When starting a small service business, there are many issues to consider. A small business owner must perform several functions, ranging from areas such as finance, marketing, accounting, etc. This guide is intended to introduce you to some issues to consider in starting your business. Contact The Business Link in Edmonton for additional information and assistance.

1. Personal Qualities

Do you have what it takes to be or become a successful business person? Are you a self-starter and disciplined while still able to maintain a balance between your business and your personal life? Take this quiz and find out how you score.

For additional information on evaluating your entrepreneurial potential, you might wish to look at:

Self-employment: Is It For Me, by Alberta Advanced Education and Career Development. Call (780) 427-5775 for a free copy (Alberta residents only).

Have You Got What It Takes? by Douglas A. Gray, published by Self-Council Press.

2. Deciding on a Business Structure

The three main types of business structures are sole proprietorship, partnership, and limited company (corporation). The Business Structure you choose will depend on the needs of your business.

3. Legalities, Licensing and Permits

Guide for New Alberta Businesses
Taxation Info-Guide

Is your business legal according to the zoning by-laws? What legal restrictions may limit you from operating?

Zoning by-laws dictate where different types of businesses may operate legally and under what local operating requirements. If your business is home-based, look into the zoning for your neighbourhood or area. It spells out what is and isn't allowed as a business activity out of your home.

Building Regulations and Codes:
The municipal government office or City Hall is also the place to get information about other by-laws that could affect a home-based business or such things as parking, signage, noise and building codes.

Municipal Issues:
Contact your city or Municipal Government and find out what permits and licenses you must obtain in order to run your small service business.

Provincial Issues:
Most service businesses are required to obtain a provincial business license from the Alberta Department of Consumer and Corporate Affairs, Licensing Branch.

A number of licenses and permits are required for services which could affect the safety of Albertans; i.e. businesses involved with electrical, gas or plumbing installations must have special licenses and as well, their work must be inspected by the Alberta Department of Labour, General Safety Services Division in most cases.

Most tradespeople require a journeyman's certificate or must be in an apprenticeship program (contact Alberta Advanced Education and Career Development).

4. Business Plan

The importance of a Business Plan cannot be overemphasized. A large percentage of businesses that start up fail due to the lack of planning and preparation needed. In order to help ensure that this does not happen to you, take sufficient time to complete a Business Plan and explore all of the issues involved in starting up a business.

A Business Plan usually includes a description of your business and the industry in which it will function. It includes information about your customers and competitors, services you will provide, price schedules, and sales and marketing plans. As well, you will need to outline the opportunities and threats facing your business, the resources you will require and current and projected financial statements. It is important to ensure your business idea is financially viable before you proceed. A business plan is more than just a paper outline that will be used to get financing from your bank. If done thoroughly, it can guide you through issues you may encounter in the start-up phase of your business.

The Business Plan and You
The Interactive Business Plan

Things to consider before you start your small service business?

a. What service are you providing?

Establish whether you want to specialize in a specific area. There may be an abundance of general repair shops, but you may specialize only in small appliances or electronics. Be sure to do market research to determine whether there is a demand for your area of specialization.

b. What will differentiate your service from that of your competitors?
It would be beneficial to you to be unique in some aspect of your service. Give your customers a reason to come to you and not someone else. Your advertising should include this specific information.

c. Where will you locate your small business? Will it be home-based or a commercial site?

Potential advantages of a home-based business:

• Low overhead costs
• Low risk of expensive mistakes
• Opportunity to use household resources for business use
• Gradual start-up and growth
• No commuting time or expense
• Tax advantages (with deductions allowed for part of the house and its expenses)
• Relatively inexpensive way to test a market
• Flexibility of working hours
• Can start off part time until you have enough reserves to make it a full time venture

Potential disadvantages of a home-based business:

• Your business will be less visible than if it were in a commercial location
• Isolation and lack of contact with colleagues
• increased family stress as you juggle the demands of work and family
• need for self discipline and the ability to plan and manage one's own time
• by-laws and zoning restrictions affecting development issues
• less professional image (you may look more home-like than business-like)
• conflict with neighbours over noise, traffic, and parking problems

Once a decision is reached to go the home-based route, ensure that physical space is adequate. Assess the physical lay-out of your home; where will you conduct business? Will it be conducted in your garage or basement? If this is the case, will remodeling be required? What changes would these ideas have on present use of space, and what effects will changes have on your family? Estimates you make at this time will be useful for completing the sections on location, premises and facilities, and start-up costs in your business plan.

d. Who are your customers?

What is your target market and how will you target them? Look closely at the customers you will be targeting. Information that makes up the social profiles of the people in your target market is called demographic information. Try to identify common characteristics of your clientele, such as:

• Age, usually given in a range (20-35 years)
• Sex
• Marriage/partner status
• Location of household
• Family size and description
• Income, especially disposable income (money available to spend)
• Education level, usually to last level completed
• Occupation
• Interests, purchasing profile (what are consumers known to want?)
• The number of people in your area

Demographic information is available from Statistics Canada and other secondary sources, such as local libraries.

e. Competition

Who are your competitors and what competitive advantages do you possess? Your competition are businesses that sell similar products or services to the same customers you have selected as target markets. Your competitors will have an effect on your business. Be sure to do research on your competitors before you go ahead with the rest of your business plan.

You can do a competition profile by:

• Using the Local Telephone Directory
• Using industry and trade pulications
• Looking in directories for your profession
• Collecting pamphlets, brochures, etc. from your competition
• Calling your competitors and asking for information as a customer

Decide what it is that distinguishes your service from that of your competitors. For example, do you deliver your service in a different way, or is your business larger or smaller than that of your competitors? You must keep in mind that potential clients cannot usually distinguish what the difference is between your service and your competitions, therefore, you must tell them what the difference is.

Also, look at how your competitors promote their service to their clients? This will give you an idea as to where your competition stands and it can also give you ideas how you will approach your marketing strategy.

Trade and industry associations can also be helpful since they possess in-depth information about their industries. As well, many publications and databases can help you assess the potential of industries and markets. A visit to your local library is a good first step in getting this information.

Some other potential sources of information may include:

• Magazines on and for small and home-based businesses
• Trade magazines
• Indexes of articles covering your area of interest
• Business directories
• Government publications.
• The Internet

f. Opportunities and Threats

Opportunities:
Opportunities mean a chance to achieve more profits. This may require some creativity on your part. You can create opportunities with a unique twist that makes your business stand out from the competition. Do something that allows you to serve your customers in a unique way, different from your competitors. For example, the owner of a dog grooming business could initiate a "home delivery service," and one-up the competition.

Threats:
Threats are problems that jeopardize the life of your small business. Anticipate problems that could arise and determine whether they are in your control. Threats could arise in a number of areas, especially in terms of your competition. For example, a bookstore would want to think about the extent that Internet sales of books would have on its business.

Also evaluate, if there are problems in the service you are presently offering.

• Are customers being served fast enough?
• Are your fees competitive?
• Are you targeting the right customers in your advertising?

5. Design your Marketing and Promotional Strategy

"If you build it - will they come?"
Some entrepreneurs think that all they have to do is "open their doors" and customers will be lined up at their doorstep. The truth is, all successful businesses invest significant time and effort into advertising and promotion. Even if you are very successful, you must continue to advertise to maintain your customer base.

Marketing is the activity that takes your service from you to your clients. It involves doing market research, analyzing your potential, setting goals and objectives, and then using persuasive communication to sell your service. A marketing strategy means a customer orientation in every aspect of your business. If you have established a specific market, a targeted approach and more personalized contact are better suited to your marketing plan.

Positioning - describes the way you will present your service to your target market. Knowing your competitors is important when positioning your company. Through research you may find a niche that you can fill, instead of being the same as all the other businesses. Match your positioning efforts, objectives, and your company's creative methods to your target market. Take the approach of the customer. Describe the benefits they will get from using your service.

HOW WILL CUSTOMERS KNOW THAT YOU EXIST?*

Advertising and promotion are often treated as one area of activity and expense. One difference is that advertising is what you pay for directly, and promotion is what you do to get your service business better known.

New businesses in particular need to get known; this takes money. Research the costs for different advertising and promotion methods and select approaches that make the most sense for you. Include realistic advertising and promotion costs in your expense projections for the first year; these costs are necessary to achieve sales. During the first year, keep track of the responses from different advertising and promotion techniques. For your second year of operation, concentrate on the ones that work.

Use advertising wisely

When selecting media for advertising, identify what medium will attract your target market's attention. Some advertising activities include:

a. Display Ads in Newspapers

Newspapers are the number one medium for small business, as the cost of newspaper advertising is relatively low and the owner can personalize the advertisement. Contact the advertising department of newspapers known to be read by your target market for information about rates, opportunities and readership.

b. Display Ads in Trade Journals

A business with a new service can draw it to the attention of retailers through trade journals. In addition to offering display ads, some trade magazines provide free opportunities for business promotion. Write directly to trade journals requesting a copy of guidelines, opportunities, and rates for paid advertising.

c. Classified Ads in Newspapers, Trade Journals and Newsletters

People do read classified ads. These ads aren't costly, relative to display ads, and they may be a good way to get your business known. Consider classifieds in local papers that reach your target market.

d. Direct Mail

Direct mail can be one of the most effective forms of advertising when it is directed at those customers that are most likely to use your service. Only direct mail campaigns that are matched to the target audience really work, and increasingly, only sophisticated direct mail gets a high response. There are different forms of direct mail, such as brochures, newsletters, offering a discount for your service, etc. I.e. VCR repair business, virtually every household has at least one VCR, therefore, letting these people in your targeted area know that your service is available can generate business for you. You can send it to people who are current customers as well as prospective customers. You also have the option of purchasing or renting mailing lists. The drawback of this approach is that your response rate will likely be lower. It is sometimes beneficial to do a telephone follow-up in a direct mail campaign.

e. Local Telephone Directory and Other Directories

If your product or service is mainly being marketed in a local area, the telephone book may be the best investment. The Telephone Company provides information about different advertising options in their directory. Business directories are sometimes prepared for an area or a city. See the "Publishers - Directory and Guide" section in the local telephone book; if there are no listings, check the same section in a major city telephone book.

f. Shoppers and Flyers

Shoppers are special localized newspapers that only carry advertising for local business. Shoppers are usually the least expensive newspaper ads and have a fairly large circulation aimed directly at your target market. Flyers are inserts into area newspapers. Both may have a circulation throughout your trading area.

g. Internet Web Page

The Internet can be a good way to promote your business; however, it can be expensive to do so. Before you proceed with a Web Page, you must decide whether your potential clients are likely Internet users. The Internet is a more passive medium than direct advertising, therefore, you may not see immediate results. For more information about marketing on the Internet, see:

• Guerrilla Marketing Online: The Entrepreneur's guide to Earning Profits on the Internet, by Levinson and Rubin, published by Houghton Mifflin Company.
• The Internet Marketing Plan, by Kim M. Bayne, published by Wiley Computer Publishing.
• Marketing on the Internet, by Ellsworth and Ellsworth, published by Wiley Computer Publishing.
• Selling on the Net, by Herschell Gordon Lewis and Robert D. Lewis, published by NTC Business Books.

Seek Promotional Opportunities

A promotion strategy answers these questions, and should be included as part of a business plan:

• How will you get word about your product or service out to the people most likely to buy it, or whom you want to encourage to buy it?
• How will you inform, persuade and influence potential buyers?
• What type of advertising and publicity will you do?
• How will you stimulate people's interest in your product or service, and increase their need and demand for it?
• How will you use sales and current customers in positive promotion?

Promotion activities require the imaginative, innovative side of people. Keep in mind that underselling is better than overselling. To work for you, all promotion also has to be consistent with your business image. Some examples include:

a. Donation of Services

Donate your services free from time to time at your neighborhood church or community centre. This will create awareness that you exist and will bolster your image as a generous community minded soul. Repeat customers will more than likely result from this type of promotional activity. For example, if a church has an annual garage sale to raise money, a service repair business could offer to repair electronic equipment free of charge to be sold in the sale.

Also, being part of an organization/association could give you an opportunity to network among members, which could result in an increased customer base. Being part of these committees could also raise your credibility as a businessperson.

b. Promotional Giveaways

Promotional giveaways are creative methods of advertising your business. Because they are more novel than other forms of advertising, they may cut through the clutter and get more notice by your target market. These are articles that carry your business name, address, and advertising message. They include calendars, pencils, pens, paperweights, matchbooks, personalized business gifts, pocket diaries, shopping bags, memo pads, letter openers, glasses, and many other similar items. Advertising specialties help reinforce previous or future advertising and sales messages.

c. Coupons and Discounts

This may be done on a door-to-door basis or by mail. Coupons offer a discount, usually some price reduction. They can be inserted into flyers, direct mail, magazines, or newspapers.

d. Free Publicity

Some other areas to consider include:

• Look for ways to trade your product or service for free advertising or publicity.
• Arrange mutual marketing with another product or service, especially one that is used with yours or complements yours. For example, ask local stores that sell the product(s) that you repair to recommend you to their customers.
• Offer free demonstrations or workshops and publicize them on free community bulletin boards and calendars in local newspapers, radio and TV.
• Write articles in your local newspaper. For example, an owner of a video store could
• Write movie reviews to increase awareness of his/her store.

e. Word of Mouth

One of the most important forms of advertising is positive word-of-mouth. If a customer is satisfied with the job you have done they will tell others which will generate more customers in return. The best possible promotion is the satisfied comments your customers make to people they know. If you provide good service, at a fair price, and support it after sales are made, people will spread the news. Ask satisfied customers to tell their friends and where appropriate, ask them for referrals and the names of people who they think would appreciate hearing about your business.

f. Professional Image

One of the factors that will have an impact on your success is the way you present your business to your customers. In all form of marketing (advertising, promotion, and direct contact) you must appear to be and act professional. This means that your advertising and promotion should be neat and professional. Your workplace (if clients visit it) must be tidy, clean and appealing to convey professionalism and establish confidence in your ability.

Things that contribute to customer confidence:

• Pleasant and courteous manner by owner and staff
• Timely delivery of service
• Promptly returning customer calls
• If you have a telephone answering service, ensure that it is positive and represents your company well
• Well organized billing system
• Honesty

g. The Marketing Package

Most businesses need to vary their advertising while still keeping it consistent. One piece of information usually isn't enough. Some marketing strategies leave a trail of brochures, business cards, etc.

There are a number of ways to plan your advertising budget. Fraction of total sales is one method of coming up with a figure. There are problems with this approach as you are basing your current advertising budget on last year's sales. Another method to take into consideration is forecasting your current year's sales and deciding on a percentage to allocate to the advertising budget.

*The Marketing and Promotion section is based on Part Three of the Barbara Mowat and Ted James Article: Breaking into the Market

6. Financial Considerations

How much money is at your disposal? Most entrepreneurs discover their businesses require more capital than originally anticipated. And while the question of how much is enough varies from business to business, you should ensure that you have access to enough money to allow for all possible contingencies so that you don't have cash flow problems or miss opportunities.

List all the expenses of starting your business, such as acquiring your business license, rent, wages, utilities, office expenses, transportation costs, etc. Start-up capital is the total amount of money you need to open your doors for business, and to keep them open until sufficient revenue is generated for operation. Small business advisors recommend that start-up expenses include at least six months operating capital, because even though revenue will come in during that time, the start-up phase also brings with it unexpected expenses.

Where to Get Start-up Capital?**

Banks, credit unions, and financial institutions like trust companies lend money to individuals and to companies. A loan to an individual is a personal loan. A loan to a business is a commercial loan. Conditions and terms, including interest rates, differ for the two kinds of loans. Depending on the amount of risk associated with a new business venture, a banker may only be willing to give a personal loan. A mortgage on a house and property is often required as collateral, at least until a business gets established. A personal loan is common in home-based business start-ups. Home-based and new business people are generally considered a poor risk by lending institutions, both because of the 80% failure rate for new business starts, and small loans required. For these reasons, provincial and federal levels of government have over the years established various programs of support to this level of business. Such supports have been of three main kinds: direct grants, loans with the government as lender, and loan guarantees. With loan guarantees, the government secures a loan with a lending institution which then makes the loan to a person or business it wouldn't otherwise consider a good enough risk.

Each program has guidelines and conditions a business has to meet to get assistance. The guidelines are called "criteria". If you apply for funding to a government program, first the program officer checks to see if the application meets the criteria. If not, no matter how good the plan is that supports your proposal or application, it will not be considered. As part of your research, get information about such programs and review them as possible sources of financing. Pay special attention to the criteria so you only consider those opportunities where your situation fits the guidelines.

How to Secure Operating Capital

a. Equity Financing

b. Debt Financing

With debt financing, the lender charges interest for the use or "rental" of money loaned, but does not get a share or equity in the business. Debt financing is familiar to most people as it is the basis of most personal credit.

A line of credit, common in business, is a type of debt financing. With a line of credit, a bank gives a business an upper limit to which it can borrow, for a set interest rate. The business doesn't get the loan in a lump sum, but draws on the line of credit for funds as required. Interest is only paid on the amounts borrowed. A line of credit can be an important tool for coping with cash flow problems. It may also be the only financing arrangement that a home-based business needs as a back-up for operating capital, although this is not as likely if investments are needed in machinery, equipment or inventory.

c. Collateral or Security

Collateral is what you have to put up to secure a loan. This security reassures the bank or other lender that if circumstances make it impossible for you to repay the lender has the right to take some identified object that covers at least part of the value of your loan. As you consider different kinds of financing and research what is available, pay attention to the collateral each requires. The usual collateral for home-based business loans are mortgages and personal guarantees.

d. Handling Loans

If you succeed in getting a loan, make it a rule of business to keep your lender informed about business developments. Even if things don't go according to plan, it is better that your banker knows how things stand before you need help. The better the relationship between a business person and the bank or other lender, the better the business's chances of getting advice and possibly an additional loan in a marginal situation.

Use the following questions to guide general research on financing options:

• Is a specific balance required in a business account before a loan can be considered?
• Will the bank give the business a line of credit? If so, what are the requirements and conditions?
• What are current interest rates for the line of credit and other types of loans or financing being considered?
• Does the bank have a ceiling on the number of small loans it grants or the types of businesses to which it gives loans? If so, what is the current situation?
• What is bank policy on the size or description of cheques deposited in your personal account to be held for collection? Will cheques under that size be credited immediately to your chequing account balance?

**Barbara Mowat and Ted James: Part Four: Handling Money Matters

7. Pricing

Price is a key part of marketing. Every service provider must set his or her own fees. It may take some time before your income exceeds your expenses. You must build up your customer base and become known in your area, only then will your income likely increase. When pricing your service, try to keep it fairly consistent as customers resent frequent price increases.

The key points to consider when setting prices are the following:

1 - Your marketing strategy and your business goals:
Your pricing strategy must be seen within the context of the overall objectives of your business. The choice you make about sales will affect your prices. For example, are you trying to maximize profits, or recover costs? Take into consideration your chosen target market and align your strategy with your long-term goals.

2 - Your competitors' prices:
Research what competitors rates are set at for the service you want to offer. To find this information, you might have to: - Research information from your library - Call, describing yourself as a prospective customer and inquire about fees. - Actually use the competitor's service - Ask a professional or trade association about fees.

3 - Market demand for your service:
It is likely that everyone requires repairs at some time, therefore, you must analyze where your potential target market currently receives service. Also, determine whether there is a direct competitor in your area. This will affect the demand for your services.

4 - Need to cover costs and provide an adequate profit:
The goal in setting prices should be to maximize profits. To correctly price a service, first determine costs, both direct and indirect.
Direct costs include:

• materials and supplies
• labour and time

Indirect costs include: - overhead

Materials and supplies include all money spent for materials and supplies to provide your service. This category is called a variable cost, as the amount you spend varies with how much you produce. Shipping and storage charges are included as part of supplies and materials costs.

Labour-related charges should be calculated in two ways: labour/time required in producing the goods or providing the service, as well as a salary in the fixed or operating cost (administration, clerical time, etc.) of your business. The time required to provide a service is usually underestimated, try to calculate this accurately so you are not losing money.

Overhead is for all fixed costs in a business. These are expenses that must be paid, regardless of sales, such as office expenses, insurance, interest payments on loans, secretarial help, license fees, etc. Another way of understanding overhead is to think of it as the cost category for all business expenses that are not materials and supplies or labour/time.

A final selling price = the total costs of production + profit

Included in the total cost of production is the total time required to complete your service in addition to materials and supplies, labour, and overhead.

Setting Prices

Prices for products and services can be set in four main ways: competitive pricing, market penetration, price skimming, and pre-emptive pricing. Two aspects of price must be considered: what is acceptable to the market, and what costs are. The choices that a business makes about its target markets and sales make a big difference in pricing. Choose a pricing strategy that is consistent with your goals and objectives. There are various methods you can use to set prices:

1 - Competitive Pricing
Set your price at the going rate. This works for businesses offering comparable services. The potential downfall of this technique is underpricing your service in order to compete. Use competitors prices to establish the price range for your service, but don't underprice. Be sure to recover your costs, even if that means your final prices will be slightly higher than the competition. Your service may go above and beyond the competitions, therefore, your prices would be understandably higher.

Your entrance into the market may affect your competitors prices. In an attempt to maintain their customer base, your competitors may lower prices. Monitor your prices in relation to sales and to the competition on a regular basis, and make changes as necessary.

2 - Market Penetration
A lower price is set to draw in more customers. You may decide to use this strategy on a short-term basis to gain recognition and market share, later switching to a cost approach to pricing.

3 - Price Skimming
Setting a high price. This works only if your service is in demand and you have no competition.

4 - Pre-emptive Pricing
Pricing your service low to discourage potential competition from entering the market.

Conclusion

Starting a business is a major endeavor. It will be hard work and there is never a guarantee of success. However, even if you are establishing a "one-person" business, you are not alone.

There are numerous groups and agencies that can help you learn how to be an entrepreneur and succeed at your business.

• The Business Link Business Service Centre welcomes your calls. We will try to help you find the information or support you need to succeed in your business endeavor.
• Business Associations and Networks such as the Chamber of Commerce. Find out if there are any in your area.
• Your banker or accountant may be able and willing to give you some helpful advice.
• Magazines related to your industry
• The Internet can be a valuable source of information on specific industries and small business issues. Check out The Business Link's Web Site "Business Links on the Internet" for good small business sites.
• Local libraries

The Business Link   Toll Free 1-800-272-9675