Small Business For Dummies

Small Business For Dummies

by Eric Tyson

ISBN: 9781118083727

Publisher For Dummies

Published in Business & Investing/Small Business & Entrepreneurship

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Sample Chapter

Chapter One

Is Small Business for You?

In This Chapter

* Understanding the role of small business

* Determining whether you have what it takes to successfully run a small business

* Reviewing the reasons to own (and not to own) a small business

* Identifying alternatives to starting a business

An old friend of ours, who has been a small-business owner for more years than most of us have been alive, says, "Small business is a place where you can take your dog to the office whenever you choose." That's one way of looking at it, but we offer several other viewpoints as well.

Owning and running a small business can be rewarding — personally and financially — but only if you have what it takes to succeed. This chapter gives you all the know-how you need to be sure that you're making the right decision. In it, we pose a set of 20 questions to ask yourself about your skills, talents, and abilities. If you're honest with yourself — don't worry, there are no right or wrong answers — this test can give you the information you need to determine whether running a small business is the right move for you. If you find that running a small business isn't for you, we provide several alternatives, which may give you exactly what you're looking for.

Lots of important issues — from your financial situation to your desire to create a needed product or provide a needed service to your ability to be a jack-of-all-trades — should influence your decision to become an entrepreneur. This chapter helps you understand the realities of starting and running a small business so that you can figure out how and why it may or may not work for you.

Defining Small Business

The lingo of the business world — cash flow, profit and loss statements, accounts receivable, debt-to-equity ratio, and so on — makes small-business ownership appear far more complicated than it really is. Don't be fooled. You're probably more acquainted with the basic concepts of doing business than you think. If you've ever participated in a bake sale, been paid for a musical performance, or operated a baby-sitting, painting, or lawn-mowing service, you've been involved in a small business.

Being a small-business owner doesn't mean that you have to work 70 hours a week, make a six-figure income, or offer a unique product or service. We know many successful small-business owners who work at their craft 40 hours a week or less and some who work part-time at their business in addition to holding a regular job. The vast majority of small-business owners we know provide products or services quite similar to what's already in the marketplace and make reasonable but not extraordinary sums of money — and, thanks largely to the independence that small-business ownership offers, are perfectly happy doing so!

Small (and large) business basics

Imagine back to your childhood ... it's a hot summer afternoon, and you're sweating it out under the shade of an elm tree in your front yard. "Boy, it's hot," you say to yourself, sighing. "I could sure go for a glass of lemonade." Eureka! With no lemonade stand in sight, you seize upon your business idea.

You start by asking some of your neighbors if they'd buy lemonade from you, and you quickly discover that the quality, service, and location of your proposed business may attract a fair number of customers. You've just conducted your first market research.

After you determine that your community has a need for your business, you also have to determine a potential location. Although you could set up in front of your house, you decide that your street doesn't get enough traffic. To maximize sales, you decide to set up your stand on the corner down the road. Luckily, Mrs. Ormsby gives you permission to set up in front of her house, provided that she gets a free glass of lemonade. You've just negotiated your first lease (and you've just had your first experience at bartering).

With a tiny bit of creativity and ego, you determine the name of your business: The World's Best Lemonade Stand. After some transactions with the grocery store, you have your lemonade stand (your store), your cash box, a table, a pitcher (your furniture and fixtures), and the lemonade (your inventory). The World's Best Lemonade Stand (your brand) is now ready for business!


From the moment you first realized that you weren't the only one who might be interested in buying some lemonade, you faced the same business challenges and issues that all small-business owners face. As a matter of fact, the business challenges and issues that a lemonade stand faces are the same that American Express, Boeing, Costco, Disney, and every other big company faces. The basics of doing business are the same, no matter what size the business is:

  •   Sales: Boeing manufactures and sells airplanes; you sell lemonade. A sale is a sale no matter what the product or service is or how large or small the ticket price is.

  •   Cost of goods: Boeing buys parts for its vendors and suppliers; you buy lemons, sugar, and paper cups from the grocery store.

  •   Expenses: Boeing has employee wages and pension plans (or employee benefits; see Chapter 17); you have sign-making costs and bubble-gum expenditures to keep your employees happy (also a form of employee benefits).

  •   Profit: Profit is what's left over after Boeing subtracts the cost of its goods and expenses from its sales; the same is true for your lemonade stand.

    Financial basics: The same whether you're big or small

    Not only are the concepts of Business 101 — sales, cost of goods, expenses, and profit — the same for all businesses, regardless of size or product offering, but many associated financial basics are the same, too. Here's what we mean:

  •   Accounts payable: Boeing owes money to its vendors who provide it with parts; you owe money to your local grocery store for supplies.

  •   Accounts receivable: Boeing has money due from its customers (major airlines and governments) that buy the company's airplanes. You have money due to you from Mrs. Huxtable, who wandered by thirsty without her purse.

  •   Cash flow: Boeing has money coming in and going out through various transactions with customers and vendors (sometimes cash flows positively, sometimes negatively), and so do you. (See Chapter 14 for much, much more on this important, but sometimes murky, concept.)

  •   Assets: Boeing has its manufacturing plants and equipment, inventory, office buildings, and the like; you have your lemonade stand and cash box.

  •   Liabilities: Boeing owes suppliers money; you owe money to your local grocery store.

  •   Net worth: Net worth is what's left over after Boeing subtracts what it owes (its liabilities) from what it owns (its assets). Ditto for your small-business enterprise.

    This comparison between The World's Best Lemonade Stand and Boeing could go much deeper and longer. After all, the basics of the two businesses are the same; the differences are primarily due to size. In business, size is a synonym for complexity.

    So you may be thinking, if business is so simple, why isn't everyone doing it — and succeeding at it? The reason is that even though the basics of business are simple, the details are not. Consider the various ways in which you grant your customers credit, collect the resulting accounts receivable, and, unfortunately, sometimes write them off when you're not paid. Consider the simple concept of sales: How do you pay the people who make those sales, where and how do you deploy them, and how do you organize, supervise, and motivate them? Think about all the money issues: How do you compile and make sense of your financial figures? How much should you pay your vendors for their products? And when you need money, should you consider taking in shareholders or should you borrow from the bank? And, lest we forget, how should you deal with the Internal Revenue Service (IRS), the Occupational Safety and Health Administration (OSHA), and your state's workers' compensation department? These are but a few of the complex details that muddy the waters of business.

    Small business: Role model for big business

    While working as CEO of General Electric, Jack Welch once said in a speech to his division managers, "Think small. What General Electric is trying relentlessly to do is to get that small-company soul ... and small-company speed ... inside our big-company body."

    Think small? What's happening here? Why would the CEO of a gigantic company like GE want his employees to think small? Because Jack Welch knew that small can be beautiful and because success and survival in the business arena always favor the agile over the cumbersome, the small over the big. Thanks to this "small is beautiful" trend — and thanks to increasing technological advances — you no longer have to be big to appear big; you can be small and still compete in most of today's marketplaces.

    Different people and businesses, similar issues

    Okay, so you know what small business means and you can identify the people who create and run one, but what about your particular small business? After all, in your eyes anyway, the business you have in mind or the one you're already running is different from anyone else's. Different products, different services, different legal entity — the list goes on.

    The term small business covers a wide range of product and service offerings. A ten-person law practice is a small business. A doctor's office is a small business. Architects, surveyors, and dentists are also in the business of owning and operating small businesses. How about a Subway franchisee? You guessed it — small business. The same goes for freelance writers (hence, we, your humble authors, are both small-business owners), consultants, and the dry cleaner on the corner of Main and Elm Streets. Each one is a small business.

    Small business also covers all legal business entities. So small businesses can be sole proprietorships, C Corporations, nonprofits, or limited liability corporations, as long as they have fewer than 100 employees. (We define these various business entities in Chapter 5.)

    After all, each of the businesses and entities we list here has the same basic needs:

  •   Marketing to make its products or services known

  •   Sales to get its products or services in the hands of the customer

  •   Varying degrees of administration and financial accounting to satisfy a number of internal informational needs, as well as the needs of the IRS

    Beyond the similarities in this list, each business is significantly different. Some need employees; some don't. Some require vast investments in real estate, equipment, and elaborate information systems; some can get by with a desk, computer, and phone. Some may need to borrow money to get the business up and running; many others get by with what's in the owner's savings account. These differences are what make owning a small business exciting because you should be able to find a good fit for your desires and resources.

    Our definition of a small-business owner

    A small-business owner (or entrepreneur), by our definition, is anyone who owns a business that has 100 or fewer employees, period. Everyone who hangs out a shingle qualifies for the title no matter whether the business is private, public, barely surviving, or soaring off the charts.

    You're a small-business owner whether you've been in the saddle one day, one week, or one decade; whether you're male or female and have a college degree or not; whether you work out of your home or on a fishing boat somewhere off the coast of Alaska.

    Everyone has his or her own definition of the small-business owner. We find these four of particular interest; pick one or combine them all:

  •   Webster's Dictionary: A person who organizes and manages a business undertaking, assuming the risk for sake of profit.

  •   Peter Drucker: Someone who gets something new done. (The late Peter Drucker is the Father of Modern Management. His books, primarily written for large companies, have virtually defined contemporary U.S. management theory.)

  •   Jim Collins: Best-selling author and business expert Jim Collins takes a broad view of the small-business owner. The traditional definition — someone who founds an entity designed to make money — is too narrow for him. He sees entrepreneurship as more of a life concept. Everyone makes choices about how to live life. You can take a paint-by-numbers approach, or you can start with a blank canvas. When you paint by numbers, the end result is guaranteed. You know what it's going to be, and though it might be good, it will never be a masterpiece. Starting with a blank canvas is the only way to get a masterpiece, but in doing so, you could also blow up. So are you going to pick the paint-by-numbers kit or the blank canvas? That's a life question, not a business question.

  •   Us: A person who is motivated by independence, creativity, and growth rather than by the security of an employer's paycheck.

    All people have their own collection of unique characteristics that determine who they are, what makes them happy, and where they belong in this world. On those not-as-frequent-as-they-should-be occasions when our characteristics align snugly with the kind of work we're doing, we know how Cinderella felt when her foot slipped effortlessly into the glass slipper offered by the Prince.

    In all fairness, we must warn those of you who are considering a future in small-business ownership that owning your own business can be addictive. We love it usually, hate it occasionally, and need it always, and we wouldn't trade professions with anybody — except for maybe a professional athlete.

    Do You Have the Right Stuff?

    To discover whether you have the right stuff to run your own small business, take the test we offer in this section. Don't close this book just because we said the word test! Tests don't have to be a pain in the posterior. In fact, they can be relatively painless (and useful) when you don't have to study for them, there are no right or wrong answers, and you're the only one who will find out the outcome.


    Some words of caution here: This Small-Business Owner's Aptitude Test isn't scientific, but we think it's potentially useful because it's based on our combined six decades of experience working as entrepreneurs, as well as alongside them. The purpose of this test is to provide a guideline, not to cast in concrete your choice to start or buy a business. The results will be most meaningful when it comes time to make your decision if you're in the highest- or lowest-scoring groups. If you fall somewhere in the middle, we recommend more serious soul searching, consultation with friends and other small-business owners, and a large grain of salt.

    Getting started with the instructions

    Score each of the following 20 questions with a number from 1 (the entrepreneurially unfriendly response) to 5 (the entrepreneurially friendly response). Determine the appropriate numerical score for each question by assessing the relative difference between the two options presented and by how fervently you feel about the answer.

    For example, one question asks, "Do you daydream about business opportunities while commuting to work, flying on an airplane, or waiting in the doctor's office, or during other quiet times?" Give yourself a 5 if you find yourself doing this a lot, a 1 if you never do this, or a 2, 3, or 4, depending on the degree of work-related daydreaming you do. A business, especially one that you own yourself, can be downright fun and all-consuming. For most successful entrepreneurs, their minds are rarely far away from their businesses; they're often thinking of new products, new marketing plans, and new ways to find customers.


    To make the test even more meaningful, have someone who doesn't have a vested interest in or a strong opinion about your decision — such as a good friend or coworker — also independently take the test with you as the subject. We seldom have unbiased opinions of ourselves, and having an unrelated third party take the test on your behalf can give you a more accurate view. Then compare the two scores — the score you arrived at when you took the test compared to the score your friend or peer compiled for you. Our guess is that your true entrepreneurial aptitude, at least according to our experience, lies somewhere between the two scores.


    Excerpted from "Small Business For Dummies" by Eric Tyson. Copyright © 0 by Eric Tyson. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.
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