If there's one thing the last several years have taught us, Millennials and Gen X have the appetite to start businesses. In 2021 5.4 million business applications were filed, according to data from the Census Bureau. This 2021 figure represents a 53% increase from 2019 levels.
And so far, 2022 trends are still way above 2019.
While entrepreneurship can be rewarding, it can also be incredibly tough. According to Fundera, only 30% of new businesses will make it to their 10th year.
So, if you're an entrepreneur or thinking about launching that small business or turning that side gig into a full-time hustle, what can you do to prepare and increase your odds of success? I cover the five necessary items to check off on your list. Those items are:
Have a Business Plan
Test Your Business Idea
Give Yourself a Long Runway
Find Your Key Partners
Manage Your Time for Success
Have a Business Plan
This statement may sound cumbersome, but you must write, mind map, or spreadsheet your business idea (whatever medium enables you best to take those creative ideas and put them down on paper). Use whatever tools necessary to help you determine your business model. This step is essential, as it will help you uncover what you do and don't know. Doing so will help you begin to map out your:
Ideal client or customer
Service offering
Client or customer relationship
Marketing channels
Revenue streams
Key processes
Key resources
Cost structure
Value proposition
Uncovering these items will help you better communicate your idea to prospective clients and customers. Furthermore, it will help you determine how long you can go without income while starting your business.
Are you planning on starting a business? Download this 27-point checklist which outlines the critical items you should consider as you start your business.
Test Your Business Idea
Once you have your idea on paper, it's time to test your business's concept. Generally, there is no hard and fast rule, but getting in front of 50 potential customers or clients can give you feedback to test any new business idea.
What is the best way to do this? Reach out to prospective ideal clients or customers. You can do this with colleagues, university alumni, and professional networks. Social media can be an excellent source for meeting people. Generally, you want to avoid friends and family as they may have a bias (but be sure to let them know of your plans, as they can be great advocates). Most people are happy to give their opinion on an idea via a coffee or virtual chat. Aim to reach out to 100-150 people to get 50 interviews. As you have these conversations, document the information and feedback you receive and update your business plan. You should have a path forward to build your small business at the end of this process.
Give Yourself a Long Runway
When you're getting your business off the ground, one thing is that your income will likely not be reliable. While entrepreneurship may bring you success in the future, you often deal with no income for months or even years during startup. So, you must get your financial situation in order. Having a cash flow plan is essential.
First, determine your required beginning cash balance at launch. This cash balance will help you get the business off the ground and help you with personal daily living expenses. Determine what your initial monthly expenditures may look like for both your business and your personal life. Consider rent, food, electricity, kid's school, technology, internet, and services. Leave no stone unturned. Talk with other entrepreneurs running businesses similar to yours to understand startup costs. They will help you uncover some of your blind spots. The key is to get the total picture.
Calculate these expenses in a monthly total. This monthly expense figure is your monthly burn rate. Take your beginning balance and divide it by your monthly burn rate. You will get the number of months you can subsist and cover business costs before you run out of money (assuming no revenue). The number of months you can rely on your startup balance is your runway. Your burn rate determines your runway length or how long you can go.
Often, entrepreneurs overestimate their confidence in gaining revenue and underestimate their costs. Trust me. As a small business owner who went through this same exercise, you will likely need to increase your runway figure before starting your business or leaving your current job to promote your side gig to full-time status. Giving yourself a longer runway may require additional sacrifice. But, having a long runway provides you with more options further down the road and will very likely increase your likelihood of success.
Find Your Key Partners
When it comes to entrepreneurship, not only will there be trade-offs with friends and family, but you'll be pulled in numerous directions and have to wear multiple hats. Accounting, sales, marketing, operations– in most small businesses, one or two people do these functions in the first 3-12 months.
But you may find it is best to outsource some of these critical tasks. I see entrepreneurs have the following team of professionals around them to help them succeed:
Personal Financial Planner - The financial planner helps determine how your business fits within your financial situation. The financial planner can help you with personal cash flow management, investment decisions, risk management, estate planning, business retirement planning, and more while understanding the business may be your most significant asset.
Outsourced CFO / Accountant - The outsourced CFO can help you with business strategy, bookkeeping, business budgeting, forecasting, pricing, costing, and more
Lawyer - The lawyer can help you manage entity formation legal documents (such as operating agreements), vendor and customer contracts, buy-sell agreements, estate planning documents, and more.
You may reach a limit if you do tasks beyond your core strengths. And if you're not careful, you'll spend too much time working in the business rather than on the business. Knowing your runway and business plan is vital to determine if it is appropriate to outsource specific essential tasks.
New Business: New Schedule
Becoming self-employed requires a mind shift. A New York Enterprise Report survey reported that entrepreneurs work twice as much as ordinary employees. What does this mean? You must get comfortable with a new schedule and lifestyle.
It's critical to respect your time and your calendar. Time blocking is a strategy to manage your time. Set aside time throughout the day or week to tackle heavier tasks. And be sure to make time for life outside of work. Also, set time aside, so you don't get bogged down with tasks that don't add value. Time blocking will help you become efficient.
The Takeaway
There is nothing quite like the experience and autonomy that comes with launching or being a part of a small business. But just like anything else, there will always be trade-offs, and being an entrepreneur is no different. Speaking with a trusted resource, like a financial planner, can help you think through and navigate the ins and outs of your startup.
Need help determining what steps you need to take as you start your business? Feel free to place a commitment-free 30-minute meeting on my calendar. We can discuss your situation and begin optimizing your financial plan in that meeting.
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