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What to Know About Starting a Small Business – Part One

January 26, 2018

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Are you thinking of starting a small business? Then you’ve come to the right place!

At Smythe Insolvency, we believe that “entrepreneurial spirit” is a part of Canadian culture and that small businesses contribute a significant percentage of our national economic productivity. While every entrepreneur would like to believe that creating their dream company will be fun, exciting and relatively easy, this is often not the reality. Creating a successful small business is a journey that requires a great deal of time, hard work and stress. Statistically speaking, a large percentage of start-up businesses inevitably fail in the first two years.

To help ensure your future success and get you thinking about some of the key considerations required before starting a new business, we’ve developed a three-part series on common small business issues. This blog, along with our next two, will cover the following topics:

  • Considerations for starting a small business;
  • Financing options/sources and current challenges; and
  • Financial warning signs and options for troubled businesses.

If you’re in the midst of starting your own business, it is crucial to go into it with your eyes wide open, understanding the potential risks and pitfalls that await, while having a sound plan to help guide you. Below, you will find a list of eight key considerations to assist you in trying to start and develop your small business. Following these points will not guarantee that your business will survive, however it will give you a good chance to get through the most difficult early stage of business creation and hopefully set a solid foundation for future success.

Start with a business plan

Like a good road map (or perhaps now, a Google Map), a well-constructed business plan will help guide your business in the right direction and help you reach your intended destination. Points for consideration: create a budget so that you can project times of cash flow shortages and monitor future performance against the budget; consider your target market and sales strategy and perform a strengths, weaknesses, opportunities and threats (SWOT) analysis to identify opportunities and risks. You would be surprised at the number of business owners we have seen who never created a business plan because they thought their idea or product was so strong that it would “all just work out”. Unfortunately, this is often not the case, so rather than paying for it in the long run, it’s best to set up a plan early on to get you started on sound footing.

Be clear about your cash flow projection and working capital

Further to the above point, a cash flow projection is generally an important part of the planning process. How much money is it going to take to get your business off the ground and to a point where it can sustain itself through ongoing sales? What is your working capital requirement? Do you need any financing for short or long-term expenses? These are all key considerations to understand when starting your small business. We know from experience that it is better to identify potential cash flow shortages in advance than try to deal with them on the fly down the road.

Structure

Determine the appropriate structure for your small business. Consider the risks and rewards (including legal points) of incorporating your company, forming a partnership or operating as a sole proprietor. Take advice where necessary (see point five below).

Understand the risks

There are several risks facing small business owners and often they are not considered in the planning phase. Some key risks to think about are competition, product litigation, financing, employment issues, insurance, government obligations and personal guarantees. Business owners need to understand what they are getting into before signing documents and taking on risk.

Obtain a good support system

Surround yourself with strong professionals including a banker, an accountant and a lawyer. These professionals will advise and guide you through some of the pitfalls discussed elsewhere in this list. Be sure to budget for some of these services in your cash flow. There is a fine line between trying not to “overspend” on professionals, especially in the early days of a small business, and not obtaining sufficient and appropriate advice on key issues. There is an old saying: “Penny wise, pound foolish”; we would recommend using at least some professional assistance.

Track all financial information

It is important to know where you stand at all times, especially in the early days of tight cash flow and low sales/revenue. If you are storing your financial records in a shoe box under your desk and not tracking actual-to-budget performance on a somewhat-frequent basis, you are bound to get into financial trouble at some stage.

Control your cash

Another old saying to think about is “cash is king.” Always look for ways to improve cash flow, whether it be increasing “cash in” (i.e. offering incentives for customers to pay sooner, sell surplus equipment or inventory) and/or reducing or delaying “cash out” (reduce operating expenses and debt servicing costs, delay payment of non-essential suppliers, try to get favourable payment terms from all suppliers).

Communicate and seek help

It is always a good idea to provide open and honest dialogue with your professional advisors, customers, employees, suppliers and other stakeholders. Do not be afraid to seek help from your advisors, or even other experienced small business owners, when needed. A lot of small business owners feel they have to “go at it alone” but there are always resources available to draw upon.

If you are thinking about starting your own small business, or if you are looking for financial solutions or counselling for a current small business, contact one of our experienced Licensed Insolvency Trustees today.

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