According to data coming out of the Australian Bureau of statistics, around 20% of new businesses will fail in their first year.  Of those who survived their first 12 months, a whopping 60% will fail by year 3.

So what is going on, why is the failure rate of those going into business for themselves so high.  Well this article quotes the Australian Banking Association as suggesting the reasons for failure include:

  • insufficient leadership and management;
  • inadequate market research;
  • poor financial management;
  • underestimating competitors; and
  • product and services issues.

Most of this information should be considered and outlined in a business plan, so surely it should reduce the failure rate.  Well, estimates around the number of businesses who have actually completed a business plan are colloquial however generally it is anticipated that a mere 3 – 5% of new businesses take the step of completing a business plan before they go ahead and start.

Why do businesses not complete a business plan?  Well a quick Google search will tell you absolutely nothing because nobody has written an article researching why, but here are my assumptions:

  • they don’t know how or where to start;
  • they don’t have time;
  • they don’t want to pay someone to do it;
  • they do it, but it’s not thorough enough;
  • they assume they don’t really need to; and my favourite
  • they know everything, it’s in their head so they assume it’s not really necessary.

So how do you avoid becoming a part of these rather alarming statistics, well I would say starting with a business plan really couldn’t hurt.  If nothing else, it will show you where you have holes in your skillset that you need to either find some training to help with or find a coach, mentor or other professional to fill in the gap.

What if you’re not a start-up, is it too late to do a business plan?  No, really they should be updated every few years anyway, so even if you’ve managed to survive your first few years, sitting down and doing a plan now to help you move forwards over the next few years is neither hard nor a bad idea.

A good business plan will cover off on these key areas:

  • the proposed business;
  • the market it will operate in;
  • what the future goals and plans are; and
  • how it’s all going to be funded.

The proposed business.

In this section of the business plan you are going to take a detailed look at the basic details of the business, so this would include:

  • it’s name;
  • the form its going to take that is, whether it’s going to be a sole trader, company, trust or partnership;
  • what registrations it needs to be able to operate;
  • whether or not it will have a physical presence such as a shop or an office or whether it will be mobile or virtual.

Once all of this has been outlined, more detailed information around the ownership structure should be included for example, if it’s a company are you going to be holding the shares directly or will you have another entity holding the shares on your behalf.  It will outline who will be managing the day-to-day operations and what their skill sets are and ideally a visual of the overall structure of the business.  As well as this, the owners will be listed together with their percentage holding.

Next we need to identify the types of insurances which are going to be needed – this will vary depending on whether the business is virtual or physical, whether it has staff, what industry it operates in, whether it will have to carry public liability and…you get the idea.

Now we’ve covered off on the basics we get to the more fun and interesting part.  We need to take a look at the risks which pose a threat to the business.  This is where I tend to look at the high-level risks to the business, so for example loss of clients, finding new work, lack of brand awareness and competition from other businesses.  These risks need to be considered on a “how likely” basis and an “impact basis and ranked high, medium or low.  The next part is key, for each risk, you need to identify two to three strategies around what you are going to do to mitigate the risk and lessen their risk.

Brief mention should be made as to the legal framework your business will be operating in such as the Corporations Act and the Income Tax Act, basically any legislation which will govern the way your business operates, delivers it’s product and manages its operations and staff.  If you are going to be in dual locations across regions, then the legislative framework for each region needs to be considered.

The topic for this section is around Operations, how will the business operate on a day-to-day basis, who will be working in it day-to-day, what software is needed, what the trading hours will be, what warranties are provided, quality control and so-on.

Once all of that is done, we are 25% towards completing the overall business plan.

The Market

The next section we need to address is what market the business will operate in and what it is like.  So for example the business is in the accounting industry in Perth Western Australia focusing on individuals and small businesses, or cleaning business in Cockburn focusing on residential property owners, or teaching martial arts in O’Connor to children and young adults you get the idea.  This is one step back from creating an avatar of your ideal client, instead it is a look at what the overall business will be doing.  The key thing here is to be specific.  The more specific you are the easier everything else becomes.

Once you have identified your market, you need to look at the financial targets you have for the business over the next 5 years and from what areas that revenue is going to come from i.e. from referrals, internet, existing clients etc.  Be honest and account for those you think you will lose – each industry will have an annual “drop-off” rate so for example in the accounting industry we generally expect to lose around 10% of fees each year.

Once that is all done you need to look at the locality you have chosen to focus your business in and identify the areas of potential growth plus those which may pose a risk.  Again, if you are multi-geographical, then you will need to undertake this analysis for each region you intend on operating in.

Next we move onto clients.  This is where you identify your avatar of the ideal client you want to be working with and honestly look at any existing clients and assess whether they fit into that avatar.  Knowing exactly who you want as a client will help you to focus your marketing efforts and ultimately make you more successful.    You also need to outline how you are going to look after your clients.  What types of services will you be providing, what type of experience will they have when they work with you, what will you do if it all goes south.

Next we get back into the analysis side of things, starting with an analysis of the Strengths, Weaknesses, Opportunities and Threats of the business, or a SWOT analysis.  Really you should be looking to identify as many of each category as possible and be as honest with yourself as possible.  We are not necessarily looking for solutions, just identifying the different criteria. 

Now we look at what advertising and marketing we need to do.  Some business plans include a marketing plan and strategy, whether or not you go into that level of detail is entirely up to you, but at the very minimum, the business plan needs to identify what your overall marketing strategy is going to be to meet your goals, and what the key things are that you are going to do to achieve it.  This might be things like flyer drops, You Tube videos, Instagram following and so on.  It is best here to provide an estimate of cost of each strategy so those reading the business plan is aware of what you anticipate your initial marketing spend to be.

The Finances

Next we look at the finances.  How do you propose to fund the initial set-up of the business, will it come from a loan, savings or another source?  How much do you need to start it up?  What financial goals do you have, what will it increase by each year for the next 5 years?  When do you expect to actually start making a profit and how will you pay for everything until you do?  How much will you be personally liable for.

Again, the key here is in the detail, so it’s a good idea to create a projected cashflow and profit and loss statement to show where you think the funds are going to come from and the key expenses you have considered spending over the next 5 years.

Outlining your key assumptions here is also a good idea.  Remember, this document will likely be provided to financial and other institutions to help you fund your investment so it is a good idea to be as detailed as possible.  This does two things, first prevent them asking too many questions as you’ve given them all the information they need and secondly, demonstrate that you have considered all the various options and you are therefore more knowledgeable and informed about what you are doing.

If it feels like a lot of work it is.  But taking the time might just take you from being one of the 20% who fail, to one of the 40% who succeed.  Best of luck, and I’ll catch you in the next one.

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