Opening a small business is both challenging and rewarding (if you do it right). It takes a lot of planning, organizing and drive. There is no guarantee for business success but certain things you do will increase your opportunity for success.
To-Do List for Opening a Small Business:
1. How do you want to structure your business? Do you want to set up as a sole proprietorship, or in a partnership or do you want to incorporate your company and limit your liability? These are questions you need to answer before you startup your business. Talk to your local government small business agency; they can help you investigate what option best fits you and your business. Before you make your decision, ask for legal advice and tax advice; talk to a business lawyer and a tax accountant.
2. Once you’ve decided what your business structure will be, you will need to create a business plan. First, develop a business plan outline that includes the areas of a plan that are specific to your business or your industry. For example, if you are planning to go into manufacturing you will need to build an operations plan, a new product development plan, your human resources plan (including a workforce plan) and safety checklist plan; include your capital expenditures budget. The objective is to focus your plan on the manufacturing aspects that are unique to your business. Other businesses with an inventory focus, or retail focus, or services focus will need to adapt the plan to be specific to their needs. All businesses will need to include your long term mission and vision statements, your business goals and objectives, a marketing plan, sales plan, business financials plan, exit plan, business continuity plan and the business strategies necessary to be successful.
3. The next step is to do a financial analysis of your business idea and business plan. Can you make a profit (and once you’ve earned a profit, can you maximize your profit) in your business? How long will it take to make a profit? Can you fund your business growth and survive until you make a profit? What are your cash flow needs and projections? Will cash flow management be a struggle? Can you finance the business and survive?
- Your objective in conducting a business financial analysis for opening a small business is to be realistic. Do not under-estimate your costs and over-estimate your sales. Develop a list of expected startup costs. For example, startup costs might include your legal and accounting costs to set up your business; a business license fee, furniture, computer hardware and software, property insurance; trade-marking your product (if applicable); inventory and/or materials; and more.
- Once you’ve identified your startup costs, develop a list of your other expenses (from daily expenses to annual expenses). For example, business space rent, your monthly utilities (such as heat, phone, etc.), membership in trade associations, office supplies, contract employees, wages and benefits (including yours if you expect to take a salary out of the business). For simplicity, put all the data into a spreadsheet and verify that you haven’t forgotten anything (check out online examples income statements – they show expenses and revenue).
- The next step in your financial analysis is to do a sales forecast for the same period as the expenses (usually banks or other lenders want to see a three year plan in annual increments and a monthly cash flow plan for the three years). Make sure to include the assumptions you are using in your sales plan and in your financial plan (for example, interest rates, dollar exchange rates, gross domestic product rates, political environment, and more).
- Put together a worst case scenario (expenses high, sales low); a best case scenario (expenses low, sales high) and an average case scenario (expenses and sales on target). Test the sensitivity of your projections. What would happen to your financials if you didn’t ‘win’ a large account? What would happen to your financials if your key supplier increased the cost of materials by 12%? Make sure you have a plan to address those issues.
- Try to find industry information that will support your financial plans and include them in the financial section. For example, talk to your industry’s association and see if they can provide average data for financial ratios, revenues, costs, salaries, benefits, etc. within your industry. Compare that data to your financial plan and see if you are ‘in range’; if you are not, you will need a good explanation for the variance.
- Run your financials: total your expenses (outgoing) and your sales revenues (incoming). According to your financials, will you lose money or make it? If you are losing money in your plan, how much are you losing? And how much cash do you need to survive before your plan starts showing a profit? Be realistic.
4. Now consider where you are going to get your startup financing from. Are you independently wealthy? Have you won a lottery? No? Then you need to borrow money or find a way to get some cash to startup. Traditional methods of financing a startup business are bank business loans, government loan programs, borrowing from family and friends, selling a share of the business to a partner who will invest in the business, and re-mortgaging your home. Less traditional methods (also known as bootstrapping), are using personal credit cards, selling assets, such as your car, furniture, your house; continuing on in your day job or taking a second job for additional income. If you believe in the business you want to start, you will find a way. Choose the lowest risk, the best value and the lowest cost financing for your business startup. But be realistic; it can be very difficult to do this. If your business cannot succeed or if you over-inflate sales and under-forecast expenses, you will go out of business and likely owe a lot of money to a lot of people.
5. If the decision is to proceed with your plan for opening a small business, and you obtain the necessary financing, then you must now focus on your product or service plan. Define your service or product. What differentiates it from other services or products? Where is the product or service in its life-cycle; in the introductory, growth, mature or declining phase? How will you position your product or service in the market? Develop your service or product plan and then define your marketing mix for your service or product. Focus on the features and benefits of the product or service. Develop your pricing strategy. Develop a strong promotional program. Define how you will get your product or service to the market (ensure that if your product is inventory-based, that you have enough inventory before starting up).
6. Ensure that you plan your workforce needs and hire the employees needed to open your new business and consider the advantages of outsourcing, particularly in the early days of startup when you might not need full time employees.
7. Finally, open your new business and launch your product or service. Use your promotional program to support the launch. Measure your results continually. Talk to customers and potential customers. What do they like or dislike about doing business with you? Is the product or service meeting their needs? If not, why not? Do this research even if the products are flying off the shelves, you want to know what customers are thinking at all times; the good and the bad.