Hi again and thanks for joining me for article 2 in my series on how to start a business. Last time we discussed briefly two things to avoid when thinking of starting a business. One being the following of oddly titled inspiration books and the other being to avoid jumping on things that promise to make you into an entrepreneur.
This is really my first proper article on how to start a business. Today we will cover your idea, and the importance of researching before you begin a business.
Lots of people think that your idea must be the most impressive thing since sliced bread. Let’s take a look at that phrase a second “best thing since sliced bread” its not the knife we discuss with its Swedish or German steel that is razor sharp and required years of research by us humans to get our metal melding skills to the point where such an impressive kitchen blade could be made, no, it’s sliced bread that we constantly compare all else to. Simple and tasty sliced bread. That should tell you something, your idea does not have to be amazing it just has to be something that people want. It’s really as complicated and simple as that.
Research your competition
Whether you are going to offer a service or a product, it is good to see if and who else is offering what you are doing. If what you are doing is not being done then you need to question why? It will not always simply be that others have not thought about it. Sometimes research will reveal that your golden idea is actually not workable for a variety of reasons. It is also just as important to note that even if others are doing it, it does not guarantee that it is a true money earner. Take a good hard look online to see how big or small your competition is and try to judge how well they are actually doing. Never assume that because 5 people are doing it, its got to be a good idea. I like to use a variety of tools to look at my competition. I will use the online yellow pages and simply type in the business type or activity, for example if I wanted to start a bike shop I go to the yellow pages and type in “bike” under name and either put in my area or leave the area field blank. This will bring up a huge list of all the bike shops and that is part of my competition. The other part of my competition resides mainly on trade sites like trademe and now the other free sites that are coming out as competition. On these sites you will find people selling individual products or many, and the same with services. Some will be offering a one off, others make a living from it. So you most definitely have competition on here that you must be able to beat.
Customer research ( target market )
So now you have an idea of your competition, you must look at who your customers are. It is no good to say everybody is my customer or target market. You will hear this discussed but people generally do not break down why it is no good. Well, let’s break it down. Let’s use bikes as our product again because in a way it is easy to say that bikes can be used by everyone therefore everyone is my possible customer. So let’s say your business plan is to market to everyone. Ok then, how are you going to reach everyone? Facebook will cover some but miss the young and the old, the newspaper will reach generally the older customers but the younger ones only read the job section and articles that leap off the page at them so they won’t go through the adverts to see your sale on bikes. TV advertisements are pricy and again you need to pick what time your advert will play to reach a target audience. You could try a flyer but with each individual flyer costing you upward of a few cents again you have to try to see where best to drop them. And of course there is your shop window in this case ( website again misses the older and younger in general ) so your window captures the attention of those walking past your shop but who walks past your shop? And how do you write something that will attract people of all ages, male and female into your shop. So you see that while it is possible for everyone to potentially be a customer, you must break down who you are going to target and how, otherwise you cannot market yourself. And if you are not marketing yourself then people won’t know you exist or what you offer so they will not come to buy it, be it a service or a product the thought behind it is the same. You must market and to do that you must know what group of possible customers is most likely to purchase your product or service and market mostly to them in ways that they will see. This group of people is called your target market and it is crucial to understand them.
Margins and profit lines
This seems simple but often people are so incensed on the possible profit that they forget certain things such as how much they need to make. Before you start a business you must understand if it is going to be profitable.
For instance, let’s say you again run a bike shop.
You come to us at gift planet and ask us to find you some bikes. We of course do a hundred and 1 checks to make sure the bikes we bring in are safe to use and up to NZ safety standards. We say that we have found some that meet your need and that you can get them at $50 each which covers all the fees including shipping etc if you buy 20 of them ( example price only ) You love that you can get them at $50 each because these things sell easily at $400 in other bike shops. So you are thinking that you can make $350 profit per bike and you are quite excited. You spend money telling your target market about your amazing new bike store’s grand opening. The opening week comes and you sell all 20 bikes. The doors close at the end of a fantastic first week and everything seems good. Now it’s time to sit down and divvy out wages and fees etc. So you have $7,000 in your hands. Let’s assume you have 2 staff on minimum wage, at $13 NZ an hour so for 1 week, let’s say you are open Monday to Saturday so 6 days at $208 a day for 2 staff is $1,248 a week on staff wages. You pay them out for their 1st week and you now have $5,752. Ok that’s still ok, and you haven’t made over $60k this year, it being your first day so you don’t need to pay GST yet, but you certainly have business tax which is 28% so from your $5,752 you take 28% or $1,610.56 and put that into a bank account to keep safe for the tax man. This leaves you $4141.44 but you are not done yet. You need to pay rent which we will say is $400 a week in this case, it can be less or substantially more so in this case you are down $400 and now hold $3,741.44. Well you need to replace those bikes you sold. So 20 more bikes at $50 each is another $1000 leaving you with $2,741.44. So from $7000 you have payed staff, tax, rent, and restocked. But you have the power bill. You need to set aside $50 for the power, and you will have a phone so let’s say another $50 for a business line. These two are rough estimates. So now you have $2,641.44 and it looks like you are almost done for the week.
Are you ready to take home your money? Don’t be too hasty. If you take home a low wage of somewhere under $900 I think it is then you will be taxed at 18% but if you take all the money your tax will be high. Let’s assume you take home a cautious $700, you deduct 18% for the tax man or $126 and you are left with $574. All the prestige of being a business owner and you go home with $574 in your pocket despite all of your managing of stock, hard work, promotion of business etc. You paid your staff approximately $511 after tax and you as the owner go home almost just as poor. You do have $1,941.44 in your business bank account, but you might need that if next week doesn’t go so well.
Remember you have not recovered the first grand spent on stock, or your advertising costs so even the money sitting in the account is looking a bit shaky. At this point you can say that while it’s not looking amazing, if you manage to save $1,941.44 every week for the year and keep the same expenses as they are, then you will have $100,954.88 in your business bank account and that would be impressive but the truth is, every industry, every service, every product, every store goes through good times and bad times. You are not going to clear that money every week without fail. You will have times where the money builds and other times when things are tight. IF you pick the right product and market cleverly, and manage yourself and your business with knowledge and skill, then you can make it work but it is tough and nothing in my articles should be taken as meaning that running a business is easy, because it is not.
Before you start, you must have researched your profit, your bills ie the “overheads” and also researched what you must make a week to cover these costs while still profiting. Do not over exaggerate on paper because while we all love to think of having lots of money, if you give yourself lip service on paper it’s like talking yourself into buying a dud car and in the end you will be left kicking yourself, or worse, bankrupt.
Researching of Laws and Regulations
Nothing is simple. Almost everything has a law or two covering it. Even if it is just the “fair trading act” and/or “consumer guarantees act” Before you decide to sell something, you need to fully understand your rights and responsibilities as well as what you by law can and cannot do. You also need to understand what laws cover that product, for example, bikes, have safety standards that must be met. You need to understand them before you sell bikes as some rules may break your business idea, ie buy cheap bikes from overseas and sell them as your own top brand, in theory ok, in practice if they don’t meet safety requirements which does put the price up, completely illegal.
Well thanks for joining me in my second article. I am sorry if it goes on a bit but some topics are simply so in depth that they need proper in depth explanations and examples to show you what you are trying to avoid. I could assume that the problems that can arise are obvious and need not be mentioned, but clearly if that were the case we would have more successful businesses. Remember, before you start a business, research and then research some more. Nothing is straight forward, nothing is simple. You even need to decide now what contracts you will have potential staff on as it very much impacts their wages and your level of interaction on their tax, kiwi saver schemes ( a compulsory retirement fund here in NZ ) and even OSH fee’s. Everything MUST be known before you begin. Join me next week to continue this discussion and as always, please keep in mind that my articles should never be taken over legal advice given or as a be all and end all guide to starting business. There are many things I do not cover, or just brush over. Do not rely on my articles for all the information you will need.