If it’s your dream to start your own business, there are some cardinal rules that, if followed, will help you dodge becoming a start-up failure statistic. Your road to starting your own business begins here.
Starting a small business: Being your own boss
One of the biggest choices a would-be entrepreneur needs to make is whether to walk away from a relatively secure, salaried job in order to pursue their own-business dreams. But the transition from being an employee to being an entrepreneur is a big one and there are things you should be prepared for:
How comfortable are you with risk?
Not only will you need to decide on leaving your job for starting a business, you may also need to fund it with personal savings, taking a loan, or cashing in a retirement policy.
Entrepreneurship by its nature involves a degree of uncertainty, and as your own boss, you’ll need to make some tough and/or unpopular decisions.
The key is to take calculated risk – make sure you’ve done as much research as possible on the industry, your business model, your target market, and financials.
Do you have the right characteristics?
Great entrepreneurs are independent, stubborn, charismatic, resilient, persuasive, able to negotiate, creative, and natural-born leaders. If you don’t possess these traits, it doesn’t knock you out of the game.
Be sure that the kind of business you’re entering suits your personality type. For example, a PR agency will require a business person who is tenacious, out-going, sociable, and loves interacting with people. An accountant, on the other hand, may not require such high social skills.
Are you in it for the love of it?
There will be times when money is tight, when hard decisions need to be made, and when family and personal time gets sacrificed for the business. If the dream you’re chasing is just to get rich, it won’t sustain you very long. You need to eat, live and breathe your passion and dream.
Do you have the right skills?
If you’re leaving corporate, ensure that you have all the necessary skills to run a business, or be prepared to reach out for help. Many corporate individuals have expertise in a particular field but don’t have all the other skills needed to run a business.
Be prepared to learn how to fill the gaps, ask for help, or outsource or hire for the necessary skills.
Have you planned properly for starting a small business?
A start-up may start out of the blue, but no successful business has survived and thrived by winging it all the time. A successful small business starts with a careful plan.
Related: Do You Speak Start-up?
First define why you are starting a business
Is it to be your own boss, to make more money, to gain more independence, to have more time, to sell for millions one day, is it for a steady income, because there’s a gap in the market, or you want to turn your hobby/personal interest/passion into a meaningful business?
Second, come up with a sound business plan
No idea can be realised or made to last without some planning. A business plan is your first port of call to mapping out your business.
Next, who will be part of the business?
Are you a sole proprietor who will run all aspects of the business? Will you have partners in the business and what will they bring to the table? A word of caution: Choose your partnerships wisely – if it’s a family business, be sure there are boundaries in place and that roles are well defined.
Make sure your business partners complement your skills and knowledge with their own. While things may start off well, make sure you have an attorney draw up papers of who’s who and contributed what in the event things go south.
Where will the money come from?
While some businesses can be started with very little, many will need a cash injection to bring them to life. Will you use personal savings, take out a loan, seek investors, court venture capitalists, self-fund and bootstrap the business?
Each option comes with its own pros and cons, so investigate them carefully. Also be mindful and realistic about return on investment – it’s very rare that a business will make back 100% of its start-up capital in the timeframe you initially expect. Be conservative in your estimations.
Pay close attention to running costs
Sometimes it can take up to three years before a business reaches break-even and starts to make a profit. So, while you’re working toward this point, keep your books immaculate, document all outgoing and incoming money. It will help you pin point areas where expenditure can be trimmed and income improved on.
The importance of networking when starting a small business
Networking is one of the most important activities you’ll be involved in when starting your business. Entrepreneurship is a hard game and can be a very lonely and isolating experience for some. By networking with other entrepreneurs, you will learn that your fears and challenges aren’t always unique to you, but just par for the course. Sharing with other entrepreneurs can give you confidence and motivation to keep going.
Networking can also help you land clients by giving you the opportunity to rub shoulders with people who may need your product or service – think conferences, trade shows, industry events – or may put you in contact with people who can provide you with skills, resources and advice.
If you’re not in need of help, networking is a great opportunity to market your company and position yourself as an industry expert. If people get to know you as the industry go-to-guy, you’ll develop a positive reputation, gain trust, and business can follow.
Landing clients: A small business imperative
Without clients, a business is a non-start. So once you’ve got your business plan in order, focus your attention on landing your first client as soon as possible. For some entrepreneurs this may involve taking on clients from their previous job, from networking, or through word of mouth.
For others it may involve finding clients from scratch. If you’re providing a new product or service, make your clients fully aware that it’s a work in progress and that things will improve with customer feedback. You may even want to get your first client by offering a free trial period or at discounted rates.
The object of getting your first client is to get feedback as quickly as possible and develop your offering based on their needs and demands, rather than producing a 100% ready for market offering that doesn’t meet the needs of your target market.
Related: Advice for Starting a Business
Starting a small business: The most common mistakes
Key performance indicators
To help you stay focused during the start-up phase and at the same time avoid tunnel vision, it helps to keep track of Key Performance Indicators (KPIs) you’ve set in place.
KPIs are used to measure performance and success in your business, and help you towards your business goals. These can be as simple as 100% customer satisfaction, zero injuries on site, or minimal defects, for example.
Each KPI should be constructed with a particular purpose in mind – the KPIs for finance will be different to KPIs for sales, for example. Some kinds of KPI include: Marketing, production, IT, supply chain management, finance, business government, sales, etc.
Focusing on high-impact tasks
With limited amounts of time and energy given to each day, week, month and year, it’s important to assess your business goals, set realistic milestones and plan accordingly. It is of use for every entrepreneur to do some research into the 80/20 principle: Where 80% of the results come from 20% of the causes.
Focus on your best customers, on selling and improving your best selling product or service. Enable your best staff to do better – fundamentally focus your attention on high impact tasks rather than being bogged down in emails for example.
Types of small businesses
Are you ready to start your business? Here are three kinds to mull on:
- Consultancy – If you have expertise in a particular field, you can start a consultancy providing professional expertise to those who need it.
- Part-time – Believe it or not, you can start a business while being employed at the same time. This kind of venture will be quite demanding, but also worthwhile as you will be able to determine whether your business idea is ready to support your financial needs before cutting off the monthly salary. It is advisable that your employer be aware that you’re running a side-line business, as most employers will support you in your entrepreneurial endeavours provided that it’s not infringing on your work time and the company’s resources.
- Hobby – if you’ve got a personal interest or hobby that can be used to create a profit, then you have a potential business in your hands. Make sure you do your market analysis though and carefully evaluate the amount of time and capital required and versus the income you can gain.
Related: Start A Part Time Business
From here, evaluate whether you can run your business from a home-office, whether you’ll need to rent office or manufacturing space – and can this space be shared with another business, and whether you’ll need staff. Will your staff need to be full-time, part-time, temp, or even a virtual assistant, and will they need training and/or specialised skills to assist you and your business?
When hiring staff, ensure that an employment contract is drawn up with all terms, conditions and expectations in writing, that it is signed by both you and the employee, and that it conforms with the Basic Conditions of Employment Act.
The Rising Cost Of Small Business
Many of the hidden costs that tend to surprise small business owners are related to the employment of people. However, the silver lining is that there are ways to mitigate the risks associated with scaling a business and several tools available to streamline HR processes.
A small business starts with a visionary dream fueled by energy and grit. Founders build on that and attract a small team of people who can help breathe life into the business. But not very long after setting out on course, the harsh realisation of rising costs like insurance, permits, licenses, equipment, maintenance, taxes, shrinkage and utilities suddenly appear.
Poor Labour Relations Management
Extensive labour laws in South Africa require dedicated overseeing and management, which generally lead to additional costs of employing labour consultants or hiring human resources managers that are not entirely relate to the core of your business. However, left unattended, labour relations issues can and will shut down your shop.
Labour relations issues cost South African companies R14 billion annually. Many companies have costly compensation orders from the CCMA due to Line Managers and HR employees not complying with legislation regarding disciplinary matters.
A surprising statistic from SEFA suggested that of the small businesses that fail, 40% of them can be attributed to poor labour relations management, therefore managing disciplinary processes by the book is critical. There are useful templates as well as step by step guides available online to help managers through disciplinary processes and to avoid incurring penalties from the CCMA.
By law employees are entitled to at least 15 working days’ vacation leave in every leave cycle. Employers could face substantial penalties from the Department of Labour if they do not allow employees to take leave. Planning for peak and off peak periods in businesses is a critical part of drafting job specs and these conditions must be communicated to staff early on.
The cost of poor leave management will contribute to the company’s leave liability i.e. the amount of leave an employee is owed is noted as a liability in the general ledger. Annual leave that employees do not take is a hidden expense for a business that if left unattended, will accrue and create cash flow problems for the business.
Employers are advised to make use of a leave management tool that enables both the employer as well as their employees to keep track of leave days owed to employees and brings some automation in to the process.
The Basic Conditions of Employment Act ensures that all employees are “entitled” to a minimum of 30 days (for a 5 day workweek) and 36 days (for a 6 day workweek) paid sick leave.
According to Occupational Care South Africa (OCSA), absenteeism costs the South African economy around R12 -R16 billion per year. This equates to around 15% of employees being absent on any given day. The answer isn’t to go on a witch hunt throwing policy at employees and demanding doctor’s notes for even a few hours off work (employers are not allowed to breach medical confidentiality by requesting a diagnosis on a sick leave note).
Alternatively, employers can be proactive in managing absenteeism by monitoring leave reports monthly and quarterly taking regular health interventions (e.g. flu shots) before a peak sick leave season e.g. before winter. Maintaining a positive work environment where employees feel acknowledged and are encouraged to perform goes a long way in keep workers present and absenteeism on the low.
Is Unmanaged Stress Killing Off Our SMMEs?
Most SMMEs don’t make it past their first year. This is worrying for an economy in which SMMEs are a vital part of growth. A range of reasons are given for what is stifling these businesses, from financing to access to markets, but one factor has been completely overlooked: Stress.
It is now widely understood that Small Medium and Micro Enterprises (SMMEs) are key to a country’s economic- and employment growth, but something is amiss in South Africa. Our SMMEs are just not doing what they should and understanding why this is – and fixing it – will be critical to the future success and sustainability of the economy.
The common conversations around SMME failure rates point at six main culprits: (1) access to funding, (2) access to markets, (3) infrastructure challenges, (4) scalability, (5) tough regulations, and (6) skills/education. The problem is that we have known about these for years, and for all the efforts to address them, we are unfortunately not seeing the growth in the sector that is needed.
A recent survey by the Small Business Institute (SBI) and the Small Business Project (SBP) put the number of formal SMMEs in South Africa currently at just 250,000. These numbers are alarmingly low – especially when compared with international benchmarks. SMMEs in Organisation for Economic Co-operation and Development (OECD) countries, make up 95% of businesses, and employ between 60%–70% of the working population, contributing up to 60% to GDP. In South Africa, while SMMEs make up 98% of the business population, they only employ 28% of the nation’s workforce, according to Chris Darroll, CEO of the SBP.
And yet the government continues to pin its hopes on the SMME sector. Initiatives like the DTI’s Invest SA and the South African Investment Conference this October, that claims to have attracted billions in foreign investment to the country, have foregrounded the role of SMMEs in economic revival. And the Government’s National Development Plan aims to have SMMEs contributing 90% of job growth by 2030. It is likely that more money will be channelled into support for the sector, to join the billions that have already been spent on incubators and initiatives to help small businesses.
This is a good thing, but it is not enough. The numbers speak for themselves. To date, none of these initiatives has borne much fruit and this signals that we may be overlooking something fundamental. Our collaborative research at the UCT Graduate School of Business suggests that what is being overlooked is something that most of us find difficult to define, or even talk about: Stress.
Stress is under-acknowledged by most people, personally and professionally, and for varied reasons. And this can have devastating effects. If ignored in business, the human devastation is likely to have larger scale effects on job loss, workforce disengagement, health-related days off, impaired teamwork, sub-optimal decision-making, lowering of productivity, and ultimately fuelling a declining economy.
While access to finance and markets, infrastructure and scalability challenges, tough regulations, and not enough educated and skilled employees are all valid hurdles tripping up SMMEs, the fact is that they are perfectly normal hurdles to have in a competitive, emerging economy. Our research reveals that good leaders, who are able to get their businesses over each encountered hurdle, are also able to manage their personal negative stress and harness their positive stress.
Stress can, generally, be quite motivating, however it is generally accepted that there are three kinds of stress: (1) positive stress, which is chosen and does not last very long (like writing an exam), (2) tolerable stress, which is unexpected and lasts a little longer, but then stops and there is time to process, and (3) toxic stress or distress. Toxic stress is tolerable stress left to run on and on without end, without rest and without time for healing and processing. It is this third and debilitating kind of stress that business leaders are likely to experience, and in SMMEs it can be even more severe.
Our research suggests that SMME owners tend to set very high, and often lofty, goals for themselves when setting up their SMMEs. And then they are constantly feeling stretched in either striving for these goals or ‘maintaining the course’. This can mean maintaining good business results, maintaining the customer base, where often 20% of the customer base accounts for 80% of the revenue, maintaining employment levels in changing political and economic conditions, maintaining pricing when squeezed for ever-lower prices while delivering good quality products and services, having their integrity challenged, and dealing with clients/customers who are not averse to replacing their products/services.
Another cause of stress for SMME business owners is that they mostly have internal loci of control, meaning that they take personal responsibility for outcomes and results and therefore blame themselves for every failure, and find it difficult to forgive themselves for deviations from intended results. In addition, an innate sense of accountability to their staff and their staffs’ families reportedly weighs heavily on business owners. Many feel similar accountability toward the broader stakeholder groups that their businesses serve.
All of these factors, which many argue are innate to the nature of business, place undue, long-term pressure (toxic stress/distress) on the cognitive, emotional, psychological and spiritual resources of individual business owners. This reportedly leads to drops in productive activity and motivation, withdrawal from relationships both personal and professional, low energy, impaired decision-making and ill health. And it also destroys resilience – leaving business leaders unable to ‘bounce back’ from personal- or business-setbacks, which is part and parcel of life and business. With a debilitated leader, the business is almost always likely to suffer, on a day-to-day basis and also in the long run. Like a virus, stress transfers to others.
An SMME’s success is inextricably linked to having an effective leader. And effective leadership is inextricably linked to effective stress management and self-care. It stands to reason, therefore, that improving the way SMME business owners manage their stress and boundaries could have a significant impact on improving business survival rates.
Along with offering business advice, funding incubators, opening up markets, attracting foreign investors, educating consumers, subsidising and improving infrastructure, the government should be looking at ways to encourage stress management and self-care into the daily operations of small to medium-sized businesses.
We need to get business owners educated about stress and self-care: about how exercise, sleep, diet, meditation, life-balance, self-forgiveness, and other-forgiveness affect them, their staff and their businesses. Effective self-care, of which stress management is a part, will enable business owners to courageously stay resilient in the ongoing stressful situations they will naturally encounter. This may, in turn, help to turn the tide in South Africa’s SMME sector so that it can drive the country’s economic revival like everyone hopes it will.
Many SMEs Start With Great Plans But Fail To Take The Big Leap
Most small-to-medium sized enterprises (SMEs) are aware of the benefits of good governance practice but, faced with limited time and resources, which could be costly in supporting growth ambitions.
- 27% of SMEs don’t have a vision that covers more than the next 12 months
- 45% of SMEs either don’t have a strategy, or one which covers only the next 12 months or less.
The latest global research, inclusive of Africa in supporting small business growth from ACCA, outlines the governance needs of SMEs. It highlights simple but effective practice over vision, strategy and human capital can provide them with greater flexibility, adaptability and resilience as they grow. This a huge factor in the long-term sustainability of the business, if put in practise.
“If you incorporate good practice for running your business from an early stage, your company is more likely to be resilient and is more likely to appeal to external investment,” explains Jo Iwasaki, head of corporate governance at ACCA. It is about leadership directing the company and being aware of factors both within and beyond their enterprise and build resilient organisations in the face pf the changing world.
The research also found that half (49%) of SMEs do not involve anyone external in their strategy discussions, despite the benefits experienced by those that do, which include additional experience and knowledge of the industry/sector (according to 46%), an independent perspective / constructive criticism (44%) and advice on their growth strategy (39%).
“There are a lot of daily concerns for the leaders of a small business, and often the biggest challenge is meeting day-to-day operations and cash management needs while thinking about the long-term future of the company. And while many leaders are keenly aware of the importance of resilience in the rapidly changing business environment and of buy-in from stakeholders, for example funders and employees, there often may not be the time to think or do much about it,” added Iwasaki.
“I hope that this research helps SMEs in focusing on some of the most crucial issues, and can be a resource not just to SMEs themselves but also to policymakers,” concluded Iwasaki.
How vision and strategy helps small business succeed is available at ACCA Global.
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