On the Formation of a Business

This is not a how-to guide, more a study in the beginnings of a business.

How does a business start? How does it grow? What drives some to succeed and some to fail?

What is a business?

We all understand what a business is, but how is it defined?

A search among different sources will give you a range of different definitions. Chambers dictionary list it as defined below:

business noun 1 the buying and selling of goods and services.

This highlights the common theme among all the definitions, buying and selling. It doesn’t matter what the end product of the company is or what service it is that they supply what matters is that someone wants to buy it.

The aim of any business, no matter how lofty a mission statement they may purport to follow, is to make money. They need to provide something that other businesses or customers will part with money to have access to. It’s important to remember that not all businesses will have the aim of a profit. A charity can be run as a business, they may give away all the money they receive or spend it on helping others, but they still need to be able to have that income stream to be able to operate.

How Does it Start?

I’m not going to get into depth about the formation of a business in a legislative sense, whether a limited company, partnership or group, that information is for another time. I want to focus on the concept of a business itself.

A business always starts in the same place. With an idea.

This idea must have a market value. Without a market value the idea is just that, an idea. The market value is the amount that people would be willing to pay for your idea, whether a physical product or an intangible service, it must have value.

These ideas can come from anything. Many come from people already working in an industry seeing a specific gap in the market that they could fill. Some come from the archetypal inventor, creating in his garden shed something that the world has never seen before. Many of them will leave you with the same reaction, “Why didn’t I think of that?”

From Idea to Business?

The hardest part of the business is this part. How to get your wonder product or idea from your thoughts to existence and profit?

This is the key part that can make all the difference between a successful business and a failure. Research. The successful businesses know that they will make a profit before they even start, it may be several years down the line but they know it will work.

Finding out the target market, the competition, the price points, the costs incurred to provide the service or product, advertising, overheads and working out margins to produce a profit without pricing yourself out of the market. All of these things need to be done and done well before even beginning the process of setting up a functional business.

This is why creditors or investors would require a full business plan before helping a business start up, no matter how good the idea itself is. Getting that idea to a functional point requires an enormous amount of effort and dedication.

Business Formation

The plan is in place. The profits are mapped and there’s even a lovely graph to show exactly when they will occur and how much they are expected to be.

The next step is where your investors come in, it requires an outlay to get a business up and running.

Whether it’s a small outlay, the renting of an office and copyrighting your company name, or whether it’s enormous, building a factory to produce your product while employing and training all the staff to operate it, the crux is the same, you will need some investment.

Many small businesses start with just their founders savings to set up, and this is often enough, while others will turn to banks for business loans.

This is going to be the most expensive period your business will ever see, there is always a period of investment before any return can be made. Once the returns begin coming in then further growth is possible but before any profit comes the initial investment.

Business Operation

The first aim for any new company is stability. Getting the business to a point where it is not losing any money. Obviously every company will be aiming for a profit as quickly as possible, but stability is more important.

A bumper period in a new business can lead to extra growth and outlay that the business cannot support and a quieter period following this can lead directly into financial difficulties.

Reaching a stable point means that there is the time to consider future growth and new strategies, without the pressure of knowing that every moment wasted means money lost. Only from this secure position can the appropriate decisions be made for the future.

From Business to Success

There is a certain mystique around the growth of those enormous corporations, the stories of Apple or Google starting in a garage and Facebook from a student bedroom. It is definite that a certain amount of luck is required but it is just as certain that no business can grow to that scale on luck alone.

There is one defining feature of all successful companies and that is that the right decisions were made. Time and again, those in charge of the company have made the right choice in regard to growth, the right choice in regard to competition and the right choice in regard to investment. Not everything they’ve done has always been a success but due to their structure and planning they are in a place to be able to cope with this.

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