March 22

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How to Start a Small Business

By Patrick Millerd


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

So what is?

More...

If you plan to start a new business and don't know where the real start is then here's the place to go.

In brief, you need to first sort yourself out before you set out looking at the details of the what's and the how's of the proposed business. You need to be clear on your strengths and weaknesses!

You need to be clear on whether you are planning to start a business or a new lifestyle? 

 And you should be clear on the difference? 

A lifestyle “business” requires the owner to be there 24/7. Think of a doctor or physiotherapist, a psychologist or plumber ... when you aren’t working there’s no income.

When there’s a problem you are the one to sort it out. This kind of operation can make a lot of money BUT it's incessant and personally demanding. 

On the other hand a business is designed to work for the business owner. 

We'll can now move on to look at all the issues of how to start a small business rather than a lifestyle.

The Market and Customers

This step is VERY IMPORTANT.

Gather as much information and understanding about the market or industry as possible. Understand and define the potential customers. Clarify the proposed position the business is aiming for in the market. 

Create a unique selling proposition – what will make you different in the eyes of the customer? Obviously this will be impossible without a clear understanding and picture of the prospective customers.

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 the market. Be aware that the right product at the wrong time will be a failure. 

Try to identify small, meaningful innovations or find narrow poorly serviced niche. These will be far more successful than trying to make a big leap into the unknown. 

The Investment

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

Are you prepared to use all your assets as sureties to borrow money? 

Warning: signing sureties in favour of a bank 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. 

One strategy for building a successful SMB is by bootstrapping – starting with limited funds and using the cash generated by the business to grow the business. Knowing that taking on this challenge that with limited financial resources this may be slower and will need added levels of effort, ingenuity and creativity.

Bootstrapping requires the business to be profitable from the early days as the cash generated is the driver of growth.

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

The Business Plan

This is an important document that will help set the business get off on the right foot. Also, if you are applying for finance the financier will want one. 

Click Here for a business plan which will work for most business ventures. It covers all the relevant sections and guides for the different sections.

During the business planning stage you should be thinking about why you should not start this business. Thinking about what could go wrong and how to prevent these events from happening. To foresee potential problems and have ideas of how you'd overcome the roadblocks and risks. 

Ask a lot of questions. Not all confirmation-based questions but questions that challenge the preconceived ideas. 

Identify the major risks – business, financial, market, seasonality, business structure, competition, industry changes, financial and legal. Be aware that you may be on that list!

An important decision is to have a clear focus on what the business will do by deciding what the business will not do.

Borrowing Money

One of the financial statements coming out of the business plan will be the cash flow statement. Here all the assumptions get filtered into a bottom line cash requirement - how much cash is needed and when.

With up front expenses and initial losses the company will need a “cash runway”. The amount of cash 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.

In an environment of low interest rates and limited investment opportunities borrowing can look an attractive option. While this looks enticing it can also be a trap. The result can be a loss of control and some short term gratification.

During one of my projects I made a big mistake. Tt involved buying an expensive machine from overseas and during the planning phase the local currency was severely devalued against the foreign currency so its price increased significantly. 

I had a limited amount of capital so the increase in the capital amount reduced the working capital and my runway. This completely changed the dynamics of the project. For the next few years it was a never-ending very painful uphill struggle! 

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 customers? There is often too much focus on the product “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 potential customers. This step is often overlooked or glossed over because it is both unappreciated and tough.

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 become the business bottleneck. So you need a team. One big advantage today is that many services are available remotely.

With the growth of the internet, part time employees and interim staff you can get many skills and services online as and when they are needed.

But be aware that to manage this type of operation requires a different management system and set of 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 good deal into a many nightmares 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 anything can happen. 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 both 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 size business owners achieve success through managing the financial health of their business. By applying focussed goals for cash and profit and customer management.

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