Tools For Exploring New Business Opportunities

I don't see much in the way of tools for business planning for self employed people. Motivational videos and DVDs aren't my idea of useful tools, even though I'm sure some people get pumped up on them. In keeping with my recent resolution to explore interactive books, I spent the week doing a very rough draft of a tool for business planning. The point of the flowchart is less about the mapping process and more about pointing out specific areas of concentration for people of different backrounds who are planning to launch a new business.



The main problem I see with business tools is, as with all tools, their effectiveness depends entirely on the skill of the user. Just like you can decapitate yourself with a chainsaw, you can destroy your finances with a poorly conceived business plan. It may be possible to "dumb down" some tools, like calculators that estimate your tax liablity, calculate a selling price based on wholesale and overhead, or tell you what your net has to be to support a given retail space with given foot traffic, etc. But all of these calculations will be subject to the rules of garbage in, garbage out. The skill is in making the right assumptions or estimates that the calculations ae based on, otherwise, the calculators may as well be chainsaws.

Internet search may be the best tool available to the new businessman today, and I don't mean for finding step-by-step guides to business success which aren't worth the electrons used to promote them. The main value of Internet search is for market research, to scope out your potential customers and the competition. There's nothing to stop you from joining discussion lists where your target customer base hangs out to see what they have to say about competing products and services. Believe it or not, they know more about what they want than you do. Tools like Google Trends and the Adwords Keyword Tool are great for determining both broadly and specifically what people search for online.

The best tool you have will always be your own brain, helping you choose where to dedicate its resources is the goal of the flowchart. If you haven't clicked on it to reach the full size version, do so, and let me know what you think. The diamond decision symbols on the full sized version are also clickable, and bring you to expanded text explanations of the decision. Remember, it's all very Beta or Alpha, it's as much a tool for me to see if there's potential in the interactive planning area as it is a tool for reader.

Why Businesses Fail (Based On IRS Statistics)

Everybody has an apocryphal number for expressing the rate of new business failures. Whether they claim 9 out of 10, or 1 in 5, failure statistics aren't going to help you succeed. What can help is knowing why so many businesses fail. We're talking strictly about sole proprietors here, and the majority of Schedule C filers are self employed sole proprietors with no employees. Rather than relying on surveys or anecdotes, I prefer to go the horse's mouth for statistics, in this case, the IRS. After spending a day studying their spreadsheets, I produced a table of statistics that self employed sole proprietors should find interesting.

A little over a quarter of the 23 million businesses filing tax returns as sole proprietorships in the U.S. lose money. Losing money in a particular tax year doesn't necessarily mean those businesses will ultimately fail, but it sure isn't a sign of health. So let's take a look at what the 73% of businesses making a profit did right, and what the 27% of businesses reporting a loss did wrong.

First, the businesses with a profit recorded almost twice as much in gross sales as the losers, 84% of all reported business income for the winners versus 16% for the losers. Lack of sales is the main killer of new businesses and old businesses alike. There's no tricky way around it, if you don't have any sales, you're just playing at business, and if you don't have enough sales to meet your overhead, you may as well be playing.

Next, the loss making businesses held almost twice as much inventory during the year as the successes. The average amount of inventory per sole proprietor is actually very low, just over $2000, reflecting a large number of services oriented businesses. And the statistics show that the profit making businesses are 60% more likely to create their own products by spending money on materials and labor. The depreciation deductions show that successful businessmen are much more careful with their business purchases, the losers spend 1.4 times as much on "stuff" as the winners.

The biggest difference between the failing businesses and the success stories is expressed by their debts. The business failures spent 250% as much on mortgage interest as the successes, two and a half times as much! It's not easy for sole proprietors to take mortgage interest deductions, the main exception I'm aware of is taking a portion of the home mortgage when declaring business use of the home. Is it possible that all of those people started a business thinking that a tax deduction would help them pay for their house? The situation with regular business debt was almost as bad, with money losing businesses spending a hair under twice as much on business loan interest as the sole proprietors who are making a profit. And failing businesses were nearly eight times as likely to be carrying over excess casualty depreciation on their home office deductions (form 8829), which sounds suspiciously like an attempt throw in the kitchen sink before throwing in the towel.

The final significant difference was in the category of "other business deductions", those deductions that don't fit nicely into any of the IRS categories and account over 10% of sole proprietor expenses. Here again, the failing businesses spent around 50% more on stuff than the sole proprietors earning a living.

To summarize, successful sole proprietors spend money creating products and focus on generating sales. Everything else is commentary.

Getting Started In Self Sufficiency

I'm the sole proprietor of a small publishing business that I've been running since 2000, and I'm a strict believer in self sufficiency. Yet, I don't make my own paper, brew my own ink, or bind my own books. All of that is outsourced to companies that do these things on a massive scale I could never approach. I sell ebooks as well as paper books, yet I use PayPal to process the payments and E-Junkie to handle the downloads. I carry advertising on my website, yet I've never called on a potential advertiser, Google Adsense does it for me. My business is a virtual company, one where I create the products and pay industry leaders to handle the manufacturing and distribution.

So how can I claim to be self sufficient? Self sufficiency isn't about the tools we use to carry out our work, it's about decision making and control. My printer, retailers and order processors are tools that I use to minimize the time I have to spend in repetitive tasks while maximizing the profits. They don't participate in managing my business and the agreements we have can be terminated by either party at any time. Risky? If you're used to working for the government or a large corporation you might think so, but I haven't drawn a pay check in over fifteen years, and I've never been more financially secure. And while some would argue that freedom is a state of mind, in a regulated world where everything has its price, freedom is no longer another word for nothing left to lose.

One of the reasons I remain a sole proprietor despite the obvious tax advantages of incorporation for a well established business is my addiction to self sufficiency. While I could incorporate without a lawyer or an accountant and meet all of the filing requirements on schedule, it's more complicated than filing taxes as a sole proprietor. And therin lies the secret to self sufficiency, you have to keep it simple. If you spend your time chasing best practices for your business activities rather than doing what comes natural, you'll find yourself trapped in a debate over how to best use your time. Most intelligent entrepreneurs end up concluding that they should focus on their core competencies, and hire expert help to make those specialist tweaks to their business, such as a CPA for corporate (or even regular) tax filings, a graphic designer for business cards and websites, an attorney for skating on thin ice. Unfortunately, all of these one-off hirings will weigh you down both financially and spiritually, until you become dependent on others for your core business functions. If you can pay their bills and make a living, you are successful in business, but you've lost some control over your destiny, You've sacrificed a large measure of self sufficiency.

There is always a tension between freedom and self sufficiency, since the two conflict when the sole proprietor doesn't have the desire or ability to perform some task that freedom recommends as the optimal outcome. Incorporation is once example of this tension that I've already mentioned, the same could be said for any specialized skill or knowledge that I'd like to utilize without acquiring it myself. My personal value system is weighted more to being self sufficient than to absolute freedom, so my business activities are largely conscribed to those that I'm willing and able to carry out by myself.

When I advise aspiring entrepreneurs starting their first business, I advise them to follow in my footsteps, not being competent to suggest they do something I haven't done. It's so tempting for people getting started in business for the first time to throw around a little cash or credit simply for the sake of feeling like the business has launched. After all, they've seen that other people in business spend money on stuff, rent offices space, buy desks and chairs and postal machines, and it's clearly all a tax deduction. Well, other people have destroyed their chances of ever making a living by running up debt by playing business, and the tax expense is useless unless you have business income to offset it. None of the sole proprietors I've known failed in business because they didn't buy enough toys when they opened shop. The leading reason that small businesses fail is that they never generate enough business activity to survive. The higher your expenses, the higher that self sustaining level of business activity (sales) needs to be.

In a Utopian business world, we would all order up the specialized knowledge we needed for the day to be impressed on our brains as we sleep. In the real world, the best thing you can do to increase your chances of attaining an independent livelihood is to stubbornly resist the urge to create a support network of professionals. Besides, you'll be surprised just how much time and effort is required to manage that support network, not to mention the increased multi-tasking load on your brain that comes from accommodating their schedules and leaving tasks open for ridiculous periods of time.