Recently an aspiring entrepreneur asked poignant questions about my prior business. He also asked me to shed light on important lessons I learned along the way. Hopefully this same information will be helpful to you or someone you know who is contemplating whether or not to start a business.
How did I start the business? Initially I had a full-time job allowing me to “boot strap” or start the business with my own money. It is best to save money towards the launch of your business or continue with your full-time job for the first year or so. A rule of thumb is to have enough savings to cover your salary and living expenses for at least one or two years. Anticipate unforeseen expenses you encounter along the way!
How much money is required? There is enormous fluctuation in the amount of money required to start a business. Some industries are complex and require substantial investments, certifications or licenses whereas others have minimal required investments. I was lucky in that sense. Since I was launching an artisan business it allowed me to get started for $500. I had already accumulated some of the tools and machinery needed which drastically lowered the costs. Some businesses require $10,000 or more for the initial launch. Be sure and do your research.
How long did it take me to make money? My business became profitable within approximately 1 ½ years. However, I did not collect a salary until about my third year in business. Profits I made were invested into the business, allowing for continued expansion of operations.
How did I build a customer base? Initially my business targeted two separate sectors. Obviously, I was at a disadvantage from the onset due to the low investment I had to get the business off the ground. I thoroughly studied the industry and determined that one particular segment allowed much easier access than the one I wanted to focus on. Therefore, I heavily concentrated on the sector that had a lower barrier-to-entry. This strategy allowed me to quickly connect with consumers and rapidly build a customer base. I simultaneously worked on the other sector as that took much longer to penetrate. The industry I was in had minimal repeat customers so it was important to identify the circles or clusters as well as the influencers. After that, the business was solely grown through organic, word-of-mouth campaigns. The first advertising I did was around year seven when I started expanding my business regionally.
Do I have suggestions for determining a business’ location? If possible, I encourage businesses to initially start with a home-based business. This keeps the overhead costs to a minimum while allowing you to really work through your idea as you build your business. It helps mitigate your risk until you learn whether or not consumers will be interested in your products, if there are seasonal fluctuations to account for, and if your profit margins are what you anticipated. After your model is proven successful and you are ready to expand operations, it is easier to identify the correct type of location that puts you in close proximity to your customer base. With all of the technological advances, it’s tougher to spot if someone has a home-based business. New businesses tend to make a major mistake by signing a multi-year lease on a storefront that requires a personal guarantee. That means if the business fails, you are required to personally pay for the remainder of the lease.
Would I start a business again in the future? It is dependent upon various circumstances. Right now I am not planning on it, although I have had some pretty cool ideas that I have been curious about exploring. When I was teaching, I told students about niche opportunities within their field and how they could capitalize on voids in the marketplace. I thoroughly enjoyed the time I owned a business and it was at a perfect time for me but it was a lot of work. People underestimate how much time is involved in running a successful business and the worries that accompany it. Yes, the rewards are wonderful but it takes a great deal of dedication.
What important lessons did I learn? There were a ton! But three major ones come to mind. The important thing is to make sure you are always learning. Don’t ever feel that you know it all. I made the mistake of working “in” my business instead of “on” it. Since I was at a disadvantage for the initial lack of investment I had, that meant working that much harder. I became accustomed to handling everything myself. Our city did not allow home-based businesses to have employees which further complicated matters. Obviously, that curtailed my ability to utilize employees so, instead, I was able to supplement work through subcontractors. No matter what, my ability to concentrate solely on growing the business was limited. Instead, I became too involved in the specific details of each project. Business owners need to concentrate “on” their businesses and not be bogged down by the minutia of the projects. You can work on certain aspects of a project, but there should be a hand-off point of which the work goes to employees to finish up.
The second and third points go hand-in hand. Cash is king . . . there is no way getting around it. Your business will likely end if you run out of cash. The biggest lesson I learned is that even though inventory is considered an asset to the company, it drains your cash. Do not look at it as an investment. There is a lot that can happen to inventory causing it to lose its value. My business had a comfortable profit margin but I almost ran out of cash. At the time I didn’t understand how I was profitable and making money yet my cash was being depleted. My accountant quickly realized that I had excessive inventory which was depleting my cash reserves. As a result, I had to adapt how I purchased goods. So another good lesson is to ensure you have qualified professionals working alongside you to assist with areas you may not be as knowledgeable about. Our society has grown accustomed to relying on results from a search engine query to answer specific questions, but there are likely contributing factors that may affect the situation. That’s why professionals, such as attorneys or accountants, are so important.
Through the years, I have met numerous people who financed their business with credit cards. Luckily, I didn’t fall into this trap as it can be detrimental to the well-being of your business. Occasional purchases are fine, but only if you can pay off the balances within a month or two. Do not finance your business with credit cards! The interest will begin to cripple your business and, if it keeps accumulating month after month, your business may begin to suffocate. Look for lower cost alternatives, even if that means you have to “settle” for the time being. Look closely at each expense to see whether or not you really need it or if a purchase can be postponed.
In conclusion, it is important to seek the guidance of individuals with relevant industry experience. It may be smart to form an advisory board that can help round out your knowledge. Understand that a business does take a lot of work but generally provides owners with a wonderful opportunity filled with adventures. Don’t be afraid to take that first step!