Posted: Mon 17th Jan 2022
Cecilia Patterson, Enterprise Nation expert adviser and founder of MTC Consultancy, dives into the topic of building and growing a business, and how to make sure the venture is profitable.
How to tell whether your business idea is viable
There are numerous business tools to help you determine whether your business is ever likely to become profitable. You can use these tools whether your business is still in its infancy or has already been formed.
However, there are specific tools for evaluating a business idea's viability. Once you've established that your business is viable, you can move on to developing other useful tools for your business.
Before you make such a large investment, it's prudent to develop your business model, for a variety of reasons. To our mind, it facilitates conceptual thinking when dealing with numbers, such as those in a sales forecast.
The fantastic news is that you can adjust your model as you gain experience and knowledge. By the time you develop your business, you'll have a firm grasp of the specifics of your model, particularly if you're starting a new venture or introducing a new service or product. Additionally, you can develop and use these business tools when diversifying, pivoting, or growing your business.
Profitability growth is a goal for any business. You find profitability by diversifying. Here, we'll discuss a specific useful tool called a business plan, which has a variety of uses.
There are several distinct types of business plan, and each one contains basic information. Some include additional information depending on why the business is making a plan, or the stage of growth the business has reached.
In other words, you outline how you'll carry out certain functions and how you'll measure the plan's objectives. You must first determine what type of business plan you need and why you need one.
Another type of plan you might need is a financial plan. This is a strategy for anticipating and preparing for future events.
In many cases, this is the section of a business plan in which most people will consult with their accountants before proceeding. It's the stage in the process at which you determine whether the project is financially viable.
Putting a financial plan together
When creating one of these financial projections for your business plan, there are several important benchmarks to keep in mind.
To begin, it's important to understand that there's no need for you to complete this process in a specific order. There are no hard and fast rules to follow.
You may find that when you first begin putting together a financial plan's profit and loss statement, balance sheet, and cash flow statement, the numbers may indicate that you need to revise your expenses and sales projections.
Using forecasting software, it's possible to forecast for two, three, or five years (short, medium, and long terms). You'll want to forecast your small business' sales over a three-year period to attract investors and lenders, which is highly recommended.
Set up monthly sales columns for the first year of operation, with a gradual transition to quarterly forecasting for the following two years (years two and three). This is where your strategic focus, offering and target market all come into play, so think about them carefully.
A spending budget can help you balance your sales forecast by limiting your expenditures. In this section, you'll learn how much money you need to make to cover the costs of manufacturing the product you're selling.
It tells you how much money you'll need to spend each month on your expenses. Among the costs in this category are leased equipment and utility payments, as well as significant operating costs such as rent, estimated monthly payroll, and other overhead expenses. It'll also be easier to calculate depreciation on any equipment you currently own or will acquire in the future if you gather all of this information.
After you've combined the sales forecast and expense budget, you can generate a cash flow statement, which provides an overview of the forecasted results.
The burn rate is critical in this process. If your company is already up and running, a profit and loss statement may benefit you. Additionally, the financial summary includes a break-even analysis, funding requirements, and a funding timeline for implementing the project.
This is also the point at which you must demonstrate your strategy for mitigating financial risks associated with the investment, product sales, and availability of the target market.
To make sure your financial projections are accurate, you may need to have them validated by an independent auditor or accounting professional before you publish your business plan.