As Accountants we hear many people ask the question “Why do I need a business plan?” or make a comment along the lines of “I know how to run my business I just want to go out and do it”! Whilst there are many answers and responses to the above it really comes back to two key words; direction and commitment
As Accountants we hear many people ask the question “Why do I need a business plan?” or make a comment along the lines of “I know how to run my business I just want to go out and do it”! Whilst there are many answers and responses to the above it really comes back to two key words; direction and commitment.
Direction is a crucial stepping stone on the path to success in both business and life. If you do not know where you are headed how you can plan the pathway to achieving your goals?
Once you have that direction it is difficult to commit to the pathway without documenting in some form the plan you have set out for yourself. Too often ideas are forgotten and/or the commitment isn’t there because you have nothing holding you accountable to a plan that is only in your mind.
Personal Financial Goals
Now that we know why we plan, the question is where do we start? As a small business owner the best place to start is with your personal financial goals, which after all this is why most of us got into business in the first place.
There are different aspects to our personal financial goals, outlined below:
- Short Term – this is concerned with the ability to fund our lifestyle day to day, week to week. It’s our ability to pay the bills, put food on the table and of course entertain ourselves with a little fun every now and then. Essentially there is a base level of income we need per year to fund that lifestyle.
- Medium Term – this is concerned with those items that take a little bit of time to save for, items that are one off purchases not made in our day to day lives. Here we are looking at things like the purchase of a new car, that holiday you have been waiting for or maybe a deposit for that new home. These are items that we need to put a little aside for week to week on top of our short term lifestyle costs.
- Long Term – this is where we look at the end game, nobody is going to be able to work forever so there needs to be a point in time where we have built up a “nest egg” sizeable enough to give us the option of retirement. What we are talking about here is our superfund balance, our investment properties, shares and other investments that we have built up over a lifetime that will either provide income or be sold to fund us when we are no longer working. What we see as Accountants is that it is this last area that tends to be forgotten or put off to be thought about at a later date when it is perhaps the most important of all.
Once you have a clear understanding of all of the above areas you can start to understand exactly what you are going to need from your business. This is not just in terms of ongoing income, which will play an important part in the short and medium term, but in terms of what your business could be worth in the future when it comes time to sell.
Having thought about and hopefully put in place some personal financial goals it’s time to look at how we are going to achieve them. Now is the perfect time to consider the business model we are going to work with. Below are the 3 core models we talk about when achieving you financial goals:
- Employee – the first we look at here isn’t actually a business model at all but an employee. To achieve the goals we talk about above you do not need to be in business you can be an employee. Your goal in this circumstance is to earn enough to fund all 3 of the personal phases. You want to earn enough to cover the short term lifestyle costs, to put some aside for those one off purchases and importantly make sure to be investing a portion for your future.
- Self Employed Business – moving into actually owning a business the first model we look at is the self-employed business model. Essentially this is when the owner is the key person in the business and without their involvement the business would not continue run. This being the case there is little room for the owner to sell the business for a significant amount upon retiring, there may be some value in the plant & equipment and maybe a little goodwill but that’s about it. Due to this an owner of this type of business has similar goals to an employee, they are not going to sell the business to fund themselves in retirement so they need to earn enough from their business profits to cover the short term lifestyle costs, to put some aside for those one off purchases and invest for their future
- Developed Business – the second business model we look at is a developed business. This is different to a self-employed business in that the business does not rely on any one individual and their relationships. There are systems and processes in place so that the owner could sell this business on to an unrelated party and that party could come in and continue to run the business. Due to this a developed business has a greater value when it comes time to sell therefore changes how an owner of this type of business achieves their goals. With a developed business there is still a need to draw a certain level of income to cover the short term lifestyle costs and to put some aside for those one off purchases. However, with the long term investment owners will retain money to continue to build the business as an asset for retirement to supplement the shares, super property, etc.
Now that we have set our personal financial goals and looked at what business model is best suited to our circumstance it is time to put some detail into planning the business itself.
Sustainable Competitive Advantage (SCA) or Unique Selling Proposition (USP)
The first step in planning out our business is understanding our SCA or USP. What these are essentially looking at is, why would someone come to us for goods or services over our competitors. It may be quality, superior service, lower cost or a range of other factors, however no matter what it is we need a clear understanding as this provides direction for the rest of our planning. Everything we do from this point forward from our marketing plan through to the staff we hire will be done with our SCA or USP in mind.
Identifying our SCA or USP can be a difficult task but the next section of our planning can be a very useful tool in doing just that and much, much more. I am talking of course about a SWOT analysis. A SWOT analysis is a key tool in identifying both internal and external factors that are going to affect our business. SWOT stands for Strengths (S), Weaknesses (W), Opportunities (O) and Threats (T). When we are talking about strengths and weaknesses we are looking at factors inside the business and opportunities and threats are looking at factors outside of the business. Once we have begun to develop a list under each one of these categories we can start to identify how our strengths will help us seize opportunities and avoid threats and by understanding what our weaknesses are we can see how they could affect our ability to seize opportunities and identify our high risk areas, areas where our weaknesses make us vulnerable to external threats.
Building a marketing plan is a crucial part of our business. It can be as simple as person to person networking and client referrals or including a multitude of different aspects from social media to flyer drops from websites to media advertising campaigns. There is no one size fits all in this area.
Generally speaking marketing can be broken down into 3 main areas, branding, advertising and selling. The key is to identify your target client by considering your offering and SCA or USP. Once we know who it is we are targeting we can build a brand that appeals to our target clients, we can direct our advertising to platforms that are relevant to that particular client and we can customise our sales process based on our understanding of the target client.
When we are talking operations we are talking about the ‘how’. How do we produce our output whether that be goods, services or a combination of the two? It encompasses planning out physical items such as a business premises and any plant and equipment necessary and also the intangible items like the systems and process used to produce the output.
Finance & Legal
From a financial perspective there are a number of boxes that need to be ticked in the planning stage before getting into the ongoing financial needs of your business. One of the first steps would be to perform some form of forecasting to project out what the first 1, 2 or 3 years look like from both a profit and cash flow point of view. This will give us an understanding of the feasibility of the business. We will then look at the funding needs of the business and how best to source the necessary funds. Also high on the list of considerations is the structure of a business – do we trade via a company, trust, or some other entity? With the pre business finance items locked away we also need to consider the ongoing items such as annual budgets, annual taxation compliance, bookkeeping needs and regular financial reports, by who and when are these tasks to be completed.
Looking at the legal aspect it can be a lot more involved depending on the number of parties involved. When multiple parties are involved documents like shareholder/partnership agreements needs to be looked at to outline the decision making process, any rules set out surrounding succession and other directions inside the business. Also to be considered are other agreements such as employment agreements, contractor agreements, customer/supplier and the list goes on. There are also industry specific legal obligations that need to be considered and planned for.
Human resources is often spoken about as being the hardest part of business, people having a mind of their own cannot be programed like a machine or computer. This is why it is crucial to set out a plan, firstly to attract the right talent whether this is the business personally or potentially outsourced to recruitment firms. Once on board we need the systems in place to effectively train those staff so they are up to the specific tasks and improving as our business develops. When we have the right people with the appropriate training it then becomes a questions of retention, how are we going to remunerate and incentivise the staff to perform at their best and to retain them in our employ?
Innovation & Review
Going through the planning process at the start of a business is not enough, no matter how much time we spend and detail we include. We live in an ever changing world with technology moving faster than ever and consumers wants and needs always in flux. This is exactly why it is imperative that we as business owners firstly regularly review our business plan but also apply that ‘outside the box’ thinking and innovate wherever possible. There are no set timelines in this area, there may be some sections of your planning you revisit on a monthly basis whilst others may be annual or even every second or third year. The important thing is that you do review. Nobody wants to get to the point 5 years down the road and think “I wish I’d thought about this or considered that.”
Having an in-depth understanding of all of the above is very difficult for the majority of business owners. Business planning is a process you should work through with assistance possibly from multiple parties. A business advisor is an ideal person for assisting you to put together your plan and from there possibly diving even further into individual experts for example seeking assistance in the marketing area if this is not your strong point, or possibly looking in human resources assistance. At the end of the day it comes back to the individual needs of your business and the level of detail will differ. Making sure you have a set plan in place is crucial to provide the direction of the business and drive commitment in yourself and your partners.
If you require help with your business planning then please contact James Newcombe or Tim Snook from Newcombe Clifton Atkins on 08 9387 0000.