People have various reasons for wanting to start their own business; to liberate themselves from their boss, get rich instantly, fulfill a lifelong dream etc. Whilst most of these reasons may be very noble, what most entrepreneurs do not understand is the amount of work, time and commitment that they will need to dedicate to see their business succeed. This article highlights some of the challenges new businesses face and gives well-researched advice to entrepreneurs on how to deal with them.
1.Understand the different business formation types
It is important from the start, to decide on the legal formation of your company. This has implications on the kind of business activities you can carry out and how easy it will be for you to attract outside investment.
2. Ensure that your company has people with the requisite skills
Having chosen the right legal formation, you need to ensure that your company has people with the requisite technical skills for the sector that you specialized in. In addition to technical skills and knowledge of the industry, managerial skills are also crucial. Having an MBA is not a guarantee for the success of any business, but it is important that entrepreneurs have a firm grasp of key concepts in areas such as finance, marketing, marketing, selling, managing employees etc. Many start-ups have gone under as a result of poor management. The earlier you recognize key skills gaps, the better for your business. In today’s digital age, upgrading your skills has never been much easier. There are lots of online management courses you can take that are reasonable priced or contact a local institution of higher education nearby, they will often always have courses for professionals interested in upgrading their skills.
Another route is to seek professional help. There are many companies out there offering consulting services for small businesses. It is important to familiarize yourself with the areas that each consultancy specializes in and see if that is exactly what you need.
3. Improve your cash-flow
It does not matter how much money is coming into the business, if you don’t have enough to keep you going. You have suppliers to pay, staff who expect wages every month, rent to pay and so on. Some tips to improve your cash flow include:
- Good Forecasting
The importance of forecasting cannot be underestimated. Start with the money you have right now, then list all your anticipated incomings followed by all your anticipated outgoings. Don’t overestimate incomes and underestimate outgoings – although your cash flow forecast is never going to be set in stone, be as realistic as you can be and if anything be conservative.
- Be tough on terms
Late payments are a perennial problem for small businesses; a majority of them will experience late payments on a regular basis causing real problems for their business. Clearly state the payments terms and make sure your customer understands them; after that chase them as soon as soon as they exceed their limits. Before setting your terms when you pick a partner to work with, make sure you check their record, are they a reliable payer? Find out as much as you can to avoid them being responsible for your cash flow hitting choppy waters.
- Reward your good customers
To avoid the nightmare of constantly chasing late payments reward your customers who actually pay you on time. This practice may impact your profit margin but it will help your management of cash flow, by giving customers an incentive to pay early rather than late.
- Accept credit cards
This may cost you processing fees but it will ensure that you do get paid and it will leave out the hassle of having to chase late payments.
4.Get a Good Accountant
Quite a number of new start-ups have gotten into trouble as result of getting bad accounting advice. When starting a business there are lots of unqualified people willing to give you advice on a whole lot of things; from how to manage your taxes, get a credit line or how to manage your supplier relations. To run a successful business you need to seek professional advice. Understanding the legal instruments on how to file your tax returns or how to reconcile your bank balance may prove too cumbersome for most start-ups. That is why you need the help of a good accountant in order to ensure that you making the best decisions with regards to managing your company’s finances. A good accountant will advise you on what records you should be keeping. Most start-ups cannot afford to hire an in-house accountant to manage all the company’s finances. However it is possible to outsource your accounting needs to a reputable Accounting consultant. The prices charged are very reasonable. As a business owner you have the option to contract them on a one-off basis e.g. when tax returns have to be filed or for a long term relationship.
5. Have the right motivation for starting a business
It is not uncommon to hear many new entrepreneurs saying that the driving force for them starting a business is to make money, spend more time with their family or be their own boss. These reasons may not be a bad thing per se, but much more holistic and well thought motivation is crucial. Starting a business without the right motivation will see you quickly being frustrated and giving up. Passion for your business idea will see you through the worst of times as a start-up. Besides having the passion for your new business venture, you need to be a person who thrives on being independent, one who is able to take initiatives, and is willing to make tough decisions where needed.Many start-ups are over optimistic about the prospects of their business. They have unrealistic expectations of sales performance. At the same time they underestimate how much money is needed to keep the business operational until it is able to sustain itself. Thus many fail.
Knowing and understanding the basic principles of marketing is crucial for any small business. A start-up may have a great product but without a marketing strategy, it is doomed to fail. You need to be able to convince people to purchase your product or service. The chances that there exist a product that is similar to what you offering is very high, thus you need to able to convince customers on why your product is superior. From the start, know what your value proposition is and think of creative ways of how to communicate it to the market. Researching on the market for your products and doing an in-depth study of your competitors is crucial to coming up with a good marketing strategy. Focus groups, questionnaires, interviews are some of the tools often employed to find out what prospective customers think about your product. Before starting up any venture it is important that you understand the whole market and how your business model fits into it. Quite a number of small businesses decide to focus on serving a niche market. Whilst this has its advantages based on the fact that there is less competition, sometimes the niche may be too small to sustain your business.
Along with a marketing strategy, you need to come up with a promotion and communication budget. It is possible to allocate a fixed portion of your sales every month for marketing expenses or decide this as per need. The budget takes into account the marketing activities planned e.g. whether you will go for more expensive over the line activities or opt for less expensive under the line marketing which is more specific and targeted.
The business model is at the core of any successful start-up. Taking your time to think through your business model helps you answer very difficult questions about the viability of your business. Having done an extensive market research, you will have a clear picture of the kind of market segments your business is targeting. However the success of any business model is dependent on fully understanding the unique needs of your market segments. Thus it is then possible to come up with the best possible method on how to reach them.
An important question that an entrepreneur has to answer is how easy it will be to acquire new customers and whether the cost of acquiring new clients surpasses the value that there will generate in the long run. Device a formula or adapt one that already exists for computing your customer’s lifetime value and cost of acquiring a customer.
CAC = Cost of Acquiring a Customer
LTV = Lifetime Value of a Customer
Another important aspect of the business model is your revenue model. Are the ways by which your company generates revenue sufficient to make it viable? This is an important question that needs to be answered in the planning phase of your company.
Having your business in a good location can make up for poor management skills in a start-up, whilst with even the best of business manager, a bad location will see the demise of your business. A good location means that you are close to your target customers, your business is highly visible, and is easily accessible e.g. good road linkages, availability of parking space etc. Start-ups can also benefit from government subsidies which are targeted at encouraging development and employment creation in certain disadvantaged and distressed areas or aimed at encouraging entrepreneurship. Having knowledge about these programs before deciding on a location for your business could be something to consider.
Working from Home
Working from home may sound like an attractive prospect but you have to think through all the practical issues. One needs to be knowledgeable about issues that come about with working from home and make arrangements on how you will manage administrative issues such as taxes, health insurance etc. Consider taking out permanent health/accident insurance that will pay out a regular income if you are unable to work because of an accident or serious illness. Working from home means that you can be easily be distracted by so many things. Try to avoid these distractions and dedicate a certain part of your house to work, so that you can concentrate fully on work.
The euphoria surrounding any startup mean that there is the temptation to take on easily available credit to fund operations. Whilst this may seem attractive, it is quite risky. As a new business you face so many uncertainties thus saddling yourself with debt from the start is the last thing that you will want to do. It is advisable to use equity capital to finance your operations for as much time as possible and avoid any sort of debt.
Raising more finance, either through getting on board more investors or accumulating extra debt, will not make up for a poor business model. The debt to equity ratio is a simple formula used to measure how much of your business is financed by debt relative to owner’s equity. The formula below shows how it is calculated. Debt to Equity ratio
In addition to keeping your debt in check, it is vital that you maintain good relationships with your lenders. Try to always pay all bills on time and should this not be possible advise them earlier before the date the money is due. For startups a bank guarantee from the government is possible. This should allow you to be able to borrow money from your high-street bank to fund your business activities without offering your personal property as collateral.
As a startup, one of the problems you will encounter is how to separate personal financial transactions from business related transactions. This may prove to be very difficult especially if you are starting up as sole-proprietorship, personal expenses always get mixed up with business expenses. Dedicating a bit of time each week to administrative tasks such as, billing, recording expenses, keeping track of all your creditors and people you owe money, recording all sales etc. is important. From the start, understand the importance of separating personal finances from businesses finances. Filing tax returns or separating personal debt from business debt may prove cumbersome. Small businesses are eligible for certain tax incentives and legal protection. Keeping your books in order will help you take advantage of these schemes. Four things that you can do to avoid mixing your personal expenses with your business expenses are:
- Open separate bank accounts; have a separate account for your business and your personal expenses.
- Pay yourself a salary; when you starting up especially as a sole entrepreneur, try to allocate yourself a salary and stick to it. This eliminates the need to dip into company funds to fund your personal expenses.
- Keep detailed records of all income and expenditure and have your accountant advise you
Though not often mentioned, poor pricing policies have seen many startups go under. Most new entrepreneurs with little knowledge on pricing often opt for the cost-based pricing approach. This entails simply calculation all the indirect and direct costs of producing a good or service and then adding a markup. Whilst this is one of the easiest and most logical way to price your products, it does not sufficiently capture the value of a given product. A good example will be, if you price a product £50 whilst the customer would have been happy to pay a price of £75, you have left £25 worth of value on the table. On the other hand a product may just be priced far above that what the market is willing to pay for it and thus as a result sales suffer. Faced with declining sales, most entrepreneurs will resort to increasing prices in order to meet their fixed costs thus the company enters into what is known as a death spiral. It is important that you get help in order to correctly calculate the costs of producing your products and applying an appropriate pricing policy.
Other pricing strategies to consider are competitor based pricing or perceived-value based pricing techniques. With competitor based pricing, you do a survey of how much your competitors are charging for a similar good and then you can opt to price above, below or in line with competition. On the other hand with perceived-value pricing technique, you try to find out how much a customer is willing to pay for your product. This can be done through a number of ways, from focus groups, to questionnaires etc. Information gathered from this exercise is used to then set the price of the product.