A great analogy for a new business
It was tranquil, peaceful — and surprisingly well-organized.
It was small so many of the gardeners found ways to maximize their space, using careful planning, creativity (and a little muscle.)
Your businesses can benefit by being equally ingenuous. Develop your own small business “green thumb” and get “more for less” by using creative, economical ways to attract, convert, and retain your prospects and customers.
Cultivating Your Business Idea into a “Sales Generating Garden”
1. Choosing the right kind of plants for you (Your “Aha” Moment): Okay, so you’ve got an idea. But is it enough to support a viable business or product — able to solve the problems faced by your potential customers? Your ability to sell (and ultimately, make money) is based on your idea’s attractiveness to potential customers.
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I read an interesting article in the November 2011 issue of Financial Management, CIMA’s monthly journal. The topic was peer-to-peer finance, which was something I had only heard a little about. Given the combination currently of low deposit interest rates and high lending rates for small business, peer networks have formed and are seemingly growing fast. The basic idea is relatively simple: some business have cash surpluses and others need finance – but not at 19% (which was a rate quoted to one business mentioned in the article). Those with spare cash can group together and lend to those that need it. The risk may be lower for the provider of finance as only a small amount can be contributed, and for the borrower the rate is lower (8.9% in the case of the business the bank wanted 19% from). Two peer-to-peer lending networks are mentioned in the article – Thincats and Funding Circle. In effect such networks are like mini-money markets. They do, of course, undetake some credit checks and crediting rating, but for small business this seems to be a very sensible way to bring borrowers and lenders together.
In recent years hard economic times have hit Ireland and other developed economies. According to an article in the Guardian over a year ago now, the number of businesses failing in Ireland was 5 times that in 2010 – a huge chunk of these being construction firms. I hope have some sympathy for many of the hard-working business people who perhaps have seen a lot of their money lost. But, there is a part of me (probably the accountant) who is not at all surprised at so many Irish businesses failing. Why? Am I getting more cranky (Yes, of course I am)? Well, let me give me a few of many examples I have encountered over the last few years which seem to show poor decision making. But before I do, I should say that many Irish businesses who started during the “boom” years were already doomed to failure due to a pretty high cost structure e.g. rent.
The first example dates back about 2-3 years now. In the area where I live, we collect an amount of money each year to help maintain the common greens in the area. The landscaping business doing the work was charging about €7000 per annum and a new landscaper offered to do the work for €4500. Both were sole traders with similar costs (as best I could guess at least). The original landscaper said he could not do the work for that price and would not even reduce his current price, so the business was lost. Now I don’t know what either landscaper was thinking, but it fairly obvious that the original landscaper was living in the boom years in my opinion. He could have reduced his price by some amount, say €1500. This would mean his net contribution would fall by €1500, but instead he lost €7500 – a bad decision.
The second example relates to a really nice bakery I visited recently in a more affluent part of Dublin. Yes, the price is of course going to be affected by the area, but having paid €4.60 (ok my wife bought it) for a loaf of sour-dough bread I thought this is not a sustainable business. Even people in affluent areas cut back on spending in lean times. The point here is that I thought the price was more reflective of a time four or five years ago.
The third example relates to an employee within a business. The employee left as €900 per week income was not “enough” for him. The job involved manual labour and some skills, but nothing that could not be replaced readily. The right decision was made by the business owner, which was adiós amigo. The employees decision was rather silly though, as the immediate income from social benefits would be way lower.
These three examples to some extent portray how high prices may have become engrained in the minds of business people following many years of the Celtic Tiger. I like to study how practices have become accepted/taken-for-granted, or institutionalised. When practices become institutionalised, there are hard to change. So I wonder are businesses in Ireland failing because some business owners cannot make the change in their minds to reduce costs or prices? In other words, they are finding it hard to break the institutionalised practices associated with past more affluent times. I know there are many other factors, but based on my experience, at least some business failures in Ireland result from a failure to change mindset.
Anyone who has started a business from scratch knows how hard it is in the early months (or even years). Lots of businesses seem to fail too in these early times. Why? Well, there are many reasons from just bad timing, to poor marketing, poor quality and so on. There is also the possibility that the business simply did not understand its costs structure and how this relates to the volume of sales needed to make a profit.
The US Small Business Administration (and similar organisations world-wide) provide good advice for start-ups. One key concept on understanding costs and volumes is called breakeven. This simply means the output level at which your business neither makes a profit nor loss. To keep it simple, if a business knows its start-up costs and running costs for the first year, it can easily work out the level of sales required to breakeven – this output level is known as the breakeven point. To work out the breakeven point, you need to separate variable costs and fixed costs. Fixed costs remain the same regardless of how much your business sells (e.g. rent) and variable costs change as the output grows (e.g. labour costs , shipping cost, material costs). For breakeven, the sales value less the value of variable cost must be equal to fixed costs; any surplus is a profit, any deficit a loss. Doing this quick sum could save many businesses from going under. In fact, as a management accountant I would suggest a breakeven calculation is included in all business plans. I would say that, but why go into business to lose money? Or at least know when you will start to make money?
Here’s a small clip and video from the New York Times about a financial printing company, seeing decreasing business due to the economic crisis, used its goodwill to hang on in there. Read it here
There are a few more short videos in the blog series, all of which are useful experience stories.
The text of this article caught my eye in the Sunday Times of 22/11/2009. The piece “Write your own success story” by Sandra O’Connell refers to the need for a good business plan for any start-up business. According to O’Connell, a business plan needs to provide TEN – text, evidence and numbers. Text is the story of you business plan, evidence is your supporting facts and research and numbers are the supporting financial data which show that your story and evidence convert to sales and profits. So how can you provide numbers in a way even you old granny would understand. The answer is to keep it simple. This means three key numbers should be the main focus of your plan; 1) how much can you sell, 2) how much does it cost, and 3) how much money do you need to get this off the ground. I think even granny can understand these! But should my business plan not be detailed I hear you say? Yes of course, but you can summarise it down to a page or two that you place at the front as an executive summary. The details – sales prices and volumes; detailed costs; detailed cash requirements – can be provided in as much detail as necessary later in the plan. So, as you fight with projected costs, revenues and cash-flows, try to do a summary of each as you go. Then give it to granny to see if she can understand it.
Finally, here’s a link to a sample business plan you might find useful http://www.dceb.ie/search/business%20plan