Starting a small business
by Pat McNees• The Importance of Service
• The Value of Location and Experience
• The Need for Capital
• Insuring Against Loss
• The Value of Labor
• Links to More Information
This article was first published many years ago by USIA.
It’s nearly 6 o’clock and many of the women who work in Washington, D.C.’s office buildings have gone home for the day or soon will. But two of them have stopped off here at a hole-in-the-wall women’s clothing store called Im’s Boutique, hoping to catch Sunny Im before she closes the store. Both of them are regular customers, who know Sunny’s business hours (she refuses to stay open late) as well as she knows their personal lives.
Sunny Im loves her customers, and they know it. They know that if they try something on and she doesn’t think it looks good on them, she will tell them so, and then find them something more appropriate. She takes good care of her customers and she knows her business — two reasons Sunny Im has stayed open for eleven years, while many similar new businesses have failed.
Which is why Ruth is here asking Sunny questions. Ruth is thinking of opening a small dress shop, and has just attended an all-day workshop offered by the U.S. Small Business Administration on how to start a small business. The retired executives who ran the workshop emphasized the need for prospective business owners to do their homework: to ask people in the business many questions so they will know what to expect.
“You don’t have to reinvent the wheel,” one speaker had said. “You don’t have to repeat the mistakes other people in your field have made. Go talk to people running the kind of business you want to be in. Most of them will be flattered if you ask them for advice, and will give it to you, if you aren’t going into direct competition with them and if you don’t ask for their time when they’re busy.”
So Ruth stands quietly to one side while Sunny Im attends to her customers. One of them rushed in at 15 minutes before closing to pick up a suit she bought the day before and was having altered. Sunny promised to have the suit ready by next week, but the customer learned this morning about a business dinner she must go to this evening and she knew she didn’t have time to go home and change clothes. “Can you get it ready by this afternoon?” she pleaded.
“Of course,” said Sunny, and told her tailor to give it top priority. Such personal service sets her apart from her competition in downtown Washington.
The Importance of Service
“Offering alterations has helped my business a great deal,” Sunny explains. “My seamstress is always busy, and I have never advertised — except for a small sign in the window saying that we did alterations. That sign was in the window six months to a year, and so few stores in the downtown areas did alterations that I finally had to take the sign down. I had more business than I could handle through word-of-mouth advertising.”
This kind of service not only makes Sunny’s store stand out from the crowd, it also brings people into the tiny boutique. Getting customers into the store is essential to sales. Keeping them satisfied and coming back is even more important—and in the eleven years Sunny has been here, this has clearly been one of her strengths. Sunny is now chatting with a second customer, a woman who came in just to say hello.
“I’m a grandmother,” the woman reports.
“You are?” Sunny responds with delight. “Did Michele have her baby?”
The customer lingers to tell Sunny about her grandchild and recent problems in her family, and Sunny listens with evident sympathy. The customer buys nothing, but it is clear that when she wants to, she will buy from Sunny. Years of experience have taught Sunny that the most important part of her business is knowing, not dresses and dress design (although that is important), but how to deal with people — whether the people are customers, suppliers, creditors, neighbors, or employees.
The Value of Location and Experience
Over dinner in a neighborhood Chinese restaurant, Ruth learns that from the beginning Sunny had spent as much time selling herself as she has selling clothing. When she bought the store, in April 1980, she had no experience running a business, although she did have experience in the clothing business. She had studied design in Korea and Kansas City and for seven years had worked as a dress designer in Kansas City, and in 1980 she was thinking of moving to New York City — center of the U.S. garment industry. She changed her mind because her sister — who lived near the nation’s capital and was feeling lonely so far from her family — had persuaded Sunny to give Washington a try.
There was little or no manufacturing in Washington, a government town, and Sunny didn’t want a 9 to 5 office job. The clothing business was the only business she knew, and she figured the only way she could work in it here was to open a retail dress store. So she had set about looking for a site, knowing that location is one of the most important factors in retail sales. She wanted to find a small place, but not a shop in a shopping mall; she didn’t want to follow someone else’s hours, but to set her own. Every day she checked the classified ads in the local newspapers, but she also asked everyone she knew to keep their eyes open.
One day a friend at the World Bank called to tell her about a little dress store across from the Bank that was open some days but not others. “The old woman who runs it does not look well,” said the friend. “Maybe she’d be willing to sell the business.”
Sunny came to look at the store, and saw that it had far more potential than the owner was realizing. Every day, hundreds of women streamed past the store’s small window. But the few clothes on the racks were old-fashioned and except for a small stock of pantyhose stockings, there was little most working women would want to buy. It took Sunny several visits to persuade the woman to let her purchase the business: since Sunny had never run a business, the woman didn’t take her seriously at first. And when the woman did decide to sell her the business, it took Sunny a while to persuade the owners of the building to let her take over the lease — for the same reason. Ultimately she persuaded them to let her have the lease by getting a friend who was a businessman to speak up for her, and by showing them her financial plan and two years of income tax returns.
It helped, of course, that she had experience in the garment industry. More than half of all businesses fail within the first four years, usually because people start businesses in which they have no experience. “You have to know the business,” Sunny says. “You may not know how to run a business — that you can learn every day as you go along. But you have to know the business and you have to know how to handle people.” These were clearly two of Sunny’s strengths.
The Need for Capital
“Next to choosing the right location, having enough capital is the most important thing in starting a new business,” Sunny tells Ruth. “You have to have enough cash to get merchandise, or you have nothing to sell.”
This confirms what Ruth heard in the SBA workshop: that one of the leading reasons new businesses fail is that the owners have insufficient capital. And if you don’t have the cash, you need the ability to borrow it. The three C’s of successful business operations, she has learned, are “cash, credit, and collateral.” To take out a loan, she must first write a business plan, which will spell out exactly what she plans to do in her business, exactly how much it will cost her the first year (in rent, utilities, payroll, carrying costs, and so forth—and to purchase clothes wholesale, in New York), how many customers will have to make purchases to cover these costs, and how much she can realistically expect to make the first year. It must also show that she has the experience needed to succeed in that business.
Ruth knows banks are wary of overoptimistic projections of revenues, so she must find out what is realistic to expect — by talking to local people like Sunny and by looking up standard cost and profit ratios for her industry — figures available in business reference books and from trade associations. Ruth knows she needs enough money to cover her operating expenses for a year, and that to get a bank loan for a start-up business she has to provide from a third to a half of the financing from her own funds — to indicate the seriousness of her intentions. She knows she should expect to operate at a loss for at least the first year, and that the bank will expect that — but that even if her profit and loss statement shows her operating at a loss, she must convince them that she will have enough of a positive cash flow to be able to repay her loan. That is all they are interested in: knowing that she can repay that loan. What she needs to find out, before she can draw up a realistic business plan, is what she should reasonably expect costs to be. Besides talking to people like Sunny, she must get an accountant who knows the business and can help her prepare the business plan.
Sunny tells Ruth she had figured eleven years ago that she would need $20,000 cash to get her business started and that figure had been right; if it were now, she would need $30.000. Fortunately, during her seven years in Kansas City Sunny had saved enough to get her through the first year and in her eleven years in business she had never taken out a bank loan — although she had, from time to time, charged merchandise on a credit card. It had helped that she was living with her sister at the start, so her personal expenses were minimal.
The rent on Im’s Boutique was $600 a month at first, for 400 square feet; in the intervening eleven years it has more than doubled, to $40 per square foot. They started the rent low, to see how it would work, and increased it 10 or 15 percent a year. If she were a new tenant, she would have to pay at least $50 per square foot. “Rent is an important cost,” says Sunny. “The rent puts some people out of business. And the rent on a small store in a prime location is higher per square foot than the rent on a larger store.”
Sunny had agreed to pay the previous owner $8,000 for her business (including $2,000) in inventory) over two years. This sum was low, to Sunny, and worth it. She knew she had far more chance at success taking over an existing business than starting a new one from scratch. For one thing, you start with a customer base; for another, the place has a track record on which to base projections and secure credit. Equally important, the previous owner spent a month working with Sunny, giving her useful advice about running the shop and invaluable insights into the customers. “It’s important to offer layaway” (to let customers know they can pay a little each week for a garment), the old owner told her, “so single parents and women with children can afford to buy. But don’t let them take too long or they may change their mind or not be able to pay and you will be stuck with a garment that is out of season.” The woman had told Sunny which customers were good for credit, which weren’t, and other information that would save Sunny a lot of time, money, and trouble.
Having the owner work with her for a month also freed Sunny to go to New York. Sunny knew that she needed to have a New York buyer. She had found her buyer, Marvin, by phoning people listed in the yellow pages of the New York phone directory and questioning them until she had found one she felt sounded trustworthy — then had gone to interview him in person. Marvin has been her buyer for eleven years now; she pays him $150 a month, she tells Ruth. Each month when she goes to New York, he takes her to the wholesalers he thinks will have what she wants, and he handles any details she can’t handle easily because she is in Washington.
Sunny knew she eventually needed credit to buy merchandise; she couldn’t go on paying cash for merchandise forever. After getting her retail license and a federal tax identification number, and registering the store’s new name (“I had no choice on that: my sister insisted on using the family name”), Sunny had asked Dun and Bradstreet to give her a credit rating. They checked her job background and credit, and after six months she had credit, which she updates by sending them a financial statement each year. More important: “I’ve never missed a payment to anyone, and that is very important,” she tells Ruth. “You have to maintain credit to get merchandise — especially a small store, because you buy in small quantities. They give credit more easily to firms they think can sell in volume.”
Insuring Against Loss
Ruth hesitates at first to ask Sunny so many details about costs, but realizes that any banker she talks to is going to want dollar facts, not guesses, so she probes further. Sunny knows she needs to ask these questions and answers them readily.
Sunny tells Ruth she spends $380 every six months on insurance, which includes coverage for fire, theft, and liability (against lawsuits) — and says you have to have insurance. Her rates have remained relatively low, because she’s filed only three claims in eleven years, once for burglary and twice for theft. “If your business is in a city, things like this are inevitable,” says Sunny. “In the burglary episode, someone smashed the window and grabbed the window display — the burglar alarm went off right away, so they didn’t get much. Both incidences of theft involved men grabbing an armful of goods and running out of the store. Fortunately I had eyewitnesses so I had no trouble collecting on the insurance.
“What’s interesting in my business is that the men tend to snatch and run; women tend to shoplift, maybe because they’re women and it’s a dress store. There’s more shoplifting in the winter, when people are wearing coats. I haven’t lost much because I watch people very carefully, and I have a rule posted that they can take only two things into the dressing room at a time. That’s also because it’s a tiny store and when it’s crowded people need to take turns using the dressing room. If you do see someone stealing, you must be very, very sure they have taken something before you accuse them. I don’t say anything unless I am 100 percent sure. And they usually feel terrible.”
The Value of Labor
Sunny pays her employees $8.50 an hour, more than Washington’s minimum wage, but worth it to get someone she can trust who also does good work. (On top of that, she has to pay for workmen’s compensation and unemployment insurance, and 7.5 percent in social security payments. And there is a fair amount of paperwork involved in withholding income tax and other federal payments.) When Sunny first opened the business, she did everything herself — although she hired an accountant knowledgeable about the garment business. After a couple of months, she had the confidence (and enough business) to hire a tailor to help her with the alterations.
Hiring good help is difficult, Sunny explains. She hired her first tailor by placing a classified ad in the local Korean newspaper (“Wanted: tailor to do alterations”) because many Koreans are skilled at sewing. “Finding and keeping good employees is difficult. If someone does good alterations, she usually can’t speak good English, so I can’t leave her in charge of the store. But if she speaks good English, she usually can’t do good alterations. And given a choice between the two, I’d rather have her be able to do good alterations. I have a former customer I get to come in when I take a vacation, but my customers don’t really like it when I’m not here, so I’m usually here myself.”
Sunny, herself an expert tailor, tackles complicated jobs and makes some custom items (especially wedding dresses), although the high cost of labor makes such items beyond the reach of most of her customers. As for knowing how to sell: “Knowing how to buy is more important than knowing how to sell. When I first opened, I wanted to sell an exclusive line of dresses, but within a month I have that idea up. I could see that in this neighborhood women wanted clothes they could wear to the office. I go to New York once a month to see what’s available and sometimes I’ll see something I think is beautiful but I know my customers won’t want it. If I buy it, I won’t be able to sell it.”
Sunny has purposely avoided expanding the business because expansion means hiring more people—which means more responsibility and headaches. She has avoided keeping the store open late for similar reasons. “My customers begged me to stay open late one night a week, so I tried it once. I kept the store open until 9 o’clock one Thursday night, and the next day I was so tired I decided it wasn’t worth it. I need a good night’s sleep.”
She has purposely limited her ambitions for the store. “With this store, I can’ get rich, but I can make a comfortable living by working hard. But you have to enjoy the business. It’s not worth it for the money. I like the people — not all of them, but most of them. My customers worry about me, and that’s a nice feeling.”
Contact the author, Pat McNees, here, for permission to reprint.
• Small Business Administration (SBA)
• Starting and managing a business (SBA)
• Hiring Your First Employee (Entrepreneur)
• SBA loan programs
• Fundera (small business loan facilitator). What Is Fundera, and How Does It Work? (J.B. Maverick, Investopedia, 9-24-15) Fundera is an online loan broker. It makes money by matching borrowers seeking financing with lenders and receives a "finder's fee," or referral fee, from the lender when a loan agreement is made. It is not a lender, but a loan facilitator.
• Breaking Into Startups
• How to Choose the Right Bank for Your Small Business (Christine Lagorio-Chafkin on the INC. blog)
• A dozen deductions for your small business (Dana Dratch, Bankrate)
• 10 Steps to Achieving Work-Life Balance: Small Business Edition (Vertical Response)
• National Association for the Self-Employed (NASE)
• Starting a Small Business 101 (About.com)
• Nolo Press (legal self-help articles on starting a small business, forming an LLC, cash vs. accrual accounting, consulting & contracting, and more)
• Positive Vibes Bert Jacobs, co-founder of Life is Good, tells an audience at the Inc. iCONIC DC conference how he decided to make optimism his core mission.
• Freelancing, contracting, telecommuting (Writers and Editors)
• Communicating and marketing online
Thanks to Erica Francis for suggested links.
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