Small Business Organizations

Chapter Two
Small Business Organizations
Chapter objectives:
After completing this chapter you will be able to understand the concepts about
 Definition and Nature of Small Businesses
 Identifying Small Businesses
 Advantages and Disadvantages of Small Businesses
 Small Business Failure and Success Factors
 Setting Small Business

Definition and Nature of Small Businesses

There Is No Single Definition of a Small Business, i.e. its definition could vary from place
to place. This is because entrepreneurship can be defined from several different
perspectives. Major factors that determine the definition of small businesses are:
 Startup capital
 Number of employees serving in the business
 Annual income level
 The economic level of the country (the location), and so on
Of course, the federal government‖s definition of a small business matters for tax purposes. But
other organizations that have significant impact on the country‖s small business landscape
disagree with the parameters defined by the government—and in some cases, disagree with
themselves.
The majority of members in the national federation of independent business, for example, have
20 or fewer employees. The small business and entrepreneurship council loosely groups
businesses into three tiers by number of employees:
 Fewer than 100 is considered small,
 A midsized business is 100 to 500, and
 A company with more than 500 is large.
However, both of these organizations allow any business to join, regardless of size.
Small businesses are privately owned corporations, partnership, or sole proprietorship that has
fewer employees and/or less annual revenue than a regular-sized business or corporation.

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Identifying a Small Business

We have just defined a small business at least from a central point of view. We said that a small
business is independently owned and operated and is not dominant in its field of
operation. We shall now go a step further to provide a general framework that will enable us
to identify any small business in our environment.

Most classifications of business units into large and small are based on their qualitative and
quantitative judgment. For instance, the US Committee for Economic Development (CED) has
developed the following definition of a small scale business. “A small scale business is one
which possesses at least two of the following four characteristics”.
1. Management: Usually the managers are also the owners.
2. Capital is supplied and the ownership is held by an individual or small group.
3. The area of operation is mainly local
4. The relative size of the firm within its industry must be small when compared with the
biggest units in its field.
In identifying any small business, we need to have certain criteria which distinguish the small
business from the bigger businesses. Some of the criteria are as follows:
 Initial Capital outlay (start-up capital)
 Number of employees
 Ownership Structure
 Types of Technology Employed.

Initial Capital outlay (start-up capital)

Initial capital outlay or start-up capital ordinarily refers to the financial resources that are
needed to start a business. If the initial capital outlay needed to start a business is small then
that may lead us to conclude that the business is a small one.
 For example with as low as 5,000 Birr (five thousand Birr – rough estimate) the
following businesses can be setup:
 A newspaper vending business
 A pay phone center
Generally all of the businesses qualify as small businesses. Although any business that requires
a small initial layout to start can be called a small business, there is no specific amount of
capital that acts as a dividing line between small and big businesses.

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Now let us take a look at the transportation business. A transporter who owns a luxury bus
costing say 1,000,000 Birr (one million Birr – rough estimate) may not be said to be in big
business because with one bus, no one cannot be said to be dominant in an industry where
such operators like Selam bus own fleets of luxury buses.

Number of employees
A second criterion that can be used to distinguish between a small business and a big one is the
number of employees that the business has. For example a business that has 5 (five) employees
is obviously a small one. But another business that has about 10,000 (ten thousand) employees
cannot be said to be a small business. In the past the dividing line between a small business
and a big business was 50 (fifty) employees. If a business had less than 50 employees, it was
classified as a small business. But if a business had employees of 50 and above, it was then
classified as a big business. That dividing line of 50 is no longer applicable or acceptable.
Ownership Structure
There are many types of business organizations with different ownership structures. We have
the proprietorship, the partnership, corporations and cooperatives. A business owned by an
individual obviously is a small one, so also is a partnership operated by two lawyers. But if you
look at the private limited liability company with many shareholders, you will quickly realize
that it is likely to lead to a big business. Therefore, ownership structure is very important in
distinguishing between a small business from a big one.
Types of Technology Employed
Because of the small size and relatively low capital base, the small business employs relatively
simple technology in operations. This is because the small businesses due to their low capital
base cannot afford to acquire complex technology that comes expensive.

Types of Small Business

By business types we mean the various functional groupings in the economy. This grouping is
based on the activities of the business concerned. The types of small businesses are:
 Trading and commerce enterprises,
 Service enterprises,
 Small manufacturing enterprises and
 Agricultural enterprises.

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Trading and Commerce Enterprises:

Obviously trading is one of the commonest business activities in Ethiopia. A trader is one
who buys goods from “A” and sells the same goods to “B” at a much higher price. The
difference between the selling price and the purchase price is the profit of the trader.
Perhaps when you look around you, you will notice a lot of small businesses selling such
items as:
 Bread and biscuits
 Recharge cards
 Small retail shops etc.
These trading and commerce enterprises possibly constitute about 80% of the total number of
small business.
Service Enterprises:
After the trading and commerce enterprises the next type of small businesses are the service
enterprises. Service enterprises are not engaged in buying and selling. Rather, they are engaged
in providing services to people and organizations. Examples of service enterprises are:
 Barber shop
 Hair dressing salons
 Shoe repair shops
 A dentist shop
 A dance theatre
 A photographer shop

Small Manufacturing Enterprises:

Small manufacturing enterprises are another group of businesses in the Ethiopian economy.
They engage in basic manufacturing activities that do not involve complex processes or
technology. Also they may not involve huge capital outlays. The examples include:
 soap making enterprises
 bread making enterprises
Agricultural Enterprises:
The entrepreneurs who undertake agricultural pursuits are called agricultural entrepreneurs.
They cover a wide spectrum of agricultural activities like cultivation, marketing of agricultural
products, irrigation, mechanization etc.

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Advantages and Disadvantages of Small Business

We have discussed the definition of small business. We also discussed the identification of small
business and then went ahead to discuss the types of small business. We will now go further to
discuss the advantages and disadvantages of small business.
Advantages of small business:
Because of the way they are, small businesses obviously have some unique advantages and
these are discussed here.
 Low start-up capital:
A major advantage of a small business is that it requires low start-up capital. So with a small
sum of money like 10,000 Birr (ten thousand Birr) a small business can be started. With
40,000 Birr (forty thousand Birr – rough estimate) someone can buy a fairly used motorcycle
and start a transportation business. Obviously if you look around you, you will see a lot of
people hawking various goods. They are engaged in a small business.
 Ease of Entry and Exit:
Because of the low capital required to start a small business, it also has ease of entry. For
example with a sum as low as 2,000 Birr (two thousand Birr – rough estimate) one can set up
a mobile phone call center. However, this ease of entry also is responsible for ease of exit. This
is in contrast to large organizations which may not easily exit from the industry because of its
huge investment. (Ethiopian BGI, Breweries PLC)
 Operational Flexibility:
Because of their relatively small size, small businesses have the advantage of operational
flexibility. Obviously in a small business, decision making is usually vested in the sole
proprietor who usually acts quickly and without any form of bureaucracy.
The sole proprietor does not need to consult any board to take decisions. This type of
operational flexibility may not be enjoyed by a large organization like Commercial Bank of
Ethiopia.
In a large organization decision making may be very clumsy. There may be various
committees along the line. There may be meetings at the divisional and regional levels. This
operational flexibility is obviously a big advantage to small business. It enables a small
business to swiftly react in the environment to changes that require reaction.
Disadvantages of Small Business:
We have discussed the advantages of small business. We shall now discuss the disadvantages.

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Lack of capital
A major disadvantage of small business is their apparent lack of capital. Lack of capital
obviously hinders the expansion of most small businesses. Because of their size, small
businesses are unable to attract bank financing.
Lack of managerial skills
Because of its inherent size, small business will obviously suffer from lack of managerial skills
as it depends only on the managerial skills of the sole proprietor or the partners as the case
may be. In contrast, a big organization like Ethiopian BGI Breweries PLC will have a rich pool
of experienced managers on its pay roll because it can afford to hire and pay them.
[

But the small business because of its poor capital base will not be able to hire and retain
experienced managers. Put together then you will now understand why lack of managerial
skills will continue to be a major disadvantage of small business.
Lack of adequate technology
If you look around you today, you will notice that science and technology started developing
in the economic landscape. New products with advanced scientific features are churned out
daily. And because the world is a global village, no nation is shielded from the economic
onslaught organized by the rich and economically advanced nations. In the face of these
changes, small businesses find it difficult to cope with the rapid changes in science and
technology. This is because they do not have the capital to embrace new technology.
Obviously lack of adequate technology will continue to be a major setback or disadvantage
inherent in small business.

Small Business Failure Factors

Several reasons might be listed for the failure of small businesses from different perspectives.
Business failure isn't something you want to think about when you start a business.

According to the statistics published in 2017 by the Small Business Administration (SBA), about
one-fifth of business startups fail in the first year and about half of all employer establishments
fail within five years. Only about one third survives ten years or more.
Those statistics are rather harsh. And while there are a multitude of conditions that can result
in a business failing, most small companies that go out of business make similar mistakes.
Here are the top seven reasons for business failure and what you can do to avoid them.

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1. Starting the business for the wrong reasons:

The reason for business failure is often tied to the reason the owner started the business. Is your
primary reason for starting your own business is the desire to make a lot of money? Do you
think that if you have your own business that you'd have more time with your family? Or
maybe that you wouldn't have to answer to anyone else? While those are benefits some
successful entrepreneurs achieve after years of hard work, they are not reasons to start a
business.
The right reasons for starting a business - reasons that lead to building a successful company
include these:

 You have a passion and love for what you'll be doing, and strongly believe -- based on
educated study and investigation -- that your product or service would fulfill a real
need in the marketplace.
 You have drive, determination, patience and a positive attitude. When others throw in
the towel, you are more determined than ever.
 Failures don't defeat you. You learn from your mistakes, and use these lessons to succeed
the next time around. Studies of successful business owners have shown they attributed
much of their success to "building on earlier failures;" on using failures as a "learning
process."
 You thrive on independence, and are skilled at taking charge when a creative or
intelligent solution is needed. This is especially important when under strict time
constraints.
 You like -- if not love -- your fellow man, and show this in your honesty, integrity, and
interactions with others. You get along with and can deal with all different types of
individuals.
2. Poor Management:
Many reports on business failures cite poor management as the number one reason for failure.
New business owners frequently lack relevant business and management expertise in areas
such as finance, purchasing, selling, production, and hiring and managing employees. If the
business owner doesn't recognize what they don't do well, and seek help, the company many
fail and go out of business.
 To remedy the problem, small business owners can educate themselves on skills they
lack, hire skilled employees, or outsource work to competent professionals.

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Neglect of a business can also be its downfall. Care must be taken to regularly study, organize,
plan and control all activities of its operations. This includes the continuing study of market
research and customer data, an area which may be more prone to disregard once a business
has been established.

A successful manager is also a good leader who creates a work climate that encourages
productivity. He or she has a skill at hiring competent people, training them and is able to
delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality, and
able to confront change, make transitions, and envision new possibilities for the future.

3. Insufficient Capital:
A common fatal mistake for many failed businesses is having insufficient operating funds. New
business owners often don't understand cash flow or underestimate how much money they will
need for startup and they are forced to close before they have had a fair chance to succeed.
They also may have an unrealistic expectation of incoming revenues from sales.
You should clearly know how much money your business will require; not only the costs of
starting, but the costs of staying in business.

 It is important to take into consideration that many businesses take a year or two to get
going. This means you will need enough funds to cover all costs until sales can
eventually pay for these costs.

4. Location, Location, Location:

Location is critical to the success of most local businesses. Whereas a good business
location may enable a struggling business to ultimately survive and thrive, a bad location could
spell disaster to even the best-managed enterprise.
Some factors to consider with regard to location are:

 Where your customers are

 Traffic, accessibility, parking and lighting
 Location of competitors
 Condition and safety of building
 Local incentive programs for business start-ups in specific targeted areas
 The history, community flavor and receptiveness to a new business at a prospective site

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5. Lack of appropriate Planning

Anyone who has ever been in charge of a successful major event knows that without their
careful, methodical, strategic planning -- and hard work -- success would not have followed.
The same could be said of most business successes.
It is critical for all businesses to have a business plan. Many small businesses fail because of
fundamental shortcomings in their business planning. It must be realistic and based on
accurate, current information and educated projections for the future.

Components should include:

 Description of the business, vision, goals, and keys to success

 Market analysis
 Work force needs
 Potential problems and solutions
 Financial: capital equipment and supply list, balance sheet, income statement and cash
flow analysis, sales and expense forecast
 Analysis of competition
 Marketing, advertising and promotional activities
 Budgeting and managing company growth
In addition, most bankers request a business plan if you are seeking to secure addition capital
for your company.

6. Overexpansion:
A leading cause of business failure, overexpansion often happens when business owners
confuse success with how fast they can expand their business. A focus on slow and steady
growth is optimum. Many a bankruptcy has been caused by rapidly expanding companies.
At the same time, you do not want to block growth. Once you have an established solid
customer base and a good cash flow, let your success help you set the right measured pace.
Some indications that an expansion may be warranted include the inability to fill customer
needs in a timely basis, and employees having difficulty keeping up with production demands.

If expansion is warranted after careful review, research and analysis, identify what and who
you need to add in order for your business to grow. Then with the right systems and people in
place, you can focus on the growth of your business, not on doing everything in it yourself.

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14 Most Common Small Business Challenges and

Solutions for New Entrepreneurs

Entrepreneurship is fraught with a lot of challenges. Though both novice and experienced
entrepreneurs have to face challenges, the nature of such challenges is significantly different.
For the latter, most of the challenges encompass establishing a new brand or staying ahead in
the league and making the business a significantly profitable one. But for new entrepreneurs,
some unique and most common challenges like arranging the funding for startup, choosing the
right business, maintaining cash flow, dealing with a significant number of competitors,
finding customers, chalking out the right marketing strategies for making a place in the
market, handling strapped budget situations etc. arise.

Let‖s take a look at the most common small business challenges that new entrepreneurs often
have to deal with, in addition to finding solutions for each of them. If you‖re an aspiring
entrepreneur, the following advice will help to make your journey a little easier.

1. Capital
The challenge: You want to grow or start a new business endeavor, but you‖re facing
difficulties for financing for new business owners.

The solution: Though various ways are there for arranging small business funding, starting
from friends and family to conventional bank loans, many experienced entrepreneurs believe
that self-fueled growth model is the best and less-risky one. Instead of trying to establish a big
business house overnight, aim at your primary customers. If you can provide value added
services to them, by the virtue of word-of-mouth publicity, your business will develop
automatically. However, if you need to take outside funding anyway, don‖t forget to consult an
attorney to avoid future complications.

2. Right Business
The challenge: Two of the most crucial reasons behind failing of new entrepreneurs are the
inability of selecting the right business and doing it in the proper manner e.g. ethically.

The solution: Firstly, to attain success in your new business endeavor, you‖ve to have an
outstanding product or service that adds value to your customer‖s life. Secondly, you‖ve to

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maintain your ethics. Having said that, you‖ve to deliver exactly what you‖ve committed to.
Because if you fail to do so, again by virtue of word-of-mouth publicity, you‖ll hardly have
your business expanded as you‖ll fail to attract new customers or retain your existing clientele.
Remember – it‖s easier to attract first time customers, but it‖s much more difficult to retain
them.
3. Cash Flow
The challenge: Small businesses can‖t survive if they don‖t follow cash flow guidelines and this
is probably one of the biggest problems that new entrepreneurs face. For example, you perform
a job timely, raise the invoice and get paid after a month. In the meantime, you‖ve to bear all
your business related expenses like your infrastructural cost, your employee‖s salary and
additionally, your personal expenses. And in case you don‖t get paid at all, only some miracle
can help you out.

The solution: Proper planning and budgeting are crucial for maintaining cash flow. One way to
increase cash flow is asking for a down payment whenever you receive an order. That way,
you‖ll be able to pay your expenses and that too while keeping some profit aside. Another way
of increasing cash flow is asking your clients for faster invoice payments. Say, instead of 30
days you can ask your clients to clear your invoice after 15 days. That way, if the client is late
on payment, you‖ll still have some time. The third way is a little uncommon and it entirely
depends on your rapport with your own vendors. If you can manage to make your vendors
agree to invoice you after 45, 60 or 90 days, you‖ll have sufficient time to receive your
payments and then clear their invoices.
4. Quitting another Career
The challenge: Most of the new entrepreneurs leave their regular jobs in the overwhelming joy
of becoming self-independent. And that too with less than the amount in bank required for
living at least a month or two even without any payment whatsoever.

The solution: Money is something inevitable for living. So, quit your present job when you‖ve at
least the required amount for living a standard life as a financial cushion and have a robust
business plan, or when you‖re earning a standard amount from your new business endeavor.
5. Too Many Competitors
The challenge: Dealing with too many competitors in the same field.

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The solution: Bring in something trendy and new in the market. Customers move to a business
that offers extensive product knowledge and a wide collection of the products they‖re looking
for.
6. Hiring Employees
The challenge: The hiring process can become a nightmare for most of the new entrepreneurs.
After completing all the steps of recruitment like reviewing resumes, taking interviews etc, at
times, they end up hiring an incompetent person.

The solution: Go through the ―wanted‖ part of the job sections of newspapers. You‖ll be able to
shortlist some candidates according to your requirements. Next, you can organize a ―walk-in
interview‖ and offer them a tour of their future working environments. Next, sit with them
across the table and finalize things. Remember to make everything clear for both sides because
that‖ll be extremely helpful to create a healthy work relationship and hire the ones that fit the
vacancies, with respect to both their skills and attitude.
7. Finding Customers
The challenge: Finding prospective customers.

The solution: If your product/service adds value to people‖s life, you don‖t need to spend a huge
amount of money on advertising in the initial stages. If you‖ve a great product/service, people
will automatically come to you. Just remember to keep your patience and approach only those
people who show interest in your product/service.
8. Time Management
The challenge: Time management is probably the biggest problem, especially for the new
entrepreneurs. In your own business, you‖ve to take care of everything unlike a regular job
where you only have to take care of certain tasks.

The solution: You‖ve to enhance your time management skills. Following are some useful tips:

 Create goal lists: Make a lifetime goals list and break it down to annual, monthly,
weekly and daily goals. That way, your daily goal will be in front you and you just have
to be on track.
 Delegate the jobs that don‖t require your personal involvement.
 Simply eliminate the unnecessary tasks.
 Assess yourself on a regular basis.

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9. Delegating Tasks
The challenge: Probably due to their inexperience, new entrepreneurs often get things messed
up when it comes to delegating tasks and they‖ve to redo it all over again.

The solution: If you‖ve a team of good employees, this job becomes much easier. Taking the help
of good outsourced agencies is another way of performing this task easily. The latter might be a
little costly but it‖ll help to get the tasks performed efficiently and in a time saving manner.
More importantly, remember to be absolutely specific about your requirement so that tasks are
delegated with clear guidelines, which in turn would help to get them completed on time, in an
efficient manner.
10. Finding Business Partners
The challenge: Finding reliable business partners is one of the most critical jobs that a new
entrepreneur has to perform. A wrong business partner will provide you with a negative
reputation and as your reputation will be connected to your partner, you‖ll be risking the
success of your endeavor somehow.

The solution: It‖s difficult to judge your partner at the first sight, but if he/she has the wrong
intentions, it‖s bound to be revealed gradually. The only way out is to immediately dissolve the
relationship with your partner.
11. Choosing What to Sell
The challenge: One of the biggest reasons for the failure of new entrepreneurs is selection of
the wrong niche.

The solution: It‖s very common that being a newcomer in the entrepreneurial world, you may
not have the adequate expertise to select a profitable niche. In that case, hire a freelance market
researcher who will survey the related market e.g. the field you want to do business in, and
prepare a report of profitable niches. You can then analyze the report and decide on your
preferred niches.
12. Strategies for Market
The challenge: You‖re unaware about the best possible way to market the products/services.
Your aim is to maximize your Return On Investment with effective and targeted marketing.

The solution: Again, it‖s a useful idea to outsource the marketing part to another third party
who has adequate expertise. Prepare a marketing budget and hand it over to them and they‖ll

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chalk out an efficient marketing plan. Remember not to take the chance of experimentation at
this stage. You can perform that later when you‖ve a productive baseline.
13. Strapped Budget
The challenge: Even when you‖ve adequate cash flow, it looks like you‖ve a strapped budget to
exhibit your products/services to their full potential.

The solution: Admit that every entrepreneur faces the phases of having a strapped budget. You
can lower the number of the situations by effective marketing efforts. Spend the money where
it maximizes your ROI and stock the rest for other infrastructural and experimental expenses.
14. Self-Doubt
The challenge: Every new entrepreneur goes through a phase where he/she starts lacking self-
confidence and feels like quitting. It mainly happens due to initial failures and watching the
growths that are lower than expected.

The solution: You‖ve to overcome self-doubt to become a successful entrepreneur. Discuss the
matters within your close circle who are aware of your goals. You may even seek the help of
fellow entrepreneurs, some of whom will be ready to offer advice and show you ways to
overcome the hurdles during this phase.

Whether you‖re thinking of becoming an entrepreneur or have just entered the domain, be
prepared for these challenges. To achieve success, plan strategically, explore the possible ways,
bring in a great product or service to the market and finally, do good business.

Small Business Success Factors

As a small-business owner, achieving success can be a struggle, especially during the formative
years. You're likely to face intense competition from other small businesses like yours while
trying to keep the larger companies from pricing you out of the marketplace. To improve your
odds of success, there are several key factors that you need to be aware of.
Find Niche
As a small business, you can't be all things to all people, so you need to cut up out your own
niche in the market. Determine what makes your business unique so you can capitalize on this
feature through your marketing efforts. For example, do you offer products that differ from the
competition or do you offer a unique shopping experience? Do you offer expertise that is not
available in your local market?

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Minimize Overhead:
You may be forced to operate on a shoestring budget, especially when first starting out, so keep
expenses to a minimum by reducing your overhead. Rent the cheapest building that suits your
needs and shop around for items, such as insurance. Learn as much as you can about basic
computer maintenance to keep service costs down. Even simple things like, such as turning off
your computers at the end of the day, can reduce your energy bills.
Focus on Service:
You may not be able to compete with the larger companies when it comes to pricing, which
magnifies the need to deliver superior customer service. Go the extra mile by providing
additional services, including free delivery or offering extended hours. Build a database of
customer email addresses so you can send them a newsletter filled with useful tips and regular
promotional offers.
Location:
If you operate a brick-and-mortar business as opposed to one that's Internet based, your
location will play a big role in determining your success. According to the Business know-how
website, factors to consider when choosing your location include proximity to your customer
base, the location of your business in relation to your competitors and your building's
accessibility.
Good Planning:
Poor planning can cause your business to fail before it has a chance to succeed. That's why a
carefully crafted business plan is an essential component to your success. A business plan is a
written document covering items, such as your business' purpose, your marketing strategy,
capital requirements and any potential problems you might face.

Setting Small Business

A great small business always starts out as an idea, but you have to transform that idea into
action. That‖s where many individuals can start to feel overwhelmed. It‖s understandable to
freeze up at the deluge of things that are required to get a business started, but getting going is
actually easier than you might think.

Like any big goal, if you start by breaking it down into smaller tasks, you‖ll be able to tackle
enough of the actions necessary to get started. Here are six ways to break down the process and
simplify getting started with your own small business.

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1. Write a one-page business plan:

The key to a successful small business, especially in the startup phase, is to keep things simple
and costs low. Costs don‖t just mean your monetary costs, but also your time.

Many would-be small-business owners fall into the trap of trying to create the world's biggest
and most robust business plan. You‖re only going to need that if you‖re seeking investment or
financing, and even if you will be seeking either of those things down the road, I always
recommend small-business owners start out with by testing their ideas first before investing
lots of time and money.

So to get started, create your own simple, one-page business plan that is a high-level overview
of the small business you‖re about to start.

1. Define your vision. What will be the end result of your business?
2. Define your mission. Different to a vision, your mission should explain the reason your
company exists.
3. Define your objectives. What are you going to do -- what are your goals -- that will
lead to the accomplishment of your mission and your vision?
4. Outline your basic strategies. How are you going to achieve the objectives you just
bulleted?
5. Write a simple action plan. Bullet out the smaller task-oriented actions required to
achieve the stated objectives.

That‖s it. It might be longer than one page, but it will surely be more organized and shorter
than a full business plan, which could take weeks to write. If you need more information on the
one-page business plan, or want to write out a full-blown finance-centered business plan, you
can check out the book I co-wrote with my brother that has a robust explanation of both, Small
Business, Big Vision: Lessons on How to Dominate Your Market From Self-Made Entrepreneurs
Who did it Right.
2. Decide on a budget:
While I highly recommend you keep your costs as low as possible, you‖ll still need to determine
a budget to get started and how much you‖ll be able to spend. If you‖re self funding, be realistic
about numbers and whatever you anticipate your budget to be. I‖ve found that an additional 20
percent tacked on for incidentals is a realistic overage amount that helps you plan your burn
rate.

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Your burn rate is how much cash you‖re spending month over month. It‖s an important
number for you to figure out to determine how long you can stay in business before you need
to turn a profit.

You should set up your business with profitability in mind the first 30 to 90 days. It‖s possible.
But have a budget reserve so you can survive if things go leaner than expected.

3. Decide on a legal entity:

Filing paperwork to start a business costs money. Often, depending on your state, it can be a lot
of money. You‖ll need to account for city or municipality licensing, state incorporation or
business entity fees and more. Do a thorough search ahead of time to determine what the filing
fees are for your city, county and state before starting any business.

Often in the initial “test” phase for your small business, it can be wise to start as a sole
proprietor, as it means less paperwork and up-front expenses. That can save you some big-time
cash while you determine the viability of your business. Do be aware though that acting as a
sole proprietor can put you at personal risk, so you‖ll want to weigh the benefits vs. risks and
then speak with a local attorney or tax professional to decide which is smarter for your short-
term vs. long-term goals.

You can always file for a business entity once you‖ve proven in the first three to six months of
business that you‖ve got a viable, sustainable model.

4. Take care of the money:

Whatever business entity you decide on, keep the funds separate from your personal accounts.
This is a big mistake that makes tax time and financials so confusing. It‖s really easy to set up a
free business checking account with your local credit union or bank. All you‖ll need is your
filing paperwork, sole proprietor licensing information and an initial deposit to get set up from
most financial institutions.

Don‖t pay for an account or get any kind of credit lines yet, just get a holding place you can
keep your money separated from your personal accounts. This should take you no more than
hour at the financial institution of your choice.

5. Create social capital:

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Successful entrepreneurs have good capability to communicate with others. If you could have
the capability to have good communication skill and have good will with several people you
will have a higher chance of promoting your products and services even through “word-of-
mouth”. So to be a successful entrepreneur, you would be required to have a higher social
capital.

6. Test sales:
You have enough of a foundation now that you can start testing some sales. Try to spread the
word in inexpensive and creative ways.

If you have a service-based business, get involved with your local chamber of commerce or
small-business chapter immediately and ask what resources are available for you to speak,
present or share information about your business. If you have a product-based business, test
the viability of your product at local swap meets, farmers markets or other community events
to test what the public really thinks (and if they'll purchase) from you.

You can follow these six steps by yourself for not a lot of money. It‖s a fantastic way to test the
viability of your small business before throwing all your time and money into an unproven
idea.

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