So, you’ve worked through your great idea for a business startup. You’ve thought about it long and hard, you’ve had in-depth discussions with your significant others and have their support, you think you’ve put together enough cash to float a loan, and you’ve written your business plan.
But before you move on that plan and open your doors, go back and take one more look at a few crucial things you’ve probably already considered in your business plan. These are the sand traps that lurk along the course on the way to a successful business startup.
The most basic trap is undercapitalization, which can be a huge problem. There has to be enough money to carry you through the rough spots that are bound to occur as you find your footing as a business, and you can rest assured that there will be rough spots in your startup.
How much capital you will need varies enormously depending on the nature of your business and what you are selling. Services and inventory intensive ventures have very different capital demands. But whatever situation you are in, you have to restock inventory, pay expenses and have cash available for your living expenses.
Having sales that are paid via invoices that are sent out to customers means waiting for the customer to take action to pay you: sand trap No. 2. You can exercise some control by setting your payment terms and communicating those to the customer. Your invoices can be due on demand, within 30 days, or maybe you can give discounts for prompt payment.
However you do it, you need to get the customer to take action, and you need to be proactive in keeping on top of the customers who are slow in paying. The worst thing you can do is to let your receivables get old as it is much harder to collect on old bills than on newer ones. You can chalk that up to human nature: “Nobody is bothering me about this bill, so I guess I’ll pay that next week or next month.”
Sales expectations can trip you up, and these are based on the assumptions you make. So you say, “I am going to sell X number of items per month, and sales volume will start out slow, but increase over time at such and such rate.” Is your target realistic given the size of your marketplace and the nature of your product? Look again at those expectations and assumptions. Maybe think of this as best case, worst case and middle of the road scenarios and base your calculations accordingly, but make sure that your expectations bear some semblance to the real world.
While we’re here in that real world, what about your prices? Are you pricing your goods or services correctly; how do they match up with what your competitors are charging? In addition to competitive pressures, pricing depends on your wholesale costs. You are also sending a message with your pricing and it is part of your brand. Higher prices can connote quality, a sort of you-get-what-you-pay-for approach.
Conversely, the message of your brand might be that you offer reasonable (read that as less than others) prices and you are positioning yourself as the fair alternative. Think about this. It’s difficult to adjust prices after the fact if you determine that your pricing is putting you at a disadvantage.
The idea that if you build it, they will come, is a sure-fire recipe for falling into a sand trap you may not be able to get out of. Your potential customers need to know you are there, which brings you to marketing. You may be the best at doing what it is you do, but unless you have a way to tell people about that and to convince them of it, it really doesn’t matter much.
You have to come up with a marketing plan, and that can include any number of channels of communication. In Hawaii, word of mouth is huge, but you need to figure out how to influence that. It can be as simple as networking, but there is also social media, or print, or radio, or brochures at selected spots, or whatever else you can think of to get the word out that you have something to offer that holds superior value. That’s why your target customer should buy from you rather than from the other guy.
Enough doom and gloom! You’ve got a great idea and a great plan. You’ve done your homework and have spent countless hours on “what if?” Go for it, and remember, there are professional resources and agencies (like SBDC) available to help you navigate the course and stay out of the traps. If you need help, all you have to do is ask.
Dennis Boyd is the director of the West Hawaii Small Business Development Center. Hawaii SBDC Network is funded in part through the U.S. Small Business Administration and the University of Hawaii at Hilo.