Establishing your own business is an enthralling experience, wherein you can make your own rules, and unleash your full potential towards your own idea. Many people are lured by the idea of starting a business, but there are certain pitfalls that you need to overcome.
Starting a new business requires careful planning and practicality, among other considerations. You may have a unique business idea in your mind, but how to traverse the path of ideation to execution takes business acumen, determination, and creativity.
Read on to know interesting facts related to startup failures:
- Approximately 50% of small businesses fail in the first four years of establishment.
- Out of all small businesses started in 2011, 4% of companies made it to the second year, 3% entered the third year, 9% operated in the fourth year, and 3% made it to 2016.
- Top reasons for small business failure include, No Market Need (42%), Ran out of cash (29%); Not the right team (23%), and Losing to competition (19%).
Here are five crucial tips that you need to consider before starting a business:
1. Identify Your Skills
What makes someone a successful business owner has got lots to do with the industry knowledge and risk taking. Knowing your strengths and weaknesses can help you conduct your business in a planned manner. The desired skills in an entrepreneur can be divided into:
- Personal Characteristics: As a business leader, your personality should exuberate positive traits like optimism, drive to excel, risk tolerance, and resilience.
- Interpersonal Skills: Even when you are running your business by yourself, you will have to establish great professional relationships with dealers, suppliers, customers and investors.
- Practical Skills: Running a business requires you to be on top of your game at all time. With practical skills like goal setting, decision-making, business knowledge, you can take your business to great heights.
Along with business expertise, an entrepreneur must know how to market his/her business to the target audience. Social media platforms and third-party websites, like Yelp, Review Centre, Trust Pilot, and Epinions.-com, can help you promote your brand through influencers.
2. Audit the Market Demand of Your Idea
Before working on your own business idea, you need to learn about your customers, competitors and the industry. Market research can help you determine which products/services are in demand, and how to increase your market share.
Research shows that 88% of customers rely on online reviews as much as personal recommendations before engaging with a business. These reviews can provide valuable insight that is useful to avoid business risks, identify current trends, predict future preferences, and identify sales opportunities.
Here are some of the key aspects that form the basics of market research:
- Product/Service Evaluation: Understanding the purpose of a product/service is important to assess consumer behavior and purchasing habits. Feedback has helped companies like, Starbucks, GE and Intuit, to differentiate themselves and enhance product offerings using customer recommendations.
- Know Your Industry: Use credible sources to gather information on businesses, industries and economic conditions that impact your sector. Collate customer reviews to spot relevant data about your customers and competitors. According to a recent study, an increase of even a one-star on Yelp can lead to a 5-9% increase in business revenue, whereas a negative review can cost you 30 customers.
- Trend Analysis: This method helps procure data on the changing customer preferences using sales figures. If the results are not convincing enough, rework on your business plan to increase product offerings. Use tools, like Google Alerts and Mention, to determine trends from mentions and reviews of your business.
3. Check for Availability of Resources
Turning your idea into a legitimate business takes immense effort and resources. Enlist exactly what resources are essential for your business to operate and their associated costs, starting from manufacturing/production to equipment for office space.
Make sure you create separate lists of assets that you are using from your home amenities and equipment that you need to purchase. This will help you estimate investment cost and calculate comparative feasibility.
4. Work on a Financial Plan
Before going into business, you need a thorough understanding of your current finances and how much you are planning to invest. The highlight of using your home space for your business is that it saves startup costs.
Here are the key points to consider when drafting a financial plan for your business:
- Create a Cash Flow Statement: A cash flow statement helps calculate cash balance by combining total costs, total sales and collections on a monthly basis. The cash balance after deducting the expenses can tell you about your cash needs and working capital.
- Calculate Monthly Fixed and Variable Expenses: Gather information on your fixed and variable expenses each month. Most common monthly expenses may include, rent, utilities, raw materials, commission on sales, production costs, and packaging and shipping costs.
- Break-even Analysis: This report estimates at what point in your business timeline will you start making profit. Preparing this report can help you price more efficiently and plan your overall business cash and profit strategy.
- Estimate Monthly Sales: This can be the most difficult part of drafting a financial plan, only because you don’t know what your sales will be like. Create sales projections for three situations, namely, best case scenario, worst case scenario, and likely scenario.
5. Be Ready to Face Failure
No business enjoys a smooth ride to success. Being prepared with an exit plan can help you deal with failure. It’s not enough to build a business worth a fortune, you must have an effective exit strategy, as a way to retrieve the money invested. For instance, Canvas, with a seemingly successful product, failed because it couldn’t sustain the business with a single app offering.
One of the most preferred ways of exiting a business is by turning it into a cash cow. If your business operates with a steady revenue stream, you can shut down operations after paying off your dues to investors, employees, and employing someone you trust to run it for you.
The success of a business depends on the level of preparedness maintained during the setup of the company. The tips mentioned above can help you sail through the initial turbulence that you may experience before establishing a home-based business.
Brian is the owner of Ponbee, a blog that shares useful resources on motivation, inspiration and success. He likes to write about self-improvement and achieving excellence, and believes that it is these qualities that ultimately make people successful in life. Apart from that, he is also an internet enthusiast and enjoys updating himself on everything that contributes towards creating rewarding and wholesome lives.