Thinking about starting a business? Although being in business is tough (the Bureau of Labor Statistics shows that there is a 50.7% survival rate for businesses at the 5 year point), it is one of the most frequently travelled paths to financial independence. As a business owner, you control your own destiny, set your own hours, and basically “run the show”. Fortunately, with rise of information technology and the internet, starting a business is easy. Here are the key steps to starting a small business.
Find Your Niche
Of all of the key steps to starting a small business, this one is the most critical. Deciding what your business is going to do and what market your business is going to target is difficult and time consuming, but this research is key to success. Not researching your market can lead you to start a business in a field that is overcrowded and hyper-competitive, or even worse, for which there is no demand for the goods or services.
I have always found that smaller niches that have demand and that aren’t hyper-competitive are the best and quickest way to generating revenue. These smaller niche markets typically have some unmet need that begs to be filled. Also, without all of the competition, there are invariably additional services or goods for that niche that aren’t being filled. Some of my most profitable businesses have been off-shoots of an original idea targeting a small niche market.
Create a Business Plan
I am not a big “business plan” guy. I am a big believer in Helmut von Moltke the Elder’s concept:
“no plan of operations extends with any certainty beyond the first contact with the main hostile force”
“On Strategy” (1871)/”Über Strategie” (1871), as translated in Moltke on the Art of War: Selected Writings (1993) by Daniel J. Hughes and Harry Bell, p. 92; German collected in: Kriegsgeschichtliche Einzelschriften, H.13 (1890), hier zitiert nach: Militārische Werke, Band 2, Teil 2. Mittler & Sohn Berlin 1900
Probably most widely paraphrased as:
“No plan survives contact with the enemy”
The Swordbearers : Studies in Supreme Command in the First World War (1963) by Correlli Barnett, p. 35
Not that I don’t believe in planning, but I choose to spend the time refining the business during operation, after contact with customers, versus agonizing about projections in a business plan. I research the market to ensure that there is demand and then find or create a niche that differentiates the new business from its competitors. The plan is to connect the two parties (my business and potential customers), and I lay out ways I am going to try to accomplish this task. My business plans are typically “one-pagers”.
Create a Budget
One thing you can plan for is expenses, and that is why creating a budget is one of the key steps to starting a small business. Lack of financing is a killer of small businesses. You need to know how long you can carry this business (or how long you want to carry the business) and how much capital you need to have on hand. This is the area to be detailed, so spend the time analyzing your finances carefully. You may determine that the entire endeavor has a poor risk-reward ratio and should be abandoned.
The popularity of online businesses in recent years has a lot to do with the expense associated with starting a brick and mortar company and the risks associated with starting a small business.
Choose a Business Legal Structure
Starting a business is the process of separating you from your work (services, products, whatever). From now on, the company is performing the work and you are a worker inside of this new entity.
The are several different types of business entity structures you can use and they all have pros and cons. The different types of typical business entities are:
- Sole Proprietorships
- General Partnerships
- Limited Liability Partnerships
- Limited Liability Companies
I use Corporations and Limited Liability Companies for my business activities, however, everyone’s situation is different and they should consult with an attorney or CPA for specific advice.
Protect Your Brand
So you have a great idea and a great niche and it takes off. You have registered your business name with the Secretary of State when you incorporated. You have purchased your domain name (preferably a .com domain name). Your business is making money and attracting attention.
What if a competitor starts using your name (or similar name) or idea?
If you don’t protect your business name and idea, you are constructing a building on a foundation of straw. Registering a name with the Secretary of State in one state doesn’t protect your name in other states. Trademark your brand. Trademarks are easy to file and can protect you in the case of infringement. Since trademarks are federal, they can protect you across state lines. You should consult an attorney for clarifications of trademark protections.
Licenses, Permits, Taxes and Insurance
Each state and local government has different rules and regulations covering business operations in their jurisdictions.
When opening a new business, you need to register for state and local taxes (in addition to getting your federal EIN number, and apply for permits.
Business insurance is a must-have for any small business. Depending on the type of business, the costs for business insurance can vary widely.
Licenses, permits, taxes and insurance are all key components of business startup. Omitting these steps can lead to big fines, legal exposure and business closure.
Set Up Operations
Setting up how your business will operate on a daily basis is one of the key steps to starting a small business. You need a place to operate and a structure to operate within. Here are some of the bigger-ticket items to consider when setting up small business operations:
Where is your business located? Online? Storefront? Warehouse?
Securing a physical location and setting up operations can include renovations to the space, furnishing the office/ warehouse, acquiring equipment, computers, and phone systems are all part of initial setup. All of these associated business start-up costs should be accounted for in the budgeting step much earlier in the process.
How are employees handled and paid? Is payroll done in-house, or outsourced? (I use outsource payroll companies due to the complexities and potential fines for errors.)
Develop an employee handbook that outlines duties of the employee, employer rules and regulations, and company policies. Your insurance agent will also most likely be able to help with developing and implementing employee safety protocols.
Set up billing and accounting systems for the company. Focus on streamlining this process, and on how and when you get paid from your customers (remember that cash flow is king, and the lifeblood of any small business).
Develop independent contractor agreements for work outsourced to consultants and contractors.
Build Your Team
At this point of the small business startup process, we have already added 3 team members:
- Your CPA (assistance in choosing business structure; federal, state and local tax setup, accounting system setup)
- Your Attorney (assistance in choosing business structure, filing business structure, and trademark assistance)
- Your Business Insurance Agent (securing insurance for your business)
The above 3 members of your team are consultants that are paid as needed, but what about the rest of the team? At this point, you add the number of staff (I suggest keeping the number of employees to a minimum) needed to execute the plan. Remember, it is always easier to scale up the business when you have customers and the business has cash flow. Consultants and independent contractors can fill short-term specific needs (legal, tax filings, web design, channel-specific marketing, etc). Focus company employees on company intellectual property-specific work (like building your widget if you are a manufacturer).
Promote Your Company
At this point, you are up and running. You now need to get customers in the door (typically the most difficult part of the process). Developing a marketing plan to promote your small business is the next key step in getting your business cash-flowing. There are several different channels to market your company:
- Television Ads
- Radio Ads
These are just a few marketing channels to reach potential customers. I focus on connecting with the customer in the planning stage, as it is the foundation of everything. Research in the beginning (when you are selecting a niche and making your business plan) on how you will get customers. If you can’t get profitable customers, whether it be due to no market, bad product, competition or high acquisition cost, you don’t have a business.
Service the Customer
We are finally at the step where you actually get to do what you envisioned: connecting the customer with your company’s services. Exceed your clients’ expectations on a daily basis, and the sky is the limit.
Think of your business that you have created as a factory. The customer enters the factory on a conveyor belt and the machine you have created (business structure, operations, employees) add value to the customer as they pass through your factory. When they exit they are better for the experience. You have added value to the customer and have enriched their lives.
Key Steps to Starting a Small Business and Business In General
These key steps to starting a small business are just general concepts to get you started down the road to building your own business. Statistics have repeatedly shown that business ownership is the path to wealth and financial freedom. It is challenging, and you will probably fail several times along the way (I know I have). Each failure is a step on the way to eventual success.
“It's supposed to be hard. If it were easy, everyone would do it.”
Tom Hanks in A League of Their Own
If you can add value in everything you do, you help others and you help yourself.