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The appeal of being their own boss has led many people down the entrepreneurial path. While owning your own business offers the opportunity for both job satisfaction and wealth, the majority of small-business start-ups end in failure. The reasons that new small businesses go belly-up are manifold; some are beyond the control of even the most talented businessperson. Many common mistakes, however, can be avoided with a little planning and foresight. If you ever contemplate launching your own business, the following information will provide you with just the necessary dose of reality to change you from a dreamer into a hard-headed man or woman of business.
If you have given much thought to starting up a business, you probably already know what kind of business you want to launch. Before you move full-speed ahead, however, a little self-scrutiny is in order. You should be confident that you are really up to the task that lies ahead. It is important, for instance, that the venture you envision calls on skills you’ve already developed. Jumping “cold turkey” into a line of business in which you have no experience is only a recipe for disaster. The last thing you want to do is to have to learn the business as you go along. Although a few extraordinarily lucky entrepreneurs have done just that, many more have failed miserably when striking out in untried directions. As a matter of fact, your business could well begin as a hobby or as a sideline to your regular, nine-to-five job. Many successful small business people started their businesses as part-time endeavors.
Starting with a thorough and well-written business plan is essential
to launching your business successfully. The very act of writing down
your ideas in a structured, coherent form will force you to think
through and refine them. Without a solid — and well-researched
business plan, your hopes and dreams of entrepreneurial success have
little chance of realization. Whatever format you choose for your
plan, it should address in clear, concise language the following questions:
What product or service will I offer?
Who constitutes my market?
How will I organize the business?
What is the long-term economic outlook for my chosen field of endeavor?
How much startup capital do I need?
How much emergency capital can I put aside to cover periods when things are slow?
What will my annual business expenses be for each of the next five years?
What will my annual income be for each of the next five years?
How will I market my service or product?
Of course, just because you’ve drawn up a well-organized plan doesn’t mean you have to adhere to it slavishly. Indeed, as your business starts to grow, you may well find that your original assumptions were partially or entirely inaccurate. Don’t be afraid to rethink your plan if real-world business conditions warrant it.
If at all possible, begin your new venture on a “moonlighting” basis. Having the security of a steady paycheck will do much to steady your nerves, not to mention your bank account, in the hard days when your business is a struggling enterprise. But once things begin to get going, you will eventually come to a crossroads: choose either the business or the job. At that point, it will have become quite clear that continuing with a full-time job is simply impossible. Be prepared to cut back on your lifestyle during the first few years of your business’s operation. Most likely, all of your disposable income — not to mention a good deal of your other income — will be used up capitalizing your venture.
For every story of the fabulously wealthy entrepreneur who started a
business with $500, there are scores of untold stories of
unsuccessful entrepreneurs who risked their life savings, went deeply
into debt, and then lost everything. Job security has been the
biggest victim of the recent recession, so it’s not surprising
that more people are thinking about starting their own businesses.
Starting any business is risky, but there are ways to manage the
financial risk so that you don’t jeopardize your financial future.
First, if at all possible, don’t quit your day job until the
business is established and it is clear that you can draw enough
salary to support yourself. If this is not possible, you should have
two years’ worth of living expenses already in the bank.
Second, figure out how to start your business on a shoestring. High
overhead at the outset can kill a business before it has had a chance
to succeed. Can you work out of your home or a shared office space?
If you must have a store, negotiate a short-term lease on favorable
terms, and buy used furniture and equipment. In short, do whatever
you can to keep your overhead to a minimum.
Third, don’t risk all your personal savings and investments on
your new venture. There is nothing as discouraging as seeing a
lifetime’s worth of savings evaporate, only to be left deeply in
debt and have to rejoin the work world. Obviously, you are going to
have to risk some of your personal wealth when starting a business,
but if you have to bet the ranch, the odds are that you’ll lose it.
Finally, try to arrange financing that does not require your personal guarantee. This may mean getting someone to provide financing in exchange for stock in the new company, but it is better to own 50 percent of a successful and adequately capitalized business than to own 100 percent of a failing business.
In spite of all these caveats, starting a business is filled with excitement and promise. The satisfaction of launching a successful venture cannot be matched. But if you want to strike out on your own, make sure your personal finances don’t strike out in the process.
No matter how good your service or product may be, if you can’t
effectively thrust it into the public eye, your business may as well
not even exist. If you don’t have good sales skills, you need to
develop some quickly. The technical and managerial skills you bring
to your business will all go for naught should you be unable to
promote and sell your product and yourself.
Some people are uncomfortable selling. Others, who have never sold before, adapt quite readily. If you don’t have a sales background, you need to take a close and objective look at how comfortable you will be in a sales capacity. It is quite likely that you will spend a substantial portion of time selling your product or service, at least for the first two years your business is in operation.
If you are planning to set up your own business, your mind is
probably chock-full of cost estimates, five-year plans, and sales
projections. But one item that may not be first on your list of items
to include in your cost-benefit equations is how much you will have
to pay for insurance once you are no longer under your employer’s
umbrella. This could be a big mistake, for once you are out on your
own, insurance premiums will take a big bite out of your income.
How much could it cost? The numbers vary greatly based on
geographical location, age, and other factors. In the most expensive
metropolitan areas, coverage for a family of four — where the
breadwinner earns $75,000 at his old job — assuring continuity
in health, disability and life insurance, could cost as much as
$10,000 annually. Premiums can be reduced by taking actions like
opting for high deductibles.
Nonetheless, the fact remains that insurance could become a major expense once you set up your own shop, so make sure you include its cost in your expense calculations. It pays to look before your leap.
Every penny that you can cut from your business’ operating
budget is one more penny of profit (or one less penny of loss). The
following 20 tips will help you stretch to the limit each dollar you
spend to keep your business running.
1. When you start your business, select the form of business that will be cheapest in the long run.
The decision to form a corporation or proprietorship is not an easy
one. You may benefit from the advice of an attorney or accountant
when you set up a business. One major consideration is to select the
form of business organization that will be the least expensive in the
long run. If you cannot afford to obtain professional advice, go to
the library or bookstore and find one of the many available books on
starting your own business. The cheapest way to organize is a sole proprietorship.
2. Work out of your home
One the biggest mistakes budding entrepreneurs can make when their
businesses are new is to saddle themselves with too much overhead. If
at all possible, start your business out of your home rather than
renting an office, with all the costs associated with rental space.
Of course, some businesses, such as retailing or food service, cannot
effectively be run out of a home. But all too often new entrepreneurs
delude themselves into thinking that they must have fancy digs. They
end up regretting the decision later.
3. Find low-cost rental space
If and when you need an office, warehouse, or retail space, search
around for the lowest-cost location that will still meet your needs.
Rents can vary dramatically in a single locale and even on a single
block. Avoid the temptation to rent in a higher-cost building. While
it may not seem significant now, a high rent can really drag down a
growing business. Look at it this way: Your customers will probably
appreciate the fact that your quarters are modest rather than located
in domains of mahogany and marble.
4. Obtain free media publicity
The media are always starved for good stories. If you can put
together a good story about your business that will appeal to a
particular newspaper, magazine, or radio show, you have a good chance
of gaining free publicity. Moreover, positive comments about your
business in a column, article, or radio or television program are
usually much more convincing than the usual advertisements.
5. Buy your business card, stationery, and forms on the cheap
Chances are you don’t need to spend a lot of money on designing
a fancy logo and on purchasing expensive business cards, stationary,
and forms. You can get perfectly satisfactory printed items at much
lower cost by using a mail-order stationery company or a local print
shop. Remember, too-fancy stationary may send the wrong signal. Your
customers want to know that you are as concerned about controlling
expenses as they are. Engraved stationery printed on thick bond paper
could send the wrong signal.
6. Establish an in-house advertising agency
This is one of the oldest tricks in the book. Advertising agencies
receive a 15 percent discount from publications and broadcasters. But
you don’t need an advertising agency to take advantage of the
discount. All you need to do is establish your own
“in-house.” How do you go about it? The absolute most
you’ll typically need is some stationery and a separate checking
account with the agency’s name on it. But you probably won’t
even need that.
7. Contact the SBA (Small Business Administration) and SCORE (Service Corps of Retired Executives) for free advice
Both the SBA and SCORE are excellent sources for free consultations.
Why pay a consultant wearing a thousand-dollar suit when you probably
can get free advice?
8. Purchase advertising space in regional editions
You can advertise in big-name publications for a lot less than you
think by purchasing space in regional editions. This is a good idea
especially if your customers are located in a particular region, or
if you simply want to advertise in a big publication so you can brag
about it (not a bad idea in and of itself).
9. Buy office supplies at discounters
Don’t pay full price for office supplies. It’s easy to get
handsome discounts at one of the many office-supply discount houses.
None are located in your area? Contact a mail-order discounter.
10. Consider employing your spouse and/or children
If you own a business, there may be a variety of advantages in
putting your spouse and/or children on the payroll. But be sure they
really work, lest you cross the IRS. Still, it’s in your
financial best interest to keep your money flowing into the family coffers.
11. Use bulk-rate postage when sending out large mailings
Many small business owners make the mistake of sending out large
mailings using first-class postage. If they used bulk-rate mail, they
would save a bundle.
12. Buy used office furniture
Used, low-cost office furniture is in abundant supply. There’s
no reason for a small business to adorn its offices with fancy new
furniture when attractive preowned furniture is available.
13. If you use your car for business travel, you can deduct unreimbursed expenses relating to the use of your vehicle
Does your business take you out on the road frequently? If you use
your personal car for these trips but are not reimbursed for the
costs of operating your chariot, you may be entitled to deduct these
expenses on your income tax return. Calculate your deduction by using
either a standard mileage rate or by keeping a log of the actual
costs of operating your automobile during business trips.
14. Use independent contractors if you can legally
If you can use independent contractors, you can avoid paying the high
costs associated with full-time employees, including Social Security
and fringe benefits. But be careful: The IRS is clamping down on
business owners who abuse the rules pertaining to independent contractors.
15. Be firm in your accounts receivable collection efforts
Don’t let your customers take advantage of your good nature
— it ends up being the “nice guy” who gets paid last.
So if some of your customers are stringing you out, be firm in your
collection efforts. Don’t worry about alienating the customer.
Your business will never survive if your customers are not willing to
pay you within a reasonable period of time.
16. Don’t pay your accounts payable too soon
Although vendors will love you if you pay your bills early, it only
ends up costing you money. Set up a file for your accounts payable so
that you pay them no sooner than on time.
17. Don’t entertain customers lavishly
Three-martini lunches are now passe as is $100-a-head dinners. If you
end up entertaining customers lavishly, you not only end up spending
a lot of precious money, you risk sending your customers the wrong
message. It’s okay to entertain them, but be sure to project a
“lean and mean” image when you do.
18. Bargain hard if you want to buy an existing business
If you are going into business for yourself, you have two choices.
One is to start the business yourself; the other is to buy an
existing business. If you choose the second route, be sure not to
overpay. Most sellers have an inflated view of the value of their
businesses — just as we all do when we sell our homes. You can
probably settle for considerably less than the asking price. Just as
with any major purchase, don’t hesitate to walk away from an
intransigent seller. Also, it wouldn’t hurt to hire a
professional appraiser to give you an objective assessment of the
business’ value.
19. Encourage free word-of-mouth advertising
Whatever business you’re in, word-of-mouth advertising is the
best and cheapest. Do what you can to stimulate positive
word-of-mouth advertising, first by satisfying your customers, and
second by asking them to spread the good word about your business.
You’ll be pleasantly surprised at how effective this can be.
20. Cut your losses if your business is not working out
If you start your own business, the odds are regrettably high against your succeeding. There may well come a time when you have to realistically evaluate whether you should continue your business. If you do find yourself facing this difficult decision, you may want to seek the counsel of an accountant or other financial professional. What you don’t want to do is throw good money after bad. Far too many entrepreneurs, by nature an optimistic lot, have risked their homes, their savings, and almost everything else to support doomed businesses. It is far preferable to cut your losses or, at a minimum, sharply cut back your business aspirations.