Why proper planning is important for a new business to survive

By Sky Accountants

For people who want to start a hospitality business, it can be easy and convenient to just buy an existing business.  However, problems often arise when you purchase a fully-functioning food business. With awareness and proper planning, you can avoid many of these problems. 

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If you want to buy an existing business, you need to check the following:

  • The last 3 years of financial statements;
  • Gross profits on food and beverages;
  • Wages as a % of revenue;
  • The average EBITD calculations (Earnings Before Interest Tax & Depreciation);
  • Licenses to make you they are in place such as liquor, food and health & safety;
  • Risk and ROI (Return on Investment); and
  • Potential handover timeframe from the previous owner to you.

Cashflow is king and while a considerable amount of money will come in, a considerable amount of money will go out as well; not just on the profit and loss statement either, but in new renovations, loan repayments and tax office payments. 

Many expenses are totally predictable, including rent, utilities, staff costs and purchases.  It is a clever idea to start planning these costs by using forecasts even before opening.  The ideal tool to do this is a cashflow forecast.  If you invest in educating yourself, the return will pay dividends later.

The most common cause of new business failures is not having adequate cash to meet expenses in the first 6 to 12 months of the business opening.  Before opening, you should forecast your cashflow needs and seek preliminary legal and accounting advice. 

It is also best to research on:

  1. tenancy or lease matters
  2. stamp duty and lease agreement
  3. statutory requirements, such as licenses and insurance.

It’s also good to forecast telephone and internet installation, power connection and bond, equipment, fixtures and fittings, signage and initial marketing, staffing and wages, and initial stock purchase.

You can visit your prospective site and take foot traffic numbers and passing cars.  Market research is very important.  Speaking with existing business owners about their issues will also be helpful.  Due Diligence is a very important part of buying a business. 

You also need to check if the location is suitable to your target demographic and understand how the traffic will drive customers to your business.

Planning will give you the chance to predict potential opportunities and cash traps and experts will be able to help you find solutions. It is important for your accountant to check your forecast, so you can compare information and predict possible problems.

Make sure your plans are all drawn up, outlining equipment, plumbing, lighting, ventilation and electrical plans.  It will save you from potential changes in design and construction and overspending.  Study the under-slab drainage, grease trap and three-phase power.  You should have enough cash for your predicted costs plus 20-30% extra to allow for adjustments.

Before starting construction work, seek for local authority approval from the health department, building department and plumbing department.  The council needs to inspect the construction and issue certificates as well.  Use a hospitality designer or architect and it will be well worth it.

Consult the experts about business planning.  Click here to speak to Sky Accountants who specialise in the hospitality industry.  Sky Accountants Sunbury are big believers in the use of professional tools to manage your business.   The right tools can streamline your processes so that the business is best placed to trade profitably.   

 

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