Three Ingredients You Need to Run a Successful Business
Tax accountant and business advisor, Stephanie Mellick, shows you how to navigate the three key stages of a new business start-up to maximise your chances of success.
Starting a business is an incredible journey, but it’s not one for the faint-hearted. As an accountant and business coach for over 11 years, I know what it takes for an SME to succeed in a sea of competitors. The best piece of advice I can give? Proper planning.
The well-managed businesses with hefty profits go through three key phases of business development – evaluation, establishment and growth – with their eyes wide open. In part one of this series, we take a deep dive into business idea evaluation.
Phase 1: Evaluation
The most common question I get asked by start-up CEOs: is my business idea any good? My answer always takes a cue from Tim Ferriss: some entrepreneurs ‘overvalue ideas and therefore, almost by definition, undervalue execution’.
Technological advances over the past two years have meant barriers to starting a business are at an all-time low. According to Upfront Ventures, the average cost of a start-up was $500,000 in 1995; as of 2014, it’s as little as $5,000. Online businesses have flourished, with the ability to run from just about anywhere and trade globally.
But although getting started is easier than ever, many don’t celebrate longevity. According to the Australian Bureau of Statistics (ABS), there are 2.1 million small businesses in Australia and more than 60 per cent of small businesses close within their first three years (Inside Small Business, 2018). In the 2017 financial year, 54,992 businesses went under (2.62 per cent), an increase of 12.7 per cent from the year before.
So what should you do in the start-up phase, to ensure your business doesn’t ultimately fail?
1. Business idea evaluation is critical. The most important step of critiquing a business idea is determining who will be buying your product or service – who is your ideal customer? Often, the narrower the niche, the better.
2. Make sure you know your Unique Selling Position (USP). Why should a customer buy from you, rather than someone else? If you can’t answer that question clearly, do not expect customers!
3. Preparation of a forecast is essential. How will my idea make money? Only a forecast and comprehensive three-way business model can really answer this question. Think of this step as an early warning system – it can identify potential shortfalls in cash well in advance and will highlight issues with customer payments. The habit of preparing and reviewing a forecast also instils an important discipline; forecasting is a critical cash flow management process and essential for a business to survive long-term.
Case study
I did a cash flow forecast for a client who was launching his first business. During the information gathering process, it became apparent that it would take almost six months to receive the first receipt of cash from major customers, and there would be eight months of start-up expenses to outlay prior. Without completing this comprehensive forecast, there’s no way the client would have been prepared to survive the first six months of business.
That said, cash flow forecasting is not a crystal ball and it won’t always be right. Unforeseeable circumstances do happen, and the wrong inputs can be used, creating a forecast that goes horribly wrong. Assumptions made in a cash flow forecast need to be strongly challenged and tested.