Starting a new small business? Find out where to begin and how to achieve success
- You want to ensure you prepare thoroughly before starting a business, but realize that things will almost certainly go awry. To run a successful business, you must adapt to changing situations.
- Conducting in-depth market research on your field and the demographics of your potential clientele is an important part of crafting a business plan. This involves running surveys, holding focus groups, and researching SEO and public data.
- Before you start selling your product or service, you need to build up your brand and get a following of people who are ready to jump when you open your doors for business.
- This article is for entrepreneurs who want to learn the basic steps of starting a new business.
Tasks like naming the business and creating a logo are obvious, but what about the less-heralded, equally important steps? Whether it’s determining your business structure or crafting a detailed marketing strategy, the workload can quickly pile up. Rather than spinning your wheels and guessing at where to start, follow this checklist to transform your business from a lightbulb above your head to a real entity.
1. Refine your idea.
If you’re thinking about starting a business, you likely already know an idea of what you want to sell online, or at least the market you want to enter. Do a quick search for existing companies in your chosen industry. Learn what current brand leaders are doing and figure out how you can do it better. If you think your business can deliver something other companies don’t (or deliver the same thing, only faster and cheaper), or you’ve got a solid idea and are ready to create a business plan.
Define your “why.”
“In the words of Simon Sinek, ‘always start with why,’” Glenn Gutek, CEO of Awake Consulting and Coaching, told Business News Daily. “It is good to know why you are launching your business. In this process, it may be wise to differentiate between [whether] the business serves a personal why or a marketplace why. When your why is focused on meeting a need in the marketplace, the scope of your business will always be larger than a business that is designed to serve a personal need.”
Consider franchising.
Another option is to open a franchise of an established company. The concept, brand following and business model are already in place; you need a good location and the means to fund your operation.
Brainstorm your business name.
Regardless of which option you choose, it’s vital to understand the reasoning behind your idea. Stephanie Desaulniers, owner of Business by Dezign and former director of operations and women’s business programs at Covation Center, cautions entrepreneurs against writing a business plan or brainstorming a business name before nailing down the idea’s value.
Clarify your target customers.
Desaulniers said too often, people jump into launching their business without spending time to think about who their customers will be and why would want to buy from them or hire them.
“You need to clarify why you want to work with these customers – do you have a passion for making people’s lives easier?” Desaulniers said. “Or enjoy creating art to bring color to their world? Identifying these answers helps clarify your mission. Third, you want to define how you will provide this value to your customers and how to communicate that value in a way that they are willing to pay.” During the ideation phase, you need to iron out the major details. If the idea isn’t something you’re passionate about or if there’s no market for your creation, it might be time to brainstorm other ideas.
2. Write a business plan.
Once you have your idea in place, you need to ask yourself a few important questions: What is the purpose of your business? Who are you selling to? What are your end goals? How will you finance your startup costs? These questions can be answered in a well-written business plan.
A lot of mistakes are made by new businesses rushing into things without pondering these aspects of the business. You need to find your target customer base. Who is going to buy your product or service? What would be the point if you can’t find evidence of a demand for your idea?
Conduct market research.
Conducting thorough market research on your field and demographics of potential clientele is an important part of crafting a business plan. This involves conducting surveys, holding focus groups, and researching SEO and public data.
Market research helps you understand your target customer – their needs, preferences and behavior – as well as your industry and competitors. Many small business professionals recommend gathering demographic information and conducting a competitive analysis to better understand opportunities and limitations within your market.
The best small businesses have differentiated products or services from the competition. This significantly impacts your competitive landscape and allows you to convey unique value to potential customers.
Consider an exit strategy.
It’s also a good idea to consider an exit strategy as you compile your business plan. Generating some idea of how you’ll eventually exit the business forces you to look to the future.
“Too often, new entrepreneurs are so excited about their business and so sure everyone everywhere will be a customer that they give very little, if any, time to show the plan on leaving the business,” said Josh Tolley, CEO of both Shyft Capital and Kavana.
“When you board an airplane, what is the first thing they show you? How to get off of it. When you go to a movie, what do they point out before the feature begins to play? Where the exits are. During your first week of kindergarten, they line up all the kids and teach them fire drills to exit the building. Too many times I have witnessed business leaders that don’t have three or four predetermined exit routes. This has led to lower company value and even destroyed family relationships.”
A business plan helps you figure out where your company is going, how it will overcome any potential difficulties and what you need to sustain it. When you’re ready to put pen to paper, these free templates can help.
3. Assess your finances.
Starting any business has a price, so you need to determine how you will cover those costs. Do you have the means to fund your startup, or will you need to borrow money? If you’re planning to leave your current job to focus on your business, do you have money put away to support yourself until you make a profit? It’s best to find out how much your startup costs will be.
Many startups fail because they run out of money before turning a profit. It’s never a bad idea to overestimate the amount of startup capital you need, as it can be a while before the business begins to bring in sustainable revenue.
Perform a break-even analysis.
One way you can determine how much money you need is to perform a break-even analysis. This essential element of financial planning helps business owners determine when their company, product or service will be profitable.
The formula is simple:
- Fixed Costs ÷ (Average Price – Variable Costs) = Break-Even Point
Every entrepreneur should use this formula as a tool because it informs you about the minimum performance your business must achieve to avoid losing money. Furthermore, it helps you understand exactly where your profits come from, so you can set production goals accordingly.
Here are the three most common reasons to conduct a break-even analysis:
- Determine profitability. This is generally every business owner’s highest interest.Ask yourself: How much revenue do I need to generate to cover all my expenses? Which products or services turn a profit, and which ones are sold at a loss?
- Price a product or service. When most people think about pricing, they consider how much their product costs to create and how competitors are pricing their products.Ask yourself: What are the fixed rates, what are the variable costs, and what is the total cost? What is the cost of any physical goods? What is the cost of labor?
- Analyze the data. What volumes of goods or services do you have to sell to be profitable?Ask yourself: How can I reduce my overall fixed costs? How can I reduce the variable costs per unit? How can I improve sales?
Watch your expenses.
Don’t overspend when starting a business. Understand the types of purchases that make sense for your business and avoid overspending on fancy new equipment that won’t help you reach your business goals. Monitor your business expenses to ensure you are staying on track.
“A lot of startups tend to spend money on unnecessary things,” said Jean Paldan, founder and CEO of Rare Form New Media. “We worked with a startup with two employees but spent a huge amount on office space that would fit 20 people. They also leased a professional high-end printer that was more suited for a team of 100; it had key cards to track who was printing what and when. Spend as little as possible when you start, and only on the things essential for the business to grow and succeed. Luxuries can come when you’re established.”
Consider your funding options.
Startup capital for your business can come from various means. The best way to acquire funding for your business depends on several factors, including creditworthiness, the amount needed and available options.
- Business loans. If you need financial assistance, a commercial loan through a bank is a good starting point, although these are often difficult to secure. If you cannot take out a bank loan, you can apply for a small business loan through the U.S. Small Business Administration (SBA) or an alternative lender. [Read related article: Best Alternative Small Business Loans]
- Business grants. Business grants are similar to loans; however, they do not need to be paid back. Business grants are typically very competitive, and come with stipulations that the business must meet to be considered. When securing a small business grant, look for ones uniquely specific to your situation. Options include minority-owned business grants, grants for women-owned businesses and government grants.
- Investors. Startups requiring significant funding up front may want to bring on an investor. Investors can provide several million dollars or more to a fledgling company, expecting the backers to have a hands-on role in running your business.
- Crowdfunding. Alternatively, you could launch an equity crowdfunding campaign to raise smaller amounts of money from multiple backers. Crowdfunding has helped numerous companies in recent years, and dozens of reliable crowdfunding platforms are designed for different types of businesses.
Choose the right business bank.
When you’re choosing a business bank, size matters. Marcus Anwar, co-founder of OhMy Canada, recommends smaller community banks because they are in tune with the local market conditions and will work with you based on your overall business profile and character.
“They’re unlike big banks that look at your credit score and will be more selective to loan money to small businesses,” Anwar said. “Not only that, but small banks want to build a personal relationship with you and ultimately help you if you run into problems and miss a payment. Another good thing about smaller banks is that decisions are made at the branch level, which can be much quicker than big banks, where decisions are made at a higher level.”
Anwar believes that you should ask yourself these questions when choosing a bank for your business:
- What is important to me?
- Do I want to build a close relationship with a bank that’s willing to help me in any way possible?
- Do I want to be just another bank account, like big banks will view me as?
Ultimately, the right bank for your business comes down to your needs. Writing down your banking needs can help narrow your focus to what you should be looking for. Schedule meetings with various banks and ask questions about how they work with small businesses to find the best bank for your business.
4. Determine your legal business structure.
Before registering your company, you need to decide what kind of entity it is. Your business structure legally affects everything from how you file your taxes to your personal liability if something goes wrong.
- Sole proprietorship. You can register for a sole proprietorship if you own the business independently and plan to be responsible for all debts and obligations. Be warned that this route can directly affect your personal credit.
- Partnership. Alternatively, as its name implies, a business partnership means that two or more people are held personally liable as business owners. You don’t have to go it alone if you can find a business partner with complementary skills to your own. It’s usually a good idea to add someone into the mix to help your business flourish.
- Corporation. If you want to separate your personal liability from your company’s liability, you may want to consider forming one of several types of corporations (e.g., S corporation, C corporation or B corporation). Although each type of corporation is subject to different guidelines, this legal structure generally makes a business a separate entity from its owners, and, therefore, corporations can own property, assume liability, pay taxes, enter contracts, sue and be sued like any other individual. “Corporations, especially C corporations, are especially suitable for new businesses that plan on ‘going public’ or seeking funding from venture capitalists in the near future,” said Deryck Jordan, managing attorney at Jordan Counsel.
- Limited liability company. One of the most common structures for small businesses is the limited liability company (LLC). This hybrid structure has the legal protections of a corporation while allowing for the tax benefits of a partnership.
Ultimately, it is up to you to determine which type of entity is best for your current needs and future business goals. It’s important to learn about the various legal business structures available. If you’re struggling to make up your mind, discussing the decision with a business or legal advisor is not a bad idea.
