Martin North from Digital Finance Analytics posed the following insight over the weekend. After a loan is secured for a business venture we often feel vindication that because the bank gave us money our business shall be a success. The assertion is that you have just outsourced your due diligence. (Click to watch his video “The problem with small business lending)
An interesting observation and I sure it will illicit a wide range of responses, but lets start at the business plan stage (Although, this can be applied to other business stages).
For many the business plan, is a description of the “who, what, when and why” but has it been translated into a monetary value? If it hasn’t been translated its time to go and measure these activities.
Each industry will have a different approach to the way they measure their activities and it may also depend on how big the business is. Either way its important to become a expert at your costs and how they work.
For instance, a $3.50 takeaway cup of coffee may be costed as follows:
Total Cost of Coffee $2.50 = Cup and lid $1.50 + Coffee and Milk $1.00
Sale Price of Coffee $3.50 – Total Cost of Coffee $2.50 = Gross Profit $1.00
Giving costs more thought, you may consider the cost of a Barista, Electricity, Rent, Plastic Stirrer, Sugar, Flavoring etc.
The bigger your business the more affordable to measure many of these costs will be and the more accurate your forecasts will become.
Once you have all the costs and the price, the next step, is to say how many cups and when.
Be as honest and as detailed as possible for each activity and once completed start having conversations with your Accountant.
An Accountant will start to use their expertise to assist in developing cash flow budgets, discuss scenarios and look at payback time frames. They will also assist in bench-marking against the industry.
The outcome is that you will be clear and confident on the feasibility of your business, what you can afford (e.g. rent) and what to do if something (good or bad) happens.
It may ultimately save you from unnecessary costs, business failure or lend you to an alternative idea or direction.
More importantly, you start treating yourself as an investor and critical appraising of your time and money.
If you have found this of interest or need assistance with making a business decision please make an appointment with our office.