Do You Know the Answers to These Questions?
October 23, 2018
Small business and SME owners have a constant swirl of questions before them but often fail to know the correct answers. These might be questions regarding operations, startup expenses, working capital, or expansion. Owners need to know the answers not only for themselves but for possible lenders or investors.
Rather than being caught by surprise when an answer is needed, the following questions should be reviewed and necessary responses known beforehand.
1. What are the gross profit margins or expected gross profit margins on various products or services?
Different products and services contribute different amounts of gross profit to a business. Owners should know not only the monetary amounts but also the percentage of gross profit margin that each produce. When these figures are known, owners know where to place emphasis on what will be most beneficial for the business. Detailed answers to this question will help put a business on the right path to success.
2. Who is the competition, and how is my business different and/or better?
A great business principle is for business owners to know the competition. They should know their own businesses “inside and out” but also details of their competition as much as possible. A critical self-evaluation of one’s business utilizing a SWOT analysis is a perfect starting point. This is a way to visualize and understand the strengths, weaknesses, opportunities and threats (SWOT) that exist in any business. With this knowledge, business owners are better able to compare their business with the competition...and then beat them at their own game.
3. How much cash is being burned each month?
If a business is not cash flow positive, an important question to answer for the owner, investors, or lenders is how much cash is being burned (or used) each month before the business becomes cash flow positive. If a cash flow budget is not prepared, then the owner will not be able to answer this important question. Going a step further, a monthly budget variance report should also be prepared. This ensures that the owner understands the differences between the business' actual and predicted results.
4. How are you marketing your product or service now, and what changes do you see in the future?
Marketing decisions must change as a business goes through its various organizational life cycles...formation to growth. Marketing plans that worked during the initial startup or product rollout need to be revised as a business matures. Owners should be able to describe current marketing plans and those for the near future even though internal or external variables might necessitate some changes. Without a solid marketing plan, a business simply operates from day-to-day without a real direction for the future.
5. How are you going to use any added funding?
Money can be used in a variety of ways in a business. Whether additional funds are added by the owner or secured through lenders or investors, the business owner must know in advance how the proceeds will be used...working capital, equipment, marketing campaign, inventory, expansion, etc., and how these additional funds will allow the business to grow and succeed.
6. How much equity and debt is in your business and the percentage of each?
Owners should always know the distinction between how much equity there is in the business and how much debt exists. Small business and SME owners have to be careful not to get over extended on the debt side. In fact, any additional investors or lenders would want to know how much “skin in the game” an owner has in the business. This basically means how much of the business is being financed with equity (owner’s money) or debt (borrowed money).
Questions are easy to ask but answers can be more difficult. Successful business owners anticipate both questions and answers.