Working with entrepreneurship students has shown me the natural inclination of budding business owners to ignore certain truths. Whether we are starting a business from scratch or planning to grow an existing operation, our focus needs to be on business fundamentals.
For five years, I have worked with students participating in the Meredith (College) Social Entrepreneurship Challenge. Students from any major are invited to submit overviews of business concepts. The most promising ones are chosen by a panel of entrepreneurial alumnae, to be developed into a more detailed presentation for formal judging. Cash prizes are awarded to the top three participants, further encouraging everyone’s best efforts.
Although the majority of advanced entrepreneurship students handle these roadblocks correctly in their new venture plan, the novices tend to overlook them – to their peril in the judging. The same issues cause problems in the very real world of business development, even among otherwise experienced professionals.
Businesses almost always grow more slowly than expected. Sales lag our expectations because we overestimate the number of people who 1) know our product exists and 2) will want to buy it from us.
While sales tend to be slower than initially planned, expenses are almost always higher. There are unexpected needs or price increases. Perhaps the budget planning was based on volume pricing for a fully-functioning business, but we do not need as many pieces delivered in the start-up phase. As a result, each piece costs more than expected.
We are anxious to get our businesses operational, so delays can be excruciating. Waiting for outside-funding approval, renovations, permitting, and long lead times for supplies are just a few of the problems that can impact other needs. The antidote is to plan expenditures carefully, and recognize that surprises are still likely.
Lack of Detailed Math
Business math, especially for start-ups, consists of the four basic functions of addition, subtraction, multiplication and division. The math becomes detailed by asking critical questions. For example, how much does each item cost? How much can you sell it for? What is the difference between cost and selling price (i.e., the gross margin)? How many items do you need to sell in order to cover all of your expenses? Is it reasonable to assume you can sell that many? Does your business have seasonal or other timing limitations?
No Understanding of Breakeven
Breakeven is the point at which sales equal expenses. Two ways to view breakeven are: 1) breakeven within a calendar or fiscal year, and 2) breakeven over a longer time period, likely multiple years and including all start-up expenses and loans. Know when you are likely to reach each type of breakeven, and update your plans and expectations based on ever-evolving realities.
Although the execution will change over time, the levers that make a business work remain the same. If we do our homework, we can minimize or avoid these five roadblocks. Careful research and planning help identify critical problems in advance so we can: 1) change plans to deal with them, 2) put the business plan on hold, or 3) save time and expense by walking away.
Ongoing planning and analysis are worth the effort, and do not have to take a lot of time. However, they may make the difference between success and failure.
Until we meet again,
The Entrepreneur’s Friend®
The Entrepreneur’s Friend® is a registered trademark of Wheaton Consulting Group LLC. Photo credits: All photos were taken by Cynthia Wheaton and owned by Wheaton Consulting Group LLC except as noted. Coffee cup art by Jim Wheaton. Author support: Fellow authors from The Wrinklings and Light of Carolina Christian Writers Group.