- Weigh the risks and rewards carefully
The Risks And Rewards
Starting and running a small business is tough.
You are subject to high levels of mental stress. You need a solid physical constitution because you may find yourself working longer hours than you ever did as an employee.
You have to deal with uncertainty and anxiety and, if you make mistakes you have to accept the consequences. There is no guarantee you will succeed.
You may start a small business and find two or three years down the track that your investment has gone up in smoke.
But if you are suited to running a business, you may find that it is one of the most exciting and rewarding things you do in your life. You can control your own destiny in a way that you never would as an employee.
If you succeed, you will have the satisfaction of carving out a place of your own in the business world. And you may find yourself wealthier than you otherwise would have been.
Assess Yourself
Your first step in becoming a business owner should be to assess yourself. Can you accept the risks and the hard work? Are you the kind of person who will be satisfied by the rewards offered by running a business?
Entrepreneurs tend not to like taking orders. This is not to say that they are difficult or find it impossible to work in a team. It just means that they strongly prefer being their own boss.
They are high-energy people who are not happy to just draw a paycheck. They need to do something they are passionate about. They need a focus for their creativity and resourcefulness.
Characteristics Of An Entrepreneur
Successful entrepreneurs tend to be sociable. That makes them effective marketers. Yet they are also self-reliant and can work long periods in solitude and without support.
They love to compete and achieve. They are resilient, can cope with rejection and failure and still come back for another try. They have mental stamina and can exercise good judgment under stress.
They are firm decision-makers, but tend to act only after exhaustively weighing up all their options. They are not gamblers – they will take risks, but only after doing everything possible to maximize the odds in their favour.
External Factors
These are some of the entrepreneur’s psychological qualities. Yet people also start a business because of external pressures. They may be frustrated by their employer’s promotion policy, for example. They may feel that they are not being paid according to their performance.
Or their job may put too many time constraints on them. They may want to be in a position to decide when and where they work.
The main thing to keep in mind is that not all motives display the sort of active drive that compels successful business people – it’s not so easy as just ‘feeling’ that it’s right for you – you need to be quite driven to be able to put in the effort that will be required.
Age, Gender, Education Don’t Matter
Some factors are not of prime importance, such as age. Some people start successful businesses in their 20s, others in their 50s.
Gender used to be an issue but currently in the US there are an estimated 6.2 million firms majority owned and privately held by women. These businesses account for 28% of all the privately held firms in the US.
It is not necessary to be highly intelligent to succeed in business though good judgment seems to be essential.
University qualifications do not seem to be a prerequisite either. Small business owners need to know a lot about business but it does not matter how they get that knowledge. Bill Gates, for example, never completed his undergraduate degree.
Team Advantages
You may find the personality profile of the entrepreneur a bit daunting. If so, you may be cheered up by the news that successful companies are often founded by teams, especially in the technology sector.
In his book Start Up – An Entrepreneur’s Guide to Launching and Managing a New Business, William Stolze quotes a study of fast-growth technology companies. Only six percent were founded by a single person, while 54 percent were founded by two people and 40 percent by two or more.
Being part of a management team is one way of sharing the load. Team members can also provide specialized skills and knowledge that broaden out the capabilities of the firm, for instance by having a good salesperson or a good marketing person.
Team Disadvantages
The downside to forming a partnership or team is that you immediately have politics at the top of your organisation. One person needs to be CEO. They are likely to feel they have an edge over other team members. This can cause problems unless everyone acknowledges that the person does in fact have superior management skills.
There needs to be procedures for resolving honest disagreements over business issues. Otherwise, in the worst case, the company might end up being sold because its directors have fundamentally different views.
The Franchise Option
Even if you’re not a natural entrepreneur you can still own a business. Consider buying a franchise outlet.
There has been enormous growth in franchising over the past decade, particularly in business-format franchising, where you buy the right to operate a particular business model. For example, you might buy a franchise to a fast-food outlet. The business is yours but you follow the chain’s operating system.
If you choose your franchise well you have access to a proven business model and run a lower risk of failure. You will be operating within an existing business infrastructure, have access to employee training from the franchise provider (known as the franchisor).
You should also get help with finance, advertising, promotion and PR. The franchisor should provide you with advice on management practices and setting quality standards.
The downside is that you will not be able to make broad, strategic decisions for your business. Nor will you be able to design and refine your product and have the complete control you have when running a business that is truly your own.
Your Unique Business Concept
Your unique concept may be an innovative product, or it may be a different way of delivering a service. You may find a way in which to provide superior customer care. You may have a better way to distribute a product, though you will generally be at a disadvantage to big business in this respect.
Whatever the concept may be, it needs to set you apart from your competitors. It has to provide you with a competitive advantage.
Your Competitive Advantage …
Small businesses are rarely founded on a technological breakthrough. Breakthroughs generally require huge amounts of time and money.
But you might come up with an improvement to an existing product that already has a market. You might come up with an appliance that is lighter, more portable or easier to set up, use or maintain.
Or you might come up with a unique combination of products and services. For example, note the appearance of carwashes that incorporate a café, so that you can relax with a coffee and a snack while a team of people washes your car.
…Is What Distinguishes You From Others
Your advantage may be geographical. For example, you may be the only convenience store in the neighborhood. This kind of advantage is fairly fragile, however, as a competitor can always open up just round the corner.
Businesses that compete solely on price are living dangerously. You are vulnerable to any competitor that wants to start a price war. Any company that has deep pockets can beat you.
So you should try to make the most of the distinctive small-firm advantages. Small companies should be able to provide a more responsive and customised service. They should be more flexible and less bound by red tape. They should be able to provide small numbers of products precisely tailored to the needs of a niche market.
Looking For Market Opportunities
Products tend to succeed best where there is a gap or opportunity in the market.
Look for a market where there have been no recent product innovations, or a large market that has a few big suppliers. There may be untapped customer demand in such markets. Also look for markets where existing suppliers are serving customers poorly, or where there is a distribution network that does not have a product such as yours.
Establish Your Demographic
Make sure that your unique business idea is a commercial proposition. Establish who will buy your product and how much they are they willing to pay.
You need to profile your potential customers. What is your likely customer base in terms of disposable income, age, gender, profession, location, culture and lifestyle? What is your customer demographic?
Reach Your Market
You then need to devise a marketing strategy that will reach this demographic in a cost-effective way.
What magazines or newspapers do your potential customers read? What radio stations do they tend to listen to? Is it economical for you to buy television advertising? Would it be worth your while to buy access to a mailing list that covers your particular demographic so that you could advertise your product directly? Should you make yourself available to speak at professional or community events? Will you be able to launch your product at trade fairs? Should you sponsor local events that your potential customers are likely to attend? Should you launch your business online?
Research Options
You can do a lot of research yourself, just by getting out and talking to people.
Discuss your ideas with friends. You can pick up useful information from professional associations. You may get useful perspectives from casual conversations with fellow businesspeople. There is also lot of free research and advice available on the Internet.
On a more formal level, you can run focus groups to establish what consumers think of your product. Focus groups can help you refine and improve your product. They can also indicate how consumers feel about your competition and how you might meet competitive threats.
Another research option is to run surveys to help determine customer attitudes and expectations. You can also buy mass market research.
You may be surprised by the result of your research. If you are opening a hotel, for example, you might be inclined to highlight customer service in your advertising. But your research might inform you that the top priority for consumers is a spotless room.
Analyze Costs
Having settled on a business concept and established that there is a market for it, you need to be sure you can make a profit. First of all, you need to assess whether you can cover your costs.
So you need to account for business costs such as salaries, property rental, plant and equipment rental, capital purchases, insurance premiums, employee pensions and medical schemes, holiday pay, office expenses, IT, power, heating, cleaning, maintenance and so on.
You also need to consider the cost of subcontractors. It may prove wise to hire a specialist to run your payroll, for example.
Be Prepared
You will need to schedule in periodic factors such as debt repayments and tax installments. You need to make allowance for business hazards such as slow payment from debtors. You need to have some ‘fat’ to cope with unexpected economic factors, such as interest rate changes or currency fluctuations.
Be thorough in assessing your costs.
Then factor in Murphy’s Law: anything that can go wrong will go wrong, and at the worst possible time. Where costs can blow out they might just do so.
Then allow for the fact that your income may be substantially less than you expect, and you are starting to get an idea of how your business may look in its first year of operation.
Profitability Is Not Guaranteed
- There is no guarantee of success
Be aware that many businesses don’t make a profit until their third year. At the same time, be ready to fight tooth and nail to bring forward the date on which you first scrape into the black. Because it’s only when your business is making a regular profit that you can be sure it is going to survive.
When you prepare, reflect on a statistic from Startup Journal, a respected magazine or entrepreneurs: 75 percent of businesses do not make it to their fifth year.
While your odds may be better if you are not running a business such as a restaurant or corner store – these have particularly high attrition rates – your business prosperity is going to be strongly dependent on the quality of your planning.
Your Business Structure
Once you have a reasonable idea of the nature of your proposed business, you need to decide on which business structure will be best for you. Will you be the sole proprietor, or will your business be a partnership, corporation, or limited liability company?
Business structures have distinct taxation and legal ramifications. If you are a sole proprietor, for example, your taxation payments may be simpler. But you may also be personally liable if someone takes legal action against your business. You might be better advised to seek protection by incorporating.
Your Business Plan
You can bring focus to your research by preparing a business plan. Writing things down will force you to be more rigorous in your thinking. A business plan will also provide a key resource for getting financial backing.
Your business plan should be no longer than 15 to 30 pages including attachments. It should be written in clear language and laid out in a way that is easy to read.
While it should contain the key facts about your proposed business, it also needs to be a sales document. Finance brokers may read a thousand business plans and decide to fund only half a dozen businesses.
Your plan needs to be clear, comprehensive, accurate and persuasive.
We won’t go into detail here about how to do a complete plan; I can offer advice on that later if you wish. For now let’s just look at what they should cover.
The Basic Elements Of A Business Plan
Business plans vary in format, but they contain a number of basic elements.
- Cover, title page and table of contents
- Executive summary
- Business description
- Market strategies
- Competitive analysis
- Design and development plan
- Operations and management plan
- Financial factors
Firstly, they have an executive summary. The executive summary will specify the legal structure of your business venture, your capital needs and your repayment schedule for loans, stock and equipment.
You also need to include a business description, giving a brief overview of your business and its main strategies. The business description should include a mission statement and financial forecasts.
You also need to include a marketing plan, which will set out your analysis of your customer base and your strategies for reaching your customers.
The Basic Elements Of A Business Plan Continued
The business plan should provide a competitive analysis which identifies your competitors and your relative strengths and weaknesses. It should lay out strategies for overcoming weaknesses.
It should also identify possible business threats and lay out strategies for dealing with them.
Finally, the business plan should include a financial overview, giving an account of your projected expenses, income and capital needs. The overview should provide a detailed financial forecast for your first three years of business, with greater detail on the first year.
It’s very important to seek help from your accountant (or indeed myself!) with writing a business plan. They will be able to spot gaps in your business analysis and presentation and put complex information into clear English.
Entrepreneurs commonly risk their own savings when they start a business.
The basic rule here is never to risk anything you can’t afford to lose. For example, you may feel that it’s okay to risk three or four years’ savings. Some people will be willing to risk more. Be aware that investors will be more likely to back your business if you show that you are willing to put your own money into it.
Banks, angel investors and venture capitalists are another source of startup funds. And you may find that there is government assistance for a business such as yours. You may be eligible for low-interest loans, for example.
Other Startup Funding
Of course, many small businesses do not get specific startup funding. People have been known to start a business on half a dozen credit cards. But you need to be able to pay the interest rates and these can add significantly to the business costs.
Others approach family members and friends but this approach can be extremely dangerous. They may decide to loan you money on the basis of knowing and believing in you as a person. The personal connection leads them to ignore the business uncertainty involved in a startup.
But if banks have already decided not to lend to you it’s probably because they have decided your plan is not viable and that might be good advice to heed. In any case the quickest way to lose friends is to approach them for money. When family and friends do help with startup funding, it’s best that contracts be signed. That’s one way of minimizing the risk of later feuds.
Choosing A Location
Choosing a location is a key business decision. And it’s one that can be very difficult or even impossible to reverse.
You may have made a decision to work from home. That simplifies things. If you run an Internet business, then location may also not be so problematic. But even Internet companies sometimes need offices and places to meet with clients.
Look at the basic logistics first. Is your potential location easily accessed by clients and team members? If you have a medium-sized business, assess the quality of the local labour force. Will a long commute make the site unattractive to team members?
Are you within reach of subcontractors and suppliers? Is the site well-serviced by utilities and are amenities still likely to be good in five years? What is the crime rate in the neighborhood and is it getting better or worse? How much will security cost you?
Do Intensive Marketing
Finally, when you do start up you will need to grow your business, you need to market intensively.
Depending on the nature of your business, you will need to either attract customers onto your premises, or win manufacturing orders, or have people ringing up to enquire about your services.
Effective marketing is crucial in the startup phase because you are racing against time to get enough income in to start covering your costs.
Let people know that you are open for business. Shout out your unique business proposition and your competitive advantage.
Conclusion
Starting a business is a complex process.
You need to consider a lot of issues and you need to make a lot of good decisions. You need to do as much as possible to minimise business risks.
The key to reaping business rewards is to look ahead. You may need to spend months researching, planning, increasing your business knowledge and working on your skills. That way, you will be prepared to cope with the uncertainties of the business world. You will be better equipped to win through and run a successful enterprise.
Prepare well and you may find that starting a business is one of the best things you ever do.
And don’t forget to seek expert advice from the beginning – the business renegade, your accountant and banker, at least, should be partners in getting you up and running and providing you with continuing advice on staying profitable.
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