Having been a small business consultant for many years, I’ve come across hundreds of individuals starting out on their own with the dream of utilizing an established trade or knowledge to build their own business. Many of these individuals have impressed me with their genuine passion to succeed, but have lacked the simple business theory needed to become successful. Below I have listed 5 tips to planning a small business, which include expectations, timing, capital, knowledge and risk/rewards.
Expectations:
When opening a small business it’s important to first establish a realistic revenue goal and then divide that goal by 3. For example, if you’re opening up a restaurant and expect sales to begin at $24,000 per month, count on $8000. The number one mistake I’ve encountered with new businesses is a gross exaggeration of how much revenue a new business will bring in its first few months of business. This is often due to businesses estimating their revenue based on other comparable firms operating in the area at that time. As you may have guessed, an estimation of this sort fails to account for the good will and established clientele those firms have developed over many years.
Don’t get caught up in the hype. I can’t tell you how many times I’ve had a drink with a new business owner and have listened to discussions of opening up their first store, but then quickly growing into multi-store within a year. Before you can grow, you must first succeed. I’m not saying to limit your dreams, but keep focused on your first store or business!
Keep in mind that in almost every business you get into, there will be competition. These competitors, just like you, are trying to gain market share and lure customer’s money into their pocket as opposed to yours. Even if there is very little competition when you begin, be aware firms will enter the market eventually and steal business if it’s perceived money can be made. Research how you will sustain your competitive advantages as the pieces of the pie get smaller.
In the current economic crisis facing our country, be certain you have the ability to gather enough cash flow away from your competitors to fulfill your basic financial needs. This comes down to how much research you have done in your market and how strong your business model is. Again don’t get caught up in the hype of becoming rich, but rather spend your time more wisely planning not to fail. Remember most businesses are out of business within 3 years.
Case in point, if your truly want to become successful spend as much time as you possibly can researching and better understating how you plan to get someone’s dollar in your pocket. Plan to succeed, but review every scenario and establish solutions to ways you could possibly fail. Keep focused!
Timing:
Timing is everything when opening a new business. Industries that have been hot over the past 5 years could grow cold for the next 5. With an economy taking a recessionary track without a clear end in sight, analyze if your product or service is a need or a want. If times are tough families may rent a movie instead of going to the theater, cook at home rather than going out to a restaurant and so forth. Is the market you’re entering saturated with businesses left over from a booming market making profit opportunities nearly impossible? By researching trade magazines, which are available for most industries, you can find out very quickly what the current trends are and how healthy it is. An interesting characteristic of timing is your business might have succeeded better 2 years before you plan to start or perhaps 2 years into the future. Be careful with your new business as there is a time and place for everything.
Capital:
Another pitfall and the kiss of death for most companies is not having the capital resources to survive. Believing that your company will become profitable within the first 6 months is often not realized. With any new business, you have to gain market share from your competition and that takes time and money. Making just a few mistakes with your business model or research data can create a catastrophic chain reaction if not anticipated and accounted for.
Give yourself at least a year of resources to make it through the mistakes and learning curves you will encounter, which includes enough money to cover your fixed cost as if you earned no income from the business at all. This is a very vague rule and often involves a large sum of money, but you get the idea as you need time to maneuver. As they say if you ever want to see time fly, sign a retail location lease. The first of the month seems to creep up every other day.
Knowledge:
Are you knowledgeable about the business you’re starting? I always recommend that you have worked in the industry you’re getting into for at least 5 years and are fully competent in the major areas of that sector. Getting into a particular business sector your not familiar with is often a path for destruction. Again there is no substitute to value of time and experience gained through hands on application.
Now that you’re knowledgeable, do you know how to manage yourself and others? Do you know how to sell? These are other issues that come up as your work environment and ability to persuade others to execute your vision is essential to success.
Risks and Reward:
A question to ask yourself when contemplating a new business is why you’re doing it. Opening up a new business not only requires capital, but also requires large amounts of time and energy on your part. Don’t be surprised if you’re required to work over 70 hours per week for an indefinite amount of time before you’re able to take a break. What is the earnings potential of your business? As opposed to spending thousands of dollars and hours of your life developing a new business that may ultimately fail, how much can you earn working for an established business in the form of salary or commission? I’ve seen a lot of business owners work 7 days a week making less money than they could working for a more established company. Of course you may grow your business over time into a large more profitable company, but at what cost to your friends, family and most importantly your own sanity. Remember the rewards of a successful business can provide your family with unimaginable riches, but these success stories are few and far between.
Conclusion:
The purpose of this article is not to scare anyone from fulfilling their dreams of owning a small business, but to add some insight into the pitfalls that occur frequently with new startups. In my opinion one of the best feelings in the world is owning a successful business that grows over time and allows you the flexibility and financial freedom to call your own shots. I hope by reading this you may add these suggestions to a long list of ingredients to opening your own successful small business!
