Owning a small business can be extremely rewarding, but the stakes are high. Only half of all new businesses survive five years or more, and about one-third survive 10 years or more, according to the U.S. Small Business Administration.
Often entrepreneurs go into business with a good idea and a sharp focus on pursuing a passion but can overlook some key business needs and encounter avoidable pitfalls. You need to have a clear idea of how your business will succeed.
When my team and I have conversations with customers who are considering starting or buying a business, we make sure they've asked themselves five important questions and have answers to each one:
1) How much time will running this business take? Often, potential small business owners underestimate the amount of time and energy it takes to launch a new business. In recent years, many people have considered starting their own business after being laid off or as a way to generate additional income. But launching a new business is not an endeavor to jump into lightly. And the time needed to research, plan, market and operate your business may be more than you imagined. Think about how much time you ÔÇô and your family ÔÇô are willing to invest in your small business to make it successful. And make sure you allow yourself time to strategize and market the business, not just run it.
2) Have I done enough research to achieve success? Whether buying a franchise or starting your own business, you must do your homework. You should develop a business plan with a clear vision and objective on how to obtain your goals. What's the product or service you want to sell? Who is going to buy it? How will you get paid? How will your idea fill an unmet need in the marketplace? Who's the competition? Be as specific as possible.
Seek out guidance from peers and organizations that provide help to start-ups. There are many resources available to small business owners, such as SCORE, the U.S. Small Business Administration, and the National Federation of Independent Business. You also should surround yourself with a team of trusted advisors, including an attorney, an accountant, a banker, and a financial advisor. Make sure you take advantage of resources available before you launch your business.
3) How long will it take to make a profit? Most small businesses do not turn a profit immediately, so you need to make sure you have enough reserves on hand to cover your expenses. Every business is different, so there's no general rule about when a business may become profitable. But many small businesses don't make a profit for years, so experts say that you should plan to have enough working capital on hand to cover your payroll, operations and other unplanned expenses for at least a year.
4) How do I price my product competitively? One mistake many entrepreneurs make is pricing their product or service based on their perceived value of the commodity, rather than based on what the market will bear. Do your research and evaluate your competition. Determine your market price and figure out whether you will make a profit selling your products or services at that price. Winning the price war is not always better ÔÇô make sure you can generate sufficient profit margins.
5) How much can I really afford? Starting any business or buying into a franchise requires you to make a large initial investment, so it's important to ensure that your current and future finances are in order. Ask yourself how much money can you afford to lose? How much can you afford to invest? And how can you get financing if you need it? Also, look at how much savings or additional income you have to live on while you get the business off the ground.
Research the startup costs for your business and develop a plan with your financial advisor to ensure that you'll have the funds you need. And before you apply for credit, make sure you are putting yourself in the best position to secure financing. A bank typically wants evidence of a strong credit history, collateral or a secondary source of repayment in case of default, a significant investment of personal capital, favorable business conditions, and the capacity to repay the loan.
A solid banking history with your financial institution can boost your overall creditworthiness. Sustained cash flow provides clear evidence of your ability to repay a loan. Try to demonstrate a consistent flow of funds over time. This creates a record that shows long-term stability. Whether it's maintaining account balances, paying off cards at the end of each month, or making regular payments on a credit line, each aspect of your payment history has the power to strengthen your credit profile.
As you launch your new venture, go forward with eyes wide open. Be sure to explore all of the resources available to you and seek the knowledge of experienced advisors and peers to help you navigate. Building a successful business starts with asking yourself the right questions. When you can answer these five questions with confidence, plan carefully and you can put yourself in position to reap the rewards