30% of all start up businesses will fail within the first three years.
What is a business plan?
I was asked by a client of mine “why do I need do a business plan as it never turns out the way you expect and often has nothing to do with reality?” This particular response misses the point of forecasting. Bookkeeping is tracking historical records of previous transactions. Forecasting allows potential entrepreneurs to set goals and run scenarios to measure the potential success and dangers of any future venture. It is also an opportunity to test your presumptions against the natural enthusiasm that people have when starting something new.
This simplest measuring stick is to look at the advantages and disadvantages of the external circumstance against our own internal resources to meet the challenge. This is expressed by a SWOT analysis which is an acronym for Strengths, Weakness, Opportunities and Threats. An example of strength could be personal organisational skills, whereas a weakness could be lack of experience in the sector. An opportunity may be a new technology that has just become available and a weakness may be other competitors in the market place.
Another strategic planning technique is STEEPLE which stands for Social, Technology, Environmental Economic, Political, Legal and Ethical. This allows you to look at social and cultural forces that may impact upon your initial assumptions. Changes in legislation could provide additional opportunities such as Ofcom’s 4G tendering process for mobile broadband.
The state of the economy, even in recession, provides different possibilities as budget supermarkets have increased their market share compared to their traditional rivals. New technology such as Apples venture into the mobile phone market has made a massive impact on peoples spending habits.
The process of preparing a business plan is an opportunity to think through as many of the issues and risks before committing time and money to a an activity that may not be as successful as first presupposed. From these assumptions you can make some realistic financial projections. These includes potential sales figures, expenses to bring the goods to market and overheads to run the operation such as office rent and telephones. From these realistic set of figures you can then run a best case and worst case scenario so that you will know that you have sufficient capital to survive if things don’t go that well. This not only clarifies your own thoughts but is also useful for interested third parties.
For a potential investor or bank manager these tools are essential to determine the potential return on investment if they commit to the project. As people who are putting their money on the line they also need to be convinced that you have taken into account as much as could possibly be foreseen, so they can measure potential risks to protect their investment.
When entering into new ventures, or areas that you have limited exposure, it is essential to research the matter in some detail. If you don’t have knowledge of an area then accessing specialist expertise can save you time and money in the future. Mintel is an organisation that provides analysis’s on most of the main business sectors on a quarterly basis. There is a cost involved depending on the report required. You can search the article database and stock reports on-line at FT.com as well as keep up to date with their standard daily newspaper.
Most of the government agencies have reduced their business advice services but Business Link is still seen as a central point to start accessing information. Interviewing people who work in that sector also gives you firsthand knowledge of the potentials and pitfalls of any venture. Any information that you can access will help you make decision on whether the plan is valid. You will have to balance how much capital and effort to employ against the risk of obtaining a return.
My client now sees the use of these scenarios as he is now able to anticipate the cost and quantity of stock ordered according to potential future units sold (he has a three month wait on a supplier) orders). His investor is now also convinced of the merits of his business model allowing him access capital when required to buy the stock at the best prices. Things rarely go according to plan but at least you will have some idea of what you are getting yourself into.
You can download our CashFlow For Start-Up Businesses and find other useful business tools at our downloads section.
