Do you have a sustainable business? It all comes down to cash, explains Paul Smith

Paul Smith is one of the Growth Hub’s most experienced business advisers. Here, in the second of a two-part blog, Paul talks us through the crucial elements of your business planning.

Understanding business finance

As I spoke about in the first part of this two-part blog on Business Plans, it’s important not to stress too much about business planning. After all, your business plan won’t make or break your business – cash flow will.

As a result, one thing business plans do need to have is a solid grasp of finance, which will ultimately help you decide if your idea has the chance of becoming a sustainable business, or if it won’t.

I ask my clients from the start how much money they need to make, to focus them on the bottom line.

I recently had a client who, after being made redundant from her full-time job, decided to start a cake-making business. When we dug into her plans, we discovered she hadn’t thought through the cost of the ingredients, the electricity in her home (where the cakes would be baked) or the packaging.

I then asked how much of her time was required and, if she paid herself a minimum wage, what would it work out at?

This continued: What price would she then need to sell the resulting cake at, to pay herself and to pay for the ingredients? What would the same cake cost at a shop or bakery? And do you have a truly sellable, Unique Selling Point, ahead of competitors?

These are the questions that you need to be asking yourself. If these questions don’t come back exactly as you’d like, you need to look at somehow decreasing your costs or finding your USP, which means you can be more attractive to customers despite having a higher price point than rivals.

This kind of critiquing we perform on business plans isn’t intended to be a harsh destruction of the plan itself – we just want the business owner to think about whether or not there’s a better way of looking at the goals they’ve set themselves and building the business plan and cash flow forecast around that.

In this example, knowing how many cakes you need to sell to cover your costs and make a profit enables you to create a logical business plan.

Identifying your audience

I worked with a client who was starting a business making beautiful wooden ornaments. He and his wife had put together the basics of a business plan, but they had based this on selling the ornaments from a market stall, whereas in reality, a website would probably make more sense.

Once set-up on the stall, they decided to also sell cheap plastic trinkets, which took pride of place at the front of the stall, with the upmarket, beautifully-crafted wooden ornaments sat at the rear. In their mind, they weren’t doing anything wrong, but it required the experienced eyes of a third party to highlight the way they’d inadvertently prevented their business from getting off on the correct footing.

This was an example of a business that was incorrectly balanced and had inadvertently targeted the wrong audience (few people would go to a market stall and buy something of that value off the cuff), and it’s a common problem.

A business plan that is constructed pragmatically and broken down into small, practical steps helps new business owners avoid scenarios like this, and it’s partly why I love being in the position to offer advice that helps my clients achieve their goals.

If you need help creating or critiquing your business plan, contact us – we’re here to help!