Starting a business can be a very exciting time. There are limitless opportunities for you to be in control of your own destiny: deciding when and where you work, the customers that you work with, and the prices that you charge. For many, the dream of “being your own boss” is an alluring prospect, but without the right planning and preparation, this dream can become a nightmare.
According to research, around 20% of businesses fail within the first year, and only 50% are still trading by the end of their fifth year. While some businesses may not be around because the owner has had a better offer elsewhere, or because they were bought by a competitor, it is safe to assume that a large proportion of them failed.
Therefore, the odds of being successful after 5 years are about the same as the odds of tossing a coin and it landing on heads. It needn’t be this way though. With careful research, common sense, and by learning from others who have gone before you, it is possible to beat the odds and be successful with your new venture. Here are some tips that all new business owners should know.
Know Your Numbers
If you don’t have a profitable business, you don’t have a business. You may be able to run for a while with a profit if you have a strong cash flow, but ultimately the math will catch up on you. Understanding whether your product or service is going to be profitable after you have covered your variable costs and overhead is important. You should calculate this before you actually start buying and selling products, as if you do it afterward, it will be too late.
This is the same in strategy games like poker – before making decisions on whether to call, raise, or fold, a good poker player will calculate the probabilities of different scenarios.
If you are not a numbers person, you should hire someone who is. A good accountant can help you check whether your business model is profitable and advise on ways that you can increase your margins. Some industries have other professionals who can help too, for example in the construction industry a quantity surveyor helps to manage the financial elements of a project.
Know Your Market
Many people dream of setting up a business so that they can sell a particular product, or offer a certain service. This might be the dream of operating a small bakery, while for others it might be selling customized wedding gifts. While many think about the product, few pay any consideration to the people who might be buying them.
Before jumping in and investing your time and money into a business, you should conduct some research into the market. Do people have a need for your product? Are they prepared to spend the amount of money you will be asking for? Are there any competitors in the market already? You may wish to do this research yourself, or you may find that others have already published useful information online.
Also, just because there are other businesses already doing what you plan to do, it doesn’t mean you should give up on your idea. Established competitors show you that there is a demand for the product or service, and they have already created interest and desire for what you will offer. If you can provide a better, faster, cheaper, or more personal service than them, you have a competitive advantage that will help you succeed.
Don’t Splash the Cash
Many new business owners fall into the “I’m an executive” trap. They buy an expensive computer, place it on an expensive desk, drive around in an expensive car, and generally throw money around on things they don’t need. All because “they’re a business person”. This is wasteful and will almost certainly cause problems in the not-to-distant future.
Businesses that don’t get a large investment when they start up must operate on a shoe-string budget. This means that money is a precious resource and should be preserved at every opportunity. If a cost can be avoided, at least temporarily, then it should be. There is no need to invest in the swankiest of websites at the early stages, for most businesses a simple, cheaper one will do. Even if you have managed to secure a large amount of funding for your business, taking a frugal approach to your spending in the early days will help you to make the business profitable earlier that you otherwise would. Businesses that are able to operate on these small budgets are more likely to survive when the next recession hits.
Starting a business is an exciting time in a person’s life. It has a very big learning curve that can be daunting and rewarding in equal amounts. Many people have already gone down the path of “being their own boss”, and therefore there are plenty of lessons to learn. By knowing your market and understanding the financial elements of your business it is possible to lay the foundations of solid operation. Then by being prudent with how you spend your hard-earned cash, you can build on those foundations to make a successful business.