Look Before You Leap

By Laurie Breitner

Public domain. U.S. Air Force photo by Tech. Sgt. Jeremy T. Lock

U.S. Air Force photo by Tech. Sgt. Jeremy T. Lock. Public domain.

Too many entrepreneurs believe raising funds to finance their idea is a first step when starting a new business or expanding an existing one. Some create business plans — often only to satisfy lending guidelines — and head off to shop their ideas at banks or other funding sources. I have known people who depleted their retirement savings, put their homes at risk, and/or tapped friends and relatives with promises of great returns only to discover that they had not done their homework.

While starting or growing a business always involves some risk, none of us wants to take on more than is necessary. Before taking a financial leap, be certain that you can answer these questions thoroughly and with confidence — that is, you have some empirical evidence and/or analysis to back up your passion:

Does your plan have legs? Have you tested your idea to determine that you know and can reach your target market and that your planned offering meets their needs? Please don’t assume that if you “build a better mousetrap” that people will flock to your door to buy one. Instead, talk to potential customers; gauge their interest and learn more about their needs and some obstacles you will likely have to overcome. Also, consider the competition — there is always competition — for your target market’s dollars. How would your business woo customers?

What resources do you have/will you need to be successful? It is essential to have as full an understanding as possible of what resources (expertise, suppliers, location, marketing collateral, forms/contracts, etc.) you have and will need to be successful. If you plan a foray into a new business or market, find someone to help you better detail what’s needed. Consider visiting a library to access industry surveys and statistics (UMass Business Library), getting how-to information from industry associations, talking to business owners in a similar business that serve different geographical markets, and checking out industry discussions on LinkedIn and other web sources.

How long will it be before your plan starts generating revenue? Is your product/service well understood, or will you need to mount an educational effort to explain its uses and benefits? Consider your sales cycle (the elapsed time from initial contact to receiving payment). Do customers make buying decisions immediately, or is there a delay to get approvals, consider alternatives, etc. Typically, how quickly does your target market pay? If you plan to open a retail store, you could realistically expect payment at purchase. If, however, you plan to sell to government agencies, expect significant delays.

Can you start smaller? Many entrepreneurs are so bullish on their products/services and excited by their potential that they seek to fulfill the needs of multiple markets with a range of offerings. What is your low-hanging fruit? Is there a niche market that you could enter to build a satisfied/loyal customer base? Consider starting small to learn what works — and doesn’t — before making a larger investment.

How much will it really take to get your plan off the ground? It’s generally safer to be conservative; no one goes out of business by having too much cash. Before you head off to borrow money, consider whether you could fund your initial foray with cash from on-going operations? For a new venture, is it possible to keep your current job (and income) while building your new business on the side? Many couples/partners who want to open a joint business do so by having one work in the new business and the other stay in their current job to keep the financial boat afloat until the new venture starts to make enough money to support both. Typically it takes about 3 years for a new business to be able to support its owner.

How will you measure success? Some entrepreneurs wait until they start generating P&Ls (profit and loss statements) before looking at results. Instead, put together a project plan (with measurable milestones) as early as possible. This is difficult to do, especially without a history of operating results, but the process will help you think through the business challenges ahead. The information you need for your guesstimates will help you with early steps for the business itself — e.g., identify/vet suppliers, develop a sales plan and marketing materials, etc. — and become one yardstick to measure your progress. Adjust revenue projections and planned expenses as you learn. By having a documented plan to help you monitor progress, you will be more nimble and able to uncover small speed bumps before they become major obstacles.

If you learn that you will need outside funding, most banks and other funding sources will appreciate your diligence. And, you will have more confidence during the inevitable tough times when you are doing all the essential pre-work before your earn that satisfying first dollar from your new venture.

© Copyright Laurie Breitner. All rights reserved.

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