In setting up a small business, it is all too easy to be carried away with the intricacies of the product or service that is at the heart of your business offer.
It is easy to get too close to your business and not step back to ask yourself fundamental questions about whether or not your business is based on a sound business model.
Those of you who have seen Dragons’ Den, where investors pitch their ideas to the 'Dragons', will be aware of the fact that many business pitches falter because the owner fails to convince the Dragons that they have clearly thought through how their business is going to make money.
We are not suggesting you become a financial expert operating with complicated spreadsheets and so on. When it comes to the money, it is OK to use the BOEing Method, i.e. use back of envelope calculations. But you must, albeit using approximations, get to grips with the key metrics and assumptions underpinning your business model. You cannot wing it!
The first metric that trips up many small businesses is a lack of clarity over their gross margin. When you’ve paid for the cost of supplying your product or service, this is how much money is left over to pay for everything else your business needs to survive. Often businesses are only covering their running costs, not their overheads.
The second metric is estimating the number of customers who are likely to buy your product or service. This is often a fantasy over-estimation.
And the third critical issue is a failure to put in due diligence around how vulnerable your various market and revenue forecasts are to competitive threats and market forces.
Pinning down these calculations, making these estimates and judgements, is never going to be a precise science. There are always going to be risks. But there is no excuse for not following established systematic processes and techniques for minimising the risk, and thereby maximising your chances of business success.
In our Excellence Tools online programme The Success Blueprint: Seven Excellence Tools for Small Businesses, we provide a number of simple tools to help small businesses succeed, including looking at the critical issue of developing total clarity around your business model. After completing the programme – if you were to pitch your idea to the Dragons, there would be nothing to fear. There would be total clarity around the key business metrics and the assumptions underpinning your business model.
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