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Are You Ready to Launch?

Three key questions to ask yourself before you start your own business
October 20, 2010
URL: http://www.entrepreneur.com/article/217431

Starting your own business is a massive task, but you can save yourself a lot of time, energy and money if you can answer three key questions upfront, before you actually start running your business day-to-day.

My experience is that the more you know about your market and your numbers going in, the better off you'll be in the long run.

Why?

You'll need some cushion in your numbers (presuming you have a product people actually want to buy in a market that is viable), because everything won’t go according to plan, and you need to be able to sustain yourself through the rough patches.

Here are three important questions to ask and answer for yourself. If you don't like the answers, you may need to rethink or re-evaluate your business idea. It is much easier on paper than when you have real overhead and payroll obligations to meet (including your own!).

  1. Is there really a market for my product or service?
    A truly viable market is an existing market in which people already spend money.

    Be careful in categories that are mature or with products that are essentially commodities (meaning buyers always buy based on the lowest price because there is no product differentiation). While you can make money in those markets, it is very difficult, unless you have a truly innovative answer to a long-standing industry issue or your product can always sell at a premium price point.

    You also need to know what share of the market your competition has (keeping in mind the top three players in any industry will have the lion's share of the revenues), based on the total value of the market in your area.

    One of my former clients was a struggling transmission shop in an area with seven other shops and a total market for transmission services at less than $1 million per year. Some quick math will immediately show you why my client (and others) were having a rough go; there simply wasn't enough business to go around.

    You can also save yourself a lot by testing and measuring your product and service on a limited basis to a small test market.

    In retail, this could mean finding "shelf space" by placing your product on a consignment basis with an established retailer, or going to local markets (flea, swap, farmers), setting up shop and seeing how things go.

    In a service industry, this could mean partnering with an established company and offering your service as an added-value proposition (think web design services to an established conventional advertising firm).

    The bottom line is if you are successful on a part-time or limited basis, the odds are good you'll also do well full time, because you are successfully meeting the needs of a niche that is untapped or under-served.
  2. Do I have enough capital?
    All companies need capital to survive, and a good rule is to have at least 18 months of both business and living expenses covered before going into business full time.

    Of course, that's just a general number, and some companies (including my own) have "cash-flowed" themselves to success. But doing that requires a lot of creativity, courage and flexible terms with vendors and creditors (which these days can be tougher than it was several years ago).

    So how much do you need?

    A lot depends on your personal situation. Are you single, or do you have a family? Are you young (under 25) or a bit older (say over 40)? Are you willing to sacrifice and go without until your company gets going? Is your family?

    Only you have the answers for yourself.

    But above all, be as objective as possible and use the numbers as your guide. Ultimately, the numbers will determine your overall viability and success.
  3. Do I really know my numbers? 
    Numbers are the language of business, and you need to know and be able to measure your numbers to succeed and survive.

    What do I mean?

    If you look at your projections and see limited positive cash flow and marginal profit on paper, there is little chance you will see anything different in the market.

    You can rationalize all you want about what a great salesperson you are, or tell yourself that “if you build it, they will come," but you need brutal honesty about the viability of a business that doesn't show cash flow and profit in the planning stages.

    Simply put, how much of your product or service do you need to sell every day to break even? How much to profit? How much does it cost you to get a new customer? How much will that customer buy the first time around? When will that customer buy again (knowing that repeat business is really where your profits lie)? 

    On the other side, what are your true costs? 

    Again, in the planning stages, nothing is really known. To get a better picture, add 30 percent to whatever you expect the expenses will be and reduce your expected revenue by 50 percent. 

    Do your numbers still add up to cash flow and profit?

    If so, great!

    If not, its time to challenge your own premises about your product or service and the viability of your market. Perhaps the help of an outside advisor, consultant or coach could help you get a clear picture of the numbers you need to make things work.

These questions aren't meant to discourage your entrepreneurial dreams, but rather to clarify your focus and make the most of your opportunity. Once you get into the numbers, you might find an opportunity or niche you never even considered at the outset. And that "new" opportunity might be the one you really need to go after since that is where the market for your business truly lies.