Starting a successful business requires a lot of effort and planning. If you go around and talk to small business owners they will quickly tell you how much work it takes. They would also want to go back in time and fix early mistakes.
Most new entrepreneurs understand the time and effort it takes to start a business but aren’t as familiar with the steps it takes. The workload will quickly pile up and trying to understand what is important and what isn’t can cause a lot of stress.
If you’re willing to follow these steps it will save you time and a lot of headaches towards your goal of starting a successful business.
1: Finalize Your Idea and Conduct Market Research
If you’re reading this you probably have an idea for what product or service you want to sell. At a minimum you have an idea of the market you want to enter.
First look at the larger companies in your market and determine if your business can do something better. Almost all markets have leaders that dominate the sector. If you’re unable to beat them in some way it will be difficult for you to succeed.
Many new entrepreneurs know they have a great idea and quickly launch their business without conducting due diligence. Conducting market research isn’t just looking at your competitors, it’s also understanding customers desires.
It’s good to gather information on the demographics of your customers so you can better understand the opportunities that are available.
You can do market research on your own by visiting with customers directly. You can also use research put together by more conventional sources.
Starting a Successful Business Requires Market Research
- What is the demand for my product or service
- Saturation of the market
- Can I offer something that is better than what’s already on the market
- Is my business a niche with low competition or a general concept with larger barriers to entry
- What pricing will I offer and how does that compare to the market
- Where do customers currently go to fulfill their needs
If your business can solve a problem for consumers or offer a product cheaper with better service, your business has viability. Now you’re ready to create a business plan.
2: Make A Business Plan
A well put together business plan allows you to take the steps that are needed to get your business off the ground. The best and most successful small businesses are those that can offer differentiated products or services.
Most new business fail because they move too quickly without planning for what it takes to make their business succeed. A business plan is a way to lay out the key elements of your business that allow it to grow, operate, and compete.
Business plans are also necessary to secure funding. When banks or investors are looking at your company they will want to see that you have a plan in place to differentiate your business. Without a business plan it is difficult to convince banks and investors to give you money.
A business plan will help you guide your business and secure financing. It’s a way to force yourself to not just live in the moment of initial excitement. It forces you to diligently plan and work through what will make your business work.
Starting a successful business without a strong business plan is very difficult.
3: Funding Your Business and Knowing Your Numbers
While certain businesses require more initial capital then others, it’s never a bad idea to overestimate how much money you’re going to need. Many small business fail because they simply run out of money before their business has a chance to take off.
Determine Funding Level
There are really only three sources of funding for a start-up: Self-Funding, Banks, and Investors.
Self-Funding
Self-Funding can be a great opportunity for start-ups and younger entrepreneurs, as long as you don’t overspend or leverage yourself too much. It allows you to retain complete control of your business equity, unlike with Investors. It also makes the burden of carrying an outside debt load less. Paying to have debt can be a large expense that can often drain the cash from a company.
It does come with its own added risk though. Having to drain your retirement savings or turn to friends and family can add a lot of stress.
Banks
The most common form of financing would be from a bank. Bank loans are usually easier to get then investors and doesn’t carry the family relationship issues. Further, it creates a set payment each month making cash planning easier. A Small Business Loan to consider would be an SBA Loan. Here is a guide in detail about how to secure an SBA Loan.
It is a great government program where they insure the debt. This makes banks more willing to help businesses. However, SBA Loans generally require larger personal assets and good credit.
There is a lot of government bureaucracy and paperwork involved but overall it is an excellent program for small business owners to get cash.
Investors
There is no quick and easy way to attract investors. Investors in start-up companies are called venture capitalists but they are difficult to attract. They tend to focus on companies with high growth opportunities and will take a piece of your businesses equity.
Investors will also want to see your detailed business plan along with complete financial projections and statements. While some investors are more involved then others you must be prepared to give up a portion of control in your business.
Determine How Much Money You Will Need
When you start a business you will want to estimate how much money your business is going to need until it can generate its own cash. There are other ways to determine how much cash you will need but the easiest way is to create an expense budget. Creating a budget will help you determine what the breakeven on your business is. If you’re trying to encourage investors or get a bank loan they will want to see financial projections.
Manage Your Expenses
Many small businesses spend money on unnecessary things. In any business it is best to think of every expense as an investment in your business. Having the fancy computer and nice desk is fun, but you have to ask yourself if that money could be used better elsewhere. When starting a successful business your priority must be to spend as little as possible. The last thing you want to have when you’re trying to grow your business is a cash crunch.
Estimate Profitability and Product or Service Prices
When starting a successful business you need to figure out the minimum gross profit and sales you need in order to fund your business, without making a loss. It is difficult to plan for the future of your business without knowing what volume of goods or services you will need to sell. In order to figure out how many units you will need to sell in order to make money conduct a Break-Even Analysis.
A simple Break-Even Analysis for Units Sold is as follows:
Break-Even = Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)
This formula lets you discover how much revenue you need in order to cover all of your expenses. It will help you determine which product you sell generates the highest profits or which ones are selling at a loss.
A mistake many early companies make is to just look at the costs of their competition. You must also look at your fixed and variable costs in order to price your products.
I have known many business that want to use the “Volume Sales Method”. It can be very dangerous for your business to follow this method. The survival of your business depends on rapid growth and strict controls on spending. If you do want to go that route make sure you have a strong cash reserve in order to ride out potentially lower sales than projected.
4: Starting a Successful Business Requires a Strong Corporate Structure
The type of business structure you chose can have long lasting effects on your business from taxes to legal protection. While you can always change your business structure down the road it’s best just to get it right the first time to avoid unnecessary paperwork.
Most businesses have to register in the state that they operate. You must also get a Tax Identification number and proper licenses and permits. I have found that oftentimes this can be one of the most frustrating and confusing aspects of starting a business.
Review The Most Common Small Business Structures
This is the riskiest route because you’re personally on the hook for all the debts and obligations. While starting a sole proprietorship is the easiest method it doesn’t create a separate business entity to shield you from litigation or debt protection. Do to the lack of protection it is very difficult to get a bank to invest in a sole proprietorship. However this could be a great route to go if you want to simply test your ideas without commiting all of your resources.
As far as business entities go a partnership is the most simple and straightforward. The two most common forms of a partnership are Limited Partnerships and Limited Liability Partnerships. The main differences between a Limited and Limited Liability Partnership are taxes and liability.
Limited Partnerships have a general partner who has unlimited liability, pays profits through personal tax returns, and must pay personal employment taxes. Partners other then the general partner are similar in every way but have limited liability, lower control, and don’t have to pay personal employment taxes.
Limited Liability Partnerships are much simpler. They extend limited liability to every partner and each partner is protected from the debts of the partnership.
Partnerships are great entities for businesses with multiple owners or professional firms like accountants and attorneys.
LLC’s have really taken off in recent years do to their liability protection and protection of personal assets. They are the middle ground between a corporation and a partnership. The greatest benefit of an LLC is that it protects your personal assets (house and retirement) from liability in the event of a bankruptcy or legal dispute.
While LLC’s generally have a limited life span they can be reformed in most states. Also the profits and losses of this entity type pass directly through your personal income taxes however some state laws require you to pay self employment taxes.
Corporations offer the most protection to owners. They almost completely separate the owner’s personal assets from that of the business. This shield does come with a higher cost and also requires extensive record keeping and financial reporting.
A C-Corp is great for rapidly growing business that may eventually go public. This structure makes it very simple to sell ownership to investors or selling stock to employees to gather talent. With most C-Corps the profit is taxed twice. Once by the business and again when dividends are paid to its shareholders. For businesses that don’t plan on selling equity or attracting investors the double taxation should be a turn off.
S-Corp’s on the other hand are a corporation type that avoids double taxation. The profits and taxes are passed directly to the shareholders bypassing corporate taxes. S-Corps are independent entities just like a C-Corp. Therefore, you have the same level of personal liability protection.
There are some restrictions on S-Corps and not all states treat them the same so make sure you double check the laws of your state. However, in my opinion an S-Corp is the best type of business structure to protect your personal assets, shield yourself from liability, and pay fewer taxes.
Which Structure Is Best?
In the end it is up to you to decide which type of business structure is best for your business. It’s important to understand the different laws and tax benefits different business structures have, and many vary by state as well.
At this step I also recommend contacting a business lawyer and accountant to help you decide which business entity is right for you and your business.
5: Register Your Business With The IRS and Obtain Business Licenses
After determining your business structure you will want to get all of the permits, licenses, and registration for your business.
To officially start conducting business you will need to register with the government. Corporations will need to create articles of incorporation and partnerships will need to have partnership agreements. These include your business structure, business name, equity details and other general information.
After registering your business you will need to obtain an EIN number from the IRS. The Federal Employer Identification Number is not required for sole-proprietorships but is required for most business entities. Registering for an EIN number is simple and free and there is a helpful checklist provided by the IRS.
You will also need to file forms to complete your federal and state income tax obligations. Most states have an online portal you can use to complete these forms and it does a good job walking you through how to do it.
License and Permits
Some business may also need to obtain a license and permits in order to operate. Professional trades such as general contractors, construction, utility, and other specify fields will need to obtain these licenses in order to conduct business. Many businesses will also need to collect sales tax from customers. If you’re starting a retail business you will most likely be required to collect sales tax.
These requirements vary on a state by state basis so it’s good to check with your local and state governments.
6: Open a Business Checking Account and Finding a Payment Processing Company
The moment your business starts collecting money and paying expenses, open a separate bank account. Once you have received your EIN number you can open a business bank account.
Opening a separate business account adds another layer of protection between your assets and your businesses assets. By keeping your business and personal expenses separate you can provide accurate reporting to the IRS in the case of an audit. With a separate account you will be able to deposit checks and other payments directly into your business. This prevents checks being made out to your personal name.
Credit Card Processing
Partnering with a payment processing company will allow you accept credit cards and other forms of electronic payment. In today’s world a larger amount of the population is using plastic to conduct business. You don’t want to miss out on that payment type because you failed to open an account with payment processors.
When you’re looking for payment processing companies it is good to go over their benefits and fee structure. I know from personal experience how expensive it can be paying credit card fees. It’s a sneaky cost that adds up quickly.
Find out what their monthly minimum services are along with the discount rate (Percentage paid per transaction), transaction fees, and nightly batching fees. Once you have found a payment processing company you like, remember that you will need to link that company to your company’s bank account in order to receive the funds.
7: Starting a Successful Business Requires Good People Around You
Unless your business only requires you to operate, you’re going to need a talented team. I have learned over many years that the employees you have are just as important as the product or service that you sell. Learning to delegate and trust your employees will free up your time to grow your business and focus on the future.
Many entrepreneurs fail because they neglect how important it is to have quality employees helping you and your business. When starting a successful business you need to have a team that has clear roles and responsibilities, delegated tasks, and feedback.
8: Get Insurance For Your Business
It’s never too early to have insurance. Ideally you should have your business insurance before your business even launches. Theft, property damage and general accidents can happen at any time.
If your business is going to have initial employees you will need to get workers compensation insurance and unemployment insurance. Most larger payroll service companies will provide an easy set up for employee insurance making the process easier for you.
General Liability Insurance can be purchased through most insurance companies and covers property damage, theft, and personal injury. General Liability Insurance also provides coverage for others, not just employees. If a customer slips on a wet floor and is injured, insurance should cover it.
9: Get Customer Relationship Management Tools and a Point of Sale System
Commonly known as CRMs, customer relationship management tools are a system that monitors your sales, helps you keep track of customer information and helps you follow up on leads from your marketing efforts.
A Point of Sale System is equally important. It allows you to properly track your inventory along with specific sales information. Knowing which products are selling, and at what times, can help you with inventory management.
If your business is only in the service industry you will still want to get these systems. You can still track customer sales and figure out peak seasons for your business.
When starting a successful business you must track where your sales are coming from in order to grow. There are free options out there that you can use so don’t worry about having to dish out large amounts of cash for these systems.
10: Understand The Risk and Have a Safety-Net
Often times the excitement and chance of success can cause entrepreneurs to take the leap without thinking about the time and frugality starting a business requires. It’s an unavoidable fact of life that many business fail. Even well planned and executed business fail. You need to have a plan B.
Before starting a new business make sure you have at least a 6-month emergency fund. You want a cash cushion to pay for personal expenses. While you might draw a salary from the very beginning that is usually very rare. You will want to reinvest the profits of your business to grow.
Make the dividing line clear between your personal and business finances. Many business owners fail because they see all of the cash coming in and use it for personal expenses.. Don’t fall into that trap.
Are You Ready to Start a Successful Business?
The only person that can answer that question is you. However, if you follow this guide you’re ahead of the game. Without proper planning and financial management it is almost impossible to be successful. Starting a successful business is extremely rewarding and to me is worth the risk.
