Having a steady cash flow and establishing market identity are the main obstacles faced during the first year of business, a survey of Iowa entrepreneurs shows.

In the survey, commissioned by the Small Business Development Center and conducted by Howard Van Auken, a professor of finance at Iowa State University, 59% of the respondents cited cash flow as being one of the three most difficult problems during the first year in operation, with establishing market identity cited next by 56% of the respondents. Personnel was mentioned next among 27% of the entrepreneurs. By comparison, 44% of the respondents cited cash flow as one of the most difficult current problems, with advertising second at 34% and personnel at 20% .

The survey was conducted during June and July, 1987. A questionnaire was mailed to 375 Iowa businesses, established between 1980-1987, in representative small and large towns throughout the state which were selected from the 1987 Iowa Business Directory. A total of 96 usable questionnaires were returned, providing a response rate of 25.6%.

The majority of the firms were in either the retail (39.6%) or services (37.5%) business. The remaining firms (22.9%) were in other business categories such as finance, construction, agriculture, wholesale, professional and manufacturing. Over one-half (58.8%) of the small businesses operated as sole proprietorships, while 17.5% were partnerships and 23.7% were corporations. Almost all of the firms served either a local (69.8%) or regional (26.0%) market. Only 4.2% of the small businesses served an international market.

The majority of the firms (51.4%) had an initial capitalization of less than $20,000. Of the remaining firms, 27.8% required $20,000-50,000; 11.4% required $50,001-100,000; and only 9.4% required more than $100,000 to begin operations.

In addition to problems the entrepreneurs encountered during their first year in business, the respondents were also questioned about advertising methods. The three most effective advertising media used during their first year were word-of-mouth/referrals (87%), followed by newspapers (70%) and telephone directory (41%). The other media outlets mentioned were radio (30%), fliers (27%), participation in community events (20%), other methods (11 %), and television (4%).

As for current methods of advertising used, the vast majority - 94% - of the small businesses rated word-of-mouth/referrals as important, while 84% used newspapers, 66% telephone directory, 50% radio, 40% participation in community events, 38% fliers, 13% other methods, and 7% television.

The study found that business size, location and type influenced which form of advertising was used. While word-of-mouth/referrals were valued highly by all firms, small businesses in small towns tended to use television and telephone directories less frequently and newspaper advertising more frequently than those in larger towns.

Retail and service firms attributed more effectiveness to newspaper advertising than other types of small businesses, while service firms ranked word-of-mouth/referrals as slightly more effective than retail firms.

The business owners were also questioned about their sources of equity and debt. The firms relied heavily on personal savings and loans from lending institutions for capital. A third party investment, life insurance, common stock, sale of personal asset, home equity, other sources and limited partnership are, in this order, other sources of initial equity that the respondents mentioned. Other sources of debt included friends/relatives, Small Business Administration loans, bonds and finance companies.

The survey showed newer businesses are borrowing more money to get started than older businesses did to launch their business. Newer businesses, those established since 1983, said 57% of the money was borrowed and 43% came from savings. On the other hand, older firms borrowed just 37% of the money to establish their business and used 63% of their own money.

Approximately one-third of small businesses borrowing from a lending institution were required to provide 100% collateral for their loan, and about one-third had no loan collateral requirement, the survey showed. Also required to obtain a loan were in this order, a business plan, financial projections, market study and professional (CPA, attorney) opinion.