So you want to start a small business! Now, is a great time since the economies in most countries begin to thrive. Unfortunately, many people think starting a business means that you have to quit your job, sell all of your possessions, and live off of peanut butter and ramen until you get a break. While this may be an option for some, it’s not always practical or even desirable – especially if you still plan on living in your house with electricity, running water, and internet access. If you spend time effectively planning your business, you’re in a better position to ensure success and can even start it as a side gig, while keeping your full-time job.
So, let’s take a look at the 7 key factors to consider when planning your business.
Planning your business
Writing a business plan is an absolute must if you want to succeed and avoid common pitfalls. Yes, we’ve all heard tales of folks who built billion-dollar companies with nothing more than a few notes on the back of a cocktail napkin but those are the exception. Most companies build their business with extensive planning; planning that’s updated regularly to guide decision-making. A business plan consists of a marketing plan, strategic plan, forecasts, and pro forma statements (here’s a link to templates for these statements) to ensure adequate cash flow. Therefore, our 7 key factors revolve around critical elements of that business plan. Read on to learn more about how to craft a business plan to optimizes your chances of success.
1. Elements of your business plan
A good business plan should include:
- A description of your product or service – Write a thorough description of your goods or the service your business will provide to the public. Ensuring you provide products (goods and services) offering a strategic competitive advantage is a must when planning a business. Check out this post for ideas that provide a sustained competitive advantage.
- Go to market strategies – How will you get the product in front of your customers? This may include advertising on social media or through word of mouth from community members.
- Compensation, revenue, expenses, and cash flow – How much will your employees get paid? Do you want to create job opportunities? Think of employees as your most valuable asset so consider an employee wellness program and other benefits in addition to cash compensation. We’ll discuss the other forecasting issues later in this post.
- Your company’s mission statement – Your company’s mission statement is the foundation of your business. It should communicate the goals and values of your small business from an overarching perspective, helping employees understand what you’re trying to accomplish as a company. Even if it’s brief, this document establishes clear expectations for everyone involved with your company and guides decisions. Planning your business around this mission places an emphasis on a mission statement specifying who you are as a company, not the products you provide.
- A market analysis – A market analysis evaluates the opportunities, challenges, and competition in your chosen niche to determine whether the business stands a chance of success.
2. Conduct market research
It’s not sufficient to do seat of the pants estimates when planning your business. You must base your decisions on a thorough analysis based on data, not guesses. Below are some of the many types of research and analysis required when planning your business.
- How many potential customers are there for your product or service? The more potential buyers, the easier it is to turn a profit. A large potential market is great unless the opportunity means a large number of competitors exist in the market or the potential means more people will enter the market quickly. The economy plays a part in revenue potential as does your cost structure and proposed selling point.
What kind of competition do you face? If there are no competitors, then great! But, remember that opportunity attracts competition and, when it’s easy for others to enter the market, it might become quickly crowded. Porter’s 5 forces model helps to identify the nature of competition both now and in the future.
- Is the business something that’s sellable? How much is it worth? Determining an exit strategy is part of planning your business since you want to get out of the business at some point. For instance, you might pass it down to your children, take it public, or sell it.
- What costs are involved in starting and running the business? How much revenue can you expect to earn each year?
- What are the legal issues involved in running the business? Can you comply and how much will it cost to comply?
- Do you have the skills necessary to run the business into the future as technology changes?
3. Funding your business
Funding a small business is challenging. Likewise, financing a start-up is tough and often requires multiple sources of funding.
Possible sources of funding:
- Credit cards: Credit cards may seem like a simple choice, but they come with high-interest charges and fees that can get you into financial trouble if not used correctly. For this reason, credit cards are only used as a last resort.
- Borrowing money from friends and family: If you’re fortunate enough to have someone close to you who’s willing to lend you the funds needed for your business, then borrowing money is a great option. However, always agree upon an interest rate and other items before taking out this loan, so no one feels taken advantage of later on. The US SEC (security and exchange commission) recently made it easier to attract friends and family investors when they eliminated the financial asset requirement to invest.
- Small business loans: These are calculated based on your business’s financial standing and it’s challenging to fund a startup with loans as you have no revenue history. To get approved, you’ll need to prove that your business is established and has enough funds to sustain itself for at least the first couple of years after opening. Loans once available through the US SBA (small business administration) are now very limited and hard to get. You may choose to fund your business using personal loans such as home equity or lines of credit.
- Crowdfunding: If there’s a new product or service you want to launch, crowdfunding may be an option. This option allows you to take advantage of the immense power behind social media marketing by using platforms like Kickstarter or GoFundMe to raise money for your business. This works best for companies planning an innovative product or a social good.
4. Choosing your legal structure
You have several options for forming your business as a legal entity. The advantages and disadvantages, as well as options available, vary by country, so ensure you research them thoroughly when planning your business. Here are some options available in the US.
- Incorporation: This is a legal structure that separates you as an individual from your business. When setting up your business as a corporation, you become a shareholder of that company along with investors and others involved in your operation, should you include stock ownership or options as part of their compensation. This distribution of ownership may dilute your control over day-to-day operations. Your corporation must also pay taxes as a separate entity, although at a potentially lower rate. In theory, a corporation protects your personal assets but in practice, you often find you must personally guarantee expenses in the beginning. Also, as the principal, you may still face certain responsibilities as the director of actions undertaken. For instance, in some instances, the owners faced criminal charges for the actions made by their corporations.
- Sole Proprietorship: Setting up as a sole proprietor is like running your business as an individual. There’s no legal distinction between you and your business, which means there are no legal protections for you if something goes wrong during business operations. It’s also worth noting that this structure does not protect you from any legal action against your business, so it’s important to know the potentially costly ramifications of running your company as a sole proprietor. Despite this, many choose this legal structure due to its simplicity.
- Partnership: If there are two individuals (or more), an agreement determines fractional ownership and specifies responsibilities. There are no “corporate” entities here. In a partnership, profits and losses are split according to the agreement and each pays taxes on their portion of the revenue. Each also incurs responsibility for losses.
LLC stands for a limited liability company, a specific type of corporation commonly used by small businesses as it provides some tax relief, simplifies accounting, and is less onerous than a corporation, while still offering protection of your personal assets. It’s important to understand your options when it comes to legal structures and how that affects the way you do business. So keep reading to learn more about LLCs, including how they work and how to start one in your state.
Disadvantages of starting an LLC: Suppose you consider starting a small business. In that case, it is vital to understand your options when it comes to legal structures because each structure has its own benefits and disadvantages.
Advantages of starting an LLC:
Here are some advantages to forming an LLC for your small business:
- Limited liability protects you from liability related to the business. If someone were to sue your business, they would sue the company and not you individually, although if you were at fault in the company’s failure, you likely still face personal lawsuits for your actions.
- You can also have multiple owners in an LLC. This is beneficial for small businesses because it allows more people to work together toward a common goal.
- You are not required to hold annual meetings or record minutes, which helps reduce the costs and reporting requirements for your business.
- How you decide to distribute profits is up to the members of the LLC.
- When you have an LLC, you are not required to appoint a board of directors.
- You have the option of being taxed as a partnership or corporation.
- You can also deduct some business expenses before you file your taxes with the IRS.
- Your LLC won’t be taxed itself, so members pay taxes as individuals on the income and dividends distributed.
Once you’ve outlined all of these important factors, you’re ready for the next step: branding and marketing.
6. Branding your small business
Once you completed your legal research and completed planning your business, the next step is to implement your strategies from the plan. Branding is the first step in building your marketing as it helps communicate to prospective buyers who you are and what you stand for. Your brand should fit with your mission, your business model, and your products. Communicating the benefits of your brand to consumers translated directly into revenue and you’ll find lots of information in earlier posts on this website and others to help you build your digital presence, advertise on digital and traditional channels, and monitor performance to optimize your returns.
7. Put it all together:
Once you conducted the necessary research, created a game plan, outlined goals and success measures, selected your legal structure, researched branding options, and developed an effective marketing message, then you are ready to put everything into action! Good luck.
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