Before you take the plunge and start your own business, there are some key questions you must consider, says CHRIS DIGHTON
Good ideas are like lights going on. Ping, inspiration strikes and suddenly it all makes sense. It seems brilliant, so obvious, so easy and you are going to make your fortune. Who could possibly deny you?
That folks, is the easy part. Making a good idea happen is something else again. This is where the blood, the sweat, the tears and sheer perseverance are all important. Good ideas, whether wholly original or part of a grand plan where you decide to throw it all in to be your own boss running a Kentucky Fried Chicken franchise, need planning, research and money.
Whatever anyone tells you, however you see it, no good idea became a goldmine without plenty of hard work, determination and a little bit of luck. The Beatles paid their dues in sweaty Hamburg clubs and then hit the big time. And what of James Dyson, the man behind the bag-less vacuum cleaner?
Dyson struck out on his own but needed family support which he got from his wife. ‘I just thought it was brilliant,’ she said, even though it was to mean 28 years of growing debts and shouldering the greater share of raising their three children, a responsibility she bore gladly.
The idea came to him while he was renovating their home in the Cotswolds. He was sure there had to be something more efficient than his ancient Junior Hoover. Inspired by the sight of a neighbouring timber mill with a 30ft-high cone using centrifugal forces to suck up sawdust – like a cyclone, he had his idea. But it wasn’t as simple as that. There were 5,000 prototypes, lawsuits and battles to find support. Eventually it took off and in his autobiography he reveals his secret dream: ‘That one day, Dyson will replace "Hoover" and become a noun, a verb, out there on its own, long after I am forgotten.’
While he lives, however, and in spite of him saying money is not his motivation, he enjoys a luxury home in the Cotswold and a £3 million retreat in France.
What it takes?
So how do we set you off down this road?
Do you even want to make the journey?
To start a small business and be successful you must ask yourself some very hard questions, not just about yourself but about what you want to do. If you don’t believe in the project then you are lost before you start.
The more honest you are about your prospects, the better placed you will be to make it work. There is no way to eliminate all the risks but careful planning and research can improve your chances.
Start with a blank piece of paper and be honest. Assess your skills. Do you have what it takes to run a successful business? Being a self-starter goes without saying, but do you have the drive, determination, initiative, motivation and mental and physical energy to start a business? You’ll need to be a good communicator and manager, as well as creative, flexible and able to plan and make decisions under pressure.
Have you researched your market? You may be wanting to make the most of your passion or hobby but is it really a viable business proposition? There’s a huge chasm between having a hobby that earns pin money, and one that feeds and clothes the family.
Find out all there is to know about your market before taking the huge step of implementing your business idea. Your market research should cover the size of the market, the demand for your products and services, and your likely competitors. There are only so many flower shops that one town can keep in business. Niche markets are the key to many surprising successes.
Writing your business plan
Next you must write a business plan and this is the axis around which your dreams revolve.
You will need it to raise money.
You will need it to know where you are going.
It should include: A description of your business. Who is involved. Information on what you are doing. Revenue projections and financial requirements and Marketing and operational plans.
Like one of those old Airfix kits, this is the instruction manual that makes it come together.
It is always best to err on the side of caution. Increase your expected expenditure by 30 per cent and decrease your estimated returns by 20 per cent. That way you’ll get fewer nasty surprises and hopefully more nice ones.
These are the key elements of the business plan:
A sales and marketing strategy
Why your idea is going to succeed and how you are going to promote it
How much you’ll need to set up and sustain the company and where you plan to get your money. When do you expect to start earning and how much do you think you’ll make from it
Skills and Experience
Contingency plans if the business goes wrong
The good news is that there will be people rooting for you and willing to help, because this is a club where success breeds success. There are loads of other people who have been where you have been and know what to do to solve certain problems. You might be about to become an IT-based business but that doesn’t mean the man who runs a successful flower shop can’t point you in the right direction over some issues.
Doing your research
There is a wealth of information on the Internet, including numerous downloads on writing business plans, and there is plenty of bona fide general advice.
On a more hands-on front, there are small business advisers in every town – organisations that are there specifically to deal with promoting small business.
You might feel like a dot on the horizon but the collective power of small business is huge. And all this help is not just benevolence on the part of those who are up and running; there’s an element of ‘You scratch my back and I’ll scratch yours’.
Let us imagine that your brainwave is an inflatable birthday card. You send it off flat-packed; the recipient receives it, blows it up and has a ‘fun’ gift and card. Great idea. You’ve researched the market, designed the product and the packaging, found a manufacturer and won promises of orders. You are ready to roll.
But there is more to it than that. How are you going to operate, and do you know the law and understand the legal intricacies of starting and running a business, including VAT registration? All this applies whether you are a sole trader, limited company or a partnership.
These are the options for setting up a company:
This means you are in business by yourself, you operate under your own name and you are solely responsible for any debts you incur.
You might decide to team up with a friend, which can be useful if you need more family finance to get started.
Private Limited Company
You can raise finance by selling shares to friends and family. If you start a limited company you will have to register its name and address with Companies House. This costs from £20. You will also need business advice and the high street banks all have small business advisers who can help when it comes to drawing up partnership contracts, understanding health and safety, and employment law.
Your local small business advice centre is there to help and can be found in a phone book or by calling 0845 600 9006.
Getting funds together for your new venture
Of course, having your small business idea and plan is no good without the money to make it happen. You need to know how much you will need, and you will need to shop around to ensure you find the best finance options available to you.
This could be via funds from business partners or investors, a bank loan or overdraft, or you may be able to borrow from friends and family. You might be tempted to take out a second mortgage but make sure that you can afford the repayments and you understand the cash flow. It is no good having a likely income of £50,000 in three months’ time when you need £5,000 now.
Sorting out the money can be a dispiriting slog but this is where perseverance and determination come to the fore and the simple fact is this: without money the idea will never float.
This is why you have to be as realistic about the possible pitfalls as you are optimistic about your future.
Another avenue for raising capital are venture capitalists. They will invest in small businesses but not before they have seen a detailed business plan. Then they will want a share of the business. Remember, such investors are after a quick return on their capital and are looking at your prospects in the three-to-five year term.
One other option is the Small Firms Loan Guarantee Scheme that is financed by the Department of Trade and Industry
(DTI) and designed to help new and established small businesses that employ fewer than 200 people. Businesses must have an annual turnover of no more than £3 million (£5 million for manufacturers), and must be able to demonstrate
that they have applied for a conventional loan from a non-government institution (normally a bank), and failed because of a lack of security.
The disadvantage of the system was the exclusion clause that seemed to rule out a lot of small businesses from applying because they didn’t fall into the right category. But since April 2003 some of these exclusions have gone and that means business in retailing, catering, coal, hairdressing and beauty parlours, estate agents, libraries and museums, car repairs and travel agents zones are now eligible.
Selling your product
Always think about the product or service you are selling. How are you going to package and present it? Decide on the most cost-effective sales channels to reach your target market – personal contact (eg. direct selling, retail), telesales, direct mail or the Internet.
Ensure you build up a profile of who your customers are and what they want, because that is the only way to keep them satisfied. This has a bearing on where you base your business.
Do you need to attract passing trade in a busy area or is it more important to have cheaper or larger premises in a less prominent area? Think of the costs.
Doing the paperwork… the less exciting but essential bit
One of the less exciting but important parts of running a small business is the book keeping. The amount of paper generated, particularly when you start up, can be awesome but it pays to keep on top of it. Many small business owners end up managing the accounts themselves, especially when first starting out, but you will still need a good accountant.
You must keep a detailed record of your business transactions. Get a proper system in place from the start and update it regularly. By law you must keep records for all your business income and expenditure, and you must keep those records for at least five years.
Depending on your turnover, you may also have to register for, and charge, VAT. You will need to tell the Inland Revenue that you are setting up a business so that you can register as self-employed and start paying National Insurance contributions.
As the business develops so will your business needs and the day will come, hopefully, when you need to hire staff. To do this successfully, work out the areas of the business where you need help and expertise.
Can you afford to employ staff with the relevant experience? Again, you have to sell yourself as well as your business.
Running your own small business is a way of taking charge of your destiny. Don’t pretend it won’t be hard work but the rewards – and we are not talking exclusively of the financial returns – can make it all worthwhile. You need faith in yourself if you are to make it and there are enough inspiring examples out there to make you believe you can do it.
Finally, remember what old man Selfridge said: ‘The customer is always right’, and if you are to make a success of your new business, then he or she always is.