To create a blueprint for success, founders must first of all map out some of the largest planning and financing elephant traps that may lay in front of them.
By avoiding these hidden traps, the path ahead to success is much clearer.
1. Underestimating your operating costs
Founders tend to be optimistic by nature – and it’s one of their most endearing traits to be never found with a half-empty glass and to always glimpse the thin line of silver at the bottom of the storm clouds above.
Yet, when creating a business plan, unrealistic optimism can be dangerous. Creating plans that assume an endlessly sunny outlook leaves your business open to fall victim to those frequent moments that rain stops play.
A plan that can only see your business rapidly breaking even and incurring minimal outlay to do so will only equip you should this eventuality come to pass.
Having a goal of maximum profits from minimal operating costs does make ideal business sense. The question here, however, is how many reality checks have been tested against this ideal.
Make sure that your projections work at the more conservative end of the spectrum, as well as at the perfect-world end. In other words, base your figures on a worst-case, as well as a best-case, scenario. And then see where you stand.
Furthermore, once you’ve added up how much it may cost to run the business on a monthly basis, you should then round up to the nearest thousand – and avoid the temptation to round down.
This is your ‘wriggle room’ for any miscalculations or unexpected expenses.
2. Investing your budget in too much equipment, inventory or stock
Beware of anything that will unnecessarily restrict your cash flow.
Particularly in the early stages of your business, strongly consider hire and lease options over immediate ownership.
Your goal is to maintain cash flow – so make sure customer payment terms favour this and that you secure as much credit as possible for the purchase of inventory and equipment.
Any business, such as retail, that involves collecting a return on investments, should avoid the temptation to sink too much money into goods in an attempt to maximise profits. This is a classic case of too many eggs in one basket: should things not work out as planned, you could be hit by a crippling loss.
As a rule of thumb, avoid investing more than 20% of your capital at any one point in time, especially when the business is not yet established.
3. Slipping yourself into contractual binds
Every contract that you sign with employees and suppliers is binding: always think twice before committing.
Your goal when hiring staff and securing suppliers is to agree to pay for only what you need to get by. The early days of your business are a time to secure the bird that you hold in your hand, not to lurch for ones flapping attractively in a nearby bush.
Commit to what you need – and nothing more.
If the need for a more extensive payroll arises then you can always enter into a new contract further down the line when your business is more stable.
4. Not sticking to (or creating) an accurate budget
No budget is ever 100% finalised: it is always a work in progress.
But, while budgets change with the dynamic needs of your business, you must treat each iteration as the final word.
Every budget change must be scrutinised and sense-checked for omissions and unrealistic assessments of all predictable expenditure.
And, once you have this final word, the plan should be stuck to. Let your budget guide you as you guide the business.
5. Failing to fully explore your financing options
Many founders, understandably, try to avoid debt like the plague. Other businesses, who have already damaged their credit score, are likewise very hesitant about applying for any credit-based financing.
Although it may seem prudent to remain debt-free and minimise your financial obligations, it may mean that you are missing out on the funding that could kick start your business.
Similarly, think carefully about the type of financing that you do decide on.
For example, if you obtain a £20,000 unsecured loan, this could show up as a negative balance on your credit report. This, in turn, may affect your ability to get approval for additional financing for some time in the future.
Do explore financing and do consider carefully any obligations and implications that come with different types of financing.