Suppose for a moment you’re moving to a foreign country to earn a living. You’re passionately excited about your new venture, willing to give up your current life style, drag your family along for the ride, and invest your savings to make it happen. As exciting as it all is, would you, even for a moment, seriously consider making the move without a reasonable understanding of the language spoken in that country? Certainly not! At the very least, your chances of success would be greatly diminished and your chances of struggle and hardship greatly enhanced.
The same is true when you are starting a business; to succeed you need to speak the language – numbers. At a minimum, you need to understand the difference between direct and indirect expenses, know how to read and interpret the three foundational financial statements, and understand how to calculate and interpret your key ratios. “The story is in the numbers” and without a clear understanding of what the numbers are telling you, you will be, in the end, doomed.
Another key point to understand, especially during the early phases of your business (and then again when you are adding new products or services) is that a “brilliant idea” is not always a “brilliant business idea.” A brilliant idea is one that meets a need or solves a problem; a brilliant business idea is one that solves the problem in a way that generates profits (in a reasonable amount of time using a reasonable amount of resources).
There are millions of great ideas that aren’t great business ideas. Knowing the difference means analyzing your idea to see if the numbers work (again with the numbers already!) They will tell you if your idea has a realistic opportunity to develop into a profitable business and how long it might take for that to happen. If it’s not looking like the brilliant business idea it once did, sometimes you can tweak it until it becomes a good business idea. Sometimes, however, it means scrapping it all together and moving onto another. It doesn’t mean your idea wasn’t brilliant… it just wasn’t a brilliant business idea. No shame in that!
Another concept that’s often not well understood by entrepreneurs is “the tighter you niche your market, the more success you’ll have.” This is a very counter-intuitive concept that meets with a lot of resistance because defining a tight niche market feels limiting. While that may be true, it is also true that the tighter your market niche, the more effective your marketing. Consider the light bulb and the laser…they both work off of the same energy but look at what a laser can do that a light bulb can not, simply because the laser’s energy is more tightly focused.
It’s common to mistakenly believe that our brilliant ideas are brilliant business ideas, that we can pay someone else to take care of our numbers, and that “everyone” is a valid target market. Yet as much as we want to believe these things, they just don’t hold up when it comes to business success. The willingness to hear and apply the wisdom in these messages does; a little understanding goes a long way.
Written by Kimberlee Hayward & Lynn Klassert, Anchorage Business Advisors for the Alaska SBDC