How to Start a Startup | Part 1
Starting a business is not a small undertaking and managing a small business is even more difficult. You are signing up to months of long days, no time off, and a lot of stress. I’m not sure why anyone would really want to do that to themselves….except the hope for success, freedom, and financial independence. Of course the potential rewards outweigh the troubles, if you have a good idea and a solid plan for your startup company. Don’t be a chump and keep working for the man; I would rather work 12 hours a day for myself than 8 hours for someone else and put money in their pocket. Make your own business and be happier.
Most start ups have that drive and determination to succeed, but often overlook some details that are necessary for new businesses to succeed. I will outline some steps to help you figure out these details and get you on the right track.
Steps to starting a business
Here are 9 steps to starting a small business. I will go through each one and really try to detail each one of these steps to start your own company and get you up and running in no time.
- Get training, assistance, and network constantly
- Do research and analysis of your idea
- Analyze locations and costs
- Analyze financial requirements and if its feasible
- Write business plan
- Form LLC and register DBA
- Begin process to obtain any licensing or permits (once you receive financing you start owing interest. Get everything time consuming accomplished beforehand)
- Finance your business
- Put your team together - Outsource accounting, HR (payroll, tax withholdings etc), Tax responsibilities (sales tax, quarterly and yearly filings) – The government has made it far too difficult for anyone to do this on their own and it is a mine-field, exposing you to fees, fines, and lawsuits.
- Find a good accountant and he will know everyone you need to know
- Get training, assistance, and network constantly
- Revise business plan within the first 6 months
You might notice that my list closely follows the SBA 9 Steps to Starting a Business. I think they do a good job simplifying the process but a few adjustments are realistic. I will now dive deeper into the first couple steps.
Step 1. Training and Assistance for your new business startup
This part can be a bit overwhelming as there are literally hundreds, if not thousands, of resources and all kinds of education for creating your own business. When I started my first business with my wife, a scarf kiosk, we bought a lot of books about opening a retail store. I think books are very valuable and help a lot but I also got a lot of information blogs and websites like this one which also have good tips for starting and building your company. Additionally, There are some new resources from the SBA Learning Center which could help you be successful .
Small Business Networking
This one is a little more challenging to nail down because networking is something that needs to be constantly. Fortunately, there are a lot of places to target for some great networking opportunities.
First, I highly recommend signing up with your local chamber of commerce. Most chambers do weekly networking meetings and you can very quickly get to know many owners and self-employed people in your area. Networking with other owners is probably the most valuable networking you can do. These people have all started and manage businesses of their own and most people are very willing to pass on their knowledge to you.
I also recommend finding every business related event and attending it. I found that Meetup and Eventbrite often have business oriented events to go to. Educational events are really important even if they don't directly help you. You can still go to the "Government Contracts for Women in Construction" educational seminar even if your a male who wants to start an online retail store. Even if your fields are polar opposite, they all started businesses, wrote business plans, received funding, have accountants and attorneys, and continually network to increase their business. Some day you may need their services or they may need yours.
Step 2 Research and analysis of idea
In my opinion, this step is the most important of all the steps to starting a business. I think it’s even more important than actually writing the business plan. Without a good analysis, you will have a very hard time starting your own company because you will have poor facts and assumptions, no idea what your competition is, or even how to price your products or where to set up locations. You cannot even begin to write your business plan without first doing a solid analysis.
There is a classic analysis that you may find elsewhere on the internet called SWOT analysis. For the “start small” entrepreneur who is reading this, as 95% of the readers are, it may have limited value. SWOT stands for: Strengths; Weaknesses; Opportunities; Threats. I’ll give an example of what a SWOT analysis may have been like on my first business venture with my wife – a Scarf Kiosk.
Strengths: My wife speaks mandarin and all the popular scarves are imported from China. She can communicate directly with wholesalers in China for the best prices.
Weaknesses: We have never run a business which makes success very difficult. Neither of us had any experience with sales, customer service, or retail
Opportunities: A major mall in our area does not have a scarf kiosk in the winter time, unlike other major malls. We could open in this location and have exclusive rights to sell.
Threats: Economy and weather are uncontrollable factors. Additionally, major retailers tend to sell nearly the same scarves for a lot less.
OK, great…. What does this really tell me? Not much actually but it’s a good starting point for a narrative in a business plan. Realistically though, you need to be much more numbers oriented in order to be a successful startup. Here are some things you should analyze before even considering starting your own startup company (in no particular order):
What is the Cost of your product (variable costs)
It is very important to know exactly what your product will cost. You should include all shipping, packaging, or other expenses related to your product.
What Demographics will demand your product
This is very important because it will determine where you need to locate (affecting rent), and the price of your products.
Sales Analysis - How much of my product will I sell
This is very hard to determine, especially for new start ups that have no sales history. I know of two ways to analyze this.
- Go to a competitor and watch their sales. Look at all different days and times to get an idea of what their weekly and monthly sales look like. You can use this information to extrapolate your own potential sales.
- Estimate sales based upon traffic near your new business startup. This may not be very accurate but it gives you some working numbers. Here is an example:
Let’s say you are opening a store in your local mall or shopping plaza that services the demographic you are targeting. Let’s assume it has roughly 1 million visitors per year, or about 83,000 per month on average. Let’s also say that you are a specialty shop that won’t attract high volume, so maybe 1 in 200 customers purchase from your store (.5%). It means that about 415 sales will be made per month on average.
You can see how this method is very fungible and really hard to ensure it is accurate. It’s good to have a goal to work toward, but the numbers are far from reliable.
What are my fixed costs
You have determined the area your business startup will be based upon your demographics and demand analysis. You should reach out to the leasing agent and get a rough idea of your rent. Though we know you will negotiate down the rent, use their first number as a baseline because it’s always better to overestimate expenses (you may save here but will forget something somewhere else in your analysis). Also, if you will have employees, take their wages and add at least 50-100% of their hourly to account for Medicare, social security, workers comp, and all other expenses you forgot about. It depends on your field, but yes, a $10 per hour employee really costs $13-18 per hour after everything is considered.
How long will it take for me to become profitable and how much cash do I need (Cash Flow Analysis)
You may have the best idea on the planet, but if it will take one year to become profitable and you only have enough money to cover 6 months of expenses, it all doesn’t matter because you will be out of business.
I’ve attached a chart to illustrate this example. Notice how the business is profitable around Christmas of 2016 and then cash starts to take a tick up around March of 2017 where it just skyrockets afterwards. Great business! Except one part. Cash falls below zero around October 2016 which in theory means your new startup company is out of business. This was not a successful business because it did not have enough cash on hand to cover the monthly expenses. This is why cash flow analysis is so important!
Summary of How to Start a Startup | Part 1
Alright, so in How to Start a Startup Part 1 we covered the 9 steps to starting new businesses and we covered in depth the first two parts, training/networking, and analyzing the business potential. In the next part, How to Start a Startup | Part 2, we will visit in more detail additional steps and keep diving deeper into your goals of starting your own business.