Tag: owning a business

Every investor will want to know how you, as an entrepreneur, plan to turn their investments into a profit. This makes writing the financial sections of your business plan absolutely critical.

As a new entrepreneur, if you are courting investors you will soon find that they all want to see details about how you are going to keep your numbers in the black. Even if you are not looking for investors, you need a clear blueprint for your business. The financial section of your business plan is not strictly an accounting report; a lot of it has to do with projections and estimates based on your research. Six key elements should be part of your business plan’s financial section.

Projected Sales

Create a spreadsheet that breaks your estimated sales on a monthly basis for at least the first year. You also should do projections for your second and third years in business as well to show that your business has growth potential. For projections after the first year, you can break the total sales down into monthly or quarterly figures. It may seem impossible to project your businesses’ sales, but that is where the research comes in. Research past results for other businesses like yours and make your best educated estimations.

Expenses and Budgeting

Tally up how much it is going to cost to meet your projected sales quota. Include fixed costs such as lease space and payroll as well as variable costs such as supplies, i.e. the more you sell, the more supplies you will need. Not all of this information will be set in stone, but the rise of sales and supplies should work out in proportion to each other. You will have to estimate certain things like taxes and interest. Your key objective is to present a workable financial plan for sustaining your business’s growth.

Cash Flow

The tricky part of determining cash flow is that you also have to figure in accounts payable and receivable. For example, if you invoice customers, you cannot always assume that you will collect 100% of those invoices within 30 days. Use business planning software or pick reasonable percentage of the number you think will collect on time. You also have to account for invoices that you have to pay to vendors, so you will have to factor those in based on the vendor’s payment terms. Match this up with your projected sales and budgeted expenses to be certain that you have a positive cash flow every month.

Income Projections

This is a basic profit and loss statement projected over a three-year period. This is where you bring all the previous figures together to show how much money you expect to make. A very simple formula is to take your gross profits, subtract your expenses including projected variables like interest and taxes and come up with your net profit. You need to show monthly figures for at least the first year, and ideally for the second and third years, but you can also do quarterly projections for years two and three.

The Balance Sheet

There is where you deal with things like assets and liabilities. Assets are inventory that is paid for, equipment and property. Liabilities are things that you own money on, such as a lease, past due bills or loans. Another important thing to add in to your balance sheet is depreciation. Computers and equipment lose value over time and become less of an asset. Speak with your accountant to figure out what items you have will depreciate over time and he or she will be able to give you a good estimate of how to factor that into your balance sheet.

The Break-Even Point / Exit Strategy

Assuming that things do not go as planned, you need to go back to your income projections and figure out much you need to make in gross profit to pay your expenses. While the goal is obviously to stay profitable, investors will want to know that you will recognize when the business is no longer viable. Knowing at what point you are just barely getting by, will help you plan an exit strategy. Investors will want reassurance that if sales do not go as forecasted, you will be able to close down the business without incurring major losses.

While this may seem like a lot of work for just one part of your multi-part business plan, it is the most important part of your business plan. Investors like to see realistic numbers, and preferably graphics like charts and spreadsheets. Later on, as your business matures, you can also use this information as a benchmark for how well you are doing. The business plan is not just your starting point; it is also a reference point for how you measure your business’s success.

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Most people do not plan to fail, they just fail to plan. Written goals will give you a blueprint or a road map of where you are to where you want to go.

Several years ago a  class at the Harvard Business school was surveyed at the time of graduation. The survey indicated that only ten percent of the class had written goals. Ten years later another survey was conducted from the same class and the results were amazing.

The ten percent that had written goals outearned the other 90 percent. You can get to any destination as long as you have a roadmap of how to get there. You would not go on a trip in your car to someplace new without a roadmap or a GPS for today’s version of road maps.

Proper training of the products and services that you will be offering will also be critical to your success as well. It may be that you will need to work on yourself and change some of your self-talk. Most people do not even realize they have self-talk, much less do anything about it.

The subject was two words that will ensure your success. Once you set your goals, develop yourself, become educated on your products and services and become a product of the product all is left is Don’t quit.

Most people will quit just at the time when they are going to have success. You must remember that in business, you will have more failures than successes. Or to put in terms of winning and losing, you will have a losing record.

I have listened to a lot of business people who have been very successful at what they do. Most everyone has mentioned that they have not really done anything different or special, they have just failed more times than anyone else.

Most professional athletes have failed more times than they have succeeded. A baseball player will strike out more times than they will hit a home run. A golfer will lose more golf tournaments than they win.

Do they quit?  No they do not. Why do people start a business and quit. They are not prepared for the rejection and in some cases they quit because of the fear of rejection. I would recommend that you put all fears aside and simply put yourself into your business and do not look back.

If all of the famous inventors had quit after a few tries, our life today would not be as enjoyable. Thomas Edison failed almost 1,000 times. Henry Ford was made fun of for inventing the automobile.  These guys turned out fine didn’t they?

If anyone is making fun of you or ridiculing you, do you really need the advice of those people? Would you want to get financial advice from someone who is homeless. Would you seek medical help from a lawyer? No you would not, so surround yourself with like minded people.

There is a lot of information available to you. I would find someone that you can relate to. Possibly you have some similar circumstances as some of the great teachers of today have had. Most came from very humble beginnings and some were even at the point of being broke. So nothing is impossible to overcome as long as you don’t quit.

You can achieve anything you desire, so keep pushing yourself each and every day and Don’t Quit.

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Now, while the overall number of self-employed is growing, many fall by the wayside in their attempts to run their own businesses. A great sounding business idea does not necessarily translate into a viable business.

Business hazards

There are countless factors that can bring a business undone, though the general consensus among small business researchers is that the main one is “management inadequacy”, associated with around 90% of business failures. Other major contributors to failure are poor accounting records, deficient accounting knowledge and lack of management advice. These business hazards are joined by many more including: inadequate financing; excessive debt; low sales; high costs; high interest rates; market collapse; lack of market knowledge; overwhelming competition; poor product; service or quality; economic downturn; excessive optimism; production inefficiencies; poor planning; poor forecasting and sheer bad luck.

Thing the proposed business through

By doing your homework very thoroughly, however, which involves seeking considerable professional advice and preparing a proper business plan, you will address and resolve many of these hazards before you even pass “Go”.

You may even discover during the research phase that your proposed venture is unlikely to work. As disappointing as this may be, it is infinitely preferable to go back to the drawing board at this point rather than be forced to bail out one or two years into the business. You’d be amazed how many businesses have been set up simply off the back of an idea without any dispassionate research being done. Of course this ad hoc approach can work, sometimes spectacularly, but mostly it doesn’t

Consider the following points because they will help you focus on the issues critical to business success (and note, this list is far from complete).

  1. What is the main reason why you want to become self-employed – either by buying an existing business or by setting one up from scratch? If it is basically to “buy” yourself a job, think again. Working for someone else who is established is generally more secure, easier, and initially better paid than working for yourself. (It is also less exciting!)
  2. Do you have experience or training in the type of business you wish to establish or buy? If you don’t, I strongly recommend you spend some time in paid employment in the area you want to enter in order to discover more about the industry’s dynamics and performance, and whether it is really for you. This experience will also help reveal how much sheer physical energy and drive you will need to succeed in the industry.
  3. What are your people skills like? Success in this vital area call for integrity, wisdom, leadership, authority, humour, patience, intelligence, tact, empathy, fairness, and an ability to listen just as much as an ability to get your message across clearly. Do you believe you can judge people well, and could you recognize merit in a potential employee? How would you motivate staff, win their respect and trust, get the best performance from them, and retain them?
  4. What about the people closest and most important to you – your family? Their support is vital and can’t be taken for granted. You must give first priority to this relationship and be sure that it is sound before you embark on self-employment, because there are times it will be strained by the demands of the business.
  5. Do you have the financial know-how to run a business? Do you know what the costs of setting up your proposed business would be? Could you construct a cash-flow analysis and predict when the business would generate profits? Having adequate capital to tide you over the early lean times is critical. Where will the money come from? From personal savings, from an equity partnership, or from a bank loan? If a loan, how and when do you intend to pay it back?
  6. Do you understand marketing? Do you know what competition you will be up against? Can your product or service evolve to meet changing market conditions?
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There is another question we need to consider: is owning a business the best way to make money?

This was definitely a belief that I held in my early twenties – that if you wanted to be wealthy you had to own a successful business. I’m not sure if I was influenced by my family, friends or things I read, but I always wanted to start a business of my own.

Now I know I was wrong about this. Wealth can be created by anyone who consistently spends less than they earn and who invests their savings on a regular basis. In fact, the more I look at business failure statistics, the more I wonder about the wisdom of starting any business, despite certainly understanding why people want to.

Once again, we get back to risk and return. Starting or buying a business is risky, but if the business goes well the rewards are high. The business in which I am a shareholder was started by myself and four partners in 1983. We put in $20,000 each and rented a very small, serviced office. Today, we employ well over 280 staff in our offices and South African joint venture.

Funnily enough, the “academic” theory about starting a business is correct. you do need a vision of what you want your business to be and a well-formulated business plan. You must control you cash flow and, in the good years, you must leave money in the company to build up its strength. I feel fortunate that we took the risk in 1983 to quit our quite well-paid jobs, because today business ownership makes me proud, gives me an unbeatable sense of job security and the benefits of controlling my own destiny.

How quickly, though, we forget the reality of starting a business from scratch. In my case, this meant earning next to nothing for five years, working outrageous hours – my partners and I used to laugh about our 35 hours of work. Thirty-five hours on Monday, Tuesday and part of Wednesday; another 35 hours on the other part of Wednesday, Thursday and Friday; and just to top things up, working on Saturday as well. Sometimes we didn’t work on Sunday, holidays were a few days off at Christmas and, as for sick leave, well, we just couldn’t afford to get sick!

If you do want to create significant wealth, building a successful business is certainly one way to get there. Look at people in the “500 most wealthy” lists. Some inherit the money, but most create it by building a business.

Few small businesses will ever grow into a News Corporation and not too many will ever be worth a lot of money, but running a business has benefits beyond the purely financial side. This really struck me when I was sitting on beach. While my kids and some friend were paddling around on a hired aqua bike, I started chatting to the owner of the aqua bike business who was originally from my town. He explained that the business was no world beater but it was pretty good and, living on a beautiful lagoon, next to a beach, hiring boats to generally pleasant tourists was somewhat better than working in a factory in industrial suburbs. He has a point. For him, his business provides lifestyle and a reasonable cash flow. He may have earned more working in his town, but tinkering with boats on Avoca lagoon seems much better.

For every success story like this, though, I know of dozens of failures. Buying or setting up a business for lifestyle is a dangerous thing – you may act on emotion, not logic. If you do plan to start up or buy a business for whatever reason, please be careful.

Look, there’s no denying owning a business sounds good and assuming it works, it is. However, as I found, you’ll probably end up working an awful lot harder for a lot longer than in the job you leave and, for the short term at least, not earning as much.

You’ll also miss out on the benefits that full-time employees are entitled to and often take for granted, such as: employer-funded super; worker’s compensation cover; paid sick leave; four weeks’ paid annual leave; holiday loading; long service leave; and maternity (or paternity) leave. You may also have to forgo other goodies company car; an expense account; paid telephone expenses; low holiday expenses; annual bonuses; share options; and the support of a union or industry association. In other words, when you work for yourself there’s no safety net – you’re on your own. Don’t let me scare the wits out of you, however. While self-employment is not all beer and skittles, the great thing about it is the freedom it gives you to run your own race, which I believe outweighs the negatives.

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