Reading: Important Considerations

Photo of a man stepping out of the ocean onto the sand and another man, in the distance, heading into the surf.

The entrepreneur’s challenge is to balance decisiveness with caution—to be a person capable of seizing an opportunity but also one who has done enough preparatory work to be well informed and not assume unnecessary risk. Preparatory work includes evaluating the market opportunity, developing the product or service, preparing a good business plan, figuring out how much capital is needed, and making arrangements to obtain that capital.

Economists have analyzed a range of entrepreneurial successes and failures and identified key issues for up-and-coming business owners to consider carefully ahead of time. Taking them into account can reduce risk; ignoring them can contribute to failure. If you’re considering entrepreneurship, ask yourself the following questions to make sure you’re thinking about the key business decisions:

Motivation: What is your incentive for starting a business? Is it money alone? Are you prepared to spend the time and money needed to get your business started? True, many entrepreneurs acquire great wealth. However, money is almost always tight in the start-up and early phases of a new business. Many entrepreneurs don’t even take a salary until they can do so and still leave the firm with a positive cash flow.

Strategy: What products or services will your business provide? What differentiates your business idea and the products or services you will provide from others in the market? Who is your ideal customer? Who is your competition? Is the plan to compete solely on the basis of selling price? Price is important, but most economists agree that it’s extremely risky to compete on price alone. Large firms that produce huge quantities have the advantage in lowering costs. It’s also important to decide how you plan to manage and advertise your business.

Realistic vision: What kind of business do you want, and how much will it cost to get started? Will you need a loan? Is there a realistic vision of the enterprise’s potential? How long will it take to make your product or service available? How long until you start making a profit? Insufficient operating funds are the cause of many business failures. Entrepreneurs often underestimate start-up costs and overestimate sales revenues in their business plans. Some analysts advise adding 50 percent to final cost estimates and reducing sales projections. Only then can the entrepreneur examine cash-flow projections and decide if he or she is ready to launch a new business.

Other Key Decisions and Planning

Experts can help with many decisions on financing, taxes, insurance, location analysis, or supplier relationships. Some bankers and insurance agents will give advice at no charge to encourage a relationship. There are even experts to help with planning itself!

There is no right or wrong way to answer these questions or do the planning. Rather, the answers and approach will be based on each entrepreneur’s judgment. An entrepreneur gathers as much information and advice as possible before making these and other crucial decisions.