What to consider when planning a new business

So you have decided to start a small business, what a great idea! 

Not only will you find this financially rewarding and emotionally empowering, you will also be adding to the overall wealth of the community through employment and education.  There are a number of benefits that flow through to communities when people start their own small business.

Before you get started, here are some initial concepts that I think you will find useful in assessing your potential business and its viability.  These questions are not meant to discourage you from starting your business, they are simply designed to help you cover off on some issues that may arise.  Nor do they cover all of the issues as these are many and varied, however will give you a start.

So let’s begin.  We will use a hypothetical remote whale watching business as an example:

So what is the business and what will it look like? 

E.g. I hope to buy a small boat @ $30,000 and take tourists out to see the whales off the coast of Broome.

How will you market your product (word of mouth, website, magazines)?

How will people know where you are and what service level will you provide?  

What are the price points?

Do you have tiers, e.g. a base level, premium and gold level?  For example you might do a long day package with lunch and drinks, or just short 1 hour trips.

What is your differentiation?

Why should or why would people go with you?

Is there a real need for your service?

How do you actually know this?

Have you considered a commercial partnership e.g. 50/50, 30/70 or even ⅓ / ⅓ / ⅓ etc? 

This structure is often useful if you have little or no experience in running these types of businesses.  As well you benefit from the experience and capital investment of a number of people. As they say, two heads are better than one.

What structure will you use i.e. sole trader, partnership or company?

This is more important than it looks (and also why you need to get professional legal and accounting advice). Think this issue through in detail, otherwise it will complicate matters later.

How does your business fit into the global outlook?

This is the big picture.  If your business goes well will it attract other entrants who might disrupt your business and create too much competition?  Or will this actually help you?

Have you planned a point to point strategy across your supply chain?  E.g.

  1. procure finance (including sufficient working capital)
  2. lease premises (front office and workshop)
  3. purchase boat
  4. work out fee structure and how people will pay (what sort of banks accounts and credit card facilities are available)
  5. market capability (website and in-flight magazines)
  6. employ designated people
  7. procure credit lines e.g. with local fuel supplier
  8. deliver the service (whale watching boat trips) to clients at equal to or above the client’s expectations (and continually assess how can you improve this)
  9. how do you bank the funds and undertake your bookkeeping
  10. how do you educate yourself e.g. on BAS, whale migration patterns, first aid, presentation skills  etc
  11. are you managing the cash-flow well?
  12. have you obtained the necessary licences (boat) and permits (National Park)
  13. have you sufficient insurances
  14. how do you train staff & do they know what you are trying to achieve
  15. and so on…..

Have you undertaken a detailed “SWOT” analysis (this should be undertaken on a continuing basis)?

  1. The strength of your business
  2. Business weakness
  3. Opportunities
  4. Threats to the existence of your business

Have you got professional assistance?

  • Accountant
  • Solicitor
  • Business Coach
  • Business Adviser
  • Insurance Adviser
  • Marketing Consultant

If not, why not.  All good businesses rely heavily on professional advice and your business is no different.

Risk Analysis – what happens if?

  • The market (e.g. tourism) collapses
  • You have a business disaster (e.g. your one boat breaks down and you can’ttake the passengers out)
  • Have you stress tested your budget for a 50% decrease in revenue and a 50% increase in costs
  • What happens if you get sick?  Who will have the skill and desire to operate the business and do they know what your vision is?

Operation Capabilities

Have you worked out your key management and operational personnel, e.g. who drives the bus to deliver the tourists, who will drive the boat? Are they licenced and skilled?  Who will take bookings and what is your refund policy if you cannot go out. Who will be in charge when you are not there? Have you identified the risks e.g. poor roads, rough seas, motor breakdown, dirty fuel, food & water and so on?

So after looking at all of this, how much do you need to apply for?  You need to cover off on all of the above identified costs and then add some for a contingency as well, just in case you have missed something or something unexpectedly breaks down (e.g. boat motor).

  • Have you done a full cash-flow budget out to 5 years with breakeven analysis?
  • What does / will your balance sheet look like?
  • How much equity are you contributing?
  • What will your P&L look like?
  • Now have you worked out how much you need and how are you going to pay it back and how long it takes?  Have you factored in interest?
  • And more importantly does it look like you will be making a profit that is sufficient to cover all the effort you are putting in, and the risk you are taking to do all of this.

You will also need to address your key ratios (you will need a good accountant and business adviser to assist on these issues).  These are very useful in seeing how your business is operating and benchmarking against other good businesses.  These include (but are certainly not limited to)

  1. Gross margin
  2. Return on sales
  3. Margin expansion
  4. Cost to income
  5. Return on investment
  6. Return per square metre
  7. Inventory turnover
  8. Debtor days
  9. Creditor days
  10. And so on.

So now we are getting somewhere.  We have “painted” a strategic and financial picture of what your business will look like, at least at the start. 

Hopefully you will be able to visualise the financial structure, the operational issues and strategic direction in light of the risks associated with each one.  From here, start with a plan to ensure you cover these issues (and many others that will arise), appoint the relevant people (accountant, solicitor, etc) and put a timetable in so that you don’t lose track of the timing.  This will be your initial strategic plan.

Of course this is just the beginning of your journey as a business owner.  Good luck in the future.

Clive Ringler, Senior Vice President, Morgan Stanley Wealth Management