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The New Entrepreneur: Before You Begin

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Regardless of market sector, all new businesses begin with an idea. While many people toy with the idea of working for themselves and setting up a business, only those who take their idea and turn it into reality can call themselves entrepreneurs. This purpose of this post is to help you analyse your idea, to see if can be translated into a viable business concept.

Timing
With any business, timing is crucial. That is not to say that a downturn is no time to start a business, but that there are certain times when it will be easier to get certain types of business off the ground. For instance, at the moment, as people worry about their jobs and cut back on leisure spending, I wouldn’t recommend starting a restaurant or catering business. In contrast, with people worried about uncertain returns from the stock market and anxious to preserve their savings, times are ripe for financial advisers who can offer impartial advice about investment products. Think about how current conditions would affect your business concept and weigh up the pros and cons of starting up straight away. You can always put your plans off until market conditions are more favourable. Delay is not failure.

Market
You may have an idea for a new business venture from your current work, or it may be a complete departure from your career to date. Regardless, there are universal questions for every business idea that need to be considered: who will buy the product or service that you will be offering? Is there a market for what you are offering? How much are buyers willing to pay for your product or service?

In terms of the market, it is also important to know who your likely competitors are, and how well they are doing. This will give you an indication as to how competitive the market is for new entrants and can also provide you with ideas for a unique selling proposition (USP) to distinguish your business from other companies in the same sector.

You can carry out this basic research by using business support organisations such as your local chamber of commerce, small business association or the relevant trade body. These organisations will offer differing levels of support, but you should be able to get most – if not all – the information you need. Alternatively, some government trade departments compile reports on different market sectors which may be available to the public from their offices or websites.

Business Structure
Another factor to consider is the structure of the business you are going to be running. Generally, you can be a sole trader, in partnership with somebody else, or a limited liability company. Generally, being a sole trader is easiest for tax and regulation purposes if you’re going to be providing a service, such as consultancy. If, however, you’re selling a product and are going to be employing staff, you may want to consider setting up a limited company. While there is a greater burden of regulation, managing payroll and employee benefits can be made easier. In addition, while an employee can usually only sue their employer (the company), sole traders and partners are personally liable for any debts or charges arising from their business. This is why it is always better to have a legally binding agreement drawn up if you do decide to bring someone else on board, rather than a handshake. It is far more expensive to sort out a disagreement in court, rather than to pay a lawyer to set out all the rules beforehand.

Resources
Even if all you will need to run your new business is a computer and a phone, it is absolutely vital that you take stock of the resources you will need to get started. The most important to consider are funds, location and staff. Generally, it’s a good idea to know how much money you will need for the first two years. Now, this may seem a long way into the future, but no business starts earning money straight away, and you need to be sure that your business idea will earn you money, rather than land you in debt. Bear in mind that your cost of living is likely to remain the same, or even increase, unless you are radically downshifiting in order to start your new venture. It is also useful to consider that it may be more difficult to raise funds after you’ve been operating for a while rather than while you are starting up.

In terms of funding, all I can advise is to use your own money. After all, why should anyone else invest in your idea if you’re not willing to put your hand in your pocket? If your savings will not cover your costs, your next port of call should be family and friends. The Bank of Social Circle generally offers far better rates than any commercial lenders and less burdensome repayment terms. Should that avenue not be open to you, start searching to see if there are any grants on offer in your field, from the government or other bodies. Some regional departments make funding available to new businesses opening in the area, while others offer cheap loans. I’ll be covering business funding in more depth later in this series, but the banks should be your last resort at the moment.

The location of your business is not a matter of your personal preference, but what your business needs. If you’re not going to be dealing with customers face-to-face and have no need to hold stock, you can probably choose the option to work from home. This is the cheapest option, which will keep your overheads down, but make sure that those you live with are happy with the idea. If you will need to hold stock or deal with customers, you need to find a location that is convenient for suppliers, staff and customers. Also consider how the nature of the area will affect your trade. You could run the best nursery in your district, but if it’s opposite a crack den, you’re not going to get many parents signing their children up with you. Again, get a lawyer to check any lease or rental contract before your sign it; you want enough flexibility to cope with changing circumstances. Hopefully you will need to move to bigger premises and therefore won’t want to be tied into a long-term agreement.

I would love to have a glass-and-chrome corner office, with squadrons of minions doing my bidding, but it is important to remember that one of the most expensive overheads for any business are people. Staff are hellishly costly, and you should manage with as few as possible for as long as you can manage. Granted, some businesses cannot cope without employees, and in such cases, you will need to go through all your business processes and decide on how many people are needed for each task. The nature of their jobs may also affect the location of your business: if you need a ready pool of highly-skilled educated people, your business will probably be urban, while you will have more leeway if all you need is a checkout clerk and a shelf-stacker.

Time for SWOT!
Once you have considered all of the above, you can start writing stuff down. Yes, it is time for the SWOT analysis, beloved of management students everywhere. SWOT stands for strengths, weaknesses, opportunities and threats and you should place the factors that will affect your business concept under one of these headings. List everything you can objectively think of, no matter how remote the possibility may seem. Once you have done so, examine how you can address any weaknesses and reduce any threats, especially any that seem to be inherent. If a particular obstacle seems insurmountable, you may need to take another look at your business idea and amend it. While you can build on your strengths and take advantage of any opportunities, going into business with an inbuilt weakness is like fighting with one hand tied behind your back, and makes you more vulnerable to further threats.

In summary, before you start a new business, you need to consider the idea very carefully, and analyse whether your concept is viable. You need to know what kind of market you will be entering, how much funding you will need, and what challenges you are likely to face. Don’t be afraid to go back to the drawing board and change your initial idea if it seems likely to be unsuccessful; entrepreneurs and not only doers, but also thinkers. The most successful do both near-constantly.

In the next post in this series, I’ll be tackling how to research the market environment and how to use the information you gain for business planning.

[Image by KM & G-Morris]

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4 Comments

  1. Kelvin says:

    Wow, what a great read. I loved it.

    I’d like to add that while making money is usually the primary goal of setting up a new business, I think that new business, more often than not, perform better when the drive behind them is not just money.

    A good friend once told me , “Don’t start a business just to make money.” While this may sound zany, lol, I think it makes sense. I don’t know whether I’m getting my point across. Does this sound zany?

    For example, the best little restaurant is probably run by someone crazy hooked into good food and quality service. Or, the best web designers do web design because they love it and probably dream about it at night. the money is just a side thing.

    It all boils down to passion. Don’t go into business if you are not passionate about what you will be doing.

  2. Inari says:

    Thanks for the feedback! The series seems to be shaping up OK so far.

    The point about going into business to make money is a good one. Running a business, especially a startup, can be unpredictable, and not every business will make its owners rich. Quite frankly, if a steady and certain income is what somebody is looking for, they’d be better of as an employee.

  3. khabereri says:

    Interesting read. I am a writer for a youth magazine, the Young African Express in Nairobi – amongst my many assignments, I am charged with the responsibility of writing business articles on how to start a business, doing market research till a point when one has to evaluate and assess their business.

    The funny thing, I write good pieces with a story to make it easier for comprehension – but I am not able to follow through and start something of my own. I have an idea in my head, but I have not been able to put it into practice.

    I have read through lots of pieces where I could start any business using as little as Ksh 3,000 – just like what I want to do in crafts. I even bought a crafts book with the ABCs of the same, but have not sat down to start.

    But one thing I have learned here is that I need to be really sure my idea will work – with weddings, anniversaries and other special occasions going on every other day, I believe I have a chance.

    Thanks for the fuller insight.

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