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Starting a Small Business

Starting a Small Business: What You Need to Know

by
Frank Jenkins Jr
on
8/1/2017
Starting a Small Business: What You Need to Know

According to one recent study, only about 66 percent of small businesses will survive their first two years. Of those that remain, only about half will ever have the opportunity to celebrate their five-year anniversary. Of those that make it that far, only about 33 percent will be around in a decade. Failure rates like these would be enough to give even seasoned entrepreneurial veterans a moment or two of pause.

However, there's good news lurking just beneath the surface. Small business failure rates aren't as high as they are because running a small business is impossible, necessarily. After all, 99.7 percent of American businesses fall into this category. Instead, it's because people keep making the same mistakes over and over again. Yes, it's true that there is no one correct path for what you're trying to do. There are, however, a lot of wrong ones.

If you really want to give yourself the best chance at success in terms of the small business that you're actively building, there are a few essential (but ultimately straightforward) things that you would do well to keep in mind.

Make sure you're not a solution in search of a problem

So much of your ultimate success in terms of your business will come down to your ability to ask hard questions of yourself and your ability to learn the right lessons from the answers you find. Perhaps the most important of these is, "Do I have an idea for a great product that can actually solve a problem in the lives of my target audience, or do I just have an idea for a great product?"

There is an important distinction between the two.

If you have the former, you have the "why" of your business. You have a benchmark for what success looks like. You have a reason for people to care about (and ultimately buy into) what you're trying to do. If you have the latter, you don't just have nothing; you have one of the major reasons why businesses fail beyond cash flow problems. You're a product in search of a marketplace when what you need is a marketplace in search of a product.

Business planning and financial forecasting

Running a small business is a lot like going on a road trip. Your destination is whatever you've decided success looks like, be it you have X number of customers or you've sold Y number of units or something else entirely. The actual brunt of the trip — the journey itself — is the path you take to get from where you are to where you want to be. Without proper business planning and financial forecasting, you only know where you're going, not how you're going to get there.

You need to start planning as early and as often as possible, taking a look at components such as workforce needs, sales and expense forecasts, marketing budgets, competitor analysis and more. This helps to break that journey down into a series of much more realistic, actionable steps. It shows that you're in it for the long haul, and it also makes day-to-day life easier. Instead of waking up every morning and just saying, "I want to run a successful business today," you've got smaller and more meaningful goals, such as, "I need to focus on generating marketing results," or "I need to secure Z percentage of additional financing so that I can take a critical step."

The art of the entrepreneur's bet

The Entrepreneur's Bet essentially involves you sitting down and determining something very important — what the break-even point actually is in the context of what you're trying to do. This is the number that, once you're able to hit it, you should be at the point of true profitability. Once you know this number, you then know exactly what you're working towards on the financial side of things; you know how much money you're going to have to burn through in order to become cash-flow-positive.

Again, so much of this comes down to giving yourself opportunities to spend money with intelligence instead of guesswork at your side. If you forecast what your Entrepreneur's Bet is, you know how much money you need to be spending and what you need to be spending it on in an effort to reach that point. Otherwise, you're essentially writing checks arbitrarily.

This segues directly into one of the other major steps you need to take when starting a small business: creating a sound accounting system as early as you can.

The spine of your business: A sound accounting system

This should be one of the first things that you think about, just after you develop your business idea in the first place and decide to take that next step. Without superior visibility into your finances, you won't be able to make the right decisions at the right time, and you'll be missing opportunities you didn't even know existed in the first place.

A lot of this will come down to the basic tenets of cash flow management. Look at how much money you're spending versus how much you're bringing in, and examine the relationship between the two. How does one affect the other? Where is your money coming from? Are you spending money in the right way? Do you have enough money to cover startup costs for at least a year or two? Would taking a step like securing liability insurance help protect you from the risks that are inherent in your industry?

These are the types of questions that you need to not only answer today, but continue to ask and answer on a regular basis moving forward. Your business is going to continue to grow and evolve, and a sound accounting system should be able to do the same. It should be a scalable approach to your finances that guarantees you not only have the ability to meet the demands of today but to address both expected and unexpected challenges tomorrow, too.

Picking the right entity

Picking the right business entity is also an essential step to take when starting a small business. It may seem trivial, but the differences between a sole proprietorship and a C corporation could cost you dearly when tax time rolls around. Be sure to sit down with a financial professional as early as you can to help make sure you're making the right decision in this regard.

In the end

Perhaps the biggest thing that you need to know about starting a small business is that the entrepreneurial spirit will only carry you so far. Yes, part of the reason why you've been successful up to this point has come down to your unending can-do attitude. It's part of the reason your business exists in the first place; you identified a problem that nobody else could solve, so you set out to do so yourself.

But once your business actually gets off the ground, you need to understand where the limitations of this mentality truly are. Perhaps the biggest area has to do with your finances. Working on a business plan, developing a sound financial forecast, creating the right accounting system, and picking the right entity — these are all mission-critical steps and you don't want to risk making the wrong move just because your pride is telling you that you don't need any help.

Not only will all of these steps help increase your odds of success in the early stages of your business, but working with a certified financial professional will increase the odds of success with regard to these steps themselves. Picking the wrong business entity early in the life of your small business could send your entire organization to an early grave. When the stakes are this high, this is the type of bet that you do not want to take. Teaming with the right professional will help make sure that it doesn't happen to you.

Frank Jenkins, CPA writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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