What you need to know before starting your small business

Inside Entrepreneurship: What you need to know before starting your small business

Last updated December 27, 2007 2:15 p.m. PT

Is making more money on your list of 2008 New Year’s resolutions? If so, starting a part-time or full-time business may be a lucrative career move for you. On average, small-business owners enjoy three times the net worth of their salaried counterparts. Small-business owners also tend to earn more money and save more money, too.

At this time of year, I know that prospective entrepreneurs are taking first steps to create their businesses. Their startup "to do" lists include selecting a business name, securing a domain name, designing company logos and Web sites, opening a business banking account, ordering business cards and more.

Despite the sense of fun and satisfaction that goes along with setting up a new company, I know these largely administrative tasks tend to overshadow the more important work of startup research and planning.

Here are a few considerations to help prospective entrepreneurs reach their extra income earning goals with greater precision and confidence.

  • Plan to earn a living. Organizing a successful business should mean paying all company bills plus a reasonable compensation package for the founder. I’ve found that startup entrepreneurs who don’t calculate the specific ongoing cash flow requirements of paying a founder’s salary, wage taxes, health insurance and retirement contributions don’t ever reach this important business milestone. Better business managers budget these costs rather than hope a few dollars will be left over at the end of the month to pay for food and rent.
  • Know your industry. To help in business planning and pricing decisions, it’s helpful to understand what represents good financial performance within your industry. If, for example, you plan to start a software company, study the gross profit and operating profit margins of publicly traded software producers. This information also will help prepare you for meetings with potential investors. Visit Yahoo Finance or MSN Money for free industry- and company-specific financial information.
  • Think beyond the product. Successful small-business owners are not "in love with their product," rather they are in love with the pursuit of customers, cash flow and profits. Founders who can’t see beyond the beauty of their inventions should step aside and find capable managers who can.
  • Know your target customer. There is a difference between a novelty item that briefly captures our attention in a store and something of value that is picked off a store shelf and carried to the checkout counter. Entrepreneurs who actively test products and services with prospective customers before full-scale business launch minimize the costs associated with mistaken assumptions. Startup entrepreneurs should have concrete answers to the question, "How have you tested your business concept with non-friends or family members?"
  • Competitors will copy. Practical small-business managers assume that one day competitors will imitate their most successful strategies. To protect their company’s revenues, they take proactive steps to lock down customers and distribution channels through contracts, incentive pricing, brand awareness and other tactics that make it difficult for customers to switch loyalty.
  • Build salable assets. I encourage startup business owners to think several years down the road to the moment they negotiate the sale of their business. The attributes that tend to reward business sellers such as consistent cash flow, recurring royalty or licensing income, customer lists, exclusive agreements, intellectual property, brand extension potential, etc., should influence startup business planning decisions today.

    It’s no coincidence that these recommendations require prospective entrepreneurs to look into the future and set specific goals. Having a clear destination is a lot better than experiencing that lost feeling of traveling in endless circles.

  • Susan Schreter writes about startup planning and small-business financing for the Seattle P-I. She has an investment banking and buyout background and serves as a coach to entrepreneurs and consultant to corporations. Find more Inside Entrepreneurship columns at seattlepi.com/venture. Send questions about small-business management or raising money for your business to susan@insideentrepreneurship.com or by mail to Inside Entrepreneurship, c/o Seattle Post-Intelligencer Business Section, 101 Elliott Ave. W., Seattle, WA 98119.


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