There’s a lot to do before you start a business. In this post, we discuss some things you need to do before you pull the trigger. There are some dismal statistics out there that say up to 30 percent of new businesses fail within the first two years of operation while the SBA (US Small Business Association) and the Bureau of Labor Statistics (BLS) show that nearly half of all business fail within 5 years and more than half fail after 10 years of operation, stats even more daunting for small businesses.
However, you do not have to become a part of this statistic. The biggest factor in those successful businesses is the level of planning that went into setting up the business before it ever opened its doors, not funding levels, not technological expertise, and not market access. If you do your homework before starting your business, you’re halfway toward ensuring its success.
Before you start a business
The costs of a failed business add up in terms of both financial and psychological costs. However, a failed startup also provides insights you might use in planning your next venture. For instance, Henry Ford failed multiple times before he founded Ford Motor Company. Instead of giving up, he used insights gleaned from these failures to develop a winning combination leading to success. Famously, Thomas Edison (credited with the invention of the light bulb) said of his extensive trials before finding the right filament for his device,
I have not failed. I found 10,000 ways that won’t work.
In another interview, he said developing the light bulb was an invention with 10,000 steps to success.
However, you likely don’t want to fail multiple times before you start a business that succeeds. So, before you start a business here are some things you need to do; problems you need to solve, to help ensure your ultimate success.
1. Do your research
One of the first things you need to do before you start a business is to do extensive research. You need to take a realistic look at the market you wish to enter and then decide whether or not your idea has the potential to earn money. Among the elements of the market you must consider are:
- Prospective buyers are commonly referred to as your target market. Who are they? What problems remain unresolved for them (remembering that consumers don’t buy products, they buy solutions to their problems)? What are their hot buttons? The more you know about your target market, the more likely you are to achieve success. A large number of failures occur because the need for your offering is only in your own mind. In fact, the image above shows 42% of failures (the highest percentage) result when there’s no market need for your business.
- Competitors, which include both direct competition (companies selling the same product you plan to market) and indirect competitors (who compete for the same consumer dollars). For instance, if you are considering opening a restaurant, you not only compete with other restaurants but other ways consumers spend discretionary income on entertainment, such as concerts, sporting events, movies, and more. Since consumers can only spend each dollar once, they make tradeoffs among the available options. Hence, the decision becomes not simply which restaurant to visit but whether you want to eat at a restaurant or use that money for some other type of entertainment, such as going to a movie. No one has all the money they want so they make tradeoffs.
Doing research on these factors before you start a business is critical in determining whether to run with your idea or wait until you come up with something with more demand among likely buyers. You want to make sure that your idea is something that is unique but not so unique that there is no market for it and that it solves a REAL problem shared by lots of consumers.
I once consulted with a major scientific manufacturer that wanted to introduce a new product. In fact, engineers already built a prototype of the product. Our research, involving focus groups, one-on-one interviews with existing customers, and discussions with buyers from major companies targeted by the product, showed no one really wanted the product, citing potential problems they’d face if they made the purchase. The company decided to ignore our research and introduced the product anyway. They needed 50 sales to break even and only got 3 orders.
2. Write a business plan
Write a business plan; every business needs one. The research you did to solve the question of whether to start a business might help in building your business plan but a business plan involves much more research. We’ve all heard anecdotes of companies formed without a business plan or with one written on the back of a napkin. Successes for these businesses are rare, so rare that the few that succeed without a plan make the news. Don’t think you have a shot at success without a well-researched, carefully crafted business plan.
You must understand and consider the implications of the following to build a good business plan:
- Environmental factors such as the economy, the state of technology, and legal/regulatory issues that potentially impact your proposed business.
- Your own strengths and weaknesses, as well as the opportunities and threats you’ll face–we commonly call this a SWOT analysis (see below).
- Decisions regarding pricing, promotion, and distribution based on all the analyses you completed so far.
- Specific plans for production, logistics, promotions, hiring needs, etc.
- Financial projection, especially those associated with cash flow, which is the second most frequent cause of business failure.
Depending on your industry, you may face additional concerns that you must plan for at this stage. For instance, if you plan on running a restaurant write a business plan for restaurant businesses. If you are running a plumbing business, write a plan that considers factors inherent in that market.
3. Decide on funding source
One of the things you will need to decide is how you’re going to finance your business. The funding for your business is paramount, sd without the proper funding your business will fail.
Don’t immediately assume the proper funding source is venture capital or a bank loan. Both options reduce your control over your business operation and represent a future debt to your business. With a loan, you must make regular payments, and missing a payment might mean losing your business or facing other negative financial consequences. Taking venture capital might seem like free money but often means a financial burden to meet agreements, especially those related to retiring the stock given to venture capitalists. Plus, venture capitalists are only interested in investing in firms with well above average returns, so mundane businesses like restaurants and service businesses hold little appeal to them.
You should take a careful look at your own finances if you plan to fund the business yourself and formulate your financial resources into your business plan. Even if you don’t have the full amount needed to start a business, putting in much of your own money shows lenders and potential investors you’re serious about making a go of the business. This makes it more likely that they will support your business.
Finally, friends and family financing is a good option. The SEC (US Securities and Exchanges Commission) recently made rule changes that make it easier to obtain this type of financing as it reduced requirements for investors to participate.
4. Create your marketing strategy
When you create a business, one of the most important things you need is a marketing strategy. Since sales is the starting point for all your financial planning and marketing is the ONLY source of sales, your marketing strategy is a major element of your business planning. Hence, your marketing strategy starts with forecasting sales, then builds tactics to reach the level of sales necessary to keep the business cash flowing.
Marketing strategy, thus, is so much more than promotion.
You must determine the optimal price to charge for various products you offer based on:
- What your target market is willing to spend to acquire your products
- How much do your competitors and close substitutes charge for products similar to yours
- Your own costs that are associated with getting products ready for sale and getting them to buyers since you can’t sell products for less than it costs you in the long run. Financial calculations such as breakeven are the starting point in helping you determine pricing and quantity solutions.
- The state of the economy. Metrics such as inflation, CPI (consumer price index), and consumer confidence impact your pricing decisions
Marketing also involves distribution or place decisions. You must decide whether you want a physical store or a virtual one. In either case, you need to determine the optimal location. Location greatly impacts sales in a physical store but it also impacts things like shipping costs and delivery times for a virtual one. The location also impacts your cost of labor, how much you pay for supplies (the closer you are to suppliers, often the lower your cost), and building costs.
In terms of building your promotional strategy, your biggest question revolves around crafting messages that resonate with your target market. Next, you must determine your budget, which dictates where you can place promotions. While digital marketing increased dramatically over the last decade, there’s still a place for traditional media in most business budgets. Once you determined where to promote your business, what message to use, and your budget, you’re now ready to consider how to best implement your promotional strategy.
Start a business
Creating a successful business is challenging, time-consuming, and expensive. However, this doesn’t mean that you should discard the option if your heart is really set on building a business. As long as you take the time to lay a solid foundation for your new business you increase your chances of success greatly.
The foundation that you lay is the building block for your business. To build this foundation you must find your target market, know what your competitors are doing, make a plan to fund your business, and then market your business so people can know what you have to offer.
Once you get these four steps right, you’re well on your way to a successful business.
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