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Are You Ready To Start Your Own Business?
By Keith Rawlinson
Volunteer Budget Counselor

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Are you thinking about starting your own business?  

Be it a small, home-based business or a larger company complete with employees, many people see starting their own business as a way to wealth and financial independence.  If you do it right, and things go well, it is possible to support yourself or even grow wealthy by having your own business; however, most people don't do it right and end up in serious financial trouble.  This article presents a list of my own personal 'rules' for starting your own business.  If you follow these rules to the letter, your new business will have a chance.  If you break any of these rules, however, it is very likely that your business will fail and possibly destroy you financially.  I'm not trying to scare you or dissuade you from starting their own business, I'm just trying to help you avoid the most common things that lead to business failure and, subsequently, financial disaster.  I call these...

The six commandments of starting your own business.

#1  Determine the demand for your product or service ahead of time.

And be very honest about it.  The problem that many people starting their own business have is that they get stars in their eyes and think they can't fail.  They ask what friends and family think of their new idea, and even if the consensus is that starting the business is not a good idea, they go ahead and try it anyway because they are just so sure that it is a great idea no matter what anyone else thinks.  Also, be aware that friends and family, in order to avoid hurting your feelings or discouraging you, might not be completely honest with you.  You are better off asking complete strangers what they think of your new idea.  If the feedback you get is discouraging, don't just ignore it figuring that you know more about it than they do.  Don't forget, complete strangers will most likely make up the bulk of your customers.  If complete strangers don't like your business idea now, what makes you think they will after you take the risk of actually starting that business.

And please don't ever make the common mistake of thinking that your business will succeed because there is no other business like it anywhere in the area.  Many people think that this means there will be little competition, and that could be.  It is possible that no one has ever thought of starting your business idea in that particular locale--or--there may be no competition in the area because such a business cannot succeed in that area!  I know of a woman who started an ice cream parlor in the middle of nowhere thinking it would be successful since there were no such businesses for miles around.  Before too long, the business went under for lack of customers.  It turned out that on the way out to her ice cream parlor in the middle of nowhere, potential customers had to pass three or four similar businesses in the more populated areas.  There was just no compelling reason to drive the extra distance when there was ice cream to be had so much closer to home.  Always remember that there might be no competition because there are no customers for whom to compete.

#2 Carefully consider the kind of business you are going to start.

You must accept and remember that most new business endeavors fail within five years.  I didn't say that some fail--I said that most new business endeavors fail!  Actually, the average time it takes for a new, small business to fail is two to five years.  As I hope you are already aware, some new business endeavors are more prone to failure than others.  Probably the most failure-prone business idea in America today is opening a restaurant; yet, this is one of the most common business ideas people come up with.  The restaurant business is very, very competitive.  Just look at any major metropolitan area--you'll see restaurant after restaurant right next to each other!  Restaurants are equipment intensive, labor intensive, regulation intensive and inventory intensive (you have to keep food on-hand and fresh at all times).  If your business idea is to have your own restaurant, it is very critical for you, of all people, to follow all of the guidelines in this article very, very carefully.  If you don't, and things go bad, you only have yourself to blame.

Probably the next most failure-prone business idea of which I am aware is the marketing of an invention.  Understand that most of the successful inventors in America didn't just invent one thing or have only one 'great' idea.  Most successful inventors invent hundreds, if not thousands, of inventions and are fortunate to have one or two truly succeed.  I have seen too many people invent one thing that they are absolutely convinced is the next billion-dollar invention, and devote their lives and their money to trying to make that one invention successful.  Too often, such people end up in financial ruin when their money runs out and they are stuck with an invention that few, if any, people wanted in the first place.  If after a reasonable amount of time and money your invention doesn't seem to be getting anywhere, please take a good, honest look at the possibility that it is not a good enough invention to succeed.  A truly innovative invention that is likely to make millions of dollars, generally sells itself.  People see it and they want it.  If you have to excessively talk people into your invention, or force it on them, it isn't likely a good enough invention to be successful.  Not to mention the fact that in order to protect your idea from being stolen by someone else, you have to get a patent on it before you even begin showing it to anyone.  Patents are not cheap.  We're talking about tens of thousands of dollars just to patent one invention.  You basically end up with a lot of money tied up in your invention before you can even try to get it into production.  And please don't try to market your invention through any kind of company that says 'for a fee, they will market it for you.'  More often than not, such companies are a rip-off that take your money and then do little or nothing to get your invention on the market.

Once you have decided to start your own business, whatever it may be, try to choose a business that involves something about which you are very knowledgeable.  If you know little or nothing about surfing, don't try to open a surf shop.  If you know little or nothing about party planning and food services, don't try to start a catering business.  If you want to start a business involving something you know little about, then first educate yourself about every aspect of that business before you even think about trying to start your own.  Before starting any new business, I strongly advise that you work in that field for at least two years before going out on your own.  While working there, learn everything you possibly can about running the business.  That way, you'll have a lot of the knowledge you'll need in your own business, or you may discover that you really don't want to be in that particular business after all.

#3 Finance your business the right way.

First of all, don't go into debt to start a business.  I can't emphasize this enough.  When you start a new business, you are taking a risk with the time and money you are putting into it.  Using borrowed money amplifies that risk considerably.  The biggest financial mistake I see people make when starting a new business is raising the money through a home equity loan, refinancing their house, or using credit cards.  Before you start a new business, you should either have the cash on hand, or have investors who lose their money if the business fails.  Make sure all agreements are in writing and that it is clearly stated that you are not personally liable for any money lost by the business endeavor.  I already told you that the average new business fails after about two years.  If you have borrowed against your house, or put thousands of dollars on credit cards, you still have to pay all of that money back if the business fails.  You could, and statistically will, end up making payments for years to come, or possibly even losing your house in foreclosure if you borrow money to start a business.  Remember, most new business fail.

Here are the golden rules of financing a new business:

#4 Start small.

Of all of the guidelines I've given you so far, this one probably has the potential to save you the most grief.  Why?  Because even if you are foolish enough to ignore the other guidelines I've given you, starting small will likely limit the financial damage.  

The first rule about starting small is to buy only what you absolutely need and only when you truly need it.  By 'need,' I mean things that you cannot possibly run your business without.  I'm not talking about things that make it easier or more convenient; I'm talking about things that you absolutely must have in order to stay in business.  Here are some examples of how to start small:

Start in your own home if possible.  Remember that Apple Computers was started in someone's garage at home; so, don't go out and rent a huge space if you can start with renting a small space.  And don't rent any space at all if you can get your business started at home.

Don't buy a large amount of inventory at first.  Your supplier might try to talk you into it, but don't do it.  Even if buying additional inventory results in a reduced cost per unit, don't do it.  You are much better off paying more for your inventory at first, and making a little less profit, than ending up with a basement full of  thousands of dollars worth of unsold goods when the business fails.  Don't forget, you have to plan for what you will do if the business fails since it most likely will.  I hope you beat the odds and succeed, but it is more likely that you will not, so try to be ready for that possibility ahead of time.  Besides, at first you are still trying to learn what your customers do and don't want.  You do not want to spend all of your money buying inventory that doesn't sell well, and then end up needing more money to buy what will sell.

At first, other than inventory, try not to buy anything new.  It is incredibly wise, and gives you a much better chance of success, if you start out with used stuff.  This includes such things as phones, office furniture, computers, copy machines, vehicles, equipment, etc.  If your business proves to be wildly successful, you can always upgrade later; but for now, go with used rather than new.

#5 Get legal advice and adequate insurance before starting a new business.

I am a financial counselor, not an attorney.  There are many legal issues that must be addressed before starting a business, and in each locale, the laws are a little different.  In this article, I'm only able to give you the very basic guidelines from a purely financial perspective.  You must consult a competent, knowledgeable attorney before starting a new business.  The trouble it can save you later is usually well worth the cost of the attorney.

Also, make sure you have adequate insurances such as disaster and liability insurance in place before starting your business.  It may not be cheap, but if you can't afford the insurance, then you can't afford to start the business.  If you don't have enough insurance, a fire, flood, theft or lawsuit can take down not only your business, but you personally!

#6 Put everything in writing.

There is an old Chinese saying:  "The weakest ink is better than the strongest memory."  In other words, if any kind of agreement is in dispute, it is much better to be able to refer to what was written down, than to what each person thinks they remember.  Putting everything in writing saves arguments, lawsuits, friendships, relationships and money--put everything in writing--no exceptions!  This includes agreements made with customers, suppliers, landlords, partners, investors, etc.  Here again, it is a good idea to get your attorney involved in making sure everything that can go right, as well as wrong, is covered in the written agreements.

Final comments:

To give yourself the best chance if having a new business idea succeed, you really need to follow all of the guidelines I have provided in this article.  You cannot just pick and choose the ideas you like--you must follow all of them.  Compromising on even one of the guidelines I have given might be all it takes to destroy what otherwise would have been a successful business.  I didn't write this article to discourage you from trying to start a new business; I wrote this article to make sure you are realistic about the endeavor and do things right so that you have the greatest chance of success.  Remember that Eclecticsite.com's Financial Page is here to help you get ahead financially and hopefully become wealthy.  If you think that starting your own business might be right for you--make sure you do it right!

Finally, once your business is up and running, you'll want to do everything you can to keep it running successfully.  A good place to start is reading my article entitled "Some Secrets To Running A Successful Business."

Please know that all of the thoughts, information, suggestions and techniques given on this site are nothing more than the author's opinion on the matter being addressed.  Do further research before making any decisions.

This article copyright 2007 by Keith C. Rawlinson (Eclecticsite.com).  All rights reserved.

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