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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JUNE 10, 2003 SMART ANSWERS Some Surprises in Store It sounds so easy: Open a market stall, sell the products you like, and grow rich. Sadly, as this couple is about to learn, it's never that simple
A: For any business, large or small, the key to success is planning. Before you jump into business for yourselves, be smart, take some basic classes on entrepreneurship or get some small-business counseling, and put together at least a rudimentary business plan. In it, you should project milestones and financial projections, such as a break-even analysis, that will help you evaluate the feasibility of your concept. CRUNCH THOSE NUMBERS. Your business plan will show you how many units of each product, at what price, will yield your break-even point, says Frank Stokes, a small-business adviser with Stokes Pacifique Associates in Los Angeles. "Use that information to determine your timeline for planning to cover both business and personal expenses until you break even. For instance, if your break-even is at six months, your business-plan cash flow statement must reflect your ability to sustain expenses during that horizon, or you must make plans to accommodate the shortfalls." If you don't make your break-even point when you had expected to do so, reevaluate your position. You should also establish a "drop dead" dollar amount -- a specific loss that will signal that the time has come to shut up shop for good. "Too often, people continue to lose money in a venture because they keep thinking that the big break is just a few more weeks away," says Gene Fairbrother, of MBA Consulting in Coppell, Tex. "This is like the gambler who thinks that if he just plays a few more hands of cards or a few more throws of the dice, it will make him a big winner. It just doesn't happen that way." If you're seriously undecided about whether small-business ownership is for you, you might want to evaluate your own financial situation and decide how much risk you should be taking as you get ready to retire. Are you flush with cash and relatively unconcerned about the possibility of losing your startup costs -- perhaps $10,000 to $20,000 -- if the business is unsuccessful? Or are you hoping that this business will help you build a retirement fund? If it's the latter, make no mistake: Starting a small business is a risky venture, particularly with no entrepreneurial experience. Gambling with your savings at age 60 is very different from doing so at 30, when you have decades to recover. SLOW BOAT FROM CHINA. In general, says Jonathan Goldhill, a small-business consultant based in Woodland Hills, Calif., small-business owners should anticipate that it will take about six months before they can determine if you have a winner. That period "should provide you a good idea as to how quickly inventory is turning, what people are buying, and whether there is enough foot traffic and likely buyers," Says Goldhill: "In a typical retail environment, inventory should turn four times to six times per year. This means that, on average, your items should sell out every two months to three months. If things are not going well after the third or fourth month, I would stop adding new inventory or reduce my buying and think about how to reach the desired target audience better." Also, keep in mind that if demand for your wares leaves shelves bare, you must wait two months to receive a shipment of new inventory, which may cause cash-flow problems. Stokes advises considering alternative methods -- air freight, for example -- that would shorten shipping times, or planning to receive a constant flow of products, with new consignments arriving, say, every three weeks. Before you set up shop, investigate similar retail establishments in your area. Find out the typical mortality rate for stallholders and talk to some of the people currently running them. Businesses that establish in such locations tend to turn over frequently, Fairbrother says. Ask the proprietors how long they have been in business, how long it took them to turn a profit, and how much foot traffic comes through every week. Also, talk to the landlord of the establishment you're looking at and ask some key questions: How many tenants discontinued business in the last 18 months? What types of products did they offer? Why did they go out of business? Warns Fairbrother: "You should also be talking to every other stall owner to determine what the economics have been. If the mall owner will not allow you to talk with other tenants or give information on past tenants, now is the time to throw in the towel."  Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | JUNE |
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