Dream of starting a business? Happy with your current job but always thought, “I’d love to be my own boss someday – I definitely have the experience and skills in my field”? Absolutely natural.
But before you sit down to brainstorm names for your new company, ask yourself: do I have what it takes to run a business? What most people don’t realise is that a successful business is not run solely on talent in their field of expertise. Things may be great at first, but over time you might find that it gets much harder to find clients and your business starts to lose momentum, at which point you’re left wondering, “Where did it all go wrong?” The right answer to that is, “Before you even started.”
Running your own business needs a whole new set of skills that are different to those you need to be an expert in your field. Statistics show that about half of all new businesses collapse within the first five years. And the main factor that determines the success or failure of a business is the amount of research and preparation that goes into it before it commences.
A good business is a lot like baking a cake. What is the secret to the perfect cake? The recipe. Sure, you need to bake it for the right amount of time for the cake to actually take shape, but the key to the taste, texture, and even the rise in the batter, lies in the way the ingredients are combined. Building a successful business is similar to choosing and combining the right ingredients before you bake the cake.
So, what do we need to focus on first? The two fundamental areas that need attention are cashflow and profitability, in that order. Even if your business isn’t profitable to start with, it can be sustained with a well-managed cashflow. On the other hand, a profitable business can come to a grinding halt due to over-trading. Therefore, your cashflow should be your first priority.
Before you start your business, you would need a proper forecast of the cashflow, which takes into account the initial capital requirements, cash locked in the inventory, salary and other undelayable expenses. In addition, you would need to be careful when fixing payment terms for your customers, and ensure that these are better than the credit terms offered to you by your suppliers. This is easier to achieve in retail businesses, as most sales would be cash sales. However, the potential challenge in retail is cash locked in inventory.
Once you’ve mastered the cashflow aspect, you can move on to focusing on profitability. Profitability is central to every business – in fact, it is the very purpose of establishing a business. How do you set your business up to make profits, and more importantly, how do you know whether you are making profits?
In the planning phase, it is important to analyse the cost structure and decide the pricing on that basis. It often happens that the selling price is dictated by the market, rather than being determined by an individual business. In such cases, analysing the cost structure is key to identifying the primary areas and in deciding whether you should embark on the proposed venture. Moreover, a simple Cost and Profitability analysis (CVP analysis) is essential to identifying the break-even point.
It would be unwise to expect your business to make profits from day one – every business needs a gestation period before it can grow into a thriving one. Before you quit your job to start your own business, remember that you would need to provide for and manage personal expenses on your own, until the time your business becomes profitable. It isn’t an impossible task, but it does require guidance from an expert, particularly if you don’t have the appropriate qualifications or skills in business management.
Spending on such an expert may be one of the most important investments you make towards a profitable and sustainable business. So, get out there and make it happen.
