Is It A Good Time To Start A Business?

I get questions that are inconsistent with the theme of the Blog, but they’re asked in earnest and part of my function, at least as I see it, is to be a source, to whatever extent possible,  of good information. The individual is planning a new business start up in the tactical space so I’ll give you my two cents worth.

The first point that I want to make is that any business venture requires a plan. The plan must include consideration of current economic conditions, regulatory environment, availability of capital, clearly defining – with pinpoint accuracy – your market space, understanding your customer’s needs and assessing to what extent your product or idea meets those needs , understanding your competition, understanding your supply chain. All of these considerations translate to numbers, which are articulated in an operating plan and budget – after all that is what business is all about, numbers. With that in mind, I’ll give you my opinion point by point.

  1. Current Economic Conditions – our economy is consumption driven and there are three consumers.
    1. Business consumption – businesses consume by purchasing raw materials, and capital equipment like machines, tools, buildings, etc. The data that I’ve seen indicates that capital invest when adjusted for inflation is very low. Even at a time where the cost of capital (interest rates ) is historically low. This says that businesses are being very cautious about expanding or improving production and production capacity.
    2. Consumer spending – when you remove major purchases like automobiles, major appliances, etc. – things that most households finance – is weak and if you adjust it for inflation which has been running on average 2.4% , consumer spending has contracted. This comes from the stubbornly high unemployment rate and the decline in real income over the years.
    3. Government Spending – this has been the economic driver over the last several years. Regrettably, that comes at the cost of large deficits and increases in the national debt. Think of it this way. In your own life, you spend 1,000 more than what to take in. You make up for it by borrowing against your line of credit. In subsequent years the same thing occurs your deficit spending is 1,000 so you hit your line of credit, which now has a balance of $2,000. Part of your deficit spending is paying interest on the money you borrow so it’s an unsustainable condition. Governments deal with that by taxation, so taxes increase, which takes money away from business and consumers so their consumption drops. (This is our current economic condition)
  2. Regulatory Environment – refers to government’s oversight (laws and regulations). For example, when the State of Colorado banned standard capacity magazines it placed at risk companies like Magpul Industries; meaning that investments in production capacity and processes were undermined. In Magpul’s case, they moved out of Colorado. Had they chosen to stay, Magpul’s management would have made no further investments in its plant and equipment, etc.
    1. The current political climate is replete with downside potential for this industry. For example, you indicated that you had ideas for a new carbine sling. If AR15s are banded your market share would be limited to what is currently available with no possibility for growth.
  3. Availability of Capital – The cost of capital is at historically low levels. Meaning that now is the time to borrow; however, finding a lender that would make you a loan is another matter. In fact, one of the phenomenon’s in the economy today is that even at these low interest rates, companies are not increasing capital improvements (spending). They are achieving greater profits by cost cutting, and on the spread between what they borrow at and what they get in return from other financial instruments; i.e they aren’t making more money from selling more widgets, Instead they are cutting costs and making money on financial transactions – speculation, derivatives etc.
  4. Defining Your Market – This seems like it’s intuitive but think again. You need to clearly understand who you are selling to. How they make decisions and how they are affected by items 1, 2 and 3.
  5. Understanding Your Competition – You’re getting ready to launch a business into a mature industry. Who are your competitors? Do they have more money than you? Will they keep you out by lowering prices, Is your product protected by patents. In other words, you need to be ruthlessly honest with yourself on what your prospects are given your competition. What is your identity as a business? What uniquely separates your from your competition? Marketing is not easy; especially when you are launching a new product. Avail yourself of a reputable marketing and public relations firm. They are an invaluable resource.
  6. Understanding Your Supply Chain – Can I count on them to be in business, will they honor delivery schedules? Will they honor pricing? How likely are they to become a competitor (important consideration if you offshore) ?

You need to sit down and develop a budget that takes all of these six items into consideration.  For example a Pro-Forma (fancy term for a best guess) Income statement. If I sell this much, I’ll have “X” amount of income. You’ll want to do that at varying levels of performance. A capital plan – these are the machines and computers and desks that I need. A  C.P.A. can help you with that and you’ll need to have it done when you try to get a loan or attract investors.

Finally, you need to have a FIRM understanding of how much risk you are willing to accept. Can you loose 100% of your investment and still keep a roof over your head and your family unit intact.

Business creation is all about planning, control and risk management!

Also explore teaming with an established business. Your idea may just be what they are looking for and there are 1,000 different ways in which you can structure a relationship.

Good Luck Scott!

This entry was posted in Reader Questions and tagged , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s