How to Start a Business in Ten Steps

Being your own boss is an enticing concept. However, not everyone can be a successful business owner. People seek entrepreneurship for different reasons. And whatever reason might attract you, will be filled with trial errors and mistakes. The good news is that the author of this blog has blown through several businesses and is willing to share many of them with you. This post will help you decide if entrepreneurship is right for you. If so, we will breakdown how to start a business. 

Even if you have a great idea, opening a business is much harder than you might think. There is so much involved, and it is very demanding. When I started my first successful business, my days were long, and my nights were short. It felt like I laid in bed for one minute and was back up running around.

According to the Small Business Administration (SBA), there is over 28 million small business in the United States. While starting a business is simple and easy, maintaining it alive is the most challenging task. Only two-thirds of new companies survive to see a second year; only half of that survive over five years.

Over the years, I have met brilliant people with a strong entrepreneurial spirit. However, the idea of security and stability kept them away from starting a business. Thus, the first step in this long process is to determine if a business is for you.

What is a Small Business?

The SBA defines a small business as any company with fewer than 500 employees. Yes, it seems a little much. I have never reached that level of success. But more than three-quarters of US businesses pay taxes but have no employees. Some of them are full-time jobs, while others are for supplemental income. The US Census Bureau shows that organizations that don’t hire are growing faster than those that do. 

Small businesses cover all legal entities. Thus, it can be sole proprietorships, C corp, nonprofit, limited liability company, etc. All of those have some similarities and differences. Some can run a business alone, while others need employees. Some need expensive equipment, others don’t. And that is what makes running a business exciting.

Small Business Financial Basics

Business can be very complicated, but at the same time, it is simple. Once you understand the basic concept — sales, expenses, cost of goods, profit, net profit, etc. — it will be a lot easier to move forward.

Accounts Payables

It is an account within the general ledger that represents an obligation to pay a short-term debt to a creditor or a supplier. Common usage for the term is “AP,” which refers to the department that is responsible for making the payment owed by the company.

Accounts payables is an essential number for the company’s balance sheet. You, as the owner, must monitor it closely. It is a critical factor for your cash flow. If the AP increases over a prior period time, that means your company is accruing more debt than paying it. Debt and cash flow should be monitored closely, as they are the primary reason businesses fail.

Accounts Receivables

Accounts receivables, or AR, is the money due to a company for goods or services delivered not paid yet. It is listed on the balance sheet as current assets.

Much like accounts payables, you must watch the receivables very close. Oftentimes, clients will find ways to not pay the full balance. However, depending on the type of business you choose to have, receivables might not be an issue. For instance, if you own a coffeeshop where all your customers will pay you immediately, you will have no receivables. Conversely, if you own a transportation company where you invoice all your clients, then you have to ensure they all will pay you.

Assets

Assets are items owned by the company, and they are either tangible goods or intangible goods. Tangible is real estate, computers, office furniture, vehicles, etc. Intangible goods are patents, trademarks, copyrights, etc. Tangible assets are depreciated, while intangible is amortized. When the business amortizes and depreciate, it helps tie an asset’s cost to the revenue it generates.

Liabilities

I will be honest, I hate this word. It makes the hair of my neck stand up. Liability is the one thing you do not want to have in your business. The more you have the worse it is for you and your organization.

Anyway, liability is something that your company owes, usually a sum of money. In general, a liability is an obligation from one party to another that is not yet fulfilled.

Let’s take, for example, some business dealings I did in the past. I had a small recycling company, more like a brokerage firm. I never spent too much time in it, but I was able to make “married sales.” I would pick-up the materials (plastic, rubber, paper, or whatever I could sell). My suppliers did not demand immediate payment, they invoiced me. For the supplier that invoice is an asset. For me, that same invoice is a liability.

Net Worth

Net worth is the value of the assets a corporation owns, minus the liabilities. It is an important metric to gauge the company’s health. It is also known as a net worth statement.

Lenders will check the net worth of a business to help decide if the company has the potential to repay the loan. A profitable business will have a consistent rising net worth.

Improving Your Survival Odds

As I mentioned before, most businesses fail within the first five years of existence. With that in mind, it is crucial to understand the financial risks involved. Regardless of how good your idea might be, or how many people are interested in investing in that idea, you should consider the risk you are willing to take.

Family

Every small business is a family business. Even if none of them are involved in the day-to-day operations, your decisions directly affect them. For instance, if you have to work late one day and miss your child’s baseball game. Or if this month things are tight, and don’t have a salary. All of these factors affect your personal life.

The financial and emotional stress of running a business can get to you sooner or later. If you neglect friends and family, you can end-up with divorce papers and no friends. If your success depends on ignoring your personal life, it can be an unfulfilling reward.

Thus, if you have a wife and children, you must consider them when making such a big decision to start a business.

Personal Finance

Moreover, before starting a business, you must understand the financial risks involved.

When you start a business, it might be months before you can withdraw money from it. If you are planning on leaving your day time job, you have to take into consideration your personal finances.

Of course, if you are wealthy and have several streams of income coming in, you will be an exception. Conversely, if you do not have the necessary capital to take care of your finances, you might give up on your venture before it takes off. Keep in mind that regardless of how much money you have, starting a business is always a risk.

Building an Emergency Fund

Unless you are well-structure, your business will be either feast or famine. Whether people admit it or not, all businesses are seasonal. There are always busier and slower seasons. And you must be prepared for these ups and downs.

Saving money is the name of the game. You should have enough to cover all your basic expenses for several months. If you fail, which the chances are extremely high, you still have a home to go to and food to eat.

Basically, an emergency fund is the ability to save for a rainy day. You should have at least three months of living expenses ready to use when needed. However, the bigger your savings, the more likely you are to survive.

Step 1 – Find your Niche

Now that you have an idea of the basics, it is time to identify and refine the concept for your business. If you are reading this post, chances are, you already have something in mind. However, building a sustainable business platform is very challenging, and it will require flexibility. 

When you are committed to starting your own business, there are many factors you should consider. First and foremost is to determine how much you can afford. Or if you are willing to take a loan, or bring investors, you must consider the pressure and the risks involved in your decision.

Type of Business

The two primary type of business is either selling a service or a product. The primary factor that will determine how much money you need to start is to determine what you are selling.

Product-Based: This business requires an up-front investment. Depending on what you are selling, you might even have to invest in equipment. For instance, if you are planning on retailing custom t-shirts, besides purchasing the blank t-shirt, you must consider buying the printer, racks, and whatever other equipment is necessary to run a storefront.

Service-Based: It is the fastest growing industry in the US. This type of business tends to be less up-front investment, however, it requires unique skill sets. Depending on your services, you can work from home and enjoy low occupancy expenses and tax advantages.

Step 2 – Market Research

In today’s highly competitive and fast-moving business environment, it is crucial to anticipate and satisfy the needs of your customers. The purpose of market research is to provide you with answers to such questions and help you understand your customer better.

An extensive analysis will give you detailed intelligence on your competitors. That is vital for your business in many different ways. For instance, once I found out that my competitors were not showing up for service calls, I was able to increase my price for simply showing up.

Furthermore, another essential factor is understanding what in marketing is referred to as the four P’s — product, price, promotion, and place.

Product or Service

This includes all the aspects of the product or service you are offering. The typical research will answer the following questions:

• Customer need for this product or service
• Features and attributes — size, shape, color, taste, smell, etc.
• Brand and association
• Usage — how is it used
• Packaging
• Competitive positioning
• Market share

Price

The pricing strategy of a product or service will vary according to how people perceive your brand over the competitor’s. In most cases, you will find price limits, unless you can offer a benefit that the customer considers as high value — showing up to do the work might be one. Your research should address the following:

• the value of the product or service to the buyer
• find price points in the market you operate
• how price sensitive is your market and how does it respond to price changes
• should you offer discounts
• price/value perception versus competitors

Promotion

In this section, you must understand how to promote your product or service. You have to think as many alternatives as possible, such as sponsorship, live events, billboards, door to door sales, means of advertising, etc. You must find ways to deliver the right message in the right environment.

• how your target market consumes advertising media
• the best time to promote – consider seasonality
• how competitors do their promotion
• credibility and relevance of the communication
• potential sponsorship opportunities

Place

This refers to your distribution channels or where you are selling your product or service. It could be online, storefront, or simply a home office. You should focus in the following areas:

• where consumers expect to find the product or service
• what do your competitors do? What can you learn from them, and how can you stand out
• how can your clients access customer service, and how are problems being solved
• how are you selling your product?

Step 3 – Business Plan

If you think that a business plan is a document generated to give to a banker or investors and later forgotten, think again. A well-crafted business plan is a roadmap for the success of your company. It outlines what is supposed to happen, when it is supposed to happen, how much it will cost, and how much money it should generate. Then you will track your performance against it.

There is no right or wrong way to create this plan. However, conducting deep research will increase your odds of survival. Additionally, if you are pitching your plan to investors or banks, they will require extensive research with several details.

When creating your business plan, here are three main factors to consider:

Define Your strategy

If you reached this point in the process, more than likely you have a business model in mind. The core of your company should be clear. Meaning, the primary area of activity that your firm’s operations will focus on. For instance, you should have decided whether you are offering a product or service.

Much like a person, over time, a business will develop a character. However, many new companies, for one reason or another, never develop such maturity. In this first stage of your start-up, you have to be watchful to keep true to your firm’s character, which is outlined by its core. When trying to build a customer base, diverging from your original plan is very tempting, especially when there is a financial need.

As a new business owner, it is natural to pursue every opportunity — after all, you got in the game to make money. For instance, the core of my service business is to provide services to apartment communities. Once during a slow season, to keep the painters busy, we took a job to paint a house. My thought behind the idea was that painting a house couldn’t be much different than painting an empty apartment, right? But I was wrong.

The quality requirements for a house are much higher than in an apartment. The owner’s demand was something that my team was not used to. Even though they were experienced painters, the results were disastrous. Thus, a good strategy will correctly frame new opportunities. If you follow the guidelines, you will make proper decisions without emotions.

While it is important to stay true to what you are trying to build, you should revise your strategy often to respond to real world conditions.

Plan Your Strategy

When building your business plan, the tactics should be as simple as possible. At first, when working on your business plan, do not get caught up with descriptions, explanations, or background information. You should wait on that until you have to explain it to outsiders.

Meanwhile, your strategy must define two primary denominators. First and foremost, every aspect of your product or service you are offering. Second, your marketing strategy, as follows.

Product or Service

If you are selling a product, you must take into consideration pricing, packaging, sourcing, etc. Likewise, if you are providing a service, you should outline what, and the specifications of each service you provide.

When working on pricing, you always consider the current competition. Research the price of similar products or services, then price yours accordingly. Don’t use a pre-determined profit margin formula, that is a recipe for disaster. Always conduct marketing analysis and competitive research before determining the price.

Marketing

Identify your potential customers. If your company is not business-to-business (B2B), you must consider gender, age, income, geographic location, etc. For instance, if you are a swimming pool supplier, your target market will be middle-aged homeowners, with higher income.

Consider ways to help your potential consumer find you. You have to present your business in a way that matches your strategy and their needs alike. Ideally, you should create a profile of how your target market behaves as customers. Moreover, that information is essential when you are deciding what social media platforms you should promote your company.

Step 4 – Finances

Starting a business requires money. You have to determine where you will get your start funds. You have to understand that your business will require a one-time start-up investment, but you will also find that you will need capital for revolving costs. Here is what each requirement mean:

• One time start-up costs: Those include one-time expenses such as legal fees, license and permits, furniture and fixtures, inventory, equipment, tools, and anything it is necessary for you to open your doors. Undoubtedly, later you will end up purchasing more tools or furniture; however, the initial cost is for what you need to get going.
• Working capital: It is the cash you need to stay in business. That includes everyday expenses such as utilities, raw materials, hiring employees, accounts receivables, and anything you need to maintain your doors open.
• Reserve: It is crucial to have some reserve to cover any forecasting differences you might have.

Once you identify how much money you will need to get you started, it is time to decide how you are going to fund the business.

If your start-up is like most small businesses, you won’t probably utilize outside capital. However, there are several ways to fund your small venture:

• Self-funding, aka Bootstrapping
• Finding investors who are willing to give you a shot
• Getting a loan from a bank
• Finding a grant through government program
• Crowdfunding

Keep in mind that when you seek capital from investors, you will have to do a lot of paperwork, explain your thoughts and strategies, and provide accountability to them. But, while there are many ways to finance your way into business, over eighty-two percent of small businesses are bootstrapped.

Step 5 – Location and Business Structure

This is a make-it or break-it step. Finding the right place for your business is one of the most crucial keys to the longevity of the company. There are many factors that you must consider when selecting a location.

While in the early stages your finances might be tight, when comes to location you might have to accept a higher financial risk. You should start at the best location for it. It needs to be strategically placed where your clients would find you without a problem.

When defining your location, consider your host city. If you are located in New York City, your considerations would be a lot different if you’re in Atlanta, Georgia. Look at walkability, age, gender, etc. — those will help you determine if you can reach your demographics from your location.

The bottom line is that you should spend a great deal of time in research before selecting your brick-and-mortar location. Besides considering the competition, you should keep in mind local laws and state laws, as well as zoning ordinances. The ultimate goal is to have your business strategically placed so that your clients and prospects find it easily.

In regards to the business structure. Before finalizing your decision, I highly suggest speaking with an accountant. Explain your plans and the nature of the company. Discuss all your options with a CPA, but don’t have them file the paperwork for you. Instead, use companies such as IncFile.com. They can do everything your accountant will do for a fraction of the price.

Step 6 – Register Your Business

Hopefully, by now you have a name for your business, and the best business structure to fit your needs. Now it is time to register. You have to investigate if the type of company you are working with needs to register with specific government entities — federal or state.

To investigate if a government body regulates your line of business, I suggest the following:

• Agencies that oversee corporations and small businesses: Start by your state government. Look for agencies such as Economic Development, Department of Commerce, Office of Small Business. Don’t be surprised if the person who answers the phone might not know the answers, but be persistent until you can get some information.
• The local Chamber of Commerce: Most cities have a Chamber of Commerce — some more active than others. But, for the most part, the staff will provide you with excellent information for prospective and current business owners.
• Trade publications and trade associations: Most lines of business have trade publications and associations. Folks involved in those will have a wealth of information that will be really useful for you. Undoubtedly, local people will have the most relevant information for you. The downside of tapping into locals is that they might see you as a competitor, and would be unwilling to give information.

Licenses and Permits

Most licenses and permits are provided by the state and city level. You can contact your city hall and find out the requirements to apply for a license. The first year is usually easy. They will require an initial fee and an inspection. For the following years, you might be required to submit tax paper for renewal (the procedure varies depending on location).

Conversely, some licenses, such as alcohol and tobacco manufacturers, drug companies, firearm dealers, meat packing, and transportation companies require a federal license to operate. You will need to contact the governing body for your line of business.

Step 7 – Choose an Accounting System

Selecting an accounting system is one of the most crucial aspects when starting a business. During the start-up stages, accounting demands your undivided attention. A very common mistake by new business owners is to not learn accounting basics, how it works, and how to apply to their business.

However, if you are not familiar with bookkeeping, and accounting, it is highly suggested that you outsource the task.

Here are the most common bookkeeping systems:

Manual Bookkeeping

This is the oldest form of maintaining your books. All you have to do is visit a local office supply store and purchase a ledger. The upside of this option is that you will not need to purchase a computer, or any software. The only things you will need is the book and a pencil.

Another unspoken benefit of this system is that will have to learn double entry from the ground-up — an essential skill when running a business.

On the other hand, manual bookkeeping has a lot of downsides, especially for businesses with lots of activities. The information collected manually will not provide you with the in-depth financial data you might need to make important decisions. Additionally, it is more prone to human error than computer systems.

Computer-Based Systems

When it comes to computer-based accounting systems, there are many options in the market today. Along with that, most of these systems are somewhat tailored for the business line. For instance, you can find Quicken — the most common accounting software — for contractors, retailers, restaurants, etc. The system must fit your specific niche.

When choosing a system, you must consider the direction you are taking your company. If in your plan you aim to have employees, your system should support payroll. Likewise, if you are going to have a store front, you must expand into a point-of-sales system.

For service businesses with little to no cash exchange, and most of the work is done by field workers, you might want to consider something on the cloud and portable. For such instances, I have used FreshBooks, it is very affordable and gets the job done.

Step 8 – Federal and State Tax IDs

Applying for an Employer Identification Number (EIN) is free. CPAs and other services charges to apply for one, but you can do it, and it is 100% free. Apply for an EIN with the IRS assistance tool, simply follow the link and answer a couple of questions. If you are a sole proprietor, you can only have one EIN. But if you own three different partnerships, you have to apply for each of them.

You will need an EIN to open a business bank account. However, a state tax ID is only necessary if you have employees on your payroll.

Before applying for a state tax ID, you can call the governing body and make sure you really need it. For the most part they are helpful in many ways.

Step 9 – Open a Bank Account

Regardless of the size of your operation, you should always keep a separate bank account from your personal. It is much easier to track, identify mistakes, and figuring out your day-to-day operations.

Just like everything else, you must do some research into banking. I personally like local credit union banks, as they have a tendency to be more lenient when you need a loan. However, it is important for you to check around and see which bank best fits your needs. Here are very important questions to ask before signing the paper work:

• Is there a minimum balance requirement?
• What fees are there? Maintenance fees, overdraft, cost of checks, cash deposit fee, etc.
• Is there a minimum transaction amount? Maximum transfers?
• Is online banking available? Does it cost?
• Can I make deposits from my phone?
• Is the account interest bearing? How do you calculate?

Once you decide the bank you are going with, be sure to ask what kind of documents you will need to open the account. While bank requirements might vary, here is what you can expect:

• EIN
• Business’s formation documents, in accordance to the structure you selected
• Ownership agreements, if applicable
• Business licenses and permits, if applicable.

The most important factor to is find a bank that best fits your needs.

Step 10 – Promote Your Business

The final step of the first stage of your journey is to promote your business. You should start promoting your company a few weeks before the launch date. Research marketing ideas and explore each of them, the goal is to get people to find interest in it; tell a story, be creative. The more people you reach, the more likely you are to succeed.

In conclusion, starting a business is not for everyone. Tending to a business is similar to taking care of a baby. It requires a lot of your attention, and it must be handled with care. Follow the steps of this post to help you get started, but keep in mind that this is only the beginning. Starting and running a business is a treacherous journey with many traps along the way.