The Facts of Business Life by Bill McBean Read Free Book Online
Authors: Bill McBean
the desired results.
The information you will need to gather includes market size, the strengths and weaknesses of your competitors, potential sales, ease of competitor entry, market demographics, typical gross profit margins in the industry, typical expenses, and expected profits as a percentage of sales. By the time you have gathered all this information, you will have essentially become not only an expert on the market but will also have developed an understanding of both national industry trends and future prospects for the industry. Once you have this information, you will be able to produce realistic financial forecasts detailing âmost likelyâ sales, gross profits, expenses, and net profits. You will also be able to determine cash flow, cash burn, working capital, and the total amount of investment required. All of this will, in turn, lead to a return on investment (ROI) number and indicate how long it will take the company to become debt free on the operating side.
Finally, ownership and opportunity decisions should always be based entirely on up-to-date facts or, at the very least, educated assumptions. Emotions, guesses, dated information, uneducated assumptions, or what you imagine life as an owner might be like should never be part of any business decision. And the simple truth is that the better the information you gather, and the better you analyze it, the more likely the decision you make will be the right one. This process is the same regardless of whether itâs the first business being bought or the fifteenth. The only difference is that the more you do it over the years, the better you get at it.
Planning at Level 1
At this level, as at every level, planning addresses the question of how you are going to accomplish what youâre expecting to accomplish. But at Level 1, planningâs primary purpose is to determine if the financial forecast youâve completed is realistic, and if it isnât, what that means for the future of your potential business. Of course, every business plan is different, both because markets are different and because every ownerâs definition of success is different. There are, however, some elements that are common to every successful plan.
The first of these are goals and objectives. Goals are where you ultimately want your company to be, and objectives are the intermediate steps you have to attain before you can get there. At Level 1, for example, you might set a goal of increasing sales by 10 percent. In order to achieve that goal, you could set up a series of objectives such as increasing sales by 5 percent a year for two years; increasing inventory, marketing, and advertising by 5 percent a year; hiring additional employees to handle the increased volume; increasing employee training; buying new equipment; or updating processes to handle the expected sales increases.
The next common element in a successful business plan is the analysis. The goal of this analysis is to determine if what needs to be done in order to be profitable is realistic. In other words, itâs one thing to put numbers down on a piece of paper, but itâs quite another to make it happen. Such an analysis should consist of several key questions, including:
What is the size of the overall market?
What percentage of the market will I have to capture and keep in order to make a profit?
Is the market growing or contracting, and how will this affect profits in the future?
What will happen if the business doesnât perform up to my expectations?
Do I have enough cash to last through some unforeseen difficulties?
Do I have the talent and experience to lead my business to success?
Is the expense structure likely to support the expected results?
Answering these questions is particularly important because they âslowâ you down; that is, they remove emotion from your calculations and force you to focus on the facts and the realities of the situation.
The last of the
The information you will need to gather includes market size, the strengths and weaknesses of your competitors, potential sales, ease of competitor entry, market demographics, typical gross profit margins in the industry, typical expenses, and expected profits as a percentage of sales. By the time you have gathered all this information, you will have essentially become not only an expert on the market but will also have developed an understanding of both national industry trends and future prospects for the industry. Once you have this information, you will be able to produce realistic financial forecasts detailing âmost likelyâ sales, gross profits, expenses, and net profits. You will also be able to determine cash flow, cash burn, working capital, and the total amount of investment required. All of this will, in turn, lead to a return on investment (ROI) number and indicate how long it will take the company to become debt free on the operating side.
Finally, ownership and opportunity decisions should always be based entirely on up-to-date facts or, at the very least, educated assumptions. Emotions, guesses, dated information, uneducated assumptions, or what you imagine life as an owner might be like should never be part of any business decision. And the simple truth is that the better the information you gather, and the better you analyze it, the more likely the decision you make will be the right one. This process is the same regardless of whether itâs the first business being bought or the fifteenth. The only difference is that the more you do it over the years, the better you get at it.
Planning at Level 1
At this level, as at every level, planning addresses the question of how you are going to accomplish what youâre expecting to accomplish. But at Level 1, planningâs primary purpose is to determine if the financial forecast youâve completed is realistic, and if it isnât, what that means for the future of your potential business. Of course, every business plan is different, both because markets are different and because every ownerâs definition of success is different. There are, however, some elements that are common to every successful plan.
The first of these are goals and objectives. Goals are where you ultimately want your company to be, and objectives are the intermediate steps you have to attain before you can get there. At Level 1, for example, you might set a goal of increasing sales by 10 percent. In order to achieve that goal, you could set up a series of objectives such as increasing sales by 5 percent a year for two years; increasing inventory, marketing, and advertising by 5 percent a year; hiring additional employees to handle the increased volume; increasing employee training; buying new equipment; or updating processes to handle the expected sales increases.
The next common element in a successful business plan is the analysis. The goal of this analysis is to determine if what needs to be done in order to be profitable is realistic. In other words, itâs one thing to put numbers down on a piece of paper, but itâs quite another to make it happen. Such an analysis should consist of several key questions, including:
What is the size of the overall market?
What percentage of the market will I have to capture and keep in order to make a profit?
Is the market growing or contracting, and how will this affect profits in the future?
What will happen if the business doesnât perform up to my expectations?
Do I have enough cash to last through some unforeseen difficulties?
Do I have the talent and experience to lead my business to success?
Is the expense structure likely to support the expected results?
Answering these questions is particularly important because they âslowâ you down; that is, they remove emotion from your calculations and force you to focus on the facts and the realities of the situation.
The last of the
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