Many things impact whether one business is riskier than another.
In this tutorial we will cover how business type and geography have an effect on assessing
risk of a business by looking at business failures.
Letís walk through exactly how DemographicsNow can help assess this risk.
For this tutorial, letís consider that you are looking to own your own business but are
undecided between the type of business you should open.
Because you and your significant other have some experience in hair cutting and hair fashion
you are thinking of opening up either a barber shop or a beauty salon.
But you are unsure of which one would be less risky to invest your money in.
This exercise requires we compare multiple businesses so letís first list these business
types on a single sheet of paper from which to compare as we progress towards a decision.
Letís start by typing in the two businesses we are considering at the top of the page
ñ Barber Shop and Beauty Salon.
Itís important to note that many things need to be considered when deciding on what type
of business to open and we are only going to be covering two of these factors in this
tutorial ñ the type of business, which we listed at the top of the page
and the second being geography, which we will list down the left side.
For this tutorial, we will identify specific counties in Michigan that we are considering
locating the business, so letís list them now, alphabetically
Of course we could list cities, zip codes or any other geography we define ñ it need
not be counties.
But for this example letís use counties.
This will tell us how many similar businesses went out of business in each area
in effect this is a helpful measure of risk, since although there may be many reasons why
these businesses failed, certainly the location may have been a factor
In addition, letís also add to the bottom of the list the Entire United States, as a
geography.
Including the entire U.S. will give us a gauge of whether the geographies we are looking
at, in this example counties, are more or less riskier than the national average.
So letís return to DemographicsNow.
First, we select LOOKING FOR BUSINESSES.
Öand then enter in the first geography LIVINGSTON and hit the carriage return (or click on the
magnifying glass next to the search box).
The screen shows us that there are several geographies that contain the word LIVINGSTON,
so letís simply scroll down and select the one we are interested in ñ LIVINGSTON COUNTY,
MI.
Next we click on BUSINESS CUSTOM SEARCH ... and then open up BUSINESS TYPE and SPECIAL
SELECTS by clicking on the arrows next to them.
Under BUSINESS TYPE we will use the KEYWORD SIC (4-DIGIT)/NAICS filter...
Öand type in our first business type, BARBER for BARBER.
Before we click on LOOKUP though, we will search within the PRIMARY NAICS codes rather
the SIC codes, since these tend to be more detailed than 4-digit SIC classifications.
Finally, we click on LOOKUP... and then click on 812111 for BARBER SHOPS,
so it then appears in our selected codes box directly below.
Next we click on the Out-of-Business filter under special selects ñ note that it automatically
will only include companies in business when we select it.
Öand finally select UPDATE COUNT.
DemographicsNow returned a count of 14 businesses.
What this represents is that there are 14 businesses currently operating in Livingston
County, MI that are classified as barber shops.
To get the number of barber shops that failed since the year 2000 (thatís as far back as
DemographicsNow tracks business failures), we simply click on the radio button ëcompanies
out-of-businessíÖ Öand click on UPDATE COUNT again...
where we see that only 2 barber shops have failed since the year 2000.
Now, let's collect the same data for out other geographies:
Oakland, Washtenaw and Wayne counties as well as the entire US...
...and then add this to our worksheet.
First, we'll add Livingston County.
We has 2 barber shops that went out of business and 14 currently operating.
The math would be 2 divided by the sum of both of these.
Why?
Because we must first get the total number of businesses before finding out the percent
that failed.
Next, we'll enter the data for Oakland...
...Washtenaw...
...Wayne... and finally the entire U.S.
Letís return to DemographicsNow and get the data on BEUATY SHOPS.
First, we enter ëbeautyí in the search box and click on lookup.
We then add 812112 BEAUTY SALONS to the SELECTED CODES box by clicking on it and also remove
BARBER SHOPS.
Since we already have the ENTIRE U.S. selected we simply click on UPDATE COUNT and results
show 337,249 beauty salons operating in the entire U.S.
We switch the radio button to companies out-of-businessÖ Ö and click on UPDATE COUNT to get the number
of beauty salons that failed which is 47,001.
We complete this process for the rest of the geographies
Note that we do not have to re-enter the geographies since DemographicsNow saves the last 5 geographies
used in the drop down menu of the geography box.
Letís switch over to our worksheet and input this information so we can see it all on a
single sheet.
First, we will put in Livingston County.
Recall we had 11 beauty salons that went out of business and 135 currently operating.
Again, the math would be 11 divided by the sum of both of these.
Next weíll enter the data for Oakland, Washtenaw, Wayne and finally the entire U.S.
So, letís take a look at the numbers we have here ñ and letís place a check mark where
the percentages are lower in that particular row ñ indicating that failures were lower
in that type of business than they were in the other.
In nearly all of the counties as well as the entire United States, barber shops have a
lower chance of failure, hence a lower RISK than beauty salons.
If we were to choose a particular county to open up our barber shop, it makes sense to
choose the geography with the lowest failure rate,
which would be Washtenaw County, since only 6.1% of the barber shops opened in Washtenaw
County in since the year 2000 went out of business
This is over 4 percentage points lower than the national average of 10.2% we found for
the entire U.S.
If we were still set on opening up a beauty salon despite these numbers, our best choice
would be to open it in Livingston County, in which only 7.5% of beauty salons failed
ñ and in fact this was even lower than the percentage of barber shop failures.
In conclusion, from this analysis alone ñ and many things must be taken it to consideration
when selecting what type of business to open and where to locate it ...
we can see large differences in business failures between business types and the geographies
they are located in ñ which we define as MARKET RISK in this tutorial.
This is very helpful information when making decisions of this type.
I think you will agree that DemographicsNow has been helpful in making this decision much
easier in a very short period of time.
With solid credible information that can be included in a business plan or other formal
document presented to a banker or a potential investor.
One final point ñ the actual numbers shown in this tutorial will change over time as
DemographicsNow is updated.