Plan for Success

Contents

  • Initial planning
  • Business locations
  • Who's my competition
  • Wll I make a profit?
  • How do I promote myself?
  • Why do I need a business plan?
  • How do I prepare my business plan?
  • Compiling an operational budget
  • Business Planning downloads


  • Initial planning

    A well-thought-out business idea must have considered marketing the product or service, as well as The financial implications for the survival of the business and the controls Within the business.

    Is there a market?

    Once you have decided on your business idea and aims, you Must look at the likely market for your services. Talk to other people, Including potential customers, to get their views on your products or Services. Do they like the ideas? If they don’t can they say why not, or what Other possible products or service could be produced? If there are no alternatives, Then it is back to square one – but at least you have avoided an expensive mistake.

    Who wants my product?

    Effective marketing is necessary for the success of any business. Without marketing, how would you expect your customers to know about your product or service? Marketing also hlps you find out who wants your product – vital if promotional activities are o be used to the best possible effect.

    Talk to your family, friends and possible customers about your business idea. Check on market trends with your local Business Link, Learning & Skills Council (LSC) or Enterprise Agency and look in the trade journals in your local library. If your line of business is in a declining market, think whether you can still make it a success. If you appear to be in a rising market, good! But remember, you will still need to persuade customers to buy from you rather than from competitors.

    Think about who is going to buy your product.

    If your product is very expensive, then your sales may be limited. Where you trade and advertise depends on the price of your product and your position in the market. These factors are important when comparing your product to the competition.

    What is my ‘USP’?

    The USP is a famous marketing term invented when American advertising was at is height. The idea was that a product had to have a Unique Selling Point (USP) which made it different from the competition and persuaded people to buy it. You should think about why customers might buy from you and not someone else.

    If you are marketing a product which has a USP that can be easily identified (a totally new product) or that can be given a USP, advertise nnd promote it. If you are in a business where there is not much difference between products, or you sell the same things as everybody else, your usp could be better service, more convenience, car parking, fast delivery, delivery to the door, after-sales service, a wider range of products and so on.

    Be careful of just competing on price. After all, it is easy for your competitors to cut prices too.

    Where should I locate my business?

    Location is usually the most important part of a retail business, and it can be very important to some other businesses too. Even if you are working from home, you will have to think about things like planning permission and access.

    If you intend to lease or buy a retail outlet, check out the location thoroughly. Look at the number and kind of shoppers, and facilities such as car parking, as well as local conditions such as the crime rate. Don’t forget to ask the owner the big question, 'Why are you selling?'

    Obviously there are advantages and disadvantages of setting up your business in different locations. Consider the following points When deciding your business location:

    business locations

      Advantages Disadvantages
    Home
    • Few overheads.
    • Convenience.
    • No commuting.
    • Still may need planning permission.
    • Objections from neighbours.
    • Clauses in lease may not allow business use.
    • Family life may interfere.
    • Not close to market.
    Town
    • Greater passing of trade.
    • Better image.
    • Nearer to like businesses – so there is a current market.
    • High rent and rates.
    • Near to competition
    Industrial
    estate
    • Easy to get to.
    • Good image for cheaper rent.
    • Cheaper growth opportunities - without relocating.
    • More overheads.
    • Cost and time of travel to work.
    • Access to other services.


    Who is my competition?



    Competition cuts both ways - on the one hand, it means that there is already a demand for your product, but on the other, it means you have to try harder. Direct competition comes from businesses that offer the same product or service as you. Indirect competition comes from all the other ways customers might spend their money, instead of with you. It is important that you know your competitors strengths and weaknesses if you are to compete with them effectively.

    Will I make a profit?



    To make the most profit, you need to know what the customers will pay, what competitors charge and the costs of making each product. You will soon find out if you set the wrong prices. If you set prices too high, people will not want to buy your product. If you set prices too low, your product may look cheap and you will lose money.

    When setting your prices there are a number of elements that need to be remembered.

    Price setting can be separated into 5 different stages;
    These stages will help you to work out your own profitable prices:

    Stage 1-household and personaloverheads per year.
    *   Food
    *   Clothes
    *   Mortgage
    *   Holidays
    *   Lighting
    *   Heating
    *   Rates
    *   Telephone
    *   Tax
    *   National insurance

    Stage 2 – Business overheads and costs per year.
    *  Your salary (household and personal overheads)
    *  Rent and rates
    *  Heating and lighting
    *  Wages
    *  Advertising
    *  Stationary
    *  Interest on bank loan or overdraft
    *  Materials
    *  Other expenses, such as legal and accounting fees

    Stage 3
    *  Estimated number of sales during the period
    *  Cost per item = business overheads
                                estimated sales

    Stage 4.
    *  Profit you would like (say 50% of cost) =cost per item x 50
                                                                          100

    Stage 5.
    *   Price per item, therefore = cost per item + profit

    Pricing tactics can be a useful way of increasing sales and profit. For instance, it is usually more effective to mark prices clearly than make customers ask for them. Price breaks can also be useful. For some Products, it is better to break prices at 99p rather than round them up to the pound(£).

    Cutting prices is not normally a good idea for any business. If your profit margins are small, your cash will be tighter and you will have less room to move. It is better to sell good products at a fair price and make a decent profit. For the long-term, remember that your customers have selective memories. They will forget the good price, but they will remember the bad product forever.

    Check what price your potential customers might pay. If they are not willing to pay your price, you may need to:

    • reduce your costs.
    • highlight the difference between your product or service and your competitor’s - to justify the higher price.
    • improve the value of your product/service.


    How do I promote myself?



    People need to know what you are selling, where you are, and why they should buy from you rather than anyone else, so you will need some form of advertising and promotion. Your advertising should create an image that attracts attention and is easy to associate with your business.

    Advertising methods include:
    • Signs.
    • Promotional gifts such as pens or stickers.
    • Local or national press.
    • Cinema.
    • Local radio.
    • Sponsorship.
    • ‘Word of mouth’ - advertising that money can’t buy.
    • Business directories such as the yellow pages.

    Whatever your business, word of mouth is likely to be very important indeed.
    How do you encourage word of mouth? You can do it by:
     
    • Satisfying your customers with work well done.
    • Having a good relationship with your customers.
    • Building up a good reputation and protecting it, by sorting out any problems quickly.
    • Getting your name mentioned in trade magazines, or by local press or radio, possibly through community public relations activities.

    The following points will help you think about how to promote your product or service:
     
    • What features of your business can you use to offer people a better deal?
    • Where can you advertise?
    • Your customers are not just the people who pay for the product, for example, with children’s toys.
    • Think of an eye-catching campaign to advertise who you are and what you sell. Make it easy to remember.
    • Make sure you can support your claims about your product and you keep in line with the Trade Descriptions Act and Advertising Atandards Authority code of practice. Your local trading standards office can help.
    • Measure the success of your advertising by asking new customers where they heard about you. Change where you advertise and your message if necessary.
    • Remember the power of signs.
    • Think of ways to reach people when they need your product or service.
    • What public relations activity could you do?
    • How can you encourage the most powerful advertising of all - word of mouth?


    Why do I need a business plan?

    You need to plan your business. Trying to run your business without planning is like floating aimlessly at sea in a fog. You will not know where you are going, any more than where you have been or where you are. What is worse, sooner or later you will hit something.

    Working out the cash you expect to get is part of the planning process. It will show you whether you need more finance. If you do, it will be easier for your bank or any other organisation to help you if you can give them a business plan which covers all of the information in a logical way.

    How do I prepare my business plan?

    To help you gain experience at completing business plans it is possible to download a sample plan from this site, which allows you to fill in the sections and submit the plan to an on-line advisor for confidential comments. This business plan is written to support the vast majority of self employed and start-up businesses.

    How do I use the attached plan?

    We recommend that you download this business plan and work on it off-line. To do this you will require Microsoft Excel.



    Please read the following notes before completing the business plan:

    An outline of your business proposal

    To start your business plan it is useful to write down the background information to your plans. Areas of particular importance include your business aims for the coming 12 months and beyond, and an outline of your business proposals.

    Estimate of personal wealth
    There is always an element of risk when starting a business. Depending on how much risk a lender thinks there is you may need to give security as insurance against things going wrong. This security will often come from personal assets, so if you intend to borrow money be prepared to look at the business and personal assets you own. This form will help you to calculate your personal wealth and estimate the security levels that this will provide.

    Survival income
    Few businesses break even in their first year. Calculating your survival income using the attached form in the business plan will help you to work out how much money you will need to make in order to cover all personal overheads.

    1. Nature of business

    This section will involve completing basic details about your business’s trading activities, VAT consideration and dates for business commencement.

    2. Owner– managers/key personnel
    Include brief details of the personal and business backgrounds of key personnel. If necessary, add more details about experience, job responsibilities and health on separate sheets of paper. You need to give a clear summary of the experience people in your business have, including your own. The exercise will also help show whether any of your staff need training and if so you will need to give details of any specialist training that will be needed. Be ready to answer questions about your own abilities and skills.

    3. Objectives
    This section describes how you hope your business to develop and grow and what you hope to achieve over the next one to three years. Be realistic about your objectives. You should be able to achieve your aims and they must agree with cashflow forecasts and operational budgets.

    4. Market
    One of the most important parts of any business plan is how you see your market. It shows how much you have thought about your product and its place in the market. Basic details must cover a description of the markets, information about competitors, an explanation of how you expect to achieve market success and knowledge of the Industry.

    There needs to be brief details about your product and service. These details could include:
    • Product or service description.
    • Proposed price.
    • Reasons for the choice of product.
    • Market trends that will influence product sales.
    • Material costs and mark up percentage.
    • Payment methods.
    • Description of how the product will be promoted.
    • Information about who will buy your product and why they will chose to buy it instead of competitors products.


    5. Premises, plant, fittings and vehicles.
    Your plans will need to show that your premises are in the right location. They must also include justification of any large amounts of money that need to be spent on your premises.

    With plant and machinery, you need to show how old it is, its present value, hire/lease purchase commitments and how much it will cost to replace it, its condition and whether it can cope if you expand. Be open and realistic when you give these details.

    6. Pre start-up costs
    In this section you need to give a breakdown of what you will have to buy and spend money on before start-up.

    7. Finance.
    This section needs to include a breakdown of the finance that you will require, with specific details about finance that will be required for equipment. Installation, carriage charges and VAT must all be calculated and added to this section. It is easy to underestimate the amount of money you will need to get going, but not having enough finance is one of the most common problems in small business, and can be fatal. Producing a cashflow forecast is the best way of estimating how much money you will need (an Explanation of cashflow forecasts is given in the next section).

    If you are already in business, operational budgets can be useful as a planning tool, as can breakeven points and profit and loss forecasts:

    Operational budgets.

    Budgeting gives you a useful planning tool. By comparing your actual performance with the budget, you can spot difficulties early on and take action to put them right. However, all forecasts are based on assumptions, so these must be specific and as realistic as possible. Also think about ‘building in’ unforeseen costs in case the worst happens. This can be shown as a separate item or by building it into the individual cost figures.

    Whatever you do, you must explain your reasoning. Remember, this is an operating budget is a plan for your trading operations. It is to do with profit and loss, not cash. Include any item that gives a profit, or is a cost against profit. Do not include any other items, such as capital expense, if they will not directly affect your profits.

    You must also be clear about the difference between the various costs of running your business. Some will vary depending on how well your business is doing (variable costs). Some will not change (fixed costs or overheads).

    Depreciation.

    At this point, we must explain the term ‘depreciation’, as it will be used when compiling an operating budget.
    depreciation takes into account the reduction in value of an asset over its working life. It is an expense the business must pay regardless of how much business it does, and so you should include it in the operating budget as a fixed cost.

    Break-Even Point. Now that you have looked at the different costs, you can work out your break-even point break-even is the level of sales you need to cover all of your costs (both fixed and variable). Let's see how to work it out, using an imaginary manufacturer. The same calculation applies to any Business.
     
    Forecast for next 12 months £ £
    sales   108,000
    opening stock 38,000  
    plus purchases 60,000  
    less closing stock (50,000)  
    goods or materials used 48,000  
    wages or salaries 32,000  
    fixed costs 10,360  


    From these figures, you can work out your projected gross and net profit. That is to say, your profits before (gross) and after (net) you allow for your fixed costs.

    Sales   108,000
    Goods or materials used (48,000)  
    Wages or salaries (32,000)  
    Less variable costs (80,000)  
    Gross profit   28,000
    Gross profit
    (profit before fixed costs)
      28,000
    Less fixed cost (10,360)  
    Net profit
    (profit after fixed costs)
      17,640


    Now you need to work out your gross profit margin. This is your profit before allowing for fixed costs. It is written as a percentage of sales.

    Gross profit of £28,000  x 100 = 25.9%
    Sales of £108,000

    If you can reach the gross profit margin and your fixed costs do not change, the break-even turnover is worked as follows:

    Fixed costs of £10,360 x 100= £40,000
    Gross profit margin of 25.9%

    Therefore, this business will need a turnover of £40,000 to cover all fixed costs, as long as it keeps the same gross profit margin.

    Finally, work out the amount you need to sell every month just to break even. This figure is important because you can use it to check whether or not you are on target, or need to make some adjustments. But remember that this calculation does not take into account any seasonal changes which might affect your business.

    To work out monthly targets, simply take your break-even sales figure for the year and divide by 12.

    £40,000 = £3,333 per month
         12

    Compiling an Operational Budget

    The Operational Budget can now be prepared. This will help you to forecast your profit and loss and means that you can compare your projections with actual performance. Include everything that produces a profit or is a cost against profit. The headings for the budget are seen below:

    Sales
    1Cash
    2Credit
    aTotal Sales (1+2)
    Variable costs
    3Goods or Materials used
    4Wages and Salaries
    bTotal variable costs (3 + 4)
    cGross profit (a – b)
    dGross profit as a percentage of sales (c%a x 100)
    Fixed costs
    5Production/operation
    6Other fixed costs
    7Selling and distribution
    8Administration
    9Other expenses
    10Finance charges
    11Depreciation
    eTotal fixed costs
    fNet profit before tax ( c – e)
    Sales you need to break even (e –d x 100)


    Cashflow forecasts


    Once you have worked out your operating budget, you are ready to move on to your cashflow forecast. Cash is the lifeblood of your business. Managing cash badly is one of the main reasons for business failure.

    Like your operating budget, your cashflow forecast will be based upon assumptions. Again you must be realistic. Think about the best and worst cases and explain the assumptions you make. The more realistic your forecasts, the better any bank will like them.

    Unlike your operating budget, your cashflow forecast is not to do with profit and loss. It is just your best estimates of how the cash will go in and out of our business over a certain period.

    Things to bear in mind when completing your cashflow forecast:

    Think about the period of credit you give your customers or take from your suppliers. For example, if you can keep your customers to 30 days' credit (which will not be easy), your operating budget could show the sales you invoiced, say, in January. But this cash should not be in your cashflow projection until February. And then only if you are sure your customers will pay on time. If you have never had dealings with your suppliers before, you might have to settle their bills immediately. Obviously, this will affect your cashflow.

    Your forecast should show all cash you will pay and receive, including your own salary, capital spending and loans. These are all part of your cashflow. However, depreciation is not included in the cashflow because it is only a book entry. It does not mean real cash coming in or going out of the business.

    VAT will be shown in your cashflow forecast but not in your operating budget. This is because it is not a charge against Profit and Loss, but a cash settlement.

    Now you need to work out your cashflow forecast. To make this process easier, it is possible to download a sample cashflow forecast that will perform all the calculations after having inputted the necessary figures.


    Sources of finance

    Banks are usually wary of lending money if there are no personal finances entering the business. This section needs to breakdown your sources of finance and will include private sector funding, such as your own resources and bank loans, as well as public sector funding such as grants and enterprise allowances.