by Klaus Walter

Business start-ups are particularly successful when they are well thought out and carefully planned. If you belong to the group of latent entrepreneurs, i.e. you want to start a business within the next three years, you should know the UFO principle.

The three letters stand for 'You' (U), 'Financiers' (F), and 'Organisation' (O). In this order, you should check whether starting a business is feasible before you start writing a business plan.

Below you will find some useful and basic information on the three issues.

You (U)
What are your motives for seeking self-employment? Is it the desire for independence and self-realization? Do you want to implement your own ideas, achieve a higher public profile, or perhaps a higher and more performance-related income? Are you perhaps in trouble with your current employment, do you want to avoid the risk of quitting or even find a way out of unemployment?

As important as these motives maybe, they should not obscure the following disadvantages of self-employment:

• No secure job
• Basically no insurance against unemployment
• No secure and regular income
• No regular working hours, less free time and holidays.

So ask yourself the following questions:

• What are my professional qualifications?
• What are my commercial qualifications?
• What relevant experience do I have in the profession?
• Do I think I have sufficient commercial skills to run a business and develop it in the long term?
• What does my personal environment (family, partner, and friends) say about my plans? Can I count on their support? In what form could the support take?
• On which people does the success of the business depend?
• What happens if I become ill for a longer period of time and cannot run the business?
• What insurances do I have or need?

Financiers (F)
The most unanswered question in business is: 'Where will the money come from? First of all, from your own pocket, you should never take the leap into self-employment without equity capital. In most cases, however, your own capital will not be sufficient. So clarify early on how your venture is to be financed as a whole. The 3F rule (family, friends, financial institutions) helps here. In addition, there are government support programs for entrepreneurs in many countries. 

When your project becomes more concrete, you will have to prepare various foundation planning calculations anyway. At least the following plans must be available for setting up a business:

• A capital requirement and financing plan
• A turnover and profitability forecast
• A liquidity plan

The capital requirement for setting up a business is the amount needed to start the business and to survive the initial set-up phase financially. The capital requirement is used for:

• Fixed assets (e.g. equipment, vehicles, warehousing).
• Current assets 1 (e.g. inventory, raw materials, etc.)
• Current assets 2 (liquid funds)
• Start-up costs

A self-employed existence is only worthwhile in the long run if a sufficient profit can be earned. This can be planned on the basis of a sales revenue and profitability forecast. The profit should be high enough to include the following items:

• An appropriate imputed entrepreneurial wage for private households and living expenses.
• Individual social expenses for sickness and old-age pensions
• The return on equity and risk premium
• The individual income tax or corporate income tax to be paid
• Repayment of loans taken out

In the sales revenue and profitability forecast, you determine whether the revenue is realistic and whether sufficiently high profits can be generated. Whether your company will have sufficient liquid funds, especially during the start-up phase, cannot be deduced from this preview.

Being liquid means being able to service liabilities on time. Meeting payment obligations is not only a matter of honor but also a matter of existence. If at a certain point in time the expenditure side is higher than the income side, a profitable business can become insolvent, i.e. an illiquid business. Therefore, the following principle must be observed:

Liquidity comes before profitability

With liquidity planning, shortfalls can be identified quickly and measures can be initiated at an early stage if there is a risk of a shortfall.

Incidentally, these plans are not only important for the start-up and development phase of the company but they should also be constantly updated as a controlling instrument within the framework of target-performance comparisons.

So ask yourself the following questions:

• How much capital do I need? How is this divided up?
• What own funds are available?
• What collateral could I offer a financier?
• What sales revenue, what costs and what profit can I expect?
• How can I determine the sales revenue?
• Which costs are variable and which are fixed?
• Do I know the contribution margin and the price floor of my services and/or products?
• What is my pricing strategy? How can I determine prices?
• What investments will have to be made?
• How long will it take before I make a profit for the first time?
• What reserves for contingencies will be needed?
• How can I ensure liquidity?

Organisation (O)

Once the personal prerequisites (knowledge and skills) and the financial basis have been analyzed and evaluated, the next step is to consider how an idea can be turned into a business and how it should be organized. A number of important points must be in focus.

There are many ways to set up a business. The most common ways to become self-employed are listed below:

• Setting up a new business
• Taking over an existing business
• Participation in a company
• Self-employment within the framework of franchising

You can

• Develop new products, services, or processes
• Develop new markets, new sources of supply
• Work in new forms of organisation

Before starting a business, the organisational structure of the company and the operational processes should be coordinated. Start-ups with little commercial experience sometimes think that they do not need this as a small company. However, a clear and appropriate organisational structure helps to avoid duplication of work, unnecessary costs, and mistakes. In this way, the appropriate organisational structure also has a positive effect on the company's image.

In our experience, clear ideas play a decisive role in successful start-ups. Market research is an important link between the start-up idea and the realisation of your desire for self-employment. It is used to carry out three important analyses:

• Needs analysis
• Analysis of the market
• Analysis of competitors

So ask yourself the appropriate questions about the following topics:

• Your product and/or service programme - What do you want to offer?
• Your target group - who will be your customers or clients?
• Purchasing - who will be your suppliers?
• The competitive situation - who will you be competing with?
• The location - where do you want to start your business? Where will your sales territory be?
• Marketing - how will you promote your product and/or service?
• The organisational structure - will you need staff? How should departments and functions be structured? What principles should be used for management?
• The process organisation - how can value be created efficiently and effectively?
• The legal form - how can you exclude liability with your private assets?
• The entrepreneurial risks - how can risks be identified, reduced, and managed?

The issues explained in the previous three sections (U, F, and O) are just some basics and principles. If you really want to start your own business, these and other issues will have to be worked out in much more detail so that a business plan can be drawn upon the basis of them. SIM-PLEMENT offers excellent support for aspiring entrepreneurs, based on many years of expertise and consultancy in the field of corporate development. Do not hesitate to contact us!