esoteriic.com

When financial markets bottomed in 2009, and with the talk of recessions, there were a lot of articles about starting up your own business. The claims were that successful starts ups that survive a recessionary period will go on to be more successful than businesses started during non-recessionary periods. That could be true as costs have to be low in a low-lending environment. It could also be true from a survivorship bias point of view. Those businesses which do survive a recessionary period go on to do very well but that says nothing about the number of businesses that failed, naively I want to guess that the ratio of failures of *new* businesses (ie start ups) is greater in a recessionary period. More businesses (in general, not limited to start up) fail in these periods because of the contractions of spending, capital flow, lending and so on. I couldn't say which businesses will do well but I can at least point to the ones that will survive. Here are some of my observations from running a business, trying to start up businesses, or otherwise involved in start-ups (eg consultancy).

Banks love a good business plan, as do government sponsored start-up agencies, but they mean nothing if the idea is fundamentally unprofitably. Numbers can be skewed, manipulated, and battered in order to look good for a business plan as it is easy to delude ourselves that we have a great business idea which will make millions (insert exclamations marks). One of the hardest parts for new potential business owners is to be honest with their bottom line. An idea could be simple, popular and already a proven strategy but it can still be unprofitable. The bottom line is that all businesses have to cover their costs and provide a salary for the owner. A business that covers all its own costs yet the owner takes nothing is not a profitable business. As much as we want such an idea to work, ultimately it will fail when we can't afford to bill our own bills (food/shelter/energy etc). If you have enough savings to afford not taking a salary for a few years then sure business might pick up and then pay you enough by that time. The reality is that you need capital to build a business and then to sustain it.

Naturally, the idea should be fun/enjoyable/interesting otherwise it won't be worth doing. Sooner or later when things get tough you will quit because the idea wasn't really that fun in the first place, all you wanted to do was line your pockets with gold. Not a great strategy to start a new business just because it looks like an easy way to make money. Some of the attraction is being your own boss, another is to simply have pride in building something yourself. There are numerous reasons why starting a business sounds great although it is easy to ignore some reasons why it may not be so great.

You may have a great idea or opportunity to do something but you don't know where to start or you want to throw your idea out to someone for their feedback, but where to start? It may sound flippant to suggest Google but it is better place to start than many. It is easy to search for sample business plans, pointers on legal requirements and also meetup groups to find similar minded people. It is worth finding out what problems other business owners have had and try to learn from their experience; what did they do when a problem arose, how did they fix it? It is impossible to avoid all problems in business life so the key is not to try and avoid but plan as smartly as possible but accepting that things will go awry.

Find people who have done it all before. Ask them questions and pick their brain for answers. Ask friends of family if they know anything about the industry you are trying to enter, there might be a relative who already in a related area but it is easy to forget that. See if you can spend an hour or two with someone that is willing to listen to your idea and have them criticise the idea and find as many flaws as possible. Look at the profitability of the company and be honest about it. Write down all your costs and compare it to the income. You will need to make up some numbers here and play around with possible scenarios to see if the business will ever be profitable. How profitable is the business?

This was a comment that a friend made to me when we were brain-storming a business idea that we were working on. Many ideas can be profitable but at what point is it profitable? While selling eggs may be profitable, perhaps you can buy eggs at 10 pence each and sell them at 20p each but how many will you need to sell in order just to pay your wage? My friend's comment was that while the core idea sound profitable there is no point attempting it if you have to sell a billion eggs every year just to pay yourself minimum wage. The calculation here is 20p income per egg then minus 10p for the cost, this is called the gross profit margin (10p or 50%). In order to pay yourself £12,000 (a bit more than minimum wage) you 'd need to sell 120,000 eggs. Then there are all the other costs such as transport, advertising, legal costs, tax and so on that actually trying to make the business break even could require the sale of an inordinate number of eggs. Ask yourself at this point: is it worth it?

Yes, some companies might be doing it profitably but their start up conditions could have been far more favourable for this type of idea. Some businesses are impossible to start because of the barriers to entry are so high. Another favourite scenario that everyone talks about is the billion pen scenario where people believe that if they can sell a $1 pen to everyone in China then they could make a $1 billion. Simple maths but quite naive and definitely not a new idea.

Not only can friends serve as a platform for listening they can also serve as a source of motivation which is one of the greatest needs in running any business. If the market tanks and profits drop then your mood can quickly drop as the future appears uncertain. Most businesses have a cyclic element to their profits, Christmas tends to be a better period for most people while February tends to be quiet. Not hard to see why that should be true although new businesses may not realise this and put themselves through unnecessary stress. It isn't always easy to stay positive whenever income is threatened and the bills keep coming in.

Friends and family are probably going to be the first source of help when starting up, either from providing money or effort. They should serve as a source of motivation in order to keep going even if they are not directly involved in the business. Motivation is a key factor to success. In the previous article I highlighted that the team should have effective and transparent communications, and here I highlight the need for focus upon achievable goals and celebrating them regularly. Morale is important but, for me, it comes after communication. With the right combination of people that share similar values and are able to communicate openly then morale will naturally fall into place. If neither friends or family are able to offer any help then you may wish to consider trying places such as Meetup in order to find local interest groups, it could be the opportunity you need to find similar-minded people to get your business started.

Comments

Search

!joomlacomment 4.0 Copyright (C) 2009 Compojoom.com . All rights reserved."