You’ve written a business plan explaining your product, marketplace, competitive advantage, and your marketing and financing strategies. You’ve got a friend to help design a web site. You’ve got a Paypal or Square account linked to your personal bank for processing credit cards and checks. You’ve even got a couple potential customers in mind. Ready to order letterhead? Not so quick! Here’s a checklist for a legitimate business (versus hobby):
1. Identify a mentor. Do you need someone with a different skill set than yours, who can contribute a different point of view and suggestions? Do you need someone in your industry, perhaps from a LinkedIn Group or a non-competitor out of the area? Have you developed a relationship with a banker, attorney and/or trusted accountant? Life-long learning opportunities with well-chosen mentors shore up personal flexibility, confidence and optimism. You’ll need all three.
2. Expect funds to fall short of cash flow needs and plan for future infusions of cash. Here are the usual options: 1) FFF – Friends, family and fools willing to invest in your dream; 2) SBA 7(a) loan guarantees from the Small Business Administration which may induce a bank who otherwise would not give you a loan to do so; 3) Angel Investors for start-up or second-tier financing; this equity financing may require a percentage of ownership as collateral; 4) Grants – specifically the SBIR and SBTT doled out by 11 federal agencies (think agriculture, energy, defense, health and human services, etc.). To qualify, you must be teamed up with a nonprofit or university for 30-60% of the research; 5) Personal Funds – which could mean savings or credit cards; and 6) Banks or micro-lending agencies will want personal collateral, which may mean your home equity, etc. pledged to the business first. Startup loans are very difficult to get without a solid business plan, personal investment, excellent credit and even then, a sympathetic loan officer.
3. File to establish a formal and proper business entity. You can easily find the correct place to do so in your state with an online search. Most state agencies offer an online application form and fee. The most common option chosen is the LLC (limited liability company), often the best and easiest entry for a small business owner. If unsure, after researching the options and channels in your state, contact an attorney. This is the step by which you are assigned a business Federal Employment Identification Number (EIN), which is like a corporate Social Security number — a legal requirement for a company bank account or employee hire.
4. Define success in measurable terms. If you are not taking a salary the first year (a common way to help fund a startup) know that your company isn’t “profitable” until you are able to pay yourself and any other employee a fair market wage for contributions and hours worked. How many units or billable hours must you sell to be profitable? How many new leads do you need a week or month? How much foot traffic should pass by your location to deliver the percent of customers you need (location, location, location). Train yourself to think and talk numbers. Once you know the target numbers, you’ll better understand and strategize how to hit them.
5. Handle every transaction as though it is going to be reviewed by an I.R.S. auditor. Set up a legitimate Chart of Accounts to track accounts payable (expenses) and accounts receivables (income), and use common bookkeeping programs like Quickbooks, which is universally used, affordable and user friendly. Most business colleges offer one-day workshops on Quickbooks and setting up Charts of Accounts, and they teach how to create/read a financial statement. Document significant transactions; set up a filing system and keep all receipts with invoices. Know what expenses are allowed, and what expenses would be disqualified or taxed back to you.