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Business Plan

Have you ever asked yourself why so many businesses are going bankrupt? Why do so many companies close after such a short while?

Well, I can save you some time contemplating this issue. The prevailing attitude in the Israeli market is: “I know more then you, therefore I don’t need your help”. One of the first questions I ask a business owner is “why did you decide to open this particular business?” Mostly, the answer is based on their experience as an employee in that field. If this article were intended for the British audience there wouldn’t be a need for so much elaboration, but since it is for the Israeli market I need you to understand. Even if this person had only worked 3 months in some business, he would still be convinced he could open the same type of company – he probably quit his job thinking he could do it much better than the owner that had managed this business for over 20 years!

It’s not even funny. The amateurism here is almost criminal.  People think they can just start a company, buy an 800 line and act like an empire. Maybe that’s why we don’t believe any more when we see advertising saying: “credibility, professionalism and experience…”

Don’t get me wrong, I’m not saying it’s impossible to open a business after only 3 months of experience. The truth is that there are quite a few that have done it and succeeded, but those that did probably had a system. After all, relying on luck won’t get you far.

Think before you act!

In business you should create a business plan. A business plan can serve four main targets: feasibility study, credit funding, business improvement action plan or substantial strategic change plan.

In this article I’m only going to focus on the first target – the feasibility study. This plan allows the entrepreneur to check if his idea has the right to exist. A lot of ideas sound great among friends, but in practice the costs versus the price the customer is willing to pay isn’t always worthwhile, the production quantity to make a profit isn’t worthwhile or there isn’t even adequate demand for the product to begin with. A business owner that wants to open a grocery store in a small community with 100 families needs to know that an average family’s shopping cart is about 4,000₪ a month. Most of it will be purchased from the big chain market stores and only around 20% will be purchased from the local grocery store – around 800₪ a month. Of course not everyone will buy from him. After all, people can go to a convenience store on their way home when they stop for gas or buy from the grocery store near their office. So let’s assume he will get 50% of the clients which means that his turnover won’t be more than (800₪/2) x 100 = 40,000₪. The average profit isn’t more than 20% on grocery products so end up with an operating income of 8,000₪. Out of this amount he’ll need to deduct: rent, property tax, an accountant, banks commissions, manpower, a manager and all of this before we talk about renovations. You can easily see from this study that it’s worthless to even start this business. Unfortunately, most new business owners open first, then deal with the results.

There are a few other things that aren’t always taken into consideration. The first is understanding any seasonal aspect to the business. Ice cream shops, gyms and even catering businesses have seasons and the income fluctuations throughout the year can be significant – first check annual trends and then figure out what cash flow you’ll need for the slow season.

The other thing you’ll need to take into consideration is how your competitors will respond when you try to take away business from them. They’ll fight you, they’ll do more advertising, lower prices and even sell with a loss in order to get rid of you as a competitor. Pay attention to that and price accordingly. Most important, have reserves ready for the war – best case scenario you’ll just return the balance to your bank.

A feasibility study isn’t just for new businesses, but can be used for a struggling businesses as well. Does it make sense to take another loan or spend more money on marketing and advertising? Sometimes you find the business has no right to exist and never had. I believe that a business that can’t produce an excess income for it’s owner’s salary has no right to exist either.

I recommend getting assistance from a professional when you want to do this study. It’s a critical step and could be one of the most profitable investments for your business.

 

Good Luck,

Elad Hadar.

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