How to Start a Company
Content
How to start a company?
E-book By Vinayaka V Cell: 9739035334 e-mail: [email protected]
How to start a company? Introduction Here we have provided a huge guide that will give you an introduction to every aspect of starting a company. We have covered: screening business ideas, making a business plan, marketing, forming business objectives, making the right legal decisions etc. etc. If you are interested only in the legal process involved in starting up a business like a “Partnership” or “Public or Private Limited Company” or a "Sole Proprietorship", we have a separate article for the same called “How to incorporate?” Do you have what it takes to start a company? If you pick up any book on being an entrepreneur, the first chapter will be about, “Do you have what it takes to start a company?” The point all these books are trying to make is, “It is not easy to start a company! It is positively difficult to be an entrepreneur.” Most people don’t want to take the risk to start a new company because they are afraid of things like: • What if I fail? • What if it does not work?
• What if I go bankrupt? etc. etc. People, who work past these initial fears and decide to go ahead and start a company, have to be prepared to really work for it. It is difficult to start a company and most people quit on the way. There will be many things that de-motivate you when you go about starting your company. If you seriously want to start a company be ready to work very very hard for it! Next we have explained how you can pick the best possible "business idea" for your new company.... How to check if your business idea is really that good? Most people who are reading this already have a great business idea and now they want to start a company and enforce their idea. Everyone has “brilliant” business ideas. To keep business ideas in check, in all big companies there is some sort of idea screening process. Most of the time the problem with ideas is that the ideas are brilliant but not very feasible in the real world. The first way to screen your ideas is to answer the following questions. These questions are designed to give you a better understanding of your own idea. If you find that you cannot
answer these questions, you might need to research about your idea some more. • Is there a genuine need for your product/service? • Is the need substantial enough to support a profitable business? • Do competitors currently offer similar products/services? If “yes”, do your ideas offer distinctive advantages and customer benefits that competitors don’t? • Is the product/service feasible to produce? • Is the product/service legal? • Is it safe? • If the product/service is a durable good, can it be easily serviced? (Who will service it?) • Are the investment costs required to develop, produce, and market the product reasonably, within your financial realities? • Is the “pay-back period” fast enough to allow you to stay in business? • Can the product be expanded into a line of similar or compatible items later, if the original product was successful? • Can you protect the product with a patent or copyright?
• Does the product infringe upon anyone else’s patents or copyrights? • Are all the needed raw materials and supplies readily available? In many cases, once you answer these questions you realize that your idea is not that great. You might have to brainstorm and come up with another idea. But, sometimes, what happens is that people are so convinced about their idea they disregard all the information that clearly points out that their idea is not profitable. This always results in failure. What ever you do, make sure you do not fall for this mistake!
If your idea has passed the initial questionnaire you should screen your idea further. To further screen your idea, do the following: Conduct “Experience Surveys” What we mean by “Experience Surveys” is that you will have to find and then ask professionals about your idea. Query the following people to get a better idea about your idea: Engineers: Ask them whether the product/service can be designed and built in a feasible way? What will go into the designing and building of the product?
Suppliers: Ask the suppliers whether the raw materials or whatever may be required to make the product/service available at a reasonable rate? Middlemen: Ask the middlemen whether there is a market for your product/service? Would the middlemen be interested in carrying your product/service? Government officials/lawyers: Ask them whether there is any licensing, safety or environmental requirements of which you should be aware. Will warning labels or disclaimers be required? However “original” you think your idea is, there is a good possibility that someone out there has already done it. Make sure to use the Internet to look up your competitors product. Learn as much as you can about your competitors product. Read up all the news items about your competitors and their product. Read up about their pricing, profits, distribution, marketing etc. At the end of all this, you will have a pretty good idea about your product/service. You your self will know whether it is a profitable idea or not. Be sure to let the idea go if it not a profitable one. As I said earlier, many people can’t let go of their idea even though they
“know” it will not work. This always leads to failure. Do not do this. If you realize that your idea is not that great let it go. Brainstorm and find a new idea. But for now, let us assume that you have found a good idea! The next step is to make a business plan..... How to make a “perfect” business plan? & Why make one? Once you have your “brilliant” business idea, the next step is to form a business plan.
What is a business plan? A business plan is basically a carefully prepared document that gives all the possible information about what is going to happen in the company that you want to start. It gathers all the information required to take decisions about the business.
Why make a business plan? The process of planning makes you think. This makes you understand what decisions and steps need to be taken.
A comprehensive business plan gives you a better understanding of the details than would be possible if the business were just run on a day to day basis. A well-written business plan will be very effective if you try to communicate with partners, employees, investors or venture capitalists ideas about your business. A well thought out business plan will convince investors that you are serious. This greatly increases your credibility. A written document is a reference to how much a business has achieved and how much it plans to achieve in the future. In conclusion: I you are a serious entrepreneur, you have to have a business plan. If you don’t, your business will not be going in any direction in particular. You shall waste a lot of time making haphazard decisions instead of progressing.
Steps in the planning process: The following steps are followed in the process of making a business plan:
1. 4. 5. 6.
Understanding Forming Forming
your the
business right Strategies
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Situation business And
Analysis objectives Tactics Document
2. What do “you” want? – Forming Personal Objectives
Written
7. Review & Control and back to Step 1 This guide takes you step by step through the entire process of forming your business plan.
Step 1: Understanding your business (Situation Analysis) Introduction Situation 1. 2. analysis where is and basically ‘customer you could done set to up analyze to your your: product’ business
‘Customer’ Location
relation
3. Competition Situation analysis gives you a much better understanding about these three things. It is used to understand what kind of environment your company will be in, what are the factors that may affect its possibility to succeed, and what might make your business fail. Customer & his/her relation to the product
To understand your consumer and his/her relation to your product/service, answer the following: • Who is the likely consumer? • Where does he/she live? • What is his/her age? • What is his/her income? • What is his/her level of education? • How many potential customers are there? • Are customers likely to perceive a purchase risk? • What needs does the product/service satisfy? • How is the product going to be used? • What are the other uses of the product? • How many units is the customer likely to buy? • If it is a service, will the customer have to be present when the service is provided? • Where would the customer learn about the product/service (e.g. friends, newspaper)? • Who actually would buy the product (e.g. Mom, Purchasing agent)? • Who influences the buying decision? (e.g. kids, engineers etc.) • How much would the customer be willing to pay for the product?
• How much would price change affect your customer? Not all these questions pertain to every type of business. If they do pertain to your business, find out the answers. After finding the answers you will have a very good understanding of your customers and your product/service.
Location where you set up your business: If you want to start a food stall or a restaurant or plan to go into the retail business, it is very important that you choose a good location for your business. It is also important to choose a good location when you are about to start a production or manufacturing house. To evaluate the location that you have chosen, answer the following questions: What is the total cost of renting or acquiring the property? What is the estimated cost of any necessary repairs, remodeling etc.? Does the site provide as much space as you need?
If customers visit your place of business-Is adequate, convenient and safe parking available? -Is public transportation available? Is the location likely to develop "drop in" or "impulse" consumer traffic? Is the site located at a popular area (E.g. Near a movie theater or a shopping complex)? If not, you will have to spend a lot of money marketing your product/service and it will eat into your profits! What other types of businesses are located around your site? Are they going to compete with your business? Is fire protection close by? Are basic utilities available (E.g. water, electricity, sewer, gas etc.) at a reasonable cost? Are you going to be transporting products from one part of India to the other? If so, are the expressways located close to your location? What is the history of the site? What types of businesses were previously run at the site? Why are these businesses no longer there? After seeking answers to these question you will be able to get a good judgment of how good the location you have selected is.
In some businesses some questions are more important than other questions. For E.g. If you are in the manufacturing business, you will not have too many customers coming to your site. So you do not have to bother about customer parking. If you are in the retail business, customer paring is an important factor. If you are an entrepreneur you will generally find it most convenient to start of your business right at home. This removes a lot of overhead costs of rent, electricity bill etc. Only if your business is so large that accommodating it at home will be difficult, think about choosing another location. In some cases, it is required that you set up at some other location, (E.g. when you are starting a restaurant) in that case, you have no choice but to choose the location wisely. Let the location questionnaire above guide you in your decision.
Competition The following is the list of questions that will help you analyze your competition. Answer these questions and you shall know much more about your competitors and how they are going to affect your business.
(Make sure that you do not define your competition too narrowly. For E.g. when you are staring a movie theater, your competition is not only other movie theaters, but also VCD rent places etc.)
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Who are your potential competitors? What are their strengths and what are their weaknesses? Who are the customers of each competitor? Why might a customer buy from them instead of you? What is the approximate sales volume of each competitor? Are there significant trends in sales? What is market share of each competitor? What is the pricing structure of each competitor? Do your competitors enjoy the support of a strong franchise or parent company? How is each competitor positioned? This means what is the mental image that comes in your consumers mind when he/she thinks about your competitor?
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How do your competitors promote their products and services? What are the distribution arrangements of the competitors? Who are the suppliers of each competitor?
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Are there any new competitors that are going to come up in the industry? What are the management strengths and weaknesses of each major competitor? Are the competitors well financed? How committed is each competitor? Will they fight hard for market share? Will the future technological developments affect your competitor? Are they better equipped to handle the change than you?
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How do the competing products rate in terms of quality, size, appearance etc.? What are the credit terms of the major competitors? How much warrantee do the competitors give for their products? Do the competitors own any exclusive distribution rights that would affect your market entry? What are their hours of operation? How saturated is the competition? Is there room for a new business?
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Before you go ahead, you must try to find out the answers to all the questions on this page. This will give you a good understanding of your own business. During the process of finding the answers
you may realize that there are certain flaws in your thinking and your business idea. Go back and correct these flaws. All this information will have to be documented into the business plan. Having information about your customers, competitors etc. tells you how you should run and set up your business so that you can cater to the needs of the market. Having all this is essential if you intend to approach a bank, financial institution or a venture capitalist with your idea.
Step 2: What do “you” want? (Identifying personal objectives!)
This is the phase where you understand why you want to take up this new project of starting a company.
What is the purpose of this exercise? Since YOU are starting a company, there must be some need that you would like to satisfy or some aim you would like to achieve though the company. We are not talking about business aims like “increasing market share” etc.
We are talking about personal needs and aims. Like the need for money, or the need for recognition and status in society etc. This exercise will help you understand and identify what personal needs you are trying to satisfy. Having identified your personal needs, you have to see whether the company you are starting and the effort you take will be able to satisfy your personal needs. If the effort you put in setting up the company will not pay off and will not satisfy your personal needs then you rather not waste time, effort and money setting up the company. Do this exercise so that you can set your personal goals and commit to yourself what you are planning to do. Besides, the most important reason to set personal objectives, is so that you have some basis to set your business objectives. To understand your personal objectives, ask the following questions: • What is my motivation to start a business? Is it wealth, security, self-esteem or some thing else? • How much risk am I willing to take upon me? • How long and hard am I willing to work? • What is a reasonable timetable for my objectives? • When shall my personal objectives be reached?
• Will I be able to “survive” if my objectives do not get fulfilled?
Step 3: How to form business objectives? & Why? Before you form business objectives, the first thing you have to do is: “define your business”!
Defining your business A business definition basically tells you ‘what kind of business’ you are in. It is a one-line summarization of your entire business. It helps you clearly communicate what your business is about to others. A business definition is generally based upon 3 points: • Who? : Who is your customer? To know this look at your customer description from “Understanding your business! (Situation Analysis)” • What? : What customer needs will be satisfied by your business. Remember needs are not only physical needs. There are also other needs like the need for achievement, need for status etc.
• How? : What solution does your business offer to satisfy the needs of the customer. For e.g. if it were a business making snacks the answers to the questions would be: Who? People who want to “munch” something What? Need to quickly quench their hunger in an enjoyable way. How? By providing good tasting between meals food products. A “sample business definition” using the answers to the above questions would be: "We will manufacture good and tasty sweet snacks to enable individuals to quickly satisfy their hunger." After you have your business definition ready, the next step is to formulate your business objectives.
What are business objectives? Business objectives are specific statements that give projections about growth or development to companies. For example, a business objective could be, “We must triple the sales of our product by next year.”
Why are business objectives needed? Business objectives are important to give direction to a business. If you are running a business without any business objectives, you shall not be able to grow successfully in any direction. Having business objectives, gives you a much better understanding of where you stand, how to improve and what changes in your current method of working will be required to reach your objectives. Not having business objectives leads to an un-coordinated business that has a very low probability of being successful. When setting business objectives, one must make sure that they are:
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Quantitative: The business objectives should be expressed in terms of numbers. It should not be expressed vaguely like, “Our sales should go up!”
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Time-frame specific: Time frames should be specified in the business objectives. This helps you to understand where you stand with respect to the completion of the current objective.
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Flexible: It is very important that your business objectives are adaptable to change. If the situation in which the business is working changes, the
business objectives should change to reflect these changes.
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Understandable: The business objectives should be made in an understandable way. This helps in communicating your objectives to your investors, employees, partners etc. Without this communication of business objectives, it becomes very difficult to reach them.
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Realistic: It is important that the business objectives are realistic, or you may end up disappointing your investors and your self.
Examples of business objectives: “Sell 1000 units o product A and 500 of product B by December 31, 2007” OR “Maintain a minimum of 5% market share in the soft drinks segment in Pune City during the whole of 2006” Step 4: How to make the “right” business decisions? Once you have decided what your business objectives are, the next step would be to take appropriate steps to achieve your business objectives. These steps are your business decisions.
If you have a running company, then these business decisions are your strategies. Making the right strategies will help you reach your business objectives. However, since you are an entrepreneur, your biggest concern is “starting up” your company. You do not really have to make business strategies. You just have to start up your company. To start up your industry, you will have to make the following decisions: • Legal decisions • Personnel decisions • Production decisions • Purchasing and inventory decisions • Marketing decisions In this guide we have just given you the introduction to the various decisions involved. Each of these decisions is actually very deep. There are whole books written on marketing, inventory control, production practices etc. Here we just provide you an introduction to give you an idea about what is involved.
How to make the “right” legal decisions for your new business? A decision must be made about the legal structure of the business. That is, will it be a sole proprietorship, a partnership, or a corporation? On this page we have just given you the basic gist of each type of legal structure. To understand each type of legal structure in much more detail, you could go though “How to incorporate?” It is complete guide on the different types of legal structures and the legal procedure of starting up your company.
Sole Proprietorship: (business owned by one person) Advantages: • Ease of formation • Sole ownership of profits • Control and decision making vested in the hands of the owner • Flexibility • Freedom from government control and taxation. Disadvantages: Unlimited liability
Unstable business life if the owner should die Less available capital in other types of business structures Relative difficulty in obtaining long-term financing Relatively limited viewpoint and experience of proprietor
Partnerships: (business owned by two or more persons) Advantages:
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Ease of formation Direct rewards Growth and performance facilitated Flexibility Relative freedom from government control and special taxation
Disadvantages:
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Unlimited liability of at least one partner Unstable life of business (e.g. if one owner should die) Difficulty in obtaining large sums of capital Firm bound by the acts of one partner as agent
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Difficulty in disposing of partnership interest (e.g. if one partner wanted to buy out the other partner)
Corporations: (a legal entity distinct from those parties or individuals that own it) Advantages:
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A shareholder or partner’s liability is limited to a fixed investment amount Ownership is readily transferable Separate legal existence Ease in securing capital from many investors Ability of the corporation to draw on experience and skills of more than one individual
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Activities are limited by the charter and various laws Extensive government regulations are required Less incentive for manager if he does not share profits Expense of forming a corporation is high
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Considering the different advantages and disadvantages of the various structures, you could choose a legal structure you would like to go for. How to make the “right” production decisions for your new business? Production decisions involve the processes by which raw materials are converted into the finished products through manufacturing. These decisions play a very important role in the product quality, cash flow, control etc. To help make your production decisions you can consider the following: Will goods be manufactured or purchased? One may tend to think that complete ‘in house manufacturing’ of a product will reduce your costs. This may not be true in the case of most entrepreneurs. The technical experience, quality and dependability that other manufacturers have may be far greater than yours if you are just starting up your business. Also the manufacturing process will have fixed costs as well as initial costs that shall eat into profits. Instead of manufacturing the products you could consider first purchasing from suppliers and later think about going into production yourself. You could also consider purchasing major component parts from others and doing only the final assembly.
How many items would you like to produce? This decision will impact your decision of how much physical space is required and how many people you need to hire. What raw materials, equipment and supplies will be needed for manufacturing? Are these readily available? Can these be leased or purchased? What operations are required in the production process? What is the sequence of operations and how much time will be requited for each operation to be performed? Could the operations be combined or sub-contacted? This consideration will help you plan and layout, the space needed, the number of employees, the skills needed etc. How much space will be needed? In addition to the basic production operation, space for storage of raw materials, supplies, tools, component parts, finished goods, restrooms, employee/visitor parking, employee lunch areas, an office and possible future expansion should be considered. What level of quality is desired? How will the quality be measured? How will consistent quality be maintained? Who will be responsible for delivering quality? Quality control is an important factor if you are an entrepreneur. If you are an entrepreneur and plan to sell your products at a lower price and less quality, then this shall work against you.
Unhappy customers may return defective merchandise for expensive repair or replacement. They will tell their friends and family not to buy your products. They may even complain to your retailer who may stop ordering from you in the future. Therefore your quality control planning should be strong.
How to make the “right” employee hiring decisions for your new business? When you start a new business, and you need to hire employees, you should investigate the following questions to guide your personnel decisions: • What types of employees are needed? • How many employees are needed? • How should potential employees be recruited and screened? • How should the employees be trained? • How should employees be compensated and motivated? To determine the number and type of employees needed, conduct a job analysis. That is, think through the requirements of each
employee’s job. Some jobs may be grouped together so that employees performing those tasks may not be as highly skilled or highly paid as employees who perform other tasks. Organizing jobs in this fashion could reduce the business payroll costs, and increase work efficiency. Considering all the possible factors you should decide upon: How many employees are needed? The details of what tasks each of the employees shall perform? Depending on the tasks, what specifications will be required for each of the positions to be filled?
How to make the “right” inventory & purchasing decisions for your new business? An effective purchasing and inventory system is mandatory. If purchasing is made haphazardly and the inventory is not managed properly, the business could face major losses. While making these decisions, consider the hidden costs of keeping too much inventory on hand. These costs will include: • Financing costs: The interest expense associated with the purchases.
• Opportunity costs: Alternative income producing use of money tied up in inventory • Insurance costs: Insurance costs will increase if more inventory is carried • Storage costs: This cost is applicable if the space to store the inventory is leased or purchased. • Obsolesce cost: The loss of sales that occur when new and improved models are introduced and consumers no longer want the “old” items in your inventory. • Shrinkage costs: Loss due to breakage, damage, spoilage or theft of your inventory. For the above reasons, having a huge inventory can be very costly. Having a small inventory on the other hand results in frequent buying. This also turns out very costly. Therefore, there should be some optimum number of units one should purchase per order. To find out what this optimum number of units is, use the following formula:
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EOQ : is the “economical order quantity” or the optimum quantity to purchase per order S : is the estimated annual sales V : is the variable costs to place an order I : is the inventory holding costs as a percentage of average inventory C : is the cost of one item Using this formula, you can find the quantity of units one should purchase every time the inventory is to be replaced.
How to make the “right” advertising & marketing decisions for your new business? What is marketing? Simply put, marketing is getting customers to purchase your product or service. Do not confuse marketing with advertising. Marketing is everything you do to get your customer to buy your product. One aspect of marketing is to let the customer know about your product and what are the different schemes and features you offer. This aspect where you share information about your product with your customer. This is advertising.
On the other hand marketing is everything you have to do like, setting your product price, giving your product the right packaging etc. This page just gives you a brief introduction to marketing. To understand the process of marketing in much more detail, go to our “How to market?” article. The marketing decisions that you will have to take while starting a new business are about the following: • Selection of target markets • Product • Pricing • Promotion
Selection of target markets: A common mistake entrepreneurs make is, they try to ‘be all things to all people’. To run a successful business and successful marketing campaign, it is important to concentrate marketing on one specified group of your customers. This specified group of customers forms your target market. Select target market on the basis of your ability to serve them relative to
your competition. Also make sure that the target market you select is substantial enough to be profitable.
Product: When you market your product, do not only market your bare product. Along with your product, market your products quality, style, colors, options, installation, warranty etc. Even though you may have a great product, it is important that your product is packaged properly. By proper packaging we do not only mean its appearance. We also mean every thing that comes with your product (like the style, colors, options, installation, warranty etc.)
Pricing: The pricing decision is not only the decision about what the price of the product is going to be. It covers many other things. Consider the following to help you make pricing decisions about your product: Cost: In the long term your pricing must cover your costs of doing business. Competition: What is your competition offering and how much are they charging? Systems price: What is the total price your customer has to pay to purchase your product? For
example: Postal charges, phone charges, parking, transportation etc. Is there a way to minimize these costs for the customer? Market demand: How price sensitive are potential customers? What are their perceptions of a fair price? Non-monetary price: How much time, inconvenience or anxiety must customers pay in order to acquire and use your products? Objectives: For example: Lower price may draw more customers giving you a large market share while a higher price might reflect that yours is a high quality product with prestige.
Promotion & Advertising: However good your product is, people need to know it exists if they are to purchase it. You will need to promote and tell people about the product you are selling. There are many ways to promote your product. Here are certain things you could do to promote your product:
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Advertising: Through radio, television, magazines, direct mail, billboards etc.
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Personal selling: Going door-to-door and making sales presentations about your products. Sales promotion: Offering free gifts, coupons, scratch cards etc. Publicity: News stories, success stories, newspaper articles about new products or budding entrepreneurs etc.
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New age marketing! Everything we have explained in this article is just the basics of marketing. There is lot more to learn. New developments are constantly being made in the field of marketing. Now-a-days, because of marketing that is present everywhere, people have become immune to marketing. They are not motivated by advertisements any more. To overcome this, a new breed of marketing is being developed. It is in it's early stages yet, but it is growing. It is called "viral" or "buzz" or "word-of-mouth" marketing. The idea is that, people do not believe advertisements anymore. They do not trust advertisements anymore. So, if you want to advertise, you will have to do it though other people. People will trust what their friends have to say even though they will not trust advertisements.
To understand this new kind of marketing, we reccommend that you read the book "Tipping Point". You can get it from ebay.in If you are new to ebay, do not worry, you can just sign up from here free and buy whatever you are interested in right now! It's quite easy! Once you are signed up, search for "Tipping Point". You could then choose one of the results and buy the book! We recommend that you buy the book from Ebay.in since it is quite safe & secure and you will get a good deal there. If you are not comfortable with Credit Card payments, there are always other options like DD, money order etc. that you can go in for. Step 5- How to estimate the capital required for your new business?
If you have read though and followed the instructions in the previous pages, you will have a good idea about how much idea you are going to need to set up and run your business initially. When you decide how much money you are going to need, consider the following suggestions:
Avoid padding your estimates: You may ask for some money for some contingency expenses. However, do not penalize yourself by being too conservative. Do not make the mistake of raising just enough funds to open the business without sufficient funds to operate the business: Remember, money is required to run the business and it may be months or years before the business becomes profitable. Determine the funds needed at each stage of life of your business: For example, if you plan to initially purchase resale items from other manufacturers and not engage in manufacturing until the third year of operation, the initial funds needed won’t require production facilities. Most investors (especially banks) will be more receptive to investing in stages as your business develops and proves itself rather than in a one-shot gamble.
Step 6 - How to “draft” the perfect business plan? After gathering all the information in the previous steps you need to put it all down in the form of a clearly understandable business plan.
It is always good to write two business plans, a detailed one for your self and a less detailed one for any one else who wishes to review your business plan and does not need to know all the minor details about how the business shall be run. I. Summary A. Business Description 1. Name 2. Location 3. Product(s) 4. Market and competition 5. Management experience B. Business definition goals and objectives C. Summary of financial needs and application of funds II. Market Analysis A. Description of total market B. Industry trends C. Target Market D. Competition III. Products or Services A. Description of product line B. Proprietary position: patents, copyrights and legal issues. C. Comparison to competitors products, operations etc.
IV. Manufacturing Processes (If Applicable) A. Materials B. Source of supply C. Production methods V. Marketing strategy A. Overall strategy B. Pricing policy C. Method of selling, distributing, and servicing products VI. Management Plan A. Form of business organization B. Board of directors composition C. Officers: organization chart and responsibilities D. Resumes of key personal E. Staffing plan/number of employees F. Operating plan for the next one or two years VII. Other Pertinent Information, Plans Once your business plan is ready, you will want to go though it step by step and revise it. Once this is done, you may submit the business plan to investors to obtain the capital that is required for setting up the business.
During the startup process, you will have to review and revise the plan again and again. Once your business is setup, your business objectives and other such specific details will change from time to time. Change the business plan to accommodate for these changes. How to raise the capital required to start your business? When you approach people or an organization for money, you will have a much better chance of getting your capital if you have a wellwritten business plan. This conveys to the other party that you are serious and committed to your proposal. Be prepared to face rejection and be prepared to try again and again till you do secure your capital. If the county is in a bad financial state when you are trying to start a company, it shall be much harder to secure the capital required. But currently, India is booming!! When approaching banks, be prepared to face the following questions: • How will the money be used? • How will the money be repaid? • What sort of collateral will back the loan? • Are you trustworthy?
• Do you have experience and background necessary for your type of business? • Do your management staff and key employees have required experience and background? • What are the long-term prospects of your business?
Venture Capitalists When approaching venture capitalists with your business plan keep the following in mind: A typical venture capitalist (VC) will receive thirty or more business proposals a day, only 10 percent of which he will read. Of those read, only a few will be investigated further, and even fewer will be funded. Therefore…. Make sure your business plan is professional looking, clearly and concisely written. Some VC’s believe that the initial proposal should not exceed more than 12 pages in length. In general 40 pages should be the absolute maximum. The facing page should outline the elements of a venture proposal. Stress your capabilities and those of the management team. VC’s often base their decisions on the fact that they are investing in you instead of your business.
Knowing the VC before he/she receives the proposal is a definite must! Try to get an introduction through a lawyer, accountant or other contact. Have a stock liquidation plan prepared so the VC will know how to exit from your business. Most VC’s want to invest in ventures with high growth potential (say, 30 percent annually) and then be able to “get out” before the business matures. Please Note: This guide just gives you the basics of starting a company. There is much more to learn! This guide was designed as an introduction and let you know about all the aspects that are involved. Here is a good site to learn more about the aspects of business management The Free Management Library Each of the pages like, marketing, inventory, setting business objectives etc. are all a science of their own. There are in-depth books written on all of these subjects. We hope that though this guide we have been successful in giving you at least a brief introduction to what goes into starting up and running a company. Best of Luck! We hope you are successful! India needs entrepreneurs like you to start companies & create employment & generate money! Jai Hind!
E-book By Vinayaka V Cell: 9739035334 e-mail: [email protected]
How to start a company? Introduction Here we have provided a huge guide that will give you an introduction to every aspect of starting a company. We have covered: screening business ideas, making a business plan, marketing, forming business objectives, making the right legal decisions etc. etc. If you are interested only in the legal process involved in starting up a business like a “Partnership” or “Public or Private Limited Company” or a "Sole Proprietorship", we have a separate article for the same called “How to incorporate?” Do you have what it takes to start a company? If you pick up any book on being an entrepreneur, the first chapter will be about, “Do you have what it takes to start a company?” The point all these books are trying to make is, “It is not easy to start a company! It is positively difficult to be an entrepreneur.” Most people don’t want to take the risk to start a new company because they are afraid of things like: • What if I fail? • What if it does not work?
• What if I go bankrupt? etc. etc. People, who work past these initial fears and decide to go ahead and start a company, have to be prepared to really work for it. It is difficult to start a company and most people quit on the way. There will be many things that de-motivate you when you go about starting your company. If you seriously want to start a company be ready to work very very hard for it! Next we have explained how you can pick the best possible "business idea" for your new company.... How to check if your business idea is really that good? Most people who are reading this already have a great business idea and now they want to start a company and enforce their idea. Everyone has “brilliant” business ideas. To keep business ideas in check, in all big companies there is some sort of idea screening process. Most of the time the problem with ideas is that the ideas are brilliant but not very feasible in the real world. The first way to screen your ideas is to answer the following questions. These questions are designed to give you a better understanding of your own idea. If you find that you cannot
answer these questions, you might need to research about your idea some more. • Is there a genuine need for your product/service? • Is the need substantial enough to support a profitable business? • Do competitors currently offer similar products/services? If “yes”, do your ideas offer distinctive advantages and customer benefits that competitors don’t? • Is the product/service feasible to produce? • Is the product/service legal? • Is it safe? • If the product/service is a durable good, can it be easily serviced? (Who will service it?) • Are the investment costs required to develop, produce, and market the product reasonably, within your financial realities? • Is the “pay-back period” fast enough to allow you to stay in business? • Can the product be expanded into a line of similar or compatible items later, if the original product was successful? • Can you protect the product with a patent or copyright?
• Does the product infringe upon anyone else’s patents or copyrights? • Are all the needed raw materials and supplies readily available? In many cases, once you answer these questions you realize that your idea is not that great. You might have to brainstorm and come up with another idea. But, sometimes, what happens is that people are so convinced about their idea they disregard all the information that clearly points out that their idea is not profitable. This always results in failure. What ever you do, make sure you do not fall for this mistake!
If your idea has passed the initial questionnaire you should screen your idea further. To further screen your idea, do the following: Conduct “Experience Surveys” What we mean by “Experience Surveys” is that you will have to find and then ask professionals about your idea. Query the following people to get a better idea about your idea: Engineers: Ask them whether the product/service can be designed and built in a feasible way? What will go into the designing and building of the product?
Suppliers: Ask the suppliers whether the raw materials or whatever may be required to make the product/service available at a reasonable rate? Middlemen: Ask the middlemen whether there is a market for your product/service? Would the middlemen be interested in carrying your product/service? Government officials/lawyers: Ask them whether there is any licensing, safety or environmental requirements of which you should be aware. Will warning labels or disclaimers be required? However “original” you think your idea is, there is a good possibility that someone out there has already done it. Make sure to use the Internet to look up your competitors product. Learn as much as you can about your competitors product. Read up all the news items about your competitors and their product. Read up about their pricing, profits, distribution, marketing etc. At the end of all this, you will have a pretty good idea about your product/service. You your self will know whether it is a profitable idea or not. Be sure to let the idea go if it not a profitable one. As I said earlier, many people can’t let go of their idea even though they
“know” it will not work. This always leads to failure. Do not do this. If you realize that your idea is not that great let it go. Brainstorm and find a new idea. But for now, let us assume that you have found a good idea! The next step is to make a business plan..... How to make a “perfect” business plan? & Why make one? Once you have your “brilliant” business idea, the next step is to form a business plan.
What is a business plan? A business plan is basically a carefully prepared document that gives all the possible information about what is going to happen in the company that you want to start. It gathers all the information required to take decisions about the business.
Why make a business plan? The process of planning makes you think. This makes you understand what decisions and steps need to be taken.
A comprehensive business plan gives you a better understanding of the details than would be possible if the business were just run on a day to day basis. A well-written business plan will be very effective if you try to communicate with partners, employees, investors or venture capitalists ideas about your business. A well thought out business plan will convince investors that you are serious. This greatly increases your credibility. A written document is a reference to how much a business has achieved and how much it plans to achieve in the future. In conclusion: I you are a serious entrepreneur, you have to have a business plan. If you don’t, your business will not be going in any direction in particular. You shall waste a lot of time making haphazard decisions instead of progressing.
Steps in the planning process: The following steps are followed in the process of making a business plan:
1. 4. 5. 6.
Understanding Forming Forming
your the
business right Strategies
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Situation business And
Analysis objectives Tactics Document
2. What do “you” want? – Forming Personal Objectives
Written
7. Review & Control and back to Step 1 This guide takes you step by step through the entire process of forming your business plan.
Step 1: Understanding your business (Situation Analysis) Introduction Situation 1. 2. analysis where is and basically ‘customer you could done set to up analyze to your your: product’ business
‘Customer’ Location
relation
3. Competition Situation analysis gives you a much better understanding about these three things. It is used to understand what kind of environment your company will be in, what are the factors that may affect its possibility to succeed, and what might make your business fail. Customer & his/her relation to the product
To understand your consumer and his/her relation to your product/service, answer the following: • Who is the likely consumer? • Where does he/she live? • What is his/her age? • What is his/her income? • What is his/her level of education? • How many potential customers are there? • Are customers likely to perceive a purchase risk? • What needs does the product/service satisfy? • How is the product going to be used? • What are the other uses of the product? • How many units is the customer likely to buy? • If it is a service, will the customer have to be present when the service is provided? • Where would the customer learn about the product/service (e.g. friends, newspaper)? • Who actually would buy the product (e.g. Mom, Purchasing agent)? • Who influences the buying decision? (e.g. kids, engineers etc.) • How much would the customer be willing to pay for the product?
• How much would price change affect your customer? Not all these questions pertain to every type of business. If they do pertain to your business, find out the answers. After finding the answers you will have a very good understanding of your customers and your product/service.
Location where you set up your business: If you want to start a food stall or a restaurant or plan to go into the retail business, it is very important that you choose a good location for your business. It is also important to choose a good location when you are about to start a production or manufacturing house. To evaluate the location that you have chosen, answer the following questions: What is the total cost of renting or acquiring the property? What is the estimated cost of any necessary repairs, remodeling etc.? Does the site provide as much space as you need?
If customers visit your place of business-Is adequate, convenient and safe parking available? -Is public transportation available? Is the location likely to develop "drop in" or "impulse" consumer traffic? Is the site located at a popular area (E.g. Near a movie theater or a shopping complex)? If not, you will have to spend a lot of money marketing your product/service and it will eat into your profits! What other types of businesses are located around your site? Are they going to compete with your business? Is fire protection close by? Are basic utilities available (E.g. water, electricity, sewer, gas etc.) at a reasonable cost? Are you going to be transporting products from one part of India to the other? If so, are the expressways located close to your location? What is the history of the site? What types of businesses were previously run at the site? Why are these businesses no longer there? After seeking answers to these question you will be able to get a good judgment of how good the location you have selected is.
In some businesses some questions are more important than other questions. For E.g. If you are in the manufacturing business, you will not have too many customers coming to your site. So you do not have to bother about customer parking. If you are in the retail business, customer paring is an important factor. If you are an entrepreneur you will generally find it most convenient to start of your business right at home. This removes a lot of overhead costs of rent, electricity bill etc. Only if your business is so large that accommodating it at home will be difficult, think about choosing another location. In some cases, it is required that you set up at some other location, (E.g. when you are starting a restaurant) in that case, you have no choice but to choose the location wisely. Let the location questionnaire above guide you in your decision.
Competition The following is the list of questions that will help you analyze your competition. Answer these questions and you shall know much more about your competitors and how they are going to affect your business.
(Make sure that you do not define your competition too narrowly. For E.g. when you are staring a movie theater, your competition is not only other movie theaters, but also VCD rent places etc.)
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Who are your potential competitors? What are their strengths and what are their weaknesses? Who are the customers of each competitor? Why might a customer buy from them instead of you? What is the approximate sales volume of each competitor? Are there significant trends in sales? What is market share of each competitor? What is the pricing structure of each competitor? Do your competitors enjoy the support of a strong franchise or parent company? How is each competitor positioned? This means what is the mental image that comes in your consumers mind when he/she thinks about your competitor?
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How do your competitors promote their products and services? What are the distribution arrangements of the competitors? Who are the suppliers of each competitor?
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Are there any new competitors that are going to come up in the industry? What are the management strengths and weaknesses of each major competitor? Are the competitors well financed? How committed is each competitor? Will they fight hard for market share? Will the future technological developments affect your competitor? Are they better equipped to handle the change than you?
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How do the competing products rate in terms of quality, size, appearance etc.? What are the credit terms of the major competitors? How much warrantee do the competitors give for their products? Do the competitors own any exclusive distribution rights that would affect your market entry? What are their hours of operation? How saturated is the competition? Is there room for a new business?
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Before you go ahead, you must try to find out the answers to all the questions on this page. This will give you a good understanding of your own business. During the process of finding the answers
you may realize that there are certain flaws in your thinking and your business idea. Go back and correct these flaws. All this information will have to be documented into the business plan. Having information about your customers, competitors etc. tells you how you should run and set up your business so that you can cater to the needs of the market. Having all this is essential if you intend to approach a bank, financial institution or a venture capitalist with your idea.
Step 2: What do “you” want? (Identifying personal objectives!)
This is the phase where you understand why you want to take up this new project of starting a company.
What is the purpose of this exercise? Since YOU are starting a company, there must be some need that you would like to satisfy or some aim you would like to achieve though the company. We are not talking about business aims like “increasing market share” etc.
We are talking about personal needs and aims. Like the need for money, or the need for recognition and status in society etc. This exercise will help you understand and identify what personal needs you are trying to satisfy. Having identified your personal needs, you have to see whether the company you are starting and the effort you take will be able to satisfy your personal needs. If the effort you put in setting up the company will not pay off and will not satisfy your personal needs then you rather not waste time, effort and money setting up the company. Do this exercise so that you can set your personal goals and commit to yourself what you are planning to do. Besides, the most important reason to set personal objectives, is so that you have some basis to set your business objectives. To understand your personal objectives, ask the following questions: • What is my motivation to start a business? Is it wealth, security, self-esteem or some thing else? • How much risk am I willing to take upon me? • How long and hard am I willing to work? • What is a reasonable timetable for my objectives? • When shall my personal objectives be reached?
• Will I be able to “survive” if my objectives do not get fulfilled?
Step 3: How to form business objectives? & Why? Before you form business objectives, the first thing you have to do is: “define your business”!
Defining your business A business definition basically tells you ‘what kind of business’ you are in. It is a one-line summarization of your entire business. It helps you clearly communicate what your business is about to others. A business definition is generally based upon 3 points: • Who? : Who is your customer? To know this look at your customer description from “Understanding your business! (Situation Analysis)” • What? : What customer needs will be satisfied by your business. Remember needs are not only physical needs. There are also other needs like the need for achievement, need for status etc.
• How? : What solution does your business offer to satisfy the needs of the customer. For e.g. if it were a business making snacks the answers to the questions would be: Who? People who want to “munch” something What? Need to quickly quench their hunger in an enjoyable way. How? By providing good tasting between meals food products. A “sample business definition” using the answers to the above questions would be: "We will manufacture good and tasty sweet snacks to enable individuals to quickly satisfy their hunger." After you have your business definition ready, the next step is to formulate your business objectives.
What are business objectives? Business objectives are specific statements that give projections about growth or development to companies. For example, a business objective could be, “We must triple the sales of our product by next year.”
Why are business objectives needed? Business objectives are important to give direction to a business. If you are running a business without any business objectives, you shall not be able to grow successfully in any direction. Having business objectives, gives you a much better understanding of where you stand, how to improve and what changes in your current method of working will be required to reach your objectives. Not having business objectives leads to an un-coordinated business that has a very low probability of being successful. When setting business objectives, one must make sure that they are:
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Quantitative: The business objectives should be expressed in terms of numbers. It should not be expressed vaguely like, “Our sales should go up!”
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Time-frame specific: Time frames should be specified in the business objectives. This helps you to understand where you stand with respect to the completion of the current objective.
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Flexible: It is very important that your business objectives are adaptable to change. If the situation in which the business is working changes, the
business objectives should change to reflect these changes.
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Understandable: The business objectives should be made in an understandable way. This helps in communicating your objectives to your investors, employees, partners etc. Without this communication of business objectives, it becomes very difficult to reach them.
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Realistic: It is important that the business objectives are realistic, or you may end up disappointing your investors and your self.
Examples of business objectives: “Sell 1000 units o product A and 500 of product B by December 31, 2007” OR “Maintain a minimum of 5% market share in the soft drinks segment in Pune City during the whole of 2006” Step 4: How to make the “right” business decisions? Once you have decided what your business objectives are, the next step would be to take appropriate steps to achieve your business objectives. These steps are your business decisions.
If you have a running company, then these business decisions are your strategies. Making the right strategies will help you reach your business objectives. However, since you are an entrepreneur, your biggest concern is “starting up” your company. You do not really have to make business strategies. You just have to start up your company. To start up your industry, you will have to make the following decisions: • Legal decisions • Personnel decisions • Production decisions • Purchasing and inventory decisions • Marketing decisions In this guide we have just given you the introduction to the various decisions involved. Each of these decisions is actually very deep. There are whole books written on marketing, inventory control, production practices etc. Here we just provide you an introduction to give you an idea about what is involved.
How to make the “right” legal decisions for your new business? A decision must be made about the legal structure of the business. That is, will it be a sole proprietorship, a partnership, or a corporation? On this page we have just given you the basic gist of each type of legal structure. To understand each type of legal structure in much more detail, you could go though “How to incorporate?” It is complete guide on the different types of legal structures and the legal procedure of starting up your company.
Sole Proprietorship: (business owned by one person) Advantages: • Ease of formation • Sole ownership of profits • Control and decision making vested in the hands of the owner • Flexibility • Freedom from government control and taxation. Disadvantages: Unlimited liability
Unstable business life if the owner should die Less available capital in other types of business structures Relative difficulty in obtaining long-term financing Relatively limited viewpoint and experience of proprietor
Partnerships: (business owned by two or more persons) Advantages:
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Ease of formation Direct rewards Growth and performance facilitated Flexibility Relative freedom from government control and special taxation
Disadvantages:
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Unlimited liability of at least one partner Unstable life of business (e.g. if one owner should die) Difficulty in obtaining large sums of capital Firm bound by the acts of one partner as agent
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Difficulty in disposing of partnership interest (e.g. if one partner wanted to buy out the other partner)
Corporations: (a legal entity distinct from those parties or individuals that own it) Advantages:
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A shareholder or partner’s liability is limited to a fixed investment amount Ownership is readily transferable Separate legal existence Ease in securing capital from many investors Ability of the corporation to draw on experience and skills of more than one individual
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Activities are limited by the charter and various laws Extensive government regulations are required Less incentive for manager if he does not share profits Expense of forming a corporation is high
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Considering the different advantages and disadvantages of the various structures, you could choose a legal structure you would like to go for. How to make the “right” production decisions for your new business? Production decisions involve the processes by which raw materials are converted into the finished products through manufacturing. These decisions play a very important role in the product quality, cash flow, control etc. To help make your production decisions you can consider the following: Will goods be manufactured or purchased? One may tend to think that complete ‘in house manufacturing’ of a product will reduce your costs. This may not be true in the case of most entrepreneurs. The technical experience, quality and dependability that other manufacturers have may be far greater than yours if you are just starting up your business. Also the manufacturing process will have fixed costs as well as initial costs that shall eat into profits. Instead of manufacturing the products you could consider first purchasing from suppliers and later think about going into production yourself. You could also consider purchasing major component parts from others and doing only the final assembly.
How many items would you like to produce? This decision will impact your decision of how much physical space is required and how many people you need to hire. What raw materials, equipment and supplies will be needed for manufacturing? Are these readily available? Can these be leased or purchased? What operations are required in the production process? What is the sequence of operations and how much time will be requited for each operation to be performed? Could the operations be combined or sub-contacted? This consideration will help you plan and layout, the space needed, the number of employees, the skills needed etc. How much space will be needed? In addition to the basic production operation, space for storage of raw materials, supplies, tools, component parts, finished goods, restrooms, employee/visitor parking, employee lunch areas, an office and possible future expansion should be considered. What level of quality is desired? How will the quality be measured? How will consistent quality be maintained? Who will be responsible for delivering quality? Quality control is an important factor if you are an entrepreneur. If you are an entrepreneur and plan to sell your products at a lower price and less quality, then this shall work against you.
Unhappy customers may return defective merchandise for expensive repair or replacement. They will tell their friends and family not to buy your products. They may even complain to your retailer who may stop ordering from you in the future. Therefore your quality control planning should be strong.
How to make the “right” employee hiring decisions for your new business? When you start a new business, and you need to hire employees, you should investigate the following questions to guide your personnel decisions: • What types of employees are needed? • How many employees are needed? • How should potential employees be recruited and screened? • How should the employees be trained? • How should employees be compensated and motivated? To determine the number and type of employees needed, conduct a job analysis. That is, think through the requirements of each
employee’s job. Some jobs may be grouped together so that employees performing those tasks may not be as highly skilled or highly paid as employees who perform other tasks. Organizing jobs in this fashion could reduce the business payroll costs, and increase work efficiency. Considering all the possible factors you should decide upon: How many employees are needed? The details of what tasks each of the employees shall perform? Depending on the tasks, what specifications will be required for each of the positions to be filled?
How to make the “right” inventory & purchasing decisions for your new business? An effective purchasing and inventory system is mandatory. If purchasing is made haphazardly and the inventory is not managed properly, the business could face major losses. While making these decisions, consider the hidden costs of keeping too much inventory on hand. These costs will include: • Financing costs: The interest expense associated with the purchases.
• Opportunity costs: Alternative income producing use of money tied up in inventory • Insurance costs: Insurance costs will increase if more inventory is carried • Storage costs: This cost is applicable if the space to store the inventory is leased or purchased. • Obsolesce cost: The loss of sales that occur when new and improved models are introduced and consumers no longer want the “old” items in your inventory. • Shrinkage costs: Loss due to breakage, damage, spoilage or theft of your inventory. For the above reasons, having a huge inventory can be very costly. Having a small inventory on the other hand results in frequent buying. This also turns out very costly. Therefore, there should be some optimum number of units one should purchase per order. To find out what this optimum number of units is, use the following formula:
Here:
EOQ : is the “economical order quantity” or the optimum quantity to purchase per order S : is the estimated annual sales V : is the variable costs to place an order I : is the inventory holding costs as a percentage of average inventory C : is the cost of one item Using this formula, you can find the quantity of units one should purchase every time the inventory is to be replaced.
How to make the “right” advertising & marketing decisions for your new business? What is marketing? Simply put, marketing is getting customers to purchase your product or service. Do not confuse marketing with advertising. Marketing is everything you do to get your customer to buy your product. One aspect of marketing is to let the customer know about your product and what are the different schemes and features you offer. This aspect where you share information about your product with your customer. This is advertising.
On the other hand marketing is everything you have to do like, setting your product price, giving your product the right packaging etc. This page just gives you a brief introduction to marketing. To understand the process of marketing in much more detail, go to our “How to market?” article. The marketing decisions that you will have to take while starting a new business are about the following: • Selection of target markets • Product • Pricing • Promotion
Selection of target markets: A common mistake entrepreneurs make is, they try to ‘be all things to all people’. To run a successful business and successful marketing campaign, it is important to concentrate marketing on one specified group of your customers. This specified group of customers forms your target market. Select target market on the basis of your ability to serve them relative to
your competition. Also make sure that the target market you select is substantial enough to be profitable.
Product: When you market your product, do not only market your bare product. Along with your product, market your products quality, style, colors, options, installation, warranty etc. Even though you may have a great product, it is important that your product is packaged properly. By proper packaging we do not only mean its appearance. We also mean every thing that comes with your product (like the style, colors, options, installation, warranty etc.)
Pricing: The pricing decision is not only the decision about what the price of the product is going to be. It covers many other things. Consider the following to help you make pricing decisions about your product: Cost: In the long term your pricing must cover your costs of doing business. Competition: What is your competition offering and how much are they charging? Systems price: What is the total price your customer has to pay to purchase your product? For
example: Postal charges, phone charges, parking, transportation etc. Is there a way to minimize these costs for the customer? Market demand: How price sensitive are potential customers? What are their perceptions of a fair price? Non-monetary price: How much time, inconvenience or anxiety must customers pay in order to acquire and use your products? Objectives: For example: Lower price may draw more customers giving you a large market share while a higher price might reflect that yours is a high quality product with prestige.
Promotion & Advertising: However good your product is, people need to know it exists if they are to purchase it. You will need to promote and tell people about the product you are selling. There are many ways to promote your product. Here are certain things you could do to promote your product:
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Advertising: Through radio, television, magazines, direct mail, billboards etc.
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Personal selling: Going door-to-door and making sales presentations about your products. Sales promotion: Offering free gifts, coupons, scratch cards etc. Publicity: News stories, success stories, newspaper articles about new products or budding entrepreneurs etc.
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New age marketing! Everything we have explained in this article is just the basics of marketing. There is lot more to learn. New developments are constantly being made in the field of marketing. Now-a-days, because of marketing that is present everywhere, people have become immune to marketing. They are not motivated by advertisements any more. To overcome this, a new breed of marketing is being developed. It is in it's early stages yet, but it is growing. It is called "viral" or "buzz" or "word-of-mouth" marketing. The idea is that, people do not believe advertisements anymore. They do not trust advertisements anymore. So, if you want to advertise, you will have to do it though other people. People will trust what their friends have to say even though they will not trust advertisements.
To understand this new kind of marketing, we reccommend that you read the book "Tipping Point". You can get it from ebay.in If you are new to ebay, do not worry, you can just sign up from here free and buy whatever you are interested in right now! It's quite easy! Once you are signed up, search for "Tipping Point". You could then choose one of the results and buy the book! We recommend that you buy the book from Ebay.in since it is quite safe & secure and you will get a good deal there. If you are not comfortable with Credit Card payments, there are always other options like DD, money order etc. that you can go in for. Step 5- How to estimate the capital required for your new business?
If you have read though and followed the instructions in the previous pages, you will have a good idea about how much idea you are going to need to set up and run your business initially. When you decide how much money you are going to need, consider the following suggestions:
Avoid padding your estimates: You may ask for some money for some contingency expenses. However, do not penalize yourself by being too conservative. Do not make the mistake of raising just enough funds to open the business without sufficient funds to operate the business: Remember, money is required to run the business and it may be months or years before the business becomes profitable. Determine the funds needed at each stage of life of your business: For example, if you plan to initially purchase resale items from other manufacturers and not engage in manufacturing until the third year of operation, the initial funds needed won’t require production facilities. Most investors (especially banks) will be more receptive to investing in stages as your business develops and proves itself rather than in a one-shot gamble.
Step 6 - How to “draft” the perfect business plan? After gathering all the information in the previous steps you need to put it all down in the form of a clearly understandable business plan.
It is always good to write two business plans, a detailed one for your self and a less detailed one for any one else who wishes to review your business plan and does not need to know all the minor details about how the business shall be run. I. Summary A. Business Description 1. Name 2. Location 3. Product(s) 4. Market and competition 5. Management experience B. Business definition goals and objectives C. Summary of financial needs and application of funds II. Market Analysis A. Description of total market B. Industry trends C. Target Market D. Competition III. Products or Services A. Description of product line B. Proprietary position: patents, copyrights and legal issues. C. Comparison to competitors products, operations etc.
IV. Manufacturing Processes (If Applicable) A. Materials B. Source of supply C. Production methods V. Marketing strategy A. Overall strategy B. Pricing policy C. Method of selling, distributing, and servicing products VI. Management Plan A. Form of business organization B. Board of directors composition C. Officers: organization chart and responsibilities D. Resumes of key personal E. Staffing plan/number of employees F. Operating plan for the next one or two years VII. Other Pertinent Information, Plans Once your business plan is ready, you will want to go though it step by step and revise it. Once this is done, you may submit the business plan to investors to obtain the capital that is required for setting up the business.
During the startup process, you will have to review and revise the plan again and again. Once your business is setup, your business objectives and other such specific details will change from time to time. Change the business plan to accommodate for these changes. How to raise the capital required to start your business? When you approach people or an organization for money, you will have a much better chance of getting your capital if you have a wellwritten business plan. This conveys to the other party that you are serious and committed to your proposal. Be prepared to face rejection and be prepared to try again and again till you do secure your capital. If the county is in a bad financial state when you are trying to start a company, it shall be much harder to secure the capital required. But currently, India is booming!! When approaching banks, be prepared to face the following questions: • How will the money be used? • How will the money be repaid? • What sort of collateral will back the loan? • Are you trustworthy?
• Do you have experience and background necessary for your type of business? • Do your management staff and key employees have required experience and background? • What are the long-term prospects of your business?
Venture Capitalists When approaching venture capitalists with your business plan keep the following in mind: A typical venture capitalist (VC) will receive thirty or more business proposals a day, only 10 percent of which he will read. Of those read, only a few will be investigated further, and even fewer will be funded. Therefore…. Make sure your business plan is professional looking, clearly and concisely written. Some VC’s believe that the initial proposal should not exceed more than 12 pages in length. In general 40 pages should be the absolute maximum. The facing page should outline the elements of a venture proposal. Stress your capabilities and those of the management team. VC’s often base their decisions on the fact that they are investing in you instead of your business.
Knowing the VC before he/she receives the proposal is a definite must! Try to get an introduction through a lawyer, accountant or other contact. Have a stock liquidation plan prepared so the VC will know how to exit from your business. Most VC’s want to invest in ventures with high growth potential (say, 30 percent annually) and then be able to “get out” before the business matures. Please Note: This guide just gives you the basics of starting a company. There is much more to learn! This guide was designed as an introduction and let you know about all the aspects that are involved. Here is a good site to learn more about the aspects of business management The Free Management Library Each of the pages like, marketing, inventory, setting business objectives etc. are all a science of their own. There are in-depth books written on all of these subjects. We hope that though this guide we have been successful in giving you at least a brief introduction to what goes into starting up and running a company. Best of Luck! We hope you are successful! India needs entrepreneurs like you to start companies & create employment & generate money! Jai Hind!
