Starting a Business: Advice from the Trenches

If you’re like thousands of other designers, programmers and other creative professionals out there, at one point in time you’ve considered starting your own business. Unlike most, you’ve gone against common sense and decided to open shop for yourself. And not just freelance full-time, mind you, but file for the company name, get some stationery, and wade through the legal mumbo-jumbo. Maybe even get a real office with a water cooler.

This article offers real-world advice from the trenches of a small start-up, and is applicable to designers, web developers, copywriters, usability experts and all manner of service providers. Freelancers take heed: there are several items that are just as pertinent to your profession.
 
Write a Business Plan

The most important thing you can do to prepare for starting and operating your own business. Developing a business plan requires a lot of time and energy, but it’s invaluable for one primary reason — it forces you to come to terms with your business idea. You must decide how you will generate income, what your expenses will be, who your competitors are, and most important, WHAT YOUR BUSINESS DOES. This may seem obvious to you now, but write it down. Think about it. What sets your business apart? What service do you offer that is superior or unique? What’s going to put you ahead of the competition?

Beyond the mental exercises, a good business plan will give you a much better chance of getting a small business loan from a bank than walking in and saying, “I like Photoshop and maybe a can do some websites or something. Gimme money.”

A few years ago, new age business rhetoric said forget the business plan and just run with it. Obviously, that didn't work out so well, so if you go that route, God bless you. The business plan exists for a reason. There are libraries of books written on them and huge websites devoted to developing good ones. Some resources:

• SBA
• Scott Kramer’s articles on A List Apart
• Businessplans.org
• Business Plan Archive

Take a few weeks and develop a strong and thought-out plan. Give it to friends, co-workers, even family to read. Your business will be immeasurably stronger because you took the time for this step.
 
File for a Fictitious Name
A fictitious name (called a doing-business-as or DBA in some states) is the government’s term for your company name. If you choose HyperGlobalMegaSoft as the start-up’s name, it has to be registered with the state to ensure no one else is using it. This will cost about $100, but prevents you from accidentally using someone else’s registered name, or from someone else using YOUR name. Also note that two companies can usually register the same name for different industries. For instance, Luigi’s (design studio) and Luigi’s (pizza joint).

Note the fictitious name is not the same thing as a registered trademark. A trademark involves a whole separate process, more paperwork and additional fees. Unlike a fictitious name, however, a trademark is not required.
 
Funding
This is a pretty involved topic, and enough books and articles have been written about it to make for years of boring bathroom reading. Advice in a nutshell: start the business with your own savings or borrow from a bank. I highly recommend the former or a combination that includes it, since it makes you pinch your pennies a little more. If you go the bank route, make sure the business plan is polished to a high shine. This may be a good time to hire a professional business plan writer/editor.

There is one Golden Rule: Don't borrow money from family or friends. 99% of the time, you won't be able to pay them back, and on the off-chance you are, it won't be for months or years. The amount is irrelevant; $1,000 or $100,000 can quickly create bad blood.
 
Get an Accountant
In starting your business and maintaining its future financial health, there is no greater ally than an accountant. He or she (or they if you go with a firm) will be able to give advice on innumerable aspects of your new venture. They can advise on what type of business entity to start with, setting up bank accounts, a means of invoicing and collecting, and more. Most importantly, they also guide you on paying taxes properly and punctually.

Brief advice on accountants:

1. Go with an accountant or a firm in your state. Each state has different laws.
2. Make sure the accountant knows business taxes. Do not hire a family-oriented accountant.
3. Unless, you are really, really strapped for cash, hire an accountant who is not a family member. While it may be tempting to get a family discount, it is better to have an unbiased viewpoint about your finances, and also better to keep your family’s nose out of your funds in general.
4. Try to trade services! Maybe your accountant wants a new logo, website, or brochure.

Start with a Partner

If you can, start the business with a partner. This person should be another designer or programmer with a level of experience equal to or greater than your own, but with a different skill set. If you’re the God of Annual Reports, your partner can be the Overlord of Identity Design. Having two Annual Report Gods will make for some lacking identity work when the client requests it. And for the record, once again, it will be better if this person isn't family.

“But why a partner?” you ask. “I'm a darn good designer, and I'm really really gonna do this right.”

A partner will keep you on your toes. When you want to buy that $2,000 scanner, he or she should question why. If you want to design a promotional piece, it should be a group effort to get the best results. If you start to slack off, he or she will be there to remind you of business priorities. No one can do everything, and two complementary skill sets create an asset that cannot be reproduced when flying solo.
About Your New Office

When you start a business, the option of setting up an office outside your home has dramatic pros and cons that must be weighed carefully.

Good:

1. You have a place for clients to visit if they are local.
2. Reinforces good image (see below). Proper presentation goes a long way, and making your office appear as if you’ve been in business for years (you didn't tell them you were a start-up, did you?) helps build client trust.
3. You can write off all office expenses (rent, repairs, phone, etc). This will affect your bottom line drastically.
4. Gets you out of the house. Having a real place to go to work makes the business more real, and forces you to take it that more seriously.

Not-So-Good:

1. Money out the window. Renting an office costs $250-$10,000 a month, not including the initial deposit. This is a lot of money if you have a thin or inconsistent client base.
2. Requires additional expense. You will need to get a fire inspection and a certificate of occupancy, not to mention additional phone lines, Internet connection, furniture, etc.
3. Setting up an outside office for a new business is a case-by-case situation, and depends almost entirely on start-up money and cash flow. Some businesses truly require a place to host clients (ad agencies),and for others it’s not as important (web development). Weigh the advantages carefully against capital, because being locked into a lease without a means to pay is no fun.

Retain a Good Paper Trail

Make sure to keep a solid paper trail with clients, and that means a real, physical file with hardcopies of proposals, contracts, invoices, time sheets and anything else you can think of that relates to the project. This also includes all financial records, bank statements, receipts, deposit slips, etc.

Before beginning your business, establish several important things. First, design a consistent and scalable filing system for all the forms. Whether you organize by client or project is irrelevant, but make sure you can find the information when you need it. Second, make sure to have airtight contracts. I advise against writing them yourself. There are many places on the net where you can get generic forms, such as www.creativepro.com. You will also need to look for NDAs (non-disclosure agreements, for contracting work out to other freelancers), RFP (request for proposal) templates for clients to fill out, expense reports, invoices, and time sheets. Every project is different, so be prepared to make changes on these forms.

And please, when you sign a contract with a client, make sure you have a copy with BOTH signatures. Seems like an obvious thing, but you'd be surprised. Don't do any work without one, because legally, you will have a very hard time forcing a delinquent client to pay without one.

Part of maintaining a solid paper trail is having a good invoice system ready to launch at a moment’s notice. Make sure your invoices arrive in the client’s mailbox while the project is still fresh. Every invoice should clearly mark the amount to be paid and terms of payment (30 days, etc.), and clearly indicate any additional fees resulting from delinquent recompense.

If payment is late, don't be afraid to call the client. Sometimes they just misplaced the invoice. Other times they don't have the money and are trying to slink away. Sometimes, “the check is in the mail.” Regardless, the business that does not call to get paid won't get paid!

Start Small, Conserve Loot
Consider working from your house/apartment to start, especially if you have clients that will never visit you, or if you live in an expensive metropolis (NYC, LA, Chicago, San Francisco, etc). Keep your expenses down! Don't buy a new quad Xeon workstation if your current machine can cut it, or a truckload of networking equipment for two computers. Be cheap! Look for sales at OfficeMax, clip coupons, and just shop smart. You’re going to need the start-up capital down the road, so don't drain it on frivolous expenditures. (And yes, the folded die-cut business card with the metallic ink counts as a frivolous expenditure.)
Don't Undercharge, but Be Flexible

If there’s one thing to remember from this article, it should be this point. Proper pricing is the one thing that keeps the business alive, on multiple levels. When you charge appropriate amounts for the work, the client will feel like they hired the right people; when you undercharge, the client will know this and take advantage of you by demanding similar rates in the future.

If you give every client a discount just to get the job (and this will be tempting, especially in the beginning), you'll find yourself working twelve-hour days and not being able to pay the bills. Undercharging hurts the industry in general as well; undercharged clients come to expect and request absurdly low prices.

Legal Software

Make sure all the copies of your software are retail versions. Do not use “educational” or pirated software. This is very important, and should be part of the start-up budget.

Separate Personal and Business Finances

Nothing much else to say about this. It will save you innumerable headaches come tax season.

Marketing
Even the most reliable clients have dry spells, so make sure you are constantly putting your company’s name in the marketplace. Word of mouth is the best, but getting truly fresh work usually requires spending money.
 
The Importance of Image
The importance of maintaining a positive image in the eyes of your clients and potential clients cannot be overstated. Know your firm’s identity so you can project that identity to the customer.

The visual identity is critical. Get business cards, letterhead, and envelopes. Design a good logo or pay someone to do it if you’re not a design firm.

Dress the part. When meeting with a client, look like someone who’s come to do business, not some clichéd black-turtleneck half-shaven graphic designer who’s gracing them with your presence half an hour late. It sounds exaggerated, but it happens all too often.

Make the office welcoming. If you entertain clients, keep the office clean, organized and hospitable. Make good coffee. Purchase comfortable chairs. Make sure they have a place to park.

Use Outside Resources

Running a business takes long hours and a willingness to learn. However, there are many services that exist to help businesses succeed and get work. For instance:

• Your local Chamber of Commerce
• SCORE
• Attend business seminars. You can learn a lot and do some powerful networking. Many are free.
• Elance.com. A cause of dissention among many designers for the ridiculously low rates you have to work for, but a good place to find work when the rest of the world has shut its doors.
• If you still decide to start a business, there’s nothing more I can say except good luck.

You’ve got to have the “fire in your belly,” or you will fail. There are long hours, hard work, and incredibly frustrating and stressful times ahead. But the rewards — being your own boss, being able to work on a variety of projects, feeling that proverbial sense of accomplishment — these are all very real results.
 
A Special Note for Those Still in School

When I was in school, what I wanted more than anything was to start a business creating customized audio solutions for multimedia content creators. I asked my teachers — they said it was a good idea. I asked my classmates — they thought it was a good idea. Then I took a six-month internship at a “new media” company whose focus was streaming audio and met people so poor they slept in the warehouse with the equipment because they didn't have the experience to succeed in what they were doing. (Incidentally, they didn't have a business plan either.)

Before you start a business fresh out of school, wait and get some real world work experience first. I started my design company when I was 23, and the business clearly suffered because of it. Not because I was young and dumb (well, not that young and dumb anyway), but simply because I didn't have enough street smarts to REALLY succeed.

Technical knowledge and raw talent only go so far. When working at a company, you see how established businesses function: how workflow is managed, how clients are dealt with, how managers treat workers, and the absolutely critical nature of deadlines, no matter how tight. These are invaluable lessons that school does not teach.


by Kevin Potts

Financial analysis with the DuPont ratio: A useful compass

Financial Analysis and the Changing Role of Credit Professionals

In today's dynamic business environment, it is important for credit professionals to be prepared to apply their skills both within and outside the specific credit management function. Credit executives may be called upon to provide insights regarding issues such as strategic financial planning, measuring the success of a business strategy or determining the viability of an acquisition candidate. Even so, the normal duties involved in credit assessment and management call for the credit manager to be equipped to conduct financial analysis in a rapid and meaningful way.


Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risks being taken. Creditors desire to know whether a potential borrower or customer can service loans being made. Internal analysts and management utilize financial statement analysis as a means to monitor the outcome of policy decisions, predict future performance targets, develop investment strategies, and assess capital needs. As the role of the credit manager is expanded cross-functionally, he or she may be required to answer the call to conduct financial statement analysis under any of these circumstances. The DuPont ratio is a useful tool in providing both an overview and a focus for such analysis.

A comprehensive financial statement analysis will provide insights as to a firm's performance and/or standing in the areas of liquidity, leverage, operating efficiency and profitability. A complete analysis will involve both time series and cross-sectional perspectives. Time series analysis will examine trends using the firm's own performance as a benchmark. Cross sectional analysis will augment the process by using external performance benchmarks for comparison purposes. Every meaningful analysis will begin with a qualitative inquiry as to the strategy and policies of the subject company, creating a context for the investigation. Next, goals and objectives of the analysis will be established, providing a basis for interpreting the results. The DuPont ratio can be used as a compass in this process by directing the analyst toward significant areas of strength and weakness evident in the financial statements.

ROE = (Net Income/Sales) X (Sales/Average Assets) X (Average Assets/Average Equity) (1)

The ratio provides measures in three of the four key areas of analysis, each representing a compass bearing, pointing the way to the next stage of the investigation.

The DuPont Ratio Decomposition

The DuPont ratio is a good place to begin a financial statement analysis because it measures the return on equity (ROE). A for-profit business exists to create wealth for its owner(s). ROE is, therefore, arguably the most important of the key ratios, since it indicates the rate at which owner wealth is increasing. While the DuPont analysis is not an adequate replacement for detailed financial analysis, it provides an excellent snapshot and starting point, as will be seen below.

The three components of the DuPont ratio, as represented in equation (1), cover the areas of profitability, operating efficiency and leverage (liquidity analysis needs to be conducted separately). In the following paragraphs, we examine the meaning of each of these components by calculating and comparing the DuPont ratio using the financial statements and industry standards for Atlantic Aquatic Equipment, Inc. (Exhibits 1, 2, and 3), a retailer of water sporting goods.

Profitability: Net Profit Margin (NPM: Net Income/Sales)

Profitability ratios measure the rate at which either sales or capital is converted into profits at different levels of the operation. The most common are gross, operating and net profitability, which describe performance at different activity levels. Of the three, net profitability is the most comprehensive since it uses the bottom line net income in its measure.

The net profitability for Atlantic Aquatic Equipment in 1996 is:

Net Profit Margin = Net Income/Sales = $70,530/$5,782,000 = 1.22%. (2)

A proper analysis of this ratio would include at least three to five years of trend and cross-sectional comparison data. The cross sectional comparison can be drawn from a variety of sources. Most common are the Dun & Bradstreet Index of Key Flnancial Ratios and the Robert Morris Associates (RMA) Annual Statement Studies. Each of these volumes provide key ratios estimated for business establishments grouped according to industry (i.e., SIC codes). More will be discussed in regard to comparisons as our example is continued below.

Operating Ficiency or Asset U tion: Total Asset Turnover (TAT: Sales/Average Assets)

Turnover or efficiency ratios are important because they indicate how well the assets of a firm are used to generate sales and/or cash. While profitability is important, it doesn't always provide the complete picture of how well a company provides a product or service. A company can be very profitable, but not too efficient. Profitability is based upon accounting measures of sales revenue and costs. Such measures are generated using the matching principle of accounting, which records revenue when earned and expenses when incurred. Hence, the gross profit margin measures the difference between sales revenue and the cost of goods actually sold during the accounting period. The goods sold may be entirely different from the goods produced during that same period. Goods produced but not sold will show up as inventory assets at the end of the year. A firm with abnormally large inventory balances is not performing effectively, and the purpose of efficiency ratios is to reveal that fact.

The total asset turnover (TAI) ratio measures the degree to which a firm generates sales with its total asset base. As in the case of net profitability, the most comprehensive measure of performance in this particular area is being employed in the DuPont ratio (other measures being fixed asset turnover, working capital turnover, inventory and receivables turnover). It is important to use average assets in the denominator to eliminate bias in the ratio calculation.

Financial ratio bias is commonly present when combining items from both the balance sheet and income statement. For example, TAT uses income statement sales in its numerator and balance sheet assets in the denominator. Income statement items are flow variables measured over a time interval, while balance sheet items are measured at a fixed point in time. In cases where the firm has been involved in major change, such as an expansion project, balance sheet measures taken at the end of the year may misrepresent the amount of assets available and/or in use over the course of the year. Taking a simple average for balance sheet items (i.e., ((beginning ending)/2)) will control for at least some of this bias and provide a more accurate and meaningful ratio. The limiting assumption is that the change in the balance sheet occurred evenly over the course of the year, which may not always be the case.

The measure of total asset turnover for Atlantic Aquatic Equipment is:

TAT = Sales/Average Assets= $5,782,000/(($2,203,200 $2,476,200)/2)= 2.47. (3)

In this case, total assets did not substantially change over the course of the year, and therefore, potential bias caused by using the ending asset amount would not be substantial. Regardless, it is a good idea to get into the habit of using averages for all balance sheet items when conducting this type of analysis.

Leverage: The Leverage Multiplier (Average Assets/Average Equity)

Leverage ratios measure the extent to which a company relies on debt financing in its capital structure. Debt is both beneficial and costly to a firm. The cost of debt is lower than the cost of equity, an effect which is enhanced by the tax deductibility of interest payments in contrast to taxable dividend payments and stock repurchases. If debt proceeds are invested in projects which return more than the cost of debt, owners keep the residual, and hence, the return on equity is "leveraged up." The debt sword, however, cuts both ways. Adding debt creates a fixed payment required of the firm whether or not it is earning an operating profit, and therefore, payments may cut into the equity base. Further, the risk of the equity position is increased by the presence of debt holders having a superior claim to the assets of the firm.

The leverage multiplier employed in the DuPont ratio is directly related to the proportion of debt in the firm's capital structure. The measure, which divides average assets by average equity, can be restated in two ways, as follows:

Average Assets/Average Equity = 1/(1 -(Average Debt/Average Assets)), or
Average Assets/Average Equity = 1 (Average Debt/Average Equity =1 (Average DebtlAvernge Equity). (S)

Equation (4) employs a simple debt/asset ratio, while equation (5) uses the well known debt/equity ratio. Once again, averages are used to control for potential bias caused by the end-of-year values. The leverage multiplier for Atlantic Aquatic Equipment is:

Average Assets/Average Equity = $2,339,700/(($995,652 $1,025,982)/2) = 2.31.(6)

Combination and Analysis of the Results

Once the three components have been calculated, they can be combined to form the ROE, as follows:

(Net Income/Sales)X(Sales/Average Assets)X(Average Assets)X(Average Assets/Average Equity) = ROE

1.22% X 2.47 X 2.31 = 6.96%. (7)

While additional measures for prior years would provide the basis for a necessary trend analysis, this result is not meaningful until it is compared to an industry or best practices benchmark. The DuPont ratio for the industry (Exhibit 4) is:

3.60% X 2.60 X 2.00 = 18.72% (8)

As can be seen, problems in Atlantic Aquatic Equipment are immediately evident in the comparison of equations (7) and (8). The company appears to have a significant weaknesses in profitability, while total asset turnover and leverage seem to be roughly in line with the industry. The analyst can now focus on the company's profitability. A quick analysis of profitability yields the following result:

As can be seen, the inventory turnover is significantly lower than the industry average, which means that the problem is more likely due to poor location or inventory quality rather than the inventory management processes. The next step in the analysis would most likely be a qualitative study of the composition of the inventory as well as the retail facility itself.

Concluding Remarks

Sound financial statement analysis is an integral part of the management process for any organization. The DuPont ratio, while not the end in itself, is an excellent way to get a quick snapshot view of the overall performance of a firm in three of the four critical areas of ratio analysis, profitability, operating efficiency and leverage. By identifying strengths and/or weaknesses in any of the three areas, the DuPont analysis enables the analyst to quickly focus his or her detailed study on a particular spot, making the subsequent inquiry both easier and more meaningful. Some caveats, however, are to be noted.

The DuPont ratio consists of very general measures, drawing from the broadest values on the balance sheets and income statements (e.g., total assets is the most broad of asset measures). A DuPont study is not a replacement for detailed, comprehensive analysis. Further, there may be problems that the DuPont decomposition does not readily identify. For example, an average outcome for net profitability may mask the existence of a low gross margin combined with an abnormally high operating margin. Without looking at the two detailed measures, understanding of the true performance of the firm would be lost.

The DuPont ratio can also be broken into more components, depending upon the needs of the analyst. In any case, the DuPont can add value, even "on the fly," to understand and solving a broad variety of business problems.

The surprising truth about what motivates us

This video by Dan Pink provides a really insightful overview as to what motivates people. As leaders this is a critical considerations. Unless we can inspire and motivate people to follow and engage with the vision – leadership fails!

As was so effectively illustrated in this video, we tend to overly rely on monetary reward as the primary means to motivate people. Which can be a very blunt instrument. This is especially true of how we reward and motivate our leaders. high levels of monetary reward does not produce leadership! the best leaders are primarily motivated by purpose and mastery, rather than money.

What are your thoughts?

Can leadership be bought?

SWOT Analysis

This article is about putting SWOT together which stands for Strengths, Weaknesses, Opportunities and Threats.We are going to talk how to develop SWOT to help your organization. The SWOT matrix is 2 x 2 Matrix which is divided into 2 parts, first part made up of strengths and weaknesses and second part contains opportunities and threats.In SWOT matrix identify the strengths to capitalize, weaknesses to overcome, Opportunities to utilize or invest on it and  threats to defend.

The purpose of dividing to segregate the internal and external environment means the strengths and weaknesses are internal to the company and opportunities and threats are external to the company. The internal part of the matrix is under control of the organization and external part is not in control of organization, this point is super important keep it in the mind while developing SWOT matrix of your organization.

The internal strengths and weaknesses data are based upon organization capabilities,resources and processes on the other hand external opportunities and weaknesses data are based upon industry, competitors and environment. After compiling the information and placing in SWOT matrix can help the organization to define objectives, set goals and formulate strategies. The SWOT matrix is used to develop SO (Strength-Weaknesses), WO (Weakness – Opportunities), WT (Weaknesses – Threats),and ST (Strengths – Threats) Strategies.