Tips for Planning Your Business Startup

Starting a business can be a very daunting adventure if a proper plan is not put in place. Most entrepreneurs start up their businesses without putting adequate plans in place to succeed. No wonder one out of every five businesses crumbles within 5 years! If one thing should be taken very seriously, it should be your business plan. This is your “blueprint for success.”

Every business begins from a thought. A thought or idea can only become reality when expected actions are taken. When an idea is conceived, the logical corollary is that such ideas need to be written out, in black and white and on paper; or else the idea will fade off when the enthusiasm that the thought initially brought subsides. Hence, having a written business plan is pertinent if your business is to stand the test of time.

Now, what is a Business Plan?

One definition, according to entrepreneur.com, is that a business plan is a “written description of the future of your business; a document that indicates what you intend to do and how you intend to do it.” If you notice a paragraph on the back of an envelope describing your business strategy, you have already started a written plan, or at least the first draft of a plan. The business plan itself consists of a narrative and several financial worksheets.

The very act of planning helps you to think things through in a systematic and thorough way. Study and research your market niche if you are not sure of the facts, and look at your ideas critically. It may take some time now, but helps to avert costly and disastrous mistakes in future.

In this article, I want to provide a very brief look at the steps involved in planning a business:

1. Identify Your Passion: Knowing what you love doing, even without making money, is the stepping stone in starting any business. Most people enter into a business they know nothing about, and stop after only few months. Some get tired of their businesses simply because they are not happy with the activities involved in running the business anymore. According to Sabrina Parsons, (CEO of Palo Alto Software) “Know yourself, and work in a job that caters to your strengths. This knowledge will make you happier.”

The reason why many businesses fail in their first five years is because the entrepreneurs do not find fulfillment in running their business anymore. Hence, they tend to move on in search for happiness.

You must look within by evaluating yourself and identify what you are good with. If what you are good at gives you happiness, think of how you can monetize it and make it a business. You do this by sharing your passion with others. However, passion alone is not enough in starting a business. You need to plan, set goals and above all, know yourself.

2. Conduct Intense Market Research: As stated above, passion alone is not enough in determining the type of business endeavor you should get involved in. You need to be sure if there are people who are really interested in paying for what you have to offer. Apart from that, you need to identity the category of people who can afford the prices of your products or services, and in what quantity.

You also need to determine how to attract your prospective customers. How do you intend to reach your targeted customers? How do you intend to distribute your products to your targeted customers? How do you know the actual price that potential customers are willing to pay for your products? These and many other things are what you should know before investing your money in starting any business.

3. Write a Business Plan: A business plan is a written document that describes your business idea. Your business plan will give you a sense of direction towards achieving your business goals and objectives. It describes what you want to do, when to do it, where to do it, and how to do it. A written business plan can also be used as a guide running your successful business.

Writing down your plans helps you to anticipate the future of your business. Anticipating your business helps you to identify and possibly avoid any challenge that may bedevil your business in the future.

4. Register Your Business: After you have written down your business plan, you must register your business so that clients will take you serious. Apart from that, registering your business makes your business have a life of its own. It separates you from your business. Any serious minded entrepreneur must have his business registered.

The most common type of business is that of a Sole Proprietor. You run your business yourself and keep accurate books (for tax purposes). You deduct your expenses and pay taxes on the gains. This is the simplest type of business to open. It is also the most vulnerable to having your assets taken away by an angry customer who would file a law suit against you for whatever reason. This is one of many reasons that business owners opt for one of the other types of business set ups.

A Partnership is a type of business where two or more people enter into a business arrangement. Two friends, etc. decide to open a business. If you decide to enter into a partnership, you need a document that details how the business will be divided if the partnership is broken up. It may sound crude to plan this before opening the doors, but it will save a lot of heartache and expenses in the end. Besides, if you never dissolve the partnership – the document is never needed. This is one of those “it is better to have it if it’s needed rather than need it and not have it” moments.

Corporations: There are several types of ways to incorporate. I am not going to get involved with a detailed discussion here. My recommendation is if you are planning on incorporating your business – hire an attorney with expertise in this area. There as several types of corporations and your attorney can evaluate the facts surrounding your business and guide you to the most appropriate type of corporation for you to use.

5. Get The Necessary Capital: This is the most difficult aspect of starting a business. Getting the capital to finance a business is the major factor that discourages most entrepreneurs from moving ahead with their plans.

There is no doubt that most businesses start through self-financing. The reason for this is clear – Nobody believes in your dream until there is a physical manifestation. As a potential business person, you must learn to save aggressively in order to meet the financial requirements of operating your business while taking care of your family at the same time. You can also opt for loans from friends, family or corporate bodies (banks, saving and loans, etc.).

A general rule of business states that, in addition to your start-up costs you should also have at least six to twelve months’ worth of your family’s budget in the bank. In order to finance your company, you will need to match the company’s needs to the appropriate financing option. You should seek the assistance of a good accountant in this area. The accountant will be able to advise you what is best in your situation and also offer assistance in tax planning.

6. Taking Risks: Once the financial aspect of starting a business is settled, what risks you should take should be the next line of action. You should keep on testing different things to be able to ascertain what works well for you and your business plan. By accurately listing the acceptable risks you are willing to take before hand (in your business plan) and in what situations these risks would be taken, will give you valuable guidance when obstacles occur (and they will occur).

By having your plan of action already in place, it will be very easy for you to refer back to your well thought out plan and decide on the course of action to take concerning a pre-identified obstacle to your business success.

It is important to know from the beginning that you may fail in this business. You may not want to acknowledge this fact. I mean, who wants to “plan” on failing, right? But, by acknowledging this now will help to keep you going when you experience any setback in the future. What matters most in business is your level of discipline, persistence and belief.

Whenever, you experience any failure, go back to your business plan and pinpoint where you missed it so that you can implement the appropriate corrections. If the trouble you are experiencing was not identified in your original business plan, now is the time to add it to your plan.

Take the time to go through all of the steps in identifying and mitigating risks, just as you did when you wrote the original plan. By doing this, you accomplish two things:

1) You are methodically thinking through the problem and determining a solution, and

2) You are now adding this unforeseen problem to your plan! If it ever manifests again, you will be able to quickly determining what you did and if it was effective (saving time and stress later).

The steps above, if followed, will help you in building a top level business that will could be your opportunity to change the world! Ensure you do not go into a business without prior planning.

29 May 2015

Writing Your Business Plan (Traditional or Online Business)

How To Write A Business Plan

In my previous article, I talked about how you can plan your business startup. I defined a business plan as a written description of the future of your business. This is a document that indicates what you intend to do and how you intend to do it. I further explained that if all you have is a paragraph on the back of an envelope describing your business strategy, you have written a plan, or at least the beginning of a plan. I also said that a business plan consists of a narrative and several financial worksheets.

I mentioned that the ‘writing of a business plan’ as one of the pivotal steps involved in setting up a successful business. By now you should understand the need for writing a business plan. Writing a business plan, for a traditional brick and mortar business, will probably take a lot of time. It may take up to 100 hours or even more. For obvious reasons, a new business needs to carry out a lot of research before a business plan can even be developed.

For an online business, a detailed and in depth business plan is usually not necessary unless you are trying to combine your online business with a traditional business. For most online business startups, the detail involved with planning a traditional business is not required. However, it would still be beneficial to you if most of the topics were still covered, even if only briefly. Having a written plan in front of you will help you to focus on important aspects of the business.

You may not have thought much about your competition or outsourcing some of your work, but things like that will impact your ability to make a profit. And you will find this especially so in the beginning phases of your business. Even you are just opening a lemonade stand in the front yard, you will still need to know what Susie is selling her lemonade for on the next street over!

So, although a detailed business plan may not be required for an online business, I am going to include it here so you can at least look at and consider each section and determine yourself if it applies to your business.

Here I shall be discussing the basic steps involved in writing a business plan:

1. Executive Summary: The first step involved in writing a business plan is the executive summary. Here, include everything that you would cover in a five minute interview.

Explain the fundamentals of the proposed business: What will your product be? Who will your customers be? Who are the owners? What do you think the future holds for your business and your industry?

Make it enthusiastic, professional, complete, and concise.

If you are applying for a loan, state clearly how much you need and be precise in how you are going to use it. Also include detail about how the money will make your business more profitable, thereby ensuring repayment of the loan.

2. Business Description: After the executive summary, you need to write a short description of the business you are going into. You need to give a general description of the industry your business belongs to. You will write about your company’s mission statement, goals and objectives, business philosophy, as well as its legal form of ownership (sole proprietor, corporation, LLC, etc.).

Describe your most important company strengths and core competencies. What factors will make the company succeed? What do you think your major competitive strengths will be? What background, experience, skills, and strengths do you personally bring to this new venture?

3. Marketing Analysis/Strategy: The next thing to write (after the general description) should be your marketing strategy. For new or existing businesses, market analysis is an important basis for the marketing plan and will help justify the sales forecast. Existing businesses will rely heavily on past performance as an indicator of the future. New businesses have a greater challenge – they will rely more on market research using libraries, trade associations, government statistics, surveys, competitor observations, etc. In all cases, make sure your market analysis is relevant to establishing the viability of your new business and the reasonableness of the sales forecast.

4. Location: Writing down the location of your business is very important. Locations with greater customer traffic usually cost more to buy or rent, but they require less spending for advertising to attract customers. This is especially true of retail businesses where traffic count and accessibility are critical.

If an online business, you need to go into detail how you will attract customers to your website. General statements like “I will use Face Book ads and email marketing” will contribute almost nothing to helping your cause unless you have detailed statistical analysis of tests you have conducted or of another similar business you have been associated with. If you do not have any data upon which you reference your estimates, it could show lack of proper thought to the remainder of your business plan.

5. Competitive Analysis: Business by nature is competitive, and few businesses are completely new. If there are no competitors, be careful; there may be no market for your products. Expand your concept of competition. If you plan to open the first roller skating rink in town, your competition will include movie theaters, malls, bowling alleys, etc.

6. Management and Operations: Because management problems are the leading cause of business failures, it is important to discuss management qualifications and structure. Resumes of the Principals should be included in supporting data. If your business will have few employees and rely heavily on outside professionals, list these key people and their qualifications. If you are seeking financing, include personal financial statements for all of the principals in the supporting data section.

7. Personnel: The success of any company depends on their ability to recruit, train and retain quality employees. The amount of emphasis in your plan for this section will depend on the number and type of employees required.

8. Projected Financial Statements: These statements are usually helpful, but not necessary. You will develop and describe your strategies for the business throughout your Business Plan. In the financial section, you will need to estimate the financial impact of those strategies by developing projected Income Statements, Balance Sheets, and Cash Flow Statements.

It is usually recommended that these projected statements be on a monthly basis for at least the first twelve months or until the business is projected to be profitable and stable. Activity displayed beyond the monthly detail may be in summary form (such as quarterly or annually). The forecast period for most business plans is two to four years.

9. Summary Section: This section is where you will be able to attach or explain any detail not applicable to the previous sections. This section should be used to provide the financial statements of the Principle’s involved in the business and any other data you think an investor would be interested in seeing.

The main thing to remember in this section is not to provide new data, but to explain in detail data that has already been provided and to provide the support for that data.

When you sit down to compile all of the elements of your business plan, make sure you have each section able to stand on its own merits. This means you should not reference other sections sending the reader (your potential investor) back and forth between sections.

Do not try to write your business plan in one sitting. As I mentioned in the beginning, for a traditional brick and mortar business, it could take in excess of 100 hours to compile all of the information needed into a comprehensive but yet understandable document. For online businesses, probably not that long. But your final product should be well thought out, well documented and easily understandable.

29 May 2015

6 Stocktaking Methods That You Can Use

Stocktaking has been given importance by different food and beverage businesses nowadays. The primary reason for stocktaking is to identify early wastage and subsequently reduce it to the minimum. This will allow businesses to have efficient operations gaining the expected profit and achieving excellence in the service.

The definition of stocktaking has been already clearly explained, that is why many businesses see its significance in attaining success. But there is more to know and to understand about stocktaking, which can help you in running your business well.

There are various types of stocktaking and they are used at various times, some more, some less. These types of stocktaking occur on different occasions, thus you need to know when each type of stocktaking should be done.

When Does Stocktaking Occur?

Businesses have their own distinct requirement for stocktaking and each of them vary from one another. The time when stocktaking is carried out occurs differently from one business to another. The following are the different types of stocktaking that can be used:

1. Daily or End of Shift Stocktaking– can be done one-off or every day. This type of stocktaking is considered as the most accurate means to view the changes that occur with your stocks. It is also the choice when you have to identify any issues with your products. Stocktaking is done right after the shift or during business hours for more accurate results.

2. Weekly Stocktaking – is another type of stocktaking, which can provide accurate results. Stocktaking is done on weekly basis to identify the troubles associated with your products and to be able to fix any issues promptly. This can be used together with Line Checks for more efficient results.

3. Monthly Stocktaking– if you have a good track record of acceptable wastage levels, just like any small business has, then this type of stocktaking can be more applicable for you. Monthly stocktaking can give you a general picture of how your products perform. This type of stocktaking is perfect for small businesses.

4. Annual or Quarterly Stocktaking – needs to be done when preparing your accurate profit and loss statements, annual accounts and tax returns. Annual or quarterly stocktaking is a requirement for all types of businesses, to be able to determine the profit gained for the year. This will help you determine whether you have efficient management of stocks. If the result is unsatisfactory then you have to change your stock management methods or address any other issues that could have caused this.

5. End of Lease Valuation – if you are to sell your business, then the end of lease valuation stocktaking would be performed by the external auditors, to determine the monies applicable between the two parties.

6. Line Checks – after finding a problem with a certain product, during your daily or weekly stocktaking, line checks are used to check stock levels of the particular product to overcome the issues. It can be done for a single or group of products before, during or after the business hours.

Determining when is the best time to do stocktaking can improve your business’ operations. You can choose from the different types listed above, depending on your business’ requirements. But it is best to practice 2 or more types of these stocktaking methods. Combination of these stocktaking methods allows you to monitor and control your stocks better.

29 May 2015

How to Sell an Unprofitable Business

We’ve all been there! You worked your tail off for years, you put your heart and soul and everything else you had into building a business but it just didn’t work out. Sure the company makes money, and you’re able to meet payroll most of the time, but as far as being profitable… well that’s another matter.

And you finally made the decision, it’s time to get out.

So how exactly do you sell an unprofitable business? Believe it or not, even a company that doesn’t make a profit, still has value and is worth money to the right people. In this article I’m going to discuss several ways to sell an unprofitable business that you may not have thought about.

In my mind there are basically for potential ways to sell a company that is losing money.

The first way to sell an unprofitable business is to look for a large publicly traded company. I’m talking about companies who’s stock trades on the New York Stock Exchange or the NASDAQ. Look for a company that closely mirrors the industry that you are in or one that has a specific need for what your company offers. These companies often have large sums of money at their disposal, as well as stock in their own company to use as incentives. Just because your company is not profitable, doesn’t mean it would be unprofitable for them. Often economies of scale allow large companies to turn a profit when a small company would not.

The next way to sell an unprofitable businesses is to look for entrepreneurs. People who like to buy and run companies often have a higher risk tolerance. Look for an entrepreneur with experience in your specific market or industry. Why would an entrepreneur buy your money-losing business? Because many times it is cheaper to buy an existing business that is to start one from scratch. And as an entrepreneur, they may have ideas that you’ve never thought of to turn the business around… that’s what they do.

The next way to sell an unprofitable business is to consider the company’s current management. Sure, you were the owner, but have you been running things on a day-to-day basis? There’s a good chance that you had a management team in place, and those managers may want to buy the company from you. Current management can always find venture capital for seed money if necessary.

The fourth and last way to sell an unprofitable business is to look for foreign companies. Many times foreign companies are just looking to get in the front door in a particular US market. They just want a toehold in America, and you can give them one! There may be additional hurdles for this technique if your company is a technology company, in which case the US government may need to sign off on your sale to a foreign company. But if your company doesn’t deal in technology or another strategic industry, selling to a foreign company may be just the thing.

So there you have it four ways to sell an unprofitable business! Whichever way you choose, the next step is to quietly send out test balloons, that is, send out feelers to whichever group you’ve decided to approach. Look at it from the potential buyers point of view, and be ready to show them exactly why your company makes sense from their point of view and you will be just fine.

 

29 May 2015

Key Metrics In Evaluating Stocks – Doing Proper Due Diligence

Everywhere you read about stocks you always see the expression “due diligence.” What does that really mean, and how do you effectively do it? Simply stated doing proper “due diligence” means to use prudence and responsibility in researching a stock that is under consideration. It involves becoming familiar with that company’s operation, its management, and relevant fundamental facts related to company growth, profit and loss, business cycle, and how it rates among its peers. Fortunately, there is a great deal of readily available information regarding every publicly traded equity, and there are a number of simple ratios and other factors that make evaluating a stock, and comparing it to others in its field, a relatively straightforward process.

First of all every company traded on a public exchange publishes quarterly and annual reports which provide detailed information regarding historical background including: revenue, income, debt, risk factors, etc. Additionally, these documents are generally published with an explanatory commentary from the Chief Executive Officer, the Chairman, or President that puts the information in context and explains current management perspective. All of this information, however, is being published by the company whose goal is to put everything in the best light possible. It is important, therefore, to go beyond the verbiage, and evaluate the numbers.

Fortunately, for the everyday investor, it is not necessary to dig deeply into company published profit and loss statements to find the fundamental numbers required to do an evaluation, this has been done for you by a great number of free financial websites including Yahoo Finance, Google Finance, and MSN Money, to name a few of the larger ones. I am not suggesting that delving into financial statements and becoming totally familiar with every financial aspect of a perspective stock purchase is a bad idea, I’m simply saying that it is not necessary to obtain the basic information required to make an informed decision. It is my opinion, that once you have a good understanding of what it is that a company makes, or what service it provides, then there are roughly ten metrics that you can use to compare it with its peers, and to determine if it is a stock that you want to purchase.

REVENUE

Revenue is perhaps the most important metric. Without revenue a company cannot survive. Generally by gaining an historical knowledge of what the revenue trend is, one can determine where a company is in its growth cycle. Like us, companies tend to have rapid growth in their early years, slow in maturity and stop growing and even shrink toward the end of their life cycle. Where a company is in its growth cycle is very relevant to you as you are making your investment plans which are also in part determined by where you are in your life path.

EARNINGS

While companies can exist for long periods with little or no earnings, it is only under very unusual circumstances that one would want to buy into a company that is not generating income, or doesn’t appear to have the opportunity to generate income in the very near future. Whether income is growing or declining is easily determined by historical data. The simple ratio of current share price to earnings (PE ratio) compared to historical PEs and also compared to the PEs of other companies in the same field will provide a quick indication of whether a stock is priced appropriately, too high, or too low. As a buyer you want to find a stock that has an irrationally low PE compared with its peers. This often happens when the market overall takes a significant drop, or when the sector drops due to some factor that is irrelevant to the stock in question. Care must be taken to be sure that the low PE isn’t because the company is in trouble and the stock price is dropping due to an anticipated drop in earnings.

Earnings per share (EPS)is also readily available information on just about every financial website, and specifies how much of the corporate earnings can be allocated to each share. This is important when looking at dividends, for example, to determine how much of the available funds are being paid out in dividends and how much is left over for company growth, dealing with unexpected problems, etc. If EPS is negative, or if dividends equal or exceed earnings, it obviously is a red flag and means that something is amiss, or there are special circumstances that a prospective shareholder needs to know and understand.

Profit margins and return on equity vary greatly from industry to industry, and a comparison with like companies will reveal how well the company of interest is doing versus its peers. There are certain specialized companies such as Master Limited Partnerships, Real Estate Investment Trusts, and Business Development Companies, which fall under a different set of regulations than the vast majority of corporations giving them tax free status and a requirement to distribute 90% of their income. In these unique operations, other metrics such as distributable cash flow, interest rate trends, and hedging may play an equal or more important role than current earnings in the evaluation process. If you are interested in these areas, once again, the internet is an excellent source of additional information.

DEBT and EQUITY

The RATIO of DEBT to EQUITY is a very important metric especially in industrial or manufacturing type companies. It is clearly better to have more equity than debt, therefore when equity is divided into debt in a healthy company the debt to equity ratio should normally be less than one.

ASSETS and LIABILITIES

Similar to debt and equity, it is logical that under ordinary circumstances that it is favorable to have more assets than liabilities. As a general rule you will want to see assets at least double liabilities. When you divide assets by liabilities it is called the CURRENT RATIO. And you should be looking for a current ratio of at least 2.

BOOK VALUE PER SHARE

Book value per share refers to the amount of equity each share holder has in the company determined by dividing the net value of the company (assets less liabilities) by the number of shares outstanding. Quite frequently successful companies’ share prices will significantly exceed book value due to the market’s perception that annual income is growing and sustainable. At times a good company may sell at or below book value. This is often an indication that the market is undervaluing the stock for one reason or another. A company that the market is misreading and is selling irrationally below book value can often be a buying opportunity. Different sectors have different typical book to share price ratios, and it is important to see how the share prices of other equities in the same field relate to book value as a comparison.

SHAREHOLDER POPULATION

Who owns a stock, and what their buying and selling history is, can be very significant in determining whether or not an equity is a good candidate to pursue. Statistics on insider and institutional buying and selling are generated by law, and can be quite telling as to the future of a stock. Would you rather buy a stock where the INSIDERS (Officers and others in the know) own a significant share of the company and continues to accumulate, or a company where insiders are selling? Similarly, what does it tell you when large INSTITUTIONS are accumulating? What does it tell you when they are divesting?

Again, this information is published and available on most free financial websites or can be had for the asking from any broker. On the other side of the coin are the short sellers. When there is high SHORT INTEREST (shares are being borrowed and then sold with the hopes of buying them back at a lower price in order to give them back to the original owner) it means that there is a belief among the short sellers that the price of that equity will go down. The question to ask is, what do they know that you don’t, or if you want to buy, what do you know that they don’t? Short sellers tend to be professionals, and often are involved with large successful hedge funds. As a general rule when short interest is high, and growing, it is a time to be very wary when considering a purchase. Statistics on short interest, like those of insider and institutional ownership are published and available readily on the internet.

SUMMARY

Every time you see the phrase, “Past performance is no guarantee of future results,” remember that while it is no guarantee it is probably the best indicator available. If you take the time to learn about prospective companies and understand how they operate, and then review their historical performance in light of the relatively few metrics listed above, you will be way ahead of the vast majority of investors. Remember, this information is readily available, and as you can see from the above is not complicated to evaluate. It does take a little time and effort, and only you can determine if that effort is worth while. There are always plenty of people out there more than happy to tell you what to buy. The only question that I suggest you ask yourself is: Who cares more about your money than you do?

29 May 2015

Establishing the Value of Your Business

Some owners have a figure in mind of what their business is worth; often it’s inflated because of their emotional attachment. On the other hand, many owners undervalue their business because they do not understand the technicalities of the various valuation methodologies and which of these is most appropriate for their specific business type.

Experience has shown that there is also a large percentage of business owners who do not know what their business is worth, nor how to go about establishing its true market value. Link uses many of the established valuation methodologies, often using a range of different options in combination to establish the most accurate figure. This figure is then further scrutinised by comparing the theoretical value with current and historical sales information from the Link database. This ensures that the valuation appraisal accurately represents what a purchaser will pay in the current market.

Profitability and Risk

Most businesses are valued based on a combination of assets and the cash surpluses generated. The risk factor of the specific business is also taken into account. This is the degree of threat from existing or potential competitors, changes in technology or consumer trends and many other factors that may affect earnings or costs.

“Barriers to Entry” is another issue that is taken into account and involves evaluating the degree of difficulty or barriers a competitor may face should they decide to establish a similar business. For example, businesses which require minimal capital investment or technical knowledge are said to have a very low barrier to entry and consequently, may have a lower value.

Most businesses are valued on a “going concern basis” rather than the value of company shares. Purchasers are reluctant to buy company shares for a variety of reasons including the unknown possible future tax, credit or legal liabilities, or the danger of inheriting contingent liabilities based on historical trading. The price of the business is usually made up of three components:

1. Intangible assets.

The future earning potential of the business reflective of historical earnings potentially including intellectual property (IP), right to products or services, benefits of a lease, contracts, techniques and procedures as well as goodwill.

2. Tangible assets.

The fixtures, fittings, plant and equipment used by the business to generate its income. This component is normally calculated according to its depreciated book value.

3. Stock.

Stock purchased by the business for resale or manufacturing purposes. It is valued at the historical cost price. An allowance may be made for old or obsolete stock.

Valuation Methodologies

Generally, two or more of the following methods are used to appraise the value of a business:

1) Industry Ratios

2) Asset Based

3) Earnings Based

4) Market Based

The appraised value is then subjected to the “sanity test”. Some businesses are in a growth industry where their track record is well established and their projections solid. Other businesses may be in what is known as a sunset industry where projections are less optimistic. Many factors affect the true market value of a business, including business sector, economic conditions, business cycles, interest rates, labour availability and a whole host of other influences. Similarly, the value of trademarks, brands, intellectual property and goodwill is not always easy to quantify. Balancing all these factors with the book valuation of businesses establishes the true market value.

1. Industry Ratios

The value of the business is based on its sales record compared with industry averages. This method is often used for small businesses and franchises where there is an established track record within a specific industry. It may also use a formula of multiples of weekly sales or an average derived from sales of similar businesses.

2. Asset Based

In businesses where there is history of low earnings or perhaps even losses, the Asset Based approach is generally used. Using this method, the value of the collective assets (both tangible and intangible) will determine the value of the business. In many cases there will be an element of goodwill payable, even where a business is not trading profitably. Although the assets alone may be purchased on the open market, there is often value in purchasing assets as a going concern, which may include customer lists, relationships with suppliers, an assembled workforce, brand awareness and reputation, among others. Calculating intangible assets, including goodwill requires some subjective judgement coupled with experience and the use of market comparisons.

3. Earnings Based

Generally the earnings based approach is used for larger businesses and places emphasis on earnings rather than assets. There are various methods used when employing the Earnings Based approach to appraisals. Return on Investment (ROI) or capitalisation of earnings is common, as is the application of earnings multiples.

Earnings Based value is determined by considering:

A. The level of return that could be expected by investing in the business in question, taking particular account of the perceived level of risk and realistic costs of management.

B. The “industry average” multiplier on true earnings. This multiplier is market driven and varies according to perceived industry risk factors, perceived earnings sustainability and historical comparisons. The multiplier used most often in this approach is EBIT (Earnings before interest and tax) but others are frequently used and it is critical that you are comparing “apples with apples” when discussing multipliers.

C. The fair market value of the unencumbered tangible assets of the business e.g. plant, fixtures, fittings, equipment, stock and the tangible and intangible assets which may include intellectual property.

EXAMPLE OF ASSETS BASED METHOD

A dry-cleaning business has been breaking even and the owners would like to sell and move on. The business has tangible assets with a total book value of $135,000, $5,000 of stock (all saleable), no bad debts and will pay all creditors. The fair market value of the tangible assets has been assessed as $110,000 and intangible assets and goodwill at $15,000. Therefore the fair market value of this business is calculated as follows: $110,000 (tangible assets) %2B $15,000 (intangible assets and goodwill) %2B $5,000 (stock) = $130,000.

EXAMPLE OF ROI

Tom’s manufacturing company produced an adjusted net profit of $160,000 (EBPITD). The net assets (Valuation of plant and stock) for the business were $240,000 and a fair salary for Tom (owner) is $70,000. If someone was looking to invest in this business they could expect a 25% ROI, as this business offers a low to medium-risk investment opportunity.

To calculate the ROI value for Tom’s business:

Business profits (EBPITD) ………………………$160,000

Minus owner’s salary ………………………………$70,000

Profit ……………………………………………………$90,000

Return on Investment

Profit of …………………………………………………$90,000

Divided by desired return ………………………………..25%

Valuation appraisal ……………………………….. $360,000

4. Market Based

There will be certain instances where no amount of sound theory or application of complicated methodologies alone will suffice. It is not uncommon that a willing buyer and a willing seller will agree on a value that defies all traditional appraisal methodologies. In other cases the use of traditional appraisal approaches produce unrealistic values that have no bearing on market realities. It is important in any appraisal to overlay relevant market data and multiples achieved in similar businesses “in the real world”. Unfortunately the level of information available in Australasia is not as sophisticated as that available in other parts of the world.

How will taxes affect your pay out?

There are tax issues you may need to consider when selling your business. For instance, if you sell the plant and equipment (or company car) for more than the depreciated book value, you may have to pay back some of the tax you claimed when the items were depreciated (depreciation claw-back). Other tax liabilities may be incurred on the profit of land and buildings if they are included in the sale. It is vital that you fully understand your tax position when selling your business, and professional advice should be sought.

“Any desktop valuation involves a substantial amount of subjective judgment. The real test of the value of a business enterprise, like any asset, is what a buyer is prepared to pay.”

29 May 2015

Retail – How to Organize Your Receiving Area

Receiving new stock in a retail store needs to be a disciplined process if the business is not to lose money from lost, damaged or stolen goods.

Too often, retailers focus on the front of hours, the retail shop floor, to the detriment of the back of hours, back office functions which can make or break a retail business.

Many retail businesses do not even have a receiving area where goods coming into the business are placed and processed. This is a huge mistake.

I was involved with one retail business recently where more than two thousand dollars worth of stock was uncovered when we were reorganizing the back room. This stock, which have been thought to have been lost, was found hidden in a wall cavity behind a desk.

The cost to the business was not only the cost of the stock which was unsaleable when found but also the opportunity cost. This was a new line which the head office had ordered to trial. The stock loss was covered up. This was able to be done because of a poor goods inward process at the store level.

Here are some simple rules for organizing the receiving area of a retail store which should help avoid lost stock, mistakes and theft:

  1. Require that all goods arriving in-store must be signed for.
  2. Lay out goods inwards rules and responsibilities. Post these in a public place in your business but away from customers. Train all new employees in the process.
  3. The process needs to explain the steps involved in getting new stock from its arrival in the business to the shop floor and how long this should take.
  4. Set aside an area, no matter how small, where all goods are placed when they arrive into the business. Include in this an area for each step of the inwards process: receiving, checking, pricing, storage and damaged goods.
  5. Establish a rule that the goods are not allowed to leave this area without permission of a manager.
  6. Follow a clockwise approach as this is often found to work best. The goods come is and are placed to the left of a back room or a storage apace and move right to the next section and so on. If the business as such space of course.
  7. Management should check in the stock arrivals process to ensure that processes are being followed and appropriate checks and balances are working.
  8. Try and get your suppliers to provide you with invoices electronically before the goods arrive. This will save time and paperwork. It will also provide an external data feed and eliminate an opportunity for employee fraud should they receive less stock into the business than you actually receive.

Once you have established your goods inwards process and area, get all employees together and explain the new processes to them. Lay down your business rules and explain why you are going through this process.

Get the goods inward process right and you can expect to receive shrinkage, speed up the time it takes to get stock to the shop floor, reduce mistakes and make better quality business decisions.

29 May 2015

5 Reasons Why IT Support is Essential For Your Business

Every medium to large business that has experienced computer downtime or data loss will know the pain and the worry that comes with it.

There are at least five good reasons why IT support is essential for any business, but before we get to that it is worthwhile looking at some of the temptations to avoid using mainstream IT support.

Many medium-sized businesses have grown from one-man operations where one or two people were responsible for just about every administrative and computer task that was required. Computer systems grow slowly and it is tempting to oversee the development of those systems in-house. It can become a major financial commitment to either outsource or internally staff and information technology group.

If this sounds familiar to you, you will probably also have experienced at least one major data loss or technical hitch that eventually frightened your business into taking some action. As you look back at your experience it is easy to understand how it happened but it is equally easy to see that the solution would have been to acquire IT expertise in an early stage in your organisation’s development.

Here are just five of many reasons why IT support will not only ease your technical concerns, but could very easily be the saviour of your business.

  1. Cash Flow. Internal accounting systems are vital in providing management reports that predict cash flow and tax reporting issues. Managing cash flow is one of the most vital tools in any business, and it is imperative that you not only have correctly maintained software, but also backup and data protection systems in place.
  2. Data Management. Apart from the accounting systems, adequate business reporting requires the use and manipulation of all sorts of data generated through the business is operational activities. This data can be used to plan for future developments and to help predict management issues before they actually arise.
  3. Inventory. Any business that is involved in maintaining stock of must have a date reporting systems to ensure that adequate stock levels are maintained at all times. Managing the flow of stock incorporating the ordering of new infantry is vital to the cash flow of the business.
  4. In-House Technical Expertise. As systems grow larger, there is an increased likelihood that corruption of data may occur from time to time. IT specialists are vital to the day-to-day running of any organisation by being able to quickly remedy problems as they arise and two in Shaw there is minimal loss of time or productivity.
  5. Prevention. One of the most valuable resources available to any organisation is that of data loss prevention. IT resources teams help to eliminate the possibility of data loss which could place a stranglehold on any business.

The five areas we have discussed here highlight the importance of having managed IT services involved in every aspect of the business.

Small businesses which recognise the importance of this support at an early stage in the development will rip the benefits in later years as the business grows and prospers.

Successful businesses recognise that they face potential ruin in the face of technological breakdown or significant loss of data.

Competent IT services are the best insurance policy business could have.

29 May 2015

How Can You Avoid Business Liquidation?

A company liquidation threat can be tedious to handle. You will have so many financial concerns occupying you and very unhappy staff and creditors ringing your phone off the hook for payments. By carefully looking at your current position and expenses, you might be able to weigh liquidation options and find out that insolvency can be avoided. When you are keen enough, you are likely to find other better solutions than bringing your company or business to an end.

1. Identify potential cash flow

This should be the first step that you take towards saving your business from failure. Go over your current assets and find out what potential cash flow options you have and whether they can do anything much to save your company. High cost items in your possession like vehicles and property can save you if you are bold enough to sell them and you are able to release the monetary potential they hold. You actually have the option of selling the physical property and retain the lease of the business sits on the property so that you do not have to relocate. As for any business vehicles, why not sell and consider hiring so on a temporary basis until business improves? A smart move can be all you need to pay off debts and save your company from liquidation.

2. Sell you inventory

No inventory is too small to save a financial situation for your business. If you are faced with the insolvency situation and you have excess products or stock you should consider selling it off as fast as you can to free up some money. By looking at balance sheets, it is easy to tell which stock is not bringing in any profits and you can sell it fast and use the money to get more successful and profitable stock that can help save your business from liquidation.

3. Offer stock on wholesale

If you are not sure how to go about this, start by contacting professional stock seller. The professional seller will be able to tell you how much the stock is worth and even help you find buyers for any stock type and quantity that you have. The thing is that you have to remember to put the money generated from the sales into good business use. It really does not make any sense to release your investment value only for you to forget the reasons behind why you had to go that far in the first instance.

Important to remember is that business liquidation is sometimes the only option you have as a business and when you choose it on time, you will save yourself the worry and hassle especially with creditors. If this is the only option you are left with, find a licensed and reputable insolvency practitioner to help you through the situation that can be depressing for many business people. Such a professional will advise and guide with your accounts and the process in general so you have a better experience dealing with the business failure.

29 May 2015

How to Make Money With This Stock Photography Business Plan

A stock photography business is a method to earn more money in the business of photography. Stock photographs are a collection of photos which are licensed for use in various purposes. These are used by people like book publishers, graphic artists, advertisers, etc to add creativity to their works. So due to the rising demand of such photos, selling stock photos have become a business by itself.

When you intend to start a stock photography business and sell stock photos to earn money, you must keep in mind certain things. Always choose and filter the photos you intend to keep in your list. In a stock photography business, more often quality is not as important as conveying the idea. People opt for stock photography, either when they do not have the time to go for a photo shoot or they are not able to acquire the required photo. So select and keep photos which are capable of conveying ideas across.

If you are selling your photos to a stock photo agency, you will have to comply with their terms and upload the photos in the specified formats and resolutions. Or if you are keeping the stock photos by your self, always go for a format and resolution which would suit the requirements of the clients.

Stock photography must not have any copyright or watermarks on it. These photos are intended for sale and reuse. So there is not point in putting a copyright mark on it. And if you are hosting your photos on a web site, be sure to use the apt keywords and tags so that search engines find you easily. You can refer the leading stock photo hosting web sites like ShutterStock, Fotolia, and so on for ideas on putting keywords and organizing the stock photos.

While, if you intend to sell your stock photos to a stock photo agency or web site that is also good. By doing so, you comply with the agency’s terms and either you will be paid a handsome amount for the pictures or each time somebody downloads your photograph, you get a percentage specified. This way, stock photos are means of generating income over and over again.

You can also take orders for producing stock photographs. The agencies will give you topics on which you need to take photos. This is a more effective way of selling stock photography. In the conventional method, the agency takes only selected photos out of the hundreds or thousands you submit. But when you capture photos based on the topic they give, the possibility that majority of the photos get selected is high.

Microstock is the latest form of a stock photography business and the photos are licensed for much lower fees. The sales of these kinds of photos are also on the increase. Microstock photos get sold in bulk and hence the photographer gets a fair enough amount with the sale. Though the amount per download is less compared to the common stock photos, the sale of Microstock is more. This ensures that the photographers get more money from selling Microstock photos.

29 May 2015