RightWay New Zealand - Blog

8 questions to ask before starting a business

Written by RightWay | 5 May 2021

Are you thinking about starting a new business but not sure where to begin?

Starting a business isn’t easy. What if it goes to plan? What if it doesn’t? Sometimes it can be better to look deep into your heart and soul and ask these questions upfront before starting a business – rather than finding out when you are smack bang in the middle of it.


1.
Is my business plan good enough?

A good business plan is multi-dimensional and examines a business idea from all disciplines including HR, accounting, legal, operations, finance, and marketing.

For a one-person band, a good business plan can exist only in the mind - but generally it's a good idea to record the plan. And given its 2021, recording the business plan securely online is a good idea.

But a business plan should be more than just a collection of words, but rather a set of well thought out scenarios including robust detail on how the scenario will play out financially. Express the business plan in a financial forecast of the balance sheet - profit and cash flow is essential if you want a road map to grow your business.

Planning is not a one-time exercise, or something you should do every few years. Planning is an every day activity for a business owner. The faster your business is growing or changing, the more often you should plan and forecast. Quarterly is a good balance between doing it too often, and not often enough.

2. Is my business model cash flow positive?

Cash flow is not a hard concept. The general idea is that you consider when cash comes in and also consider when cash goes out. Simply put, cash needs to come in before it goes out or you run into a problem.

Do you provide the good or service before getting paid? Or can you charge a deposit or subscription to make sure you get money in before it goes out? Can you work with your creditors or debtors to move the model more in your favour? Or can third party funding bridge the cash flow timing gap that exists in your model? There is generally a lot to think about upfront when it comes to the timing of cash flows expected in your new business.

3. What return can be expected from marketing activity?

How are you going to market your products? Who are you marketing them too? These days there are lots of ways you can spend money marketing online. For any marketing spend, you need to see a return on investment that is appropriate, given your gross profit levels.

An easy example is a business trading at a Gross Profit percentage (GP%) of 50% needing a return on marketing spend of 200% to just break even. If the GP% is 30%, then you need return on marketing spend of 333% to simply stand still.

Being clear on how much you are spending on marketing and the return you are getting is key to running at a profit.

4. Are you going to charge the right price?

No matter what industry you are in, there exists a spectrum of price points for the good or service you are offering. There is the most expensive operator in your industry, the cheapest operator and everything in between.

Where does your business sit on this price point spectrum? Unless you have high volume, being the cheapest might not be the best strategy.

You should make sure you are charging more than the average price, if you are going to compete on anything other than price (quality, speed, convenience, service etc).

Overcharging can lead to bad outcomes such as lowering demand. But undercharging can also lead to bad outcomes such as insufficient cash flow. Neither is good. Making sure you strike the right balance in your pricing can help you build a sustainable business.

5. Do you have the right advisors?

You can pay for formal business advisors/mentors, or you just have some people in your network that you bounce things around with from time to time. It's good to get a broad range of advice when making key business decisions, or just to challenge the assumptions or blinds spots that you have in your business plans.

You don’t know what you don’t know, so if you try to think it all through by yourself you are likely to fail. 

6. Do you have the right business apps?

These days you can get cloud-based apps that are user friendly but offer you analytics, reporting, or insights into your business data.

Have you got the best CRM system for your industry? Does it link in with your accounting system? And does that link with your payroll system? And does that connect with your workflow scheduling system?

Finding the right stack of apps for your business can cost you upfront - but saves time in administration and can improve the customer experience.

7. Do you have the right business structure?

Should the business be set up as a company, partnership, trust, or sole trader? How lean should operating costs be? What level of debt is appropriate? Should you take shareholder drawings or earn a PAYE salary? There are lots of things to think about when you structure a new business.

Have you got a good understanding of your proposed structure? Have you stress-tested this with advisors, accountants etc to make sure it is the right structure?

8. Do you have a robust plan for taxes?

Some find that they work best by saving it as they go. Some try to rob tomorrow to pay for today’s taxes. Those who don’t plan for it at all can find paying taxes an uncomfortable experience.

Understanding what taxes you will need to pay when, is key to making sure you can navigate cash flow and keep on the good side of Inland Revenue. If trying to estimate your taxes seems confusing, then reach out to your accountant.