Many "how to start a small business" articles and programs begin with the nuts and bolts of the business ... but that's not where it should start!
As you think about starting a business, you'll be overwhelmed with the endless questions you ask yourself.
With many answers adding to the confusion about what to do first, what is essential, what can be done later, and on and on.
So before seriously thinking about the business, I recommend you read this article.
In summary the article says that the biggest initial hurdle that you're facing is yourself. And to get yourself out of the way you need to understand what makes you tick. Being clear on your strengths and weaknesses!
Understanding your "why" and whether you are planning to start a genuine business or switching to a new income-earning lifestyle.
Then with 'you' out of the way, you can start looking at the details of the what's and the how's of the business.
Firstly, understanding whether the vision is to build a "lifestyle business" or a "real business". Understanding the differences between a "real business" and a "lifestyle business".
A "Lifestyle Business"
The primary requirement of a "lifestyle business” is that the owner is available 24 hours a day, 7 days a week, for 365 days a year. Where the owner works FOR the business!
Some versions of this are a sole practice doctor, physiotherapist, psychologist, small shop owner or plumber ... when you aren’t working there’s no income. You are the boss but, in many cases, also the bulk of the staff.
When there are decisions, you must make them. You bear the consequences, whatever the outcome. When there’s problems you must sort them out. Even at 10pm on a Saturday night!
Despite being endless and demanding, a "lifestyle business" can be extremely rewarding both personally and financially and most small businesses fall into this category.
A "Real Business"
On the other hand, a "real business" works FOR the business owner.
It is an entity independent of the owner and can operate without the owner. Here the business owner's focus is working on the business and not being stuck day-to-day working in the business operations.
While many small businesses start off as a lifestyle change, the long-term vision is to grow into a "real business".
Once this difference is understood then the next steps are looking at the specifics of the business.
The first step in this planning is CRITICALLY IMPORTANT and often overlooked. It involves spending time and effort getting an in-depth understanding of the industry, the market, and the customers.
But in most cases, not appreciating the importance and in the rush to get the business going, it is glossed over.
Not realizing that even with 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 time-consuming, intimidating and can be discouraging but it is essential. One of the main reasons that so many small businesses fail is that there is too little research upfront.
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" or "great product" but people (and enough of them) who will pay for it.
Sometimes, there is too much focus on the product with 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 to the bin.
This article on small business failure from 2013 is as valid now as it was then where the top three reasons 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.
It cannot be emphasized enough that at the start the total focus must be on identifying and fully understanding the potential customers. This step is skipped over because it is both tough and undervalued.
To get started and for some inspiration and guidelines I recommend reading the book "Talking to Humans" by Gif Constable
When planning a new business, you need as much information and understanding about the market and industry as possible. This can be started with some online research but more importantly, it requires speaking to experts and people already in the industry.
The objective is to be clear on the position that your proposed business is aiming for in the market. Every industry has different sectors, or niches, and has companies competing at distinct levels. These vary from being a low cost / high volume operator to those with lower volumes and higher margins.
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 in the way that it does – so don’t try and outguess it. Be aware that there are two dangerous business 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 a large market or to find narrow, poorly serviced niches. Either of these options will be far more successful than trying to make a big leap into the unknown.
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 online is not enough. You MUST get out into the real world and speak to people face to face.
Neglect this and you increase the chance of the business failing!
To compete successfully you'll need to offer something different. This requires creating a USP, or unique selling proposition. An offering that will make you different in the eyes of the customer. Establishing differences is impossible to do without a detailed understanding of your prospective customers.
Here is a final thought. The biggest problem in business isn't running out of cash. It's running out of customers.
As you start 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 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 major step. Many business owners later rue the day so be VERY careful.
Understand that there is a relationship between what you put in - cash + sweat - and the return you can expect. Although this formula will also be impacted by the luck factor!
Bootstrapping is the lowest financial risk strategy for building a successful business. 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 as the cash generated is the driver of growth. This can also be done with a large amount of seed capital.
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 thing is that it defines all the business requirements.
It forces potential owners to write down and clarify their thoughts. Then anyone from friends to business specialists can review the plan.
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 as it covers all the relevant sections and includes section guides.
Remember that it's not the plan that's so important, it's the exercise of planning.
"In preparing for battle I have always found that plans are useless, but planning is indispensable.”
This famous quote from Dwight D Eisenhower, who led the Allied Forces in the invasion against the Nazis during World War II – holds true today.
During the business planning stage, you should also be thinking about why you should NOT start the business.
Considering 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 roadblocks.
This will include identifying and evaluating the potential risks the proposed business could face. With the risks varying in importance, they will 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.
The final part of the business plan will be the cash flow statement.
In here all the assumptions have been valued and filtered into the bottom-line cash requirements. Showing how much cash is needed, for what and when.
To cover the up-front establishment expenses and initial losses the business will need a “cash runway”. This is the amount of cash needed to meet the costs before the business runs out of cash. Simply this is the available cash divided by the expected monthly excess of cash out compared to cash in or “cash burn”.
To be safe the cash 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 has the downside of a long-term millstone around the business's neck. And the risk that with any future cash flow difficulties having to learn the painful lesson of how quickly the bank can turn from friend to foe.
During one of my business ventures, I made a big mistake. It involved buying an expensive machine from overseas. During the planning phase the local currency suffered a severe devaluation against the foreign currency.
I had not taken a forward exchange contract, so the price of the machine in the local currency soared.
As I only had a limited amount of finance 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 major change in the preliminary stages of a project then make sure that all the implications are considered.
As talented as you think you are, you can't do everything yourself. And if you try you will soon 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.
With the growth of the internet, it is possible to get many skills and services both online and part time (fractional) as and when they are needed.
But be aware that managing this type of remote operation requires its own set of management skills and a different management system.