While you are in this important stage of planning your new business, the Waterloo Region Small Business Centre can be an invaluable resource to you. They can tell you what you need to know about business structure and registration, how to register your business name, what licenses and regulations apply to you, what taxes you’ll have to pay and of course, how they can help you to get started on your business and get on the right track. You can even schedule a free 1-hour consultation with one of their business advisors that will allow them to assess your needs and find the best methods to help you.
Now that you’ve identified an idea that offers a unique benefit, and you’ve preliminarily assessed the financial viability and marketability. Now its time for a more in-depth analysis. Proper business planning will give you insight as how to operate to your fullest potential within your general environment and your specific industry. You will need to use tools such as a PEST analysis, and Porters 5 Forces industry model to assess your environment. Business planning also includes identifying the business structure, including form of ownership.
A comprehensive understanding of your business environment will allow you to make better operational decisions that can translate into financial success. Better planning means better strategy, and better strategy means better performance.
A process of understanding the larger global environment is usually the first step followed by a review of the specific environment that the business will operate within.
A common method used to understand the larger global business environment an analysis using the PEST factors. PEST stands for Political, Economic, Social, and Technological factors, each having an important relationship to your business and how you should operate accordingly. PEST factors can help you to recognize trends and changes in the environment to help create your business model. A PEST analysis will also answer some important questions, such as:
Below are the four elements of the PEST analysis, and what to consider about each of them.
The elements that fall under the political category are:
In summary, how does the government intervene in the economy, and what are the implications.
The elements of this category are:
Each of the above points has an impact on business operations and major financial decisions. It is important to align your business plan with the current economic conditions.
The elements pertaining to the social aspect of the environment include customs, values, attitudes, and demographic characteristics. These elements influence consumer preferences, spending and buying habits, worker attitudes and behaviors, and standard business conduct (ethics, social responsibility, and stakeholder management). Social factors affect how we work, live, consume and produce. This is a very important component of the business environment to consider when matching your idea to a location.
This will have a huge effect on demand for your product or service. For example, there is a cultural difference when it comes to smoking, comparing countries such as France or Mexico with Canada. Having a thorough understanding of the market you plan to sell to is important in order to appeal to as many people as possible. Depending on your product or service, you need to consider what your buyers think about, and what they are looking for.
One of the most representative factors of a demographic is age. When you divide up the population of buyers by age, you are able to tell a lot about their wants and needs. For example, we are coming into a time where the baby boomers are aging and there is a spike in the amount of seniors. This is an opportunity to focus on the needs of seniors, rather than the population at large.
Age can also give insight as to how they will be buying the product or service. It is less likely that the seniors will be ordering products online, and more common to have them shopping closer to their homes and at certain times. All of these factors should be researched and studied based on whom you think your target market will be. In other words, produce what you can sell, don’t sell what you produce.
The elements of this category include R&D activity, automation, technology incentives and the rate of technological change. Because of advances in computer technologies, we have changed the way we design and build products. Automation and the use of robotics has made production faster, more precise, and more efficient. The technological environment is fast paced, dynamic, and constantly changing. That is why it is crucial to keep yourself informed of all new advances in technology and stay current, in order to avoid becoming obsolete.
A review of the significant factors effecting the specific business environment can include applying “PORTER’S 5 FORCES” The creator of this model, Michael E. Porter, is a graduate of Harvard business school. He is a leading authority on business strategy. Porter’s framework for industry analysis is made up of 5 different forces: suppliers, Customers, potential entrants, substitutes, and rivalry among existing firms. You can use this model to conduct research and adapt your business plan. It will allow you to project profitability, determine whether or not you should enter the industry and how you will position your company to compete in that industry. Here is a link to a visual representation of the model.
SUPPLIERS:
Where will you get your raw materials or products to sell? Are there many suppliers to obtain what you need, or are they limited? What level of bargaining power will you have to secure the items you need? It is important to document and understand the terms you must meet in order to access the supplies you require from your business.
CUSTOMERS:
You will need to find a way to position your business in the market in a way that appeals to your customers. Whether this is on a price-competitive basis, or product differentiation, you product has to offer a benefit that other products do not.
POTENTIAL ENTRANTS:
The existence of barriers to entry will discourage new firms form entering the industry. Industries that have low barriers to entry will more easily allow innovation to the existing market. High start up cost and low exit cost environments are less competitive because few new companies are able to enter, but low performing companies can easily leave.
SUBSTITUTES:
Substitutes are other products that compare to those that are offered by your firm. A good is a substitute of another if the consumer will readily switch from one product to another if they view it as providing more value. If there are many substitutes to your product in a particular industry, this will increase competition because firms must compete based on price, service, and quality.
RIVALRY AMONG EXISTING FIRMS:
If there is a high degree of rivalry among existing firms (very competitive market) you will need to maintain a competitive advantage in order to keep your customers.
This can be a deterrent for other firms to enter the market because if they can’t operate with a competitive advantage, they can’t compete in the market. You should do some research to find out if the market is concentrated with other firms, or if there is room for new firms to come into the market with innovative, competitive strategies.
FORMS OF OWNERSHIP
A major decision is forming the structure of your business and choosing the type ownership. You can choose form a few different forms; sole proprietorship, partnership, and public or Private Corporation. Each form of ownership has its own advantages and disadvantages, and it is important to choose the one that suits your needs.
SOLE PROPRIETORSHIP
Sole proprietorship means that you are the only owner of the company. Sole proprietorships (SP’s) are easy to form, requiring few legal steps to create. There are fewer regulations when it comes to reporting, and operational information can be kept private. As the sole owner, you alone have complete control over decisions, and are entitled to all profits. There are some disadvantages to an SP. Profits that you generate from the business are taxed as personal income, (although this can also be an advantage if the business incurs a loss, as losses can be used as a deduction against other personal income).
As the sole owner, you are liable for any and all debt the business incurs. If the business suffers a loss and cannot meet its liabilities, creditors can go after your personal assets (home, car, etc.). An SP can also be an operational challenge, because you have fewer resources to draw from such as managerial and financial help. This does not mean that you cannot seek advice form others or do research, this simply means that you are on your own to do so. Obtaining financial capital becomes even more difficult because the bank may view your SP as a risky loan, because you as the owner may not be experienced, may not have much to offer as collateral for the loan.
PARTNERSHIP
If you have more than yourself involved in the business you can form a partnership. Partnerships like sole proprietorships are easy to form as they require few legal steps. Also similar to an SP, partnerships are not regulated in terms of reporting, and information can be kept private. sometimes including another individual in your business is advantageous because there are more resources to share,including financial and managerial. Creditors may also be more inclined to invest in the business or issue a loan because there are two people responsible for paying back funds instead of one.
Some disadvantages to a partnership formation are similar to those of an SP. Profits are taxed as personal income (which is still an advantage if the business incurs a loss, and losses can be deducted against other personal income).
Partnerships also have unlimited liability, which means that if you cant pay your liabilities the creditors can take control of personal assets of both parties. Furthermore, if one partner cannot pay back any of the money, the other is responsible for all of the repayment.
Any time you go into business with another person it is advisable to draft a partnership agreement which sets out the procedures that will be put in place as a result of an event. Setting up a partnership agreement when forming a partnership is a good idea as the procedures should be fair to both parties as neither partner knows what side of the conflict they will be on at that point.
CORPORATIONS
The last form of ownership is a Corporation. Corporations are businesses that exist as a separate entity. You are not connected to the business, nor are your personal assets. If a corporation fails, shareholders may lose their investments, and employees may lose their jobs, but neither will automatically be liable for debts to the corporation’s creditors The owners of a corporation are those who own the shares. Some corporations are public, meaning shares are sold on a stock exchange and anyone has the opportunity to buy them. Private corporations sell shares to private owners. Forming a corporation is not as easy as forming a simple partnership or SP.
Corporations are usually registered with the province or the federal government and regulated by the laws enacted by that government. A board of directors governs corporations, since decisions can’t be made by one owner alone. The board members are traditionally appointed by shareholders to represent the best wishes of shareholders, who are not involved in day-to-day operations. The government also heavily regulates public corporations in order to protect the people who own shares in the company. Reporting regulation requires corporations to publish annual reports in order to ensure full disclosure of financial status and operations. Corporations are a separate entity and pay taxes separately from personal income tax.
ASSESSING RESOURCES
You need to assess the resources that you have to get your business started. “Bootstrapping” is a term that is often used in the entrepreneurial world which means, “doing more with less.” New ventures usually go through a lot of cash very quickly, and it is not uncommon for new venture to not make any profits for the first year or two. To learn more about how to bootstrap your finances and how to apply them to your new business, look at this article, “6 sources of bootstrap financing”.
A common misconception is that debt is always bad. Every business uses debt to some extent to finance it’s operations. Proper debt management comes with an understanding that profit does NOT equal cash. If people are buying your product/service on credit, although you have sold them the item, you have not received payment. You cannot use money form this transaction to pay off debts yet, and, if customers take too long to pay, you may not be able to make your payments on time. This is why it is important to always have enough working capital to pay your bills, in the form of cash. If your cash flow cycle is not liquid enough, meaning that the cash is not flowing from customers into your pocket quickly, consider changing the terms of the credit agreement, and implementing a penalty for late payments. As long as you keep enough cash on hand to cover your short-term payments, you can stay on top of your debt.
With debt financing, your payments are temporary and you are able to retain ownership of the business. It is also important to note that if you have some debt, (most likely a bank loan), and you find that you need more money, this likely wont deter investors from giving you capital for equity. They view this as “taking someone else’s money and making money for them”. However, an investor knows what an appropriate amount of debt is, and will make their decision to invest accordingly.
One alternative to debt financing is equity financing, with which you essentially sell away partial ownership of your business, (along with part of the profits) to receive an investment of capital. The upside to equity financing is that you are under no obligation to pay back the money that you receive. You also are not responsible for paying interest payments. The downside to equity financing is a possible loss of control. The investor that you sell equity to now has some say in business decisions and operations. Depending on how much equity they are sold, they may even take over voting control of the Company. This of course is all determined by the overall agreement established between all equity controlling partners in the company. If control is something that you are not willing to give up in return for a capital investment, then debt financing maybe the better option for you.
DEVELOPING THE OPPORTUNITY
Throughout your planning phase, you might notice that your original idea has changed quite a bit to adapt to your general environment and to ensure financial viability. This will continue to evolve as you incorporate research and information into your business plan. Now it is time to set the wheels in motion, and go about obtaining some capital to get the business going. The idea does not need to be perfect at this time, as it will continue to evolve. What you now need is a business plan.
While you are in this important stage of planning your new business, the Waterloo Region Small Business Centre can be an invaluable resource to you. They can tell you what you need to know about business structure and registration, how to register your business name, what licenses and regulations apply to you, what taxes you’ll have to pay and of course, how they can help you to get started on your business and get on the right track. You can even schedule a free 1-hour consultation with one of their business advisors that will allow them to assess your needs and find the best methods to help you.
