Planning to Start a New Business?
How to Make Sure It’s a Financial Success!
Hints of Spring are all around and the days are starting to get longer and lighter. It’s the time of year when, as positive energy levels rise and creative juices flow, many people start making plans to turn the dream of owning their own business into reality.
If you’re one of them, you’ll be brimming with enthusiasm and champing at the bit to get started, but we’ve got one very important question to ask you:
Are you certain your business plan is financially viable?
OK, we know, numbers are the ‘boring bit’, and you just want to get on and put your brilliant idea into practice, but the sad reality is that lack of financial planning is the reason why 80% of new businesses launched in the UK this year won’t survive to celebrate their 5th birthday.
Many of those businesses destined to fail will have been set up by people who leave the world of salaried employment, using the expertise they’ve developed working for others as the foundation of their new venture – ‘technicians’ – as Michael E. Gerber calls them in his book, The E-Myth Revisited – a must-read for anyone thinking of starting out on their own.
As an accounting practice specialising in working with start-ups and new businesses, we’ve helped hundreds of people to get their business off the ground – and to succeed long-term. In fact, Start-ups choosing Inca as their accountant improve their chances of making it to their 5th anniversary by 185% compared to the national average!
Financial Viability: 5 Point Checklist
1. Be realistic about the income you need to generate
From the outset, it’s important you’re completely realistic about the income you need your new business to generate. Wherever your start-up funding is coming from – your savings, a bank loan, or a redundancy settlement, it will be finite, so your business needs to be standing on its own two feet before your initial capital is exhausted.
The early weeks and months will be critical. As well as funding your business, which will be as demanding as a new baby, you’ll have to continue paying all the usual bills and outgoings associated with your life.
Things will probably be tight at this stage. Maintaining your old lifestyle might not be possible, and you’re likely to have to make a few sacrifices until your business is established.
2. Don’t be complacent about key contracts
If you’ve set your business up on the back of a contract that brings you guaranteed income from day one, you might miss out on the belt-tightening stage, but be careful, you can easily find yourself lulled into a false sense of security.
Being dependent on a single contract is more like employment than running your own business, and unless you’re proactive in seeking to acquire other customers, you risk finding yourself high and dry if (or more likely when) your key contract comes to an end.
3. Plan for profit
A business that simply covers its costs is doomed to fail, and yet we hear plenty of start-up owners talking about break-even as if it’s a goal to aim for. Your business plan must generate sufficient income for you to be able to pay the running costs of the business, meet your tax liabilities, AND deliver the profit you need to fund the lifestyle you want.
As our friends at ActionCOACH teach, profit in a business is an outcome, and the level of profit a business makes is determined by 5 key things:
- Number of sales leads generated
- Sales lead-to-business conversion ratio
- Number of transactions per customer over a given period
- Average transaction value
- Profit margin
Like the answer to ‘life, the universe and everything’ (42 according to the Hitchhiker’s Guide to the Galaxy), the secret to a financially viable business can also be expressed as a number. Using the above factors, it’s simply a matter of calculating how many sales leads you’re going to have to generate in order to deliver the profit you want.
Of course, there’s a bit more to it than that. The next step will be to implement marketing activity to deliver the volume of sales leads required, and the level of effort needed to do this can sometimes come as a shock to anyone from a corporate background, used to having resources to support them.
4. Remember, cashflow is key
When you’re in employment, you take it for granted you’ll get your pay cheque at the end of each month, but things are very different when you’re running your own business – especially at the outset. If you work a month and then send out your invoices, they may not be settled for anything up to 90 days, meaning that in the worst-case scenario, you could have to fund your business and yourself for 4 months with no income coming in.
There are plenty of things you can do to mitigate this situation, including being selective about who you work for, establishing strict payment terms, securing advance deposits and invoicing in staged payments. Failure to recognise how critical cashflow is until it’s too late results in many potentially successful businesses having to close – even though they have a full order book.
5. Choose the right accounting partner
Few things will help influence whether your new business succeeds or fails more than your choice of accountant. You don’t just need a ‘number cruncher’, you need an accounting partner experienced in supporting start-ups. A partner who can help you prepare a solid business plan, ensure you avoid making the most common mistakes and support you with all the advice you need to give you the best chance of success. For more information on choosing the right accountant, see our blog, Choosing the Right Accountant: An Essential Checklist!
Start-ups choosing Inca as their accountant improve their chances of making it to their 5th anniversary by 185% compared to the national average!
If you’re in the process of starting a new business, or even if you’re just in the early stages of thinking about it, we’d love the opportunity to tell you more about the difference we can make.
Call us now on 0123 586 8888 for an initial chat and to arrange a meeting!