How NOT to start a business

Written on :

Work was the last thing on my mind... but I took the call anyway. The call led to a consulting offer and the offer led to analysis and recommendations but, more importantly, it reminded me of how exactly not to start a business. Reflecting on it now, I get it. Once, we get a business idea, it's very easy to think, only, of the reasons why that business idea will be a runaway success. Well... according to research, sometimes, failure in business is as a result of how you start your business. Most businesses failed because the allure of a business plan and nicely laid out optimistic projections made the business look like a certain success. and it probably was. However, nobody kept an eye on the numbers. So, here's how not to start your business. Don't start your business without a strong knowledge of your numbers Yes, its the boring stuff. Numbers. However, it's so important, it can make or mar your business. The old way was to do optimistic financial projections based on randomly generated industry growth rates and attempt to build a business based on these projections. That doesn't work anymore. It doesn't work because, as a start up, you operate with so much uncertainty and in my experience, dependencies. You're either depending on the customer or another business to achieve those projections. When you're starting out in business, there are two primary things you should never lose sight of; how to keep costs in check and how to ensure you grow the variables that add up to revenue How do you keep costs in check? If you’re not making any revenue, there are costs you shouldn't bother taking on at all. Costs such as renting an office space if you really don't need one.  You should consider getting a website up to sell online or working from home. You should also negotiate and collaborate. Negotiate the cost for every service you need. For instance, negotiate the cost of software. Consider a revenue share model, if possible, because you're better off spending money when you have revenue than when you don't. If it's not negotiable, try to ensure you can use it for more things than you planned. Collaborate on costs with similar companies. Don't be in a hurry to hire additional staff if you really can't bear the costs at your current revenue position. In a bid to grow revenue, the company I consult for, went on a hiring spree before the business started and ended up with huge staff costs. A smarter way to grow would have been to launch a minimum product which a few capable people could manage, give them incentives to grow the business and manage costs. The less costs a business has, the shorter time it takes for it's revenue to cover costs and earn a profit. Once you can keep costs in check for a certain level of production or service, the exciting journey to grow revenue commences but sometimes, revenue is the weak link. It can be the weak link because there are variables that add up to revenue. At its simplest form, these variables are price and volume. You constantly need to find the balance between charging appropriately and selling the right volume. It's like a give and take game. Sell more at a lower price or sell less at a higher price and earn profit sooner. However, you need to consider your market before you make pricing decisions. Offering a lower price might not necessarily lead to higher sales. Based on the dynamics of your industry, consider different pricing models such as selling at a premium and offering additional value or selling at low price to drive volume. For instance, The cost of a movie ticket at the cinemas was recently increased from N1,500 ($3.3) to N2,000 ($4.4), but comes with a box of popcorn and a drink. It's quite straightforward when you sell tangible products, but not so much, when you provide services. If your business provides services, it's advisable to create products so revenue can be more predictable. In essence, the best way to compete as a business is to watch your costs and drive the variables that make up revenue. I hope this helps