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A Guide to Starting a Small Business

New business start ups have the highest failure rate of any business sector. If you want to avoid being part of that statistic, then it’s vital to set off on the right foot with firm foundations.

The first piece of advice to is to ‘think small!’ This may seem contrary to the American Dream and not what made Henry Ford or Bill Gates rich, however, many new businesses go bust because they over extend themselves too early. This can lead to spending money on offices, equipment, advertising and staff – all hungry mouths that have to be fed, usually by servicing a large bank loan. So let’s work with a better scenario and ten golden rules.

1) Be 100% committed

Self-employment involves long hours and hard work. You won’t be able to give up or get disheartened easily, you’ll have to be decisive, take risks and be self-motivated and reliant. If that sounds like you, then you’ve got what it takes but if you are able to arrange it, keep your day job until you’ve developed enough business to go solo.

2) Play to your strengths

One of the possible dangers of a positive outlook is over-confidence in what is possible. Desire and belief are not enough to guarantee success. Let’s say you’ve been an accountant all your life but your dream is to run an ice-cream parlour. There’s nothing wrong with that but if you start your first day without a clue how to run such a business, you are heading for disaster. If you want to switch careers, get some experience in the new one until your weakness becomes your strength. There are always three choices; hope, chance or action.

On the other hand, one of the best ways of switching from employment to self-employment is by working in your existing area of expertise, where you already have the skills, knowledge and contacts. Know yourself. If you are great at selling but totally disorganised with paperwork and administration, find people with opposite or complimentary skills.

3) Take in washing before you take in partners

This is an adage about the perils of partnerships. Many people start off a new business with a best friend or close relative. What could be better? We get on like a house on fire and we share a common interest; we certainly don’t need to write a contract as we’re the best of pals!

The problem is that if things go wrong, you are liable for your partner’s debts and the sweetest friendships can turn to bitter acrimony. If you must have a partner, often for investment purposes, write a clear and simple contract stating responsibilities and liabilities.

4) Do your research

You might be in a hurry to get going but take time to do your research before you start spending money. Find out the demand for your product or service, whether the market is expanding or contracting, what prices are charged, what the competition is and what percentage of market share you can reasonably achieve. A friend recently opened a language school in a new area. She was so focused on the school building decoration and marketing material design that it wasn’t until she got there that she discovered there were already three other schools in the area. That said, competition isn’t necessarily a bad thing as this at least suggests that there is a healthy demand in the area and it easer to obtain a small market share of a crowded market than it is to challenge a monopoly. However, the moral of the tale is don’t be caught by surprise through a lack of research. 

5) Differentiate

Now imagine I am viewing the four schools in the area; how will you answer the question, ‘Why should I choose yours?’ Will your answer be? ‘Because we’re the cheapest.’ If you have kept your costs low, you may well compete on price but think of other qualitative forms of differentiation and how that might attract the customer. You need to have a very clear picture in your mind of what sets you apart from your competition. If you don’t, how can the customer?

6) Be a scrooge

When you start a business it can be great fun writing a shopping list of all the things you need. Of course, you need a vehicle, an office, a workshop maybe, furniture, equipment, stationery, business cards, and brochures; not to mention rental deposits, insurances, legal and accounting fees. When you put it all down, it’s quite a long list but it doesn’t have to be. It’s very easy to kid yourself that you are ‘in business because you have all these things but in fact, the only thing you are likely to be in, is ‘in debt!’ These days with the internet, it’s much easier to start with a virtual office and create a corporate image from your living room. There really is nothing clever about building overheads; the secret to successful business start up is to work from a low cost base. Think of how little you really need and only buy things out of income.

7) Have a business plan

Most people think that a business plan is something that you prepare for the bank in order to get a loan. This is a mistake. A business plan should be your plan and for your benefit. Asking questions like, how do you define your service, who are your customers, who are your competitors, what is your income projection etc. will be immensely helpful and may identify weaknesses in your project that you need to rectify.

Cherish your cash flow

Many businesses go bust not through a lack of orders but through a cash flow crisis. Manage your cash flow with kid gloves. Depending on your business, this may be on a daily basis. You should know at any given moment, how much you have in the bank, what cash you have, what is due in and what has to be paid out and when. Maintain a cash flow projection and err on the side of pessimism. Don’t base your predictions on best scenarios. At the same time, work hard on receivables. Offer tight payment terms, possibly linked to early settlement discounts. Chase late payers and don’t be embarrassed to ask for payment – it’s not a sign of desperation but a sign of good management. On the other side, always pay for things as late as possible with the possible exception of small traders who may be in the same boat as you. Look for good deals and interest free credit. Spend as much time looking after your money as making it.

9) Get professional advice

Having said, save money, there is one area where this is false economy and that is accountants and lawyers. You may think you are smart and can read a book and do it yourself; maybe you can, but if it was that simple, would these people spend years becoming qualified? A good accountant should easily be able to recover his or her fees through tax and investment savings that s/he advises. Similarly, having a professional lawyer scrutinise your contracts could save or make you a fortune. However, finding the right person is important. Where possible, work on recommendations. Avoid a big, expensive consultancy because they will fleece you to recover their immense overheads but neither go for the bargain basement Philip Marlowe type. A small, respected, professional firm is best.

10) Stay awake!

Never, ever get complacent. The minute you take your eye off the ball, it will be in the net behind you. Always seek customer feedback, keep informed about changes in the environment, the market and competition. Spend time on money on training, technology, research and development and think about how you can continually modernise and upgrade everything you do. You need to be very focused on managing today but always with one eye to the future.

Put it altogether and what have you got? A well thought out, planned approach, a low cost base, careful cash flow management, a differentiated product, professional assistance and a commitment to continuous improvement and development. Now your new business stands a chance!

 

Tags: Business, Guide, Small, Starting