The facts are that most new business endeavors fail in the first year or two due to poor planning and poor financial support. There are some very important steps to consider when starting a new business and that is what this article is all about – the major steps that one must follow, consider, then implement BEFORE OPENING DAY in order that the business can thrive and be profitable.
STEP 1: IT MUST MAKE SENSE
If your idea of a new business is to have a Sno Cone store located on the beach in central Maine, then you will have major obstacles to overcome, not unlike selling ice cream to Eskimos in the winter time. Sure, you will be busy for a month or two each year, but is the business able to be sustained, i.e. remain profitable on a year round basis? Likely not. Your new business needs to be an idea that makes sense, or is something you have been trained to do. I was personally trained to be a dentist and later a real estate agent. Both careers made sense in the busy Washington, DC, metro area. My current consideration is in the restaurant business – an idea that makes sense because of the next step in this article. So first and foremost, your idea for your new business has to be logical. This is where step 2 comes in.
STEP 2: LOCATION and DEMOGRAPHICS
The first three rules of real estate are: Location, Location, Location. You have heard these words a million times over, and they are true now more than ever. There is NO POINT in putting that dry cleaning shop next to a smelly meat rendering plant, or next to a cigar shop, or worse yet, next to three other dry cleaners that are already well established (i.e. the area is saturated) One of the most logical things to do at this point is to run a demographic analysis to see if your business idea might fit into the physical location you have in mind. If you are a dentist, for example, you would want to know the population of your area, how many other dentists are right nearby, is the population always moving? (transient types), are they able to afford your expensive fees when a dentist down the street charges half?, are the possible patients commuting to work and would prefer a dentist in town perhaps?, what insurances are in that community? (i.e.is this a suburb of Washington DC so we know Delta dental dominates?), how many children are in the community (you would not want to specialize in children’s dentistry when the demographics show 90% of the people are over 50 years old).
STEP 3: THE BUSINESS PLAN
In all my years as a dentist, real estate investor, and business consultant, I have seen very few business plans and I’m not sure why. They are really not that hard to do if you have a good business model/concept in mind. There are plenty of books out there to help guide you. If you have the money, you can hire a good consultant to help you write one. Basically – create an outline of what you intend to do, the costs involved in getting the business started, the costs to keep it going, how many employees you need, what you will pay them, insurance costs – life, health, disability, business overhead, etc, legal costs, accounting costs, and the list goes on and on. The idea here is to create a plan that says you know what you are doing here, you know what you are up against. So make sure to write up a good plan because the next step is where you will put that plan to good use.
STEP 4: FINANCING
Unless you are wealthy enough to pay cash for this new business, you will need some degree of financing to make it happen. This is where that business plan will come in handy. With my own clients, whether they have been in business 20 years or are just starting out, I tell them to create a plan that explains where they want to go and map out the first few years so you can see how things are progressing. Then, you can show this plan to your local bank to get the financing you need to get the new restaurant open on time. I guarantee a good business plan will greatly increase your chances of getting the money you need. In addition – you must plan for a reserve fund. This is critical for a new business. Your first months, perhaps your first years, may be a bit lean and you will need money in the bank. What happens if we have a snowstorm that shuts the area down for two weeks and you have not had a single customer in that time? Well, payroll, rent, debt service, etc. are all still due. You don’t get a break on the bills just because it snowed. This is why you MUST have a reserve fund, or a LOC (Line of Credit) ready. For my own clients, we set up a special LOC since it costs nothing to just sit there, but if there was a broken down pizza oven that needed replacement right away, the money is ready. This is a good segue to understanding types of costs each business must face.
STEP 5: COSTS
Fixed Costs – these are costs that are always there until the day you close the business and likely they will go up every year you own the business. These costs include things like rent, debt service, insurance, condo fees, cleaning and maintenance fees, and staff salaries. These costs will always be there, staring at you every month like a hungry baby bird with it’s mouth wide open! So as I explain to my clients – if you have a small business, most likely you will have to be there most of the days it is open to make sure things run smoothly and properly.
Variable costs – supplies, maintenance needed due to being busy, staff bonuses, legal fees, marketing costs, and finally your own salary/pay/profit. So, this means that you do not get paid unless EVERYBODY else gets paid first.
STEP 6: LEGAL ISSUES
Is your business going to be as a sole proprietor or a corporation? The difference is that a sole proprietor is personally liable for all actions in the business, and pays for all problems that might occur on a personal level, i.e. if someone breaks their ankle at your doorstep, they can not only sue the business, but they can sue you personally as well. So you say – that’s pretty stupid, isn’t it? Well, I just met a businessman recently who has been in business for over 20 years, he makes over $200,000 personally and is a sole proprietor. He has a beautiful home with a wife and kids……he could lose all of this if something as common as a broken leg happened at his doorstep. If he was to set up as a corporation, his corporate insurance with an umbrella policy would likely cover any accidents and he would not be held personally responsible and risk losing all that he has worked for. There are different types of corporations out there, depending on what type of business you are running. The best thing to do is hire an attorney who can set up your entity properly and maintain it for you.
The issues mentioned above are what I try to tell all new clients to consider (just for starters) before they even consider opening the new business. These concepts need to be reviewed and reconsidered carefully, with the understanding that maybe you should not open that business in that location. Maybe a whole new demographic analysis needs to be done in a different area. You might be pretty disappointed at first when your pizza restaurant does not fit into the community where you live and you would need to move it 20 miles further out to make sure you have customers. This is the way a business is, this is the way you have to think of a business. In the end, it’s just a business!
Next Article: Are we there yet, can we open shop?