You’ve decided to start a business and have taken the first major step: commitment. Now, where do you go from here? How do you start a profitable business? There are so many things to consider and tasks to complete, the process can seem overwhelming.
The failure rate for first-year businesses is 20 percent, and the five-year rate is 50 percent, according to the Bureau of Labor Statistics (BLS). But if you can start your business armed with the knowledge and perspective of a more seasoned business owner and survive those early years, long-term success is achievable.
The key is starting out with the knowledge of your available resources — and how you can use them to avoid costly mistakes. You’ll still face challenges along the way, but the ups and downs of your business journey are part of what makes it all worth it in the end.
To help guide you on this exciting journey, use this in-depth business startup checklist:
- Conduct a self-assessment
- Determine your exit plan
- Take care of legal
- Know your cash flow
- Determine your business funding needs and sources
- Identify your go-to-market strategy
- Create a business plan
- Properly price your product or service
- Know what’s involved in hiring vs. outsourcing
- Right-size your technology
1. Conduct a self-assessment
According to Richard Parker, an investor and business advisor, for your business to succeed you need an organizational structure “where the ‘driver’ of the business utilizes your strongest talent.” So if your talent is marketing, you should seek out a business that is marketing focused. And if your talent is sales, focus on a sales-driven model.
Questions to ask:
- What do you excel at?
- Do you thrive on collaboration and partnership or work better alone?
- Do you have experience running a business? If not, do you have advisors who can help? Is there a relevant class or course you can take (online or in person)?
- Do you understand the different components of running a business?
- What aspects of running a business do you enjoy (e.g., sales, marketing, production, hiring)? Is this the best use of your time?
2. Determine your exit plan
Many technology-related or high-growth startups know they need to determine an exit plan. These sorts of startups typically seek investors immediately, and those investors need to understand how they’ll get their return on investment (ROI). But even if you want to start a profitable business that you’ll keep indefinitely, it’s still best to plan with your end goals in mind.
As a new entrepreneur, you can get bogged down by wearing multiple hats. Silas Mosher, who sold his printing company in 2019, says that “as a startup, you’re just focused on what’s going to happen tomorrow, not on what’s happening five years from now. You’re not sure you’re going to be around. So you get so focused on the details, you think the business can’t run without you. But if you are the business, you don’t have a salable business.”
Questions to ask:
- What is your long-term plan for this business?
- If you plan to sell your business, what is your target date?
When you focus on your exit plan, you continually affirm that you’re building something of long-term value — even if you don’t actually plan to exit the business anytime soon. This mindset will encourage you and your team to think bigger and build faster, not just working on the business, but strengthening it.
3. Take care of legal
Roxann Smithers, Esq. of Smithers + Ume-Nwagbo, LLC, advocates for laying a strong legal foundation for your business from the outset. A good small-business attorney can help you “organize a business opportunity in a way that will be most beneficial,” she says, to protect you from potential problems and limit your liability. This includes establishing a legal structure, creating the agreements (operating, shareholders’ or buy/sell) that govern how the company is run, how owners interact and what happens should someone become disabled or die. “Unfortunately, business owners often think that lawyers only come into place when something has gone wrong,” says Smithers.
Unfortunately, business owners often think that lawyers only come into place when something has gone wrong.
A good attorney will help you set up an appropriate corporate structure. Jason Holley, who formerly belonged to an ownership team that recently sold their asphalt manufacturing and construction business, advises, “If you’re dealing with multiple shareholders, have a detailed plan as to how funds will be allocated, when funds will be allocated and set specific timelines.” Your buy/sell agreement should incorporate this level of detail.
If you intend to tap investor funds, make sure you have the proper documentation in place before soliciting investors. Online documenting services like Clerky provide templates for forms such as convertible notes and preferred stock, which can reduce the cost of putting these essential protections in place.
If you’re creating knowledge-based products or services, make sure you consult with an intellectual property attorney to file those necessary protections as well. For intellectual property (IP) such as computer code, methodologies, designs and formulae, IP attorneys will help protect your intangible assets by filing patents, trademarks or copyrights as applicable and enforcing any infringement.
4. Know your cash flow
Cash flow — the actual cash you have on hand, in bank or investment accounts, to pay your bills — is the lifeblood of your company, and very different from profits. Insufficient cash flow presents a huge risk. Bills will come due every month. While it is possible to operate at a loss for a few years if businesses carefully manage their funds, the goal, of course, is to be profitable and cash flow positive.
If you’re not an expert in accounting or finance, consider hiring an accountant or financial advisor.
Determine your startup costs and major expenses you expect to incur over the next two years. Forecast your revenue, costs and profits in a profit and loss statement (income statement). Typical expenses include:
- Business insurance
- Cost of goods sold (labor, supplies, shipping, delivery)
- Sales commissions
- Advertising and marketing
- Licensing and permits
- Rent and utilities
- Meals and entertainment
If you’re not an expert in accounting or finance, consider hiring an accountant or financial advisor. Once they create your income statement, have them map your expenses on a weekly basis for the next 12 weeks. This will allow you to anticipate cash flow at least a few weeks in advance — so if you anticipate a negative week, you have time to do something about it.
5. Determine your business funding needs and sources
Running out of cash — or failing to raise new capital in time — is the top reason startups fail, finds CB Insights. After forecasting your income statement and 12-week cash flow needs, talk to small business owners in your field to make sure you have a realistic understanding of your finances. Ask them about how quickly you can expect to break even — when revenue equals expenses — and how long it takes for customers to pay. Remember, you need to ensure you have enough money to not only pay your expenses but to cover the gap between when you pay out and when your customers pay you.
Is your vision for your business big enough to entice investors?
Your cash needs, your industry and your market determine your funding options. As a startup, your business has no history, so most lenders will focus on your personal credit and assets to determine if they’re willing to lend to you, and how much. To start determining appropriate funding sources, ask yourself:
- Do you have sufficient savings to cover everything?
- Is your vision for your business big enough to entice investors?
- Does your business qualify for grants?
- Can you quickly generate enough revenue to cover expenses? If so, how will you generate it? Can you structure customer payments to provide you with immediate cash flow?
- Can your business generate the cash flow needed to repay a bank loan for the amount you need?
Alternative lenders present other avenues for funding. Asset-based lenders provide factoring and equipment loans and credit lines for inventory or accounts receivable. If you have strong marketing or public relations skills and a suitable product or service, crowdfunding is also an option. For investment capital, consider angel investors, seed funds and economic development grants.
6. Identify your go-to-market strategy
Your go-to-market strategy is part of your business plan, and it has two main components: how best to deliver your service or product, and how best to get the word out.
Questions to ask include:
- What strategies do my competitors use? Are their strategies effective?
- What potential strategies align with my interests and strengths?
- Can I access the resources I need to implement these strategies?
Service delivery and product strategies vary according to your industry, customer targets and desired growth rate. For example:
- If your startup is a software provider, you can sell software as a packaged product with installation services and maintenance, or offer it via software as a service (SaaS).
- If your firm is a leadership training provider, you can sell one-off, customized training or provide more general, webinar-based classes.
You can use direct outreach via a sales team, advertising or social media. Or you can partner with strategic partners or resellers. Your strategy determines your marketing options.
However you go to market, ensure your methodology and messaging is cohesive across all collateral and channels. Keep your brand consistent, and incorporate your logo’s main colors and fonts into your website, brochures, business cards and social media pages.
7. Create a business plan
Benny StaRomana, a business consultant with the University of Georgia’s Small Business Development Center (SBDC), compares being in business to being on an open sea. “With business planning, the water is easy,” he says — and without it, the waters can be turbulent. A written business plan helps owners identify trends and roadblocks as well as define the target market and forecast sales.
Consider creating an advisory board comprised of a few key individuals to discuss business issues with.
According to CB Insights, the second biggest reason for startup failure is lack of market need, and the fourth is a flawed business model. By documenting your plan completely and concisely, in four to 10 pages, you can readily review it on a quarterly or semiannual basis to check your assumptions against market feedback. Documenting your plan is part of a planning process. One step of that process is thinking through various scenarios as well as challenges that can arise and how to address them. Returning regularly to this planning process — and revising your plan accordingly — significantly increases your visibility into threats and opportunities as they develop, so you can take appropriate action.
The U.S. Small Business Administration offers business plan guidance, including these key elements:
- Business description
- Go-to-market strategy
> Need help documenting your business strategy? Use my business plan template to create a rock solid outline.
In lieu of a management team, consider creating an advisory board comprised of a few key individuals to discuss business issues with. Your board might include a successful entrepreneur, an accountant, a lawyer and a marketing consultant.
Finally, you can use a streamlined version of your plan — an executive summary — to show to bankers, prospective landlords or interested investors.
8. Properly price your product or service
One area that many startups fail to properly consider is pricing. You want to charge a reasonable price that fully reflects the value you provide to the customer. Ascertain those value components and clearly communicate them as benefits.
In addition, you’ll want to:
- Outline all the costs to create and deliver your product or service
- Determine what competitors charge: request price lists, obtain quotes or ask their customers as needed
- Incorporate profit expectations into the pricing
And ask yourself: Are your prices market-competitive? Be aware that competing on pricing alone increases your risk in down markets. If your prices are high, can you justify this with the additional value your firm provides?
Before finalizing your pricing, make sure you fully understand the math behind marking up the cost of goods sold to cover your operational costs. Use gross margin, which is the percentage difference between the sales price and the service cost, and the gross margin multiplier.
- Example: Your target gross margin is 20 percent, so you mark up your $100 product by 20 percent. Now the price is $120. However, 20/120 is only 16.6 percent. Instead, calculate markup by dividing by (1 − desired margin). In this case, $100/(1 − 0.20) = $100/0.8 = $125. The price you need to charge is $125.
9. Know what is involved in hiring vs. outsourcing
Before you make your first hire, get advice from a human resources consultant or attorney to ensure you set everything up properly. Consider outsourcing your payroll to ensure you pay all payroll taxes on time. The IRS and state revenue departments strictly enforce employee tax payments and often act quickly when they discover an error. Managing your cash flow will help you avoid missing payroll, an issue that startups often struggle with.
Be aware that hiring someone as an independent contractor and treating them like an employee can lead to serious issues with the Department of Labor and the IRS. If you need people sporadically or for special projects (or can’t consistently afford a part-time or full-time employee), outsource to a freelancer or a company that can provide the service instead. The Department of Labor publishes guidelines that define who is an employee versus an independent contractor. If you’re still unsure, it may help to consult with an employment attorney.
Lastly, if you intend to hire employees quickly, consider utilizing a professional employer organization (PEO). These organizations will handle all the human resources administrative work, ensure compliance and often provide benefits at a reasonable cost.
10. Right-size your technology
With capital at a premium, right-sizing your technology is essential in a startup. Control your tech spend by running cloud-based apps, and selecting the best phones and PCs for the unique needs of your business and employees. Cloud based applications are a good way to reduce your technology spend and have your team collaborate remotely. Consider what computing devices your team members need to most effectively do their jobs.
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You may find yourself working on a variety of devices, while your office manager, for example, may need only a desktop computer and a smartphone. Some employees may be better served with only an advanced smartphone — a smartphone that can provide a great desktop experience when connected to a full-size monitor, keyboard and mouse. Other team members may need even less mobile technology. Employees in the field, for instance, can benefit from mobile apps for time and location tracking that work with standard smartphones and require no physical connection.
Cybersecurity is also paramount to maintaining data protection and basic productivity. You can help keep malware and ransomware out of your network by providing employees with work-only smartphones, and either managing device updates yourself or outsourcing to an IT and mobile tech support firm. The key to tech security is to ensure the software and operating systems are always up to date.
Building strong fundamentals for your business
Managing a business is extremely complex, but working through the checklist above will help ensure that you have a strong strategic, legal, financial and overall well-rounded base to build your business upon. When you’re confronted with the inevitable ups and downs of beginning a new business, you’ll have the fundamentals and basis to remain focused, and keep moving forward.
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