Posts Tagged ‘Start Ups’
What Are Budgets and Forecasts?
They are predictions of future income and expenses and cash flow. They also predict future performance with financial forecasts and projections and with financial models.
Why Budget and Forecast?
Budgets and forecasts provide a feasibility analysis. They can help develop a business model, review your key assumptions, and identify resource and capital needs. Budgets and forecasts can be used to find funding. They demonstrate the potential of your business to investors and lenders. Budgets and forecasts can also be used as a management tool. They can help you establish milestones and require accountability for accomplishing the milestones. They can help identify risks and show benchmarks. This will help the small business owner make the necessary adjustments to avoid the risks, to reach the milestones, and to measure up to benchmarks.
Why Are Forecast Important?
A forecast can establish measurements to guide management, to facilitate planning, and to facilitate goal-setting.
What Areas Do You Need to Forecast?
It is critical that you forecast your start-up costs so that you know how much it will cost to open your doors. You need to prepare estimated start-up financial statements and estimated short and long-term revenue forecasts. As part of your forecasts, you will review key concepts and issues that will make a difference in your company’s survival. You also need to forecast the resources you will need and set up a schedule for using and replenishing your resources.
Do Investors Want to See Forecasts?
Yes, your forecasts will show investors that you know your business, that you are likely to succeed, and that you will make wise use of their money. You must have at least a five-year forecast that shows significant profit by year five, significant net income by year two, and that investors will earn approximately 10% return on their investment.
Do Lenders Want to See Forecasts?
Yes, your forecasts will show lenders that you know your business and the you will be able to repay the loan. Be sure you forecast for the entire period of the loan and use conservative financial ratios, because the lenders will. Also, you will need to collateralize and personally guarantee the loan.
The investors and lenders will want to see forecasts of your profit and loss and revenue. They will also want to see what drives income in your industry; for example, sales, distribution, advertising, internet search engines, referrals, location, price, or coupons or other discounts. You also must forecast the revenue cycle for your target customer. How much time will you need to start production, and how quickly will your product or service be accepted in the market?
What Other Forecasts Are Needed?
Another important forecast is the total personnel required to support your desired revenue. If your revenues result from sales, you should start with the desired revenue in year 5. From year 5 subtract 40% from each prior year. On the basis of your research, estimate the number of sales each sales person will make each year. From that you can calculate number of salespeople required.
After you make your forecasts, you should complete a sensitivity analysis by adjusting each major item estimated by 10% plus or minus. Examine the impact on revenues, profit, and cash needs. Remember that most operating expenses are roughly proportional to personnel headcount. These are your variable expenses such as salaries, benefits, employment taxes, furniture, computers, rent, supplies, utilities, training, travel, meals, training, and dues. Other non-variable expenses may or may not be proportional such as professional services, subcontractors, advertising, and trade shows.
Use your forecasts to compare yourself to others in your industry by such things as revenue per employee, revenue per salesperson, gross margin, expense categories as a percentage of revenues, financial ratios, and inventory control. It is critical that you know your industry’s benchmarks and metrics and that your business forecasts are within these benchmarks and metrics. You can find this information by researching your industry.
Should You Hire a Business Consultant to Prepare Your Forecasts and Research Your Industry?
Yes! Unless you have a very strong finance and accounting background, you cannot create financials that will be acceptable to investors and lenders. You cannot do an acceptable business plan with a spreadsheet, and it will be difficult for your to be objective in developing your business model. Also, you are the entrepreneur and your efforts are better spent building and developing your business which is what you do best.
Jo Ann Joy, CEO, Indigo Business Solutions
JoAnnJoy@IndigoBusinessSolutions.net, Phone: (602) 663-7007
The future of your business starts here.
For more information about these and other important topics and for legal consultation, please visit our website at http://IndigoBusinessSolutions.net Copyright 2006. Indigo Business Solutions is a registered trade name.
Online Niche Market: Associated with solidarity trade in its early days and not presented any differently than charitable causes that support third world countries, Fair Trade is all about providing fair wages to the handicraft producers in the developing countries. However, today’s online entrepreneurs are targeting a growing niche market to offer ethnic handcrafted products to a generation that needs to express itself in a unique and original way and at the same time support the quality and diversity of world cultural and artisanal goods. To learn to respect and appreciate differences is the common ground for consumers with a conscience, a lifestyle that has grown to be more accessible to the common man. Not any different than the growing organic market, access to fairly traded products through the dropship model raises questions on the reliability of the products’ origins: unless certified by regulatory institutions, fair trade importers’ guidelines can be as broad as one’s preferences.
Social Networks: Next to certified international organizations that regulate and monitor the fair trade movement, online networks and forums composed by a diverse crowd of activists, customers, producers, importers, and wholesalers offer endless tips and support to fair traders’ start-ups. The development of a reliable and dynamic social network using innovative supply chain management strategies such as drop ship is the key to success for the online fair trader whose goal is to achieve a high sales turnover and zero inventory. Still, customer loyalty is a tough business when it comes to the dropship model because for the reseller to develop brand recognition when offering non-exclusive products in the fierce online market, is a continuous struggle.
Ask the experts: To develop and keep a brand identity is for online dropship resellers crucial to attract and retain customers but when it comes to fair trade, the primary selling point is the products’ tribal origins and the experts are the artifact producers. So when offering fair trade, the best advice is to stick to what you know in terms of marketing and networking and let fair trade do the rest.
Buying a profitable business is often the preferred route for people that do not want to take the huge risks involved in trying to start a business on their own. 80% of all start ups fail in the first 5 years so if you find a small business that has been trading successfully for at least a few years, you cut down the risks of failure dramatically.
For the shrewd operator there are bargains to be had as many small business owners do not know how to value their business properly. I have come across instances where a small business has been sold for less than one years profit potential!
One of the best approaches is to find a seller that is disposing of the business because s/he wants to retire. Usually people in this category have let their business run down due to the fact that they have already made their money, paid off their mortgages and have a handsome pension waiting!
In the last few years they have probably only managed their business part time and are now looking forward to escaping the rat race altogether. They often have not utilised the internet to grow their business and some of them still do not use computers to help them manage their data!
Many people close to retirement are often eager to accept the first real offer they get for their business. For a young entrepreneur this is the ideal type of business to buy. If the business is already profitable running at half speed think of the potential if you were to put in twelve months of full concerted effort in and bring it back up to full speed.
When buying a small business get a decent accountant in to help you sift through the financial records and ascertain the true value of the business. This is not the price you offer! In the first instance it is far better to ask the seller what price s/he would accept and then start negotiating.
Check out the market trends for the niche the business occupies. You do not want to enter a declining market. Check out the competitors and find out what they are up to. This is the ideal time to talk to them as they are unlikely to be so forthcoming once they know that you have bought the business.
When you are valuing the stock, make sure you put zero value on all stock that has not moved for six months. Get in touch with the suppliers and ask them if they would be happy to carry on supplying goods at the same prices and terms.
Speak to the employees and find out what the think of the business. What are their plans in the business and are there any that you can let go without causing a rift. When a small business has been operating for years sometimes close friends and family members are employed that really do not contribute to the business at all.
Make initial contact with the main customers and find out how they are faring. The last thing you want to do is to buy a business just before the largest customer goes bankrupt! If the largest customers are thriving then chances for expansion are high.
Carry out a survey of the premises to ensure that there are no unexpected bills in the pipeline. Make sure there are no outstanding legal matters that still have to be dealt with and ensure that you get full rights over the trademark and other intellectual property when you purchase the business.
Only once you have carried out all the checks are you ready to consider putting an offer in. If the offer gets accepted then this is where the real fun begins.