Tips to help you determine if you should start a business

When you are interviewing for a job, you are not only being considered for the position, you are considering whether you want to join that business. The same goes when you start a business. In fact, given the amount of dedication it takes to start, build and profit from a new business, it is critical that you look at the endeavor as a job and compare it to your other opportunities to make sure it is the right fit for you.

Here are three key things to think about when starting a business:

Team

While going it alone is common, at some point you will need to hire someone. Whether this person is a partner, employee or independent contractor like a lawyer or accountant, you should have a pretty good idea of the type of people you want to work with. Early-stage investors often say that they invest in the team, not the idea. The team is critical to success and be it their expertise, tenacity or chemistry, the team can make or break the business and this holds for everyone associated with your organization, not just the founders.

• Do you know the general makeup of your team from legal to operations to client service to marketing?
• Do you have an existing network that you can tap into for all aspects of your team?
• Do you know your strengths / weaknesses and how to round out your team effectively?
• Do you know the type of people you work best with? and not so good with?

Target Customer

You need a customer base. Make sure whatever your idea might be, that there is a customer that you are targeting. You can not be successful otherwise. One mistake businesses often make is assuming that the public will recognize the orignality and value of their products or services when in fact, it is the business’  job to understand the customer and find a way to fit into their life.

Recognition and fulfillment of a customer’s need combined with effective communication to that customer is the key to success. Eliminating any one of the three parts of the equation will hamper your business’ chance of success.

Event Horizon

There are a couple of key events that occur throughout the early life of a business. Each of these events are hurdles that can make or break a business and recognizing each ahead of time will help you prepare for success.

• What is the latest date you can wait to start paying yourself competitively? Everyone has obligations and at some point, you will want to pay yourself (and your partners and employees) a competitive market salary. Otherwise it will be more lucrative to go out an get a job. Many business owners start out by saying they will take a limited or low salary - this is not relevant for the exercise. It is more important to determine how long you can work without a competitive market salary that you could earn elsewhere. If the time line that you would pay yourself the competitive market salary you could earn elsewhere is longer than you can live without a competitive market salary, then your business plan needs reworking to determine how you can pay yourself sooner. This step is the first critical step to success. So long as you can pay yourself, you can live to work another day.
• What is the free cash flow situation? Related to how much money you need to start the business, managing cash flow is critical to the early life of a business. Free cash flow is essentially the amount of money available to you to run your business after all obligations have been met. Questions to consider: What does it cost to sell and implement your product or service? How long will it take between when you spend money and collect money on a particular sale? A classic case: Business A wins its first big client and must invest resources to fulfill the order (like a big manufacturing run). It invests 100k of its savings into making and delivering the product over the course of 30 days. To ge the sale, they offered credit terms to the buyer and the buyer pays 90 days after delivery. In this situation, it might be 120 days between when the business spent $100k and when it collects its revenue. Add in payroll, taxes, rent, sales & marketing for other clients, etc. and if the lag between spending $100k and receiving $100k was not accounted for, there can be a significant crush to the business. Understanding your free cash flow situation will help you plan and determine how to best finance your operations.

To speak with a Thrivepoint Advisor on these topics or others related to starting your business, contact us.