What Business Should I Start? How to Figure It Out
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What do you need, know and like?
Most of the people who visit the Illinois Small Business Development Center (SBDC) at the Chicagoland Chamber of Commerce know the industry they want to go into and the type of work they want to do. There are occasions, however, when people only know that they want to be their own boss and haven’t a clue about what they actually want to do.
“In that case, we’ll do a consultation and talk about their strengths and weaknesses, what their skill sets are, their experience, education and background to help them understand the different opportunities,” said Stacy Pitts Caldwell, center director of the Illinois Small Business Development Center (SBDC) at the Chicagoland Chamber of Commerce.
It’s at this time that Pitts Caldwell or another adviser will remind would-be entrepreneurs that entrepreneurship isn’t limited to creating a business from scratch and includes purchasing a franchise like a McDonald’s restaurant or partnering with insurance agencies like Allstate to open an office.
Once the client decides on the business venture they want to pursue, they work with a business adviser to evaluate their skills and the marketplace to see if it’s conducive to their goals. Clients at the Chicagoland Chamber SBDC complete a feasibility or action item checklist that asks a series of questions to determine their knowledge of financial statements, the business they’re pursuing and their knowledge of that industry.
“It talks about the differences between a hobby, a talent and a passion and turning that into a business. It’s really designed to see if they have the understanding of what it would take to do that [as a business],” she said.
Knowing the difference between those things is very important to a business’s vitality. Pitts Caldwell, who has been working in the small business space for a while, said she’s noticed a pattern when it comes to why businesses fail.
“A lot of times when someone is really good at something, it’s their talent and their passion. If they don’t have the right business skills to start the business, they usually burn out because they don’t understand the business side,” she said.
Beyond passion and talent, small business owners need to know how to read financial statements as well as grow and access capital in order to proceed successfully. Her office helps clients identify how they can make money from their idea or passion so they can sustain the business when they start it.
Is your business viable?
Steve Jobs started Apple in his parents’ garage, while Amazon CEO Jeff Bezos reportedly started the world’s largest retailer as an online bookstore that operated from his garage. I’m not promising that you will become the world’s wealthiest person, but there’s a reason why many businesses begin as home-based: flexibility and very little risk.
If money is an issue, the U.S. Small Business Administration advises launching a low-cost startup business. If you’re internet-savvy, consider starting a social media management services firm where you manage a company’s profiles and activities on platforms like Instagram, Facebook and Twitter. Other internet-based startups include an online retail business where you sell goods on sites such as eBay, Amazon and Etsy or offering your web design business if you’re a code and web developer. If you have $100, you could start a virtual assistant business where that would include social media management, data entry and setting appointments.
There isn’t one particular thing that an aspiring business owner can do to determine whether a business idea is viable but there are some structured processes they could follow that could help them reach that determination. Business viability is important because it determines whether your business will be able to survive beyond the first few years. Given that half of small businesses fail by the fifth year, it’s important to make sure that your business is one that services the needs or wants of your target audience. For example, creating a social media management firm can be advantageous because many companies need a strong and active online presence for sales and growth, yet some business owners aren’t internet-savvy or simply don’t have time to oversee those accounts along with their other duties.
Starting a ride-sharing business à la Uber or Lyft may not make much sense in areas that are saturated with those companies’ on-demand drivers. But there could be a need for it in places where their drivers have little or no presence. It’s imperative that you research the competition in your desired industry before investing money, time and other resources.
This is why Pitts Caldwell stressed the importance of these aspiring business owners understanding how to go through the business planning process. Depending on their skillset and background, some people may be better at writing a fully comprehensible business plan and starting that way because they need the structure. Others may prefer working directly with a business adviser once a month and creating goals along the way with a business plan outline to help them stay focused.
“So if I had to narrow down three things, it would be the business plan, the way that they approach the business plan and the revenue stream,” Pitts Caldwell said.
Understanding the market you’re going into is also vital.
Pitts Caldwell often points her clients to ReferenceUSA.com, a free tool that provides business and residential data in the U.S. Her office uses this when staff members have conversations with clients about their desired industry and targeted demographics and whether they are realistic.
Figuring out the costs
Whether you’re an established small business owner or an aspiring one, you’ve probably heard the saying “It takes money to make money.” But in many cases, just having startup money won’t cut it. Business owners also need to know how to keep the lights on, inventory stocked and how to get access to capital when needed.
You also need to calculate any additional training, certification and other related costs your new venture will require. Free or low-cost training may be available depending on your industry. If the fees are more than you expected, see if there’s a payment plan available or squirrel money away to cover the fees. An adviser at the SBDC can help you create a budget to follow.
If your business is centered on a unique product or invention you’ve created then you should apply for a patent with the U.S. Patent and Trademark Office to protect it. Patents aren’t free — in fact, they can be quite expensive depending on the invention, so if you don’t already have the funds, you will have to save for it. Covering costs for fees and operations is vital to your business’s success.
The Chicagoland Chamber of Commerce conducts an annual small business survey with Loyola University Quinlan School of Business that shows that many small businesses fail because of the owner’s poor understanding of the financial aspects of their business’s operations, Pitts Caldwell said. It’s important for business owners to know the business inside and out and how to avoid too much debt.
“If they’re not educated in that part, they will typically start to scale down and eventually close down or fail,” she said. “And that’s just because people will typically go into and open businesses without understanding that at all.”
So how do you avoid this type of fate?
One thing is to create a first-year cost budget that’s an estimate of everything you would need, such as your operations and overhead. For example, if someone is opening a brick-and-mortar business, they should contract leasing agents to determine rent rates and put together a real plan based on that information. Creating this budget will help you understand how much revenue you need break even in the first three years.
“We’re really just looking at a first-year operations budget and then that helps to determine some financial projections down the road,” Pitts Caldwell said.
This is why it’s important for you to determine whether there’s a need for your business and project any revenue in the beginning. Business owners should also know whether they can dedicate the time required to start and run their business. Are you really equipped for this undertaking?
Setting smart goals for themselves definitely can help business owners along the way. Pitts Caldwell said making sure that you have planned and organized time for administrative and growth tasks is one “big goal” you should set starting out.
“I say that because those are the two things that eventually you need to separate but still get accomplished,” she said, adding that the goal should be set pretty quickly so that you can make sure to continue to focus on both the talent side of the business and the administration side of the business.
Having a working business plan that you that you revisit often — and will help you to stay on track — along with setting your financial goals that will help you understand what it’s going to take to make the revenue will also help you know what position the business will be within the next five years.
If your credit rating isn’t the best, it’s important that you work on raising your FICO score so it won’t impede you from accessing needed capital down the road.
“When it comes to growth, structure, business planning and financial planning, clients sometimes can’t access capital because of credit,” Pitts Caldwell said.
Even if your credit score is solid, you may still encounter hurdles borrowing money in the beginning. There’s limited funding available for startups because most lenders want businesses to be established for at least two years and have a proven track record for making money so they can repay the loan. There are funding sources available for startups that have been around for six months but those generally have short loan terms (six to 18 months) and higher interest rates.
Have you already started a business and looking for funding? Learn more about small business loan options here.
The importance of a business plan
Getting and putting together an actual business plan can be challenging for many small business owners. But it can be quite helpful and necessary if you ever need capital.
A business plan is a comprehensive roadmap that helps you stay the course when it comes to meeting goals and hitting all of the targets necessary for your business to thrive. But is it necessary for you to have one the day you start your business? Pitts Caldwell doesn’t think so.
“The statistic, I think, it used to be somewhere between 60 percent of entrepreneurs who were in a successful business did not write a plan until year two or three,” she said. Instead, as she previously stated, the business plan should be treated as a working document that you’ll “always want to update and change and make sure that you’re documenting what’s happening so that you can then be successful in the future.”
Most entrepreneurs write their business plan when they’re ready to grow and want to access capital because they often can’t seek capital from many financial institutions without one.
There are a variety of resources such as software, templates and other samples available to help you create a solid business plan. For clients who are internet-savvy, the Chicagoland Chamber of Commerce SBDC will provide them with access to LivePlan, a business plan software that allows you write, revisit and create projections for your plan. LivePlan also has a pitch function that clients find helpful.
Not a fan of creating your business plan online and want to do it the old-fashioned way? No problem. Pitts Caldwell said she has clients who prefer to take a template, know the parts they have to cover and start writing. Either way will work; it just depends on the person.
“Some people are more visual and like the online way because they can see this come to life. Those who need the roadmap to get started will have a more structured way of doing it,” Pitts Caldwell said.
Before you write your business plan, you will want to make sure you research everything you need to know about your business. Regardless of the type of business you start, you need to understand the target market, the demographic, the disposable income and other things associated with operating your business. You can start by using Google to research information. The SBA also sponsors free workshops, training programs and one-on-one business advising for as long as you need.
“A lot of times people think it’s a little more complicated than what it really is,” Pitts Caldwell said.