Tens of millions of people from all walks of life have considered starting their own business. Millions of people have actually done it. Hundreds of thousands of people are still in business today.
It is sad but true that many businesses fall by the wayside quite early into the venture. Yet, some make it through and prosper. Most business people don’t just open a business without giving it a great deal of thought. Clearly though, it takes more than careful thought to make it through those entry-level barriers.
There are many factors that make for longevity in business, and each factor will have its merits for a specific type of business and the characteristics of the people that run it. In contrast, most businesses tend to fail for just a handful of reasons. So, learning how to fail is a forewarning of the perils.
Cashflow and Planning
Cashflow is by far the primary reason for business failure. Before we can discuss cashflow we need to understand what it is. Cashflow is the balance of the flow of incoming and outgoing cash. By cash, we mean hard cash – the money in your bank. Cashflow is not a measure of how much your customers owe you for work undertaken, or how much you owe your suppliers and other creditors. However, these are essential aspects of cashflow forecasting.
When the cash runs out, in simple terms, the business is unable to do what it needs to do to carry on. It can’t, for example, pay suppliers, wages, loans, bills and so on. It is therefore vital to forecast the likely flows of cash within the business to determine any possible issues that might occur. The business might be facing a large supplier payment next month, is that likely to leave it short of cash to pay for other essentials? If so, what needs to be done to overcome this issue? This isn’t rocket science and it doesn’t need an accountant or book-keeper to provide the answers. It is no more difficult than planning workload. In fact, it is to the planned workload that business owners should first look.
Retail business need to get an inkling of their daily sales and their expected percentage profits. Let’s say the gross profit, not to be confused with mark-up, is expected to be 40%. This means that the cost of sales, for stock, deliveries and such like, will be the remaining 60% of the takings. For £1000 in takings, the cost of sales will be in the order of £600. This leaves just £400 to pay for all other expenses like rent, wages, bills, rates, insurances and so on. This type of business will typically need to buy or take on stock before it can be sold, as well as the cost of premises, fixtures and maybe transport.
Service providers need to forecast the services that will be provided and the likely costs associated with doing this. In this type of business it is not so necessary to buy lots of stock up front, but there is likely to be an outlay for tools, premises and transport. Therefore, there has to be a certain level of revenue-earning work to cover the fixed costs. In taking on the work, further costs will be incurred to buy the raw materials needed to do the work.
For any business type, expected income and outgoings need to be profiled, certainly over the first year, in periods of at least one month. At the end of each month actual cashflows must be measured with the forecasts. This will enable timely adjustments to ongoing forecasts. After the first year, it may be possible to plan in quarter-years.
The art of doing this is known as business planning, and from it comes the Business Plan document. Many people consider themselves ill-equipped to create a Business Plan and therefore rely on professional services to do it for them. In doing this, people risk being out of touch with their own business.
Business Plans do not need to be sexy, unless the business is selling lingerie and such like.
Seriously, the only person that business people need to fully impress is themselves. After all, it is the business owner who is making the ultimate commitment. Banks will want to see a business plan, but most will not bother to read it from cover to cover. Banks are interested in the likely cashflows. Sure, they will ask questions about the intended business, but they ask the person in front of them. They do not look to the Business Plan for the answer. So, the Business Plan is the owner’s tool.
A Business Plan is merely a document that brings all of the ideas and plans that a business owner should already know together in one document, along with the cashflow forecast. The Plan will determine the type of business, the likely customers, demographic data with respect to potential customers and competition, external influences like government policy and economic issues, premises, transport, capital and so on. For new starters it will show all of the likely hurdles that the business will face in the early years and how the business will overcome them. This deed should not be outsourced to someone else. It is through the planning process that the business owner implicitly understands his or her business. In turn, this planning process drives a cashflow forecast. This is where we put a cost against the things that are being planned. The Business Plan and cashflow forecast must co-exist.
The Business Plan and a cashflow forecast should not be put aside after the business starts up or after an expansion plan or other major change is executed. As time moves on, what was estimated and speculated in the Business Plan becomes a known reality. These emerging facts can dramatically change the plans and the cashflow forecasts. Many people hold this information in their heads because they live and breathe the stuff every day in the course of their business. For example, if a major competitor closes, they don’t bother re-writing the section of their plan that identified that competitor. The Business Plan should be re-visited, at least every six months, if only to read it. The act of doing this could flush out new ideas based upon newly found knowledge. It provides objectivity and something by which the success of the business can be measured.
So, to answer the question, to fail in business, owners should not bother with business planning. They should be out of context with their business and the environment in which it exists. They should know little about their customers and suppliers and, importantly, their competition. Owners will not have much of an idea how much revenue is likely to be received and what their outlay will be. Because of this, owners cannot forecast future income and expenditure. They will be continually bombarded with unplanned events and related expenses to the point that the money in their banks will dry up. This will prevent them from continuing their dreams and aspirations, and may instead lead to frustration and stress-related illnesses.
That’s it! There could be arguments for all sorts of other reasons why businesses fail, but most tend to come back to good old cashflow problems, coupled with a lack of business planning. Many business people, especially now, are suufering the effects of the economic downturn. Business planning and cashflow forecasting are the key tools, not just for survival, but for sustainable competitive advantage.
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