Archive for Business Start Ups

Why Small Businesses don’t make it: an accountant’s perspective

You might remember we talked to Business Insider last August about the three mistakes you need to avoid as a small business owner hoping to grow your business.

This month I took the theme up with Business Review Australia in an article ‘Why Small Businesses Don’t Make It: An Accountant’s Perspective“.

One of the big dangers I see is that new starters will often wing it with a cursory internet search to suffice as competitor analysis of marketing or pricing points without fully realising big companies can afford to run marketing campaigns such as loss—leaders, manage for years without profit or have other strategies to support their losses.

They also need to recognise that they really have to ‘sweat the small stuff’.  It gets down to understanding literally how many cups of coffee you need to sell each day from your small coffee shop, to make a profit.

Shoot over and read my article “Why Small Businesses Don’t Make It:An Accountant’s Perspective, I think you’ll find it helpful.

And I have suggested some actions you can take yourself without needing an accountant or business adviser to get you through.

Testing whether your business model works

Building block gameTesting your business model to make sure it will work is the next step after you have researched the market, gathered information and identified the niche opportunity for your products.

How do you go about this?

You will need to get  your concept down on paper or into a model and test it. This is a process that can mean hours and hours of spreadsheets, pain and pressure, and involve assistance from your accountants and many other things to get it right.

There is an easier way.

You can use a business tool that takes you through the process.

We use CashMAX Forecaster™ (www.cashmaxforecaster.com) when we want to  evaluate a business model to look at Cash, Profit (& Loss) and your Balance Sheet timing (a three way forecast) to see how everything fits together. It takes into consideration GST and other related tax and legal requirements.

Testing your business model is testing the process of what you are selling and how you are going to sell it.

Forget about the ACTUAL numbers just for the moment. The numbers are simply the end result of the plan.

Just for now, we won’t consider the actual dollar value of the product / services that you need to sell (eg $10,000), instead we will start thinking about the dynamics that make up the dollar figure.

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In your business model, the dynamics of the numbers are what tells you that you need to sell x amount at y dollars with a margin of z%.

 

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For instance this allows you to say if I want to sell x amount in Month 4, what actions will I need to take in Months 1, 2, and 3 to make that happen?

And what are each of those sales/ marketing / and other activities going to cost me?

What we are starting to build is not just a financial model to see if the numbers work,  but also a picture of all the steps that will be required to make it work, and what each of those steps will require both in cost and activity.

Activities are what drives business.  Your task is to assess the balance between the cost of the upfront activities and the returns on the results these activities generate.

This allows you to decide what you need to do, and what can you afford to do upfront, to drive results and build business. Once you have worked this out, you will be able to determine if your business model is viable.

Remember that at this stage everything is based on assumptions. The assumptions you make will drive the model so be realistic on all assumptions that you put in place.

Buying a franchise doesn’t guarantee success: do your homework

Buying a business, any business, is risky. You could lose everything. Franchises are no different. A franchise is not some kind of fail-safe choice when it comes to business investment.

 

The impending legal action against the Pie Face franchise by three of their own franchisees, which have collectively lost around $2million from their investment, points to a potentially serious dilemma for franchisors and franchisees alike.

Pie Face, the franchisor, claims that a store’s ability to meet projections can be effected by the franchisees in areas such as attention-to-detail and competency, as well as the way they choose to run their store – for example does the owner work in store, or hire a manager.

The franchisees claim on the other hand that the projections supplied by Pie Face were completely inaccurate.

This story is developing and I am certainly not going to point the finger of blame. Nevertheless I would suggest that from a learning perspective there are a few lessons we extract from this.

With every franchise transaction in which I have been involved with clients, the franchisees have been advised by the franchisor to do their own research. The franchisor has certainly always supplied a certain amount of information on which the purchaser can base an assessment. But the level of information, the assistance and its form, while vital, are only part of the story. Location, personnel and demographics are just a starting point in the many things that impact upon a businesses success.

We need to be mindful that the seller – in this case the franchisor – has a goal to sell a franchise or have a franchise change hands. They are presenting their information in a positive light. The potential buyer is also swayed by their desire to purchase a franchise. Maybe part of the attraction is that they think that purchasing a franchise reduces the need for extensive personal research – it’s a kind of fast track route into owning a successful business without the need to fully delve into the model and its details.

Any business, a franchise or other, is a risk.

The adage ‘buyer beware’ might be an old one but it still applies. Ignoring your own research and analysis is stupid and irresponsible, both to you, and to the other people’s lives that might be impacted. Let me be clear; when you buy or start up a business or franchise you can lose everything you have.

 

Here is one simple example.

Let’s say you can buy into the business itself for a cost of $50,000. That is only one item on the ticket. When you do your numbers you will need to assess and understand everything else that will be involved in operating that particular business.

For instance you may be required to sign a lease with a personal guarantee and the rent is $120,000 per month for five years. From the moment you sign that lease you have potentially lost those funds. Even if your business closes, you must still pay that full amount (less anything that you can get from someone to take over your lease). It is not only the original investment you risk but also potentially everything you own.

My question is, can you blame someone else, in this case the franchisor, for your failure to do your own research first?

Or is the Pie Face scenario a case in which the franchisor has oversold / misled to such an extent that they become liable?

Either way this opens up serious concerns for both franchisors and franchisees.

And either way, you, as a business owner or purchaser cannot be complacent, no matter how successful the franchise or business appears to be. The onus is always on you to do full due diligence and analysis to uncover all potential issues in the purchase and sale of a business.

 

We’ve developed CashMAX™ Forecaster for the specific purpose of helping people plan and determine their business future. For details on it give me a call.