The FINANCIAL — Preliminary financial analysis, market research, proper distribution of capital and enlisting professionals who can walk you through the start-up process – are the top steps that entrepreneurs need to follow before starting their own business. Simply having the idea for a business is not enough, experts warn. Otherwise, all of us would quit our jobs and start a business.
“Mistakes can be made at every stage,” said Zaza Chelidze, Economist at Policy and Management Consulting Group (PMCG). “They can be made during the planning, income distribution, as well as the re-investment and expansion process. Business starts with planning. Accordingly, the main mistakes are made during the starting process among most start-ups. Every project needs preliminary financial analysis. Just having an idea is not enough. Unfortunately, there are cases when a business is built only on an idea and is not accompanied by appropriate financial calculations. Insufficient attention is paid to the market research of their potential business and risk management. All of this is necessary for start-up businesses,” Chelidze told The FINANCIAL.
“Abroad as well as in Georgia, inexperienced entrepreneurs are imagining that they can achieve success in a short-term perspective. However, to achieve a little success and its transformation into greater success, or the achievement of the existing one, requires more work and more concerted efforts. That is why many people with interesting ideas fail to achieve their goals,” said Aieti Kukava, CEO of Alliance Group Holding, financial company based in Georgia.
According to Kukava, young entrepreneurs often start a business without having an exact plan, budgeting or market study.
“Therefore, it is necessary to get qualified consultations before starting a business even with your own budget. That is what our company takes into consideration while financing a start-up business. We rigorously evaluate any business idea. We appreciate risks, study the market and potential consumer behaviour and competition. Only then do we adopt realistic plans consisting of several stages. This is everything that the final business plan includes. To critically analyze ideas and only after that start their implementation is our main suggestion for start-ups. The support of qualified staff is also important for this purpose,” said Kukava.
Together with four friends Giorgi Jokhadze, 27, founded Vita Logistics, the international shipping company, in 2012 with initial capital of just GEL 200. Within a two year period of time the company can employ 30 people and pays GEL 300,000 to the state budget. Jokhadze and his friends increased the annual turnover of the company to GEL 10 million, investing GEL 1 million in their own tracks and increased the turnover capital to GEL 400,000.
When looking back, Jokhadze realizes some mistakes which he would have avoided had he had the same perspective he has today. He underlined the improper distribution of capital as his main mistake.
“I think that at the initial stage, reinvestment of 100% of a company’s profit is important for the company’s further success. Many entrepreneurs tend to spend improperly, for personal purposes, and not only the profit, but also credit issued for their business development. All of this combines to have irreparable consequences,” said Jokhadze.
An almost 10 percent increase was observed in registering business in the first quarter of 2014 compared to the same period of 2013, according to official data provided by the National Agency of the Public Registry. While the number of individual entrepreneurs increased by 10.5 percent, the number of registered for-profit entities reduced by 6.6 percent, the data shows.
In terms of its profitability, Jokhadze said that choosing a sector with a high margin is preferable at the initial stage. “It will be easy to introduce your business to customers with a damping policy. It is also desirable to select a field where it will not be necessary to purchase expensive facilities,” he explained.
Chelidze, PMCG, pointed out the energy and tourism sectors in Georgia as the most prosperous and worth investing in.
“The energy sector is one of the sectors that has the most potential currently, where a successful business can be run. Georgia uses only 20% of its hydropower resources. There is a big opportunity for the construction and operation of new plants. FD in the energy sector has been significantly increasing during recent years. It is indicative of the future potential of the sector. Increasing demand for electricity not only in Georgia, but in the whole region is also an important factor. From an importer country Georgia switched to being the exporter of electricity during recent years. The export potential of the country is increasing. Existing regulations also contribute to the establishment of new enterprises and reduce the risks related to starting a business,” said Chelidze.
“Tourism is one of the fastest growing and potentially interesting fields in Georgia. There still remain many directions in tourism which have not yet been assimilated. Recreational and wild tourism are one of those directions. There are les bureaucratic barriers, besides standard permissions, which is very important,” he added.
As the exact type of the project, its scales and territory, determines the volume of investments, Chelidze found it difficult to name the sum needed for start-ups in the above-mentioned fields. As for the payback, he said that the energy as well as tourism sectors are not calculated for the short-term period.
Starting a business with one’s own capital is the best option, believe Jokhadze and Chelidze. Meanwhile they do not consider a bank loan to be a hamper to business development, in the event of proper management.
“From my own experience I would say that authorized capital does not play a decisive role. For a start-up business, especially in the service sector, in the case of the proper usage of a loan, the development of the business is inevitable. The loan will not complicate business activities,” said Jokhadze.
“The banking sector plays a vital role in business and the whole economic development in all countries. The loan contributes to the implementation of any business initiative. However, it should be correctly calculated and profit-oriented. In Georgia, like in all developing countries, there is a lack of capital. Accordingly, this increases the demand for bank loans. Any business financed with its own capital, rather than with a banking loan, is naturally more lucrative for an entrepreneur. This is because interest rates on credits are high in Georgia, like in other developing countries,” Chelidze said.
When talking about the common personal characteristics of an entrepreneur, Jokhadze thinks that having great, but realistic goals and measurably striving towards these goals is crucial. He believes that an entrepreneur should have excitement about overcoming obstacles. Responsibility and passion are also very important in Jokhadze’s opinion.
While talking about the link between one’s Alma Mater and success, many recall the example of Steve Jobs, who dropped out of Reed College. “The business education of top management plays a big role in the success of a business, but not a decisive one. In some cases, the knowledge of accounting programmes and a high level of general skills is sufficient to succeed,” said Jokhadze.
In the event of failure, many people start blaming it on misfortune. However, Jokhadze has his own formula to explain it. “I believe that one should deserve their fate. You should defend the principles of fair play with competitors and customers and that way you will ‘force luck to be on your side!’ ” Jokhadze told The FINANCIAL.
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