Starting a Small Business

Starting a small business is a big step. Because it is a big step, people often ask for ideas or advice about what they should do first. Over the years, we've come up with a laundry list of ideas and comments. Here they are:

1. Idea #1: Stay upbeat. While the conventional wisdom says you're likely to fail in a new business, the statistics don't bear that out. If you carefully analyze the data available, a new business, on average, has between a 60% and an 80% chance of making it through its first five years of life. And then after that critical startup period, owning the now mature small business is safer, statistically speaking, than working in a job. Mature small businesses probably fail at the rate of about 1% a year. That means that once you've got a small business up and going, you're actually much safer than many of your friends who have "real" jobs.
2. Idea #2: Learn all you can. Wonderful resources exist for new entrepreneurs. Some of the best are easy-to-read books. For example Peter F. Drucker's "Innovation and Entrepreneurship" is an excellent source of ideas for searching out great new business opportunities. And Karl H. Vesper's business school textbook, "New Venture Experience," is a goldmine of entrepreneurial wisdom. (Dr. Vesper teaches at the University of Washington Business School.) We encourage anyone who's thinking about starting a small business to read these books. Internalize even a bit of the wisdom that Professors Drucker and Vesper share and you'll reduce your risk.
3. Idea #3: Invest in a scorecard. You need a good accounting system in order to succeed in business. No, we don't say this to gin up our fees. We say it because if after you start you business you don't know whether your business is making money or not, you can't easily tell whether you're winning or losing. You also can't easily tell when you're doing something right, and when you're doing something wrong. You need a good, fast, easy way to measure your profits. Fortunately, an accounting system doesn't have to be expensive or complicated. Simple businesses like one-person consulting shops can use an easy checkbook program like Quicken. Businesses with more complicated finances probably need something like QuickBooks. If you're a retailer, bite the bullet and invest in a decent point of sale system like QuickBooks Point of Sale.
4. Idea #4: Write a business plan. Do write a "white-paper-style" business plan as a way to think about the big issues of starting your business and to learn all you can about the industry. We talk about how to write a business plan elsewhere so I won't repeat myself here. (See the links at the bottom of the page.)
5. Idea #5: Stay lean. You want to watch your startup costs--and keep them as low as possible. That's what experienced entrepreneurs do. For example, if you can, work out of your house or apartment at first. If you can buy used furniture and equipment, do it. Stretch your startup dollars as far as they'll go. Part of your profit comes from tightly managing your costs. If you overpay and over-invest, you may in the end find that there's no profit leftover for you. What's more, if you can reduce the startup costs required to create a business, you also reduce the risks of failing.
6. Idea #6: Grow slowly. A counter-intuitive truth that many business owners don't realize until too late is that you can grow a business too quickly. And if you do grow a business too quickly and you maintain the fast growth, you can kill the business. To grow a business's sales by a certain percentage each year, you also need to grow its assets, its liabilities, and the owners equity the same percentage. Yet that may be impossible. If your plans require or presume continued growth, be sure that you understand what your sustainable growth rate is. (You might want our help to figure this out.) Then manage the business so that you don't grow faster than your sustainable rate.

Related Topics:

• Building a Business Planning Workbook (1.4mb pdf)
• BIZPLAN.XLS
• Business Strategic Planning
• Business Tax Planning for an Obama Presidency
• Calculating Break-Even Points
• Financial Planning in the Post-sub-prime-crisis World
• How to Save Taxes with an S Corporation
• How to Write a Business Plan
• Incorporate Your Business: Forming a LLC vs. Scorp
• PVC.XLS workbook (for performing profit-volume analysis)
• Sample Business Plan
• Setting Up a Washington LLC
• Starting a Small Business