Starting your first small business can be very exciting, making you take rushed actions to see your enterprise set up. However, statistics show that about 90% of businesses fail within the first five years globally. This figure is higher in developing countries such as Papua New Guinea where small businesses face more challenges than those in the developed world.
But, why such a high failure rate? The studies have shown that many small businesses fail for several avoidable reasons such as lack of market, lack of funds, and lack of the right skill set. This begs the question; do most of these failed entrepreneurs ever sit down to think through their business ideas before setting up the businesses?
People start businesses for a myriad of reasons. What most don’t know is that your “why” will have a huge impact on the success of your business. For example, if you are starting your small business to supplement your other sources of income, it means that the business won’t be your primary source of income. Therefore, you can afford to reinvest a huge chunk of your profits to grow your business over time. On the other hand, if you are starting the small business because you can’t find suitable employment, then you will be short on capital and therefore you need to be creative in managing your finances if you want the business to survive, grow and thrive in the ever-competitive business environment in the country.
The real reason for starting a business may be well beyond finances. Maybe you want to serve customers better in a given market or you believe you can build better products than those available in your local market. Whatever the reason for deciding your business, you need to know how it will impact the business and how best to handle the situation. This way you will prepare to steer your business in the right direction so that it can grow and become profitable.
Know the Business Model to Follow. Businesses in the same industry and under the same legal structure often follow different models. This has a huge impact not whether the businesses become profitable or not. You must follow a business model that will set you apart from the competition. When starting a small business in a competitive market, you must find your differentiating factor long before you set up the business. This is important as it will make sure you get everything right, from funding the business all through to the marketing plans, from the start.
Know Your Target Customers. At this stage, you may not have a clear business idea yet. But, it pays to know who you will want to target even before carrying out actual market research. This will help you know if your business model will work and whether to go ahead and conduct market research or not. For example, if you propose to produce a product that people in your locality have no use for, then you will have to move to where there is the market or consider a different business idea.
Know Your Location. You have all the plans ready, registration done and have the required capital and you can’t wait to start the business and be your own boss. But there is one thing you need to get right, and that is the location of your business. Location is a crucial factor that will make or break your business. Pick a great location and your business will blossom in no time. Pick a wrong location and your business will die a slow painful death.
There are countless factors that determine if a location is good for your business. Here are a few to consider:
- Customer base. The most obvious one should be the customer base. Are there enough potential clients already available who really need your product or service? The bigger the number the better. Don’t just act on assumptions. You need to do some market research and have your decision backed up by real data.
- Available Competition. Another factor would be the available competition. Are there well-established businesses already offering what you intend to sell? How good is their customer service? How fast do they deliver their product or services? Is their price affordable to the target audience who need your product or service?
- Accessibility. Is the location easily accessible by your target audience? Think about how fast your target audience can reach your business location and if it’s safe for them.
You need to have a clear idea of where your business idea will do well. Let’s say you have just completed a short course on property management and you think that you have the right knowledge to set up a small real estate management agency, but, you live in a rural area with just a handful of rental properties. Do you think your business idea will work? I doubt it would.
Take another example. Let’s say you are a mechanic and wanted to start a workshop on fixing vehicles but where you live, hardly any vehicles use the road regularly. Even if you start, your potential for growth will be very little. Even if you are living in town and want to start a restaurant, the place you picked already has well over five restaurants located in the same vicinity and offer the highest quality food at the most affordable price. It would be an uphill battle in this case to win clients over.
The decision to choose a particular business location shouldn’t be done on haste. Take time, do your market research, discuss with close friends or family members and think about it very carefully before you make a decision.
Map your Finances. Starting a small business requires money. This is a simple fact that everyone knows and often everyone starting a business is prepared for. What many people planning to start small businesses overlook is their financial health. It will take time for your small business to turn a profit. In some cases, you will have to reinvest the profits you make to grow the business to a level where you can take a salary. This can have a huge impact on your wellbeing and is especially the case if you have to invest your valuable time in the business for a long time.
If you don’t have some money set aside for personal needs or you don’t have an alternative source of income during this time, your business is likely to suffer. Make sure you map your finances before starting your business to make sure you have yourself covered during the initial phase of setting up the business (What are the steps to map your finances).
Understand the Risk. Starting a business whether it is a small business, or a large company is always a risk. If you don’t understand the risk, then you won’t prepare properly to manage the business, and this can affect not just the business but your wellbeing as well.
A friend of mine started a small grocery store a few years back together with his wife and because he was still in employment, he made arrangements for the wife to manage the store during the day and for him to take over in the evening as the wife goes home to prepare dinner. However, he overlooked the risks of being involved in the management of a busy grocery store while still working in a demanding job. Soon he began devoting more time to his business than his job during working hours, mostly talking to suppliers on phone. To cut the long story short, it didn’t take long before he was fired from his job.
The truth is starting a business involves many risks. Risks are not just those that involve finances and customer relations. When you are planning to start a business you need to also consider personal risks the decision will bring your way. This way you will be able to prepare adequately.
Know the Right Timing. You have been working in a fashion store for the past twelve years, now you feel you are ready to jump ship and set up your small fashion stall. You have done your homework on the right location for your business, you have the capital and you have put in place the contingency measure for all potential risks. But, do you think this is the right time for your business model?
Timing is a very important factor in the success of your business based on your target market. As you think about taking the next step in becoming an entrepreneur, it is important to think about what impact the season and time of the year will have on your small business. For some business, this may not be the case, but if you are considering a business idea in an industry affected by seasons then you need to be clear how this will affect you and take the necessary action as you move forward.
I can’t stress more on the importance of being well prepared before you set up your business. It has been said that “failure to prepare is preparing to fail.” Once you decide to set up a small business you need to think through how the business will impact your life both positively and negatively, and what will impact your business. If possible, talk to someone in the same line of business to just have a feel of what things are likely to be for you. This will also give you insightful ideas to help you as you move forward with your decision.