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Do you pass the dragon’s den test?

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Wednesday September 8, 2010 at 9:53pm

Well it is a fair question that most of us would like to say yes to, but when put on the spot we find we stumble and don’t have all the answers.

Some of the more common questions asked by the Dragons are: “how can you convince me there is a market for your product”, “what sales have you made this year so far”, “what is your forecast profit this year and next”, “who would buy this product” and “how much profit do you make on each sale”.

In the excitement of developing their new product the Den newcomers have often not prepared for these questions or have completely unrealistic answers, based on speculation rather than research of their chosen market or accurate forecasting and planning.

I suppose in business it is easy to see the daily detail but completely lose sight of the overall big picture. Every business needs a mechanism or system that allows them to know what the big financial picture look like.

What we need is an expression of the realistic aspirations for our business articulated in terms of financial results and money. In other words we need some financial forecasts. Simply preparing forecasts forces us to answer those Dragons Den questions without ever asking them outright.

I have set out below my Dragon’s questions, used when helping clients to express the big financial picture for their business:

  1. What level of monthly sales are your forecasting and who is going to be responsible for achieving this? One sentence does not do this justice. It is a big question and usually the crux of any business. It leads on to another key question being who is your target customer and how do you actively seek them out? And because sales only arise through activity then how are we going to monitor that activity on a monthly basis and whose activity and what should we monitor? 
  2. What gross margin is realistic? What has been achieved in previous years and can that be improved, and is it sustainable? Again who is responsible for production/ operations as they will usually be the one controlling variable costs? 
  3. What are your monthly fixed costs and are they truly fixed? The surplus after deduction of fixed costs leaves profit. Here is the fun bit as tax efficient extraction of this surplus is the main motivator for most business owners. It is nice to know how much you are going to be able to pay yourself when your efforts turn into profits and cash. 
  4. Cash flow is another buzz word but you really need to answer one question here. Will your bank balance be within a comfortable margin of the overdraft limit at the end of each month? This in turn is a function of profitability for the month and how quickly customers pay you and how soon you pay suppliers. The crucial KPI’s of debtor days and creditor days will answer these questions for you.

So prepare the forecasts for the year and compare actual monthly results against the month’s forecast. It will answer all of those Dragons Den questions for you and also help you to get paid more than you would probably otherwise achieve. The least it will do is help you sleep at night.

Andy Parker
Chartered Accountant

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here