13 Things to Know Before Starting a Business

Being your own boss and running your own company is an exciting endeavor. However, there are several things to know before starting a business.

Before opening your doors, you must be prepared to complete whole-scale research, planning, and financial decision-making to give yourself the best chance of success.

By understanding some basic things to know before starting a business, along with questions to ask yourself before opening your small business, you will be better prepared for the ups and downs of owning an LLC.

In this guide, we’ll cover some essential things to do before starting a business so you can set yourself up for success.

What You Need Before Starting a Business

First, you’ll need to have a clearly defined business plan—an outline for how you will run your business and make money. This includes understanding your target audience and how you will manage your cash flow. You also need to know the legal requirements for establishing your business. The more you know about topics like accounting and managing customer relationships, the more likely you are to succeed.

Obviously, you need money to start a business, too. But before you invest, you need to do the necessary groundwork to make sure there is demand for what you plan to offer. You need to understand best practices for running your business or get help from those who do know. The right foundation is what will ultimately allow you to overcome common small business challenges.

13 Things to Know Before Starting a Business

With all of this in mind, here is our checklist for starting a business. Make sure you have an understanding of each of these topics as you prepare to set up your business.

1. Don’t Rush Your Business Plan

Creating a business plan before starting a business is essential. A business plan is a formal document that essentially serves as a blueprint for your business. It describes the nature of what you do and how you do it. It explains how you will earn money and how you plan to reach your target customer. It can help you set goals (including best practices and deadlines for reaching those goals).

A well-crafted business plan takes time. It requires thinking deeply about how you want to run your business, who you plan to serve, and so on. Going through the process of creating a business plan doesn’t just help you fine-tune your approach to running your business. It can also be a valuable document that makes you more likely to be able to obtain financing.

The Small Business Administration (SBA) offers excellent guidelines for developing your own business plan.

2. Performing Market Research Is Critical

The importance of market research before starting a business cannot be understated. Market research tells you who your target audience is, as well as what their needs and interests are. It can also help you identify existing competitors in your niche. Detailed research can help you identify areas where these competitors are currently falling short or if there are certain groups or sub-niches that they aren’t serving.

Not sure how to conduct market research before starting a business? You can use a wide range of secondary and primary research options. Existing industry reports and market research databases (including government research and trade surveys) can help you better understand the market. Conducting surveys and interviews, or even looking at comments and reviews for other competitors, can help you better understand your target audience.

These and other sources can help you identify trends and insights that you can use to set your business apart.

3. Cash Flow Problems Are the No. 1 Reason Small Businesses Fail

A recent study revealed that 82% of small businesses cite cash flow problems as the reason they fail and 44% percent blame running out of cash for their failure.

This makes proper cash flow management critical for every business. You must track all the money that moves in and out of your business so you can understand your current financial picture. This information can help guide your decision-making with how you use your available cash resources.

Tracking your cash flow can also help you identify and cut unnecessary expenses or reevaluate areas where changes are needed. For example, something as simple as shortening your invoice terms can ensure faster payments from your customers so you can stay in the black financially.

4. How You Structure Your Business Matters

Among the legal things to do before starting a business is figuring out how you will structure your business entity. For most small business owners, this means deciding between a sole proprietorship or an LLC, but larger businesses may also want to look at forming an S-Corp or C-Corp.

Each of these legal structures has different pros and cons and different requirements for legal establishment. For example, an LLC provides liability protection to its owners’ personal assets, but it also requires more extensive documents and fees. Operating as a sole proprietor is easier to set up but isn’t recommended if you have potential liabilities.

5. Other Legal Requirements Can Vary By State

Where you live can play a major role in the legal aspects of running your business. Research what your state’s filing requirements are for forming a business. For example, many states don’t require a formal filing to start a sole proprietorship, but they do require a formal application and fee payment to form an LLC.

Depending on the type of business you operate, you may also need to obtain other permits and licenses. You may also need to understand how state sales tax applies to your business. Make sure you understand your state’s legal requirements so you don’t have to deal with fines or other penalties later.

6. You Can’t Do Everything Yourself

You may have a great idea for a business and a lot of industry knowledge. But this doesn’t mean you understand how to do everything required to run your own company. And that’s okay. Many businesses choose to outsource tasks like accounting or marketing when they don’t have internal expertise.

Depending on the scope of your needs, you could work with a freelancer, use digital software, or even hire a full-time employee. Be honest with yourself about your capabilities and how much time you can devote to these other tasks. Consider your budget as well so that outsourcing efforts don’t negatively impact your cash flow. Ideally, delegating or outsourcing tasks will help you become more efficient and profitable.

7. Accounting Processes Will Prove Tedious, But Important

Part of why many business owners choose to delegate or outsource accounting is because accounting processes can be very tedious. Managing balance sheets, profit and loss statements, and cash flow statements is critical for tracking the financial status of your business. Going deeper, you need to track the status of invoices and receipts, accounts payable and receivable, inventory, tax documents, and more.

Tracking all of this information can be extremely tedious and time-consuming, but this isn’t something that can be overlooked. Accounting processes are what help you get paid and make payments on time, stay compliant with tax and payroll requirements, and keep track of your cash flow.

8. Customers Tend to Pay Late—Be Prepared

Late-paying customers are one of the most common reasons why businesses struggle with cash flow issues. No matter what industry you work in, this is likely to be an issue sooner or later. And when late payments get out of hand, it can limit your ability to cover your own expenses.

With this in mind, you must have a clear plan in place for collecting unpaid invoices. A system that helps you quickly identify overdue invoices and send payment reminders is a good start. You should also establish policies for late fees on overdue payments and scenarios when you would need to contact a collection agency.

9. Value Relationships With Your Customers

Building good relationships with customers is critical to the long-term success of your business. After all, it’s easier (and cheaper) to sell again to an existing customer than it is to try to gain new customers. By consistently providing a high-quality service experience and treating customers with respect, you can build lasting relationships.

As part of your business planning, consider simple ways you can improve customer relationships. Actions like sending invoices quickly, offering multiple payment options, personalizing your services, and communicating effectively can all make a difference.

10. Qualifying for a Traditional Loan Will Be Difficult

For many small business owners, obtaining financing is one of the most important steps to take before starting a business. Unfortunately, qualifying for a traditional loan can often be challenging when you don’t already have demonstrable cash flow or a business credit score.
To qualify for a traditional loan, banks will generally want to see an extremely detailed business plan that explains why you need funding, how you’ll use it, and how you’ll repay it. They may also look at your personal credit score or ask for personal collateral on the loan. Even then, there is no guarantee that you will be able to qualify for a traditional loan.

11. New Businesses Typically Rely on Alternative Financing

Because getting a traditional loan can be so difficult, many new businesses rely on alternative financing, both when starting their business and when funding operations later on. Make sure you understand options like MCA loans, ACH loans, crowdfunding, grants, and asset-based lending to determine whether they could be a good fit for your needs.

Invoice factoring can be helpful once your business is more established. This allows you to essentially sell unpaid invoices for a cash advance. Typically, up to 90% of each invoice value is paid to you in just 24 hours, while the factoring company pays the remaining balance after they collect payment from your client. While you do have to pay a small factoring fee, this allows you to get quick cash without taking on additional debt.

12. Networking Will Take You a Long Way

Even if you’re running your business as a solopreneur, you can’t overlook the importance of networking. Connecting with other professionals in your community can be a great way to discover new resources, form partnerships, or even get referrals for new clients.

Forming genuine relationships can be one of the most important things you do for the long-term health and sustainability of your business.
Look for opportunities to network. This could include participating in industry-specific events, joining local community organizations, or even participating in online groups. Focus on building relationships instead of selling yourself. This will make others more willing to share their resources and knowledge with you as you’re starting out.

13. Small Business Growth Takes Time

How to manage business growth is one of the most important dilemmas for those whose businesses grow unexpectedly. While it can be exciting to see some initial success for your business, many companies actually fail when they try to grow too fast. Common mistakes may include trying to service more customers than your current team can handle or hiring additional full-time employees before you need full-time support.

Sustainable growth takes time and requires a mindful strategy. Slow and steady allows you to gradually expand while maintaining a high level of quality for your customers and keeping your cash flow properly balanced.

Things to Know Before Starting a Business FAQs

Should I get an LLC before starting a business?

Starting an LLC is recommended before starting a business if your business has potential liability risk. An LLC provides legal protection for your personal assets. Keep in mind, however, that your business may be better served by forming an S-Corp or C-Corp, depending on its structure and business model.

What are some good books to read before starting a business?

Some popular books to read before starting a business include:

• The 7 Habits of Highly Effective People by Stephen Covey
• The Lean Startup by Eric Ries
• Blue Ocean Strategy by Renee Mauborgne and W. Chan Kim

Each of these books offers excellent insights, covering additional factors to consider before starting a business.

Can you claim expenses before starting a business?

For many, one of the considerations before starting a business is figuring out how they will manage startup expenses. Fortunately, you can deduct certain startup expenses for tax purposes. You can deduct these expenses during the first year you are open for business. Deductible expenses may include market research, training employees, marketing, and legal fees.

Can I get a business loan before starting a business?

You can get a business loan before starting a business, but this can be challenging. Lenders are more likely to approve you for a loan if you have a strong business plan with sound financial projections and an explanation for how you would use the loan. When deciding to lend to you, lenders are more likely to look at your personal credit score or want you to offer collateral to back the loan.

How much money should you save before starting a business?

To cover your own personal needs, experts recommend saving at least three to six months’ worth of living expenses before starting a business. This way, you can cover basic needs before you can pay yourself any income from your business. You should similarly save up enough to cover your business’s operating expenses for at least the first three to six months.