Popular business books offer all sorts of advice about how to start a new business. The same themes come up all the time - write a business plan; prepare detailed financial projections; research the market. But does any of this actually happen much in practice? And if not, why not?
I suspect many startups actually pay little heed to this sort of advice. Especially at the smaller end of the scale, people often just start selling something - because they are passionate about what they want to do, or based on a hunch, or because someone else seems to be doing well with a similar business - and everything else sort of evolves over time.
There's nothing inherently wrong with that approach, but unless you're the type of person that is prepared to risk your time and resources merely on a whim, it certainly makes a lot of sense to spend at least a little time up front thinking about the journey you're about to embark on.
All of this got me thinking about what really matters, when it comes to getting a startup off the ground. How do you sort out the essential, from the merely important? I suggest that the following points are all pretty crucial for just about anyone thinking about forming a new startup.
1 Know what problem you want to solve
All business is really just about problem solving - in other words, solving the problems - meeting the needs, if you prefer - of a customer or group of customers. To create a successful business, then, it's essential to be clear about:
- who your customers are;
- what problem(s) they have, that you are seeking to solve with your product or service; and
- how you are going to solve that problem, ideally in a way that is better than any competitors.
2 Determine how you will compete
Building on the problem solving aspect, articulate how you will compete in your chosen market(s). Effective competition is rarely just about price competition (and when it is, profit margins are likely to be thin - or, worse still, negative).
Pricing and product quality are just two aspects of the "marketing mix"; depending on the type of business you are considering, some or all of the following factors may also be really important:
- promotion - how you promote and advertise your product
- place - how and where customers will access your product
- packaging - how your product is packaged
- positioning - how you position your product in the minds of consumers (is it a premium product, for example?)
- people - the behaviour of other people involved in customer-facing activities
Generally, the better able you are to differentiate your offering from those of competitors, the more likely you will be able to charge a premium price.
3 Understand your financial model
A sound understanding of the financial aspects of the proposed business is crucial. There's no getting away from it. Detailed, multi-year financial projections are not always necessary (especially if the business will be well capitalised and no outside finance is being sought). What is necessary, at a bare minimum, is a solid grasp of:
- your pricing approach
- breakeven sales volumes, based on the pricing adopted
- the nature of variable and fixed costs
- potential cost types, including tax and remuneration etc
- cashflow / funding requirements
If there is any doubt at all about the availability of sufficient cash to fund the business, you'll have to get some robust and detailed financial projections done. Call us for help with that!
Here's a great blog on the concept of breakeven sales.
Check out my book "Small Business Financial Management: how to organise and manage the finances in your small business" for more on this subject.
4 Start small, be flexible and don't risk what you can't afford to lose
At the risk of stating the obvious, it often makes sense to start small. Until your idea is tested and proven, why risk your hard-earned capital unnecessarily? Starting small also makes it easier and quicker to make changes to your initial concept, based on "real world" feedback.
- work from home, rather than renting (or buying!) premises
- hire, rather than buy, equipment
- appoint contractors, rather than employing staff
- don't stock up too much if you are unsure of demand
This blog has some more great tips on starting up at low cost.
5 Get as much advice as you can
There's plenty of good advice out there, much of it free. Learn from others' mistakes, rather than repeating them. Scholes CA provide a free consultation for anyone aspiring to start a new business - just contact us today to get the ball rolling! Chambers of commerce and local enterprise agencies will also usually be good sources of help and support.