Assessing your abilities

Business lore claims that for every ten people who want to start their own business, only one finally does. It follows that an awful lot of dreamers exist who, while liking the idea of starting their own business, never get around to taking action. Chapter 3 of Book 1 looks in detail at how you can assess whether you’re a dreamer or a doer when it comes to entrepreneurship. For now, see whether you fit into one of the following entrepreneurial categories:

• Nature: If one of your parents or siblings runs their own business, successfully or otherwise, you’re highly likely to start up your own business. No big surprise here, as the rules and experiences of business are being discussed every day and some of it’s bound to rub off. It also helps if you’re a risk taker who’s comfortable with uncertainty.
• Nurture: For every entrepreneur whose parents or siblings have a business, there are two who don’t. If you can find a business idea that excites you and has the prospect of providing personal satisfaction and wealth, you can assemble all the skills and resources needed to succeed in your own business. You need to acquire good planning and organisational skills (Chapter 4 in Book 1 covers all aspects of writing a business plan) and either develop a well-rounded knowledge of basic finance, people management, operational systems, business law, marketing and selling, or get help and advice from people who have that knowledge.
• Risk taker: If you crave certainty in everything you do, running your own business may be something of a culture shock. By the time the demand for a product or service is an absolutely sure-fire thing, there may already be too many other businesses in the market to leave much room for you. Don’t confuse risk taking with a pure gamble. You need to be able to weigh matters up and make your risk a calculated one.
• Jack-of-all-trades: You need to be prepared to do any business task at any time. The buck definitely stops with you when you run your own business. You can’t tell a customer that his delivery is late just because a driver fails to show up. You just have to put in a few more hours and do the job yourself.

Discovering a real need

You may be a great potential entrepreneur, but you still need to spell out exactly what it is you plan to do, who needs it and how it can make money. A good starting point is to look around and see whether anyone is dissatisfied with their present suppliers. Unhappy customers are fertile ground for new businesses to work in.

One dissatisfied customer isn’t enough to start a business for. Find out if unhappiness is reasonably widespread, because that gives you a feel for how many customers may be prepared to defect. After you have an idea of the size of the potential market, you can quickly see whether your business idea is a money-making proposition.

Aside from asking around, one way to get a handle on dissatisfaction levels is to check out websites that allow consumers to register their feelings, such as www.reevoo.com, www.grumbletext.co.uk and www.resolver.co.uk. Then scour blogs where irate people can complain their hearts out. Check out websites such as http://thebloggerhub.com, www.totalblogdirectory.com and www.bloghub.com, which all operate blog-indexing services that can help you filter through the 70 million plus blogs and reach the few dozen that serve the sector you’re interested in.

The easiest way to fill a need that people are going to pay to have satisfied is to tap into one or more of these triggers:

• Cost reduction and economy: Anything that saves customers money is always an attractive proposition. Lastminute.com’s appeal is that it acts as a ‘warehouse’ for unsold hotel rooms and airline tickets that you can have at a heavy discount.
• Fear and security: Products that protect customers from any danger, however obscure, are enduringly appealing. When Long-Term Capital Management (LTCM), one of America’s largest hedge funds, collapsed and had to be rescued by the Federal Reserve at a cost of $2 billion, it nearly brought down the American financial system single-handedly. Two months later Ian and Susan Jenkins launched the first issue of their magazine, EuroHedge. At the time 35 hedge funds existed in Europe, but investors knew little about them and were rightly fearful for their investments. EuroHedge provided information and protection to a nervous market, and five years after its launch the Jenkinses sold the magazine for £16.5 million.
• Greed: Anything that offers the prospect of making exceptional returns is always a winner. Competitors Companion (www.competitorscompanion.com), a magazine aimed at helping anyone become a regular competition winner, was an immediate success. The proposition was simple: subscribe and you get your money back if you don’t win a competition prize worth at least your subscription. The magazine provided details of every competition being run that week, details of how to enter, the factual answers to all the questions and pointers on how to answer any tie-breakers. It also provided the inspiration to ensure success with this sentence: ‘You have to enter competitions in order to have a chance of winning them’.
• Niche markets: Big markets are usually the habitat of big business – encroach on their territory at your peril. New businesses thrive in markets that are too small even to be an appetite whetter to established firms. These market niches are often easy prey to new entrants because businesses have usually neglected, ignored or served them badly in the past.

Checking the fit of the business

Having a great business idea and possessing the attributes and skills you require to start your own business successfully are two vital elements to get right before you launch. The final ingredient is to be sure that the business you plan to start is right for you.

Before you go too far, make an inventory of the key things that you’re looking for in a business. These may include working hours that suit your lifestyle; the opportunity to meet new people; minimal paperwork; a chance to travel. Then match those up with the proposition you’re considering. (Chapter 3 in Book 1 talks more about finding a good business fit.)

Researching the market

However passionate you are about your business idea, you’re unlikely already to have the answers to all the important questions concerning your marketplace. Before you can develop a successful business strategy, you have to understand as much as possible about your market and the competitors you’re likely to face.

The main way to get to understand new business areas, or areas that are new to you at any rate, is to conduct market research. The purpose of that research is to ensure that you have sufficient information on customers, competitors and markets so that your market entry strategy or expansion plan is at least on target, if not on the bull’s eye itself. In other words, you need to explore whether enough people are attracted to buy what you want to sell at a price that gives you a viable business. If you miss the target altogether, which you may well do without research, you may not have the necessary resources for a second shot.

The areas to research include:

• Your customers: Who may buy more of your existing goods and services and who may buy your new goods and services? How many such customers exist? What particular customer needs do you meet?
• Your competitors: Who are you competing with in your product/market areas? What are those firms’ strengths and weaknesses?
• Your product or service: How can you tailor your product or service to meet customer needs and give you an edge in the market?

• The price: What do customers see as giving value for money, so encouraging both loyalty and referral?

  Make sure you don’t set your price too low. Undercharging is one of the main reasons for early failure. Raising your price is always harder than lowering it.

• The advertising and promotional material: What blogs, newspapers, journals and so forth do your potential customers read, and what websites do they visit? Unglamorous as it is, analysing data on what messages actually influence people to buy, rather than just to click on a link, holds the key to identifying where and how to promote your products and services.
• Channels of distribution: How can you get to your customers and who do you need to distribute your products or services? You may need to use retailers, wholesalers, mail order or the Internet. All have different costs, and if you use one or more, each wants a slice of your margin.
• Your location: Where do you need to be to reach your customers most easily at minimum cost? Sometimes you don’t actually need to be anywhere near your market, particularly if you anticipate most of your sales coming from the Internet. If this is the case, you need to have a strategy to make sure that potential customers can find your website.

Try to spend your advertising money wisely. Nationwide advertisements or blanketing the market with free CD-ROMs may create huge short-term growth, but little evidence exists that indiscriminate blunderbuss advertising works well in retaining customers. Certainly, few people using such techniques make any money.

Doing the numbers

Your big idea looks as though it has a market. You’ve evaluated your skills and inclinations and you believe that you can run this business. The next crucial question is – can it make you money?

You absolutely must establish the financial viability of your idea before you invest money in it or approach outsiders for backing. You need to carry out a thorough appraisal of the business’s financial requirements. If the numbers come out as unworkable, you can then rethink your business proposition without losing anything. If the figures look good, you can go ahead and prepare cash flow projections, a profit and loss account, and a balance sheet, and put together the all-important business plan. (Chapters 1, 3 and 4 in Book 2 cover these procedures.)

You need to establish for your business:

• Day-to-day operating costs
• How long it will take to reach break-even
• How much start-up capital you need
• The likely sales volume
• The profit level you require for the business not just to survive, but also to thrive
• The selling price of your product or service

Many businesses have difficulty raising start-up capital. To compound this, one of the main reasons small businesses fail in the early stages is that they use too much start-up capital to buy fixed assets. Although some equipment is clearly essential at the start, you can postpone other purchases. You may be better off borrowing or hiring ‘desirable’ and labour-saving devices for a specific period. This obviously isn’t as nice as having them to hand all the time, but remember that you have to maintain and perhaps update every photocopier, printer, computer and delivery van you buy, and they become part of your fixed costs. The higher your fixed costs, the longer it usually takes to reach break-even point and profitability. And time isn’t usually on the side of the small, new business: it has to become profitable relatively quickly or it simply runs out of money and dies.

Raising the money

Two fundamentally different types of money that a business can tap into are debt and equity:

• Debt is money borrowed, often from a bank, and that you have to repay. While you’re making use of borrowed money, you also have to pay interest on the loan.

• Equity is the money that shareholders, including the proprietor, put in and money left in the business by way of retained profit. You don’t have to give the shareholders their money back, but shareholders do expect the directors to increase the value of their shares, and if you go public they’ll probably expect a stream of dividends too.

  If you don’t meet the shareholders’ expectations, they won’t be there when you need more money – or, if they’re powerful enough, they’ll take steps to change the membership of the board.

Alternative financing methods include raising money from family and friends, applying for grants and awards, crowdfunding, and entering business competitions. Check out Chapters 1 and 2 in Book 2 for a review of all these sources of financing.

The Financial Conduct Authority, a City watchdog, ordered all banks to publish statistics on complaints on their website from 31 August 2010. Throughout 2015, Lloyds received 85,505 complaints, Santander received 80,566, Barclays received 140,584 and HSBC received just 72,356. If your bank is high on this name-and-shame list (visit www.the-fca.org.uk/firms/complaints-data/firm-level, then click the link ‘Downloadable table: Firm level complaints data’), get straight on to Chapters 1 and 2 in Book 2, where all aspects of raising money are covered.

Writing up the business plan

A business plan is a selling document that conveys the excitement and promise of your business to potential backers and stakeholders. These potential backers can include bankers, venture capital firms, family, friends and others who may help you launch your business if they only know what you want to do. (Chapters 1 and 2 in Book 2 consider how to find and approach sources of finance.)

Getting money is expensive, time-consuming and hard work, but sometimes you can get a quick decision. One recent start-up succeeded in raising £3 million in eight days, after the founder turned down an earlier offer of £1 million made just 40 minutes after he presented his business plan. Your business plan needs to cover what you expect to achieve over the next three years. (Chapter 4 in Book 1 gives full details on how to write a winning business plan.)

Most business plans are dull, badly written and frequently read only by the most junior of people in the financing organisations they’re presented to. One venture capital firm in the United States went on record to say that in one year it received 25,000 business plans asking for finance and invested in only 40. Follow these tips to make your business plan stand out from the crowd:

• Hit them with the benefits. You need to spell out exactly what you do, for whom and why that matters. One such statement that has the ring of practical authority is: ‘Our website makes ordering gardening products simple. It saves the average customer two hours a week browsing catalogues and £250 a year through discounts not otherwise available from garden centres. We have surveyed 200 home gardeners, who rate efficient purchasing as a key priority’.
• Make your projections believable. Sales projections always look like a hockey stick – a straight line curving rapidly upwards towards the end. You have to explain what drives growth, how you capture sales and what the link between activity and results is. The profit margins are key numbers in your projections, alongside sales forecasts. Financiers tend to probe these figures in depth, so show the build-up in detail.
• Say how big the market is. Financiers feel safer backing people in big markets. Capturing a fraction of a percentage of a massive market may be hard to achieve – but if you get it, at least the effort is worth it. Going for 10 per cent of a market measured in millions rather than billions may come to the same number, but the result isn’t as interesting.
• Introduce yourself and your team. You need to sound like winners with a track record of great accomplishments.
• Include non-executive directors. Sometimes a heavyweight outsider can lend extra credibility to a business proposition. If you know or have access to someone with a successful track record in your area of business who has time on his hands, you can invite him to help. If you plan to trade as a limited company (Chapter 2 in Book 1 has details on legal structures) you can ask him to be a director, without specific executive responsibilities beyond being on hand to offer advice. But non-executive directors do need to have relevant experience or be able to open doors and do deals. Check out organisations such as Venture Investment Partners (www.ventureip.co.uk) and First Flight Placement’s non-exec search site (www.nonexecdirector.co.uk) for information on tracking down the right non-executive director for your business.
• Provide financial forecasts. You need projected cash flows, profit and loss accounts, and balance sheets for at least three years ahead. No one believes them after Year 1, but the thinking behind them is important.
• Demonstrate the product or service. Financiers need to see what the customer is going to get. A mock-up is okay or, failing that, a picture or diagram. For a service, show how customers can gain from using it – that it can help with improved production scheduling and so reduce stock holding, for example.
• Spell out the benefits to your potential investors. Tell them that you can repay their money within x years, even on your most cautious projections. Or, if you’re speaking to an equity investor, tell him what return he may get on his investment when you sell the business in three or five years’ time.