How To Start a Business: 21 Steps (With links)

“I just need a checklist to start my business.”

 

Well, I hope you’ve found it here.

 

If you’re entrepreneur who is starting a business, you’ve got a lot on your mind. So, to organize all of those thoughts, here’s are the steps you can take to start your business. Learn how to start a business, and you can outperform the competition.

Even if you’re a beginner who is starting a business with no money, this checklist can help you succeed.

Business formation is an important step, and you need experts who can steer you in the right direction. If you’re in the UK, work with a Company Formation Registration Agent who can register your limited company at a reasonable fee. You can choose from a number of registration packages.

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#1- Idea Validation

 

This is the step many entrepreneurs skip.

 

You’re excited about your idea, and you move straight into creating your product or service for the masses.

 

But that’s a mistake.

 

First, you need to validate your business idea, which I list here in 4 steps. If you don’t seriously consider these 4 components, run away from your product idea screaming…

Let’s use the example I wrote for Inc.com, to explain these four key ideas. Here’s the business idea:

“Say, for example, that you create a bike tire tube that inflates at the push of a button. No need for a pump or an CO-2 cartridge to inflate the tire. If you’re a bike rider, you know how difficult it can be to change a flat. You may be in bad weather, or a dangerous location on the road.”

a) What problem does my product or service solve?

Your improved bike tube helps riders avoid getting stuck and not able to change a flat tire

b) Do customers feel that solving this problem is urgent?

Serious bike riders- who ride a lot and ride far from home, do consider this problem to be urgent. Imagine the time wasted if you have to call for help and wait? (I’ve been there…)

c) How much will they pay for a solution to the problem?

d) Are there enough of these people to justify creating and marketing the solution?

“Assume that 2,000,000 people in the US consider themselves serious bike riders. These people ride lots of miles every week. They’d be willing to pay $5 per tube. These bikers estimate that they’d get 2 flats a month that would require your bike tube. Your market size is (2,000,000 bike riders X $5 X 2 times per month = $20,000,000 monthly sales).

The idea here is get your product or service in the hands of a relatively small group of people, ask them to use it, and then get their feedback.

 

If your product solves a problem, and you can sell it profitably to a large enough group of people, you may have a valid business idea.

If you’ve had a financial setback, this article can help.

Get Up to Speed on Accounting

 

Every business owner must understand the basics of accounting, in order to post transactions and to generate financial statements.

It’s also important to hire an experienced accountant who can help you start your business. If you’re looking for Accountants Melbourne, HLB Mann Judd provides a variety of accounting services, including advisory, audit, business services, and tax consulting. Contact the firm to find a trusted advisor for your new business.

 

Accounting is a cycle that starts with gathering source documents (invoices, receipts) and ends with the financial statements. The cycle repeats every month and year.

 

#2- Chart of accounts

 

The chart of accounts is listing of each account and the account description, and your accounting software will provide a standard chart of account that you can change as needed.

As an example, the bike tube company will have inventory accounts for rubber, metal, and the other component parts used to make bike tire tubes.

#3- Journal entries

 

Accounting transactions are posted using debits and credits, which you can read about in detail here. A journal entry records all of the needed detail about a particular transaction, including the dollar amount, the accounts used, the date, and a brief description of the transaction.

If the bike tube company buys 10 pounds of rubber material to make bike tire tubes, for example, inventory will increase and cash will decrease.

#4- Trial balance, adjustments, financial statements

 

A trail balance is a list of every account and its balance as of a certain date. Accountants generate a trial balance to review the impact of transactions, and to assess the overall financial status of a company.

 

At the end of each month, accountants post adjustments to the trial balance, and the adjusted report is used to generate the financial statements.

If you manage a business and want to increase your productivity, I highly recommend QuickBooks accounting software. Read this article to decide if you need the desktop or online version of the software.

 

#5- Three important financial statements

 

Here are three most important financial statements you need to generate and review each month and year:

 

A balance sheet is a financial statement the lists a company’s assets, liabilities, and equity balances as of a specific date. The three components of the balance sheet are driven by the balance sheet formula:

 

Assets – liabilities = equity

 

The income statement, on the other hand, is generated for a period of time (month or year), and is created using this formula:

Revenue – expenses = net income.

The income statement is connected to the balance sheet through the net income account. Net income in the income statement increases the equity balance in the balance sheet.

 

Finally, the statement of cash flows documents the cash inflows and outflows in a business, which are separated into three categories: operating, financing, and investing. Think of this report as summarizing the activity in your checkbook.

 

The ending balance in cash is equal to the cash balance in the balance sheet.

 

Reviewing your monthly financial statements helps you to make informed decisions, and make improvements in your business.

Use online accounting software to dramatically increase your company productivity. Find out more here: QuickBooks Online Edition – Free Trial

#6- Create a Business Plan

 

Once you validate your business idea, and you have a basic understanding of accounting, you’re ready to create a formal business plan.

 

To make the process easier, invest in business plan software. Using software allows you to address each required component for your plan, including tools to create a set of projected financial statements.

Your business plan will include the details of the idea validation discussed above, the market research you’ve performed, and forecasted financial statements.

#7- Raising capital

 

You may decide to bootstrap your business, meaning that you fund the business out of your own pocket, using savings or taking out a personal loan.

 

If, instead, you decide to raise funds, there are two ways to raise capital to operate your business. You can sell ownership in your company by issuing stock (equity), or you can borrow money and take on debt. If a firm doesn’t monitor the amount of debt borrowed over time, repaying the debt may become difficult.

 

Produce a complete business plan using software- even if you don’t have outside investors or creditors.

Writing your plan forces you to consider each important factor in your business. What if, for example, the market for the new bike tire tube is only 30% as big as you planned? Or, what if demand is much higher than you forecasted- where do you get the funds to produce more units of product?

 

#8- Create an Annual Budget- Before the Year Starts

 

Create an annual budget each year, before the new year begins.

 

Start by making some assumptions about sales prices, units produced, and your labor and material costs (if applicable). At the end of each month, you’ll compare you actual results to you budget, and investigate any differences.

 

Reviewing budgeting and actual results helps you find ways to reduce costs, increase sales and improve company profits.

 

 

#9- Three big issues with cash flow

 

The most important part of your budget is a cash flow forecast. Each month, you’ll estimate cash inflows from sales, cash outflows for payroll, and other costs, and project an ending cash balance.

 

Here are three big issues that you must address in a cash flow forecast:

 

• Accounts receivable: This term is defined as the dollar amount of credit sales that are not collected in cash. You need to consider the dollar amount of receivables, and the average amount of time it takes to collect the receivables in cash. If you sell bike tire tubes through retail stores, how long (on average) will it take them to pay you?

 

• Inventory: The dollar amount of inventory needed to fill customer orders over the next several months. You need to plan for inventory purchases, and how you’ll pay for inventory. If you run short on inventory, you may lose sales- and possibly customers.

 

• Debt payments: Interest payments, and any repayments of principal due in the next few months.

 

These three factors must be in your cash flow forecast.

#10- Plan for asset replacement

 

You need a long-term plan to replace assets as they wear out, and you need to budget for repair and maintenance costs.

 

If you own a restaurant, for example, you’ll eventually need to replace fixtures, furniture, ovens, and refrigerators. Keep a listing of these fixed assets in your accounting system, and track the remaining useful life of each asset.

 

Say, for example, that a $1,000 commercial refrigerator will last another two years. If that’s the case, you need to set aside funds to replace the asset, or plan on financing the purchase with a bank loan.

Many companies lease assets, rather than buying the assets required to operate the business. The accounting industry has recently introduced new standards for lease accounting. This website explains lease accounting for ASC 842, and you can use the site to properly records balance sheet and income statement entries for leases.

 

Invest the time to create an annual budget, and you’ll see a big payoff as you move through the year.

 

#11- Understand How Do You Generate Income

 

Now, that question may sound odd.

 

“I generate income from anywhere I can!”, you may say to yourself.

 

But to succeed in business, you have to generate the vast majority of your income from operations. That’s because income from operations is repeatable and sustainable.

 

If you manufacture baseball gloves, for example, the majority of your income comes from making and selling gloves. Selling a piece of equipment for a gain is nice, but it’s not something you can count on every month.

 

Drive income and sales from your day-to-day business operations.

 

#12- Determine a reasonable level of profit

 

Your profit margins will be affected, in part, by your company’s industry, as well as the amount of competition that you face. If you operate with an industry with a large number of competitors, you may be forced to keep your prices lower than you prefer.

 

Perhaps the biggest profit factor is your customer’s perception of the value of your product or service. If clients strongly believe that your product solves a problem, they may be willing to pay more. Again, go back to that idea validation step above. Are serious bike riders excited about the problem you’re solving for them?

 

Use all of these factors to determine your sales prices, and a level of profit on your sales that is reasonable, considering all of the factors listed above.

#13- Analyze the profit on each product

 

Profit margin is defined as (profit / sales), and it measures the profit you make on each dollar of sales. This ratio allows you to compare the profit on a $5 hammer with a $200 lawn mower, and a product with a lower sales price may have a higher profit margin.

 

You may have more profit selling the $5 hammer.

 

Sales mix, on the other hand, is the percentage of total sales that each product represents. Home Depot, for example, sells thousands of products, and lawn mower may only be 1% of total sales.

 

If you sell multiple products, you can increase profits by selling more items that generate a higher profit margin.

 

Managing Your Business

 

Once your business is up and running, use these tips to effectively manage your business.

#14- Timely bank reconciliations

 

If you don’t reconcile your bank accounts quickly, you may not catch errors and possible fraudulent transactions in your cash accounts.

 

Successful businesses reconcile all bank accounts and investigate possible errors within a few days of each month end. Your company may post more transactions to cash than any other account in your accounting system, and the bank reconciliation can help you find errors and reduce the risk of theft.

 

#15- Monitor accounts receivable

 

Firms that do not closely monitor accounts receivable and enforce a formal collection policy may not generate sufficient cash inflows to operate.

If retail bike shops are paying you slowly, you’ll need a plan to follow up and ask for payment. Take your business seriously- don’t hesitate to ask for payments.

 

Your accounting software should provide an aging schedule for accounts receivable, which groups your receivables based on when the invoice was issued. You should monitor this report and implement a collections process to email and possibly call clients to ask for payment.

 

#16- Preventing employee theft

 

As your firm grows, you’ll add employees and process more transactions. Growth also increases the risk of employee theft, and you need to take steps to reduce this risk.

 

One way to reduce your risk of theft is to segregate duties between different employees. Protecting cash from theft should be your number one priority for segregation of duties.

 

Whenever possible, these three specific duties should be kept separate:

 

• Custody of assets: The person who has physical custody of the checkbook should not have any other duties related to cash processing.

 

• Authority: Who has authority to sign a check? If you own a restaurant, for example, your manager may have authority to sign checks for purchases of food received at the restaurant. That same manager should not have access to the company checkbook.

 

• Recordkeeping: This duty refers to posting accounting entries and reconciling the bank account. The role of the accountant must be segregated from the other duties.

 

For a very small business, it may not be possible to segregate these duties. Maybe the owner handles two, or even all three of these tasks. A growing business, however, needs to separate these duties.

 

#17- Create a procedures manual

 

A procedures manual is a written document that explains how you complete every routine task in your business. It tracks how each task is performed, who is responsible for the work, and how often the task must be completed.

 

Using a procedures manual clarifies how you do business, reduces confusion about the work you do each day, and serves as a great training tool for your staff. If every routine task is documented and understood by your team, ignoring the procedures and attempting to steal assets is more difficult.

In order for your bike tire tubes to operate as you promised, they must be carefully assembled. Write out clear procedures, so your manufacturing process creates a product that works as intended.

Get Help From Experts

 

As your firm grows, it may be less costly to outsource some elements of your business operation to a third party. Here are several points to consider:

 

#18- Outsourcing payroll

 

Payroll is often the most time-consuming accounting task, and your firm may benefit by outsourcing this complicated process to a payroll firm.

 

Managing payroll is difficult, because the federal, state, and local tax laws may change frequently. Businesses that don’t outsource the payroll function may spend too much time on the process, and make errors that trigger tax penalties and interest costs.

 

#19- Bookkeepers and accountants

 

If you need help with accounting, you may eventually hire a bookkeeper or and accountant.

 

So, how do they differ?

 

Here are the differences between the bookkeeping role, and the responsibilities assigned to an accountant:

 

Bookkeeping responsibilities

 

Bookkeeping refers to the recording of financial transactions in an accounting system. Business owners hire bookkeepers to post customer sales transactions, inventory purchases, and company expenses into the accounting software. Using the services of a bookkeeper frees up the owner’s time for more important business tasks.

 

Accountant’s role

 

An accountant can use the transactions prepared by a bookkeeper, along with payroll data and other records, to generate monthly financial statements, including the balance sheet and income statement.

 

Accountants use their higher level of training to make decisions and judgment calls that bookkeepers don’t address. An accountant reviews transactions and posts more complex journal entries. Accountants also post adjustments to the trial balance and generate financial statements.

 

You may start by hiring a bookkeeper, and then hire an accountant on a part-time basis. At some point, you may need a full-time accountant to manage all of the accounting tasks.

#20- Hire an Interim CFO

At some point, your firm may be so complex that you need even more accounting and finance help, including a Chief Financial Officer (CFO). If you need an expert, but don’t have the budget for a full-time manager, consider hiring a interim CFO.

Many owners start by having an interim CFO review their monthly financials, and ask them to provide key metrics to track business results. If you’re a retailer, for example, a CFO might suggest reviewing days sales of inventory to track your inventory levels and related sales.

A CFO also manages your bookkeeping and accounting staff, and helps you make key financial decisions, such as a major asset purchase.

#21- Outperform Your Competitors

 

Simply put, business owners that plan outperform those who don’t.

 

If you invest the time and create a logical plan to start your business, you’ll save time, make better decisions, and you won’t waste valuable resources.

 

Implement a plan to start your business, and you can outperform the competition.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/