Being an entrepreneur is not an easy task. It is a very big decision and one has to make efforts, has to be patient, and should work hard. Before starting an enterprise, some factors should be considered and reviewed in order to increase the probability of profitability.
The meaning of small business, however, changes in different countries according to their respective laws. The criteria depends on the number of employees, turnover, asset of the company etc.
Before starting an enterprise, some factors which should be taken care of are −
Starting a business includes planning, making crucial financial decisions, and accomplishing a series of legal activities.
Taking care of the following six steps will ensure a successful start.
Careful planning of business before launching it is not restricted to preparing a business plan. Preparing a business plan is an important exercise. Bachenheimer recommends the following three planning methods for a business plan −
The Apprentice Model − Earning from direct work experience in the industry.
The Hired-Gun Approach − Partnering or sharing with experts who are more knowledgeable and have more experience.
The Ultra-Lean School of Hard Knocks Tactic − Finding out a way to frequently test and refine the model at a very reasonable cost.
While documenting a business plan is precisely helpful, the real value is not in having the finished good in hand, but instead in the process of researching and thinking in a systematic approach. It assists in thinking things through in depth, to study and research if the facts provided are completely accurate. Starting a new business without the commitment of thorough preparation, can be a very expensive lesson in the value of planning.
It is recorded that approximately sixty percent of new businesses fail within the first three years, as mostly the young entrepreneurs rush into business without carefully checking out their idea and all other aspects to conclude if it will work.
It is crucial to understand the critical metrics of the market, even if it is as simple as sales per square foot and inventory turnover, or an esoteric measure in a highly specialized upmarket. Questioning others, conducting research or gaining experience by assisting others to learn the inside of the market, engaging with the main suppliers, distributors, competitors and customers is a must.
In most business plans, a description of potential customers and how they make purchasing decisions, receives much less attention than operational details such as financing, sourcing and technology. In the end, customers determine the success or failure of an enterprise.
It is important to understand the customers’ demands, what affects their purchase decisions, what can be done to differentiate the offering from that of competitors and how to convince them that the value offer is genuine. Acknowledging and understanding the needs of the future customers is a crucial and important step in launching a business.
Necessary measures and steps are to be taken to frequently capitalize the business and secure ready sources of capital for growth. While some startups rely on owners' capital, others look for investors.
To determine the total amount of cash required, develop a cash-flow statement that evaluates complete expenses and income of the company. Accurate stages of expenses are marked by researching costs of actual business. Minimizing long-term commitments, like long-term leases help in limiting the need of cash unless it is important. A noticeable amount of ambiguity can be seen within initial years, to avoid this one needs to be conservative in making commitments for utilizing resources that might not be required yet.
Starting from the initial stages, it is very important to identify the appropriate corporate layout required for the business. This should include tax and legal implementation. The chosen layout assures the success of decisions to be made in future, like raising capital or exiting from business.
To identify which layout is best for the business, consider the following four points −
Liability limitations − For C Corps, S Corps, and LLCs, the entrepreneur’s personal liability is typically restricted to the amount invested and borrowed. There is unlimited liability for partners of the entrepreneurship.
Startup losses − A S Corp or a LLC is referred as pass-through layout due to the tax liabilities and advantages of pass-through to the entrepreneurs' personal tax return. Generally, one can write off initial costs like losses earned in personal tax return. In a C Corp, initial costs produce tax losses that can be utilized only at the business level and there is no future benefit if a new company has future tax profits.
Double taxation − Basically, double taxation of total income is neglected for passthrough items, but not for C Corporations.
Capital-raising plans − If an entrepreneur plans to take the entire entrepreneurship as public or fundraise through private equity, these plans may demand that the company is not a pass-through structure.