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 creation. Show all posts
Showing posts with label creation. Show all posts
Saturday, June 28, 2008
SMES - stealing from the taxman decreases wealth
Many SMEs reading this are thinking I am crazy, as they often fund a better lifestyle with the cash sales in their business, which never enter the accounting system. The only loser is the tax man, so what harm is done?
The harm is to your own business and your wealth creation strategy. Let me explain. Firstly, we must reiterate that starting a business is not intended for the purpose of creating a salary for yourelf, but rather to create wealth for yourself. So how does stealing the cash sales destroy your wealth?
Firstly, by stealing the cash sales, you reduce your overall reportable gross profit, as your cost of sales is higher against lower sales. This naturally leads to a lower nett profit, which means a lower business valuation when selling the business, which means less wealth has been created. As an example if you are stealing 200000 per annum, a realistic PE on that amount would be 400000 when selling the business, and could be higher.
Often however, the owners steal all the profit and only breakeven each year, thereby creating no wealth to sell. They therefore remain locked into the business and cannot leave or sell, long after they should have retired. They always claim when trying to sell, "But I can prove how much I took". Would you believe a self confessed thief is being honest, especially when he is trying to sell you something?
Finally, it does not take your staff long too work out you are stealing from the business, and not much longer to work out how they can too!!!
The harm is to your own business and your wealth creation strategy. Let me explain. Firstly, we must reiterate that starting a business is not intended for the purpose of creating a salary for yourelf, but rather to create wealth for yourself. So how does stealing the cash sales destroy your wealth?
Firstly, by stealing the cash sales, you reduce your overall reportable gross profit, as your cost of sales is higher against lower sales. This naturally leads to a lower nett profit, which means a lower business valuation when selling the business, which means less wealth has been created. As an example if you are stealing 200000 per annum, a realistic PE on that amount would be 400000 when selling the business, and could be higher.
Often however, the owners steal all the profit and only breakeven each year, thereby creating no wealth to sell. They therefore remain locked into the business and cannot leave or sell, long after they should have retired. They always claim when trying to sell, "But I can prove how much I took". Would you believe a self confessed thief is being honest, especially when he is trying to sell you something?
Finally, it does not take your staff long too work out you are stealing from the business, and not much longer to work out how they can too!!!
SMEs - can entrepreneurship be taught
This is a question that stimulates much debate. As an entrepreneur, I like to think I am unique and that no one can be taught to be like me. Am I correct?
There are two aspects to every entrepreneur. What personality traits/attributes they have, and what skills they have.I have no doubt that the skills an entrepreneur needs can be taught. But the traits of an entrepreneur I believe cannot. The Iceberg Theory says we cannot change peoples' values and beliefs. An entrepreneur has a strong sense of values, such as working hard when necessary, staking it all when the decision looks right. Can we change a person's values by telling them what they should aspire too.
Perhaps not, but perhaps by explaining what they should aspire to, we can assist them in at least having the opportunity to change their values. But at the end of the day the decision is still theirs.
There is no standard test to measure the personality traits of wannabe entrepreneurs in such as way that it can successfully predict their probability of success. I think that there are possibly certain skills that determine the probability of success, but there is a certain innate driving force which true entrepreneurs have which most people do not have.
There are two aspects to every entrepreneur. What personality traits/attributes they have, and what skills they have.I have no doubt that the skills an entrepreneur needs can be taught. But the traits of an entrepreneur I believe cannot. The Iceberg Theory says we cannot change peoples' values and beliefs. An entrepreneur has a strong sense of values, such as working hard when necessary, staking it all when the decision looks right. Can we change a person's values by telling them what they should aspire too.
Perhaps not, but perhaps by explaining what they should aspire to, we can assist them in at least having the opportunity to change their values. But at the end of the day the decision is still theirs.
There is no standard test to measure the personality traits of wannabe entrepreneurs in such as way that it can successfully predict their probability of success. I think that there are possibly certain skills that determine the probability of success, but there is a certain innate driving force which true entrepreneurs have which most people do not have.
Friday, June 20, 2008
SMEs - the research is valid and correct
I had the pleasure, as part of my PhD research, to interview a successful business owner, as part of my fine tuning of my questionnaire. It was a pleasure because he confirmed so much of my research to date.
Key to his success has been a vision/plan on where he wants to be down the road. He reads a lot, networks at every opportunity and has done some additional skills courses subsequent to leaving school. He funded his own business by initially working in the industry and gaining experience, and then saving until he had enough money to start his own business. He is a strong believer that the point of business is wealth creation not income creation.
Finally he said that he is extremely opportunity aware, and once he has identified a genuine opportunity, he does not delay in making the decision to proceed. He does very little without seeking out possible opportunities, and he is wired for opportunities. He has learned from his peers and through studying, and has full confidence in his skills.All this is directly in line with my research to date, as this man is undoubtedly a natural entrepreneur.This leads me to my next blog. Can we create entrepreneurs?
SMEs - can we create entrepreneurs
The whole world has gone from seeing SME's as an inconvenience, to seeing them as the salvation for developing as well as developed economies.
One has to question whether this is possible. While there is no doubt that SME' s are able to play an important part in economies, the confusion that I believe is arising, is the misperception that SME owners and entrepreneurs are one and the same thing. If we consider the USA as an example, the entrepreneur is considered in an extremely positive light. The number of SME's exceeds 25 000 000 to the best of my knowledge. However, I believe the bulk of these are not entrepreneurs. They are predominantly SME owners who bought a franchise.
The franchisor carries out the two mission critical aspects of owning a business, and which differentiate the entrepreneur from the SME owner. These are strategy and marketing. It is the business strategy and marketing which make the business unique and entrepreneurial, but the franchisee has no control over these.Therefore the owner of an SME is not by default an entrepreneur, and the fact that they might be a franchisee diminishes that possibility even further.
Therefore should governments be investing vast sums of money to create SME's, or should they be investing in entrepreneurs who will in fact create the SME's. I believe we need to become better focused on how we spend our money in order to create more quality entrepreneurial businesses.
One has to question whether this is possible. While there is no doubt that SME' s are able to play an important part in economies, the confusion that I believe is arising, is the misperception that SME owners and entrepreneurs are one and the same thing. If we consider the USA as an example, the entrepreneur is considered in an extremely positive light. The number of SME's exceeds 25 000 000 to the best of my knowledge. However, I believe the bulk of these are not entrepreneurs. They are predominantly SME owners who bought a franchise.
The franchisor carries out the two mission critical aspects of owning a business, and which differentiate the entrepreneur from the SME owner. These are strategy and marketing. It is the business strategy and marketing which make the business unique and entrepreneurial, but the franchisee has no control over these.Therefore the owner of an SME is not by default an entrepreneur, and the fact that they might be a franchisee diminishes that possibility even further.
Therefore should governments be investing vast sums of money to create SME's, or should they be investing in entrepreneurs who will in fact create the SME's. I believe we need to become better focused on how we spend our money in order to create more quality entrepreneurial businesses.
Thursday, June 5, 2008
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
Wednesday, June 4, 2008
SMEs - harvesting and reinvesting (2/2007)
I spoke to a SME/SMB/SMME business colleague today. He was raving about how going into debt and moving from a supermarket manager to a supermarket owner has been such a wonderful experience. This to the extent that they bought the small shopping centre they were located in, which has appreciated by 400% in 3 years and that other than the property bond, they were debt free.
When I suggested selling his business he was initially horrified. “I do not want to retire and live off the interest. I am not sure there is enough”. I then suggested that he reinvest the money in a number of smaller businesses and properties and build them up again. Alternatively use the capital to buy a bigger business which would provide large capital returns and growth potential.
It took him a while and a lot of discussion to accept the idea, and then only I think because I said that he would be financially better off if he did.I just find it amazing that so many business people see their business as the beginning and the end of their business careers, instead of just the beginning. Each to his own I suppose?!
However, sit down some time and work it out. You will soon see that buying and selling will create more wealth for yourself than retention. This is a generalisation but often does hold true. So check it out for yourself!
Rob Smorfitt
When I suggested selling his business he was initially horrified. “I do not want to retire and live off the interest. I am not sure there is enough”. I then suggested that he reinvest the money in a number of smaller businesses and properties and build them up again. Alternatively use the capital to buy a bigger business which would provide large capital returns and growth potential.
It took him a while and a lot of discussion to accept the idea, and then only I think because I said that he would be financially better off if he did.I just find it amazing that so many business people see their business as the beginning and the end of their business careers, instead of just the beginning. Each to his own I suppose?!
However, sit down some time and work it out. You will soon see that buying and selling will create more wealth for yourself than retention. This is a generalisation but often does hold true. So check it out for yourself!
Rob Smorfitt
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