You’ve hopefully read Part 1 of “Starting a Business”. This article discusses the mindset and things you need to consider when starting a business. In this article I discuss another four key areas that you need to get right as you start your business. By considering these four areas closely, you can (hopefully) avoid the same mistakes that many small business owners make, as well as avoid being part of the 20% of small businesses that fail in their first year.
As an accountant I’ve dealt with businesses in all parts of their lifecycle. As such, I can safely say that the number one reason for business failure is poor management.
New business owners often lack the relevant business and management expertise in broad areas such as finance, purchasing, selling, production, and human resourcing. This is not because they are bad business owners or negligent, but rather that they haven’t developed these skills yet.
To face this challenge, small business owners can educate themselves on the skills they require; hire employees who have the required skills; or outsource work to external professionals. Outsourcing work is becoming more and more popular, due to the growing “gig” economy, as well as the shift in professional services from hourly rates to fixed prices.
Software that provides efficiency and reporting metrics is paramount to starting a small business.
With cashflow tight and labour expensive, an easy trap is to think that reporting and measuring tools don’t add value. But, spending a slice of your budget on good software can add great value, particularly in the long-term. Ranging from bookkeeping solutions such as Xero to chat-bots that convert leads on your website, the right software can simplify your job as a business owner, which in turn maximises the time you can spend providing services/selling goods or spending it elsewhere such as with family.
There’s a saying that Revenue is Vanity, Profit is Sanity, but Cash is Reality. Planning and monitoring your cashflow on a weekly to monthly basis should be an important focus of your business once you’re up and running.
A key consideration is that in the early days, you’ll need cashflow to cover both your business and personal expenses, until you’re more established. This stage can frequently last 18 to 24 months, until required levels of cashflow are established.
A common technique to reduce cashflow requirements is for business owners to take a reduced salary while the business cashflow improves. This needs to be factored into your capital requirements.
Other means of financing your cashflow include borrowing from the equity in your home or approaching a bank for a loan with a detailed business plan and cashflow forecast.
Continuing to work in your current job either full-time or part-time whilst transitioning into your new venture is also an effective (if more time consuming) way of maintaining your cashflow and supporting yourself. It also has the bonus of allowing you to test if your business is viable, but some employers have specific provisions in contracts regarding working outside of employment, so best check there first.
Starting a business can be a challenging but a rewarding journey. Importantly, know your limits- particularly when it comes to legislative requirements. Bringing in a professional at the right time can save you a huge headache and money down the track.
The four areas above, together with the tips provided in part 1 are a good starting point for any prospective business owner. If you are looking at starting a business and want to discuss it further, get in touch with the team at DW Mathers & Co – we would love to assist you in your journey.