- 19th April 2016
- Posted by: Rodolfo Basilio
- Category: Articles, Posts
Before you invest thousands of pounds launching a new business, you should think carefully and do your homework first. The chances of your business being successful increase when you plan cautiously before spending money.
In my opinion, starting a business without a plan is a waste of money. There is a well-known phrase that states: “Fail to plan, plan to fail”. I totally agree with this because I think you always need to think about everything that will be involved in your business in order to avoid obstacles during the launch phase. This will minimise risk and help you to start your venture on the right foot. Also, when you plan in advance you will know exactly (or very closely) how much money you will need to invest in the business and if you don’t have enough money to start up your business (start-up costs + working capital), you need to raise an external financer such as an investor, a partner, a bank loan, or any other kind of funding.
Before you set up your business you should think about the topics below.
Where did the business idea come from?
Some entrepreneurs set up their business because they’ve found a need in the market. Usually a business idea has arisen because the entrepreneur has a solution for a specific problem. Most people with a business mind are always asking themselves how they resolve a certain problem and if they make money out of the solution.
The rise of the internet has led to a large proportion of people looking to buy products and services online and thus the amount of opportunities is vast. There is a lot of information online that you can read before you launch your business. Not having enough information about your new business is not an excuse.
You could also start up a business in an area which you already have previous experience in. Bare in mind, that being a successful professional or an expert in your area does not necessarily mean that you will also run a successful business. Obviously, you have an advantage but in order to run your business efficiently, you should have a basic understanding about finance and legislation that could affect your business in the future. It would also be beneficial to know how to deal with people and clients, management skills, leadership and software acknowledge. On top of these, you should always improve your sales skills because there isn’t a business that can survive without customers. Even if the business is a not-for-profit organisation, it needs to have customers to keep the door open.
I have met people who started their business an extension of a hobby. Hobbies could become a successful business but most of the time they don’t. Family and friends may say, “Why don’t you open a shop and make a business out of your hobby?”. Think carefully about this idea.
Some business models have been tested in the market for many years. You don’t need to create a new wheel in order to succeed in business. The most important thing you should ask yourself is: “Would I really like to work in this business for at a few years?”. You will need to dedicate more than 50% of your day to succeed in your business. For this reason, you should be very comfortable to run a business you will get involved in. I have seen cases businesses have been launched but after the first year the founder doesn’t actually enjoy what he is doing. In this case, you need to think what will be the best strategy to leave the business and minimise loss. I am not being a pessimist; your way out strategy can also make a profit.
If you have found a solution for a need in an area that you have previously worked in and you’re really passionate about your new business idea, what should you do next? The answer is market research.
You can find information about your business idea either online or offline. You should spend a lot of time researching online. Your aim should be to find businesses that are providing the same product or service that you are looking to sell. If there isn’t one, you should find out why nobody has launched something similar before. Is there a barrier? Are there some businesses delivering the same product or service in a different way? Why?
Also, if you live in England you shouldn’t limit your online research by geography location; research your business idea in other countries as well. You will be surprised by your findings. Sometimes, a new business concept has been running successfully for many years in a different country and it has not been developed where you live. In this specific case you should try to research the running of this business very carefully. You could even try to approach the existing provider and negotiate with them to expand their business to a different country. You should think about the pros and cons of developing the whole business yourself or to join with someone else.
What is the actual situation of the segmented market you chose?
Find out if the business segment you are getting involved in is increasing or declining. Is it a new market with many years to be explored or is it a dead segmented market? Is the segmented market suffering with so many changes? Is the segmented market dominated by a few big players?
The chances to succeed in a new rising segmented market are higher than in a declining one. You should also take into consideration the economic situation in the country you plan to sell your product or service. Is it in an economic up or downturn situation? In an economic downturn situation, the consumers become more selective and they will think twice before they buy something from someone. In addition to this, some products and services that are not in the area of people’s basic (housing, food and clothing) tend to suffer more.
Technology and software development
Some businesses segments are very difficult to get involved in. It could cost you a lot of time and money to develop a very specific bespoke software system to help you to run your business. You should also have enough time to try your new software before you launch officially. You could also use your new software to prevent other people trying to get into the same market with the same business idea to reach the same potential clients. This is a unique subject by itself. Non you can explain why some big businesses buy software developed by small competitors.
Is it easy to find people to work in the industry you are in? Think about finding individuals to work for you in different ways. If it is easy to find people to work for you, it makes things straightforward when you need to hire a new employee or if one of your employees leaves. On the other hand, if it hard for you to find individuals to work for you it will be hard for your competitors to find and recruit the same individuals. Think about the supply and demand concept; the more difficult and technical the role is, the more expensive the salary will be. Can your business afford a very expensive labour resource? Another option would be to bring in your main employees as partners. This way you can reduce your payroll costs and you could share the profits with them.
Promotion and marketing
You should find out how you will deliver your message to new potential or existing clients. I would advise you to not rely on one single marketing channel. You should balance your marketing strategy so that your message reaches your potential clients in different ways. You should prepare a marketing budget to understand how much you will invest in your business marketing initiative. Before you prepare your marketing strategy make sure you know who your potential clients are and find out where they are. What is the best way to approach them? You really need to offer a high quality service or you should have a good product to offer to your clients. Please, don’t think marketing as being a business expense but see it as a business investment. With any other kind of investment, it should always bring an investment on return and you should measure it. Without a proper marketing strategy in place, the clients will not come and you will not have enough sales to cover your business costs and expenses. Do not get frustrated either. The vast majority of business people try different marketing strategies and sometimes they do not work. Rather than changing the way they deliver the message they only give up during the marketing implementation phase. Giving up means you will fail and you can waste the whole amount you invested.
Does the business you want to start up need a lot of equipment? If yes, are you fully trained and prepared to operate the equipment? Do you need technical employees to operate the equipment for you? Usually individuals who are trained to operate specific equipment are very well paid. You should also consider how much the equipment will cost you. Should your business own the equipment or should it be leased? One of the most important points to consider about equipment is the fact that some equipment becomes obsolete very quickly. In this case, I would advise you not to buy the necessary major equipment initially. You could think renting and buying at a later stage.
Choosing a reliable supplier is not easy for some businesses. Some big companies just do business with other big companies. This could be a problem. You can, however, use your supplier agreement to your advantage. How? You could have an exclusive agreement in which they will manufacture a specific product designed by you only to supply your company. You should find out what will be your supplier payment terms. How long do you have it to pay them?
Delivery of products and services
Most consumers don’t want to wait a long time to receive what they’ve purchased. People are becoming less patient as the world progresses. Some consumers choose suppliers who have the shortest delivery time. If you have a competitor that can deliver a product within two days and your company can deliver a product in seven days you should at least match your competitor’s delivery time.
Also, make sure that you deliver exactly what you have sold. Consumers do not want to buy something and receive something else. Make sure you have a nice package for your product. Packaging should add value to your product. If you want to choose a logistic company to deliver your product on behalf of you, you must choose a very professional company.
Don’t forget that the delivery company will be the last point of contact. You need to make sure that individuals working for them have at least a basic understanding about what they are delivering.
Make sure that when you sell a product and you promise a delivery date and time it arrives as agreed. It is very frustrating for consumers to wait all day and sometimes over the weekend for a delivery. Most of consumers will work during the working day. Think about what Amazon is doing in the UK. They have special boxes in allocated places where you can collect what you bought whenever is convenient for you. This is a very interesting idea. How much money does it cost to try to deliver and redeliver to a consumer who isn’t in?
Finally, should you deliver the product to the next-door neighbour? I don’t think so. The neighbour can forget to let you know that your pack was delivered in their house and people generally don’t want to be disturbed when they don’t need to. I have received a package for my neighbour a few times and it leaves me feeling annoyed.
Do you really need a commercial premise on a high street? Could you start up your business from home? When I started up my first business I set up my office space in a room where I used to live. I used to visit my clients in public spaces as well as in their own home. I am very proud that I started like that. We should always grow our business step by step. As soon as I noticed that the business could afford to pay a low rent value in an office space I moved out.
As the business grew I had to change the premises again. Don’t be afraid to move to new premises. If you need to change your premises for your clients to be more comfortable, then do it. But don’t forget that rent is a fixed expense and if you commit yourself to a long lease or rental agreement, it needs to have a breaking clause to make sure that when you want to leave, the landlord does not sue your company. You need to make sure that your company turnover can cover the rent expenses. Be careful about choosing a high rental price if your business cannot afford to pay it – you could spend more money to leave.
Be careful when looking for office space. Take London as an example. Back in July 2014, the government changed a law and now allows any office space to be used for residential purposes. As a result, many companies have had to find new premises with little notice. It is very difficult to find the ideal office space in a short time. Many businesses collapsed because of this change. The office space rent became even more expensive and individuals who need office space have been left feeling frustrated. It happened with Vertice Services.
We recently had to move to new premises. We had invested a lot of money in our previous office space and after a year we had to move to new premises. Thankfully, we found our new premises but it wasn’t easy. You should really understand what the building owner’s intentions are. Don’t trust the commercial estate agent alone – call the council to find out if someone is applying for a change of planning permission. Make sure you research properly before you move in.
There is no business without any competition. Competition can be divided in two categories: direct and indirect. Direct competitors are competitors who sell similar products and services like you. These competitors will try to sell their products or services to the same potential customers as your business. You should know more information about your competitors than they really know. You should know about their prices, the way they deliver their products and services, what their communication process with their clients is, who are the people behind their business and why they are doing things differently to you and what is the reason.
How are you looking to set up your prices? If you don’t know how to set up your prices I would advise you to hire an accountant or a consultant to help you. I still believe that the first question you should ask yourself is: Will my potential client be willing to pay the price I want to charge? How much are they willing to pay? How much does your competitor charges? You should always consider your price structure. You could add extra value to your product or service in order to sell the same product as the competition but with something different. If you want to sell the same product as your competition with the same price what is the reason the consumer will chose to buy your product rather than them? If you want to sell exactly the same product as your competition with a more expensive price, it will be very difficult for you to sell your product. I would never use price cutting in my business strategy if I am selling the same products or services as others. You could offer discounts or even sell your product cheaper on a short-term basis (always add extra value)– remember, you need to make sure that it will be sustainable. At the end of the day, your business should pay its bills. Don’t forget that your price should cover your direct and indirect costs, your business overheads, your labour costs, taxes and your profits.
Financial forecast (profit and loss forecast):
Some business people don’t like figures. Imagine preparing a financial forecast. If you’re not very familiar with financial terms and calculations I’d advise you to find someone to who is. Once again, it could be your accountant or someone else who has previous experience with business. But don’t rely only on their help and advice because people sometimes get it wrong. You should try to find financial figures from businesses similar to what you are doing to understand if you are going in the right direction with your forecast. Make sure you carefully analyse the financial forecast – try not to be too optimistic during this exercise.
Most business people overestimate the sales and underestimate the costs and expenses when they forecast figures. Usually I multiply my expense by 1.5 and I divide the sales by 1.3. I do this because, we usually overestimate the sales by 50% and we underestimate the costs and expenses by 30%. Your ready financial forecast could be used as a financial comparison when you start selling and spending. In this way you can compare what was forecasted with your actual figures. Make sure you control your figures properly.
Have you heard the phrase “Cash is King”? Some businesses need to issue an invoice, deliver the products and receive the payment later. Sometimes your client will pay you on credit terms. You can sell to them quickly but they will only pay you in 15, 30 or more days. If you offer credit to your clients, you should always have cash to pay your expenses if they are to be paid instantly.
A very common situation is if the business started growing on a credit term basis and after some time you realise that your business is suffering from a lack of money to pay its bills. This is what we call overtrading. Your business is growing so quickly that it does not have enough money to buy more products to be sold. Usually it happens when, you want to sell expensive products and services.
Don’t forget to add in your cash flow all your start up expenses such as: equipment, furniture, rent deposit, solicitor costs and others. Take into account that the first months of trading will be during the set up phase and most of the time you will not sell a lot. I always account for the first two months as having no sales. Once again, let’s be heart optimist but brain pessimist.
Calculate your start up costs
Start up costs is the total amount of money invested in equipment, hardware and software, furniture, vehicles and other asset resources you should have before you open your doors. You will find that you cannot launch a business without them. Also, because you are a new business, it will be very complicated to find finance companies to offer you a financial product to spread your start up costs for at least a few months. Being a personal guarantor when you want to guarantee a loan or lease can definitely increase your chances of being accepted by the finance provider. Don’t forget to prepare a list and describe each product, the price and where to buy before you approach a finance provider. It definitely looks more professional.
Calculate how much you will need as working capital
Working capital is basically how much money you will need to keep your business running. You should have working capital for a few reasons: if you give credit terms, you have money to pay your bills first, to have enough money to reinvest in your business, to change major necessary equipment when it become obsolete, to avoid overtrading as I explained above, to cover any loss of sales if your business suffers from seasonality and finally to avoid your business closing it down if any kind of accident happens.
Calculate your breakeven point
Your business breakeven point is when your total business sales are enough to pay the total costs and total expenses of your business. If the business sales are below the breakeven point your business is making a loss. If your business sales are above your breakeven point it is making a profit. When I set up a business I make sure that I reach the breakeven point situation as soon as possible. At least I know that my business sales can at least pay the business bills which means that it will not accumulate losses.
If you are selling a product you should calculate how many items you need to sell in order to cover the total cost and expenses. It is a very simple exercise. Let’s say for instance that, you are buying a product for £1.00 and selling it for £1.50. The marginal contribution of this sale is £0.50. If you have total costs and expenses of £6,000 per month, you should sell 12000 units (£6,000/0.50). You can set your sales targets based upon these figures.
Regulation and legislation (license to operate)
Not knowing if your business needs to be registered in any kind of regulator could mean that you will need to correct a big mistake before you close your business down. It could also mean that because you start up without registration you are not allowed to register in a future stage. WOW. It happens all the time. Most businesses in the UK should be registered or authorised by a specific regulator. For example, finance companies, accountants, immigration advisers, medical clinics, loan companies, solicitors, money transfers and cab companies, among others. Some licenses are easy to apply for but some of them are more difficult.
You should also consider how long it takes for your license to be approved. Some businesses cannot open the doors before the licence is granted. If you open your doors before the grated licence, you should have enough money to pay the bills before you receive your first client. Some licenses takes months to be approved, especially if it is necessary to have an external inspection by the regulator first.
If you have any questions or comments about the article above, please send me an email at Rodolfo.firstname.lastname@example.org