SPECIAL BUSINESS COLUMNS FROM THE PILOT

The following columns were written by one of our Sandhills SCORE members and are reprinted from The Pilot newspaper. They are specifically directed to the small business owner and the entrepreneur.

# 2 - Have you thought about your Marketing lately?
# 3 - Keep accurate records to avoid tax stress.
# 4 - Do your homework before buying a business.
# 5 - Use independent contractors carefully.
# 6 - Manage your working capital to maintain business success.
# 7 - Find the right financing for your business.
# 8 - Find out if a franchise is right for you.
# 9 - Setting the right pricing strategies for your business.
#10 - Learn the essentials of equipment leasing.
#11 - Choose the best legal structure for your new business.
#12 - Lay a strong foundation before opening your home office
#13 - Build repeat business through customer satisfaction

 

ASK SCORE # 2

by Willy Campbell - special to The Pilot

Have you thought about your Marketing lately?

ely?

It’s so easy to fall into a routine and let it run you rather than you take charge. Your marketing efforts need to be reviewed periodically because changes are going on around you. New competitors, new arrivals into the area, a changing economy – all have some impact on your business and should impact your marketing!

First you must be sure that you have identified and understand your “target market”. Unless you know who your actual and potential customers are in terms of location, demographics and interests, there is no way to plan an effective marketing program. This will allow you to select the right media and to use the proper appeals in order to convey your message.

Secondly, you must determine your “image” or “niche”. What makes your business unique? If there are two additional competitors, why should I buyfrom you? You should carefully identify the strengths and weaknesses of your competitors (and yourself!), which will allow you to understand your market position: been in business longer, more experience, greater product selection, lower prices, etc. Then you will be able to intelligently define the image you will want to convey.

The relatively inexpensive part of your marketing program should be public relations. Are you a member of the Moore County Chamber of Commerce? The Chamber’s members may represent part of your target market. The Chamber has many business functions and relationships that can benefit you directly. If you are a small business in Southern Pines, are you a member ofthe Southern Pines Business Association? If you have a particular expertise in an area of business, you may be able to serve as a guest speaker on a business topic for a local professional group’s meeting. Exposure, exposure, exposure!

Knowing your target market and your image will allow you to spend your advertising dollar wisely. Moore County media reach out to all the area demographics. Are you in The Yellow Pages…and if not, why not? The selection of local media outlets offers you a way to selectively address your target market: The Pilot, Sandhills Business Times, Pinehurst magazine, Panorama Carolina magazine, and more. Many small business owners fail torecognize that you need to select your media with an eye to being able to measure the results of the advertising. The wise person will be continually evaluating the results and changing when necessary.

Another aspect of media coverage is the exposure opportunities they offer beyond paid advertising. Newspapers, periodicals and radio often look for special stories about small business, especially those offering a unique or unusual product or service. Perhaps you may have a visiting specialist in your business’s product area and you wish to have your current and potential customers be made aware of the special event. Can you work witha supplier to introduce a new product with you and the supplier creating a special event of broad appeal to our community? Introduce yourself to the media business editors who cover such stories in Moore County and learn what they are looking for.

Finally, participate in and sponsor community events – interact with the public. Be an active participant in your community!

ASK SCORE # 3

by Willy Campbell - Special to The Pilot

Keep Accurate Records to Avoid Tax Stress

April 15 is behind us…but one thing that changes when you become a smallbusiness owner is the “luxury” of paying taxes only on April 15. Depending on your location and type of business, you may have to pay one or more commercial and revenue taxes several times a year. If you keep good records, you can eliminate the worry and complications of these filings. The key is to create a recordkeeping system that is consistent, organized and comprehensive.

Today, accounting software makes sense for even the smallest businesses to record and reconcile transactions. Whether you use a manual or computerized system, your goal is the ability to document your business activity for tax purposes as well as to develop a picture of how yourbusiness is doing at any time. All funds passing through the business should be documented in your business checkbook and logged into the general ledger, which serves as the master record of your business’s financial transactions.

Deposit and enter all cash and check receipts into this business account and post all expenditures through it. This ensures that all incoming and outgoing funds associated with the business are properly documented. If you do not have a business name, open the bank account in your name as a business account.

A petty cash box can take care of advances for small day-to-day expenses such as parking or postage. However, you should limit the number of employees who can dispense these funds. Require signed receipts for any use of petty cash.

Make sure that you maintain on your calendar all deadlines for filing returns and making payments on state, local and federal taxes. In some instances a late return or payment can invoke very serious penalties! The IRS can provide additional pointers to help make your tax preparation less complicated. Downloadable forms, publications and other resources are available at www.irs.gov. Similarly North Carolina offers appropriate information and tax forms at www.dornc.com/business.

ASK SCORE # 4

by Willy Campbell - special to The Pilot

Do Your Homework Before Buying A Business

Not every would-be entrepreneur wants to start a small business from scratch. There is a certain attraction to coming into a business that already has a location, name, permits, customers and cash flow. Moreover, compared to a start-up there is a lower level of risk and a greater likelihood that lenders will help you with financing.

However, none of this guarantees that the going will be smooth. The risks you encounter can be many. Consider the following ten questions regarding the purchase of a business; many of them also apply to purchasing a franchise.

1. If I am actively considering a specific business opportunity, have I assembled an acquisition team comprising my attorney, banker and accountant?
2. Why does the owner really want to sell the business?
3. Is the owner willing to show me projected financial statements plus the last three years’ balance sheets, income statements, cash flow statements and tax returns?
4. What assets convey with the business? Do there seem to be more fixed assets than it warrants?
5. How much inventory is there? For a business that sells a product, excessive inventory is a red flag!
6. Will the owner help me learn the business and give initial operating help?
7. How much cash does the owner need up front?
8. What is the best way to finance the purchase? Will the owner assist, for example, through leveraging the buyout?
9. Has the company or its principals been involved in bankruptcies or lawsuits?

You must establish your independent valuation of the business. This value is usually a function of its earnings, not its tangible assets. There are three approaches to valuing a business. The “Asset Based Approach” arrives at a value through the costs to replace tangible assets in like-kind condition. The “Market Approach” derives a value using ratios or factors derived from past transactions or similar businesses. The “Income Approach” converts future earnings or cash flow into a value using a capitalization or discount rate. I strongly recommend this method and direct you to www.score.org/article_business_valuation.html.

There is also valuation software for purchase on the web. And there are a number of companies and brokers that will perform business valuation.

A number of web sites provide information for prospective buyers and sellers of private businesses. They include www.onlinebusadv.com, www.score.org, and www.buysellbiz.com.

ASK SCORE # 5

by Willy Campbell - special to The Pilot

Use Independent Contractors Carefully

Here in the Sandhills we have many small businesses, small shops and significant employment in the services industry. Many such businesses can benefit from using independent contractors, or “contract workers”, because the business does not have to withhold taxes, pay Social Security or Medicare or meet numerous other employer responsibilities.But – you must be very careful to meet IRS definitions and regulations or major troubles will lie ahead. The strategy can really backfire if someone later claims they should have been treated, and paid, as an employee. If you incorrectly classify an employee as an independent contractor, you can e held liable for employment taxes for that worker, plus a penalty!

A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result. Independent contractors work for themselves; they operate their own business. You are their client, not their employer. You don’t dictate their hours or control how theyperform their work. In the eyes of most government agencies, a worker is an employee unless you can prove otherwise.

Contractors control when and where they work. Avoid setting a pattern of daily or weekly work hours dictated by your business. Also, independent contractors do not usually have a permanent or continuing relationship with the business and have time to pursue other clients. Plan to compensate contractors on a per-job basis, not weekly or monthly. Note that you must file IRS Form 1099-MISC to report payments of $600 or more to persons not treated as employees.

And since contractors are paid to complete a set task, they may bring in others to help, at their discretion and on their payroll. They should use their own tools and technology and be responsible for incremental expenses.Contractors cannot be fired as long as they produce results that meet their contract specifications. Be sure not to include them under any insurance or benefits coverage you have for employees.Always require an invoice before making payment!

There are several IRS publications, which you should review before agreeing to independent contractor relationship with anyone: “Publication 1779 Independent Contractor or Employee”, “Topic 762 - Independent Contractor vs. Employee”. These publications can be viewed and downloaded at www.irs.gov/businesses/small.

ASK SCORE # 6

by Willy Campbell - special to The Pilot

Manage Your Working Capital to Maintain Business Success

As the owner of a small business, you may think it has little in common with a large corporation. While it is true that you will likely rely more on trade credit, bank financing, lease financing and personal equity, your long-term investment decisions require the same kind of diligent analysis used by large firms. The key is understanding those factors that affect financial decisions, how they apply to your business’s short and long term goals and strategies, and any other influences that may be unique to your situation.

Working capital, the difference between current assets and current liabilities, is a vital issue for every small business. Lack of close control of working capital is one cause of business failure. Every small business owner must be constantly alert to changes in working capital, the reasons for them and any resulting business implications.

It is helpful for the owner to think of working capital in terms of its six components:

ASK SCORE # 7

by Willy Campbell - special to The Pilot

Find The Right Financing For Your Business

Finding the right type of financing, or finding ANY financing for that matter, is often one of the most difficult parts of starting and building a solid small business. You may have a terrific Business Plan and be a talented workaholic, but finding funding is another matter.
Business owners often start with too little money (in financial circles this is known as “undercapitalized”). Statistics show that it is the single most common reason that new businesses don’t make it.

Sources and types of small business financing fall into a few broad categories. It will be either debt or equity financing from institutional or informal sources. Debt financing is a loan you pay back. Common sources include family and friends, personal credit cards, home equity lines of credit, commercial bank loans and bank loans backed by the U.S Small Business Administration (SBA).

With equity financing you offer investors shares of your business in return for cash. Unlike loans, however, you are not required to pay the money back. But…these investors now own part of your business and will want a return on their investment. As a part owner they will also represent themselves as part of management.

Not to be overlooked for an existing business is working your relationship with your suppliers. They want you to succeed – so much so that they may provide special payment terms, discounts or even direct loans.

Banks are historically the most common agent for loans to small business. They set their loan rates according to the Federal Government’s prime rate and adjust that rate for the risk they perceive in your business and the length of the loan. The great majority of small business loans made by banks call for collateral, usually 30% or more of the amount of funds required. Start-ups face a daunting task of obtaining funds because many times the owner has no business history and usually very little business history. Without significant collateral, obtaining a start-up loan from a bank can be exceedingly difficult.

Enter the SBA 7(a) Loan Guarantee Program. The SBA will guarantee up to 85% of a loan made by a bank (up to $1,000,000) if it is satisfied with the applicant’s Business Plan and that other requirements are met. The bank submits the application, the bank makes the loan, and the SBA assumes the great majority of the risk. Go to www.wba.gov/services/financialassistance/index/html for all the details on funding basics, estimating costs, eligibility standards, 7(a) loan programs and more.

There are two SBA pilot programs that are of major significance to start-ups seeking financing: The Community Express loan program administered locally by the Women’s Business Center of Fayetteville works with several lenders that require no collateral for loans under $50,000. The Patriot Express loan program is a new SBA initiative for veterans and their spouses that is administered through major banks (several local Pinehurst banks are already on board). It too offers no, or low, collateral conditions and promises a very rapid application turn-around.

ASK SCORE # 8

by Willy campbell - special to The Pilot

Find Out if a Franchise is Right for You

For some entrepreneurs acquiring a franchise is their cup of tea. Profitable franchise operations exist in virtually every industry – the common denominator is a successful business model, beginning with an established name. In exchange for giving up a certain level of autonomy and creativity, the franchise operator acquires a turnkey business with a proven set of operating guidelines and management systems. In addition the operator is usually run through the franchisor’s “school” covering every aspect of the business.

As with any other venture worth pursuing, you will increase your chances of small business success in a franchise by doing your research. That means researching and evaluating not only specific franchise opportunities but the business line or industry that you are considering: the target market, length of time in business, competition and relevant comparisons, its growth rate…and how that industry is doing in your region. There are some excellent resources that you may consult as you perform your due diligence on franchises:

The above due diligence is an absolute requirement as your first step in investigating whether a franchise meets your business needs. When you have established a list of potential franchises, the second step is a personal interview with current or former franchisees with a prepared list of questions.

ASK SCORE # 9

by Willy Campbell - special to The Pilot

Set the Right Pricing Strategies for Your Business

Setting the proper prices for your small business products and services can be very tricky. Some business owners think they have it down. But after reviewing costs, expected profit, what competitors charge and what they think customers will pay, it becomes a complex matter.

Pricing too low can cut into your profits, while overpricing can also hurt your business. Finding just the right balance between all of the factors is more art than science.A common misstep – especially in the early stages of a business – is pricing too low in order to attract customers. While special deals can work in some cases to start the ball rolling, going low is not always the best path. Low prices can draw customers interested only in price. They are the ones most likely to abandon you the moment they find something even lower elsewhere.

Selecting excessively low pricing levels to attract clients is even more dangerous for service businesses. You only have so many hours to sell. Your business cannot make up in volume like a retailer who still profits from lower prices if volume is high enough.Pricing is partly psychological. You will want to set your levels according to the perception of your product or service “brand”. If you want to be in the premium neighborhood, your pricing can be higher to match an upscale image. Pay attention to price points. They differ widely by product and industry.

Pricing is an ongoing process, so test your pricing periodically. You may need to adapt to changing conditions. Competitor prices, your own costs, customer perceptions and your profit expectations can all change. Or you may want to simply test different pricing levels to see what works best for your business.Research the norms for your industry, including price ranges across the country if you sell nationwide. You may want to charge more or less depending on your brand positioning. Check your trade association for info; start by checking via Google.

No pricing strategy is complete unless you know with as much precision as possible what your own costs are to deliver the product or service. Do not guess! Price it out to the penny and include all of your overhead costs, both direct and indirect. This application of costs is extremely important. You should know exactly what you have to do in order to earn the profit you want.

Ask SCORE # 10

by Willy Campbell - special to The Pilot

Learn The Essentials of Equipment leasing

If you plan to invest in new equipment for your business sometime soon, and were considering a loan to finance the purchase, you might also want to look into leasing as an option. If cash is in short supply, and/or the equipment you need may become quickly obsolete, leasing rather than buying can be a good option.

No matter what type of business you are in, almost any equipment you would need to buy can also be leased. Companies of all sizes, from sole operators to Fortune 500 firms, use leasing. According to the Equipment Leasing Association (ELA), about $218 billion worth of equipment is leased by U.S. businesses each year.

Leasing can conserve cash. Whereas a loan usually requires that you invest a down payment in the equipment, a lease generally needs no down payment and finances only the value of the equipment expected to be used during the lease term. When you purchase the equipment outright, you assume all the risk of its becoming obsolete. Leasing transfers the risk of obsolescence to the leasing company, for a price, since there is no obligation to buy the equipment once the lease expires.

Leases are not loans so their costs are calculated differently. Equipment purchased is treated as an asset, appears on the Balance Sheet, and has a depreciation schedule which determines the amount of expense allowed on the Income Statement. Payments on an operating lease are considered an overhead expense that you can deduct from your business income on the Income Statement. Generally, however, the actual cost of leasing is similar to the cost of other financing options when you consider the entire transaction.

Flexibility is another leasing hallmark. You can tailor a lease to fit your month-to-month, seasonal or annual cash flow needs. If customers or the competition demand that you always have the latest technology, a short-term lease can help you get what you need and keep your cash. A startup might well look at lease options for the store equipment, van, and similar items it may initially need as a route to reduce initial capital needs recognizing that the cash flow must support the lease payments.

The ELA, a trade group of leasing companies, has created a special web site called “Choose Leasing” that explains the basics. Areas covered include how to lease equipment, leasing benefits, loan/lease differences and leasing terminology. The site also has a handy search feature to help you find a leasing company. Visit www.chooseleasing.org.

Ask SCORE # 11

by Willy Campbell - special to The Pilot

Choose The Best Legal Structure for Your new Business

When it comes to setting up the legal structure of a new business, there is no one-size-fits-all solution. As the founder of the business, you will be considering one of three legal forms – sole proprietorship, partnership or corporation (which has several forms – “C” corp., “S” corp., and Limited Liability corp.). Your selection will depend on answers to questions such as these:

The greatest disadvantage to a sole proprietorship is that your personal assets and those of your family are not protected. Should there be financial problems or a lawsuit, your assets are at risk. Additional insurance can help to minimize the risk and cover liability up to a certain dollar amount; however, you also assume greater personal liability. Using this form of legal structure presents serious issues of risk that must be carefully addressed.

With more than one owner, the business can form as either a partnership or a corporation. Partnerships come in two varieties: general or limited with both giving all partners a say in the decisions. General partnerships do not require a formal written agreement, although not having one would be a serious mistake. Limited partnerships do require a formal written agreement and also the filing of a certificate with the state. The general partnership stipulates that all partners have unlimited personal liability, but in a limited partnership, partners are typically liable only to the extent of their investment.

The main advantage of incorporation is the limited financial liability of the owner. Personal assets cannot be attached and ownership is transferred through the sale of stock shares. The corporation is a legal entity and will continue to exist until its legal dissolution, even if one of the principals in the business should die.

There are different types of corporate structures. A “C” corporation has government control and reporting requirements; additionally, corporate earnings are subject to double taxation –first profits, and then the shareholders’ earnings through dividends. As an owner, you may draw a salary which, of course, will be taxed at an individual rate. However, an “S” corporation provides the limited liability of the regular corporate structure and earnings are flowed through to the individual owners being then taxed at their individual rates. These are two significant benefits to this structure. A Limited Liability Company (LLC) offers the benefit of limited liability without being as complex as a corporation.

Ask SCORE # 12

by Willy Campbell - special to The Pilot

Lay A Strong Foundation Before Opening Your Home office

 

Ah, the luxury of having a home-based business. No office leasing costs, no frustrating daily commute and no disturbances from noisy co-workers. Although these and other advantages have enticed many people to start their own businesses, your home office should reflect the same level of commitment, professionalism and dependability customers would expect if you set up shop on main street.

These eight tips will get your home office started on the right track:

1. Legalize it. Check with your local zoning office about zoning regulations. Some communities, neighborhoods and apartment complexes may have covenants that restrict certain types of businesses. Requirements for licensing vary among jurisdictions. Some require a fee or tax based on income, while others simply want to know that your business exists.
2. Establish a business address. Not all customers look favorably on a business with an obviously residential address. Many home-based business owners rent a post office box and use that address on their business cards and stationery.
3. Get the right equipment. You need to consider devices such as an all-in-one fax machine, printer, scanner and copier. Make sure your home computer resources can accommodate the demands of your work and communication needs. Cable modems can provide continuous internet access without the need to tie up a phone line.
4. Emphasize professionalism. Install a separate telephone line for your business calls. Voicemail is a must. If you expect to use email frequently, set up a separate address from your personal or family account. An email address containing your name or your company name is best. Most email users today regard unfamiliar addresses with suspicion or to guard against viruses.
5. Create a professional office space. Make it quiet, comfortable and organized.
6. Establish contacts. Working from home can limit your ability to network. Make an extra effort to connect with potential clients and colleagues by joining a professional association. Join a trade association to get exposed to new ideas, advice and contacts.
7. Keep careful records. The IRS tends to audit home-based businesses more frequently, especially when they claim business expenses such as writing off a portion of the mortgage payments for the home office. Discuss thoroughly with your accountant.
8. Practice self-discipline. With many distractions in a home such as children, pets, delivery people, etc you must be strictly disciplined to get your work done efficiently. Time away from your office for personal chores and errands is time and money lost!

Ask SCORE # 13

by Willy Campbell - special to The Pilot

Build repeat Business Through Customer Satisfaction

Attracting customers is important to your business, we all agree on that. But even more important is keeping the customer you have as a repeat. Since only a fraction of first purchase customers will return, it is extremely important that you emphasize the mission to generate repeat business. Let the high satisfaction rate of your current customers do its part to lead you to the best referrals to future customers.

Put yourself in your customer’s shoes. Understand your customer’s most important needs and priorities. If you are not sure why they are coming to you…ask. You cannot build on your business strengths if you don’t know what they are; and they are truly those that are perceived by your customers and not necessarily the same as imagined by you. What counts? Convenience or location or hours? Ease of access to you or your employees? Friendly service? Knowledgeable staff? Price? A better product?

Employee training can pay dividends. If your employees interact with customers, whether over the counter or over the phone, they need to know the fundamentals of customer service, not just the product information.

Be sure your customers know that you appreciate them. Sending them a thank-you note after a large order is bound to make a favorable impression, and it’s not just about letting them know you appreciate your business. You are reinforcing the customer’s opinion that doing business with you was a wise decision.

Follow-up after the sale. Ask customers for their feedback on your product or service. Did they have a good experience with your company? If so, can they tell you how or why? If not, what would have made it better – and, can you do anything to fix it now? Use customer comment cards and surveys regularly. You may be surprised at the things you haven’t noticed – but your customers have.

Customer complaints are a golden opportunity. If handled with patience, diplomacy and an honest willingness to meet the customer half way, you will be able to turn a disgruntled customer into a loyal patron who recommends your business to others. Some thoughts on handling customer complaints:
• Listen to each complaint and consider it seriously. No matter how foolish the complaint may seem, most people will complain only if they feel they have a legitimate grievance.
• Try to take the customer’s point of view. If you were in his or her place, would you be upset or angry about the problem?
• If at all possible, troubleshoot the complaint while the customer is present.
• If your investigation shows that the customer is right, admit it immediately. Apologize and offer to make amends on the spot. An open and honest response brings you from conflict to common ground.
• Should the complaint turn out to be baseless, try to let the customer save face. Tell him or her that the feedback has helped you evaluate and improve your service.