March 22

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How to Start a Small Business in 2022

By Patrick Millerd

March 22, 2020

best to start a small business, small business start, small business start-up, start a small business, steps for starting a small business

Many "how to start a small business" articles and programs begin with the nuts and bolts of the business ... but unfortunately that's not where it should start!

So what is?

More...

If you're thinking about starting a business you will have endless questions to answer. Some of these may lead to confusion about what to do first. Reading this article is a good place to start.

To summarise. The biggest initial hurdle that you face is yourself. To get this out of the way you need to understand what makes you tick. 

You should be clear on your strengths and weaknesses!

Understanding your "why" and whether you are planning to start a business or switching to a new income earning "lifestyle"

Understanding the differences between a "real" business and a "lifestyle" business. 

Then you can start looking at the details of the what's and the how's of a business.

A Lifestyle Business

A lifestyle “business” requires the owner to be there 24/7. The ultimate version of this is a sole practice doctor, physiotherapist, psychologist or plumber ... when you aren’t working there’s no income. You are the boss and the bulk of the staff. 

When there are decisions, you have to make them. You bear the consequences, whatever the outcome. When there’s problems you have to sort them out. Even at 10pm on a Saturday night!

Despite being endless and demanding a lifestyle business can be very financially rewarding.

And it is clear that most, small "businesses" fall into this category.

A  "Real" Business

A "real" business works for the business owner. It is independent of the owner and can operate without the owner. Here the business owner's focus will be working on the business and not working in the business.

While many small businesses start off as a lifestyle the long term plan is often to grow into a "real" business.

Once this difference is understood then the next steps are looking at the nuts and bolts.

This next step is CRITICALLY IMPORTANT. It involves spending time and effort getting an in-depth understanding of the market and the customers.

But in most cases, in the rush to get the business going, it is glossed over.

You may have the greatest idea for a product or service. But if the customers don't "get it" or don't "want it" the business is destined for the scrap heap.

Warning: This exercise is intimidating and can be discouraging but it is essential.

The Market  

When planning a new business you need as much information and understanding about the market or industry as possible. This can be done with some online research but more importantly, it requires speaking to experts and people already in the industry. 

Being clear on the position that the proposed business is aiming for in the market. Every industry has different sectors, or niches, and has companies competing at different levels. These vary from being a low cost / high volume operator to those with lower volumes and higher costs. 

At this stage you can be creative ... but don’t try and be too clever. 

There is a reason that the market or industry works the way that it does – so don’t try and outguess it. Be aware that there are two dangerous traps:

  • having the right product at the wrong time or 
  • the wrong product at the right time. 

The ideal solution is to find small, meaningful innovations in the larger market or to find narrow, poorly serviced niches. Finding these will be far more successful than trying to make a big leap into the unknown. 

Customers

It is critical to understand and clearly define the potential customers. Asking yourself "Who is going to buy from me and why?".

It is tempting to do this online but it is not enough. You have to to get out into the real world and speak to people face to face. It is daunting and that is why it is often neglected.

To compete successfully you'll need to offer something different. This requires creating a USP, or unique selling proposition. The offering that will make you different in the eyes of the customer? Being clear that without a detailed understanding of the prospective customers this will be impossible to do. 

The Investment

Before starting out it is critical to understand how much you can afford. What funding will you have after pooling cash savings and contributions from family and friends?

Deciding whether you are you prepared to use all your assets as sureties to borrow money. 

Warning: Signing sureties in favour of a bank or a financial institution is a serious step. Many business owners later rue the day so be VERY careful

Understand there is a relationship between what you put in - cash + sweat - and the return you can expect. Into this mix you can also add luck!

Bootstrapping is the lowest financial risk strategy for building a successful SMB. This involves starting with the funds you have and using the cash generated by the business to grow the business. The downside of this approach is that it takes longer.  In addition to being slower taking on the challenge of starting a business with limited financial resources needs more effort, ingenuity and creativity.

Bootstrapping requires the business to be profitable from the early days (or having a large amount of seed capital!) as the cash generated is the driver of growth.

While there are many “get rich quick” or “get rich with no investment” schemes featuring Ferraris and MacMansions touted on the internet there is one thing to remember “if it looks too good to be true... it is!” 

The Business Plan to Start a New Business

A business plan can serve a variety of uses but the most important is that it covers all the business requirements. It forces potential owners to write down and clarify their thoughts. This document can then be evaluated by outsiders from friends to business specialists.

This written plan will help the business get off on the right foot. Also, if you are applying for finance the financier will want it.

While there are many types and versions of a business plan you can Click Here for a draft which will work for most business ventures.  It covers all the relevant sections and guides for the different sections. Remember that it's not the plan that's so important it's the exercise of planning.

During the business planning stage you should be thinking about why you should NOT start a business. Considering the risks, thinking about what could go wrong and how to prevent these events from happening. This thinking helps to foresee potential problems and generate ideas of how to overcome the roadblocks. 

This will included identifying and evaluating the potential risks the proposed business could face. These risks vary in importance but can include business, financial, market, seasonality, business structure, competition, industry change, financial, legal and even political risk.

Ask a lot of questions. Be careful that these are not just confirmation-based questions but rather questions that challenge your preconceived ideas. 

At the start it is important to have a clear focus on what the business will do. This can be clarified by deciding what the business will not do. 

Borrowing Money

One of the elements of the financial projections in business plan will be the cash flow statement. In here all the assumptions are valued and filtered into bottom line cash requirements. Showing  how much cash is needed, for what and when.

As most startups will have up front establishment expenses and possibly initial losses it will need a “cash runway”.  An amount of cash that will be required before the business runs out of cash. Simply this is the cash resources divided by the monthly “cash burn”. 

To be safe the runway should never be less than 6 months. With the ideal target of being able to survive operating for 3 to 6 months with no income.

In an environment of low interest rates and limited investment opportunities borrowing can look an attractive option. But while this looks enticing it can also be a trap. The short term comfort with the downside of a long term millstone around the business's neck. And the risk that with any future cash flow difficulties learning the lesson of how quickly the bank can turn from friend to foe.

During one of my projects I made a big mistake. It involved buying an expensive machine from overseas. During the planning phase the local currency was severely devalued against the foreign currency so the  price of the machine soared. 

I had raised a limited amount of finance so the increase in the machine cost decimated the working capital and killed most of  my runway. This completely changed the dynamics of the project. The result was a never-ending very painful uphill struggle for the next few years!

The lesson here is that if there is a change in the early stages of a project justification then make sure that all the implications are considered.

Understanding the Market and Customers

“The most important single thing is to focus obsessively on the customer.
Our goal is to be earth’s most customer-centric company.” ~ Jeff Bezos

Has the business idea got real customers? Not friends who say "great idea/product" but real paying people. There is often too much focus on the product and the attitude “it's such a great product that I'll make it and they’ll come”.

This is a fallacy and destines a lot of start-up businesses for the bin. 

This article on small business failure from 2013 is as valid now as it was then.

In the article the top 3 reasons identified for failure were: 

#1: Not really in touch with customers through deep dialogue.

#2: No real differentiation in the market (read: lack of unique value proposition)

#3: Failure to communicate the value proposition in a clear, concise and compelling fashion.

Another more recent article on small business failure is also worth reading as it confirms the points above. 

At the start the total focus must be on identifying and fully understanding the potential customers. This step is often overlooked, or glossed over, because it is both tough and unappreciated.

So for some inspiration and guidelines read "Talking to Humans" by Gif Constable

The biggest problem in business isn't running out of cash ... it's running out of customers.

The People

You can't do everything yourself. And if you try you will soon be be the business bottleneck.

So you need a team. There are many specialised areas in a business and it's impossible to be an expert in all of them. This can be overcome today as many services are available remotely.

With the growth of the internet it is possible get many skills and services online and part time (fractional) as and when they are needed.

But be aware that to manage this type of remote operation requires a different management system and set of management skills.

The Final Steps in How to Start a Small Business

  • Mistakes made at the beginning are difficult to correct later and one mistake can turn a great deal into a nightmare deal!
  • If at any stage there is a change in any major assumption or condition – step back and re-evaluate the complete project.
  • Be patient – this can be an emotionally and intellectually challenging time. Slow progress can become very frustrating.
  • If the evaluation doesn’t go as planned be prepared to walk away.
  • It can be a grave mistake to be bull-headed and just push on. Getting entangled in the process believing “it can be sorted out later”... unfortunately later may never come! 
  • If there is more than one shareholder then a shareholder’s agreement is very important. In the early days relationships are like an early romance “all wine and roses” but later an ugly divorce. Be clear on the process and valuations if a shareholder wants to leave ... or you want them to leave.
  • Getting and keeping customers is tough ... it is expensive and time consuming. Do everything to keep the good ones and discard the bad ones. It's a never ending battle which requires an investment of money and focus to understand and get them.  
  • There will be many items on your to-do list – make sure that you are focusing on the ones that will reduce the chances of failure. Or said in another way manage the risks as well as the opportunities. 
  • Have a lazer focussed management system. I recommend using something like OKR’s (Objectives and Key Results). It has been adopted very successfully by companies like Google and Intel ... and it’s certainly worked for them! 
  • And finally ... best of luck!

Patrick Millerd

About the author

I help small and medium-sized business owners drive success by managing the financial health of their business through understanding the numbers.
Set goals and action plans for cash and profit and customer management.

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