Every business is different but there are at least five essential components to entrepreneurship:
- Ideas – a clear vision of the future and ideas for turning the dream into reality
- Management skills – the ideas need to be implemented effectively and efficiently
- Time and commitment – the focused time the entrepreneur is prepared to invest in the business.
- Money – it often requires an initial investment to build a business to a level where it can generate cash on an ongoing basis and the entrepreneur needs to be able to provide or raise the cash. Other tangible assets might also be used to support a business like a property.
- Relationships and reputation
You may be tired of hearing that 50% of small businesses fail within the first two years and 80% within five years (source Michael Gerber) but each of these factors play a role in contributing to the failure rates.
The Power Of Ideas
If the idea is not good the business will not get off the ground. In the UK, the BBC has a TV show called “The Apprentice” as a group of wannabees compete to have a £100k a year job with entrepreneur Sir Alan Sugar.
Last week’s show featured a terrible idea. The two teams were asked to create a new celebration day for the greetings card industry and one team came up with the Environmental Awareness day when we were also supposed to send people we know a paper card encouraging them to conserve the world’s natural resources.
The Apprentice team thought we should use resources to encourage people not to use resources!
Not exactly sensible and not fun either with the lecturing tone of the cards they designed.
But other ideas are great.
For example, who cannot admire the idea of Starbucks which totally changed the concept of coffee and has swept across the globe. I don’t get the Starbucks concept myself but I admire the idea which has inspired so many people to spend a small fortune on coffee.
In Business Failure and Bad Management, I explained that insolvency experts believe the overwhelming cause for business failure is that the management team is just not up to the task. Too much talk, too little action. Too many bad decisions and not enough good ideas.
Management skills make a huge difference and that’s why the business management support industry is thriving from the thousands of books through to extensive ongoing coaching and consultancy programs.
Time and Commitment
Many business owners I talk to are amazed just how much there is to do when you are starting a new business and how many hours it needs to do everything that must be done.
Better management skills and experience can make life easier (you waste less timing making mistakes and then having to recover) but clear goals, prioritisation and time management discipline are essential.
But you can outsource tasks which are outside your strengths and you should delegate to any staff you have so that your hours are kept within reasonable limits.
It seems that you need money to make money and it is certainly much easier to spend than it is to earn.
Many businesses make a loss in their first year although it is a concept I am not keen to encourage. If you plan for a loss, it creates a ready-made reason for you to lose money.
More justifiable is that a growing business usually needs cash to finance the business. You may need to buy equipment and stock and your customers are probably going to expect to pay you after your suppliers expect to be paid. The bigger your business gets, the more “working capital” is needed and that’s why fast growing businesses are often profitable but need to keep raising extra finance. (See Secrets Of Getting Your Bank Manager To Say Yes if you need a bank loan).
Entrepreneurs may bring other resources and tangible assets to the business to lower the start-up barriers. For example the entrepreneur may own a property where the business can operate. At the lowest level, this is working from home which millions of people do but the entrepreneur could own an office building, a warehouse or factory unit as an investment.
Since property usually requires signing a formal agreement, often with a significant commitment into the future, the chance to avoid these risks can give the business a significant advantage over competitors who are starting up.
Relationships and Reputation
I thought about separating out relationships and reputation but your reputation is at the very centre of your ability to build strong relationships with customers, suppliers and other people who can help you to build your business.