Chapter 2
Knowing Your Path as a Micro-Entrepreneur
In This Chapter
Seeing the value of a business plan (or not)
Naming the components of your business plan
Keeping in mind important considerations and tools for your business path
I’m the biggest advocate of folks starting their own business. No matter who you are or what your situation is, there is a business — some kind of business — that is personally right for you. In this chapter, I help you figure out a path for you and your business. I realize that everyone is different, and some of the information in this chapter may not apply to you, but it’s still good to know what to do and what not to do.
Recognizing Whether You Need a Formal Business Plan
Every business in history started off as an idea. Think about what type of business you want to have. I assist you in finding ideas in many of the chapters in Part I and Part II. For example, Chapter 3 helps you figure out your idea by first understanding yourself better. This section assumes you already have an idea in hand. Now, you’re ready to start your business, so you need a plan, and pronto.
A business plan is a detailed statement describing the business’s operations and marketing along with goals to be attained and the strategies and methods to be used to reach those goals. As a micro-entrepreneur, you don’t necessarily need a formal business plan. If, for example, you’re selling trinkets and stuff from your attic and basement on eBay or Amazon to make a few extra bucks in your spare time, then you don’t need a business plan, at least certainly not a formal or complex one. Think about it like this: Do you need a map when you’re driving to your local store? Probably not. However, when you’re driving to an attraction you’ve never been to, and it’s located several hours in the part of the country where you’ve never been, then you do need a map (or your GPS). Many folks shy away from launching their business dreams (even modest ones) because some authority type in a pinstriped suit admonished them about not starting a business without a business plan.
However, on the other hand, when you have a serious desire to turn your business idea into a sustainable and ongoing business, then a business plan becomes more of a necessity. It’s especially true if you’re hoping to have the backing of potential business partners or financing from a financial source, such as a bank, credit union, venture capital firm, or a government agency (such as the Small Business Administration or your state’s economic development authority).
When the moment comes that you need (or feel you need) a business plan, then this chapter is a good place to start (take it from an authority type who rarely wears a pin-striped suit)!
Eyeing What Your Business Plan Addresses
The over-arching point of your business plan is basically there to address what may be the five most important questions in your business venture. The following list breaks down these five questions in greater depth:
What do you plan to do? A business plan helps you figure out your goals and mission statement. Here you explain your plans and what you’re aiming to do. Set your focus regarding what your products and/or services are going to be and how you’ll conduct your business. In addition, make sure you have clear financial goals, such as what you want to achieve during your first year in business, such as generating sales revenue of more than $50,000 or getting five major clients.
What are you able to do? A business plan can spell out your business’s capabilities (yours specifically if you’re a one-person operation). It addresses your strengths and how you’re able to carry out the functions of your business. You can specify activities, such as how you’ll create the product or service and how daily operations will be. Here you can address your strengths and weaknesses.
You can identify what you personally can do and which tasks you may need help with. Perhaps you’ll need assistance with bookkeeping, taxes, and so on.
What is the reality of your marketplace? A business plan identifies who your potential customers are and whether you’re dealing with a large market or a small niche. You can also figure out who your customers are. Are they large companies with large advertising budgets or smaller companies that you compete with online?
How will you make money? Your business plan helps you specify how you’ll make your revenue — from making products or providing services. It helps clarify whether you’ll sell online, have affiliates help you sell, or have joint ventures. You want to be as clear as possible how you’ll make money.
How will you finance your business activities? A business plan spells out how you’ll pay for your operations and potential projects — from savings, a business loan, or other source of funds (or a combination of these). Your other options include doing your business on a shoestring budget or with working capital from a third party (such as a local bank, credit union, or an investor). Some micro-entrepreneurs have used funds from a credit card (which I don’t recommend), whereas others have received financial assistance from family and friends (make sure you have very clear agreements and payment terms to avoid confusion and conflict). See the nearby sidebar for details about getting additional funding.
Naming the Type of Business Plan You Have
When you choose to create a business plan, you have one of two models to choose from. These sections briefly explain them:
Action plan: An action plan means that you’re using the business plan in your day-to-day activities. In other words, you’re actually using what you wrote to help you conduct your business activities; it acts like a tour guide, and you use it to stay focused on your business goals.
Besides stating your goals, this approach means that you detail specifics on what you’re doing and will be doing during the days and weeks when you’re conducting business. An action-plan mode is particularly important for home-based businesses because many micro-entrepreneurs can easily get distracted. You want to avoid busy work in favor of work that keeps you moving forward to your sales and profit goals.
Static proposal: A business plan that acts like a static proposal means that it doesn’t change. In other words, it’s not an action plan. It merely serves as a useful proposal to individuals outside your business for the purpose of convincing them to become partners or lenders. Some advisors call it a presentation style plan.
Some business plans can be a hybrid of these two modes, but the whole point of which type you use is who the audience is for your business plan. In other words, ask yourself who needs to be convinced, motivated, or guided by the business plan’s contents. If the audience is a group of potential investors, you would present more of a static proposal, whereas if your audience is you and your staff, you’d use an action plan.
Investors (such as angel investors and venture capital firms) and those providing financing (bankers, loan companies, and so on) want to know that the business plan exudes and projects competence and experience from the entrepreneur (or business management team).
For example, investors and bankers want to know to what tangible extent you are committed to the business. Do you have personal assets tied to the enterprise or have you pledged personal money that shows a real commitment to its success? They also want to see that you have experience in this type of enterprise.
Looking Closer at a Business Plan and What It Constitutes
Your business map is like the road map that shows where you are and where you want to be. What goes into the business plan will vary based on what folks you are talking to. Here are the main general components of a typical business plan:
Section one: This section is for the business itself. Here you discuss the industry, your business structure, your particular product or service, and how you plan to make your business a success.
Section two: This section is for the market. Here is where you describe and analyze potential customers: who and where they are, what makes them buy, and so on. Here, you also describe the competition and how you’ll position yourself to beat it.
Section three: This section covers the financial information and contains important financial statements that I discuss in this section. This part may require help from your accountant and a good spreadsheet software program.
Breaking these main sections down further, I pinpoint the components that you should be aware of. Here is an extensive list of what is usually in a detailed business plan:
Table of contents: Just like a book, a business plan can use a table of contents. Here you list the contents, their order, and maybe even page numbers. You may not need to create an extensive table of contents if your business plan is meant only for your eyes, but if others, particularly investors and lenders, are meant to see it, then use a table of contents.
Executive summary: In a nutshell, the executive summary describes what your business is about. If outside parties want to get a quick and reliable snapshot of you and your enterprise, they should be able to get it in the executive summary.
Mission statement: The mission statement is a brief description of a company’s fundamental purpose. It answers the question, “Why do we exist?” The mission statement expresses the business’s purpose both for you, your staff (if any), and for those in the marketplace. For help in drafting your mission statement, refer to the resources later in this chapter.
Company overview: The company overview is a brief summary (one or two pages at most) of the company’s history, its management, products, and position in the market. The overview may also mention things such as accomplishments made by the entrepreneur or company that were notable.
Business environment: This section explains the kind of environment in which the business operates. Basically it gives an accurate picture of the economic environment, which can in return help you make better decisions. It also touches on the type of economy (slow or growing) and whether the market size has grown for what you offer, or not. It also looks at the bigger picture of the industry and its status. This section also reviews what your market research tells you about consumer trends and changing tastes.
Market analysis: The more you know about you customer (your target market), the easier it will be to generate sales. This section describes who your customers are, what their buying habits are, and who your typical customer for your business is.
Competitor analysis: The more you know about your competitors, the better you’ll compete. This section identifies your customers and explains how you stack up to your competitors’ strengths and weaknesses.
Company strategy: This section is the general direction and scope of the way your business will have its various parts (production, marketing, customer service, and so on) working together to achieve objectives.
Company setup and description: This section is an actual description of your company, including what it looks like and its composition (staff, assets, and so on). As a micro-entrepreneur, this section is more valuable the more complex your business is.
Marketing plan: I include this section for completeness’ sake because the marketing plan is an integral part of the business plan. For some points about the marketing plan, refer to the next section, “Updating Your Business Plan” in this chapter.
Financial statements: Financial statements are documents that detail the financial condition of your business, such as its revenues and expenses, what it owns and what it owes, and other important financial details necessary for both the entrepreneur and any lenders or investors that may participate in funding the business. When you write a business plan, make sure you include the following statements:
• Balance sheet: This statement is a list of the business assets you own and the business liabilities you owe. Your total assets minus your total liabilities equal your net worth (also referred to as your net equity). In other words, what does the business own and owe, and which is greater?
• Profit and loss statement: This statement shows the total revenue and total expenses (with the net gain or loss) for the business for a given period (such as a month, a quarter, or a year). This statement is also referred to as an income statement or a P&L statement. This statement shows how profitable (or not) the business is.
• Cash flow statement: This is similar to the profit and loss statement, but it’s mostly intended to show the flow of money going through the business. It shows what money is flowing out (such as paying bills) and what money is flowing in (such as sales).
• Use of funds statement: Investors and lenders usually like to see this statement. It’s intended to show them how you’ll use the money that is provided to you (from either invested money or loaned money). They want to see that you’ll efficiently and profitably use the money.
• Pro-forma statements: The previous statements reflect past moments or past periods, but this statement is intended to predict or forecast a reasonable estimate of future financial activity. Usually, these are done in several ways where the entrepreneur makes forecasts that are considered best case, worst case, and a reasonable estimate of future sales and profits.
A couple of good guides to help you understand financial statements are the latest editions of the following:
• How to Read a Financial Report; Wringing Vital Signs out of the Numbers by John A. Tracy, CPA (John Wiley & Sons, Inc.)
• Reading Financial Reports by Lita Epstein (John Wiley & Sons, Inc.)
Budget: A budget may or may not be in a static proposal, but it’s a good consideration in the action plan mode because you want to track the inflow and outflow of money. You want to stay within your means and conduct business to the extent that it won’t put you in debt or otherwise weaken you financially.
A budget can also be a pro-forma budget, which means that you’re projecting or estimating what you expect your expenses and financial needs to be in an upcoming financial period, such as the next month or the next quarter.
Action plan: This portion of the business plan details the steps you’ll take and the timeline over which you’ll take the steps to achieve certain objectives in the business.
Appendix: This section is usually the last portion of the business plan, and it may include corroborating data or reports that help to flesh out or back up assertions in your business plan. Maybe, for example, you plan to launch a new store in Cincinnati, so you include in the Appendix a magazine article or a government report highlighting what a wonderful business environment that city would be for this new location.
Updating Your Business Plan
A business plan isn’t a static document that you create and then put on a shelf to look at later when you feel nostalgic (especially if it’s of the action plan variety). (Check out the earlier section, “Naming the Type of Business Plan You Have” for more information.) Here are four things to keep in mind when periodically updating your business plan. If your business plan is to be a guiding instrument in your business life, keep it updated.
Market changes: When you’re offering your products and services to the marketplace, you need to keep track of significant changes regarding your customers and your competitors. A good business tries to adapt to changes and new trends in its marketplace. Identify the changes that are occurring in your marketplace that translate into changes for your business and marketing approach. Refer to Chapters 5 and 13 for more guidance on markets and market research.
Financial changes: As your business grows and changes, your finances will likely change, too. Focus on being able to take advantage of any changes or handle any new pitfalls.
If your business is doing well, for example, and sales are up, then you should take advantage by either paying down debt or upgrading your business equipment. And if your business isn’t doing well, you may want to sell some assets to gain some extra cash for the slow periods or refinance your debt to lower your monthly payments.
New developments: Long after the ink is dry on your first business’s plan, new developments may occur that will change your business plan as the business progresses. Maybe you’re creating new products and services, hiring new staff, or forging new business alliances. Perhaps the best development of all is that you reached the milestones from the original business plan and now you’re set to target and reach new milestones.
Your business plan versus your marketing plan: For many self-employed folks (part-time or full-time), a complete business plan isn’t the answer. Perhaps the issue is only a portion of the business plan — the marketing plan.
The marketing plan encompasses only that activity that you’re doing to ultimately make money. Marketing is all about learning about and finding your customers, publicity, advertising, and all approaches that can lead to the sale. Although I cover marketing throughout the book, here are some resources to help you understand and create a marketing plan for your business plan:
• American Marketing Association (www.marketingpower.com)
• The Direct Marketing Association (www.the-dma.org)
• Marketing Profs (www.marketingprofs.com)
• The National Mail Order Association (www.nmoa.org)
See the chapters in Part III for more specifics.
Creating Your Business Plan: Helpful Resources to Review
The great thing for you is that in today’s information-rich environment, you needn’t do a business plan all by yourself. You can find tons of resources for help. Check out this list for assistance.
Dummies.com: I admit I may be biased as a For Dummies author, but this site (www.dummies.com) can help you with business plan guidance. Search for "business plan" and get some great articles. In addition, when I wrote this chapter, I looked up "business plan" (see that? I practice what I preach) and I found the newest edition for Business Plans Kit For Dummies by Steven D. Peterson, Peter E. Jaret, and Barbara Findlay Schenck (John Wiley & Sons, Inc.). I also found the Cheat Sheet from that book, which gives some great tips on creating a business plan.
Don’t stop there, though. The site is good for useful articles and some nifty Cheat Sheets on a batch of topics scattered through this book.
Sample business plans: Here are some places where you can find sample business plans:
• Bplans (www.bplans.com)
• Reference for Business (www.referenceforbusiness.com)
• Small Business Administration (www.sba.gov)
Business organizations: Here are organizations that have plenty of guidance for small businesses and entrepreneurs. Do a search at their sites for “business plan” and other concerns that you can think of:
• Association of Small Business Development Centers (www.asbdc-us.org)
• National Federation of Independent Business (www.nfib.org)
• Service Corps of Retired Executives (www.score.org)
Making Other Stops on Your Path
The business plan is certainly the most important potential document in the early days of your business as it develops, but you also need to ponder some other important considerations as you create your business so they don’t blindside you in your entrepreneurial pursuits. Keep these in mind:
Your business name: Choosing a business name is like choosing a baby’s name, only different. Your business name gives a constant reminder about the value of your company and for what you offer. Choose a name very carefully because it’s a business asset.
You can register your business name at the state or county level. Check out Chapter 21 for more information about registering your business name.
Your business structure: I could easily write an entire book on the business structure you choose, whether it be sole proprietorship, partnership (if your business will be two or more owners or partners), corporation, or limited liability company (LLC). When working out your business plan, make sure you select the one right for you. Chapter 21 gives you some insight into which decision might be right for you.
Licenses and permits: Check to see whether your business needs any type of license or permit to operate. At the very least, you may need a tax ID number (issued by the IRS). (See Chapter 21 for more about this number.)
Although you probably don't need a license as a home-based business, you should probably check. The best place to explore this topic is at the local office of the Small Business Administration (www.sba.gov). Even though it's a federal agency, it usually has staff that is familiar with state and local requirements for businesses. If it doesn't, the SBA can usually refer to the state or local office that can let you know if you need a license or permit for your type of business.
Your accounting system: When you're tracking all the numbers to tell you how your business is doing, it boils down to your accounting system. Your accounting system should be a software package that matches your needs. Some businesses are so simple that a spreadsheet program is sufficient (you can get free spreadsheet software through the Open Office productivity software suite found at www.openoffice.org). For most businesses, accounting software is a better choice. You can shop and compare various accounting software programs at sites such as Top Ten Review (www.toptenreviews.com), Accounting Software World (www.accountingsoftwareworld.com), and Find Accounting Software (www.findaccountingsoftware.com).
Whether you’re using popular accounting and financial software such as Quickbooks, Quicken, Microsoft Money, or some other program, set up a system to help you easily see how well you’re doing and aid you in the day-to-day financial transactions. Fortunately, today’s accounting software is very powerful and gives you the ability to easily track every penny. Ask your business adviser or tax professional about accounting software suggestions if needed.
Your business location: For micro-entrepreneurs, business location probably isn’t a big concern unless you’re agonizing over doing business in the spare bedroom or somewhere in the basement. When you create your business plan, determine exactly where your location will be.
Marketing and sales: To me, the big hurdles for entrepreneurs are in the realm of sales and marketing. I won’t spend a lot of time on this crucial topic in this chapter because I do cover it in greater detail in a variety of chapters. Here, though, are some places to go:
• Salesmanship: As the head of your business, you’re the lead salesperson. Of course, when you’re a micro-entrepreneur, you are the entire sales force. Therefore, understanding the process of selling and building up your sales skills is very important. I cover this topic in greater detail in Chapter 14.
• Your customers: Understanding those folks that will buy from you is critical information. Chapter 13 provides more information about what you can find out about your customers.
• Marketing: To do a variety of marketing strategies ranging from utilizing search engines, social media marketing, and more, head over to Chapters 15 to 18 that go through the various marketing strategies that you can employ on the Internet.
Making Your Business Path Easier: Tools for the Road
When you’re ready to roll up your sleeves and do the work, the good news is that plenty of tools and resources are available to help make your journey along your path of micro-entrepreneur smoother. When you’re essentially by yourself, knowledge and productivity are important. Here are some considerations for your tool chest.
Going online for some education
One of the great trends in society right now is that education is migrating to the Internet. Factors such as cost, convenience, and competition have made taking classes over the Internet and from the comfort of home a reality.
For the micro-entrepreneur who needs to know more about a specific business topic or skill, gaining knowledge and training is easier than ever. In the past, people felt that to do well in business, they had to plow lots of time, money, and effort into getting an MBA or some advanced degree. But whether you’re out to get an entire range of business skills and knowledge or just need a slice of knowledge, you can do it now with less time and less money (just don’t skimp on the effort).
Besides using your favorite search engine, here are some places to check out:
Your local university: Sooner or later, that traditional college or university will have online courses, if it doesn’t already. Contact its business department for details or search on its website for details.
Educational firms: Many firms now specialize in online education and training. Some examples are the University of Phoenix (www.phoenix.edu), Ed2go (www.ed2go.com), and Universal class (www.universialclass.com). More of these types of firms are coming. Choose the ones that have a long history and a good reputation.
Large companies: Some companies also have strong educational programs. A good example is Hewlett-Packard. It has online classes ("HP Learning Center") on small business technology (you can find out more at https://h30440.www3.hp.com/learningcenter/Default.aspx.
Online tutorial sites: Plenty of great sites provide video tutorials on various business, Internet, and technology topics. Some to consider are Eli the Computer Guy (www.elithecomputerguy.com), Webucator (www.webucator.com), and Eclasses.org (www.eclasses.org).
Teleconferencing or videoconferencing
With the rise of services such as Skype (www.skype.com) and similar services, now you can communicate cheaply with your contacts. With smartphone usage exploding, you can take advantage of cheap or free telecom services with services such as Fring (www.fring.com), FreeConference (www.freeconference.com), and Ring Central (www.ringcentral.com).
Teleconferencing and videoconferencing services and software can also help you communicate with your customers, vendors, and business partners easier than ever. A wealth of choices is available, and you can also go to sites such as Teleconferencing Directory (www.teleconferencingdirectory.net).
Using open-source software
Gone are the days when a small business had to buy expensive software suites from major companies. Now you can get great software suites from major companies (and small ones, too). A software suite is just a bundle of software that any business would need. A typical bundle has software that does word processing, spreadsheets, presentations, database or contact management, graphics, and so on. Much of this software is referred to as open-source software, which means that software developers can freely have access to the programming code for the software to modify or improve it as needed. This contrasts with software that is designed entirely by a company’s programming staff and not amenable to change or modification by other independent programmers.
One of the most popular free software suites is Open Office by Oracle (www.openoffice.org). It competes with paid software packages, such as Microsoft's Office suite (www.microsoft.com). Either suite can help you tremendously, so do your comparison (of course, free has an edge over paid for the budding micro-entrepreneur).
Organizing and being more productive
Whether you're managing your time or finding ways to be more productive and organized, plenty of tools and tips can help you. Some good places to find them are at Online Organizing (www.onlineorganizing.com) and Get Organized Now (www.getorganizednow.com).
Relying on colleagues
You can reference a host of resources, tools, and strategies from people who have done what you’re doing. You can find out what others in your niche or market are doing now to staying ahead of the pack. Refer to the following:
A professional association: Virtually every business niche has an association that keeps track of the trends, news, opportunities, and so on. Find the right association with your search engine or at places such as the Encyclopedia of Associations (www.gale.cengage.com).
LinkedIn: This great social media site (www.linkedin.com) has all sorts of great groups that professionals can tap into. You can get referred to great resources by pros in any of the various groups you find. For instance, several active groups specialize in business start-ups.
Technorati: This site (www.technorati.com) has literally hundreds of great blogs for home businesses and small businesses that offer great tips and information for business start-ups.
Business.com: This site (www.business.com) is one of my favorite search engines for all things business. Whether you're looking for business resources or need to do some vital research, this site should be part of your Internet tools.