customers may be a source of money. This is a less
conventional method, and your timing must be right to coordinate this type
of deal. You simply take advance orders for your product and collect at the
time of the order. If you take enough orders, you can search for a lending
institution which makes loans against accounts receivable.
SBA Microloans
The Small Business Administration may be helpful in
connecting you with a Microloan. These loans are administered by non-profit
organizations that want to foster economic development in your area. Contact
your regional SBA office for information on this loan program. You can find
your local office using this online locator: C http://www.sba.gov/regions/states.html
Suppliers
Your suppliers may be a great source of money. They want you to
succeed and they want you to appreciate their assistance. Check to see if
your suppliers will provide the inventory or supplies on time payment. If
you can sell the product and collect before payment is due then you can
significantly reduce the amount of capital needed.
Venture Capital
Venture capital is out there. But, you must be able to
show you've got a real winner. You must do it without fluff or a "come
on, dream with me" embellishment. Therefore, you need a good detailed
business plan. A very good one that shows you've done your homework and know
the "lay of the land."
Venture Capitalists are looking for good investment vehicles. They
generally want a pretty big part of the company and often take over major
portions of the business. Do they mess around with the little guy? On the
whole, they don't want to fool around with little investments and they are
bully on companies that have high-growth potential. Gotta think big with
these guys!
The VC's are pretty tight fisted when the economy is sluggish. That
doesn't mean you can't find someone who loves your idea and is willing to
finance it. But you've got to have a strong case and a spectacular
presentation.
Below are a few good places to learn more about available venture
capital.
In the final analysis, the name of the game is networking. Get your name
and idea out there in the real world. Start talking to people about your
intent. Become a player in the 'who ya know' game. Get your business plan
together, be aggressive, and you can get the money you need.
How can I get a government grant?
Actually, writing a grant proposal can
be as simple as following the directions in your application packet. Add a
little flair and your grant application can stand out, making your chances
of selection better. However, you need to remember that every agency
bestowing grants has different rules for application. The government is a
stickler for details so, if you can't follow directions or if you make just
one small mistake, your application will be disqualified.
There are reference sources in your library to consult about grant
proposal writing in addition to the advice given here. It's best to read as
much as you can in preparation for your grant writing duties.
If you are requesting a grant for a specific idea or project, contact the
agency to see if they have recently awarded any grants for your kind of
business. If they have, it could mean two things. It may mean that yours is
a kind of project that they support. Or it could also mean that no further
grant money is available for that project. You will then have to come up
with another idea to obtain your dollars.
Whatever your idea, try to enlist written support from individuals in
your community who may know you and like your idea. Grant applications
backed by letters from local government, community and business leaders
improve your chances of receiving the award. Federal grant money may
actually require these letters of endorsement. Your application packet will
inform you of the specific requirements. Even if not required, support
letters are encouraged. It gives further credence to your idea and may make
the difference if the grant award comes down to a couple of applications and
the agency is forced to choose.
If you have a partner or two who have a different expertise than you, add
their names and qualifications to the overall proposal. Having assistance on
the project often encourages agencies who make grants available, as the
project's chances of completion are heightened.
It is a sound move to bounce your idea(s) off the agency individuals who
will be considering your grant request. Many of these employees have been
there a substantial length of time and will be well versed in the ins and
outs of grant obtainment. They often appreciate that you asked their advice
up front and it can do wonders for you in terms of saving time and effort if
you're headed down the wrong track.
You could make, if convenient, a personal visit to the specific agency to
meet the individuals who will be considering your proposal. Or call them on
the phone. There may be pertinent reference information in the agency which
can help you with your proposal. It always helps to put a name to a face and
a professional look will help you in their estimation.
Stay in contact with these people, especially if they work in the agency
to which you will be submitting your bid(s). Even if you don't get a
positive response on the first grant proposal, keep in touch! They can often
tip you off to what future projects have a chance of being funded. If it's
in your area of expertise, you have an inside track to the next fund
availability.
You will likely not be the only one writing for grant money, so you have
to do a better job of it than your competitor. You need to make sure that
there is:
- A need for your idea or project
- Sufficient research done on
your part to satisfy the grantors
- No question that you are the best
candidate to receive the grant
- Time enough for you to review the
application process and prepare your grant proposal
Then you will be ready
to write your first proposal draft.
Here are the essential parts of a grant proposal:
1. Summary. This
generally outlines the proposed idea or project and is naturally slotted for
the opening paragraph. Keep it both brief and interesting. It will be the
first impression the grantor(s) will have of you and your abilities, so work
hard on this part of the document. Poorly written, this opener could end
your chances immediately. Conversely, well-written beginnings are
encouraging to the reader(s) and improve on your chances. Be sure only your
key points are in this portion. Don't oversell it with too much detail. Make
this part easy to read, but informative.
2. About You (and your Business). The next section summarizes your
qualifications and those of any others who will be working with you. You may
want to include up-to-date biographies of all involved. Let the grantor(s)
know about your recent work and success, especially if you've been
successful with any other grant program.
3. Problem Statement. This is where you summarize the need for this
project or idea. You will need to note your idea's purpose, who will
benefit, how they will benefit, what socioeconomic area will be affectedï¿?
hard data supporting the nature of the problem, what is currently being done
(or not done) about the problem, what will happen if your idea is not funded
and implemented and how you intend to solve the problem. This may be the
longest part of your proposal. Get any supporting documents you need from
local community and government organizations. Be sure you can defend all
your thoughts contained in this section. It's the what, why and how of the
grant proposal.
4. Objectives. These are the actual means by which you will solve the
problem you outlined in step #3. Outline them in detail, provide cost
analyses of each to support your funding request and lay them out in
logical, sequential order. The agency will periodically review the progress
of your project or idea once the grant is given and it will likely be these
actual objective points that will be used to measure your work.
5. Detailed Objectives. While step #4 provided a summary of your
objectives, all of the activities relating to accomplishing these objectives
will be laid out in detail here. This could include dates, resources needed,
staff needed, progress checkpoints, relevant diagrams, charts or drawings
and all relevant detail. Highlight any innovative work that will be used to
help accomplish your objectives. Provide any reference material necessary to
back up your details.
6. Evaluation. Here, you will need to identify the results that will come
from the project. You briefly stated these in your opening, but more
specifics will be needed here. The only way to evaluate the project may be
from seeing if it meets the results expected. You are solving a problem,
after all, so your results should be your solutions and their resulting
benefits. Some agencies have standard evaluation techniques, so be sure you
reference those here if that is the case.
7. Future Funding. What will happen to the idea or project once finished?
If it is self-completing, say so. If further maintenance will have to be
done to keep the problem at bay, record how this is to be funded. You might
be able to arrange for local support once the initial funding is depleted
and the problem solved if it is something that requires ongoing work.
8. Budget. While it would be nice to see the grant money fund the full
cost of your idea or project, current federal budget cuts may not make that
feasible. If you are securing other funding or have a plan for money to pick
up the additional expenses of the project, let the agency know that. Write
out a detailed budget listing (and justifying) the assorted expenses. You
may receive all of the funding you need from the one grant, but you really
shouldn't count on it. It's often easier to secure government funding if you
have also tapped into other sources to help cover the costs, even if it's a
small investment on your (and, if applicable, your partners') part.
While these are the key elements of a proposal you will write, get as
much help as you need depending on the size of the project. Obtain as much
input from area experts as you need before writing the proposal. They might
have excellent suggestions and could play a role in helping you to complete
the various activities associated with accomplishing your stated objectives.
They might even be helpful in writing certain aspects of the proposal,
especially the details of the work and tasks necessary to meet your
objectives.
Do a first draft. Then get feedback! Give it to people who have helped
you, or whom you trust to be properly judgmental about it. The best writing
is done during the rewriting phase, so it's important to have people take a
critical look at your first draft. You're too close to be thoroughly
objective. That's O.K.! Just know that you should get others to help you
analyze your initial work in preparation for a second draft.
Go through the same process with your second draft. This should be
shorter and less feedback should come in if you elicited enough comments the
first time around. Make any changes necessary and get it to final draft
form. Then have it proofread and bound into a booklet for submission
purposes. You're ready to submit!
Remember that the grant should be written after you've obtained the
agency's application and grant guideline forms. There are many places to
contact for potential grant information, and your decision should be closely
allied with your skills and interests.
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