Starting a business takes careful consideration and planning. It takes emotional and financial preparation and a commitment to invest the time required to see your endeavor succeed.The stakes are also high: only half of all new businesses survive five years or more, and about one-third survive 10 years or more, according to the U.S. Small Business Administration. But despite the many challenges of starting a business, the business owners say the rewards are plenty.
In the second quarter 2014 Wells Fargo/Gallup Small Business Index, we surveyed small business owners across the U.S. and asked them to look back to when they began their businesses. Here are the areas they said aspiring entrepreneurs should consider before starting and owning a business:
One of the first considerations of becoming a business owner is to make sure you have a solid business plan. That includes doing research to learn about your customers, your competitors and your industry and meeting with a financial advisor to review projected cash flow. In our survey, when business owners were asked to identify the most important challenge they faced at the time they opened their business, the number one challenge was securing accounts and customers (23 percent), followed by cash flow (15 percent) and credit financing/availability of funds (10 percent). Although starting a business often requires a great investment of time and dedication, interestingly, only two percent of small business owners reported the personal sacrifice and long hours was their biggest challenge – an indicator of the great personal satisfaction derived from business ownership.
Starting any business or buying into a franchise requires you to make a large initial investment, so it’s important to ensure that your current and future finances are in order. In terms of funds small business owners used when opening their businesses, personal savings (77 percent), loan or credit (41 percent), and family and friends (33 percent) are the most cited sources of funds.
Make sure you research the startup costs for your business and you have a financial plan that you’ve reviewed with your financial advisor to ensure that you have the funds you need for the first years of operation. And before you apply for credit, take time to understand what your business needs to do to be considered credit-ready and in the best position to secure financing. It’s important to meet with a banker to understand your options before you need credit.
Often, potential small business owners underestimate the amount of time and energy it takes to launch a new business, yet owning a small business can be extremely rewarding. Think about why you want to start a business and what the potential opportunity could be.
In the Small Business Index survey, the independence of being your own boss was far and away the most rewarding aspect of being a business owner identified by respondents (42 percent). The next three top mentions were job satisfaction (17 percent), flexibility (12 percent) and interactions with customers (11 percent). Interestingly, only 7 percent said making money was the most rewarding aspect.
Your financial future
In the survey, business owners were asked in an aided fashion the reasons why they opened a small business, and securing their financial future and being their own boss were the most frequently mentioned.
However, most small businesses do not turn a profit immediately, so you need to make sure you have enough reserves on hand to cover your expenses. We typically advise business owners to plan on having enough working capital on hand to cover payroll, operations and other unplanned expenses for at least a year.
Building a small business comes with many challenges, yet as business owners have shared with us, the opportunities and rewards of starting a business can be amazing. A successful business starts with asking the right questions. When you prepare, work hard and plan carefully you can put yourself in position to reap the rewards.
Cary Yates, a Wells Fargo market growth & development manager, is based in Houston.