Often people say wistfully “I wish I had my own business”. Some of them take it further and decide what kind of product or service they will offer. A last few go as far as putting pen to paper to do some planning and calculations. It is at this stage where you need to consider the factors listed in this article. This is not an exhaustive list but merely a starting point.
Before spending money and energy to start a business, you want to make sure that you have a reasonable chance of success. Some of the factors to consider are:
- Market research
The first and most important factor to consider is who your clients will be and whether they will be willing and able to pay for your product or service.
Find out who your competition is likely to be and how you can differentiate your business from theirs.
Customers need to know about you in order to be able to do business with you.
Although the best kind of advertising is referrals by word of mouth, it is also the method that takes the longest. How will you approach advertising to make sure clients know about you until your business has established itself as one that is worthy of such referrals?
- Cash flow
Most start-ups fail due to insufficient cash flow. When you draw up a cash flow budget, try to be as realistic as possible. Be sure to include projected cash flow for both worst and best case scenarios too.
Remember that you must buy a product or deliver a service first before you will receive money from a client. Until the client pays you, you must have enough cash to be able to carry the cost of the product or service you sold to them.
If you are going to sell on credit, keep in mind that all clients might not be prompt payers. There will be slow payers and some inevitable bad debt – that’s part of business. Make provision for it.
Who will your suppliers be? Might it be possible to buy on credit from them? Having an account with a supplier can relieve pressure on your cash flow, especially if you must buy stock for resale.
Also enquire about potential cash and quantity discounts on purchases.
- Running expenses
If money is coming in slower than expenses are incurred, you will need enough funds to carry the expenses that must be paid, for example, salaries, rent, stock purchases and insurance.
- Personal cash flow
The owner is the last person to be paid. It can happen that you must pay everyone else’s salaries and after that there is not enough money left to pay yourself. Will your personal cash flow be able to survive the pressure if you don’t receive a salary every month?
Start-up costs, running costs, capital purchases. There are various ways to raise funds to cover these outlays:
- Bank loans;
- Loans from friends and family;
- Finding an angel investor;
- Take a bond over your personal assets e.g. your home;
- Use personal savings; or
- Any combination of the above.
It’s not pleasant to think that your start-up can fail, but if it does, it’s far better to be prepared. At what point will you seriously consider cutting your losses and closing down the business?
Finally, consider the fact that start-ups often take longer to become profitable than originally planned as all obstacles cannot be foreseen in advance. Make sure to take this into account when doing the planning and calculations for your new business.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.