Rob Orme, marketing manager at Franchise Finance, shows you how to assess a venture’s viability and make sure you have enough cash at the start of your business journey
Starting a new business is an exciting time and the temptation can be strong to jump in with both feet, so as to hit the ground running.
To an extent, this is a healthy attitude. However, assessing the viability of a new venture is vital from a risk perspective. There may be some challenging hurdles to jump in order to ensure the business has the best chance of success.
Rushing into a new venture could lead to an oversight on capitalisation (making sure you have enough cash to sustain the establishment and growth of your business), misjudgement of demand and a failure to notice the launch of a competitor.
How do you avoid this happening? Read on for my top tips:
Depending on your personal circumstances, it’s probable these life changing decisions will affect your husband or wife, daughter or son, your free time, holidays and a multitude of other areas of your life.
Ensuring you have the support network you’ll need as your venture starts and grows is critical. If differences of opinion exist, it’s better to have a conversation at this point, so as to avoid conflict at a later date where the opportunity to change things may have been taken out of your hands.
Always remember cash is king
You’ve probably heard it before, but it’s vital to not only know but actually understand why cash is king.
The number one reason for business failure, franchise or otherwise, is running out of cash. It may seem surprising to some, but profitable businesses can and do close their doors if cash management is not up to scratch.
Imagine a situation where a business sells £100,000 of goods on a Friday afternoon, credit terms of 30 days have been negotiated and the company packages and ships the goods to complete the order.
On Friday evening management take staff out to celebrate the sale. On Monday morning the VAT bill falls due, along with a number of other bills the company had not adequately planned for.
Technically, the company has made a legitimate profit, as the raw materials and associated manufacturing and delivery costs totalled £50,000. However, not having the cash when it’s needed has caused serious problems.
Not being able to pay your bills in a timely manner will at best lead to late payment fees and in a worst case scenario could lead to debt collectors knocking at your door and even closure of the business. Having enough cash from the outset is of paramount importance.
Compile a comprehensive business plan
If only there was a tool available to help you assess the viability of a venture and then calculate the likely requirement of working capital at the outset of your business journey. Hang on, there is.
A business plan serves both of these purposes. Business plans can be written for a variety of purposes, including crystallising business objectives, as an application for finance, assessing venture viability and calculating working capital requirements.
It’s important to be realistic when putting together your plan. Being too optimistic and, similarly, being too conservative will not reflect accurately the likely performance of the business, which means the usefulness of the document comes into question.
You might borrow too much capital and incur higher than necessary borrowing costs or alternatively you borrow too little and run out of cash.
Be a scientist
What do I mean by this? Don’t worry, I’m not suggesting you don a lab coat and some goggles.
I am, however, strongly recommending you research and investigate your market inside out to construct sales and cost assumptions as accurately as you possibly can. While this may be a time consuming process, it will prove worthwhile as it minimises the likelihood of business failure or other inefficiencies.
Become a human calculator
You’ll need to make lots of calculations to arrive at your working capital figure. How do you arrive at this all important number? By compiling comprehensive financial forecasts.
I would suggest your forecasts span a period of say three years. Include a projected profit and loss account (to measure income, cost of sales and business overheads, arriving at your profit/loss amount), a cash flow forecast (showing the level of cash in your business account at any given time - this statement may show the requirement for an overdraft facility) and end of year projected balance sheets (showing what the business owns, owes and is owed at a snapshot in time).
Look for help in areas you’re not confident
You may or may not be an experienced business person, you may or may not be a fan of numbers or you may or may not have experience in producing comprehensive business plans.
It’s a simple fact that some people are better equipped than others to assess the viability of a venture. If this process does not play to your own personal strengths, it’s sensible to seek some help and guidance.
There is a range of support available in the franchise industry to help you, so seek it. Is it not better to invest some time and money in doing things the right way, rather than trying to do everything yourself, getting it wrong and ending up with a venture that never truly reaches its potential?