Ways to Increase Revenue

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Keep in mind that a profit increase doesn’t always have to focus on driving sales. Often improving a number of things a little better has more impact than making one large change.

Increase Profit

Consider implementing the following tactics at the same time to achieve an accumulative effect on your profit.

The rule of 10%

If you can increase or decrease ten percent of your business that links to profit (or even five percent), then possibly customers will either not notice (unless you are in a very price sensitive market), or be fine with the changes.

Increase prices

Raising prices can lift your profit, but take care to check with your customers to see how they’d react to a price increase. If such a change lowers your demand and you lose customers, your profit margin may go up (as you’re charging more) but your overall profit may drop. To reduce a drop in sales while increasing prices try:

  • Increasing prices on those items where customers are less price sensitive.
  • Not increasing prices on items that you know customers compare with competitors.
  • Gradually phasing in a price increase. To get to a 10% rise, you could try 1% each month for ten months.

Always monitor the effect of a price rise to detect any unhappy customers.

Increase revenue

A simple increase in sales (without discounting) should increase your profit. Some ideas to help you increase turnover include:

  • Look to add new markets and distribution channels to your sales strategy. Identify any partners or ways to sell more.
  • Use tactics that cost very little (if nothing) to increase sales such as asking for referrals, visiting existing customers, calling potential customers on their phone (yes, even in the digital age, selling on the phone can still work).
  • See if there are any digital market places who will re-sell what you do.
  • Form strategic alliances with complementary businesses or joint venture to tackle work you don’t have the resources to handle on your own.
  • Maximize the value of your sales by moving upmarket and providing a premium product or service. Customers just may say yes when asked if they’d like the more expensive option. Add features if the perceived value to customers is greater than the cost to you.
  • It could be possible to extend your product range by asking suppliers to provide you inventory and only pay for it when it’s sold. If you are the supplier and have excess stock, then you could do the same.

Reduce costs

Identify the steps you can take to minimize your direct costs, such as:

  • Negotiating lower prices with your suppliers.
  • Reviewing processes and systems to minimize waste.
  • Implementing additional security to reduce the chance of theft.
  • Make sure you get paid by putting systems in place to ensure that invoices are sent and paid promptly.
  • Review fixed business costs such as insurance, power, and telecommunications and check if there are newer cheaper providers.
  • Check any on-going subscription services (often via the internet) in case they are no longer being used, or you’re paying for more capacity than you need.

Categorize your customers

Divide your customers into four categories and put different effort and resources into selling to them depending on their value. For example customers that have a:

  • High percentage of sales and high profit margins – nurture these customers and put most of your sales effort into them. Put in place customer loyalty programs so there is less chance they will get lured away by the competition.
  • High percentage of sales but low profit margins – seek to raise the margin they return to you such as a price increase or examine how you can cut costs. It could be something simple like charging for freight when in the past it’s been free. Remember these customers are getting a good deal already.
  • Low percentage of sales but high profit margins – consider a sales push to try and get them to buy more regularly, as for some reason they’re not buying as much as they could.
  • Low percentage of sales and low profit margins – consider nurturing them to buy more or pay more, so you can move them up the profit scale.

Take into account any possible effects of increasing profits before making decisions. For example, a low-profit product might be the one that brings other business from a major, highly profitable customer.

Have staff focused on profitability

Focusing staff on profitability can have also a dramatic impact if they are aware that small savings can benefit everyone. Develop incentives if they assist with:

  • Reducing power costs by switching off equipment or items that have a heavy power drain when not in use.
  • Finding causes of waste and eliminating to increase overall margins.
  • Referring and supporting new and existing profitable customers even if they are not in a sales role.
  • Manage to exceed any sales targets.
  • Sell items or services that have the highest margins while delivering a great customer experience.

Summary

Operating efficiently is essential to a sustainable, profitable business. From negotiating better terms with suppliers to nurturing your most profitable customers, your efforts can pay off.

Consider changing a number of things in your business all at once, to gain that cumulative effect on your profit.

Get started today for a more profitable bottom line.

Next steps

  • Review every part of your business in detail to gain every cent of savings that you can.
  • Find an external advisor to help you identify ways to build profit.
  • Consider gathering like-minded small business owners to brain-storm ideas for building profits.

Six Numbers to Measure Success

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There are so many financial ratios and indicators that it can be a difficult to keep track of everything. Here are six important numbers to pay attention to when it comes to the success of your business, including ways you can improve them.

6 numbers of success

No. 1: Gross margin

Gross margin is the difference between what you pay for a product and what you sell it for. Look to improve your gross margin by considering:

  • Increasing your prices. If it’s small enough, it may not cause too much disruption, but it may result in significant gain.
  • Reducing cost of goods sold by using lower-cost materials where possible, without affecting quality. Research lower cost providers or ask your current supplier to renegotiate for your business at a lower price.
  • Reducing waste. Examine any areas where there might be excess waste and devise ways to minimize. Recycle and reuse any materials you can.

No. 2: Average revenue per customer

The average revenue per customer is the total revenue divided by the total number of customers. Here’s ways to help increase this number:

  • Predict customer needs by using your sales data to identify trends such as seasonal fluctuations and items frequently bought together, therefore helping you plan marketing promotions.
  • Learn to up-sell and cross-sell.
  • Make it easier for your staff by bundling products and services together.
  • Target customers who you think have the most potential and develop a specific plan to sell more to each of them.

No. 3: Revenue growth

Steady, predictable revenue growth is the sign of a healthy company. Consider the following to further increase revenue:

  • Generate more sales by selling more to existing customers. Set up a campaign to keep in touch with your existing customers.
  • Look at developing new products or services for your existing customers.
  • Create a marketing plan to identify, locate and sell to new customers.
  • Look for new distribution channels to expand your customer base, including on your website and third-party ecommerce platforms.
  • Consider exporting to gain new customers and increase revenue.

No. 4: Revenue per employee

Revenue per employee can be affected by several factors, including average revenue per user, better systems and processes, and automation. Here’s ideas to help increase revenue per employee:

  • Set goals for your employees. Help them put a sales plan in place and measure their success.
  • Incentivize your employees by providing either individual bonuses for sales achieved or run a combined sales revenue target (especially when you have employees in non-selling roles but they are still crucial to the business succeeding).
  • Ensure your sales data is transparent so there is some measure for employees to track how they are doing. It doesn’t have to be sales information which may be confidential. It could be things they can easily see such as numbers of new customers, number of coffees sold per day, number of products finished and off the work floor.

No. 5: Net profit percentage

The net margin that accrues from all the effort of a business is the ultimate measure of how a company is being operated. Consider the following to increase net profit:

  • Identify costs that occur each month on a subscription basis or are charged to you every month such as power, internet and phone. Look for ways to reduce these regular fees.
  • If rent or lease payments comprise a large portion of your overhead, consider relocating all or some of your business to cheaper areas, especially if it’s not essential to your business, or customers don’t come to visit you directly.
  • See if there are any costs you can share with other businesses: employees, marketing agencies, floor space, exhibiting or travel costs.
  • Consider outsourcing any full-time tasks that you only need every now and then. For example, administrative tasks like payroll may not need a full-time (or part-time) person, and it could be cheaper to contract a specialist firm. See what else doesn’t require a full-time resource that would be overall cheaper to buy only when you need it.

No. 6: Net customer satisfaction  

Track customer satisfaction by asking for opinions, feedback and ratings. This can give your business invaluable information about customer preferences, and what they like and don’t like. The higher the satisfaction of your customers, the more likely they are to come back again and again and refer your business to others.

Consider the following to help your customers spread good news about your business:

  • Find out what people are saying about your competitors and use that information to improve the customer experience in your own business.
  • Keep track of customer complaints. Document who the customer was, why they were unhappy and what was done to resolve it.
  • Engage with customers on social media to measure their levels of satisfaction. You can talk to them directly, create customer surveys, and incentivize them to visit your website.
  • Use email to send out customer satisfaction surveys. Incentivize them to participate in the survey by offering a discount or small gift.

Summary

Most businesses do not need a long list of ratios or numbers to track with spreadsheets, accounting software, applications, and dashboards sending unlimited streams of data to you each day. Instead establish a few numbers that mean something to your business, then set up a system so you can monitor what is happening to each of these every month.

If you can improve each one in small increments, you may see substantial improvements in profitability.

Next Steps

  • Contact one of our Business Relationship Managers to see how we can help your Hawaii business grow.
  • Set up monthly reporting so you can see if the numbers are improving each month. If not, take steps before the number further decrease.
  • Talk to your accountant or financial adviser if there are other numbers you should measure and track.

How to Value Your Business

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If you’re selling your business, one of the main challenges is what you think the business is worth and what the person on the other side of the bargaining table thinks it is worth, are usually two different figures.

Value of Business

Deciding on a market value

Regardless of the method anyone uses to value a business, it’s simply a matter of finding someone who will pay what you’re asking. Theoretically if no-one wants your business then it’s worth nothing (apart from the second hand sale of any assets or inventory).

Past cash flow, profitability, and asset values are the starting points but it’s often the hard-to-measure factors such as key business relationships, reliable suppliers, loyal customers and goodwill that provide the most value.

To assist in this process it’s usual to arrange a business valuation with a business broker, accountant or valuation expert with experience in your industry.

Factors influencing value

Individual circumstances

The reasons for selling a business can affect its value. For example, if you are forced to sell for  health reasons, you may have to accept the first offer that comes along, which weakens your bargaining power and could drive down the value.

Tangible assets

A business that owns property, machinery, raw materials, furnishings, computer equipment or stock-in-hand has tangible assets that will have some resale value. This makes the business easier to value as you can often find current market value or at least replacement value if you had to buy everything again.

Intangible assets

Many businesses have intangible assets with significant value. Some examples are a well-respected brand, positive customer word of mouth, and even the potential for growth in your industry could be viewed as an asset. These intangibles can be harder to value. Your business banker or accountant may be able to give you guidance with these.

Intellectual assets

If your business owns the rights to patents, copyrights or well-established trademarks, these may add value to the purchase price of a business. For example, if you’re selling a patented invention, you may be able to value your business higher than a similar business selling an unprotected product.

Length of time

The longer your business has been operating, the more likely it will have a proven track record and cash flow, and possibly loyal customers who provide repeat business.
If you’ve only been operating for a short time buyers may sceptical why you’re selling so soon.

Agreements

If your business holds a licence or distributorship rights for a product or service, the business could be worth more than a business that does not.

Management stability

If your key employees are going to stay after the sale, the business may be worth more. Any written agreements or incentives to retain key employees could add value.

Valuation techniques

Remember, the true value of a business is always what someone is willing to pay for it. To arrive at this figure, buyers use various valuation methods, often to give a sense of reassurance that they are not paying too much. The main methods are as follows:

Asset valuations

Add up the assets of a business, subtract the liabilities, and you have an asset valuation – nice and simple. So if your business has $500,000 in machinery and equipment, and owes $50,000 on equipment finance, the asset value of the business is $450,000.

A buyer could decide to just buy the assets of a business rather than take over the business as a going concern. Take into account:

  • Property or other fixed assets that may have changed in value. Just because an asset is ‘valued’ at a cost on the balance sheet, doesn’t mean that’s what you should sell it for.
  • Assets that you’ve added value to, for example that have been installed, or improved. These may be worth more than just book value.

Entry cost valuation

An entry cost valuation reflects what it would cost someone to start the business from scratch, as it’s always an option for them. To make an entry cost valuation, calculate the cost of:

  • Purchasing or financing assets and developing the products or services.
  • Recruiting and training employees.
  • Building up a customer base and generating repeat business.
  • Knowledge of networks, suppliers, competitors and processes.

Industry rules of thumb

In some industry sectors, buying and selling businesses is common. This has led to industry-wide rules of thumb that are typically considered in valuing the business. These rules of thumb are dependent on factors other than profit. For example:

  • Turnover for a computer maintenance business or monthly recurring revenue for a subscription business.
  • Number of customers for a mobile phone airtime provider.
  • Number of outlets for a real estate agency business.
  • Net profit multiplied by an industry standard number.

Buyers will work out what the business is worth to them especially if they can merge your customer base with their existing business.

Next steps

  • Determine which method of valuing your business creates the most value for you.
  • Get expert advice as there are other valuation methods such as price earning ratios. Talk to your accountant, lawyer, a business broker, your banker or small business adviser about possible valuations of your business.
  • Search online for similar businesses that are for sale to get a feel for the market of similar businesses for sale and what they were sold for. Remember that ultimately, your business is worth whatever someone will pay for it.

How to Manage a Cash Crisis

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There are many reasons why small businesses experience sudden cash flow crunches. A (usually) reliable customer might take longer to pay than anticipated. Essential gear breaks down and you must pay to replace it. Or, if your business is new, it could simply be taking longer than expected to turn a profit.

How to manage a cash crisis

Figure out the cause of your crunch and take action

Identify the reason for your cash crisis and move quickly to address it:

  • A major customer hasn’t paid on time.

Implement stricter credit control and better debt collection procedures. Contact them to ensure you have the right purchase order and the invoice has been sent to the right person. Check if your contact has gone on vacation and forgotten to process your invoice.

  • A rise in the cost of production has eroded your profit margin.

Try and source less expensive materials or supplies or decide if you need to raise your price.  Monitor your gross profit margin for any further profit slippage.

  • Your business overheads have increased.

Identify specific expenses and see how you can reduce them. Regularly monitor your net profit margins to spot any out-of-proportion increases so you can take action.

  • Your business is growing quickly.

You don’t have the capacity to fund the growth with your working capital. There’s usually a time gap between selling goods or services and getting paid by customers. Meanwhile there are bills to pay. See if you need to slow down growth to avoid failure.

  • Sales have been slower than predicted.

Review your marketing plan and sales campaigns.  Alternatively, if you can’t see any future improvement in sales, make sure your business still viable.

There may be other causes such as the loss of a major contract or you bought a large asset at the wrong time and you now need that cash reserve for working capital. In each case, understand the cause and the action you’re taking to avoid repeating the crisis, such as diversifying your customer base or using your cash flow forecasts to time purchases more appropriately.

Try to be paid on the spot

Finding money in a cash crunch

If you do find yourself in a cash crisis, there are a number of funding options to consider, ranging from self-financing or bank loans to finding a business partner. The relative attractiveness of each option will depend on the size of your cash flow shortfall and how long you’re likely to need the cash. Talk to your accountant, tax advisor or legal counsel for advice.

Explore these sources of internal funds

Before you look for external sources of funding however, can you free up cash from within your business? For example:

  • Offer customers a discount for early payment or ask them to pay up-front.
  • Ask customers to pay by credit card now rather than invoice for payment later.
  • Hold a sale of surplus or slow-moving stock to raise cash.
  • Ask suppliers to take back excess stock and a credit or give you longer credit terms.
  • Sell under-used assets and rent the equipment instead.
  • Downgrade or sell vehicles and lease them back instead.
  • Reduce your drawings from the business until revenues improve.
  • Your accountant and advisors may be able to suggest other ways to release the locked-up cash in your business.

Apply for a bank loan

If you need a business loan and have a good credit history, consider a higher line of credit or access to a business loan to tide you over. If you’re going to need quite a lot more money, you’ll likely have to present a more detailed business plan and financial forecasts.

Invoice factoring

Factoring involves selling your invoices for immediate cash. Factoring companies may take 5% or more of the value of your invoice. The factoring company will collect 100% payment from your customer when the invoice comes due.

Taking on partners and investors

A business partner might be a source of quick cash. There are advantages but also pitfalls to taking on a business partner, so get expert advice first from your accountant and your lawyer – they may also know suitable investors. Be aware that you’ll need to share the ownership of your business if you go down this path.

Family and friends

You could ask family, friends or business colleagues to help out with a temporary or longer-term loan. It’s best to put the agreement in writing and get everyone to sign it, so that both sides are clear on what has been agreed. Be aware that this sort of agreement could strain personal or working relationships if things go wrong, so treat it as a last option.

Summary

A cash crisis is stressful for any business owner. Take a deep breath, and be reassured that you do have many options available to you. You’ll feel better about your situation when you take immediate steps to pull your business through what will surely be a short-term cash flow crunch.  

Next steps

  • Contact one of our friendly Business Relationship Managers to see how we can help your business.
  • Update your cash flow forecast to make sure you are working with fresh numbers. You’ll want to see exactly how much money your business requires to stabilize cash flow.
  • Talk openly with your banker about your situation. Don’t hide your cash flow crunch. Chances are, your banker will have solutions to suggest to you.

Five Strategies to Make More Money

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Here are five key strategies to increase your business, and your profit. It’s best to build up by 10 percent using these methods, but the slow and steady approach will be worth the results.

How to Increase Profit.

1. Increase Your Leads

Grow your number of prospective customers. By interacting with more people, you’ll increase your chances of turning them into customers. Here’s a few tactics to increase leads and make more people aware of your business:

  • Document your most successful promotional tactics. Repeat those successes by putting more budget and effort into those marketing strategies.
  • Profile your target audience and contact them directly.
  • Attend industry events and conferences to meet potential customers.
  • Redesign your website to increase opportunities outside the Islands.
  • Develop new distribution channels. Think about using agents, licensing your goods or utilizing new distributors.
  • Ask current clients to give you referrals.
  • Use search engine marketing and buy AdWords.
  • Run webinars or speak at local events.

2. Convert Leads Into Customers

Once you have more leads, increase your conversion rate by making them your customers. Even converting 10 percent more into customers will generate significant sales.

Measure your current conversion rate. For example, calculate the number of unique users visiting your website divided by the number of your online sales and then consider the following:

  • Organize local staff training on selling techniques and closing methods.
  • Provide your staff with incentives or bonuses for higher conversion rates.
  • Run demonstrations for potential customers to see what you can offer them, how they can benefit and then sign them up.
  • Ask people to connect by creating calls to action or incentives through promotional materials, your website, blogs, social media and free trial offers.
  • Create whitepapers or research content to encourage people to register or download content for you to then follow up and close the sale.

3. Increase the Number of Items You Sell

If you can entice your customers to buy another item, hour or extra service from your business, your sales—and your profits—will increase. On-selling is a classic tactic to improve your profit. They include:

  • Add impulse or lower-cost products at your checkout or offer a final sell when closing.
  • Ask customers what else they would be interested in buying from you and then widen your product range to accommodate their needs.
  • Bundle your products together.
  • Offer complementary services.
  • Research your competitors to find new product or service opportunities.
  • If you sell products, add a provided service; if you provide services, add products to sell.

4. Increase Your Average Sale

If you can increase the average value of each sale, you’ll directly improve your profit. Here’s what you can try:

  • List all your highest margin products and services. Check that they are profiled on your website, that they have the most promotional budget allocated to selling, and that they are the first products to be sold.
  • Ensure all employees know to sell those products with the highest average sale price, and that there are incentives when they sell.
  • Increase prices. Even small improvements, such as one to five percent, will show direct profit results.
  • Introduce new premium products or services that have a higher value.

5. Increase Net Profit Percentage

Net profit can be improved by looking carefully at your gross and net margins. To increase net profit, try these tactics:

  • Review all of your main suppliers and determine if you can swap any for lower-cost providers. Ensure any new supplier can match the quality and service you expect..
  • Assess if there’s any parts of your business that can be sub-contracted out to lower-cost suppliers, or can be imported from more affordable producing countries. Make certain this tactic won’t impact what your customers expect. (For example, Hawaii-made versus imported).
  • Identify your top five overhead costs to explore savings. Overheads such as insurance, office supplies, internet, subscriptions and communications often reduce in price year by year. Make sure you’re getting these reductions.
  • Trim employee costs, if possible. Review job descriptions to find any overlap; you may be able to get by with fewer people on the payroll.

Summary

There are several simple, practical steps you can implement to improve your business’ profitability. Review these five strategies to increase your profits at least once a year. Repeat any strategy you find to be successful.

Next Steps

  • Contact one of our friendly American Savings Bank Business Relationship Managers to see how we can help your Hawaii business grow.
  • Meet with your employees, accountant and any other advisors to brainstorm additional tactics to increase profits.
  • Ask your employees to contribute ideas to sell more and spend less.
  • Monitor your main competitors to see what they are doing to increase sales, reduce costs and improve profits.
  • Keep up to date with industry trends and look to adopt any new ideas or technologies that will lower your costs and improve your profit margin.

Find New Customers

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Find out the main sources of local help and advice, including  incentives and initiatives to encourage small business development.

New Customers

It’s always beneficial to seek new customers. When new competitors enter the market and try to steal market share or old customers no longer need your business, it’s important to draw upon a fresh customer base. Here are five strategies to win clients. 

1. Look for New Customers in Your Existing Market

Chances are, there are several new customers in your existing market, they’re just hidden. Profile the best customers you have now. What do they look like? Where they are located? What do services or products do they utilize? Also include if they have any buying cycles, whether they attend conferences and what process they followed to become your customer.

Next, list how your best customers prefer to be contacted, and what worked when you originally marketed your business to them. Using the profiles of these ideal customers, find more that match. Set a marketing budget and develop a shortlist of targets that have potential for your business.

Don’t forget to ask for referrals. Your customers are likely to know other people just like them who could benefit from your products and services. Many customers are willing to refer your business if you ask.

2. Look for New Distribution Channels

To seek new ways to expand your customer base, identify other ways you could sell your products and services. Here are some strategies:

  • Expand beyond Hawaii into different geographical locations by opening new locations, outlets, a franchise or a joint venture with other businesses.
  • Go up or down the supply chain. If you’re a wholesaler, add a retail outlet—going up—or start importing direct—going down.
  • Go online. You’ll be able to create a new avenue for your customers and widen your audience and therefore potential customers.
  • Join contracting bids or open tendering opportunities in different markets.
  • Consider any competitors or complementary businesses looking to exit. You might be able to buy them out to extend your reach and customer base.
  • License what you do to similar businesses in other markets or countries. You own the intellectual property and they pay you a royalty.

3. Find New Markets

Define your market area or region, such as Hawaii or the Pacific, and then using local statistics or your industry knowledge, look for other areas, such as on the Mainland or overseas in Asia, to expand.

  • Consider exporting: Overseas markets offer opportunities to expand your business. Conduct on-the-ground research in the countries you’re considering. Make sure to find out what regulations, tariffs and business risks are present in your new target market.
  • Explore new market models: If you sell to consumers, consider if you can sell to businesses as well. Similarly, if you sell to businesses, find out if there is a way to sell to individuals.
  • Look at nontraditional markets: The government or education sectors have opportunities worth exploring.
  • Review your online strategy: While the internet offers a potential worldwide market, identify what’s practical for you to target. Otherwise your marketing efforts will be ineffective because your message is off-market or spread too thin.
  • Focus on Selling

Every local small business owner should be placing emphasis and budget into selling strategies. It may sound obvious, but if you don’t sell anything, you’re out of business fast.  Assess your tactics and improve your sales success rate by:

  • Host workshops, webinars or events to talk with customers directly and close the sale.
  • Call or visit existing and potential customers at their business to direct sell.
  • Offer discounted products or services to get new customers, and then up-sell and on-sell once they have signed up.
  • Attend industry events and trade shows.
  • Create content for new customers to download in exchange for their email addresses, and then add them into your email marketing campaign.
  • Develop a sales plan, train and encourage everyone in your business to be a sales person.
  • Using direct marketing software or engaging third party companies to send you qualified leads.

5. Partner with Other Businesses

To find new customers, you have to be creative. Sometimes that means seeking out strategic alliances and joint ventures with other businesses. Tapping into a complementary business’ database of customers and forming an alliance can uncover a new stream of customers. Here’s how to do it:
  • Form marketing partnerships: Jointly promote with another business. It’s even better if you can get in front of their customer base. Working together gives you instant credibility to their clients.
  • Constantly network: Attend events, conferences or exhibitions your customers attend. Invest in any speaking opportunities to enhance your profile.

Summary

Finding new customers is one of the most common growing pains for small business owners. Over time it’ll get easier, because you and your staff will know what sales and marketing methods work best for your business. It’s important to actively market to new customers on an ongoing basis to ensure your business never runs short of buyers.

Next steps

  • Contact one of our friendly American Savings Bank Business Relationship Managers to see how we can help your Hawaii business grow.
  • Generate a list of practical tactics to add new customers that are relevant to your business and industry.
  • Ask new customers how they found your business so you can focus on marketing activities that yield results.
  • Make a list of non-competing businesses serving the same customers and approach each one about forming a strategic alliance.
  • Invest in sales training for you or your sales team to improve selling skills.

Check that your business idea will work

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Although the only real way to find out if your business idea will work is to actually start your business, there are a number of things you can do to help research your business idea before you take the leap.

Feasibility

Working through this process methodically will give you a better sense of your businesses chance of success .

Reality Check 1

Have a key competitive advantage

Your business ideally needs to stand out from the competition. If your business has a unique selling point (USP) or competitive advantage, it will give customers a reason to go to you, rather than anyone else. Businesses which do not have a clear and strong USP, often have to resort to competing on price. This typically means lower profit margins.

Consider basing your competitive advantage on something the customer values. For example:

  • First to the market and no one else sells what you do.
  • Being the most reliable with the best guarantee.
  • Having exclusive products or a contract so you are the only supplier.
  • You have the best quality or longest warranty.
  • Having a cost advantage so you can be the cheapest yet still make a profit.
  • Being the healthiest or most sustainable.
  • Knowing more than anyone else and being an expert
  • Being made in Hawaii.
  • Organic or use recycled materials.

 

Reality Check 2

Research your target market

It makes sense to ask the people you’re likely to be selling to, what they think of your business idea. Try and find out:

  • Whether people actually want what you’re selling.
  • Which people or businesses are most likely to buy.
  • Which group of customers are likely to be the most profitable.
  • What prices you could charge for your products or services.
  • How often people will buy.
  • The benefits that people want to receive when they buy your type of product.
  • What needs people have which are currently not being met by any other businesses.
  • The best ways to market to potential customers.
  • Where people currently buy from and why they choose to support those businesses.

Much of this information can also be used to determine whether there will be sufficient demand for your business’s products and services for your business idea to work. It can also be used to figure out how you can modify your original idea so it will be viable, perhaps by identifying ‘gaps’ in the market.

Test the market

Trial marketing can be one of the most reliable ways to test your market potential. If you are introducing a new product or service, you could:

  • Set up the business part-time while still working.
  • Test the response by selling at trade fairs, weekend markets or short-term contracts, depending on the type of business you’re running.
  • Launch a limited marketing campaign in a selected town or area.

 

Reality Check 3

Make sure your business model will work

It’s relatively simple to determine whether you can sell enough to make a profit, but can you physically make enough?

For example selling a product which takes four hours to build, means you have a capacity of two a day (around ten a week or five hundred a year). Is this enough to make a profit from the price you’re selling them for? If you’re a retailer then calculate how many people you need per day spending the average amount for a customer in your type of business. Is the business viable?

Conduct a break-even analysis to show the minimum amount of sales that your business needs to make in order to cover all of your costs. Then work it out again, this time with your profit margin added in. If you can make at least this amount of sales, the idea may be financially feasible (assuming you can still get customers of course).

Reality Check 4

Do you have the money

Calculate how much money you need, and how much money you have. If there is a gap then you’ll need to cover this amount somehow. It's common for some business owners to underestimate the actual amount of money needed to start up a new business venture.

Step 1

Add up all the purchases you’ll have to make to get your business up and running. Some of these costs could include:

  • Vehicles, plant equipment and machinery.
  • Office equipment, computers, scanners, desks.
  • Initial inventory or raw materials.
  • Fees for licenses or permits.
  • Any staff you need in advance before the doors open.
  • Your own salary (if you intend to take one).
  • Internet, online, website build.
  • Product or service development.

Step 2

Once you’ve determined all your set-up costs calculate your ‘working capital’, which is how much you’ll think you need to cover all your running costs until you start to make a profit.

Examples of these on-going costs include:

  • Rent, power, internet.
  • Accounting fees, insurance, bank fees.
  • Salaries or wages, any sub-contractor costs.
  • Online subscription fees, communications.
  • Anything that is a regular cost regardless of sales.

For example if these costs totalled $20,000 a month, and you’ll think you need at least 6 months until the business can pay its own way, then you’d need $120,000 in working capital.

Step 3

Add the set-up costs to your working capital costs to get a final start-up estimate.

Do you have enough money saved, borrowed or accessed from somewhere to cover this amount?

Summary

Your business is much more likely to succeed if you can pass these initial four reality checks. Sure, there are still hurdles to cross, such as accurate pricing, finding a location, being able to find customers and building a sustainable revenue stream.

Next steps

  • Allow some time after you have collected all your research. Ask yourself if you want to proceed.
  • Talk to a business advisor or another small business owner about your idea, and collect as much feedback as you can. Though the final decision is yours.
  • If your information points to a viable business, you feel confident in your entrepreneurial abilities, and you want to move ahead, then your next step is to write up a proper business plan.

Decide how much money you need to start

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Many new businesses need start-up capital. Find out the main options of raising funding for your new business.

How much money do you need to start?

Before you start a business, it’s best to know how much money it will cost and make sure you have access to sufficient capital. It’s important to be realistic with all of your figures, and to estimate costs and revenue as accurately as possible so you can calculate how much you need.

How much money do you need?

Estimating your start-up costs falls into two categories:
  1. Set-up costs (money you’ll need before you start operating).
  2. Initial working capital (money you’ll need to run the business until you start making a profit).

Set-up costs

These are one-off costs that you will need to pay before you start operations. Every business will have different set-up costs to consider depending on the industry.
  • A web designer would have low costs: a computer, software, possibly liability insurance and any legal costs setting up a company.
  • A builder would have higher costs: tools, vehicle, and equipment for any specialized work.
  • A restaurant’s set-up costs may include kitchen equipment, seating and initial food ingredients.
Other start-up costs might include:
  • Rent deposits and any building renovations before you open for business.
  • Licenses and permits.
  • Employee recruitment and training.
  • Initial inventory or raw materials.
  • Signage, marketing materials, web site development and advertising.
If you're buying a business (including a franchise), the purchase price becomes your set-up costs figure, as usually all these start-up costs are included.

Working capital

Once they open, many businesses don’t have enough sales revenue to cover overhead costs. Time is needed to start and generate customers to cover all the overhead (and make a profit). Until this happens you’ll ideally have spare cash in the bank (also called “working capital”), to pay for monthly expenses until sales can cover all your monthly costs.

Work this out:

  • Begin by estimating your monthly costs (wages, utilities, internet, advertising, rent – everything). This will give you a monthly amount you need as a minimum to stay in business.
  • Transfer these totals to a cash-flow template.
  • Now add your sales estimates for the first six months (being realistic and remember some businesses don’t have any sales initially). Each month you’ll see how much working capital you are short.
  • If you have customers on credit or account, they rarely pay on time. Factor into your calculations that you may need to wait 30, 60 or 90 days for payment.

Cost out every item and get quotes

You can get accurate figures for set-up costs and working capital expenses by rolling up your sleeves and carefully researching all costs.

  • Get written quotes from suppliers for each service or product you need to run your business. Ask them to guarantee the quoted price for at least 90 days; that way, you won’t have any surprises when you go to start-up your business.
  • If you are leasing or buying premises and must pay for utilities, contact the utility company to find out the monthly cost. Ask about any anticipated rate changes.
  • Research online or contact vendors directly to identify costs for office supplies, internet access, telephone charges, furniture, alarm systems, data storage and office cleaning.
  • Include any transportation or travel costs you may incur to get your business going.

Contingency budget

It can be difficult to foresee all the costs you will incur to get your business up and running. Inevitably, there will be some costs that you didn’t expect, or purchases that simply end up costing more money than your earlier estimate. Costs can also change if there is a substantial period between when you priced something out and when you buy it – an insurance rate obtained last year may be much higher this year because of changes in the marketplace.

You can accommodate changes to your start-up budget by including a contingency budget. Consider adding ten to twenty percent or more to your start-up budget for unexpected set-up expenses or changes to your working capital needs.

Start-up budget formula

Use this formula to safely calculate the amount of money you’ll need to start your business:

  • Set-up costs + working capital costs (monthly costs x the number of months you’ll be short) + a contingency budget.
  • Example: Start-up costs $200,000 + working capital $120,000 ($20,000/month x 6 months) = $320,000 to start and cover costs for 6 months. Add a 10% contingency to be safe which totals $352,000.

Take this total and calculate where this will come from:

  • Personal savings.
  • Bank finance.
  • Investors.
  • Government grants.
  • Loan from friends or family.

Summary

Work out exactly how much you think you’ll need to start, with a realistic contingency to cover any cost blow outs. Remember to make a plan to pay for your personal living expenses while your business gets off the ground because if it won’t be able to pay you a salary initially. Figure out your household expenses to know exactly how much you’ll need each month.

You may have all the cash you need for starting a business. If not, then carefully consider all the options available to secure start-up funds.

Next steps

Building Competitive Advantage

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Two kids in race cars

Identifying your competitive advantage

A competitive advantage is what your business does better than others. The smarter you can be about developing and promoting your competitive advantage, the better placed your business will be to succeed. The most common competitive advantages are:

  • Low pricing: You’re able to supply the lowest-cost product.
  • Specialization: You service a specific niche market better than other businesses.  
  • Differentiation: You have the same product or service as others, but you deliver it a different way.

However there are a number of other ways to build a viable competitive advantage, especially when everyone in the same industry has similar prices, products and services.

Eight ways to build

1. Promote your staff

One of your best competitive advantages is your staff. The advantage of having friendly, knowledgeable, proactive staff shouldn’t be underestimated. The key is to make sure your staff are motivated, trained and successful. Help your staff by:

  • Establishing clear performance standards.
  • Starting incentive or bonus programs to reward staff for their successes.
  • Encouraging employees to develop their product or service knowledge and paying for training.
  • Learning what other great companies do and adopt any ideas that are relevant to your business.

2. Use your location

Be where your customers are located. For example, if you are a retailer and you don’t have a location that attracts foot traffic, you’ll be short of customers. You should also consider:

  • Retail and customer location trends and whether you need to, relocate.
  • Marketing your business with business-to-business accounts, free pick-up and delivery, drop-off points or wholesaling through other businesses with better locations.
  • Encouraging customer interaction, such as via online communities, attending conferences or exhibiting at events.

3. Offer unique or exclusive products

You have an advantage if you can source products or deliver services that the competition cannot. If you’re competing against larger or similar businesses, establish a reputation for unique products. For example:

  • Seek exclusive agreements with suppliers.
  • Look overseas to find products or a brand that other businesses don’t carry.
  • Find a location, contract, service, agreement or tender that only your business can deliver.

4. Have a great website

A website that is more attractive and easy to navigate than your competitors can be a distinct advantage. Can you create a better, easier online shopping experience? Here are things to consider:

  • Focus on great design.
  • Be aware of how search engines rank sites and be on the top.
  • Use content marketing, such as guides, whitepapers or giveaways to build expertise and to have potential customers make contact.
  • Use new technologies and marketing automation to gather, nurture and close any new leads.

5. Become a star

Your own image can be a competitive advantage. No one else has quite your mix of skills, and you can build a character owner image by having your name on as many materials as possible, including:

  • Having your name or face associated with the business.
  • Speaking at conferences as an expert.
  • Becoming prominent in your community by volunteering on local boards.
  • Becoming an authority in your field and a spokesperson for your industry.

6. Get to know your suppliers

Being on good terms with your suppliers and their sales representatives is an often-overlooked competitive advantage. You might find that they do most of the market research, develop new products, conduct customer analysis and provide nation-wide branding and advertising that enhances your credibility. A good relationship could provide:

  • Better service and support. You might get promotional material, displays and signs or training for your staff in advance of everyone else.
  • Better supply and faster delivery.
  • Better return policy and customer support.

7. Form strategic alliances and joint ventures

One of the best ways to compete against other businesses is to form alliances and joint ventures. For example, by banding together with other businesses in your industry, you can often gain better group discounts from suppliers than you would if you ordered on your own. Joint venture marketing is another way of sharing advertising costs. By joining together with businesses from the same location, or same industry group you can help increase demand for the industry as a whole.

8. Deliver speed

People increasingly want quick service, so the faster you can deliver your product or service the better. Hold regular staff meetings on how to streamline your business processes and fulfill or exceed customer requirements without sacrificing quality of delivery.

Next steps

  • Contact one of our Business Relationship Managers to see how we can help your business grow.
  • Find out what your business does well.
  • List your key competitors and outline what specifically you’ll do to challenge them.
  • Always look for new competitive advantages. Go to conferences, research online, and look at what other industries are doing.

 

Find out the best way to start with our business planning tools.

Learn more about starting your business with the right business planning tools.

 


CHECKLIST TO START YOUR BUSINESS

To help you navigate your way to the start line, here is  a comprehensive checklist to support you through this process.

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CASH FLOW FORECAST WORKBOOK

Forecast what your likely sales and expenses may be over the first 12 months with our cash flow workbook.

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BUSINESS HEALTH CHECK

Whether you are starting up for the first time or established and looking to grow, our Business Health Check will help provide practical information and guidance for your business.

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BREAKEVEN CALCULATOR

Use our breakeven calculator to work out how much you need to sell in order to achieve your desired return.

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