Fred McKinney, president and CEO of the Greater New England Minority Supplier Development Council.
With so many people out of work during this economic recession, there is an upsurge in entrepreneurial activity as people try to establish a livelihood. This occurs even as the formation of new business is at a cyclical low.
In 2008 there were 627,200 small businesses formed. This was down from the over 670,000 business starts in 2006. As the recession took hold in 2009, the numbers of businesses formed will likely show dramatic declines and the number of business closures will significantly increase. Yet despite these dismal statistics, entrepreneurs are out there preparing to launch new businesses.
Americans are aware that owning a business is one of the key ways to build wealth for themselves and their families. According to the Minority Business Development Agency (MBDA) of the U.S. Department of Commerce, blacks, Asians and Hispanics have formed businesses in recent years at rates four times the national average.
The overwhelming majority of minority businesses in the country are small. Over 80 percent of the 18.4 million minority businesses in 1997 had annual revenues under $10 million. In Massachusetts, there were a reported 39,000 minority firms or 7.3 percent of all firms in the state, according to the 1997 MBDA study. Unfortunately, we are dealing with data that is certainly outdated. But it is the best that we have.
These numbers tell a mixed story. On the one hand, the number of minorities starting businesses is growing. But on the other hand, these businesses are so small that they become vulnerable to the slightest change in business conditions. As an economist and someone who specializes in minority business development, I have several recommendations for any entrepreneur who is considering starting a business.
But before we get to these recommendations, it is important to note that some might be asking why would anyone consider starting a business in these depressing conditions? The answer is that while the economy is certainly not as healthy as it should be, the reality is we have most likely seen the worst of the “Great Recession.”
An economic recovery is inevitable. Timing is everything in life, love and business. If the economy is poised for recovery, now is a good time to begin planning for business. This recession has lasted twice as long as the average recession since 1945. It is likely that when the recovery does take hold and public confidence returns, the expansion will be strong and sustained as consumers and businesses make up for expenditures they postponed during the recession.
So what advice would I provide a budding entrepreneur? The first thing to note is that even if you do all of what I suggest, there is no guarantee that your venture will be successful. Business is risky, challenging and competitive. If consumers like what you offer at prices that are profitable given your costs, you will survive. If consumers do not like what you offer you will fail. It really is that simple.
The first recommendation I make to any entrepreneur is to do your homework. This means that if you are going to start a business you need to understand what companies and products/services are now on the market that will compete with your offering.
And please never say that you do not have competition. Anyone who says this will induce a banker or a knowledgeable investor to simply walk away from you because you have demonstrated a dangerous level of ignorance. Everyone has competition for the attention and resources of consumers.
Your homework should be conducted like your life depends on it. Your business life does depend on your market intelligence being done fully and flawlessly. You have to know more about your business than anyone. And until you are an expert, don’t start or you will get your money taken by those who know more.
Secondly, you must plan and your planning must be realistic. Planning is fundamentally about predicting and preparing for an uncertain future. It is most healthy for entrepreneurs to ask tough questions in this planning process. One question I make entrepreneurs ask themselves is what would happen if you did not make a single sale for a month, a quarter or a year? Would you still have the desire to continue? Would you still have the resources to continue?
Planning a business is like planning for a political campaign. You want to map out in great detail, where the customers are, what they like, how they spend their money, and what factors influence their spending behavior.
You need to know, in great detail, how you are going to produce and deliver high quality mistake free products and services. While your friends and family might be tolerant of less than the best, consumers today are intolerant tyrants. These are only some of the questions that will require further drilling on your part. Your planning should inform your strategy for success.
Another major issue that must be resolved is financing. Where will you get the money you need to run your business? Most entrepreneurs start off with their own money; after all it is their business. Yet almost all entrepreneurs do not have enough of their own money to fully fund their business.
Almost all businesses require the use of Other People’s Money (OPM). Now unless you have a rich uncle who just loves to give you money, these other people are not just going to throw their hard earned savings your way. You will need to convince them that giving you their hard earned resources is better than keeping it themselves.
It must be clear that a successful entrepreneur must not only be able to sell their products and services to consumers, they must also be able to sell themselves and their businesses to banks, family, friends and investors.
The amount of money that entrepreneurs start their businesses with before they spend their money on anything is called their capital. Some of that capital is money the entrepreneur has invested in the enterprise. Some capital comes from others who are investing in you and your venture. And some of the capital might be borrowed. The more capital you start with the longer you can survive in business before earning profits.
Too many entrepreneurs rush into businesses without having close to enough capital, only to be forced into bankruptcy. This could have been avoided had they waited until they were able to secure more capital. It is good to have faith in your business, but it is better to have capital.
One of the main sources of capital is household savings and wealth. Federal Reserve data shows that the wealth gap is a major financial impediment in minority communities. In the most recent surveys, black and Hispanic households had less than 10 percent of the wealth of white households. It is the wealth of family and friends that is the source of most entrepreneurial business capital.
Having done your homework, come up with a well thought out plan; having secured your capital, then and only then are you ready to go through the next steps of becoming a successful entrepreneur. There are other details that must be explored to increase your chances of success. These will be addressed in the next edition of Banner Biz.
Fred McKinney, Ph.D., is president and CEO of the Greater New England Minority Supplier Development Council.
