Adding an Enterprise
There are five key considerations in evaluating an enterprise addition.
Market is the place to start. The key question is, “is there a demand for what I will be producing?” Obvious enough for you? Well, many folks decide to do an enterprise and then go look for a market, so apparently it is not so obvious.
So, do some research. Test your products or services to see if they have demand and how these should be configured and placed. Ask questions. Check around to see if anyone has done this before. Look at real life business models similar to what you want to do. Figure out what the business proposition is or should be. If you enter a new market space, you are still faced with competition that has supplied that market in some form before. Your key question is, “Am I better than; cheaper than; or different than?”
Once you discover what you believe is an unmet need in the marketplace, then you need to see if it fits in “where you are.” Is there enough resources such as water, electricity, roads or whatever might be affected by your decision. This could be things like having three phase power to your place. What about zoning issues? Will this enterprise adversely affect your neighbors. Conversely, are there synergies that might be enjoyed “because” you do this enterprise? Will this enterprise be more sustainable because it fits so well with what others are doing nearby? Look for the good or bad elements of this decision while you try to imagine it in this bigger picture.
Sure, you are likely doing this for the money. Or, you at least better know it will pay for itself, right? But, there are questions to look at and here are several which are not ranked for importance. First would be, “do you have the money to put this enterprise in play?” If there is money to be borrowed, will that jeopardize your core business? Do you have issues in your core business that won’t be solved because you are stretching into this new enterprise and it will use all your cash?
Will this enterprise help increase your net worth over time? Can this enterprise help even out net cash flow or does it make cash flow more volatile? Does your banker understand what you are doing? Does your spouse agree and understand what you are doing? Have you identified where you make your margins in this enterprise? Can you stand a business interruption in this enterprise? What are your breakeven volumes? What will be your likely cost of goods sold? In order to get a true picture, can you identify and correctly allocate all the costs associated with this enterprise?
Allow a sufficient marketing budget. Allow enough cash to “burn” in the early days when this enterprise is not returning any money.
Consider an exit strategy. Whether you succeed, get burned out or fail, you are likely to come to a point where you need to unwind this enterprise. Consider this event and try to structure in a method.
A new enterprise may bring new technical needs. It may be equipment or other hard technology. In some cases it could be soft technology such as management systems, bookkeeping systems or experiential knowledge from someone outside your business. These technical needs must be identified and handled right up front or you will waste time and money on mistakes. Spend time going to other businesses that will share with you. Learn from anyone who will talk to you about it. Humbly ask and you will receive more help than you might imagine. Emphasize the soft technology first. Keep the hard technology to a minimum. Machines, automation, new facilities are all overhead costs that will pull at your finances. Put together the finances to have what you need but keep it lean and strictly purpose built.
Do you have management experience to do this enterprise or will you need mentoring? Will the addition of this enterprise stretch you thin or burn you out? Can you share management duties and how might that be done?
Management guru, Peter F. Drucker always said that “…inside your business are only costs.” This is an excerpt intended to remind us that in management your main task is to constantly manage and reduce costs. You do this for competitiveness and profit, of course. You do this because you don’t control what the market will pay but you do have control over your costs. While many of us might chose a new enterprise because we see big premiums in the market, in a very short time these premiums will do what they were intended to do…attract lots of competition. So, if you are going to be in that attractive market, you better be the best at getting costs down or value to the customer up because the premiums will go away very soon.
Don’t see the beginning of your enterprise as if it was the be-all and end-all. In fact, you should be thinking of how you will immediately begin to change it. Think about how you can innovate. Remember that innovation is not simply about making your product different. Innovation can be about making your delivery or packaging or service different. Maybe you create a better “story” to go with your product. Maybe your innovation is about personalizing it. It is up to you to innovate sufficiently so you can differentiate yourself in the market. Don’t assume that you have a market there for the taking. Aggressive management assumes they have to earn their market space every day.
Lay out an organization chart. Even if there is only one or two of you in this enterprise, put all the functions down on a chart and write in who is responsible and who has authority to do certain things. Don’t laugh. This will stop some arguments and misunderstanding.
Who is the backup in case someone goes down for some reason? Structure this business for continuation and sustainability at a management level. Don’t leave this to chance.
Figure out what are the key cost and margin points that you need to manage to. Put your cost accounting together in such a way that these numbers are accurate and easy to check on a very regular basis.
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