When we commence our new business venture, how realistic are we in our expectations of how the sales will progress? Most business plans I see are seldom realistic! They invariably show the business making profit from the first day. This seldom if ever happens!!
If it does happen, it is often when a very popular franchise has been purchased, or if the business has commenced activity with a pre-sold order book.
This is normally a red flag for any financier who has been approached for finance for the new business. Realistically there is seldom much chance of most businesses breaking even before the end of the first six months, and it can often take a lot longer.
A way to resolve this problem is to do your sales budgets first, and then your expense budgets. Too often sales budgets are done after the expense budget, and then made to fit the occasion. Your first sales budget is normally based on gut feeel and hopefully also some market research. Rely on it and do not change it to make sure you are profitable from an early stage. If the business takes a while to turm profitable then it is quite likely realistic. If it takes longer than you can afford to carry it or raise funds to carry it, then drop the idea and find a new idea and then start the process again. The purpose is to find a profitable business, not try to force our dreams to come true even if they never can .
REMEMBER THE PURPOSE OF BUSINESS IS TO CREATE WEALTH, NOT DESTROY IT! So please review your sales projections before seeking finance and assess their realism!!
Showing posts with label cash flow. Show all posts
Showing posts with label cash flow. Show all posts
Saturday, June 28, 2008
SMEs - the stress of start up
What do you do if you suddenly find you have sold your business? Yes, it can happen that the process is so quick, that you suddenly find yourself without a business. You have some capital, but not enough to live off, for very long. You need to live off the capital and start a new business really quick before you consume the capital. The pressure you suddenly find yourself under, can reduce your ability to think clearly and inhibit your creative processes.
A quick rule of thumb is to try and start a business that will give you some real income fairly quickly, especially if your capital base is fairly small. Remember that most businesses, particularly business-to-business sales, often have a 3 to 6 month lead time. Do you have enough capital to last 6 months? If not look for a small cash only retail opportunity. This may then cover your living expenses while at the same time preserving your capital for the development of another business with greater growth opportunities.
Once the other business is up and running you can then sell off the small cash retail business or let your wife or kids run it. Remember to ensure it has immediate sales, and no long sales cycles, which invariably means a consumer type product or service. However, even this kind of business, unless a franchise outlet, is likely to become a major source of profit overnight. However, it may generate sufficient cash flow to sustain the business into the profit zone.
A quick rule of thumb is to try and start a business that will give you some real income fairly quickly, especially if your capital base is fairly small. Remember that most businesses, particularly business-to-business sales, often have a 3 to 6 month lead time. Do you have enough capital to last 6 months? If not look for a small cash only retail opportunity. This may then cover your living expenses while at the same time preserving your capital for the development of another business with greater growth opportunities.
Once the other business is up and running you can then sell off the small cash retail business or let your wife or kids run it. Remember to ensure it has immediate sales, and no long sales cycles, which invariably means a consumer type product or service. However, even this kind of business, unless a franchise outlet, is likely to become a major source of profit overnight. However, it may generate sufficient cash flow to sustain the business into the profit zone.
Friday, June 6, 2008
SMEs - quick cash lies in solving problems
Business opportunities lie in businesses that will solve future problems, and also those that solve current problems. I have a tendency to target the future problems, but learnt from a fellow entrepreneur to look at current problems too.
Short term cash flow definitely comes from solving current problems.The problem with current problems is that there is a lot of competition, which means you need to differentiate your business somehow, make it unique in the marketplace, bearing in mind that price is seldom a differentiating factor. Instead product and service differentiation are required. Or a unique approach to sell the product. This is what makes it difficult. Finding a unique way to differentiate your business.
So for short term cash do current problems, and for medium and long term cash do the future problems.
Rob Smorfitt
Short term cash flow definitely comes from solving current problems.The problem with current problems is that there is a lot of competition, which means you need to differentiate your business somehow, make it unique in the marketplace, bearing in mind that price is seldom a differentiating factor. Instead product and service differentiation are required. Or a unique approach to sell the product. This is what makes it difficult. Finding a unique way to differentiate your business.
So for short term cash do current problems, and for medium and long term cash do the future problems.
Rob Smorfitt
Thursday, June 5, 2008
SMEs - finance versus cash
In an earlier SME blog I discussed the need to use the correct finance for the task at hand. A reader concurred with me, and asked how to make the decision, in order to make less demands on cash flow.
I suggested at the request of a reader of the blog, that they need a decision system to assist them in decision making, so that they do not make decisions with their hearts, but rather with their minds. Ideally this is better suited to a decision tree. Maybe someone who is reading this can give it back to me in a graphic format which I can paste onto the blog.
1. Is this a recurring cost ie. Is it going to be paid every month or is it a single payment?
2. If a recurring payment then it is to be funded from working capital.
3. If you have insufficient working capital, then you may need to consider an overdraft facility with your bank or a short to medium term (1 to 3 years) loan from your bank if they do not offer overdraft facilities, depending on the country you are in.
4. If a single payment, is the payment amount for an item that will be used for a period longer than three years?
5. If the item is a consumable item, such as tyres for a vehicle, then pay for it out of working capital.
6. If the item is an asset such as a computer, manufacturing machine, vehicle etc, then it must be considered for purchase as an asset and should be considered for purchase using asset based financing.
7. If the bank or an asset based finance house will finance it, then it is quite likely something that should be financedI hope this is of help and welcome questions. It is rather difficult to do something this potentially complex in a short blog.
Rob Smorfitt
I suggested at the request of a reader of the blog, that they need a decision system to assist them in decision making, so that they do not make decisions with their hearts, but rather with their minds. Ideally this is better suited to a decision tree. Maybe someone who is reading this can give it back to me in a graphic format which I can paste onto the blog.
1. Is this a recurring cost ie. Is it going to be paid every month or is it a single payment?
2. If a recurring payment then it is to be funded from working capital.
3. If you have insufficient working capital, then you may need to consider an overdraft facility with your bank or a short to medium term (1 to 3 years) loan from your bank if they do not offer overdraft facilities, depending on the country you are in.
4. If a single payment, is the payment amount for an item that will be used for a period longer than three years?
5. If the item is a consumable item, such as tyres for a vehicle, then pay for it out of working capital.
6. If the item is an asset such as a computer, manufacturing machine, vehicle etc, then it must be considered for purchase as an asset and should be considered for purchase using asset based financing.
7. If the bank or an asset based finance house will finance it, then it is quite likely something that should be financedI hope this is of help and welcome questions. It is rather difficult to do something this potentially complex in a short blog.
Rob Smorfitt
SMEs - benefits of portfolio entrepreneurship (3/2007)
What is portfolio entrepreneurship? Portfolio entrepreneurship normally follows on from serial entrepreneurship. Ideally this should be something all entrepreneurs do, but seldom is.
A serial entrepreneur is someone who buys and / or starts a business, and then moves on and sells it, and then repeats the process. However, a portfolio entrepreneur, as the next stage, owns multiple businesses at the same time.
A portfolio entrepreneur requires a fair amount of skill to juggle these different requirements on his or her time. It is not a simple process and ideally, to start with, the entrepreneur should ensure that the two businesses are in the same industry, as this will allow the entrepreneur to then gain the necessary skills in managing two businesses simultaneously.
Key success factors here are partners and delegation. Failure to do take partners, and more importantly the delegation of duties, will surely lead to business failure, and quite likely a nervous breakdown. There are always exceptions ot the rule, but ideally you need someone to do the work. At this level you should be focused on strategy and possibly top level sales.
I personally love the sales part, and therefore focus on strategy and sales. Work to your strengths.Give it a try. It is fun and challenging. It is exciting and as you begin to diversify it is incredibly stimulating. Just remember the cash flow consequences or you can lose it all.
Rob Smorfitt
A serial entrepreneur is someone who buys and / or starts a business, and then moves on and sells it, and then repeats the process. However, a portfolio entrepreneur, as the next stage, owns multiple businesses at the same time.
A portfolio entrepreneur requires a fair amount of skill to juggle these different requirements on his or her time. It is not a simple process and ideally, to start with, the entrepreneur should ensure that the two businesses are in the same industry, as this will allow the entrepreneur to then gain the necessary skills in managing two businesses simultaneously.
Key success factors here are partners and delegation. Failure to do take partners, and more importantly the delegation of duties, will surely lead to business failure, and quite likely a nervous breakdown. There are always exceptions ot the rule, but ideally you need someone to do the work. At this level you should be focused on strategy and possibly top level sales.
I personally love the sales part, and therefore focus on strategy and sales. Work to your strengths.Give it a try. It is fun and challenging. It is exciting and as you begin to diversify it is incredibly stimulating. Just remember the cash flow consequences or you can lose it all.
Rob Smorfitt
Monday, June 2, 2008
SMEs - is cash flow an external problem? (12/2006)
I see that in the UK there is a big problem with SMEs collecting their debtors. Similarly, like SMEs all over the world, their biggest problem is that the SMEs are terrified of putting too much pressure on their clients to pay, as they are scared of losing the client if they do.
However the report stated that quite the opposite was true. Debtors in a bizarre way judge the SME as a partner by how vociferously they collect their debtor outstandings. The more aggressively they do so, the more likely they want to partner with the SME, as they perceive these SMEs to be more likely to succeed.
Practically speaking I can only concur with this. My experience has shown that a no nonsense low tolerance approach to debt collection generally has won me more contracts. The exception to the rule are those businesses who are in fact on a downward trend themselves and who in fact you do not want as a client anyway.It is critical that if possible you utilise a service which checks your debtors out before they get given credit, and if the deals are large enough, insure against their loss.
So get out there, stop the credit to bad payers, find the harshest solution to debt recovery available to you in your country, (maybe start the process to liquidate the debtor), and start to enjoy business.
Business is only fun when you have the cash to run the business. Cash flow problems are extremely debilitating.
Rob Smorfitt
However the report stated that quite the opposite was true. Debtors in a bizarre way judge the SME as a partner by how vociferously they collect their debtor outstandings. The more aggressively they do so, the more likely they want to partner with the SME, as they perceive these SMEs to be more likely to succeed.
Practically speaking I can only concur with this. My experience has shown that a no nonsense low tolerance approach to debt collection generally has won me more contracts. The exception to the rule are those businesses who are in fact on a downward trend themselves and who in fact you do not want as a client anyway.It is critical that if possible you utilise a service which checks your debtors out before they get given credit, and if the deals are large enough, insure against their loss.
So get out there, stop the credit to bad payers, find the harshest solution to debt recovery available to you in your country, (maybe start the process to liquidate the debtor), and start to enjoy business.
Business is only fun when you have the cash to run the business. Cash flow problems are extremely debilitating.
Rob Smorfitt
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