I led a US strategy and planning team in a Fortune 500 company to determine where to invest billions of dollars. Invariably, the business sections, product groups and geographic areas across America would always ask for more than we had available in cash flow.
To determine if we should invest, we developed a planning process: every part of the business would need to pitch their business case and compete for limited funds. After whittling down thousands of proposals, each group had to state their case — which played out like an internal company Shark Tank.
This approach is useful when you start planning for a successful business. Planning helps you to address critical issues and forecast whether you will hit your target.
Think about business as a journey. Where do you want to end up, and how does success look along that journey? Determine the end point first and break it down by year. For example, you might define success over the next three or five years.
What does success mean for you?
- Be clear and definitive.
- Write it down.
- Don’t be afraid to change your definition as circumstances change.
- Keep it visible and up to date.
- Include both financial and non-financial definitions.
- Determine whether you are building a business to sell, to hand down to your kids, or for some other reason.
- Use the SMART approach when defining success. Your objectives need to be specific, measurable, achievable, results-focused and time bound.
Are you planning for a business?
If you are sole trader or a start-up, it is worth looking at if what you are planning is actually a business. This is important!
If your definition of success is quite small-scale, your activity may be classed as a hobby. In Australia, if your activity is classified as a hobby, you will face completely different tax obligations.
- Is your business actually a hobby?
- Evaluate what structure you need. Is a sole trader, partnership or company more suitable?
- What registrations or licenses, both tax (such as PAYG) and professional, are required?
- What insurance do you need?
Seek professional advice on how your business should be structured and insured before you begin.
Pause for a moment
Before you get too far into the detail of planning, you need to make sure you have a financially viable business.
Do a back-of-the-envelope calculation. If you give up your $150,000 job to develop a business over two years, that means you have effectively invested $300,000 at least. Even at just a 10 percent return on investment on $300,000, you need to earn $180,000 per annum after costs to finance your current salary and earn a basic return on your investment in the business.
Would your business survive Shark Tank? By doing your planning you will find out and give yourself the best opportunity for success.
Develop a plan for success
Create a written business plan or update your existing one. It need not be long. Write it down and keep it updated. Templates are available online, in books, or through business coaches or accountants.
- Apply the SMART approach as you plan out each month (yes, month) in the current year and the coming years. (Annual numbers are fine for future years.)
- Use Excel or a business-planning tool to build a cash flow and profit forecast based on activity.
- For instance, let’s say you want to sell 1000 units, increasing by 5 percent per month, for the first year. Use the units and multiply this by average sale value for revenue and the average cost of goods sold to show a gross profit.
- Be realistic in your assumptions. Base your ideas on facts from research you have done or best estimates. Add all costs like insurance, superannuation, accounting and legal fees.
- Don’t forget about you. How much do you need to live on? How much do you need to sell to have enough remaining to fund your personal life?
- Have you got the right people involved in all areas, including marketing, business development and customer service?
- Use the SMART approach to develop and plan major projects, targets, timelines and budgets. Remember, plans should be specific, measurable, achievable, results-focused and time bound.
- Allow time and resources for business development and marketing to grow the business. Also account for administration and creative space for planning and new ideas.
- Cash flow is critical to your success. You need to forecast and manage cash as the business depends on it, because it does. You must know how much cash you will need and when — and where it will come from (self funded, mortgages, business loans or borrowings?)
- You’ll need great accounting software like MYOB to track your performance and manage inventory and invoicing.
Make sure you ask the tough questions. If this is such a great idea, why has no one done it before? Or if they had, why did they fail?
While plenty of great ideas will never make a profit, there are also plenty of long-term profitable businesses that have run out of cash before the profit was made. Good planning and execution will help form a basis for your ultimate success.
Remember to schedule in your calendar specific monthly or quarterly times to do nothing else but stop and critically evaluate your performance against your plan. Develop a scorecard and key metrics to regularly review. If you are off plan, you need to change what you are doing and/or change your plan.