Startups must assess staying power

You're square with your attorney and accountant, you have a designer working on your new business' website, and you've answered the who's-going-to-buy-what-I'm-selling questions from last week.

But you might not be quite ready to make lemonade out of the lemons the economy and your former employer gave you. David Gay has some additional things for you to think about.

Gay is director of the Illinois Small Business Development Center at College of DuPage offices in Lisle and a veteran counselor to small businesses. His first questions are perhaps the most important.

"What's your staying power?" Gay asks. "How long can you hold on? How much are you willing to risk?"

Many hopeful business owners "fail to research what all is involved to launch and make a business self-sustaining," Gay says. "Step back and determine what you'll need - your minimum living expenses. You may want $200,000 a year, but you may need $75,000.

"Then there's the self-employment tax and your health insurance. There will be marketing expenses, professional fees, your phone line, the cost of goods you'll be selling, fixed business costs.

"Know what you need each month," Gay says. "Figure it will take two years to get to break even. And then determine how long you can hold on."

A big part of the answer to the how-long question involves business income. Assume, as Gay did during our conversation, that you're a consultant planning to work 40 hours a week with two weeks off for vacation.

That's 2,000 hours to work with each year. If your income goal is $200,000, the math indicates you should charge $100 an hour for the 2,000 hours.

But, Gay points out, those 2,000 hours aren't all billable. "You'll spend one-third of your time on marketing outreach and another third on professional development," he says. That leaves, roughly, 700 hours as billable time.

Do the math again. Hitting the $200,000 goal requires hourly billings of slightly more than $285. Doable? Only you and your potential clients know.

That gets us to Gay's focus on planning - before you actually start up. Part of Gay's planning process is a monthly cash flow forecast. Too many startups, Gay says, "don't understand the amount of working capital necessary to get their business to profit."

Gay suggests having conversations with others already doing what you want to do. "Find as many operating models as you can and talk to the owners," Gay says. "Ask what worked - and what didn't work - during their start-up process. Ask what they would have done differently."

Finding peers to talk with is fairly easy if you're considering a franchise, but more difficult if the other owners think you'll be a competitor. You may have to research outside your home market.

• Contact Jim Kendall, JKendall@121MarketingResources.com.