How to start a business from scratch

You want to start a business but you don’t even know where to begin? Here are some tips to learn how to start a business from scratch. Like all things a little complex in life, it seems complicated, but if you reduce it to a series of small decisions and arm yourself with perseverance, you will see how each step can be overcome without too much difficulty.

1º- What needs of the client do I want to cover?

Call it a business idea or a new business concept, the purpose is the same and you have to have it very clear from the beginning. A business, a company, has to provide value to its customers, covering needs in exchange for paying a price. If your idea does not respond to a real need, it is no good.

In this blog we have talked many times about the business idea, and how it can be valued. We always repeat that the essential thing is that you contribute an improvement, however small, on what already exists. You don’t need to invent a product like the iPad to succeed, just improving a little bit what already exists can be enough, but you have to make sure that there is a sufficient market for your project.

2º- How much is the client willing to pay for my product or service?

This point is very important. In the first place, because in many cases the client, although he values the contribution of your concept, is not willing to pay for it. On the other hand, if the client is willing to pay for something, it is normal that they do not want to pay as much as you would like. About pricing policy, I refer you to the article we wrote some time ago about selling expensive or cheap.

3º- How much does it cost me to produce?

Once you have a more concrete idea of the potential market and the price you could put on your services and products, one very important aspect remains: How much does it cost you to produce them? Obviously, if you create a company it is to make money, so it is essential that you estimate the variable costs and fixed costs of your project, to have a first idea of the profitability. If you see that it costs you much more than you could sell, in principle your idea has little future, but do not be discouraged, it is possible that approaching it otherwise can be profitable.

When you want to know how to start a company from scratch, you must first have clear priorities. Often, entrepreneurs sin of greatness, and want to start with a large and well located, several employees, new machinery, etc. Big plans make it very difficult for a project to be viable, because there is no doubt about it: the expenses will always be higher than you could have estimated and the income will be lower. It is better to start with humility and less expenses.

4º- Am I qualified for this business project?

One of the greatest causes of business failure is that the promoter of the project is not qualified to lead it. That is why it is important to ask yourself frankly if you really have the capacity to turn the idea into a success. One of the most important aspects is to know the sector where you are going to work. The enthusiasm and interest in your project, although necessary, is not enough.

Imagine that you have always worked in a bank and your dream is to set up a chain of pet shops, because you love pets. No matter how much you want to, if you do not have the knowledge of the sector or the contacts, it is not going to be impossible to succeed, but you are going to have a very, very difficult time. In this case it is better to partner with a person or persons who will give you the look you are missing.

5º- The Business Plan

Once you have more defined your idea and your first estimates make you think it is viable, the real work with the business plan begins. You have to study in detail the commercial and financial aspects of your project. Answer such important questions as: What are you selling? What is your clientele? What are your competitors? It is important to be very specific.

A small example:

Let’s imagine you’re going to set up a bookstore. The answers to these three questions cannot be: I sell books, to readers in the X district and my competitors are the Fnac and the Casa del Libro. Generalities are not valid. Another thing is that you answer that you sell the largest range of historical novels in Spain. Then you answer that you are addressing a mostly male audience between 25 and 45 years old. Finally, you should have analyzed that your competitors are partly the big bookstores, partly the online stores. All this with the nuance that you have identified a market niche where nobody offers such a wide variety. And you sell both in a physical shop in the centre of Madrid and on the Internet and in electronic format, etc.

6- The legal form

The next question, when you consider how to start a business from scratch, has to do with the legal form. Once you have your project well defined, you will have to decide how you are going to formalize it. In Spain there are two main options (although there are more): self-employed or limited company. To simplify, you can say that if you are going to start up on your own and the volume of profits you estimate will not exceed an annual salary of around 45,000 euros, the most practical thing to do is to choose to register as a self-employed person.

If you have more profits, other partners, a significant turnover, or the legal structure of the company itself is relevant to your image (in certain circles, suppliers and customers will only listen to you if you have a company), then it is better to choose to create a SL (limited company), which you can start with only 3,000 euros of capital.

7º- Financing

The business plan will determine how much investment you will need, and how much money you will need to cover the more than certain losses of the first months (sometimes years). So, either you already have this money (congratulations, you can start your project), or like most entrepreneurs, you will have to find it. There are several sources of funding, from your own savings, money from friends and family, public grants, bank loans or equity from venture capital funds or business angels.

8º- The partners

Another very important aspect is to know if you go alone or with partners. This depends on your personal skills, your preferences and your needs. As we explained before, if you lack knowledge (financial, commercial, sectorial), it can be very useful to have a partner. But your management style is also very important. If you prefer to work alone and want to control everything, it may be better to go it alone, although working alone is not easy.

If you choose to partner, you will have to avoid the mistakes we made in a previous article.

9º- The location

If we’re talking about starting a business from scratch, we’ll have to find a location for your base of operations. Where you are going to locate your business is always important. It is clear that if it is a business location, you will have to look for the most suitable area, and never forget that you have to go where the customers are, not expect customers to go where you are, because for this type of business location is essential.

Even if you don’t have a shop, there are other aspects to take into account. You will always have to receive customers or suppliers, so being in a town 50 miles away from civilization is probably not a great idea. Similarly, if you choose to trade online, you have to find a location that allows you to optimize your logistics.

Searching for a location is not always easy, but in the end, everything is achieved.

10º- The employees

The employees are your most important partners. They are the ones who have to offer your customers the best products with the best quality of service. You have to keep them happy to work with you while demanding the best from them. Maybe the first thing you have to explain to them is that you are not going to pay their salary, that the customer is in charge of this, as Henry Ford said.

When choosing them, think about what is best for your company in the long term. You may have no money at first and want to hire unskilled staff for little money, but in the long run if your employees are not better than you it hurts. Always look for the best people for the job. If they are not very experienced, go for young people with potential.

Human resources is possibly one of the most complex aspects in the management of a company, because you have to mix objective economic aspects with personal emotions and preferences. But you learn a lot and quickly.

11º- The suppliers

Entrepreneurship means learning how to buy. If you do not take care of this fundamental aspect, you will not be able to offer the best services at the best price. Always negotiate and look for several budgets for all relevant purchases. Try to build long-term relationships of trust with your suppliers, because on more than one occasion they can get you out of a tight spot (for example when you urgently need a product for your most important customer).

12º- Looking for and satisfying customers

You have almost everything to get started, but you lack the most important thing: a customer to buy your products or services. And don’t be fooled, even if you have a highly visible shop on the busiest pedestrian street in town, you’ll have to go and find your customers.  Convincing your potential customers to buy your product or service is one of the most important moments in starting a business from scratch. You will have to advertise, phone to propose your services or send your commercials to tour the city door to door.