Here’s the truth about being a business owner: you cannot fully predict what will happen once you launch your business. There will be incredible wins that allow your startup to make a difference and to better the lives of countless customers. These wins will also be accompanied by complex hurdles—like dealing with cash flow crunches, acquiring customers and strategizing to increase sales.
Is 2021 the year of starting your business? Before you start, ask yourself these six questions and get the answers.
1. Do you have a viable business idea?
Launching a business is a serious decision that impacts every aspect of your life. It’s easy to get swept away in the exciting aspects of entrepreneurship, like setting your own hours and being your own boss. However, you must first understand your “why” for getting into business.
Consider the viability of your business idea. This will require asking yourself relevant questions about your vision:
- What makes my business idea unique?
- How can my product or service make life easier for customers and solve problems?
- Is there a demand or need in my area for this product or service?
- Why me? What makes me qualified to start this business?
As you answer these questions, start surrounding yourself with a supportive community. You’ll need more than friends and family to help you vet a good business idea. Start gathering customer feedback. You can do this with the help of social media platforms, conducting a survey to gauge interest and meeting with focus groups.
2. Do you have a business plan?
Once you know you have a thorough understanding of your business idea and offering, you’ll need to draft a business plan.
A business plan acts as the foundation for your company. You may set goals for the business, add timelines and steps for how you plan to reach each goal, and evaluate the feasibility of your business from an objective standpoint.
Here are a few areas your business plan should address:
- What your business does, why consumers will pay for your offerings, and how the company plans to make money.
- Overall strategy and goals for being in business.
- An industry analysis that studies your competition, both direct and indirect.
- A market analysis about your target audience and plans to attract, capture and retain this audience.
- Financial projections for your business that outline its cash flow and profits and losses (P&L).
As you reach each goal, revise your business plan accordingly. Your business plan carries a lot of weight. It helps you stay on track with your goals and acts as documentation potential investors can review if you decide to seek outside financing.
3. Are you financially prepared?
How much do you reasonably need to set aside in your startup’s cash reserve? The general rule of thumb is to have a cash reserve that covers three to six months’ worth of business expenses. You may determine this number by crunching your average monthly costs for the last twelve months. Then, multiply that number by three to six. If your business has $7,000 average monthly costs, for example, your cash reserve should be between $21,000 and $42,000.
If this sounds like a lot of money, consider where this capital is being allocated.
You will need initial capital to start the business and pay for filing fees to incorporate, register a trademark and obtain business licenses, among other compliance necessities. Then, you will have working capital in your cash reserve that will help keep your business open. You should also have home capital to pay for personal bills outside of the workplace.
Making the leap from employee to business owner requires building up a significant financial cushion. You will not have a steady paycheck coming in from your employer and will be responsible for paying for additional expenses, like healthcare, on your own. There are additional financing options available beyond self-funding, such as applying for a small business loan. Remember that you will need to repay that loan once you sign for it.
4. Do you have time for this business?
Time is a major factor when starting a small business. No matter what industry you go into, the business will consume a great deal of your time and energy. However, you do not want to become so consumed with the business that you only have time for work.
Consider your work-life balance. What if you don’t have time to start a business and make it your full-time line of work? Ask yourself if the business is better suited as a side hustle. This gives you the chance to gradually ease into the startup and determine if it is what you want to pursue in the long run.
5. What happens if the business fails?
What sort of alternative, backup or plan B do you have if the business does not work out?
Draft a business plan for your personal life. For example, you may decide to re-enter the workplace or go back to school. In the event that the business does not work out, speak with a legal professional about next steps for dissolution. This ensures you shutter the company properly while remaining in compliance.
6. From what position are you starting this business?
Are you ready to start a business?
Were you able to answer each question above confidently? Or did you find that some of these questions hit sore spots? It’s okay if you don’t know everything about what’s to come. However, you should not throw yourself into starting a business where you do not feel confident or positive about its short- or long-term outlook.
The position in which you start a business should be one where you are excited and ready to do great work. Set aside some time to speak candidly with friends, family, mentors and legal professionals. They will provide you with honest advice and guidance about what to do next — whether that means making a leap forward right now or waiting it out for a short while until you are fully ready.
This article was written by an FGB Contributor.
Deborah Sweeney is the CEO of MyCorporation.com, which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.