5 Steps You Need to Take Before Starting a Business

I've worked with a lot of businesses in my career so far in the accounting world, businesses can make incredible amounts of money which can lead to freedoms that would be otherwise unattainable. The other side of the business world is risk, these are the businesses that take families' life savings and return nothing. The majority of small businesses that start don't make it past a year without going under. Before embarking on the journey of starting your first business there are a few steps that I would recommend taking to ensure that you're giving it the best chances of success that it could possibly have.

Here are 5 steps you need to take before starting a business:

Get Stable First

Businesses can be a risky endeavor, in society we tend to glorify those business success stories without acknowledging the number of business failures that there really are. In addition to this, we love stories of people who were at rock bottom and stumbled upon a million-dollar idea. Contrary to what we idolize in society, I would never recommend starting a business when you're barely making ends meet. The first step is to get a stable income and begin to build something on the side in your own time. Working a job may be seen as a time waste when your goal is to be a business owner but I believe there's a missed opportunity there to work as an employee for a business you may like to start.

Working in the industry you want to start a business in is a fantastic way to get real experience in the mechanics of how that industry works. While you're also getting experience, having a job lets you build income and savings for when you eventually take the leap. I like to think of starting a business in the conventional "Start-up method". What I mean by that is, define your business plan and then define your "Runway". This is the period of time when you can use your savings to invest in the business and make ends meet before you actually start to generate revenue. Try getting as big of a runway as you can to ensure that if you don't generate revenue instantly you can still give it a good crack before you have to go back to work. Optionally, you can keep working during this startup phase, meaning you don't have to burn through any of your savings.

Find Your Nexus of Value

Your nexus of value is the intersection between something you're passionate about, something you're good at, and something you can charge for.

• What you're passionate about

Passion gets a lot of hype in the media, with "Find your true passion" type quotes hoping to inspire you into the dream business where you absolutely love what you do every day. I think there's some truth to this but I think it has some a negative side too.

On the one hand, if you have something you love that you can turn into a business, you could make a lot of money and have a good time doing it. The truth that I have seen, however, is that most people tend to fall out of love once their focus is on making money. Their passion is slowly lost as the business forces them to do the work that they used to choose to do. You should find something that you like or are interested in, it doesn't have to be your biggest passion in life. There are so many successful people who started their businesses in car washes, scaffolding, or cleaning services, these are not glamorous passion-filled businesses. Boring businesses have as much chance of success as glamorous businesses, you only need a spark of interest to begin.

• What you're good at

Being good at the business you're starting is a must, this is most relevant in the services business like legal or physio services. When operating a business, your goal is to maximize the value that your clients or customers are paying for and this requires a high degree of skill in the industry you're operating in. There's not too much explanation required here, just make sure you spend as much time as you can learning about the industry and the skills used in the business.

• Something you can charge for

Not all things you're good at or interested in can actually be charged to someone. look for something that can actually be sold as a service or product. If your business is something in an untested market, I would highly encourage you to do some viability testing. Try to test on some of your friends, family, and colleagues, or even post online to get an idea of if that's a service or product that they would actually pay for.

As an exercise, I would recommend getting a piece of paper and drawing 3 columns with one header for each of the above points. From here, list out answers to the above points in each column. There will be an intersection with one or more ideas that you are passionate about or interested in, are good at and you can charge for, this idea here is your nexus of value.

Assessing Business Viability

How do we know if a business idea is a good idea or a bad idea? This is a concept that is touched on in the book "The Millionaire Fastlane" by M.J.DeMarco which gives us a fantastic, quick model for assessing if a business has potential or not. The model that M.J.DeMarco discusses is the CENTS test, the CENTS test looks at the following elements of a potential business:

• C - Control

The first element is Control, not having complete control over your new business venture could significantly reduce your potential gains. Having 100% equity within the business means that you are entitled to all the gains but also increases the risk that you take on.

• E - Entry

The second element is Entry, how easy is it to get into this industry? How easy an industry is to get into often means that there is more competition. If we look at 2 example businesses we can see how this shapes out. Starting a YouTube channel or some other type of content-based business is super easy to start out but the inverse of that is that there are millions of other content-based businesses that you are competing with. On the flip side, starting some sort of financial services-based business is quite difficult and requires education, experience, and licensing which means you may only be competing with a small number of local competitors.

• N - Need

Need is the third element that revolves around whether your product or service is actually of need. Need is also correlated with Entry, this is super clear when we look at our 2 examples again. A YouTube channel may not be needed if it's in a category that's heavily saturated due to the low barrier to entry. On the flip side, our legal or financial services business may have a high need due to the higher barrier to entry. Where you have a higher need for the product or service you can charge more and to more people.

• T - Time

Time is an interesting fourth element, you want to start a business not another job. If we take the same two examples that we've been looking at, the YouTube channel creates a product that can be liked, viewed, and shared independently of the creator's time. The content creator can be asleep, studying, working, or playing sports, and the product they created is still working for them. Inversely, our financial services business charges out by the hour meaning that if you, the owner, want to increase revenue you have to charge more hours which means you have to work more. There are only so many hours in the day so be careful in a service-based model that you aren't just creating another job for yourself (if freedom of time is part of your ideal lifestyle).

• S - Scale

Finally, the fifth element is Scale, scale represents the ability of the business to scale its products to reach as many customers as possible. In our examples, the YouTuber simply has to keep producing content and the channel will scale and grow to thousands and ideally millions of people. For our financial services model, to scale the business would have to hire employees to sell out their 7 to 8 hours of work per day. Scaling a services-based model is much more difficult.

To assess whether a business could be viable, you should look at each of the CENTS principles to determine if it's right for your lifestyle and has the potential to achieve the vision that you have for the business.

Risk Assessment & Planning

We've already touched on the element of risk, starting any business venture requires taking on risk and it needs to be respected in your decision-making process. In our example of the YouTube channel, the business starter isn't really taking on any risk maybe the cost of a microphone if they bought one but for the most part, it's a low-risk venture. If we compare this to say starting a hotel or Airbnb-type business. Owning an Airbnb has become a more and more popular business model but requires you to take out a loan for several hundred thousand dollars and if you can't get residents you risk your own savings or defaulting on loan payments.

Risk must be respected and assessed against your lifestyle to determine if you are comfortable taking on the risk for your chosen business venture.

Begin

The beginning is always hard, it's easy to get stuck in analysis paralysis where you're trying to find the perfect idea or model. The reality is that most business owners have a number of failed business ventures behind them that they have learned from at each stage to get to where they are now. It's okay to make mistakes so long as you are learning from them. Get started, have a go, and learn from your mistakes.