First things first. We talk about our “Gross Domestic Product” or GDP. That is the total dollar value of all the goods and services produced by any country. In the United States our 2013 GDP came in at $16.8 Trillion. Not bad at all, and the good news is its growing. Small businesses contribute about 46% of all non-farm GDP in the United States. So it sounds like small business is the place to be in the United States. The United States is the land of opportunity, but there a few things all prospective business owners should know. Nationally, Bloomberg reports that 8 out of 10 new businesses fail within the first 18-months. So, you have a 20% chance of being successful, the question is “What can I do to improve my chances for success?”
- Know your prospective customer. What do they want, how do they want it, where do they want it. What motivates them to buy? Are they ready, willing and able to pay for what you are selling? The more prospective customers you talk to the better. You can interview friends and family, but you will not always get honest answers because they will not want to disappoint you. Talk to other small business owners, attorneys, and accountants—people you may not even know. Survey them. Collect honest opinions and feedback, you may find that you are trying to sell something or service that people may not be interested in or may already have, and therefore reluctant to change.
- Understand your market. Is there market demand for my product or service? Is it consumable is the demand constant? Who is the competition, where is the competition? How big is the market, what is the opportunity? If you are trying to sell high-efficiency florescent light bulbs delivered to your door, consider what are the options, who else sells them online, or in store? How long does a high-efficiency light bulb last? Can I offer them at a comparable or even better price? Will the market pay what I am asking?
- Product or Service Differentiation is Key. If your business is just like everybody else’s you are not going to attract attention or customers. More than likely you are going to have competition. If you do something just like everyone else, there is no incentive to try your brand, product or service. Give them a reason to try your business and when you have them give them a compelling reason to stay.
- Know your value proposition. You should know this by heart and be able to tell customers what it is, easily and succinctly. If you have trouble telling customers what this is, take this as a sign. Think about branding campaigns of the past and how well they work. “There’s a lot riding on your tires.” This is a famous Michelin ad featuring a child wrapped by a tire. Michelin tires are really expensive when compared to other brands, but no one puts a price on the safety of their kids. Michelin pulls that emotional cord and it works. The new Subaru ads are the same way. The cars are well known for safety. In their ads today they show the cars being passed down to young drivers who have been protected by that very car. Or they have ads showing the car after an accident and the family is fine. Again they are making an emotional appeal. Subaru’s are not inexpensive cars and they are built really well. People don’t mind paying for quality and safety. The key is knowing what motivates people to buy the product or service you are offering.
- Prepare a business plan. This is imperative. #1., #2., #3., and #4., all need to be included. You must also know exactly how much it’s going to cost to start the business and how you plan to fund it. In banking it’s called Sources and Uses. In other words, what are my sources of funding and what will the funds be used for? You also need to include a projection of revenue and expenses by month for the next 3-to 5-years. Include all the assumptions you used to construct the projection. Tie the revenue back to: how many will I sell? Identify the market and how much of it you plan to take. Illustrate the number potential customers and how you reached that number. Talk about pricing and how price was set. Tie the cost of goods sold back to vendors and suppliers, and use confirmed bids and prices. Back up all your expenses with data, i.e., how much rent, utilities, insurance, advertising, utilities, legal, wages, etc., all cost and go over your plan with trusted advisors. SCORE is a great place to start and they are a part of our local Chamber of Commerce. You can also talk to bankers, accountants, attorneys or other business owners you may know.
- Capital: This came up in #5. It’s very difficult to start a business without capital. It’s equally hard to sustain a business with inadequate capital. In most cases, the new business owner must look to their own savings, family or friends for the “seed capital” to start their business. Bankers have a tendency to look for businesses that have a demonstrated track record. Simply put, bankers look for the existence and sustainability of revenue stream that sufficiently covers all expenses plus any required debt payments. The best time to develop a capital plan is before serving notice to your current employer and launching your new business.
There is much to think about and consider! Entrepreneurs with a vision and a plan started all businesses at some point and time—we see them all over our community. Recently we launched a new business incubator known as “Match Box” to help promote the exchange of ideas and approaches so that a wider audience might benefit. In summary, new small businesses are a key driver of our local and national economy. We welcome small business owners at Lafayette Community Bank, we strongly believe in investing right here in Tippecanoe County. Come and see us today or give us a call!