Dec 162011
 

Think carefully about your small business ideas before taking action

I’m a real advocate of the phrase ‘time spent in reconnaissance is never wasted’ – in other words, the more preparation you do before taking action the better (that’s not to say you never take action, just that you make sure you’re prepared before you do).  This advice is particularly important before you start your business because if you don’t then all you’re doing is wasting your own time and money.

One area I’ve noticed that many people skip is defining their business – digging down to really clarify in their own mind what sort of business they’re going to start and how they envisage the whole thing developing.  They have loads of ideas for starting a business but don’t think beyond the design of their business card or what the shop window will look like (you think I joke…).  Let me give you a real life example:


I once did some work with a company that sold winter sports clothing.  The shop was far away from the slopes (I’m talking hundreds of miles) so wasn’t a natural place for people to go to buy.  When the owner called me in to ask for help and advice he had nearly $0.5 million in unsold ski suits, ski boots, gloves etc which had built up over 6 years (his storage area for this stuff was bigger than his store!).  The owner was a great guy but hadn’t really thought through his business model.  Fundamental mistakes he had made included:

  • Setting up store in a place few people would naturally expect to find a ski store;
  • Setting up a store that was highly specialized towards a seasonal market;
  • Selling products that were time limited due to quickly changing fashions.

He hadn’t thought through the business model and was lucky to survive.  We did turn him round but he learned some hard lessons (including the fact that people will only pay pennies on the dollar for out of date ski clothing – he made less than $75k on the fire sale for his stock).

Getting clarity in your own mind is important because by doing that you will have done all the research; it’s also important if you’re hoping to get external funding.  If you go along to your bank for a small business loan and it is evident to them that you haven’t thought everything through then you’re unlikely to get the funding.  How many times have you seen people demonstrate this on ‘Dragon’s Den’…?

Here are a list of things that you should research before physically starting your business; the list is not exhaustive but will give you a good idea about things you need to think about.  As well as answering the questions here, make a list of your own as you go through.

What product or service are you going to sell?

A key thing to think about is whether you’re going to sell a product or provide a service.  If you plan on selling a product then you will probably need to buy stock and that will mean paying out cash weeks (possibly months) before you sell the stock.

My advice here is buy limited lines of stock and in the smallest quantities that make economic sense; the cost of starting a small business is high enough without spending big money on a wide range of stock.  As a new business you’re likely to be paying higher prices anyway as suppliers will be wary about your lack of experience so keep the volume low until you’ve built up some credit and confidence with the suppliers and you have got more of an understanding of what stock is selling.

There are ways around this – such as drop shipping – but these options still need some careful research.

If you’re planning to sell a service then things can be easier in that you don’t need to invest in as much stock.  However, you may need to start employing people (full or part time) and that can bring its’ own costs in relation to HR/legal support, contracts etc.

What makes you think the product/service will sell?

Is the product/service new to the market, or is it something already out there?  It might seem counter-intuitive but selling something that’s already on sale elsewhere can be the easier choice.  Why?  Because you know the market already exists and you can do lots of research into how you can compete in the market.

If your product/service is unique then you’re going to have to work very hard to make people understand what it is and why they need it; sometimes that can take years and you probably don’t have the money to survive that long.

A little business tip if you’re starting a small retail business that is going to have a physical presence – try to get premises in an area where there are other businesses of the same type, or which sell complimentary products.

Again, I know this may sound counter-intuitive but next time you’re in town look at how clusters of similar retailers build up; there might be a group of restaurants or food stalls in one area and realtors in another.  People get to know that a particular street is good for electrical goods so they go there and go from store to store to find what they’re looking for; if all the electrical shops are in one street and yours is 3 blocks away you’re going to miss out on all that trade.

What/who is your market?

When I’ve asked this question I often get the response ‘everyone’, accompanied by an excited and enthusiastic embryonic business owner’s smile.  Wrong answer.  You need to be more focused otherwise you will be wasting time and money.

If you’re selling something that is already out there then you need to develop a Unique Selling Point – USP – and determine who your market is going to be; professional marketing people call it market segmentation.  (Note: selling cheaper is not a USP – it’s a high speed journey to bankruptcy so don’t use it).

You need to think about who the competition is and how you can stand out from them.  For example, if you plan on opening a burger joint don’t try to compete with McDonalds, but think about how to differentiate yourself.  How about organic burgers?  Burgers made from buffalo or venison rather than beef?  Mini burgers in brioche rolls?

Who you’re selling your burgers to and how might determine whether they’re going to be viewed as fast food junk or gourmet cuisine.  That, in turn, might determine where in town you set up your outlet.  All these things need some careful consideration to make sure that you’re not getting yourself into a position at the start that will lead to business failure.

What price will you sell at?

As I mentioned above, trying to undercut the opposition is the fast way to financial ruin.  That’s why you need the USP because that gives you license to charge more.  When people see words like ‘hand made’ or ‘organic’ they naturally assume they’re getting a higher quality product and so are willing to pay more.  Very often the cost price to you may not be much more than a normal version of the product but the chances are that you will be able to put a bigger markup on it and so make more profit.

How much markup you put on will depend on a lot of factors, such as they market you’re in, where you are on the quality ladder, what your own overheads are etc so make sure that you think carefully about the price you sell for.  I’ve come across business owners who have thought they were doing really good business when in fact a lot of their products were actually selling at a loss once all the overheads were taken into account.

What volume of business do you expect to do?

This ties in with price because you will normally allocate a percentage of your overhead to each sale so you need to have a rough idea of how many sales to divide the overhead by in order to see a break even point.  This, in turn, will form part of your cash flow forecast and/or budget.

Summary

I think it should be clear by now that if you have an idea for a small business there’s probably more research to be done than you initially thought, and that each piece of research impacts or ties in with other research so you can’t finish the job without doing it all.

I know you’re keen to get on with getting stared and making money but don’t jump in there until you know what’s happening.  Believe me, time spent doing research now will save you a whole load of heartache later – and could even stop your business from going under.