Skip to 0 minutes and 3 secondsSetting up a business is hard work. Most entrepreneurs have a good idea for a product or service, but that is not a guarantee of business success. They may encounter many difficulties turning their idea into reality. Esther Thompson set up a business called Teahuggers in 2013. Her business sells specialist herbal blended tea through retailers and online. She's found that a number of challenges have faced her during the startup phase. So the biggest problem initially for Teahuggers was really getting traction, getting people to understand what our concept was, why it was different, and to take on and to really persevere with people to convince them to take off other tea brands and put Teahuggers on its place.
Skip to 0 minutes and 49 secondsEvery year, there are approximately half a million businesses started in the UK. However, 20% of them fail within the first 12 months and only half of them are operating four years later. Now, why do they fail? Too much red tape, poor management, no proper goals, tough competitors, poor marketing-- all of these are contributing factors to business failure. But actually, the most common reasons for business failure are a lack of planning and poor cash control. Carl Swansbury works for a corporate finance firm who advise business owners at all stages of their operations. He explains how important planning is when starting a business.
Skip to 1 minute and 35 secondsI think the three key things to make any business a success are planning-- I think you have to plan to succeed. Otherwise, you will plan to fail. I think secondly, you have to have a great product or a great service that the market wants. Therefore, the second is product and/or service. I think thirdly, you have to make sure there is margin in the product or service. Otherwise, you will not have a profitable business. As we have already seen, planning using the four P's is a useful way to think about your product or service idea and how it will be translated into reality.
Skip to 2 minutes and 8 secondsThe planning process will also include answering questions, such as, what do I want to achieve in my business? How am I going to get there? And how will I measure the business performance against my plan? This process will culminate in the production of a document called a business plan. The business plan is not just used by the entrepreneur and management team working within the business. Regardless of how good their idea or product is, an entrepreneur at some stage needs to persuade other people to support their business financially. For this to be successful, most investors and lenders would insist on a business plan. What goes into the contents of a business plan?
Skip to 2 minutes and 56 secondsThe five key sections of the business plan are the product/service. What is it? Secondly, what is the market opportunity presented to you and how will your product and/or service sell into it? Thirdly, management team-- who will run the business and how will the management team grow in time? Fourthly, funding-- what funding will the business need to execute the business plan that's being presented? And then I think fifthly, actually, I think it needs to set out how you differentiate yourself from the competitors who are already servicing that sector.
Skip to 3 minutes and 29 secondsNo bank will lend you any money without having a business plan that they can look at and identify where you want to get to so they can also look at what security they can take against your business to feel safe in loaning to you. Just like if you're buying a house, someone needs to come around and have a look and make a survey of it to understand what they think the value is going to be. When we decided to set up the business, the first thing we did was to sit down and make a plan.
Skip to 3 minutes and 55 secondsNot the 25-page plan that some people think you need to prepare to the bank-- we actually sat down with just a few black pieces of paper and said, right. What do we want to be famous for? What's our vision? What type of customers do we want and what do we want our customers to say about us? From those comments, it is clear that a business plan is an ever changing, ever evolving document. It is crucial that the business owner refers to it and compares the actual business performance to that predicted in the plan. One of the most important elements of the business plan is the financial forecasts of how it will perform.
Skip to 4 minutes and 37 secondsAnd probably the single most important part of these forecasts is the cash flow forecast. This shows how much cash is expected to be received, for example, from sales and how much cash is expected to be paid out, for example, to pay bills during the first months or years of the business. This is the component of the business plan that is most influential in encouraging or discouraging investors or lenders from providing money to the business owner. So why is cash so important? We will find out in the next video.
Planning and success
A great product or service isn’t enough for an organisation to succeed; effective planning is essential to turn a good idea into a successful business.
In this video Peter is joined by a number of entrepreneurs, business owners and financial partners. They discuss some of the challenges they faced and the critical components of an effective business plan.
As Peter explains, one of the most common reasons for business failure is poor cash control. In the next few steps of this course we will explore how any business or organisation needs to manage their money carefully if they are to survive.
© University of Leeds / ICAEW