Every once in a while I get pulled into a conversation about quitting jobs and starting businesses. It goes like this:
“Things at work suck, I have to work long hours and I’m not happy with my boss. I’ve been thinking about this idea, it’s something that I love doing and I was wondering: should I quit my job and start a business?”
When I hear this, it gets me very worried about my friend’s future and about his potential company. Many aspiring entrepreneurs are thinking of starting businesses for the wrong reasons. They haven’t done any research about their idea or the market, and yet they’re ready to quit their job and jump into an unknown business world only because they are not happy with their current situation and they feel that starting a business is the solution to their problems.
Starting your own business is a big commitment, it’s going to completely switch your lifestyle and your day to day; it will affect you as well as your loved ones, so make sure to do your homework and know what you’re signing up for before taking the plunge. There are many misconceptions and myths that influence the decision of starting a new business. If you want to start something because you’re unhappy with your job, you might be better off by finding another job instead of starting your own business! This blog post should help you understand the realities behind starting your own company and hopefully will give you a good idea of what you need to think about before starting.
Myth #1 – Flexibility: I will be my own boss, my work will have more flexibility, and my job will be easier.
Reality: When you run your own company, you’re in charge of everything. This includes finding customers, setting up your phone system, fixing your computer, doing sales and cleaning up at the end of the day. Being your own boss might seem great, but it also means that you have a lot of responsibilities and a lot of work.
Myth #2 – Passion: I will be able to do what I love (this is a legitimate reason for starting your own business!)
Reality: When you’re in charge of your own business it means that you own the long term vision, but are responsible for the short term reality. The day to day might be less glamorous than you’d expect. You will have to go through the ups and downs and the frustrations of getting things going. The vision and the passion are what keep you going, but sometime it’s hard to connect that vision with reality
Myth #3 Freedom: I’m going to be my own boss and do what I want – be the owner of my destiny.
Reality: Most business owners quickly realize that you always have someone to answer to, whether it’s your investors (if you raise capital from friends, family or investors) or your customers.
Myth #4 Money: I’m going to makes lots of money quickly.
Reality: Starting a small business usually requires a significant amount of capital. Whether you have savings, you’re raising money from investors, or you’re taking on a second mortgage (we don’t recommend this or using your credit cards!) it’s unlikely that you will be profitable right away. Most small businesses take a lot of effort, time and money before they start generating enough cash to pay for your salary. And even then you might be tempted to reinvest it to continue growing your successful business.
As long as you know what being a business owner means, then you won’t be surprised when at the end of a packed day you still haven’t done half of the things on your to-do list. If you’ve read all of the above and you’re still reading, then maybe you do have what it takes to run your own company!
Now that you know what you’re signing up for, let’s look at your idea and some other aspects of running a business to make sure you’re set up for success once you start.
Market Size: You must select a business with a large enough market to support your operation. Don’t try to build a business out of a niche since it will be hard to find customers and grow. This doesn’t mean that you shouldn’t focus on or offer something that’s really specific. It just means that you should make sure there is enough demand and enough dollars to be made for you to grow and make a living. It’s always a good idea to ask a few people (other than your friends and family) how much they would be willing to spend for your product or service, you might be surprised about how different your expectations are when compared to reality.
Competition: Take a look at other people in the space and understand whether you’re going into a market that has one or more dominant players. It might be very difficult and expensive to enter a local market when others have already established a loyal customer base. If you offer a differentiated service (or product), then you have a better chance of succeeding. It always pays to do a little research (use Google, Yelp and other local directories) to find out how crowded the space is, what are they’re selling, and what their average prices are.
Marketing: After you’ve researched the market and the competition and you think you still have a good shot at building this business, you’re probably wondering “How do I get clients?“. This is where understanding what’s the best way to reach people, engage with them, and convert them into responsive prospects is critical. Feel free to reach out to one of our marketing experts to get a free marketing consult for your business.
Costs: Once you have defined your business idea, it’s very important to run some numbers to make sure you can actually build a real business from it. First, understand how much it will cost you to run your business: rent, utilities, taxes, etc. Then take a look at your other costs like raw materials, supplies, etc. Measure the sum of these costs with the price that you think people will pay for your products or services to calculate how much profit you think you can make every time you sell something.
Finances: How much money do I need? You need to build a small spreadsheet using Microsoft Excel or Google Spreadsheets to calculate how much you need to invest upfront and how much cash you need to have available to make your business a reality. You might be surprised when you run the numbers at how much it will take to get started. Some businesses require a lot of cash, especially if you need to invest in machinery or inventories, others are less cash intensive like consulting, advising, design and other service businesses. When you build your model, it’s helpful to look at different scenarios:
1) Best Case: How do the numbers look like if I sell a big project the second I get started and immediately after I sell two more? What if I continue selling this projects over the next 12 months and they’re all very profitable? When would I decide to hire some one and how does that affect the numbers?
2) Average Case: If things go as planned and it takes me only two weeks to get set up and two more weeks to get my first project, how do the numbers look? Also, what happens if I continue to sell 2 projects a month as planned?
3) Worst Case: I put all my savings into buying everything I need to get started, but after two months I still haven’t sold anything. On month three I sold a project, but it’s only half as profitable as I had expected. What if it takes 12 months for things to pick up? How much of a cushion do I need in terms of cash to be able to sustain this scenario?
This type of planning will help you understand how much money you need to get the business off the ground and it will also help avoid surprises down the line. Project this mental experiment for a year. Also look at how much you need to sell to break even and how much more you need to sell to pay yourself the salary you want? All of this will give you a good idea how feasible your idea is and how long it will take before things look like the picture you had in your mind.
Cashflow: After you run the numbers around costs and profits, you must also take into account that your suppliers want to get paid today, but your customers might want to get their service first and pay you later. This creates cash flow issues and it’s one of the biggest threats for a new business. Make sure to include this in your financial model since it can make or break your company.
Now that you know that your idea is economically feasible and have enough capital to get it off the ground, it’s time to get started! Start thinking about incorporating, getting your permits, setting up your bank accounts (it’s important to keep your personal finances separate from the business), setting up your health insurance and getting an accountant. It’s also a great time to kickoff your marketing, starting with a website and your Facebook account!
A final thought, remember that you must be strong, always ready to get back up when you fall in order to continue building your vision. It won’t be easy but it will be fun and fulfilling, and you will be creating value for your community.
If after reading this article you think you have what it takes to start your own business, go ahead and read our article on Starting my own business?