Starting a business
So, you want to start your own business.
I have had several businesses throughout my life. Let me give you some advice that may save you time and money.
Do not mortgage your home to start or expand a business.
Do not risk anything that you are not prepared to lose.
Please ensure that you have ticked the boxes for the following minimum steps in starting a business:
Business model. The business has a proven business model.
Controlling interest. You are the controlling investor/owner.
Capital. You have sufficient capital to start and maintain the business for 6 months. (preferably 12)
Intellectual property. You own it or you are it.
Many businesses have failed before they start and the rate of failure within 6 months is high. If you can get past the first year your chances of survival are looking better. Most businesses fail within 5 years.
The key to initial business success is a clear business model/plan that is proven in the marketplace. The essentials are
A market for your services.
Capacity to deliver and scale.
A clear forecast and realistic budget.
There is no point in leaving your secure job to start a business if you must answer to a greater god. If someone has a majority interest in your new venture, then you are just changing from one boss to the other. It is important that you have a structure of operational control that has you as the boss. You may be an employee but make sure that you are also in charge.
All your investment and ongoing effort should be to build a capital asset that has a market value and can be sold for real money. You will only achieve your goals if you have control of the outcome. You will only control the outcome if you are the boss and not accountable to anyone else.
Always think of your business as a cash flow generating operation that can be sold to someone else. Small businesses have a re-sale value that is generally calculated and based on a proven cash flow. If you think of your business this way then it will be worth something to someone else.
Most start-ups fail because they run out of money. Many businesses run out of money because it took longer to achieve their objectives than they had originally planned. If this happens you will need other investors or loans. This increases the potential for you to cease becoming the boss.
This is a big subject in itself and one which needs careful consultation with your accountant or business adviser. However, much like having a contingency amount when building a house, or a capital reserve in a company operation, it is always prudent to put money aside for those unexpected events that upset the forecasts.
It is also important to distinguish between start-up or seed capital and working capital.
Start-up capital is the funds required to launch the business. It may include motor vehicles, buildings, tools, implements and other devices. Licences, company/business registration and other compliance requirements.
It is the investment required to arm the business with assets that are needed to generate profit. I advise that in addition to start-up, start a contingency fund for capital items that may need to be purchased in the short term after business commencement.
Working capital is the money required to keep the business running. At any one time, it is the net difference between current assets and current liabilities.
A.Current assets are those that you expect to cash in within 30 days. These include cash, stock, debtors (those who owe you money).
B.Current liabilities are those liabilities that are payable within 30 days. They include, loans (short term component), employee wages, creditors – (those to whom you owe money).
Working Capital = A-B (surplus of A over B)
This is a simplistic explanation of working capital and a basic knowledge of working capital is essential when you start a business. In principle, your working capital should be adequate to fund the business on an ongoing basis. Most small businesses require a working capital ratio of 2:1. i.e., you should have twice the level of current assets compared with current liabilities.
This is the asset that underpins the unique strength and viability of the business. It is the smarts that no-one else has and it could be as simple as the value that you bring to the business as its founder and mentor. It is often that which gives the business and its products/services a competitive differentiation (what you offer that is not able to be offered by your competitors).
In some businesses there may be registered defensible IP rights. There are various types of IP rights
Patents protect inventions and new processes.
Trademarks protect logos, words, and other branding.
Copyright protects art, writing, music, film, and computer programs.
Registered designs protect the visual design of a product.
Circuit layout rights protect layout designs or plans of integrated circuits used in computer-generated designs.
Plant breeders’ rights protect the commercial rights of new plant varieties.
Regardless of the IP, you need to own it or own its use. If you are the key to the business and you offer a unique idea that is productive and you are the sole creator, then it can be registered as your intellectual property (IP).
A business name is not IP. A registered trademark is an example of IP.
If you are starting business with an idea that no-one else has registered, then find a way to protect your idea and you will protect the future of your business that depends on that idea.