5 critical things entrepreneurs need to do when planning new companies
Over the course of my career, I’ve seen many new businesses open, thrive and grow. It’s satisfying when I’m able to help a client start or acquire an enterprise, and even more thrilling from a personal and professional standpoint when their business strategies result in success.
On the other hand, though, there are countless new businesses that fail each year for a variety of reasons. Whether you’re buying or beginning a new venture, there are five important things to which you need to give careful consideration. I have outlined them below.
1. Determine which business structure is right for you.
There are several ways to set up a business, and I will define them here. It’s crucial that you (together with your CFO or financial manager) determine which will work most effectively for your venture.
A sole proprietorship is the most common business structure for new businesses. It can be set up easily and relatively cheaply. With this type of business structure, there’s no distinction between the company and the owner, nor is there a separate legal entity. Most sole proprietors just use their own name.
Similarly, a partnership takes the concept further by registering the business under the names of the co-owners, so there’s not a separate legal entity nor a distinction between the business entity and the owners. As with sole proprietorships, in a partnership the partners are personally responsible for all business obligations.
Now, things get a bit more structured and complex when we start to consider setting up a corporation. Unlike sole proprietorships and partnerships, a corporation removes your personal liability by creating a separate legal entity, and is one of the main benefits of incorporating your business. With a corporation you can enter into contracts in the name of the corporation rather than taking that liability on personally.
There are also professional corporations (PC) that are available to certain regulated professions like medical practices and law firms. Professional corporations are owned and operated by one or more members of the same profession, and are allowed in every province and territory across Canada. In each jurisdiction, the professional regulatory body usually determines whether its members may incorporate.
2. Set up a line of credit.
A business line of credit is a type of loan that provides small businesses with greater flexibility than is generally offered by a regular business loan. With a business line of credit, you have X amount of dollars available to you, and you can borrow whatever amount you need up to that limit and pay interest only on the amount of money that you borrow. It’s like having a pre-loaded credit card, and in fact, might even include a business credit card.
You can draw and repay funds as you need them as long as you don’t exceed your credit limit, and most lenders will allow you to repay your full balance early to save interest costs. Most traditional lenders, like banks, require businesses to have strong revenue and some history to qualify for a line of credit. However, there are also a number of nontraditional lenders that lend based on different criteria, many of which are specifically in business to lend to companies that don’t qualify for traditional lending arrangements.
3. Track your spending.
For everyone starting a venture, it’s critical to track money in and money out. Otherwise, how will you know where your money goes each month? To keep your company financially healthy, it is imperative to monitor your expenses carefully, and on an ongoing basis. This includes all expenses, from capital expenditures to buying small things like stamps and office supplies. Tracking expenses plays a vital role in letting you know if your company is making money, and helps you project and adjust costs in the long and short range. It’s very much like having a personal budget, but with many more line items.
4. Plan for taxes.
Every enterprise has specific tax obligations. This is something every entrepreneur must deal with, and why it’s also advisable to have either a company CFO with expertise in tax matters or an external accountant or tax advisor with expertise in this area. Let’s face it: taxes can eat into your annual earnings. To counter this, tax planning is a legal way to reduce your tax liabilities. It pays to understand tax exemptions, deductions and benefits as they relate to your enterprise, and plan in advance to take full advantage of them.
5. Understand customer acquisition costs.
Do you know how much money it costs you to acquire a customer? It’s something every business owner needs to understand. This cost, when compared against sales figures, tells you what your profit margin is. So how do you figure out this metric? Compute your entire cost of sales and marketing over a given period, including salaries and other related expenses, and divide it by the number of customers that you acquired during that period.
Another related number of which you need to be aware is the lifetime value of a customer. To determine this, look at the gross margin you expect to make from that customer over the lifetime of your relationship taking into consideration any and all support, installation and servicing costs.
Over time, as your business grows, you will likely find ways to reduce your customer acquisition costs while increasing customer lifetime value.