10 Things to Consider When Starting a New Business
Welcome to the land of opportunity! The Small Business Administration (SBA) estimates that more than 627,000 new businesses are opened each year. At the same time, a little less 595,000 close up shop each year. So as you can see, starting a new business isn’t really that rare an occurrence in the United States. Neither, unfortunately, is closing one.
If the entrepreneurial spirit is moving you to be one of the 600,000+ who do open a new business each year, there are a handful of things you might want to consider first.
#1 Defining Your Target Market
What is your market? The key question to ask here, “Who am I selling to?” Or maybe more aptly, “Whose problem am I looking to solve?” Knowing your audience is the key to unlocking a lot of the really important decisions to make throughout your adventure of starting a new business.
In addition to knowing WHO you’re selling to, it’s also vital to know the SIZE of the market you’ve selected. Is it large enough to justify a business? Does your target market have—and also dispense—the means to afford your product or service?
#2 Is Your Product or Service a Profitable One?
You’d be surprised how many would-be business owners fail to think this one through. If you have sufficient demand for your product or service, and you can produce (and sell) the product or service at a high enough margin, then you will have the profit to fuel your business. But if there is a breakdown with supply and demand, cost-to-price, or in production in distribution, your product or service could put you out of business FAST.
What you sell is important, and how you produce and sell it also determines the viability of your business idea.
#3 How Much Money Do You Want to Make?
This could have easily been the #1 thing to consider, as this is why most people open a new business to begin with. And there is nothing wrong with that. But, before you go to the trouble of opening a new business, it’s important to know what you want (or need) to get out of the business. You could open and run the most popular bakery in town, but if you’re paying more in employee wages and equipment and rent than you have the margins to cover, then you may find you don’t have a business, you have a JOB—and possibly a low paying one at that!
Be sure you know what you want to take home when all is said and done. This will help you make better decisions in all other aspects of your business.
#4 How much money will it take to operate the business?
Try to get as clear as you can with all aspects of running the business ahead of time to eliminate heartaches (and financial failure!) later. What will you need for business rent? Equipment? Materials? Technology? Staffing? Accounting and bookkeeping? Travel? These aren’t the only things to account for, but it’s a start. And of course the amount of money you need to operate the business may very well scale with its success.
But at least get clear on what it will realistically cost to operate the business for the first year.
#5 How long will it take before you make your first sale?
Ahhhhh. Income. You trade your product or service for money. But how hot a commodity is your business idea. How long after you start operating (and incur expenses) can you expect to sell your goods. How long before you invoice? How long before you collect? For how long will your business be a cost center only? Be realistic in your projections.
When you start to bring in money in is important to know how long of a runway you need before you can cover your expenses with actual income.
#6 When will you be able to quit your day job?
Roughly a third of all people who start a new business are already employed full-time. How you answer this question will be somewhat tied to your answer to #3. With one caveat, you might need to make the jump from your day job (and the safety net it provides) to your business sooner than you think.
More involvement doesn’t always mean more success, but there’s a good chance you will need to double-down on your commitment at several points during your business’s life cycle to get it to the desired next levels.
#7 What are your sources of income?
Be clear from the beginning what products or services you expect to sell. And make sure that your market is clear on what you are providing. Ask yourself, What am I selling? In what ways am I collecting the money? Am I seeing all the potential income streams? If you are selling copy machines, should you also sell service contracts (even if they are re-sold and you’re just getting commission)? If you wanted to open a batting cage, would you offer monthly memberships in addition to one-off ala carte visits? If you decided to go into commercial printing, would you also offer web site design?
Thinking through your “menu” invoiceable items is key to knowing just how much your business could be worth.
#8 What will your startup expenses be?
So this is a little different than question #4, which has to do with ongoing costs to operate your business. Your startup expenses, or many of them, will be unique to your first month or few months or operation. Some may consider all startup expenses to be those that are incurred before your first sale. Either way, some businesses are way cheaper to start than others. Knowing how much money you have—or can access—may be a determinative factor on what business you can—or should—start. Think of everything you need to start day one. And then estimate the expenses.
Startup costs may be quite a bit higher (again depending on your industry) than normal ongoing costs, or they may actually be less. It just depends on what kind of business you open.
#9 What capital or equipment will you need to operate the business?
Yes, there are some businesses whose production (and perhaps distribution) requires large machinery or equipment to operate from day one. Will you be able to purchase these capital goods at a discount, like finding a business that’s closing and liquidating their equipment? Maybe. But it’s best to plan for the future—for the long haul. Plan your initial capital investments at the fair market value to give yourself a more realistic number on what it will take to capitalize your business idea.
#10 Will you need business financing?
According to fundera.com, 29% of small businesses fail because they run out of capital. And 43% of small businesses applied for a loan last year. The thinking is that mostly capital-intensive products-based businesses need business financing—whether for inventory or equipment or some other recurring or non-recurring expense. But service-based businesses have also applied for, and received robust loans to fund or expand their businesses. In 2018, the average small business loan was $663,000.
Whether you need $60,000 or $600,000 to fund your business dream, it is vital that you connect with the right partner for your business loan.
So you’re ready to look at financing for your business but you aren’t sure of the right next step?
Let us help you.
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