Picture this: you’re speeding down a highway at night, buzzing by the idea of opening your own Italian restaurant. You’re a highly proficient accountant, and your friend in the seat next to you is a chef with 10 years of experience. Your brother, an estate agent, has promised to find you the perfect location in the city centre, for a reasonable price, and in your mind you’ve already decided to quit your job and you’re already rehearsing your resignation speech to your Boss.
Sounds inspiring, right? However, at this euphoric moment, the best thing to do is stop, take a deep breath and consider everything with a level head. The prospect of a future startup can easily cloud an entrepreneur’s thoughts, making them incapable of rational thinking, evaluation of risks and opportunities.
We have put together 5 questions that any entrepreneur should ask themselves at the start of their journey. This is the basis that’ll allow you to think rationally and make realistic plans.
Why do I need a business?
Are you hoping to achieve personal and financial freedom? Or maybe both these things? Are you hoping to use your business as an additional source of income, or are you ready to gamble with everything to try to make it work?
In other words, how high are the stakes? Remember, the higher the risk, the higher the reward should be. You should start by formulating your personal motivations for starting a business.
Here are some popular reasons to start a business:
wanting to turn your hobby into a job;
significantly increasing your current income;
searching for an additional source of income.
Define your motivation and write down your main reasons for starting a business. Write them on paper or in a note-taking app on your smartphone. Make sure to save this list. Better yet - print it out and display it in a visible area of your house!
Does my proposition have any value?
What’s the value of your product? Why should clients buy what you’re selling instead of turning to competitors?
Ideally, you need to find out the demand for your product before you launch. The best and easiest way to do this is by seeing how many people are searching for your product or service on search engines. If you’re targeting the Russian speaking market, open Yandex.Wordstat, and if you’re targeting foreign clients, check out Google Keyword Planner. These services will show you how many times your product is searched each month. You can do this quick research without leaving your home, and it can give you a great insight into the value of your idea.
Here’s another life hack that’ll let you test your idea - create a survey in Google Forms and send it to your friends and acquaintances via Direct Messages. Ask them how often they purchase the product or service that you would like to sell, on which factors they base their decisions, and which companies they prefer. Keep the surveys anonymous, this way you’ll get closer to the truth. There are some more complicated methods, such as focus groups and analyses. Major corporations allocate a large chunk of their budget on studying consumer preferences, so you should never skip this stage.
Based on the insights you get, you might adjust the features of your product that’ll make it more competitive.
Who are my target audience?
Understanding your client is key for marketing experts and product managers working on a product. When you’re just starting out, you have to play both of these roles, which means that you need to pay particular attention to audience analysis. Try to make the description of your prospective client as detailed as possible. Ask questions like: ‘Where do they live?’ ‘What’s their job?’ ‘How do they spend their weekends?’ ‘Where do they shop?’
You need to understand which segment of the market you’re targeting and what size of production will enable you to maximise your profits.
What are the average margins in this market?
This question often stumps people, when in reality it’s very straightforward. For example, if you’re working in cement production, your margins might be around 5%. If you’re developing software, you’re dealing with potential margins of 50%.
Remember, margins are what you get after subtracting costs and expenses from total company revenue. You can calculate them using the following formula:
Revenue - Expenses - Costs = Profit
Net profit = Profit / Revenue х 100%
By knowing how the margins of your business are created, you‘ll become more adept at managing your finances and planning your budget.
Do you have enough startup capital?
Do you have enough money to purchase equipment, pay rental costs, pay out salaries and provide for your family during the early stages of your business? The duration of this period depends on its type, size of the company, cost of operations, etc.
Imagine that you need £50,000 to open a fitness centre. This sum includes 6 months of rent and the purchase of all the necessary equipment. You should also include payroll expenses, marketing and utility costs for the first 2 months. If you only have £50,000 of personal savings, you should consider alternative options of financing your project instead of risking your own financial security.
Here are some strategies to attract external funding:
- sale of assets (real estate, vehicles, jewelry, electronics, etc.);
- unsecured loans from people you know;
- secured bank loans;
- funding from investors.
Each strategy has its own pros and cons, for instance, some loans might have a high interest rates, and investors might demand a high stake in the company and regular detailed reporting. Select the best option by weighing up the pros and cons for each one.
Remember, the important thing is to act and lose your fear of failure. Talk to people, read industry reports, search for financing - whatever you do, don't stay in the same place. The longevity and profit margins of your company will largely depend on the quality of your preparation.