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Small Business
Small isn't just beautiful anymore. It's where the action is.
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Business New Haven
4/5/1999
By: BNH
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According to the U.S. Small Business Administration (SBA), small businesses as those with fewer than 500 employees. That means 98 percent of all businesses registered in Connecticut qualify as “small.”
Generally, though, when we speak about small businesses, we're referring to those with average annual revenues of, say, between $5 million and $10 million. These are the companies with the highest growth rates in the state - and those most sought after by business service providers.
While small business may be hot, surviving is still trial by fire. Convert information into profit and value, and customers will let you know if you've succeeded. Andrew Grove, founder and CEO of Intel Corp., has said, “Only the paranoid survive.” A less pathological rendering might be: “Only the alert survive.”
In other words, don't get too bovine about your business. Periodically, take stock of the basic tools of the trade reviewed in this guide - no matter how small your business is, or how big you want it to be.
Thousands of years of human civilization passed before we finally invented the wheel. One way to avoid re-inventing it is to go on-line and check out the Connecticut Economic Resource Center's (CERC) site at www.cerc.com.
The CERC site houses a well-organized overview of small-business resources, start-up help and state demographic/market data available through state agencies or state-supported organizations. Or, call CERC at 1-800-392-2122.
Financing
No matter how much equity you're willing to deal out to working partners when creating or expanding your business, cash on hand is indispensable. Most larger bank lenders are turning increasingly to small business because it's the only area of the business world in the state that's growing.
Says Carl Harris, first vice president/community lending department for People's Bank: “There is more credit available to small businesses by various lenders than there used to be several years ago. Lenders have finally realized that you need to approach small business applications a little bit differently.”
Most important to lenders of all stripes is individual commitment on the part of the small-business borrower. Creditors and investors want to be confident that loan applicants will do whatever it takes to make the business work.
Explains Harris, “We are looking at the commitment and personal credit of the owner, as well as for a realistic plan for how working capital will be used, how business costs will be covered, and living expenses met during the term of the loan.”
For instance, a gradual ramp-up of sales in the business plan projections generally strike lenders as more realistic than forecasts that a start-up or expansion will generate the same amount of revenue each month from the outset. Sometimes there's a loss the first year, and sometimes a business is profitable from the first day.
Another important element of the plan that small-business people frequently overlook is analyzing the competition, both direct and indirect - those here today and those likely to enter your market tomorrow.
Since each loan is unique and variables abound, there's no set formula. Harris suggests to start-ups that if you're not going to break even the first year, don't get a bank loan. Other options include taking out a line of credit or arranging for mezzanine financing, which has a smaller payout over a longer term.
Unemcumbered by banking regulations, a so-called non-bank lender such as the Connecticut Economic Development Fund (CEDF) can offer first year interest-only loans, with reduced payments over the second year, and by the third year conventional repayment terms will kick in.
There's also always equity financing from private investors or venture-capital (VC) groups, but that usually forces you to surrender chunks of your profits as soon as your bottom line starts to perk up.
To successfully obtain the financing you need:
1. Assemble a top-notch management team.
2. Create a realistic and comprehensive business plan.
3. Allow plenty of time for your financing search.
4. Try working with milestone funding, breaking down the $5 million you need into smaller increments.
5. Raise money for a specific goal, then accomplish that goal. Otherwise you'll be spending all your time raising money.
Human Resources
Economists, who rarely agree on anything, concur that hiring is going to be an inhibiting factor on small-business growth. Becoming savvier in recruitment and retention practices is becoming a survival necessity, but small businesses also must find other ways to increase productivity.
To assist employers with recruitment needs, the state's Department of Labor hosts a Web site, www.ctdol.state.ct.us, where employers may post job orders directly onto the Connecticut Job Bank and to the national America's Job Bank site.
In addition, small businesses should be trying a simple, cost-effective approach that corporations have had success with over the years: an employee-referral program, which rewards existing employees for referring a job candidate who is hired by the company.
Studies show that workers hired through referrals have a lower turnover rate than non-referred workers - perhaps because the new employee enters the company with a peer contact and a more realistic image of what the workplace is like.
Tried-but-true recruitment tools may also pull some of the qualified candidates you're looking for. These include job fairs, advertising on radio or other broadcast media, and ad placement in “pennysaver” publications which are distributed for free in shopping centers.
Desperate for talent but stuck with difficult or unproductive staff? Whether you're a scrappy start-up or a more settled managerial culture, firing workers is a fact of life. Do it carefully, and you'll protect yourself from lawsuits and possibly even unemployment claims.
If an employee has worked in your company for more than 90 days, be sure to generate a clear paper trail detailing any issues relating to the problem worker's performance. Try to have a replacement ready to start as soon as the employee is terminated - or plan to do without that position if the labor market crunch is too much for you to deal with right now.
When in doubt about your liability resulting from terminating an employee, check with an employment attorney for proper dismissal procedures. Firing an employee is usually hard to do whatever the circumstances, but being sued later on makes it worse.
You'll look bad in court if an employee can show:
• A personnel file that, after the fact of termination, is “papered” with memos written from memory.
• Training for new or younger workers but not for older employees - it's like giving some employees time off to attend seminars, but not others.
• Inequitable working terms and conditions among employees with comparable skills.
Computer Technology
Powering up beyond your needs wastes dollars better spent elsewhere in your business.
One major advantage to purchasing equipment from a local computer shop - especially a smaller one - is the availability of consulting services tailored to your needs and a quick service response time.
Sam Davis, owner Branford-based One Stop Computing, first asks his customers about the kinds of applications they will be running. He determines whether these are mainly financial or creative, or both.
Explains Davis: “Most very small businesses require a network or a few stand-alone systems. For 50-100 employees, 99 percent of time these businesses need a network application for PCs like Windows NT. Our installation and software recommendations are then made from the standpoint of the basic operating system.”
All the glittering software out there is not gold. And most small businesses don't need it to run their operations efficiently. Nearly every industry has its own standard software applications that can be purchased off the shelf, and be easily customized to a company's needs.
“For example,” says Davis, “Great Plains module programs include everything from purchase orders, accounts receivables, payables, payroll, inventory control, and so on.” Typically you don't need to write a program, because there is software readily available that fit into a Realtor's needs, say, or even a church pastor's needs.
Since the cost of the technology itself is dropping so rapidly, it makes more sense to buy systems based on what your needs are now, rather than what they might be two or three years down the road.
For small businesses, if a $1,000 system will meet your requirements today, it just doesn't pay to go with $2,500 system, because in two years that system will be worth $50.
Upgrading is becoming easier and less expensive, too. Davis believes that most of the hardware being marketed to small businesses and even to home PC users exceeds what the applications need to run smoothly. “The latest, greatest technology is best for a 13-year old running flight simulator games with high-end graphics. For financial packages, the real requirement often is no more than a 486,” says Davis.
Internet capability as far as hardware goes does not pose too many problems. Dial-up modems at 56K are usually as fast as you're going to get based on what most Internet Service Providers (ISPs) are offering right now. However, faster T-1 lines and super-fast cable Internet access require computers that have at least 48 MG of RAM in order for the high-speed connections to operate properly.
Accounting
Planning the growth of your business starts with a review by a qualified accountant. Accountants are taking on a greater advisory function for small businesses rather than merely filing tax forms and gathering copies of your quarterly reports.
It is true that many CPAs are highly competent at analyzing the numbers, but they can tend to be considerably more prudent than most entrepreneurs in taking stock of today's market - and imagining tomorrow's opportunities.
While you have to listen to your accountant's advice on business decisions you may be contemplating, it is your own counsel that you need to heed most. In other words, you need to manage your accountant.
Mark P. Dempsey, an Orange-based CPA, advises small-business owners to make sure they ask as many questions as possible of their accountant with each new fiscal year.
Explains Dempsey: “For instance, your accountant should provide you with a software update every year or so. Basic trial balance and general-ledger software doesn't change all that much from year to year, but it pays to have a look at what's new on the shelf.
“In addition,” notes Dempsey, an accountant should provide “information on any changes affecting business taxation or organization. This year S corporations, which used to be taxed at the state level as a C corporation, will now be treated in the same way as the federal government treats it. This could mean a more tax-advantageous way to re-structure your business.”
Dempsey believes that small businesses should not dismiss Y2K threats as a worry for big operators only. Computer problems for your customers and suppliers are going to affect your business' ability to deliver goods on time, collect receivables, and possibly to carry out everyday transactions - even if it isn't your system that is plagued by the bug.
What can you do? Get status updates from customers and vendors so that you don't get caught off-guard. Most major companies are well underway to solving the problem, but small businesses need to be on top of it as well.
Leasing is still a highly cost-effective way to keep costs under control, especially for computer equipment, and to keep up with technological advances that you really need to expand your business from year to year.
Because the equipment is yours only for the term of the lease, you typically want to keep the deal as short as possible so you can easily upgrade later. That way your cash flow isn't adversely affected by a large outlay for purchasing equipment outright that will be outdated within a few months of taking it out of the box.
There are, of course, tax advantages to leasing as well. Says Tom Mongillo, of TRM Accounting & Tax Service in North Branford: “You generally do not own leased equipment during the term of the lease, so it is easier to upgrade on, say, a two-year basis without continually laying out more cash for equipment purchases. Also, there are different ways to calculate cost deductions on leased equipment.”
However, for equipment with a greater longevity, Mongillo advises business owners to consider taking out a small loan in order to avoid sometimes expensive lease rental fees that can go above 18 percent annually. While leasing can be the cheapest way to avoid upfront costs, you and your accountant should analyze the benefit of depreciating equipment expense over time versus the shorter-term - but sometimes higher-priced - advantages typically associated with leasing.
Web Presence
What's a the most common advice Internet experts have for small companies? Get on as quickly as you can. The more “niched” your products, the better the chance that products will sell well on the Web.
You can check prices and services available from your ISP, but if you want to go up in style by hiring a Web consultant, you may be surprised to learn that it's not likely to break your budget. Web designers should be able to get you up and running in a matter of weeks, and site-enhancements can be made incrementally.
“All companies could benefit from general communications - just getting a presence on-line that has a permanent domain name that they can carry with them. They can route general mail and communications through the general medium,” says Dave Armenia, marketing director RealInteractive, an Internet consulting company based in Branford.
“If a company's Web site is put up properly and consumers are searching for a particular service or product, more likely than not they will be able to find them.”
Any company can put up a strong, opening brochure-ware-type Web site which carries four to five pages about the company, its products and services, how to contact it, a way to generate qualified sales leads, visitor-response forms, and a new concept design.
The price range for this level of presence is from $1,500 to $3,500. Hosting the site around the clock and calendar ought to cost $50 to $100 a month. That's about $5,000 for the first year.
Selling online costs more. Designing and posting a set of forms that allow customers to order something, with security (usually encryption), will add around $3,000 per year to maintain.
Explains Armenia: “The Internet firm will encrypt an order and send it to an online database, or download it to company's network database. Twenty to 100 products sold online can still be driven off standard HTML pages and processed via a form. But in most cases you also have to a database running in the background to make sure everything is operating correctly during the order-taking process. That would bring you up to between $10,000 and $15,000 a year.”
Once your shopping cart is up and running, it costs only a little more each time you upgrade.
Phones & Communications
Instead of thinking first about the phones you need and what they can do, decide how many phone lines you need and what they will be used for.
Retailers, depending on volume of business, often require separate phone lines for credit-card transactions, fax operations and Internet use, cell phone and pager systems, in addition to regular voice lines.
Manufacturers or professional offices may need phones to place on dozens of desks or walls, and are likely to want more the high-end features telecom suppliers can provide.
These may include voice-mail systems, 24-hour, seven-day-a-week support coverage, built-in call measuring or analysis capabilities, easy conferencing, call forwarding, pager messaging, and high-quality speakers for hands-free telephone meetings.
There are really two major choices: Solicit proposals and quotes from three to five telecom vendors, or do it yourself. Naturally, the smaller you are, the easier it will be figure out on your own what you need and to get the installation done.
But if your requirements are fairly basic, you may save yourself hundreds, even thousands, of dollars by devoting a day or two to setting up your phone system solo using the à la carte approach.
Even a frantically busy surgeon decided he'd rather do it himself. Explains New Haven ENT Mark Bianchi, M.D.: “My administrative assistant contacted about five different phone companies, installers, carriers and equipment vendors. Most seemed to be advising us to buy beyond what we felt was necessary. So I took an afternoon off and went to one of the big office supply stores and came back with phones, extension cords, and a fax machine.
Before making the initial purchases, Bianchi walked through each of his offices and took notes on how they would be physically set up, how many staff people there were and where they would be stationed. Then he recorded all the different types of phone line transactions, including frequent pager use, wide-coverage cell phone range, and forwarding capability to the call answering service.
Insurance
A risk-analysis performed by a competent broker or insurance agent can help you to reduce liability exposure on any number of fronts. Before settling on a policy or plan, be certain that the broker whose advice you're getting is reputable with proper credentials, and has served other clients well. And don't neglect to call a few for reference checks.
Property insurance to cover losses on any business property is the most common coverage. While paperwork and equipment are included in standard coverage, additional riders for fire, theft or flood may have to be written separately.
General liability pays for legal defense and judgments resulting from accidents on your property. Product liability is a more expensive addition that will protect you from losses resulting from your product's performance in the market.
Commercial auto insurance is required by the state if you use one or more vehicles for business purposes. The only other compulsory form of insurance in the state is workers compensation coverage. Premiums vary by payroll levels and job descriptions.
Insurance that covers your business in sexual harassment, age and disability discrimination cases is known as employment practices liability and, since it tends to be costly, has become most popular with mid-sized and larger companies.
Health Care Insurance
There's talk in Washington about helping employers get out of the health-care business altogether. This would be accomplished by the federal government subsidizing health-care vouchers that employers would distribute to employees to use in purchasing health insurance.
“Let them figure it out,” is the thinking of proponents of tax credits for employers who go the voucher route. That's because not only are health-care benefits an expense for employers; insurance-plan menus continue to multiply beyond what most small employers can reasonably and competently choose among.
Says David Isenstadt, owner of the New England Insurance Group in Guilford: “Each health care company can write as many as 50 variations of plans. The greatest number of options are available if you have ten or more employees.” More choice means more time spent choosing - and who can afford that?
Isenstadt recommends that companies contact more than one health-care insurance broker, since each broker deals with about dozen or so different carriers. Since there's no price differential for the buyer in using a broker to screen health-care plans and narrow options down to three or four, it doesn't pay to try to do it yourself.
Some of the key elements in plan selection that employers should keep in mind are the plan's provisions for: hiring and participation, eligibility, deductibles and COBRA coverage for departing employees.
Plan costs are rising at an annual average rate of three to five percent, which is fairly modest given the double-digit spikes many employers were seeing in the days before managed care. Other good news is that paperwork on the claim side - for employers, that is, is on the decline. Overall, patients' out-of-pocket expenses are also decreasing.
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