You don't need to be a 'numbers person' to make your business profitable! With Planning a Profitable Business For Dummies, discover the secrets of financial success and how to generate above-average profits. Written especially for the Australian audience, Planning a Profitable Business For Dummies explains how to build a business with profit in mind, using smart pricing techniques and clear-eyed strategic planning. Whether you're just getting started in business or still recovering from lockdown losses, this book points to where extra profits might lie. Flip through these pages to learn the importance of competitive positioning, smart pricing, and how best to secure an enduring advantage over your competitors. Reflect on how you can transition to becoming an entrepreneur, rather than just a business owner, and why this distinction is so important. * Make a safe-and-sound transition into working for yourself by using proven business strategies * Discover the fundamentals of financial projections, margins, and ratios -- even if you aren't a math whiz * Secure finance for your business and manage your working capital wisely * Identify savvy expense-saving ideas, and, when the time is right, sell your business for the highest price Business owners need straightforward, practical tips that ensure that extra edge of profitability. Find these tips inside Planning a Profitable Business For Dummies, and pave your path to financial success.
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Planning a Profitable Business For Dummies®, Australian Edition
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About This Book
Icons Used in This Book
Where to Go from Here
Chapter 1: Building a Business with Profit in Mind
Shifting to an Entrepreneur Mindset
Finding the Secret to Profit
Keeping Expectations Real
Getting the Timing Right
Planning in Dollars from the Start
Chapter 2: Finding Your Competitive Edge
Being the Best on the Block
Identifying Your Strategic Advantage
Picking Just One Competitive Strategy
Connecting the Dots
Chapter 3: Staying One Step Ahead
Taking an Eagle-Eye View
Identifying Opportunities and Threats
Rating Your Strengths and Weakness
Doing a SWOT Analysis
Chapter 4: Guarding Your Working Capital
Budgeting Enough for Start-Up
Keeping Cash Flowing
Sizing Up Your Finance Options
Chapter 5: Pricing for Profits
Choosing a Pricing Strategy
Building a Hybrid-Pricing Plan
Forming a Plan of Attack
Monitoring and Changing Your Price
Chapter 6: Setting Sales Targets With Profit in Mind
Forecasting Sales for a New Business
Forecasting Sales for a Service Business
Pushing Targets for an Established Business
Making Targets Work
Chapter 7: Modelling Business Scenarios
Understanding Cost of Sales
Building Profit Projections
Keeping Things Real
Factoring Personal Expenses into the Equation
Chapter 8: Making Magic with Margins
Understanding Gross Profit
Analysing Margins for Your Own Business
Identifying Your Tipping Point
Changing Your Break-Even Point
Looking at Things from a Cash Perspective
Understanding Other Ratios
Chapter 9: Using Reports to Boost Your Profits
Placing the Horse before the Cart
Telling a Story with Your Profit & Loss Report
Taking a Snapshot with Your Balance Sheet
Why Profit Doesn’t Always Mean Cash
Budgeting for Profits
Looking at Cashflow
Chapter 10: Ten (Almost!) Tips for Improving Your Bottom Line
Evaluate Every Workflow
Get Good Accounting Systems
Become the Expert
Invite Customers to Buy More
Focus on What Works
Be Prepared to Think Afresh
Stay on Top of Debtors
Chapter 11: Ten Tips for Selling Your Business
Start with a Game Plan
Prepare Well in Advance
Give Your Financials a Make-Over
Get a Professional Valuation
Go for the Max
Plan for a Few Bills
Woo the Buyer
Do Due Diligence in Advance
Be Straight Up with Employees
Spread the Word
About the Author
Connect with Dummies
End User License Agreement
TABLE 2-1 Analysing Your Competitors
TABLE 3-1 Industry Analysis — Regional Accounting Firm
TABLE 3-2 Summarising Opportunities and Threats
TABLE 3-3 Identifying Strengths and Weaknesses for Your Business
TABLE 6-1 Incorporating detail (and a healthy dose of ambition) into your sales ...
TABLE 6-2 Calculating Maximum Billable Hours per Year
TABLE 6-3 Different kinds of sales targets
TABLE 7-1 Variable Costs Examples for Service Businesses
TABLE 7-2 Cost of Producing One Bottle of Pickle
TABLE 8-1 Calculating Gross Profit and Gross Profit Margin
FIGURE 2-1: Use your strategic advantage, competitor analysis and competitive s...
FIGURE 3-1: The principles of a SWOT analysis.
FIGURE 6-1: Building a sales forecast in Excel for a service business.
FIGURE 7-1: Start by estimating an amount for each expense, along with how ofte...
FIGURE 7-2: Forecasting expenses for the months ahead.
FIGURE 7-3: Building a gross profit projection for a service with employees or ...
FIGURE 7-4: Building a gross profit projection for a business selling products,...
FIGURE 7-5: Compiling a monthly profit projection.
FIGURE 8-1: Calculating business break-even point.
FIGURE 8-2: Calculating break-even point to cover both business and personal ex...
FIGURE 8-3: Understanding your break-even point enables you to plan ahead for c...
FIGURE 8-4: Calculating what you need to do to break even in the first 12 month...
FIGURE 9-1: A simple Profit & Loss report.
FIGURE 9-2: A Balance Sheet shows where your business is at.
FIGURE 9-3: Keep budgets real by comparing against actual results.
FIGURE 9-4: A sample cashflow report.
FIGURE 11-1: Checklist for preparing your business for sale.
Table of Contents
About the Author
I confess to feeling a little ambivalent about the title of this book. While ‘Planning’ and ‘Profitable’ offer a delightful opportunity for alliteration, to go into business with only profits in mind is the antithesis of my usual approach. To my mind, successful business is at its best when it reflects the values and interests of the owner, and when the owner’s enthusiasm for what they do shines bright.
However, the reason I chose to write Planning a Profitable Business For Dummies is this: I’ve met many business owners who love what they do — indeed, they’re hard-pressed to think of anything else they might want to do with their life — but find business profits remain elusive, year in, year out.
In this book, I share the insights I’ve gained over 30 years of working with small business. I highlight the importance of smart strategy and detailed competitor analysis, and take you step by step through the basics of planning for profitability, including finding your competitive edge, pricing, budgeting and financial modelling.
I do hope you can use this guide as a reference to yield more profits — and more pleasure — from the business that is your passion. (How’s that for some alliteration?)
Despite the branding, I don’t think you’re a ‘dummy’ — far from it. For me, For Dummies books are about a ‘can-do’ attitude. No matter how inexperienced you are, if you’re ready to give something a go, this book is here to help.
This book (all 11 bite-sized chunks of it) is designed so you can pick it up at any point and just start reading. Perhaps you want to know about profit projections (Chapter 7) but you’re not the least interested in competitor analysis (Chapter 2). That’s fine — just skip the first six chapters and start off from where you want to be.
One more thing. Throughout this book you’ll see sidebars — text that sits in a separate box with grey shading. Think of sidebars in the same way as you might do about designer brands: Nice to have, but not essential. Feel free to skip these bits.
When you work with small business, you learn to assume nothing. I see everything from clients who time all strategic decisions to fit with the stars (no kidding!), to multimillion-dollar enterprises that have grown out of nothing in a matter of months.
So, in this book I try to assume very little about you. You don’t need to know anything about business planning, financial projections or marketing, and I try to explain all concepts in the simplest possible way.
Want to be streets ahead of the competition? Look for this handy icon.
Get out your calculator and start doing those sums. This icon flags money stuff, highlighting vital information for anyone with an eye for making a dollar or two.
Tie a knot in your hankie, pin an eggtimer to your shirt but, whatever you do, don’t forget …
This icon indicates handy advice or insights into how to improve your business or make life easier.
If you can’t learn from history, you’re doomed to repeat your mistakes. Real-life stories from businesses and people who’ve been there provide all the history lessons you could ever want.
A pitfall for the unwary. Read these warnings carefully (and then you can’t say no-one told you …).
Planning a Profitable Business For Dummies is no classic work of literature (one day, I promise myself!), and so you don’t need to start reading from page one and plough through to the end. Instead, jump in and start reading from whatever section is most relevant to you:
, I focus on expectations, finding your competitive edge and analysing the business environment in which you operate. Although not particularly financial in nature, these elements of business strategy are key to profitability.
talk about the building blocks of profitability: Ensuring you have sufficient working capital, setting your prices to maximise profits, and creating ambitious, yet realistic, sales targets.
go to the heart of financial management, and cover the challenging topics of profitability projections, calculating profit margins and understanding financial statements. Even if you’re not a numbers person, and you have an overwhelming instinct to avoid these three chapters, I encourage you to persist.
offers ten fabulous tips for squeezing that extra bit of profit from your business.
follows hot on its heels, providing smart tips about selling your business and reaping the rewards.
Thank you for taking the time to read Planning a Profitable Business For Dummies. I hope you find something along the way that helps you and your business flourish.
IN THIS CHAPTER
Finding your inner entrepreneur
Discovering the secrets for profit
Balancing dreams with just a pinch of reality
Taking the time to time it right
Developing a financial plan
When I talk to people about their business and hopes for the future, I’m aware that I’m in a unique position. Listening to anybody’s dreams is a privilege, but even more so when people share their doubts and hopes about this significant part of their lives.
People often ask me for help modelling the financials to support their business idea. They feel that it’s the financial plan, and this plan alone, which will reveal the secret of how to make a profit.
Financial plans are crucial to profitability, that’s for sure. However, just as important is establishing what you’re going to do differently in your business, how you’re going to take advantage of this difference, and whether this difference will be something that customers really want.
In this chapter, I touch on all these aspects, as well as the importance of knowing how to temper ambition with realism to keep your expectations grounded, and how to manage the level of risk that any new venture entails.
For almost all businesses, in order to build something that’s truly profitable, you need to create a business where employees — rather than yourself — are the ones doing most of the work.
If you look around you, most medium-sized businesses fall into this category. For example:
My local plumbing company has a team of plumbers, each with their own van and apprentice. The owner occasionally helps with tricky jobs, but mostly focuses on management and marketing.
The place where my son used to learn piano is a music school, with lots of different tutors teaching different instruments. The owners teach sometimes, but rely on a team of teachers to deliver most of the lessons.
A girlfriend of mine has a business selling baby sleeping bags. She no longer stitches each sleeping bag herself. Instead, she still manages the design, marketing and distribution, but has shifted production offshore.
My neighbour runs a small chain of three cafes. He rarely cooks or serves tables any more, but focuses on the finances and management.
Can you see that for each of these examples, the owners have made a leap in how they think of their businesses? The plumber is now the manager of a plumbing services company; the music tutors started their own music school; the barista opened a chain of cafes; the seamstress runs a manufacturing company. In all of these examples, the owners no longer unblock pipes, teach violin, serve coffees or stitch fabric. In return, the potential for each of these businesses is that the owners can have more freedom and earn more money than they otherwise would have done.
For me, this transition from owner to entrepreneur is really exciting. Such freedom provides an opportunity to do other things in life that have only been dreams up until now.
If you haven’t made this transition, and your business is still dependent on you for pretty much every cent of income, my question to you is this: Have you ever consciously made the decision not to be entrepreneurial? Or have you never really let yourself imagine how you could do things differently?
If your answer is ‘yes’ to the latter, do try to give the visionary in you some room to breathe. Spend time thinking about how you can grow your business and create something that has a life of its own. Chapters 2 and 3 may help develop your thinking in this way.
Businesses fall into three broad categories:
The first type of business is one that has been done before, and therefore has been tried and tested. I call this a
The second type of business is one that finds its own niche, thereby doing something especially tailored to a small group of customers. I call this a
The third type of business is one that launches an entirely new concept on the world. I call this an
Each category of business has its own secret to profitability, which I explain in the next sections of this chapter.
The most common kind of business (and probably the safest and most reliable) is a traditional business. Most retailers and many service businesses fall into this category — for example, bookshops, builders, electricians, florists, hairdressers or software engineers.
While traditional businesses were a safe bet in times gone by, changing technology means that many of these business models are now relatively precarious. For example, bookshops used to offer solid profits, so long as you selected a good location and knew your trade. However, the changes brought about by ebooks and online distribution mean that, nowadays, running a bookshop is a very different proposition indeed. Similarly, a bookkeeping business may have been a steady income stream in the past, but cloud technology and new accounting software solutions are rendering many traditional bookkeeping services obsolete.
In my experience, the secret to profitability with a traditional kind of business depends on your ongoing capacity to differentiate yourself from your competitors. If possible, this difference should capitalise on your skills and resources, so that this difference is hard for competitors to imitate.
Here are some examples of businesses working in this way:
A regional bookshop acts not just as a retail store, but doubles as a quasi-community centre, with morning teas, book clubs and regular author readings.
A guitar teacher livestreams a performance of his original music each month, selling charts for these compositions, promoting his online lessons and attracting regular donations via Patreon.
A vet provides a 24-hour mobile service to people’s homes.
A cabinet maker mills his own wood on his 30-acre property on the South Coast of NSW, using this timber for his custom-built high-end furniture.
In addition to regular services, a mechanic offers monthly do-it-yourself classes where she teaches customers how to do basic maintenance on their own vehicles.
I talk much more about differentiating yourself from your competitors, and identifying your strategic advantage, in Chapter 2.
A niche business creates something specialised and caters to a narrow but (hopefully) dedicated market. A niche business can cover anything from manufacturing custom guitars to producing hand-stitched silk lingerie, or from designing permaculture gardens to cooking special food for diabetics.
The best thing about niche businesses is that they can operate on a small scale. Running a micro business typically means lower risk, less expense setting up and an opportunity to try out new ideas and test the response.
I’ve worked with many owners of niche businesses and, in my experience, the secret to profitability lies in the strength of your marketing skills and strategies.
One of the huge changes in business in the last couple of decades is the way that advertising is becoming increasingly specific. Just 20 years ago, people were stuck with newspaper advertising, hoping that out of the 80,000 people reading the paper, maybe three people would be interested. Now, you can create marketing campaigns on social media that define who will see your ad based on their age, where they live, what their interests are, and much more. You may only reach 800 people with your advertising, but if your message is specific enough, chances are you’ll still get at least three responses.
With these highly specific marketing tools in mind, the secret with niche businesses is to identify your niche and tailor your messages specifically to that niche. Don’t be shy about narrowing your market, and then narrowing it again and again, until you reach the exact demographic with the perfect fit for your product or services.
For more about developing competitive strategy, check out Chapter 2.
The last type of business is called the entrepreneur type, reserved for new inventions or new market concepts. Untested and unknown, this type of business can occasionally experience resounding success or spectacular failure. (I still feel a pang whenever I remember my friend’s invention of a solar-powered windmill-hat, a great idea but scarcely a hot fashion item.)
With the entrepreneur type of business, you’re taking a gamble. Though the chance of failure is high, if you do succeed, the rewards can be huge.
In my experience, the secret to entrepreneur kinds of businesses relies on two things. First, you need excellent market research. Second, you need enough start-up capital. While I don’t have enough scope within this book to explore the topic of market research for a new business, I do focus on start-up and working capital in Chapter 4.
As the years have passed by, I’ve developed a sniffer-dog instinct for which businesses are likely to succeed, which are going to struggle and which are doomed to fail. Although I usually wish I wasn’t so chillingly accurate (especially when I predict failure), occasionally life delivers a surprise — the success of an overpriced French restaurant with a mad chef, for example, or the survival of a bed and breakfast in the back of beyond.
Running a business is an inherently risky game. Sometimes, this risk makes things exciting and, other times, just plain old scary. Of course, business success is a fantastic feeling but, on the other hand, failure can be quite catastrophic. You can lose your house, your job, even your family, all in the one hit, not to mention the disillusionment of having precious dreams crushed by harsh reality.
Australians are a pretty entrepreneurial bunch. With a population of 25 million (give or take a few), almost 2.4 million businesses are alive and kicking. Impressive, don’t you reckon? Almost 10 per cent of the population run their own business.
But what about business survival? Are all these businesses fly-by-nighters, starting up one year and disappearing the next? Not so long ago, a business coaching franchise advised a client of mine that 80 per cent of businesses go bust in the first year, and only 8 per cent of businesses survive five years or more.
Pish tosh. Business is tough, but it’s not a suicidal mission. The ABS reports that half of new businesses without employees, and 30 to 40 per cent of new businesses with employees, cease trading within the first three years. However, these figures don’t shed light on how many businesses chose to cease trading (as opposed to going broke or ‘failing’), and how many businesses actually experienced financial loss upon closing their business. In my experience, very few business people rate their overall experience as a negative one.
Unfortunately (or maybe fortunately), the brilliant business ideas that earn $10 million in the first year are few and far between. For many people, the only sure-fire way to succeed is to work loooong hours not just in the first year or so, but often for many years beyond that. Many people find themselves taking on the roles of bookkeeper, marketing consultant, salesperson and managing director all in one.
One of the hardest things about being self-employed is staying motivated. Not just in the first year, where everything is interesting and different, but also year after year after year. Of course, as your business grows, and if you’re seeking above average profits, your likely aim is that you employ staff to help. Ideally, you can arrive at a point where your business earns money, even if you’re not working in it every day of the week.
Sometimes, the highs and lows of small business profits make even Melbourne’s weather look reliable. A bumper year, and the bank account is rosy. Then you lose a client or two, interest rates go up and, before you know it, you’re wondering how to pay the rent.
In Chapter 4, I talk about creating budgets for business set-up expenses, and share tips for securing business finance. Some consultants advise you not to expect to make any money at all in your first year of business, and to have savings put aside to pay for your living expenses during this time. Such advice is prudent, but the truth is that sometimes businesses take even longer than a year before they make a profit, and even businesses that have been cruising along happily for years can strike hard times.
I used to find the feast and famine of running my own business very stressful, but I’m getting better at managing this dichotomy as time goes by, even managing to put money aside when things go well. How you cope with the effect of this insecurity depends not only on your personality, but on your family commitments as well.
In Chapter 2, when I talk about identifying the strategic advantage for your business, I explain that key to strategic advantage is doing something different from your competitors and, ideally, ensuring this difference is hard for others to copy. The stronger this strategic advantage is, the more potential for profit.
Logically, if you’re doing something different that nobody else is doing, chances are your idea is either untested or requires significant capital (or both). For this reason, the ideas that offer the most potential for gain are usually also the ones that carry the most significant risks.
For example, if I decide to start a business as an electrician in my local area, chances are that once established, I can generate similar profits to other electricians in town with minimal risk. However, imagine I decide to start a business specialising in high-end solar battery systems and storage. While the potential profits are higher, the risk is higher too, both in terms of capital investment required and the risk that demand may not be sufficient for my services.
If your business is very similar to many others, you may find it’s tricky to identify strategic advantages and to stand out from your competitors. The upside of a business that’s very similar to many others is that the risks are usually lower; the downside of a low-risk business is that it’s always going to be tricky to charge premium rates or make above-average profits.
One of the secrets of creating a profitable small business is getting the timing right: The right timing for the business idea, the right timing for you and your family and the right timing for the business environment.
An experienced entrepreneur once said to me, ‘If real estate is all about position, position, position, then business is all about timing, timing, timing.’ He’s right, of course. If you were selling fondue sets in the 1970s, chances are your business would be successful. Try to sell the same fondue sets for a living these days, and it would be slim pickings indeed (although my mother does have very fond memories of cheese and chocolate fondue dinner parties).
To capitalise on business trends and maximise your chances of profit, bear the following in mind:
Fickle fashions: Humans are capricious creatures and what’s hot today may be ice-cold tomorrow. Whether the latest craze is kids going nuts about a Disney action doll or making organic hand sanitiser, make sure you’re not the one who suffers when everyone gets bored and tired. Try to jump on the bandwagon near the beginning or during the build-up — don’t leap in at the peak.
The difference between a trend and a craze may seem hard to pick at first, but the difference is both real and important. Be aware of trends in your industry and capitalise on opportunities. For example, the long-term and growing interest in low-carbon and energy-efficient building supplies is a positive trend that indicates many business opportunities.
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