Launching your own business can be an exciting prospect. But the road to success is filled with many roadblocks. According to Statistics Canada, 20% of small businesses fail within their first year, and only 72% of all new launches are still operating after two years. Here’s how not to become an ugly statistic.
Sober second thought
Before you invest too much time and effort in launching a new business, you should get some feedback on how viable the idea is.
“Once you have your great idea, you need to a do a bit of vetting with some trusted advisors for sober second thought,” says Shelley Swanlund, vice-president, Business Banking and head of Small Business Banking with CIBC. These could include your accountant or financial advisor, and other small business owners. There are also a number of government and non-profit agencies that provide advice to new business owners who can connect you with mentors and advisors. The Business Development Bank of Canada (BDC) is a great starting point (bdc.ca).
Plan for the future
In order to survive your first year in business, one of the most important things you need to do is to develop a thorough business plan. This is a multi-page document where you analyze every aspect of your business, including:
* A description of what the business is
* Who your customers and suppliers will be
* A market analysis of the competition and opportunities for growth
* Details on any competitive advantage you have
* A marketing plan
* Where the business will be located and any equipment you’ll require
* How you will find–and retain–staff
There are shelves full of books at your library and bookstores on how to create a business plan, and you should read at least a couple of them. You can also find numerous sample plans and templates online, including ones on the BDC’s website.
Cash flow, or lack thereof, is one of the biggest challenges facing small businesses. As a new business, your suppliers will want to be paid as early as possible (and penalize you for delayed payments), while there will likely be a lag in revenue coming in. Having access to money is extremely important.
For many, that means using their personal savings. Next on the list is asking friends and family for start-up loans. But, ultimately, you’ll likely need to tap into a larger pool, either in the form of a business loan or line of credit.
Your financial institution will take a close look at your business plan for all lending, whether it be for operating purposes such as cash flow or for investing in real assets for your business. You’ll likely need to have some collateral to back up any loans. According to Industry Canada, in 2011, about 65% of small businesses were required to provide collateral, either business or personal assets, to secure loans.
Stay on track
“Set milestones for your first month, first quarter, etc., and track and measure them,” says Swanlund. “If you’re not tracking your milestones, you could go along thinking things are going fine when they’re not.”
Of course, not every business will turn a profit in its first year in operation. But if that’s going to be the case for you, you need to know that in advance. The type of business you’re running will be a big factor. Retail operations often face large upfront costs buying a franchise, and it can take time to build up a loyal client base. But if your low capital, online-only business is facing a negative cash flow month after month, there may be a fundamental flaw with the operation.
If you aren’t hitting your goals, Swanlund suggests circling back to your pool of advisors for suggestions on where the problems may lie, and how to overcome them.
“It takes a lot of courage and ability to commit to starting a business,” says Swanlund. “The first year is very much about adjustment.” If you’re able to deal with the unexpected, by planning ahead for it, you’ll be well poised to survive your first year and many successful ones beyond that.