Basic Guide to Understanding Cash Flow

Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the fundamentals will help entrepreneurs better manage cash flow. In fact, poor management can be a predicator for business failure and for many new entrepreneurs; especially those without a financial background, cash management can be considered a major stumbling block. To be competitive, small business owners must prepare for all future events and market changes. One of the most important aspects of such preparation is cash flow planning. Failure to properly plan cash flow is one of the leading causes for small business failures.

Cash flow refers to the movement of cash into and out of a business. Monitoring the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes checks for salaries, suppliers, and creditors. The inflow includes cash receive from customers, lenders, and investors. If cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a good sign of financial health, but is by no means the only one. If cash outflow exceeds the inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable.

Cash flow analysis can let you know if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. An understanding of cash flow will lead to better control of your cash flows and will allow adequate time to plan and prepare for the growth of your business. It is important to note that it is best to have enough cash on hand each month to pay the cash obligations. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

The Components of Cash Flow
Operating Cash Flow Operating cash flow (working capital) is the cash flow generated from internal operations. It comes from sales of the product or service of your business.
Investing Cash Flow Investing cash flow is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.
Financing Cash Flow Financing cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

Good cash management involves:
1. Knowing when, where, and how your cash needs will occur
2. Knowing the best sources for meeting additional cash needs
3. Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors

The starting point for good cash flow management is developing a cash flow projection. It is important to develop both short-term cash flow projections to help manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help develop the necessary capital strategy to meet the business’ needs. It is also necessary to prepare and use historical cash flow statements to understand how the business used money in the past.

Planning a Positive Cash Flow
Businesses can increase cash reserves in a number of ways:

• Collecting receivables: Actively managing accounts receivable and quickly collecting overdue accounts.
• Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing uncorrectable accounts.
• Adjusting the price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Pricing is the critical element in achieving a profit and maintaining positive cash flow. Before setting your prices, you must understand your product's market, distribution costs and competition.
• Taking out short-term loans: Loans from various financial institutions are often necessary for covering cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
• Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Therefore it becomes critical to collect outstanding accounts quickly.
• Managing your expenses: Watch your expenses carefully. However, beware of penalties for late payment and the potential impact on your credit rating. You should monitor your expenses to make certain they are necessary and reasonable in amount.

Bootstrap Your Way into Business

Bootstrapping can be defined as “a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors”. While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. In essence, bbootstrapping is getting a lot done on very little cash. For most start-ups, bootstrapping is an essential first stage because it:
• Demonstrates the entrepreneur's commitment and determination.
• Keeps the company focused.
• Allows the business concept to mature more into a product or service.
• Gives the concept a chance to be investigated by the market.
Bootstrapping means behaving very smartly at every cost point, given there is no external investment in the business. It means entrepreneurs consume business essentials only and are constantly looking for innovative means to substitute costs out of operations. It means resourcefulness. Bootstrapping can be beneficial because if the business fails to take off as planned, it is less painful to exit as the cash burn rate will have been low, so there are no significant losers. However, if the business takes off the rewards are not dispersed to third parties.

Bootstrapping Ideas
• Cash from savings.
• Borrowing against assets, such as your home.
• The careful use of selected credit cards.
• Keeping your day job, while starting the business in off-hours.
• Living off your spouse's wages while starting the company.
• Doing consulting work to provide start-up cash for the business and for living expenses.
• Rushing an early product to market to provide for early revenues and earnings.
• Running extremely frugal operations, allowing the company to grow on internally generated cash earned on the sales of products.
These are some tactics to stretch your bootstrapped cash runway:
• Lease or borrow the equipment you need to acquire new, such as computers.
• Buy fixed assets such as furniture used.
• Go as long as possible without paying yourself.
• Compensate advisers and consultants with equity, good will, and in-kind services.
• Call in past favors and rely on personal relationships to get things done for free.
• Use lawyers and accountants to help you with judgment issues, not basic education issues.
• Be frugal everywhere-drive instead of flying, choose cheap hotels, and use your personal computer and printer.
• Spend money on marketing only if you must.

Continue bootstrapping as long as possible, but know when it's time to seek investors.

Dangers of bootstrapping
While certain aspects of bootstrapping are clearly useful, it is important not to overstep the line. There needs to be some reasonable amount of cash available. Excessive thrift can be counterproductive and can send out the wrong signals to staff, customers and prospects alike. The objective is not to become compulsive in managing the costs or to expect a company to successfully develop on nothing. As always it is a question of balance. You do not want to lose credibility by being noticeably focused on bootstrapping, but you do want to manage your cash position to move the company forward.


Summary
Bootstrapping is an increasingly popular way to start a business, regardless of the economic conditions. Once the idea you are bootstrapping gains traction and revenue begins to increase, you may then need to switch out of bootstrapping mode. At this point it may be appropriate to seek external funding from the likes of VCs. However once you have proven the concept, the risk for investors reduces a little and hence you should capture more of the upside as you need to give away less equity. In short, the aim of bootstrapping is to keep a low cost base to ensure you can gain a foothold in some market and to generate a sufficient return so you can then assess how best to proceed.

International Operations

Would you consider an international market in your business?
As an upcoming entrepreneur, I was confronted with the question, “if there were a market for it, would you consider entering an international market for a product or service that you offer?” Initially I thought to myself, sure why not this would be a great opportunity to grow a business. However, I deeply reflected on the possibility and decided that it would not be in my best interest to market my enterprise globally especially before it is established and growing.

International marketing is when a company that is based in one country decides to sell products or a service in another. Like your company based in the United States distributing your product in Europe. International marketing can be compared to a franchise being established in another country. The parent company still owns and operates the business in the other country but the chain store still has its name, logos, and products, but it sells mostly items that are specific to the needs in that country.

While the overall concept of marketing is the same worldwide, the environment within which the marketing plan is implemented can be drastically different. Common marketing concerns—such as input costs, price, advertising, and distribution—are likely to differ dramatically in another country. As the business owner, I would need the ability to adapt, manage, and coordinate a marketing plan in an unfamiliar and perhaps even unstable foreign environment.

Marketing abroad can spread corporate risk and minimize the impact of undesirable domestic situations. In order to market internationally, the business should have products or a service that are patented marketable abroad. Additionally, the products should have a high earning potential in foreign markets. Secondly, the management of companies marketing internationally must be ready to make a commitment to these markets including a willingness to educate themselves about the countries they choose to enter and must understanding the potential benefits and risks of a decision to market abroad.

As a business owner who is not a native yet operating abroad I would need to understand the culture and develop the proper frame of reference to make decisions. Thus, choices that I could make automatically at home could be dramatically incorrect when operating abroad. Unless special efforts are made to understand the cultural meanings for activities in the foreign market, I could possible misinterpret the events taking place and risk making the wrong decisions. To overcome these potential disastrous decisions, firms must understand the cultural factors existing in both their domestic country and the host country. Business problems and goals must be defined in terms of the host country's culture. Being able to separate home-country norms from those in the host country can be a very challenging task. Often, the influence of one's own culture is underrated.

Although the internet allows the potential to distribute globally, I would still have to ensure that I am offering my clients a product or service that they can utilize. Like I said initially, I consider this an option and would not rule it out in the future but it would have to be after the initial business is established and is growing. I have consider my personal implications and recognize that it is not the choice for me however please read the pros and cons of international marketing below, it might be right for your business.

Advantages of International Marketing

• Faster growth: Firms that have operate internationally tend to develop at a much quicker pace than those operating locally not that this growth can take place faster than you can handle it
• Access to inputs: Operating internationally may enable the firm to source raw materials or labor at lower prices or higher place
• Increased quality and efficiency: Doing business in the international market allows a business to improve the quality of their product in order to gain a competitive advantage.
• New market opportunities: International business presents businesses with new market opportunities. These new markets provide more opportunities for expansion, growth, and income. A bigger market means more customers, increased revenue, a larger profit margin, and allows the business to realize economies of scale. Just be prepared to handle the influx and demand of all customers.

Disadvantages of International Marketing

• Increased costs: There are increased operating expenses including the establishment of facilities abroad, the hiring of additional staff, traveling of personnel, specialized transport networks, information and communication technology.
• Foreign regulations and standards: The business may need to conform to new standards. This may require changes such as in the production process, inputs and packaging, incurring additional costs.
• Delays in payments: International trade may cause delays in payments negatively affecting the firm's cash flow.
• Organizational structure: International business usually requires changes to the firms operating structure. Training/retraining of management may be necessary to facilitate restructuring.
  
  

Just In Time Inventory

A buffer of inventory on hand is comforting - and costly. When carrying a large inventory you are locking away a huge amount of cash unnecessarily. These items can be lost, stolen, or damaged, or they can deteriorate. They occupy space, which could otherwise be devoted to operations. And they can become obsolete; particularly when products are improved or changed. All of this represents financial loss to the business.

When items are ready just in time, they are not sitting idle, taking up space. This means that they aren't costing the business owner anything nor are they becoming obsolete or deteriorating. However, without the buffer of having items in stock, you must tightly control your manufacturing process so that inventory is ready when needed. By taking a JIT approach to inventory and product handling, companies can often cut costs significantly. Inventory costs contribute heavily to the company expenses, especially in manufacturing organizations. By minimizing the amount of inventory you hold, you save space, free up cash resources, and reduce the waste that comes from obsolescence.

JIT is intended to spread throughout the organization so it can have an impact on many areas through improvements in processes. When the emphasis is on lean production, systems tend to be made simpler and more predictable. From how a product moves through the building to ways to increase worker involvement in system design, JIT improves efficiency. Before implementing the JIT system one must evaluate the pros and cons to make an informed decision.

Pros of JIT

There are a lot of strengths in incorporating JIT inventory in a company. JIT makes production operations more efficient, cost effective and customer responsive. JIT allows manufacturers to purchase and receive components just before they're needed on the assembly line, thus relieving manufacturers of the cost and burden of housing and managing unused parts. The benefit of carrying smaller amounts of inbound, in-process, and finished goods inventory exists regardless of the firm's operating context.

Just in Time appeals to many companies because it helps prevent the organization from being trapped with inventory that may become obsolete. JIT was initially developed and justified based on cost reduction and quality improvement dimensions. Companies now view JIT as providing an approach to achieving excellence in the elimination of waste as well as making the company more responsive to short-term customer demand patterns.

JIT inventory can be a real money-saver for a company. Companies are not only more responsive to their customers, but they also have less capital tied up in raw materials and finished goods inventory, allowing companies to optimize operations.

Cons of JIT

Just as JIT has many strong points there are weaknesses as well. In just-in-time, all is very interdependent. Everyone relies on everybody else. Because of this strong interdependence with JIT, a weakness in the supply chain caused by a JIT weakness can be very costly to all linked. JIT processes can be risky to certain businesses and vulnerable to the supply chain in situations such as labor strikes, interrupted supply lines, market demand fluctuations, stock outs, and lack of communication upstream and downstream in the supply chain and unforeseen production interruptions. Adhering to the just-in-time concept can be expensive in times of emergency. This lack of inventory makes it risky because there will not be enough buffer inventories to react and keep the supply chains moving. Communication is critical in a JIT rich supply chain. There is a risk involved with JIT when there is a communication breakdown and the company cannot get the right amount of supplies needed to keep the just-in-time system running smoothly. Technology is playing a big role in JIT number; however, the reliance on technology can lead to breakdowns in the IT systems that can be costly to work around. Weaknesses in JIT systems are very important to recognize.

Conclusion

Just in Time is a way of managing operations so that they run leanly and efficiently. JIT requires giving up your "Just in Case" safety net, and controlling supplies and inventory to levels that just support production. The main emphasis of JIT is on cost reduction and minimal waste. The process of implementation requires you to take a very close look at every stage of your production and inventory carrying points. This alone is a useful exercise that will highlight some areas for improvement. Ultimately, the more efficient you are and the higher quality product you provide, the more appealing you will be to customers and clients.
Key Points
Pros:

• Low month to month holding costs.
• Low impact of the daily cost of money (your money is not tied up in inventory so you can use it elsewhere in your business)
• Eliminate the problem of obsolete and outdated inventory.
• Eliminate the problem of damage to inventory from holding it month to month.

Cons:

• It requires a committed work force always correcting mistakes
• Any delays are extremely costly – late deliveries are killers to JIT
• Higher possibility of stock outs – if you get defective product from a supplier, and have no other inventory to back it up, what do you do then?

The Four C’s of Credit

In the credit world there are four things lenders look at to determine your creditworthiness. Creditworthiness is ultimately determined by character, capacity, capital, and conditions. One must be cognizant of the fact that financial records are snapshots of the past and credit analysis is trying to figure out the future. Thus all 4 Cs of credit are important in the overall analysis of a company or an individual where you combine elements of the past to make a futuristic prediction.

Character refers to the financial history of the borrower. Character can be determined by looking at credit history. Late payments, delinquent accounts, Available credit and Total debt all have a bearing on a person or business’s character. Lenders and investors assess your character by your past performances the way you handle your financial affairs both business and personal. Character for a business includes factors such as size, location, number of years in business, business structure, number of employees, history of principals, liens, lawsuits, stock performance, and comments from references.

Capital assesses whether a company has the financial resources to repay its creditors. It refers to the business’ assets. Capital might include machinery and equipment for a manufacturing company, as well as product inventory. Lenders consider capital, but with hesitation, because if a business folds, they are left with assets that have depreciated.

Capacity refers to the demonstrated ability to repay. It refers to the ability of the business to generate revenues in order to pay back the loan. Since a new business has no record of profits, it is a greater risk when compared to an established business. Capacity also includes the structure of the company's debt, whether secured or unsecured, and the existence of any unused lines of credit. Any defaults must also be identified. A business should also have plans both for good and bad times in the economy. If your product is not competitive then it could reduce the business’ capacity to make payments. Competition definitely influences Capacity.

Lenders also find it practical to look at current economic conditions when deciding to extend credit. They will look at the industry you are in, and how it is affected by those conditions. A slower economy means lenders are more careful in their practices. Conditions consider the external factors surrounding the business under consideration: influences such as market fluctuations, industry growth rate, and political/legislative factors.

To me, of the four C’s the most important is character. The character of the management team, their reputation in the industry and the community are critical. Investors want to stand behind individuals who have impeccable credentials and references. The treatment of employees and customers, your accountability, and your appropriateness in fulfilling your obligations are all part of the character. Your character counts. Your leadership skills in both your business and personal life gives the lender a clue about how likely you are to handle leadership as a business owner. Your character comes into play if there is a business crisis. After all, would you extend credit to some one who has a history of late payments, no payments, and defaults?

Summation
The four Cs of credit are the four primary considerations that will affect a lender’s decision to approve or decline your a loan application.

1. Capacity

• What is your ability to repay the loan?
• Do you have a job or another income source?
• Do you have other debts?

2. Character

• Will you repay the loan?
• Have you used credit before?
• Do you pay your bills on time?

3. Conditions

• What are the current economic conditions and how does your company fit in?
• What are the trends for your industry, and how does your company fit within them?
• Are there any economic or political issues that could negatively impact the growth of your business?

4. Capital

• What are you worth?
• Do you have other assets, such as a savings account, car, or certificate of deposit that could be used to repay the debt?

Fraud A Big Problem for Businesses

When fraud is discovered within a business, the initial response is "How could that have happened?" Fraud is a deliberate deception for the gratification of an individual or group. Fraud can be divided into many categories, the major one falls under employee fraud Schemes included billing abuse, check tampering, bribery, skimming, cash and non-cash robbery, payroll fraud and stealing of financial data, equipment and stocks.

The Scope of Fraud to Businesses
The scope of fraud to businesses is difficult to estimate because not all fraud is discovered. Fraud affects businesses directly through economic loss but indirectly there is the legal, accounting, and increased insurance costs. Additionally the loss of productivity associated with hiring and firing employees are additional factors that must be considered. Unfortunately it is the trusted and valued employee who generally commits fraud. In most cases, offenders do not view stealing from companies as harmful; they may think that the crime was victimless; and they do not view their theft as being costly to the business. Many frauds occur because the opportunity exists and the person responsible does not believe he/she will be caught.

Factors That Make Small Businesses Susceptible to Fraud
Small businesses are far less likely to be able to recover from frauds because they have limited capital and they do not carry employee theft insurance because it is deemed to be “to expensive.” The owners of small businesses are usually deeply involved in the business, and rely on that involvement to prevent fraud. Additionally, small businesses often employ friends, family members, and “trusted individuals.” Due to their small size, they are not large enough to provide an adequate division of duties and a system of checks and balances, which exists in a larger company. Because many small businesses rely on personal trust and personal relationships, rather than systematic systems of internal controls, they are particularly vulnerable to fraud.

Prevention
There are some steps that business owners can take to prevent fraud. Hiring the right employees is the best way to stop fraud before it happens. Screening employees is critical, perform background checks on potential employees including the applicant’s criminal history, civil history, and drivers’ license violations, and verify his/her education, past employment and references. Since employees experiencing financial difficulties may be more prone to committing fraud, think about requesting a credit check as well.

Your business should implement a system that spreads the financial duties of the business among two or more employees. This reduces having one person handling all of the money. Store bank checks in a secure location and carefully review bank statements month, taking special care to look for checks made out to cash, employees or suppliers you do not know.

Another effective way to prevent fraud in your business is to create a positive work culture. It is important that the business owner and senior management serve as role models of honesty and integrity. If the individuals at the top take a careless approach toward company policies and procedures, they are inviting their employees to do the same – or worse.

Clear standards should be implemented from the beginning, a company-wide written code of conduct along with a zero tolerance policy for employee theft. To maintain credibility, be sure to conduct a prompt and thorough investigation of every incident. Establish a system that makes it easy for employees, vendors and customers to anonymously report suspected fraud activities. Be sure employees understand what constitutes fraud and that all reports are treated confidentially and without punishment. Consider hiring an accountant to conduct both regularly scheduled and surprise audits. Audits can serve as a deterrent because when employees are aware that there will be checks of their areas, they are more likely to stay honest.

Conclusion

Fraud and white collar crime have increased and professionals believe this trend is likely to continue. The cost to business and the public can only be estimated, as many crimes go unreported. Also, the expansion of computers into businesses may make organizations more vulnerable to fraud and abuse. In order to combat fraud and white collar crime in businesses, a concerted effort must be exerted by the management of the business, the external auditors, and by all employees of the business. Everyone must realize that fraud is not a victimless crime. The cost of fraud and theft are shared by all through higher costs and lower profits. Through adequate control methods, everyone can start to combat frauds.


Prevention Tips to Remember

• Eliminate opportunity. A business creates the opportunity for fraud when it does not have basic checks and balances in place.
• Maintain oversight. Use your financial statements as an early warning system for fraud. Know how to read your financial statements and what signs of fraud look like. Protect your assets by staying involved in your business.
• Lead by example. Model the ethical, honest behavior you want from others. A boss that skims cash, underreports income, or engages in other questionable business tactics makes it easy for employees to rationalize committing fraud.
• Be careful in hiring. Interview carefully, check references and conduct background checks.
• Be approachable. Make sure your employees feel appreciated for their contribution to the business and feel like they can talk to you if they have a problem.
• State the obvious. Have a written policy that fraud is unacceptable. Everyone in the company has a vested interest in preventing fraud. Educate employees about fraud, the effect it has on the business and them. Have a procedure that helps employees feel comfortable reporting suspicions of fraud.
  

Ecommerce

E-commerce is yet another avenue that individuals can utilize to start a journey into entrepreneurship. Before we delve into the matter at heart, we will distinguish between two terms used interchangeably, e-business and e-commerce. E-business includes running a website that informs the prospective clients about the available products in detail, so that they can be converted into customers. Whereas e-commerce is a subset of e-business and it essentially refers to activities involving monetary transactions. E-commerce (electronic commerce or EC) refers to the buying and selling of goods and services over the Internet. E-business is a broader term and it aims to educate the potential customers about a given product, as well as the manufacturer.

As we discuss e-commerce, we will give consideration to tangible products. Aspects of e-commerce include:

• E-tailing or The Virtual Storefront and the Virtual Mall This provides a place for direct retail shopping, with 24-hour availability, a global reach, the ability to interact and provide custom information and ordering.
• Email, social networking, and instant messaging E-commerce is also conducted through email, instant messaging and social networking sites such as www.Facebook.com.
• Business-to-Business Buying and Selling Thousands of companies that sell products to other companies have discovered that the Web provides a 24-hour-a-day showcase for their products but a quick way to reach the right people in a company for more information.

In order to set up your e-commerce business as with any business, one must plan, setup, market, and continually maintain the e-Commerce site and business. As you begin you must keep in mind that this is business ownership and in businesses there are risks. The key to remember is that your business should be fueled on passion and once that passion is gone, it is a lot more difficult to grow or succeed.

Pros of E-commerce
One of the major advantages of conducting business online is that the company and its products have a worldwide presence. As a result of, both the consumer and business owner enjoys savings. Reducing gas consumption and employee time are cost-saving benefits to parties involved. E-commerce is available 24 hours a day and customers around the world can traffic to the site.

E-commerce is popular and appealing to people in remote areas who can now visit their favorite stores online. Additionally, shopping online is fast, convenient and buyers can shop in the comfort of their own home. Convenience is one of the reasons both buyers and sellers are eager to get into ecommerce. When businesses engage in transactions with vendors, information exchange and business dealings can take place without location barriers.

Software development and upgrade continues to provide businesses online tools to perform many tasks online. Business owners and managers can access time-keeping reports, inventory, customer queries and project proposals at any time from any place with online programs.

Advertising costs can be greatly reduced by utilizing the Internet. Search engine allows customers to access a business’ products and services. Emails, newsletters, and social networks can also provide and bring new customers in without printed marketing materials making marketing and advertising extremely cost effective. Techniques like pay per click advertising and affiliate marketing can help businesses and affiliates to marketing their product or service reducing expenses.

E-commerce can greatly contribute to improvements in customer service. Online chatting can solve many customers’ complaints compared to lengthy, frustrating telephone calls with excessive holding and waiting times. Email and chat are faster options than letter or telephone calls. Moreover, prospective customers who visit the website can be greeted by a pop-up asking them to enter the chat box for more personalized information. Also, ppayments can be made online and the product is transported to the customer without causing him or her any inconvenience.

Rarely can a business especially a new one keep its doors open 24 hours a day, seven days a week. E-commerce provides business owners with no time restraints. Customers can reach the business anytime and from anywhere. Automatic reply programs can process orders and send emails to clients with confirmations of an order received. Small business owners, often overwhelmed by the time constraints they face during the day, can conduct business with vendors and clients after hours.

Cons of E-commerce
With the advantage, there are disadvantages as well. E-business has some very potent sectoral limitations. For example, the food sector has not been able engage in e-commerce for many practical reasons, including the selling of perishable items. Supermarkets and grocery stores are conveniently located to most consumers and people would rather walk or drive to the supermarket instead of ordering online and waiting for delivery. Similarly, some other industries do not seem to be benefiting from e-commerce.

E-commerce requires substantial resources at hand for online selling. Many resources need to be spent in order to establish an e-commerce. Factors like good and efficient computer systems, website updating, website maintenance, personnel training, and other planning needs to be considered before set up and they require human resource.

Visitors to your business site must also know how to find you. This can include complicated knowledge and expertise of search engine optimization. It is also more difficult to trust and build a relationship with a business that you cannot physically interact with. Many consumers are still more comfortable with traditional purchases compared to online purchases. Additionally, the disadvantages of having an internet business is if your business computers are not backed up and secure your system could be a victim of numerous attacks like viruses, Trojans, and worms. Additionally as with any business fraud can occur, therefore you must protect your customer’s privacy. Ecommerce is also competitive.

Point to Consider
E-Commerce Pros:

• Lower start-up costs compared to a storefront
• Ongoing web presence
• International customer access
• Business conducted 24/7
• Quick response to customers
• Lower overhead
• Lower product cost
• Work from home possibility

E-Commerce Cons:

• No physical interaction with customers
• Constant need to maintain sites
• Lack of customer trust
• Implementation of fraud prevention
• Sectorial disadvantage e.g. the food industry esp. perishable goods
• International customer access an awareness and means to accommodate all customers including national and international shipping requirements
  

With the emergence of advanced Internet tools, high-level security protocols and the ubiquitous use of computers by consumers and businesses, the advantages outweigh the disadvantages of doing business online.

Buying a New Venture

To build or to buy?-That is the question
Many aspiring entrepreneurs ask the question: Am I better off purchasing an existing business and improving it, or should I build my own from ground up? Buying an existing business can be highly profitable, but it has its own share of complications as a means to business ownership. Before buying an established business it is critical to consider its advantages and disadvantages.

Buying an existing business can be quite a deal. The current business should have everything in place to run the business; employees, equipment, established vendors, established clientele and hopefully a good reputation. As the purchaser of an existing business there is a proven track record. Additionally the business should be generating revenue. In most cases, the current owner is willing to mentor the new owner because he or she wants to see the business they developed continue to succeed.

In addition to this, the current owner has determined what works and what does not and will advise you on how to excel. If the business you are seeking to buy is being sold because of financial struggles, you can talk with the current owner to find out why, it may be something as simple as the owner is not able to commit the time necessary to grow the business. Financing is also easier to secure on an already established business, since the financial institution can look at the business’ record to determine its financial stability.

Likewise, there are also possible pitfalls to buying an existing business. One of the biggest downsides to consider is the risk of suffering from deception; it is not in the best interest of the seller to tell the buyer if something is going wrong. You are paying a price based on the value of the entire package, as shown on their financial statements. Unscrupulous individual could hide information that could work against them. In addition to having a trained staff in place, this can also work against you. Negative attitudes and employee dissatisfaction can decrease productivity and revenue.

Pros of Buying a Business

• The business is already up and running and has surpassed the start-up phase.
• The business already has existing customers.
• The business should have established a good relationship with reliable suppliers and you can immediately take advantage of the existing credit line.
• Historical data exist-the cash flows, performance data and other records of the business are in place.
• The previous owners will very likely give you the trade secrets and offer initial help and support.
• It is less risky and offers a greater chance of success than starting the same business from scratch.

Cons of Buying a Business

• Buying a business usually requires a larger initial investment as compared to doing a start-up or acquiring a franchise.
• The seller may choose not to mention or forget some important details about the business.
• Some degree of disruption in the company could occur especially if the previous owner held a critical role and influence in the administration and operation of the business.
• Gaining the trust of employees and existing clients. As the new owner, you would have to prove to them that you can run the business the same way or even better than the previous owner.

Ways to Buy a Business
There are two ways of buying a business. The first is to buy the shares in the company which owns the business. Stock acquisition involves either direct stock purchases from all the selling shareholders or a merger of two units. When you purchase corporate stock to buy a business, there is always an unknown potential liability. There is the possibility that the seller owed money to a creditor and did not disclose this information or maybe they never paid their income taxes. If you buy the stock of the corporation, those liabilities become your liabilities.

The second means is to buy the assets of the business. Because buying shares in a company can mean gaining that company’s debts and liabilities, buying the assets of a business is the preferred means. Acquiring the assets gives you the freedom to incorporate your own company to become the owner of the business, thereby enabling you to start fresh. As such, when possible, many business buyers prefer to purchase the assets of the business instead of purchasing the stock. This form of business sale minimizes the risks of contingent liabilities. When buying a company's assets, you can buy intangible assets, such as the name of the firm, customer lists, patents, trademarks, and contracts. Important to note, you can opt to not buy certain assets that you do not want. When purchasing the assets of a business, there is an implicit tax advantage to the buyer because they can increase their newly acquired assets.

Goodwill
The value of goodwill is directly influenced by the performance of the business. The sale of a business may involve a number of intangible assets such as trademarks, patents, copyrights, and licensing agreements, these can be assigned a value. The remaining intangibles including the business's reputation, brand names, customer lists, unique market position, knowledge of new technology, good location, and special skills or operating methods are goodwill. Although these factors that contribute to goodwill do not necessarily have an assignable value, they add to the overall value of the business.

A combination of advertising, research, and management talent may give a particular company an edge for which a buyer is willing to pay a high price. The ability to command a premium price for a business is the result of goodwill. Goodwill is an intangible value created by a business which may be converted into tangible value. A business' goodwill may be described as a combination of elements such as: market penetration, brand awareness, customer loyalty, size and quality of customer list, or longevity in the marketplace. In an established business the goodwill value is transferred since the vendors and customers have relationships with the business not necessarily the owners. During a transaction, goodwill may be converted into tangible value for the business owners when seeking investors, a purchaser, or a loan. When identifying and evaluating the goodwill of a business it is important to note that goodwill includes anything that makes that business unique or gives it a competitive advantage.

***Things to Consider before buying an existing business

• Is the business right for you?
• Does it complement your skills, knowledge, interests and personality?
• Will you be passionate about this business?
• Can you deal well with the type of customers and employees that the business has?
• Are you fully aware of the existing and potential problems of the business?
• Do you have a complete list of the current assets and liabilities of the company including outstanding debts?
• Have you done your own research and are convinced that the business is profitable and has the potential to grow?
• Have you checked the image of the business to its employees, customers, suppliers and competitors?
• Is the selling price reasonable? What is the current net worth of the business?
• Are you ready to go through the legal issues and processes of the acquisition?

Franchising

A franchise is a business model that allows the franchisee (the entrepreneur, possibly you) to start a business by utilizing another person or group’s (the franchisor’s) expertise, ideas, and processes. It is a legal and commercial relationship between the franchisor and franchisee. As a franchisee, you purchase this right through a franchise fee and in return, the franchisor maintains the business model and you agree to operate your business according to their model.The franchisor owns all the trademarks, business methods, and supplies that it allows others to use under its contract.

A person who operates a franchise business owns their business but has an agreement in place with the franchise owner, whereas a company store within a franchise chain is owned by the central corporation and all of its staff members are employed by the parent business. Hence, the difference between a franchisor's and corporation's operating a chain of stores is that the chain store has store managers who are company employees, whereas the franchise operation is owned and managed by self-employed business people.One might prefer to become a franchisee because it offers the lowest risks and the highest level of support in the instigation of a new business. As a part of a franchise, you will have a team of dedicated professionals willing and able to help you every step of the way. Their assistance can range from site selection to employee hiring to grand opening. Franchising enables everyday individuals to change careers and launch a new business without years of schooling.

Benefits of being a franchisee
Research has shown that the success rate of new franchisees is much higher than that for other new business start-ups. Franchisees have an advantage over their non-franchisee competitors because they have the privileges to use the franchisor's image including brand names, trademarks, copyrights, trade secrets, patents, and uniform logos. Additionally by utilizing the franchisor's business practices and offering products that meet the company's standards, franchisees can consistently provide customers with quality produce and services. Franchisees can also take advantage of lower cost materials due to group buying power. They also learn from each other and usually form a peer support system. There is a lot of support offered to the franchisee this allows the business owner to focus on growing the business.

Provisions to the franchisee
As a franchisee you are going in business for yourself but not by yourself. As a franchisee you will have ongoing support from your franchisor and other franchisees in the system. This will be beneficial in helping with the start-up phase and through other rough patches that one may stumble upon. You are a part of a team who has an interest in your success. The service provided by the franchisor is valuable to the nascent entrepreneur because the business has been tested. Business procedures have been developed and are in place so there is no need to start from scratch. As you buy into the franchise you become a part of a team with a proven track record, established system of operating, and recognizable brand. Consumers are comfortable with a familiar, recognizable brand that they can rely on.

Franchisors provide the following to their franchisee:

• A copy of the Uniform Franchise Offering Circular (UFCO). The UFCO will disclose estimates of all initial start-up costs.
• A copy of the franchise agreement, other contracts and the franchisor's financial statements.
• Training to the franchisee, and their manager along with the operational manual and ongoing support and assistance.
• Information on franchisee's initial fees and other costs (e.g., royalties, promotional fees).

Franchisors should:

• Provide a marketing plan, promotional materials and area site selection assistance to franchisees.
• Advise franchisee of necessary insurance coverage. The franchisor knows what kind of insurance and liability protection is needed, as well as what kind of protection they need. The agreement will generally establish what amounts will be required for protection including workman's compensation, general liability, product liability, bodily injury and property damage.
• Provide a trademark or service mark that is known, or will be known through advertising in the geographic area of use.
• Provide guidelines on the purchase of inventory and equipment, requirements on restrictions on goods sold and the terms of agreement and renewal.

Franchising, A Better Way? Franchising is unquestionably one of the most popular ways of operating business in today’s time. It is a mutually beneficial arrangement between franchiser and franchise. The fact that, the franchisor has presence as an established name really helps in the success of a franchise. Franchise business is lucrative, but its success is very much dependent upon the strength of the brand and how it is being operated. There is a higher failure rate among new business ventures when compared to franchises. When evaluating a franchise to its counterpart new start up, there is no franchise support, no franchise community to ask for advice, and it’s often more difficult to get financing for a company that doesn’t already have a track record. There is no brand recognition, and higher costs for things like advertising and design; costs that are shared in a franchise system. The business formula is proven and one does not need to establish the brand name from the scratch. Everything about the venture from name, services, products and quality has already been established. Franchising works for the franchisor, for the franchisee and for the consumer.

Four Factors That Can Influence Entrepreneurship

Business success can be defined in terms of revenue, income, satisfaction, or growth however; every business owner should develop a personal definition of success and use it to measure themselves. Success cannot be measured by finances, power or fame but by how well we achieve the purposes for which we were created. There are many factors that can affect one’s ability to start and run a successful business. Entrepreneurial drive is something that comes from a collection of personal attributes; although many of these are shaped by outer influences we all have an internal drive. Therefore our life experiences, parental influences, career displacement and education greatly impacts our desire to delve into the world of entrepreneurship.

Life experience is the sum of the things that have happened to a person. Life experiences whether good or bad acts as the fuel that gives life to our passion. Therefore life experience plays a role in impacting business success. Lois Stevens was born to an impoverished family. Her parents did not have a lot of education nor did they possess lucrative jobs. Making ends meet from month to month was a struggle for this family of eight. Lois, the second child became aware of her family’s struggles at an early age and decided that this was not the life she wanted for herself. Her parents impressed upon Lois the importance of getting an education and making a better life for herself and her family. Through her life experiences Lois determined to work hard in school and keep her grades up because she realized that this would play a key role in her future. She excelled academically and was given a scholarship to further her studies she did and eventually got her doctorate in dentistry. She is currently the owner of two dental practices. Through this she was able to help all of her siblings advance above their life experiences to live a more productive life. Therefore one may ask does parental influence impact business success? Our parents are our first role models. Parental influence is one that can affect an entrepreneur in both ways. With positive influence from parents, the entrepreneur has the foundation of confidence to take risks and to optimistically believe in their potential for success in business. A more negative influence from parents can still be a positive force in small business success. Coming from a poorer background can give one the zest to create a way to implement a change to improve their life. Just like Lois, whose parents provided a motivation for her to excel.

Career displacement can mean diverse things to different people. For some people it can be the end to a means of an income. Whereas for others it can be a motivating factor to start a business. Many people have ideas and dreams but enjoy the security of a steady income hence allowing these dreams to lie dormant sometimes for years. Therefore career displacement can be a motivator to allow these ideas come to life. In fact some believe that individuals will not pursue a venture unless they are forced into it through displacement from other activities.

Education or the lack of education can influence an entrepreneur. Although there are many Fortune 500 CEOs who left high school or university and went on to become self-made billionaires, education is still important. Education enables us to learn technical skills but more importantly it gives shape to our character. Therefore education is not a predicator of success in small business because no academic level would understand the real world of business. However any entrepreneur should expand him/herself. There is an adage that says, “To be rich in material wealth and impoverished of mind makes a person poisonous to his fellows”. On the other hand a lack of education can also be a force for some entrepreneurs’ success. Business creation enables persons with less education to view entrepreneurship as a means to reach financial security.If you have a passion there is nothing that can stop you. But on the other hand if you are educated and passionate at the same time your impact for business success is even greater.

Many factors can impact success in small business; we are not limited to the ones discussed here. Everyone who wants to embark on an entrepreneurial lifestyle needs to cultivate themselves. So as I conclude I ask you, will you allow your characteristics to close you up or to bloom into the world of entrepreneurship?