Three Ways To Successfully Start A Business And Build Revenue

Founding partner of CEO Advisory Guru, LLC. Best-selling author of The Private Equity Playbook and The Exit-Strategy Playbook.

There are over 30 million small businesses in America. Collectively, they account for 99.9% of all U.S. companies, and they employ nearly half of all the workers in this country.

It’s fair to say that America is built on small businesses, and yet 82% of them fail due to insufficient cash flow as a contributing factor. Of the ones that survive, only 40% are profitable, and only 50% last more than five years. Of the ones that do beat the odds and stay open, only 9% ever achieve revenues north of $1 million.

These sobering statistics lead to an inescapable question: How can an entrepreneur build a business that stays open and turns a profit? And beyond that, how can they achieve what 91% of small business owners fail to do: get to revenues of $1 million or more?

While the answers to these questions are complex and multifaceted, there are three things every entrepreneur can do to increase the likelihood of achieving these goals.

1. Create a sound strategic plan.

The vast majority of people who start a small business don’t have a plan. That’s a big mistake; trying to “wing it” is almost guaranteed to end in failure. A much better approach is to develop a sound strategic plan that will allow you to identify all the costs associated with running your business.

Start by honestly assessing your startup expenses. How much will licenses and insurance cost? What about startup inventory? Once you’ve figured out all your startup costs, determine your ongoing costs. Will you need a vehicle? Do you need to ship or receive products? How much will marketing cost?

If you’re going to have a physical location, how much will you have to pay for rent and utilities? As you do this exercise, make sure to include your living expenses as well, since you’ll need to be able to cover those costs until your business can.

Remember, 82% of small businesses fail due to insufficient cash flow, which means their owners underestimated how much it would cost to run those businesses. Taking the time to come up with a realistic, complete plan will help you avoid that trap.

2. Ensure you have adequate financial resources.

Once you know what costs to expect, it’s time to move on to the next step: ensuring you have adequate financial resources. In other words, how will you pay your expenses until your business reaches the break-even—and then the profitable—point?

To determine this, figure out when you’ll start generating revenue and how quickly revenue will ramp up. Be realistic, because your answer here—coupled with the costs you came up with in the first part of this exercise—will determine how much you’ll need in financial reserves to survive the time between startup and profitability.

Once you know how much you need to fund your business and living expenses until your business is profitable, consider the best way to build those reserves. It might make sense to continue working at your current job while you build your business. You might be able to utilize your credit line or a loan from the Small Business Administration, or you may be able to partner with someone who can supply capital while you grow the business.

There are a variety of ways to fund your startup. To choose the best one, you need to know how much it will cost to sustain your business until it can sustain itself. That’s why it’s so important to do the work of developing a plan before you open your doors—or, if you’ve already started the business, as soon as you possibly can.

3. Get the unit-level economics right.

After you’ve developed your plan and have a reliable source of funding, it’s time to consider the final piece of the puzzle: making sure your business can achieve profitability. To do that, you need to perfect your unit-level economics.

To show you what I mean, let’s pretend your business produces widgets. What does it cost you to manufacture one widget? What’s your overhead? Based on your strategic plan, what profit do you need to generate? The answers to these questions will lead to the unit-level price for one widget. Get that right, and you will be profitable. Get it wrong, and you won’t.

I can’t tell you how many businesses I’ve encountered where people tell themselves that if they could sell more, they’d be profitable. Unfortunately, their economics at the unit level just don’t work. If each widget costs $20 to manufacture and it costs $10 for your business overhead, then you need $30 per unit to break even. If you can only sell the widget for $15, you have a programmed loss. Now, let’s say you sell 10,000 widgets. At that point, all you’ve succeeded in doing is generating 10,000 times the loss.

This doesn’t only apply to product-based companies—it holds true for service-based companies, too. The bottom line is that, whether you’re selling products or services, you need to perfect the economics at the smallest level possible. By proving the concept before you scale, you significantly increase your likelihood of staying open and achieving profitability.

Put it all together.

Following these steps gives you multiple opportunities to spot potential pitfalls before they become catastrophes. For example, if you realize you’re undercapitalized, take the time to build the financial foundation needed for success before starting your business. Similarly, if you realize your unit-level economics aren’t right, fix them before dumping thousands of dollars into a losing model.

Ultimately, these steps increase the likelihood that your business will be one of the relative few that stay open and turn a profit. Even better, they help ensure your business has the right model—and enough time—to eventually achieve $1 million or more in revenue.


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https://www.forbes.com/sites/forbesbusinesscouncil/2022/06/07/three-ways-to-successfully-start-a-business-and-build-revenue/