If you're an entrepreneur, you've heard the statistics that most small businesses overwhelmingly fail.
In my next six blog posts, I want to show you six elements of how to succeed in business, whatever it is you want to start.
The first of these blog post topics is Finance.
After I had started, grown and sold a multi-million dollar business, I decided to coach other small business owners. What took me by surprise were the strange ideas that many new business owners had about money and business.
At first, I discounted these notions and would try to correct their thinking by having them create financial forecasts thinking this simple exercise would show them the error of their ways. What I found was that they wouldn't create a financial forecast until they changed how they thought about money.
What do I mean by 'strange ideas'?
If you haven't run a business before, it seems common to think that wanting to make a profit is somehow evil or wrong-minded or that money matters can be ignored when running a business. On top of the problems with poor thinking about money, most emerging business owners jump into doing business without a clear understanding of what business is all about.
Here are the thoughts that tend to emanate from a business amateur:
All of these thoughts tend to completely miss the mark of what a business is about and why a person would start a business in the first place.
In order to build a successful business, there are four thoughts that are key to creating your business foundation.
Do something that isn't being done in your area or your sphere of influence currently. Don't join a sea of other products and desperately convince people that your product or service is just slightly better.
Your prospective customer will need to gain more value from your product that it costs you to produce it... and be happy about it.
Most successful business owners will grow their business for 10-years or more. Your product or service must adapt and grow and be ahead; not behind of what consumers or businesses need.
While any one of the previous items are flexible; this one is not. Your business must generate money and not cost you money. If it loses money, it's a loser.
Once you have adopted this new way of thinking, you will feel compelled to create a financial forecast to see if your business is indeed profitable.
Before we skip ahead to financial planning, it's important that you understand a little more about the language of money when it comes to running a business. This language is called Accounting. You don't need to be fluent in accounting lingo; but you do need to understand a few basic terms.
Here is a quick list of the concepts that you'll need to know:
By understanding what each of these terms means, you are now ready to set up your pricing, understand financing, establish a reasonable accounting system and write a financial plan for your business.
In my experience as a business coach, pricing is one of the major reasons that most startup businesses fail to make a profit.
Small business owners are afraid to charge what something is worth; they base their price on a fixed markup from their costs; or they are convinced customers won't pay them more than what they're currently charging.
In order to price properly, you need to consider four things:
As it turns out, some business ventures will not create cash flow right away.
Even though a company is technically profitable, it may not create enough profit in its early stages to give the business owner any substantive income.
In these situations, it is important that you understand how to finance the company before it makes money. You can borrow money, you can find investors, or you can fund this deficit from your personal savings.
I'm not sure why new business owners are highly reluctant to create a financial forecast. It could be they're bad at math; or scared their business looks bad on paper; or don't understand the accounting jargon well enough to talk the financial talk; or think such planning is a waste of their time.
It really doesn't matter why... All I can tell you is that failure to create a simple financial plan will result in failure of the business; or it will result in a high degree of stress for those folks who happen to get their business up and running.
Let's say that my grand plan is to operate an online hat business.
I believe that I can make hats for $10 per hat and sell them for $20 per hat. On the surface, this sounds like a great business.
Now, let's say that it will cost me $25,000 in marketing and sales costs to get people to buy my hats; and another $50,000 per year to lease a building to make and store my hats. You can see that this simple business has just become a little more complicated.
Questions race through my mind:
Business financial plans are not a static idea of selling something for twice as much as you buy it for and making an instant profit. Instead, creating profit from a business often takes an initial investment, is subject to risk and involves a lot of other costs that you didn't initially consider.
The financial plan is the foundation on which all business decisions are ultimately made.
Now let's make my hat business a little more complicated and more realistic.
Let's say that for every three leads for my hat business, I get one hat sale. And it takes approximately 2-months from the time I invest in lead generation to achieve these sales results.
If I were to plan out my simple hat-making business, I would estimate that I would need to sell at least 7,500 hats in a single year in order to break even. Based on simple math, I would need to get 22,500 leads to sell the 7,500 hats. This means that I can afford to invest $1.11 per lead ($25,000 / 22,500). Since it takes a few months before money starts coming in, I'll need to be able to pay my rent and make hats for 2-months without getting a penny in revenue. This means that I will need to have $25,000 to start my hat business to pay for hat-making, marketing costs and building rent for two months.
This simple example was done to show how financial planning and forecasting are crucial to understanding why such planning is vitally important when you start a business.
Before I leave this subject of financial planning, I think it may be informative to point out how a rookie business owner will most likely start this business without a financial plan:
Obviously, the rookie mistakes can be plentiful.
However, my point is that when you don't create a 1-year and 10-year financial plan and then execute to that plan, you are making decisions as you go; and usually skimping on your investment because you're not being deliberate about your business.
In this blog post, I have quickly covered three first key steps on how to succeed in business by creating a financial plan:
If you don't have these basics covered, I suggest you keep your day job. Otherwise, your business startup can be a painful experience.
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As a business coach and 30-year business veteran, I help my business owner clients change their mindset in a way that allows them the freedom and profitability they’ve always hoped for, but never thought possible. If you’d like to develop a successful business mindset, I offer online training along with individual and group coaching sessions.