The burden of small businesses

Editor’s note: Michelle Stockman is an independent consultant with her company, Fort Smith-based Msaada Group. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

“Jobs will be our No. 1 focus. … And we’re going to start where most new jobs do – with small businesses. These are the companies that begin in basements and garages when an entrepreneur takes a chance on his dream or a worker decides it’s time to be her own boss.”

President Barack Obama believes in small business, especially the entrepreneurs who dream big like Jeff Bezos, Mark Zuckerberg or Tony Hsieh.

While many see entrepreneurs as blessed to enjoy their freedom from “the man,” entrepreneurs are fare from that image. Entrepreneurs are true fighters simply surviving all the obstacles thrown in their path for the hopes of making one’s own living. Like last month’s value chain column, this month is going to see what entrepreneurs are realistically up against in starting and running a small business.

To do this, I would like to introduce you to John and Kate. John has always wanted to open his own business while Kate has always wanted to pursue her interest in baking. Together, they open a bakery that specializes in custom cupcakes (in the hopes of sparking a new food trend across the nation). To start the business, John and Kate develop their strategic business plan before hiring a lawyer and an accountant to work with their businesses.

Their first task is to draw up incorporation documents and file with the Secretary of State (which costs $125 in Arkansas) and open their bank accounts (one for payroll, one for general expense and one for taxes). Now if John and Kate needed to file a patent on an invention, they would have to engage a lawyer that specializes in patent/intellectual property law. However a business lawyer is able to assist them with trademarks and trade secrets. Additionally, John and Kate heard that not all accountants are alike, so they set out to find one who is knowledgeable about small business needs and tax accounting.

The next step is for John and Kate to secure their bakery location as well as any bank financing needed to renovate and open the business. The couple has taken all their savings, 401(k) and equity in their home to secure the business loan to get enough working capital to open their doors. Since John and Kate have not been in business before, they are labeled a high risk business, so their loans are at maximum interest rates of 5% plus prime. Also since John and Kate are new business owners, their bank insisted they apply for an SBA loan, which triples the amount of paper work and time needed to process their loan.

After researching locations, demographics, available rental space and the options for building their own facility, the couple decides to rent a location downtown. After numerous and somewhat unsuccessful negotiation attempts with the property owner (who is asking for rent rates of which you would see in Dallas or Atlanta), the business location is secured.

Now the two hire contractors to renovate the space (of which the property owner benefits from) so that the business can meet required state and municipal building codes. However, the contractor overbooks his schedule and the renovations have seen delays. Additionally, the code inspector has been giving John and Kate grief over the proper ventilation of the bakery’s ovens.

While the contractor is busy, John and Kate hire a designer who helps them create the company’s brand identity and related design materials. Next, the company begins acquiring kitchen equipment by utilizing the local restaurant supply wholesaler and delivery company. Additionally, the two start negotiations with food supply vendors while scaling Kate’s recipes up for larger quantities.

Once the building is ready to open its door and they have their privilege license, bank accounts, incorporation papers, their accounting records established and all their building inspections for code and fire have been completed, the next step is ready. Now John and Kate need to hire employees (three to start and eventually add up to 15 or more) as well as add utilities to their facility. Since John and Kate have not run a business before, the electric company asks them to make a deposit (refundable after 14 months of good behavior) of triple the amount of their forecasted monthly bill (i.e. $800-$1,000). The gas company does the same, while the phone company charges them $3,000 in set-up charges plus their monthly bill expense.

The employees are now on board, the cupcakes are smiling at customers starring through the display cases and the advertising has been placed across town. John and Kate begin their business with a buzz.

However, the business buzz wakes up to reality of managing employees within the guidelines of the labor laws, working with the local health inspectors, managing problems with the food suppliers, dealing with the constantly changing inventory at Sam’s Club, working through the malfunctions of equipment and birthing new meaning to “marketing on a shoestring budget.”

John and Kate now need to pay payroll taxes (including social security, Medicare, Federal unemployment and State unemployment), sales tax (including any zoned or specialized sales tax collections), personal (and eventually employee) health insurance, loan repayments, line of credit payments, retirement savings (if offered to employees) as well as payroll, raw goods, marketing and other outstanding supplies needed to run the business.

Since John and Kate are the last two to get paid (if they get paid at all) in the business, their personal finances have been dwindling as they sweat over how long the business will take to begin to break even let alone make money so they can pay their mortgage, car loans, utilities and the like at home. On top of that, John and Kate start their days at 5 a.m. and end their day an hour after the bakery closes at 7 p.m. In the spare minute they have between the bakery and their home responsibilities, John and Kate typically spend that free time thinking through ideas, concerns or tasks needed for the business the next day six to seven days a week, 52 weeks a year.

John and Kate learned firsthand that starting your own business is neither easy, nor glamorous or without politics. The more rules, regulations, taxes and red tape our country, states and communities add to businesses, the more difficult it becomes to successfully start and run a business.

While the intentions of regulations are to protect people and businesses, small business owners are often left to shoulder these additional burdens at a time when they need the most help. In order to grow an entrepreneurial community, the community needs to lend a helping hand rather than scoff, wish them luck and expect them to shell out the money and jobs for the community.

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Stockman can be reached at [email protected]