Revealed! Why almost half of start-up businesses shut down in the first 12 months and what you must know if you want to start a small business that generates profits from the first year
and every year after that!
Why start a business?
If you are currently employed and working for 'The Boss' perhaps thoughts of venturing out on your own have crossed your mind for some time. Possibly you're frustrated with the political process at work. Or perhaps you're tired of working your guts out, only to see that your colleagues mop the rewards and recognition that you deserve.
Whatever the reasons, you may feel that working for yourself is the only way to bring long lasting satisfaction in your life. Many people start a small business in order to enjoy the perceived rewards of freedom and independence. This is understandable because owning your own business can offer you the opportunity to experience freedom:
The reality of small-business ownership can be quite different. Many small business owners will tell you that they work more hours than when they worked for someone else. A large number of those hours are the result of demands of others on your time.
You may have also heard that almost half of small businesses fold within the first 12 months. The most common reason for businesses to fail is that they don't pump in enough capital to start with, or don't have enough money on hand to keep the business running smoothly.
Often this is the result of insufficient planning or starting without a written business plan.
The most common reasons for business failure are
The challenge of growing a business and getting everything right can shock even the most successful managers working in a Company.
Sometimes businesses expand too quickly without a deliberate decision to outgrow their small business status. When this happens the owners can often feel overwhelmed by the growing pains associated with middle business and can become distracted from main cash management issues.
The transition from micro to medium business requires the business leader to understand the risks of faster growth.
Planning and accessing expert help for crucial areas such as marketing and financial management are vital to avoid failure.
Questions You Should Ask Yourself Before Starting A Business
Before you quit your job to start a business ask yourself this question
Do you have the ability to work by yourself?
If you are currently employed and working for 'The Boss' perhaps thoughts of venturing out on your own have crossed your mind for some time. Possibly you're frustrated with the political process at work. Or perhaps you're tired of working your guts out, only to see that your colleagues mop the rewards and recognition that you deserve.
Whatever the reasons, you may feel that working for yourself is the only way to bring long lasting satisfaction in your life. Many people start a small business in order to enjoy the perceived rewards of freedom and independence. This is understandable because owning your own business can offer you the opportunity to experience freedom:
- the freedom to use your own ideas;
- the freedom to be the boss;
- the freedom to not be fired; and
- the freedom to earn as much as you want.
The reality of small-business ownership can be quite different. Many small business owners will tell you that they work more hours than when they worked for someone else. A large number of those hours are the result of demands of others on your time.
You may have also heard that almost half of small businesses fold within the first 12 months. The most common reason for businesses to fail is that they don't pump in enough capital to start with, or don't have enough money on hand to keep the business running smoothly.
Often this is the result of insufficient planning or starting without a written business plan.
The most common reasons for business failure are
- Lack of financial planning and review.
- Over-dependence on specific individuals in the business.
- Owners concentrating on the technical, rather than the strategic work at hand.
- Inadequate capital
- Lack of good management systems.
- Lack of vision, purpose, or principles.
- Poor market segmentation and/or strategy.
- Failure to establish and/or communicate company goals.
- Competition or lack of market knowledge.
- Absence of standard quality program.
The challenge of growing a business and getting everything right can shock even the most successful managers working in a Company.
Sometimes businesses expand too quickly without a deliberate decision to outgrow their small business status. When this happens the owners can often feel overwhelmed by the growing pains associated with middle business and can become distracted from main cash management issues.
The transition from micro to medium business requires the business leader to understand the risks of faster growth.
Planning and accessing expert help for crucial areas such as marketing and financial management are vital to avoid failure.
Questions You Should Ask Yourself Before Starting A Business
Before you quit your job to start a business ask yourself this question
Do you have the ability to work by yourself?
My Cubicle
Some people thrive in an office atmosphere. Will you miss the daily interaction of employees or will the occasional contact suffice? Is there an organization out there whereby you can join and keep in contact with your peers? How about annual conventions?
Importantly, if you start your own business from scratch you will need to register your business, file incorporation papers and pay the related fees, set aside quarterly taxes, and oversee the day to day operations of your business.
You may find that you are spending a disproportionate amount of time on administering your business and discover that billable hours are taking a hit. Who will keep you centered? Your spouse? A mentor? A trusted former co-worker?
It isn't always a matter of money when choosing to work for yourself. Personal satisfaction is one of the key reasons for self-employment as it is for people who are employed elsewhere. If you can get more satisfaction working for yourself, running your own business is worthy of your consideration
Working for yourself can bring many rewards, but it also comes with many challenges. Take a look at the questions below. They can help you decide if the entrepreneurial route is right for you.
Are you willing to take risks?
Going into business for yourself means giving up many benefits (such as health and dental) available to employees. It may also mean going without a regular salary, especially in the early years.
Are you willing to work long hours?
If you enjoy the 9-5 lifestyle and taking annual vacations, then starting a business may not be right for you.
Have you done your market research?
Do you know who your potential customers are? Are you convinced they will buy your product or service? Is someone already doing what you're doing? What makes your product or service unique? Take the time to research the market before starting your business.
Are you willing to market your product/service?
You may have a great product, but if you're not prepared to market it and yourself, you should think twice about whether business is right for you.
Have you determined your start-up costs?
Thanks to communications technologies, many businesses can be started without much cash. But you still need to budget for things like computers, Web-hosting services, and supplies.
Are you willing to learn?
Combining your passion and your business is the dream of many budding entrepreneurs. But be prepared to learn all about the nuts and bolts of business as well - things like finance, operations, accounts, and customer service.
Do you have what it takes to lead?
If your business becomes successful, you may need to hire employees. Do you enjoy giving direction to people? Can you bring out the best in them?
Why Will "You" Succeed?
At this point, the idea of running a small business may not seem very attractive. Don't get discouraged. Running your own business can provide you with a tremendous source of self-satisfaction and pride.
Most small business experts urge prospective business owners to carefully and completely analyze their potential to succeed and assess their strengths and weaknesses. Typically, you will begin by analyzing yourself as a future entrepreneur. What kind of person are you?
What technical or special knowledge do you have?
Self-confidence and drive, innovative thinking, goal-orientation and business and technical knowledge are necessary for success. These traits must also be tempered with realism. Knowing the limits of your own abilities and not being afraid to ask for help is imperative.
Successful business people know what they want to achieve. They determine where they are going by setting goals, paying attention to details and motivating others around them. It is wise to understand and follow the lead of those successful people around you.
What Kind Of Business Should You Start
The type of business that you enter should complement your experience, interest and/or technical knowledge. It is fine for you to dream about becoming your own boss someday; however, before you put too much work into your business, make sure that the area you choose is the right one for you.
When deciding what business to start, you may want to consider what hobbies and/or interests you have as well as your experience and background. If you are interested in an area in which you have little experience, you may want to seek some training before you begin.
Arranging a job in the area of interest or acquiring a mentor are two ways that may help you gain the knowledge and experience that you need.
Other factors that are equally as important as the above mentioned are:
1. Is there a need for the goods and/or services you are going to offer?
2. Are you equipped to fill the need?
3. Will there be a market for your product in the future?
Fads, technology, and innovations all affect the opportunity for any business to be and remain successful.
Six Steps to Minimizing Your Risks
How can you minimize your risks? Use this checklist to get ready. This will help you carefully weigh whether to trade valuable years of traditional work experience for your new business dream -- and then how to pull it off when you're ready.
1. Get some experience
If you've never clocked a day of work in your life, you might consider taking a job before striking out on your own -- even if the thought of doing time in a cubicle makes you shudder. Work experience in the field you want to break into may be the most productive use of your energy.
Think of it as a paid research position. In a couple of years, you can give your business a go. By then, you'll have learned the ins and outs of the real world and reduced the risk of total inexperience.
"Financial literacy is the language of owning a business." So, if you're still in school, take classes in business, management or entrepreneurship.
If you've already graduated, sign up for night classes. Formal business education is integral to your success. Nothing brings the classes to life like running your own business.
2. Build a winning team
Bring on people who complement your skills and fill in the gaps. As an example, Jane a student of Spanish literature may have dreamed of opening a boutique. But her short stint in retail didn't provide all of the details of running a shop.
Tanya, her friend studied fashion design and merchandizing. Naturally, Jane asked Tanya to be her business partner when she opened a shop.
3. Fight inexperience with advice
Getting advice is an option to consider if you don't have enough experience. Universities and alumni networks are great sources for mentors. Or you may know someone in your community who is a successful businessman and can ask for advice.
The Internet is another great place to get free advice. SCORE for example, boasts a mentor network of more than 10,000 mostly retired entrepreneurs nationwide. You can search by related background and meet the mentor locally or by email. You can also get feedback online from thousands of peer entrepreneurs at YoungEntrepreneur.com.
Another source is business organizations in your local area. Many budding entrepreneurs have sought the advice of local business people and have extended the relationship to take them on as mentors.
4. Write a bulletproof business plan
One of the biggest mistakes a young entrepreneur can make is simply failing to write a business plan. There is no other single process that can be more useful in beginning business problem-solving than addressing the risks and thoughtfully forecasting by writing the plan.
Don't fall into the excuse that you have the business plan in your head. That's a fantasy. It only becomes a reality when you put it into writing because when it's in your head, no one else can see it.
Not only is it a good planning tool, but a solid business plan is also your key to raising capital -- the money you need to get your show on the road. Although you may not have had a time to build a long credit history to show that you are financially responsible, you can demonstrate your penchant for using sound judgment by crafting a document that sells your business and lures financers on board.
It's your greatest opportunity to fill the credibility gap.
A business plan will showcase your product or service, how you plan to make a profit and the exceptional team who can bring the business to success. It should include market data and tests to show the service or product will sell, the essential skills that will drive profits, estimates for startup costs, projections for sales and profits, a break-even analysis and long-term goals for the company.
If, while writing the business plan, you decide from your research that the business isn't as sensible or profitable as you originally thought, the plan has served its purpose. Rather than cost you money and effort, you've spared yourself any loss.
Once you've crafted a plan that satisfies you, show it to your mentor or entrepreneur friends and ask for their input on how to improve it.
Find inspiration from sample plans at www.bplans.com. But be sure your plan shows your original thinking for the unique situation so that readers can see how the team problem-solves and relates to the business.
The top-rated Business Plan Pro is a software product that will walk you through the entire planning process. It includes cash flow projections and a useful tool to help you understand when you'll break even. It also includes freebies like a company logo crafter and a guide to small business law.
5. Raise money
Your business plan should overestimate how much money you will need from the beginning because it's easier to raise money before the launch than it is after you've failed to meet projections.
To minimize risk, limit the amount of personal money that you put into the business. Also, you'll be tempted to use credit cards, but credit card debt is the most expensive debt you can have. Try to steer clear.
Clutching a business plan that sells, go first to a bank to request a loan. Banks are conservative, and they're still in business. If you have a FICO credit score of 680 or more and you're seeking a loan for less than $50,000, you'll likely be granted the loan.
Even if the banker can't offer you a loan, ask for his or her advice about how to improve the plan so you can try again.
If your credit history is too short, friends and family may be your best shot. But tread carefully: Set the loan up like a formal business transaction that explicitly states when it will be repaid.
A smart way to manage a loan between family or friends is with a professionally-administered loan. The company will send you statements and track payments -- and provide a healthy distance.
6. Follow the money
Count on a cash cushion to live on for at least the first six months because you likely won't have an income. Conserve your money before you start. Once the business launches, regularly compare your actual income and expenses to your original forecasts to take the pulse of your company.
Stay focused on your financial goals. One of the biggest causes of failure is diffusion of focus. The first year you should have two over-arching goals: meeting or exceeding your projections and treating your customers right.
The Final Analysis
Entrepreneurs have always turned their ideas into goods and services. They have met the needs and wants of consumers and, at the same time, they have built rewarding careers for themselves. In the final analysis it is money, after all. Your success depends upon your ability as a boss to make sure your business is making more money than it spends.
Think of it as a paid research position. In a couple of years, you can give your business a go. By then, you'll have learned the ins and outs of the real world and reduced the risk of total inexperience.
"Financial literacy is the language of owning a business." So, if you're still in school, take classes in business, management or entrepreneurship.
If you've already graduated, sign up for night classes. Formal business education is integral to your success. Nothing brings the classes to life like running your own business.
2. Build a winning team
Bring on people who complement your skills and fill in the gaps. As an example, Jane a student of Spanish literature may have dreamed of opening a boutique. But her short stint in retail didn't provide all of the details of running a shop.
Tanya, her friend studied fashion design and merchandizing. Naturally, Jane asked Tanya to be her business partner when she opened a shop.
3. Fight inexperience with advice
Getting advice is an option to consider if you don't have enough experience. Universities and alumni networks are great sources for mentors. Or you may know someone in your community who is a successful businessman and can ask for advice.
The Internet is another great place to get free advice. SCORE for example, boasts a mentor network of more than 10,000 mostly retired entrepreneurs nationwide. You can search by related background and meet the mentor locally or by email. You can also get feedback online from thousands of peer entrepreneurs at YoungEntrepreneur.com.
Another source is business organizations in your local area. Many budding entrepreneurs have sought the advice of local business people and have extended the relationship to take them on as mentors.
4. Write a bulletproof business plan
One of the biggest mistakes a young entrepreneur can make is simply failing to write a business plan. There is no other single process that can be more useful in beginning business problem-solving than addressing the risks and thoughtfully forecasting by writing the plan.
Don't fall into the excuse that you have the business plan in your head. That's a fantasy. It only becomes a reality when you put it into writing because when it's in your head, no one else can see it.
Not only is it a good planning tool, but a solid business plan is also your key to raising capital -- the money you need to get your show on the road. Although you may not have had a time to build a long credit history to show that you are financially responsible, you can demonstrate your penchant for using sound judgment by crafting a document that sells your business and lures financers on board.
It's your greatest opportunity to fill the credibility gap.
A business plan will showcase your product or service, how you plan to make a profit and the exceptional team who can bring the business to success. It should include market data and tests to show the service or product will sell, the essential skills that will drive profits, estimates for startup costs, projections for sales and profits, a break-even analysis and long-term goals for the company.
If, while writing the business plan, you decide from your research that the business isn't as sensible or profitable as you originally thought, the plan has served its purpose. Rather than cost you money and effort, you've spared yourself any loss.
Once you've crafted a plan that satisfies you, show it to your mentor or entrepreneur friends and ask for their input on how to improve it.
Find inspiration from sample plans at www.bplans.com. But be sure your plan shows your original thinking for the unique situation so that readers can see how the team problem-solves and relates to the business.
The top-rated Business Plan Pro is a software product that will walk you through the entire planning process. It includes cash flow projections and a useful tool to help you understand when you'll break even. It also includes freebies like a company logo crafter and a guide to small business law.
5. Raise money
Your business plan should overestimate how much money you will need from the beginning because it's easier to raise money before the launch than it is after you've failed to meet projections.
To minimize risk, limit the amount of personal money that you put into the business. Also, you'll be tempted to use credit cards, but credit card debt is the most expensive debt you can have. Try to steer clear.
Clutching a business plan that sells, go first to a bank to request a loan. Banks are conservative, and they're still in business. If you have a FICO credit score of 680 or more and you're seeking a loan for less than $50,000, you'll likely be granted the loan.
Even if the banker can't offer you a loan, ask for his or her advice about how to improve the plan so you can try again.
If your credit history is too short, friends and family may be your best shot. But tread carefully: Set the loan up like a formal business transaction that explicitly states when it will be repaid.
A smart way to manage a loan between family or friends is with a professionally-administered loan. The company will send you statements and track payments -- and provide a healthy distance.
6. Follow the money
Count on a cash cushion to live on for at least the first six months because you likely won't have an income. Conserve your money before you start. Once the business launches, regularly compare your actual income and expenses to your original forecasts to take the pulse of your company.
Stay focused on your financial goals. One of the biggest causes of failure is diffusion of focus. The first year you should have two over-arching goals: meeting or exceeding your projections and treating your customers right.
The Final Analysis
Entrepreneurs have always turned their ideas into goods and services. They have met the needs and wants of consumers and, at the same time, they have built rewarding careers for themselves. In the final analysis it is money, after all. Your success depends upon your ability as a boss to make sure your business is making more money than it spends.