Ten Things to Think About Before You Start a New Business

The tux fits perfectly. The boutonniere is jauntily pinned to your lapel. All of your friends and family are patiently watching and waiting for you… and then you see her, waiting at the other end of the aisle – it’s your new business.

Much like expectations of wedded bliss upon getting married, high hopes and expectations abound when you are starting a business. But, like so many others in life, starting your very own business is a lifelong commitment. Before making the plunge, here are 10 questions to consider:

1. Is it a viable business? This is the big one… that’s why I put it first. So many people rush into a business just because it sounds like a good idea or it’s something they really want to do. The question to ask yourself is “Do I really want to risk hundreds of thousands of dollars on a hunch or a feeling?” The answer will come from your due diligence.

• The idea

First, is it a workable business? For example, you can’t mine for diamonds on Pluto. No one even knows if there are diamonds there, and unless you have a spaceship handy, you can’t get there. Similarly, you can’t grow oranges in Alaska. As much as you may want to, they just won’t grow there. Go to Florida or California instead.

Your business has to be based in reality. It has to be doable, and it has to have a large enough market willing to pay the price for your product or service.

• The market

For example, take a store filled with fancy dog collars. Yes, dogs wear collars. But will you really find 10,000 people a year willing to spend $100 for a bling-ed out dog collar in a town of 1,000 people? Doesn’t sound like a good bet to me!

As I stated above, you need a target market that is large enough to sustain you-plus the ability to convert enough of that market into customers on a continual basis.

• Profit Potential

OK, so if the idea is workable and there’s a market, that’s great. Next you have to see if it will be profitable. It’s not enough to open the doors. The only thing that’s going to keep those doors open is customers-lots of them.

This is going to require a little more work to figure out. You need to estimate as accurately as possible every single expense involved in this business-from the rent to the inventory to the marketing to the payroll, even the licensing fees.

Usually, you’ll have start-up and operating costs. As in, it takes $1.5 million to open the doors of a typical McDonald’s. What it takes to run it every month-that’s additional. And so you’ll have to make enough money every month to not only cover those monthly expenses but also to recoup your investment plus turn a profit. It can be a tall order! So that leads me to the other side of the equation-projected sales or revenue (the money you will be bringing in). Since there are so many hands in your pocket as a business owner (the employees, the taxman, the utility companies, your inventory suppliers… you name it), you get to keep only a fraction of every dollar you make. That’s why it’s critical to find out what that profit margin will be. Thirty percent? Twenty percent? Ten? The answer is: It depends on the business.

Let’s take a look at the latest information available as of this writing. Of course, it only includes publicly traded companies, as private companies tend to keep their information, well, private!

First, if you take the information all together, the median profit margin across all industries in the United States is currently about 4.6%. The average is a little lower, at 4.4%. That’s right, less than 5 %! Meaning that the average business makes about 4 cents profit out of every dollar in sales. That’s not so great, is it? You’d have to do a huge volume of sales-or have an extremely high-priced product (4% of $1 million isn’t too bad) to get by on that profit margin.

Now, obviously, some businesses are more profitable than others. Near the top of the list are Internet Information Providers with an average profit margin of 22.7%. Hmmm… very interesting! Could it be because of the low overhead required for that sort of business? Most likely-with lower expenses, you get to keep more of the money that you make.




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