In addition to thinking about employees as the key parts of a company, it is important to think about team dynamics. Make sure that you hire people you want to work with, and who believe in the vision of your company. There’s an old saying that “A people hire A people, and B people hire C people.” If you hire the best people, when it’s their job to hire, they’ll also hire great people. Dennis Crowley of Foursquare recently spoke on the challenges of being a CEO. He spoke about hiring a programmer, and eventually promoting him. The programmer then had to realize that he could spend a week fixing a problem, or spend a few days and hire people who were better at the problem to code for him. If you teach employees to hire for great skills and not to be afraid to hire people better than them, you’ll constantly improve your company with each hire.

The legal aspects of hiring are many and varied. It’s important to know the restricted information you can’t ask  in a job interview (things like race, height, weight, and more.) This piece called “Don’t ask an applicant these questions” does a good job of summarizing, but a chat with your attorney is a good idea. These issues should be discussed with other employees, board members, or advisors if they’re helping you vet candidates since anyone acting on your behalf could open you to a legal issue.

That brings up another point – don’t “improv” in a job interview. You should know the questions you want to ask, and how you want to ask them, before a candidate arrives. If you’re being deliberate and have a list of qualifications, qualities, and skills you want in an employee, writing them down first is critical. Have a mentor, advisor, lawyer or other trusted person look over your list.

1. One-time startup costs
2. Monthly costs during the startup phase
3. The timing and profitability of revenues during the startup phase

One-time costs include things like the legal costs of incorporating or otherwise setting up your business legal entity; the purchase price or down payment if you’re buying a business or a franchise; licenses and permits; initial inventory and supplies; and furnishings and fixtures.

Monthly costs will be ongoing, and include things like rent, equipment leases, salaries and payroll taxes, insurance, marketing, utilities, and postage/shipping. For both one-time and ongoing costs, you’ll want to plan for the unexpected and include a cushion for the unknown.

When you estimate your revenue, it’s best to be conservative and plan a slow ramp-up. It often takes quite a bit of time after your business first launches to acquire customers, even if you have a robust marketing plan. And if your sales projections rely on repeat customers, think carefully about how often they will need your product/service and whether you will want to offer discounts at first to get them to try you.

You can use this calculator to help you estimate your startup costs for the first six months of your business. This tool is especially useful if you want to see the cumulative effect of changes in different cost/revenue scenarios. Once you are confident that you’ve made the best estimates possible, the calculator will show you the total amount you will need to start your business. And whether you will be funding the startup yourself or seeking funds from others, knowing how much money you need to get going is critical for creating a financing plan.

Last week, I went over the first five sections crucial to a financial plan. The next four sections are just as important and include fundamental information you will need to present when you meet with potential investors. Remember a financial plan is necessary when you want to attract outside funding but it is also an adaptable plan that helps you set profit milestones, gauge your business’ future progress and set up your company’s ideal financial trajectory. Here are the final four parts you’ll need in your financial plan:

Use of Funds

The Use of Funds section shows how you will use the money that you’re raising to get to your next step, whether it’s a product launch, the next fund-raising push, or another milestone such as profitability. Almost every investor will want to know how much money a startup is looking to raise, the milestones it hopes to achieve, and generally, how you plan to use that money to meet a particular milestone.

The discussion between entrepreneur and investor regarding use of funds needs to be very open and detailed. Just stating “it’ll be used for marketing or hiring staff” doesn’t suffice. It is absolutely crucial to know the details of how much money you need to raise to get you to the next big step and exactly how you intend to use it.

Valuation and Investor Return

Valuation is the worth of your business concept today. It’s a relatively arbitrary concept based on perceived value. You as the business owner are going to have a higher perceived valuation relative to an investor, who will set a much lower value since the business is most likely unproven. If you’re going to be selling equity in your business to raise capital, you will need to determine a valuation for your company.

First off, while the “friends and family” group may be more lenient in terms of expected returns, most sophisticated investors aim for a 10x return on their investment within five years. This means if they were to put $10,000 into a company, they would want to exit with at least $100,000. Projected investor returns depend on a future valuation, which depends on the sales forecast or income forecast or both. Most investors look hard at the sales and profitability projections so that’s why your assumptions are critical.

Second, and more important, investors tend to care more about the product-market fit, management team, and other factors to determine whether the company is going to make it. If you’re going to be selling equity, keep these considerations in mind as you document what you’re willing to give up in exchange for financing.

Exit Strategy

An exit strategy is exactly that: the method by which an investor or business owner intends to “cash out” of the investment. Examples include an initial public offering (IPO) or being bought out by a larger player (trade sale). It could be you don’t plan on exiting, that you have found the job you want to stick with. In that case, if you do have outside investors, you may want to make a plan for buying them out. Either way, having a clear exit strategy is key.

Summary

The financial plan section of your business plan is the key variable that investors will use to evaluate your company. This area is how investors will know whether or not they stand to make any money in investing in your company. This section should be approximately four pages; you can skip around in presenting different areas but make sure that you retain a cohesive set-up. Make sure to focus on statistics, back up your numbers with relevant evidential research and present with compelling facts. Be as precise and realistic as you can be and be ready to explain why you chose the values you did.

The Financial Plan section is a critical component of the business plan. Having a thorough financial plan will help you determine how much money you will need to turn your idea into a business and serve as a budget once it’s launched. If you aren’t experienced with creating budgets or using spreadsheets, it will be important to have someone on your side who is – ideally an accountant or CPA, but, many communities offer free resources to help you review or prepare these with you. You can talk to aSCORE mentor with financial expertise, seek assistance at a local Small Business Development Center, or search on Meetup orEventbrite for community events where entrepreneurs can learn how to structure their business financials. There are nine key parts to your financial plan. This week, I will cover the requirements and considerations that go into the first five sections. Next week, in “What’s In My Financial Plan? Part II”, I will dive into the remaining four areas.

The Financial Plan section should contain the following elements and should be no more than four pages, with additional details in the appendix if you want to include supporting statements and visuals:

• Business Model

• Statement of Assumptions

• Key Financial Data

• Break-even Analysis

• Desired Financing / Structure

• Use of Funds

• Valuation and Investor Return

• Exit Strategy

Business Model

The business model is how you intend to make money. How exactly you’re going to generate revenue and make a profit at some future point? Let the following questions guide you in describing your own business model:

Is it a business that will sell to other businesses (B2B) or directly to consumers (B2C)?

Is it a retail or service business with a storefront?

Is it a service business that’s home-based?

Is it an online retail business?

In terms of generating revenue, are you selling a product or service directly to customers? Are you charging a one-time or recurring fee? Selling memberships? Finding some other revenue-generating strategy? Provide a simple visual snapshot of your model, using an illustration or diagram to show how your business model works.

Assumptions

These are the basic assumptions that you’ll be making to support your estimated revenue and expense projections. Your list of assumptions should contain three categories:

• Start-up Cost (one- time expenses to get the business opened)
• Revenue
• Costs (COGS – Cost of Goods Sold or variable cost per unit sold and Operating Costs – Fixed costs)

Most of your cost assumptions should be pulled together from other sections of your business plan. Determine how many customers you’re going to get and the price they’re going to pay: That’s your basic calculation. For example, if you’re going to get 100 customers who are each going to pay $10 for the product, then your revenue will be $1,000. If it’s recurring, meaning that the customers pay this each month – for example, a subscription – then you will have $1,000 each month for as long as the customers continue to subscribe.

Key Financial Data

Your Key Financial Data section will be a set of spreadsheets that documents your financial picture along with assumptions (as outlined above). These should include the following three financial statements with five-year projections, broken down by month for the first year and annually for the subsequent four years:

Income Statement: Measures all your revenue sources set off against business expenses for a given time period.

Balance Sheet: Provides a snapshot of the business’s assets, liabilities, and owner’s equity at a given time (e.g., December 31, 2011).

Cash Flow: Like the income statement, measures financial activity over a period of time and is the most important. If you run out of cash, the business won’t be able to sustain itself, so you’ll need a good handle on your cash flow.

Break-Even Analysis

One of the most common tools used to determine the financial feasibility of starting a new business is to do a Break-Even Analysis. This analysis lets you determine what you need to sell, monthly or annually, to cover the costs of doing business – your break-even point.

The break-even point can be expressed in terms of unit sales or dollars and is extremely important for potential investors, as they can get a sense of how long the company will need to run on investment capital before it can sustain itself. Below is a simple calculation you can use to determine your break-even point (in units):

Break-even=Total Fixed Costs/Margin

Margin=Revenue per unit less Variable costs per unit

When you subtract the variable costs (costs that you pay only as each product is sold) of each unit from the price you charge per unit, you get the margin on each unit. Then divide the total fixed costs (costs that you have to cover even if you are not doing any business) by that margin, and you get the number of units you need to sell in order to break even.

For example: Fixed costs equal $1,000 to cover rent and electricity, the Revenue per unit is $15, and the variable costs are $5 (which are the costs of production).

Margin=$15 revenue-$5 variable costs

Margin= $10

Fixed Costs= $1,000

Therefore, break-even=$1,000 fixed costs/$10 margin, or 100 units. So, in this example, you must sell 100 units at $15 to break even. Profit will be $0, but you will not be operating at a loss.

Desired Financing/Structure

How much money are you going to need to start this business? Document how much you’ll need and how you’re going to use it to support the five-year income statement projections that you calculated.

Whether your number is $10,000 or $1,000,000, you’ll need to demonstrate why it’s the magic number to get going. List every expense projection to justify your numbers. Give your budget room if you predict changes in your market or factors that might affect your industry. For example, if you’re operating a business that depends on vans to transport goods. Based on economic trends, you’ll have to factor in increasing gas prices over the next five years.

Once you’ve figured out how much money you will need to finance your company, think about how you plan to structure that investment: as equity, debt, convertible debt? Which makes the most sense for your type of company? Refer back to my previous blog post that defines the differences between debt and equity funding.

Debt: Financing takes the form of loans that must be repaid over time, usually with interest. These can be obtained from friends, family, banks, or even the SBA (Small Business Association).

Equity: Financing takes the form of money obtained from investors in exchange for an ownership in the business. This can be obtained from friends, family, wealthy “angel” investors, or venture capital firms. The primary advantage of equity financing is that the business is not obligated to repay the money; rather, the investors hope to reclaim their investment out of future profits.

Convertible Debt: Financing is simply a loan that can be turned into equity, generally upon the occurrence of future financing, and can sometimes be a good solution for small businesses.

Whatever money you need and however you decide to structure the investment, take into consideration that getting capital is difficult, and sometimes “bootstrapping” is the primary option you’ll need to consider – which means that you’ll have to self-fund the business for a while, at least to get it going.

Does your business have a seasonal or other time-related component?

Many restaurants are busy on some days of the week and not so busy on others; most retail stores move the most merchandise during the winter holidays; and health clubs tend to gain more members at the beginning of January (because of New Year’s resolutions) and just before bathing suit season. By tracking when sales occur, you can prepare for any ups and downs in your sales – and even smooth out the sales cycle by holding promotions during times that would otherwise be slow.

Set up promotional campaigns around holidays and national events. For example, if you’re operating with a liquor license, offer special deals on St. Patrick’s Day, Super Bowl Sunday, Cinco de Mayo etc. and set up more expensive packages for holidays like Christmas, News Year’s and Thanksgiving. Take advantage of nationally recognized occasions that also get people excited and in the mood to celebrate, such as presidential elections, graduations and the Fourth of July.

What are your key metrics besides sales revenue?

Online businesses tend to measure the number of visitors to their web site, knowing that a certain percentage will convert to paying customers. Companies with a direct sales force often require that their sales people report how many cold calls and how many in-person meetings they make, as a way of understanding what practices lead to sales. Use free tools like Twitterholic,Klout and Facebook Page Post Metrics to measure the effectiveness of your social media. With real-time numbers you can see how well your posts and tweets are converting leads into sales.

Do not get discouraged if a potential customer visits your site or your brick-and-mortar establishment but leaves without buying anything. It’s a lot easier to get someone to return than to get a fresh lead through the door. Always track every individual who shows interest in your product. Offer an online discount to new site visitors who submit email addresses. Incentivize with an even bigger promotion by providing visitors who fill out marketing information with a freebie. Ask for their company type, product needs and budget. If you’re running out of a physical location, talk to potential customers and find out what kind of products they’re looking for, if they work or live around the area and why they’re looking to buy. This gives you an idea of who your target customer is based on who you’re naturally attracting.

Is there a way that you can track referrals?

Satisfied customers who share their experiences with your business can be one of your best sources of new sales. Finding a way to reward them (perhaps with a discount off their next purchase for each new friend they send your way) can help provide useful information about what your customers like best about your business. Hulu Plus has an excellent referral program; for every friend you get to sign up for a free trial, Hulu will grant you two weeks of usage for free. Maximize the power of referrals by promoting to clubs, associations and unions who have a lot of participants. Groups love to give their members discounts so this relationship not only helps you to get new customers but you’ll find many organizations that are eager to join in.

In order to get a merchant account, your business signs an agreement with your bank or another entity like PayPal that sets legal terms which you agree to and which allow you to receive funds for services or products sold, put forth terms for disputes, and so on.

If your business is a brick-and-mortar shop, or has an in-person component, you may need a credit card terminal – one of those machines you see in so many businesses where the card’s magnetic strip is swiped and the information is sent by phone line or Internet to confirm the card is legitimate and has a balance to pay the bill. The online equivalent is a payment “gateway” that processes payments from your online store through to your merchant bank and back. The card terminal and payment gateway may or may not be from the same bank or company as your merchant account – it pays to ask your merchant account provider for recommendations. Authorize.Net has a very nice graphic example of how online store credit card processing works on their website.

One thing that is important to understand is that merchant accounts don’t have to come from your bank. There are many firms that offer accounts at different rates.  This article about Fighting Credit Card Processing Fees may prove useful. FeeFighters has a nice guide to becoming a “Credit Card Processing Ninja” that explains the entire process end-to-end.

Based on the kinds of cards people present (plain old Visa vs “points back” or “bonus cash” cards) you can end up paying different percentages to your processor. Processor fees can vary and different contracts can lock you in for specific rates after introductory periods. It pays to shop around and get the best rate you can for your business.

-Written by Howard Greenstein for Wicked Start’s 10 Steps to Startup Blog Series

Nature is remarkable. Not every animal is equipped with the power, capability and sheer mass that it needs to triumph over any situation BUT many creatures can act as if they have all that they’re lacking – and this in turn allows them to get what they want.

The Bowerbird (male) for example, stages “scenes” made out of pebbles and sticks so they can appear bigger to potential mates. How can this be a lesson to you? Whether or not that lead will convert into a sale is weighted on how you present yourself to your customer. Depending on what your customers are looking for, i.e. excellent customer service, security and quick turn around time, then it could advantageous to appear bigger than you actually are. A bigger company will be perceived to have the resources to take care of all customer service issues. On top of that, an established company seems more professional, streamlined and efficient.

We’re not denying that a small company has their own advantages. In fact, your situation could be that your customers are attracted to your service because it offers them a local, unique and boutique experience. The thing is, if you plan on scaling your business so you can compete with the “big dogs,” it makes sense to appear “big” even when you’re still starting up. Like the Bowerbird female, your customer may be shopping around and reviewing your competitors. If they’re used to buying from a large company, you should consider offering them all the advantages of working with a formidable enterprise…even if you’re really just a lemonade stand.

Here are key tips on how to “look big” while being small:

1. Set up a phone system with multiple extensions

This is the usual situation: you’re a sole proprietor and you’re working out of one phone line. Whatever the set up is, you really need to have more than one extension if customers are calling you about your business (Ex: press 1 for customer service, press 2 for billing, press 3 to leave a voicemail etc.). The good news is that you can set up a phone line with multiple extensions pretty cheaply with VoIP services like Grasshopper, Toktumi and you’ll be paying about $10-15 bucks a month. With Grasshopper you can even set up a toll free “1-800” custom number which we think is pretty cool and it gives the illusion that your customers are calling an established company.

2. Card It

When it comes to networking for your business, you really need to make stellar first impressions. It’s superficial but people WILL always judge your company on how you present yourself so pretty please don’t settle for those DIY business cards with the perforated edges. Spend a few extra bucks and get actual business cards printed out at a copier. If you want to make a lasting impression, opt for heavier card stock, matte finish over glossy and think of a conversation-inspiring look and tagline. Make sure you include your title; even if you’re the only one working in your company, having a title creates the illusion that you have many working on your team with different roles.

3. Jeez, get online already

About 13% of small businesses do not have a website or do not plan to have some type of web presence in the next 12 months. That’s…seriously unbelievable. 13% may seem small, but considering that the first thing that people do when they’re looking up information is to jump on the internet, it’s a missed marketing and sales opportunity for any business to go without an online presence. If you want to appear bigger than you actually are, then get a robust and comprehensive website. A website is a key marketing tool, it can go from bringing in more local customers to providing a way for your business to be scalable on a national scale.

4. Treat your first customers exceptionally well and get testimonials

Starting small is not necessarily a bad thing. In fact, when your business is small you’ll have the time and capacity to forge relationships with your initial customers. This time provides you a unique opportunity; you’re coalescing a new brand and reputation so start out on the right foot! What does that mean? It means going the extra mile and rolling out the red carpet for your newbie clients. Call your customers when they have customer service questions; let them know that you’re willing to focus on their issues one on one. When your happy customers refer your business to others, reward your “fan base” with discounts and small perks. It’s been proven that people will depend on a peer’s opinion over the crafted guise of an advertisement so be sure to treat your initial customers well and they’ll be happy to recommend your service. Take advantage of being “small” now, it’s a great strategy to grow bigger.

5. Have a strong executive team who can wear many, many hats

Small companies have limited resources: less money, less people and less capacity. Don’t worry though, many startups run effectively with only a handful of people.  A small and closely knit team can be just as effective as a large employee force. Recruit talent who are skilled at more than one thing, for example: if you’re just starting out, your “Marketing Manager” can also field customer service emails. The CEO can also wear the hat of “HR Head” and interns can be responsible for anything from daily admin tasks to minor web testing (when properly trained). We don’t recommend pushing vital assignments onto interns but we do sing the praises of a startup team that can multitask, work together, communicate often and appear “large” even when it’s just a few friends in a basement.

There are a lot of sources out there that will tell you how to start a franchise and eventually how to run one. So, how do you start your search? Too much information almost makes decision-making worse. Here we’ve outlined some resources for those looking to open a new franchise.

1. Ask your friends. You’ll be surprised how much your friends know about running a business. It doesn’t matter if they have started their own business before, their opinions can be very valuable because a lot of business is common sense. You can also cultivate relationships with people in the franchise industry. Ask them for their personal advice and see where that gets you.

2. Find a good franchise consultant. You can look up franchise consultants near you who will help guide you through the process of starting a franchise. They have knowledge of franchise systems and are more than happy to help you out. The Franchise Consulting Network is a good place to start.

3. Utilize a franchise legal consultant. You will need to talk with one of these people to help you with all of the legal stuff behind beginning a franchise. They are a wealth of knowledge and you should spend extensive time trying to get all of the information you can from him/her.

4. Consider hiring an accounting firm. When you are starting your own business it might be very helpful and beneficial for you to outsource your accounting. An outsourced accounting firm can help with your bookkeeping and taxes so that you are free to take care of the parts of your franchise you really love. There are plenty of safe outsourcing options.

5. Network with franchise associations. Franchise associations have all of the resources you need at your fingertips. This is another way to make friends with people who have franchises to get some personal advice (see tip #1). The American Franchisee Association is very helpful.

6. Hit the banks. Before you start your franchise, you will need to go to the bank to get some financial advice. Beginning a franchise can be very costly and you will need to be secure in your financial position after you take on this endeavor. Talk to your favorite local bank for some tips.

The moral of the story is that you should know what you are getting yourself into before you start your own franchise. It is challenging, but not impossible, and it’s important to know the resources that are available to you. Good luck on your information search!

Imagine this: you’re sitting across a conference table pitching to an angel investor. They’ve got the financial resources you need and you’re one decision away from either making or breaking your startup idea. Wouldn’t it be helpful if you could understand exactly what your investor is looking for, what they would find as an attractive investment and what their due diligence criteria requires?

Lucky for you, I sat down with an anonymous investor friend of mine last week and grilled her on what she looks for when investing in early stage startups. Keep in mind, she only funds technology-based products but she assured me that this initial criteria is what most investors who are looking for a return will abide by.

Criteria For Investing

Don’t jump in unless you know all the facts! Prepare yourself by investigating the investor, the investing organization and its investing patterns. Anticipate rounds of extensive questioning so arm yourself with answers to what they would potentially ask you. Here is my list of initial investing criteria:

1. Have significant market potential – Does the market size have potential to grow well beyond what already exists or what is there at the local level? How much room is there to expand?
2. Fulfill a market need – Is there an obvious demand for this company? Is the product innovative? What problem is the product solving? Would the product, once it exists, be indispensable?
3. Be technology based – This requirement is not for everyone but as a tech investor, this is a must.
4. Have the right team in place – Do they have mentors, product builders, experts who know the industry and who have committed to the potential of your startup idea by working only for equity etc.?
5. Have devoted founders – Is the founder passionate enough to sell this product all day and is he/she flexible enough to make the necessary changes when required? Does the founder have the significant time and dedication it takes to devote to this startup idea? I’m wary of founders who aren’t willing to reduce other work or social commitments to focus on their startup. Bottom line is, why am I putting up my funds if you won’t put in the most important resource – time?
6. Doesn’t completely make me roll my eyes because it’s just not something I would invest in – Did the company do some due diligence on me and my investment history? Does the pitcher know which specific companies I’ve invested in in the past and does she angle this knowledge to her advantage? For example, if you know that I’ve funded two client app startups in the past year, does it make sense to listen to a pitch about a brick-and-mortar coffee shop venture?
7. What tangible progress has the company made so far and in what time frame? If the startup has been bootstrapping for a few years already, I expect to at least be presented with a prototype. What did your initial sales look like? Do you have some kind of a customer base? How has your business grown, changed, adapted since its inauguration?

Debt

Debt is basically a loan that will need to be paid back, with interest, over a period of time. For example, you need $10,000 to start your business, and your Uncle Buck lends you the $10,000 at a 10% interest rate with a five-year term. That means you pay back Uncle Buck every month a portion of the $10,000 along with interest for five years, until the loan is fully repaid.

Sometimes you may have to personally guarantee a loan – or a portion of it – if you’re starting a business. For example, a loan from a bank or a credit union may require that you do this to protect their loan. This is common, so you have to be prepared to take on this risk if your business doesn’t work out or goes belly up. This may be a preferred option for you, because you’re not giving away an ownership percentage in the business. If you’re confident that there’s lots of upside and you don’t mind taking on the debt, then this may be the right option for you.

Equity Funding

Equity, on the other hand, does not have to be paid back over a fixed term but provides for an actual ownership stake in the business. For example, using the Uncle Buck example, you need $10,000 to start your business. You agree to give Uncle Buck 10% of the equity in the business for that $10,000. As the business grows and generates profit – or is even sold – Uncle Buck is entitled to 10% of the proceeds. The hope is that the business will do well and Uncle Buck will see more than his $10,000 investment returned!

Conversely, if the business fails, and there is no profit, Uncle Buck may lose his entire $10,000 investment. Unlike a loan, which you have to repay, with equity funding Uncle Buck is taking on part of the risk – in exchange for the possibility of greater profit if the company is successful.

Selling an equity percentage may be an attractive option for you instead of debt, since you don’t have to make monthly payments, pay interest, or sign a personal guaranty. From that perspective, it’s a little more flexible. However, with an equity investor, you’re giving up some percentage of ownership in the business. If your business is financially successful, then you’re sharing that with an investor or multiple investors. These investors may also have a say in how your business is being run. You decide what’s right for you.