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Sunday, August 11, 2013

RANDOM THOUGHTS #154: Starting a Successful Business

Steve Cole writes:
In our current economy, many people who find themselves suddenly outsized think of starting their own business. This can be fun, and it can work, but there is no guarantee that it will. Indeed, if you have never been part of running a successful business (i.e., if you don't actually know how to run a business), your odds of success are nearly zero. Running a business is not easy and it's a skill set that many people do not have (but most can learn). Far too many people think that if they just open a business, enough profit will automatically come in to pay the rent and a salary, without any real effort. That's not simply wrong; it's seriously dangerous. Nobody is going to loan money to a new business without expecting to get paid back even if the business fails, which means you'll have to come up with some kind of personal guarantee or collateral. For many people, this is a home equity loan, and results in losing the home and the business when it proves to be less than successful.
So, enough gloom and doom. Let's review the rules for starting a successful business.

0. Understand What a Business Is
A business is where you do, make, or sell something that people pay for. The difference between what it costs to do, make, or buy that something and what you can get paid for doing it is not the profit; it's the margin. The profit is what's left after the margin pays the cost of overhead (rent, salaries, insurance, taxes, utilities, advertising, shipping, equipment, and everything else). Worse, some of the profit has to be kept inside the business for emergencies, replacing worn-out equipment, investing in new things to do, and so forth.
That's the theory. The problem is that the overhead expenses are going to keep going whether you sell anything or not. Let's say you have a huge collection of baseball cards. You rent a store and offer them for sale, but nobody buys any. Well, the rent on the store still has to be paid, as do the utility bills, and your own personal rent (or mortgage) and utility bills also have to be paid. That's the trap. If you don't pick a business where enough people buy the thing (product or service) and you don't make enough profit on each thing, you'll fail.

1. Do Something You Enjoy
If you hate your job, you won't be able to drag yourself to work during the not-yet-profitable period. Even if the business becomes a success, what's the point of owning a business that you hate working for?
The problem side of this is that not every business that you would enjoy makes a profit. Say your great passion was to be a consultant on 18th-century German polka music, and you'd really enjoy that job. The problem is, nobody is going to pay you money to do that job, no matter how much you enjoy doing it. So don't let the fact that you love something trick you into thinking that others will love paying you money to do that something.

2. Do Something You Know
I love that television show about fixing a failing restaurant. Most of the time, the place was started by people who had a vague idea about how to cook and absolutely no idea about how to run a restaurant. If you don't know how to do something, learn how to do it before you try to run a business that does it.

3. Write a Business Plan
You need a written plan listing all of your expenses and what you expect sales to be. You need to document and prove every expense, and do the best you can to estimate sales. If you do not know how to write a business plan, learn before you go forward. Find out what business courses are available in your area, perhaps at the local college or from local business groups. Consider taking a course or two in business administration or accounting or marketing (or all of those) at the local college.
There are no end of wonderful books out there about how to start a business. Go buy two or three of them (or borrow them from your local library) and read them.

4. Visit Another Planet
Men are from Mars; women are from Venus. They don't look at the same thing the same way. What's a perfectly logical plan to a man is the height of insanity to a woman (and vice versa). Ask someone of the opposite sex, someone who loves you: a parent, child, sibling, or spouse. If they shoot holes in your idea that you cannot patch, get another idea.
For that matter, run your idea past someone who actually runs a business, someone you respect, someone who likes you enough to spend an hour telling you what you didn't know, didn't realize, didn't expect, or didn't anticipate. Ask them how they would run the business you envision. Do not ignore those who tell you that you are just wrong or naive or even crazy.

5. Have Enough Money, but Avoid Debt
Borrowing money is dangerous. It's another bill to pay, and it means paying "rent" (interest) on something you cannot really touch. Debt is another recurring expense, one you have to pay every month whether you sell anything or not.
Go back to Rule Zero. You need enough money to pay the overhead for several months, plus enough money to buy the equipment you will need for a manufacturing or service business or the inventory you will need for a retail business.
If you don't have the money for that, please don't start a business, as you'll simply end up in bankruptcy.
About the only kind of debt that a start-up business should even consider is equipment debt secured by the equipment itself (if you can get the equipment vendor to sell that way, which you probably cannot). This is the kind of debt where, if the business fails, the vendor just takes back the printing press or the pizza oven or the welding truck and you owe nothing. Maybe some vendor is desperate enough to sell things that way. A similar idea is to buy inventory for sale on a returnable basis, perhaps with a small restocking fee. Just remember that, if you buy inventory on credit, any sales have to go to pay off the inventory debt, not to pay overhead. You have to have the overhead money to start with, and be willing to lose it all if you fail.
If you don't have the money to rent a store, try to start a business from home. If you don't have the money for the equipment, find another way to run the business or buy used equipment or lease equipment on a contract (if you can find one) where you can just hand the equipment back and not have to pay years of payments.

And in Conclusion
There are entire books on how to start and run a business, and this article is NOT a substitute for those. The best I can hope for is to open your eyes to how much you do not know about starting and running a business. Most new businesses fail because the wonderful thing about the United States of America is that anyone can start a business, even someone without a clue how to do that.

Copyright (c) 2013 Stephen V. Cole