Starting a business certainly has the potential to provide you with a more rewarding working life, but there are no guarantees and no shortcuts. The survival rate in the UK remains dauntingly low, so taking the plunge is certainly not for the faint hearted. Estimates vary, but of the 500,000 businesses launched every year, data suggests that a third are believed to fail in year one, while more than half fail within year two. Feeling encouraged? The good news is that many new businesses do survive, and it’s mostly down to you whether you become a positive or a negative statistic. Proper planning and some due diligence will give you the best possible chance of success. This may sound dull, but the truth is that starting and operating a successful business is 10% fun and 90% plain nitty gritty.
In terms of dreaming up an idea for a business, most successful entrepreneurs have already identified an opportunity and have a vision for making things happen. Setting up in business is just a means to an end in terms of making a dream a reality. Before you set up a business just for the sake of doing so, be very careful about randomly searching for ideas to suit. When people want something, they have an unfortunate tendency to imagine things that are not really there. This thought process is responsible for some of the worst business ideas in history. Be honest with yourself before you invest your life savings in developing that open-on-impact parachute.
How much time are you willing or able to commit, and how little money can you afford to earn in the first year or two? Be realistic. Answering these fundamental questions will help you to decide whether you need to start a full-time, part-time, spare-time or seasonal business, or indeed whether you need to give yourself a reality check and just hang on to the 9 to 5. It may not be time to tell your boss to shove it just yet, because being the boss is not as easy as it looks.
Modern culture is plagued by delusional wannabe entrepreneurs, lazily operating in the belief that the get-rich-quick scheme actually exists. This is foolish; similar to chasing rainbows in the hope of finding a magical pot of gold. Producing real life pots of gold takes time, tenacity and monumental amounts of hard work – they are not dished out by charitable leprechauns. Be under no illusions about what it will take to make a business work.
To Partner or not to Partner
There is a lot to be said for having a wingman (or wingwoman). They may have the investment that the business needs or they may have certain skills or experience that you lack. These are two excellent reasons for entering into a partnership, and in both my companies I have taken on partners for each of those reasons. This approach is particularly useful when starting from scratch, as you’re unlikely to have the money to employ a high level executive who can fulfill that key role. I also find that having a sufficiently motivated business partner frees me up to concentrate on the aspects of the business that I enjoy, as well as allowing me to pursue my other ventures. If you happen to be the founder, structuring your partnership in the right way will mean that you can retain control of the business whilst sharing the profits fairly with your partner. You should always have a clear exit strategy, preferably on a 5 or 10 year scale, before you enter into any binding agreements. This will mean that you set out with a clear vision for the future and can work towards that goal together. My own personal rule of thumb when it comes to a prospective partner is this: If the business will most likely make double the money with the partner than it will without them, their stakeholding is justified. This crude but effective method has always stood me in good stead. Taking this one step further, you should ideally believe that the business will not work without them.
You should never take on a partner simply because they are a friend, or because they are willing to help out. If you can simply pay someone to do the same job, an employee is always preferable. This means that you’re not obligated to share the profits of the business, or indeed the proceeds of an equity sale if and when you make your exit. It also means that you can avoid any complications or disputes arising from the sharing control. The potential for conflict when money and ego are involved should not be underestimated. A partner should be a necessity to you, not a charitable enterprise.
Find out what starting and running your own business really involves. You have a lot of hoops to jump through before you actually get out there and start trading. There are excellent websites that offer free advice for startups. Try Business Link, Start Up Donut, Smarta and Startups.co.uk. These sites contain all the information you need, so there is certainly no need to pay someone to give you advice that is already free of charge and in the public domain.
People often turn to their local enterprise agency or the bank. I advise against this, mainly because these people have no clue what they are talking about. What does your bank manager know about starting and running a business? Precisely diddly. The best way to learn is from people who have ‘been there and done it’, so do seek tips from fellow small-business owners who operate in the real world. Beware also of buying (or even reading) self-help books written by business academics. Common sense should tell you that if these writers really knew what they were doing, they would be out there doing it rather than penning fancy books about it. In a more general sense though, learning about the mind-set of past masters can at least provide some inspiration. Richard Branson’s autobiography ‘Losing my Virginity’ is a particularly good read, as is Alan Sugar’s ‘What You See is What You Get’. Both of these guys have ‘been there and done it’ in a very big way.
Some people use the services of an accountant to establish a new limited company, believing that this can help to ensure tax efficiency and is somehow more professional. Unfortunately, any tax saving benefits will be outweighed by the money you are wasting by paying someone to do something that you can do yourself. If you want to incorporate a company, simply do so online with Companies House here. Moving forward, you will of course need an accountant to file things like your annual returns, accounts and tax-related administration. Choose wisely, and for a modest monthly fee a good accountant will do these things and provide sound advice to boot.
Sole Trader, Partnership or Limited Company?
There are several legal entities to choose from – advice on what will suit you best can be found on the Gov.UK website here. As a general rule though, smaller enterprises such as painters and decorators tend to set up as sole traders. In fact over 60% of small UK businesses are classed as sole traders. It is less complicated, although you will have personal liability for all your business debts and will be held personally responsible for all bills and expenses incurred through your business. If you are looking at lines of credit, this does not exactly minimise your risk. You are entitled to any profit you may make, and will be taxed on that money via straightforward income tax. If you envisage your enterprise growing significantly and perhaps one day being sold as a growing concern, the limited company route is more suitable. A limited company also offers certain personal protections for the business owners, i.e you will not necessarily be personally responsible for any debts the company owes in the event that things go wrong.
This Little Piggy Went to Market
It is unrealistic to expect your products or services to appeal to everyone, so you should focus on a specific type of target customer. This typical person should dictate how you present your product or service – in other words you need to tailor your offering to their needs. Segments of markets are called ‘niches’, and success is normally assured if you can become the number one supplier within a niche market. Once you know who your target customers are, think about how they buy. Do they shop online, offline or both? You need to know exactly how you will get your product or service to your target customers. Think precision bombing, not carpet bombing.
Having your own distinctive brand is important. It can inspire loyalty, ensuring that customers buy from you and not your competitors. Think of branding as what comes to mind when people think of your business. It should evoke your business’s personality and what it stands for. You also need a brand identity (i.e. logo, house colours and typeface) and although you must minimise your start-up costs, paying someone to create one for you is often worthwhile, unless you have the creative know-how yourself. Apply your branding consistently throughout everything that you do. Originality and simplicity are the key, don’t overcomplicate things.
Know Thy Self, Know Thy Enemy
If you are to stay ahead of your competitors, you must know who they are, what they offer, how they sell, and how much they charge. Focus on their strengths and weaknesses, and think about ways in which you can outsmart and outperform them. Try to avoid competing on price alone, because that may not be always be enough to tempt customers away. Being cheaper is of course always a huge selling point in certain markets, but your customers still need to believe in your brand and have the confidence that you are the real deal.
Do not be arrogant enough to believe that your idea is so special that you will be without competitors. There should always be competition nipping at your heels, and if there isn’t then it probably means that your idea is so terrible that nobody wants to copy it. The trick is simply to be better than your competition. Many a successful business is built on taking an existing product or service and making it the best it can possibly be. The entire Virgin empire is built on this principle. Innovation is therefore useful, though certainly not essential. The concept of the ‘USP’ (Unique Selling Point) being crucial is a myth. Helpful? Yes. Crucial? No. ‘USP’ is exactly the kind of nonsensical marketing jargon that should be avoided anyway. The best businesses are invariably simple and based on common sense.
The Public Gets what the Public Wants…..
….not the public wants what the public gets. Both lines are superb lyrics from ‘Going Underground’ by The Jam, and the first line is most definitely a truism is business. Even if you think you have sound knowledge of what your potential customers want, always go out there and meet enough of them to ask them about your prospective products and prices. This is the best way to test your idea. If they don’t like what you want to sell, just bin it. Most importantly, you’ll have dodged a bullet in terms of launching a product or service that nobody wants. If they like your products or service, but not your prices, this gives you the chance to slim your costs down in order to lower your prices. If you’re not sure how much to charge, ask potential customers what they would pay, and tailor your costs accordingly. Never be put off or upset by criticism — the smart cookies in life simply learn from it and come back bigger and better. Feedback from potential customers is invaluable. An excellent online survey platform is Survey Monkey, which you can register for free. You can then spread this through your Twitter, Facebook and Google Plus networks.
The Crystal Ball
There is nothing more important in business than having a sound grip on your finances. Read that sentence again repeatedly until you have memorised it, and then get it tattooed on your forehead for good measure. Anybody who blunders along without knowing where every penny is at all times has no right to say they are in business. They are simply in freefall and would be better suited to a roulette table.
Accurate realtime cashflow forecasts are essential, as are accurate monthly profit and loss accounts. If you cannot read or understand accounts, you do not understand the language of business. I would advise you to learn fast or go home now before you do some serious damage. You are asleep at the wheel. The most user-friendly book I have found on the subject is ‘Understanding Accounts’ by Stephen Brookson, available on Amazon here. The misconception that your book keeper and / or accountant is responsible for financially steering your business is rife. This is nonsensical – the only person responsible for the financial welfare of your business is you. Take control.
Writing a simple and concise business plan makes sense, regardless of whether you are applying for funding. Putting pen to paper will enable you to focus your thinking by having to explain what your business is, where it fits into the market, who your customers are, what you sell, how you sell it, where you plan to take your business, and how you are going to get there. Even when only pitching to yourself, the process of doing so formally may reveal that your idea is barking lunacy. This is not the realisation you want to be having when you’ve invested your life savings and publicly stated that your idea is the next sliced bread.
Despite the bells and whistles, a business plan is not worth the paper it’s written on when the figures don’t add up. The difference between cashflow and profit and loss is night and day. Millions of profitable businesses have failed because of cashflow. Understand how VAT works, and whether it will affect you – if you think you’ll take more than £77,000 in your first year, you need to register for VAT. If so, you’ll be quids in, to begin with, as you will charge 20% VAT on most of your goods and services. You will however need to complete your VAT return for HMRC and pay the piper every three months, so you need to ensure you have set the money aside to do that. Failing to do so will result in a sizeable cashflow hole that could well sink your ship. Being able to see this sort of thing coming is your ‘crystal ball’. Without it, starting out in business is reckless and highly likely to end in tears.
The most common fatal error that startups make is over-forecasting. This is the kiss of death and can doom your business to failure before you even start trading. I myself have suffered bankruptcy in the past as a result of committing this classic sin, and I really wouldn’t recommend it. This can damage both your finances and your reputation, both of which are equally important in my book. Though I learned invaluable lessons the hard way (none of which can be taught in a classroom) it took me many years to recover. Be pessimistic when it comes to your forecasted figures, and plan for the worst. Under-forecast your revenues and over-forecast your costs. The essence of business is really quite simple – receive more money from your customers than you pay to your suppliers, and do so in a timely fashion. Do those things, and all will be well. You can download a business plan template from the Business Link website here.
Powered by the People
Once you have your financial foundations in place, you need to look at your team. The most powerful asset in any business is the people who work within it. A business is nothing without good people, and this holds true for all the strongest and best-loved businesses. Your people should be happy in your environment and naturally motivated. Never underestimate the power of a riotous party.
Be careful about who you recruit – if you don’t employ idiots, you won’t need to rule with a rod of iron. Dictatorships are unpleasant, and things didn’t turn out too well for Saddam or Gaddafi. Intelligent human beings who operate on a level playing field rarely need to be told what to do. Establishing an open structure with a clear pathway to success is the key; human nature will do the rest. I’m proud to say that my staff treat the business as their own and work largely under their own steam. Many have been with me from the beginning and have worked their way up through the ranks. On the very rare occasion that anyone abuses the ethos, they are replaced quickly, professionally and quietly. We all know the old adage about what one bad apple can do to the rest of the barrel.
If you set up a company, you should open a company bank account. If you are a sole trader you can use your personal account, but it’s always better to have a separate business bank account so you can easily distinguish business and personal income and expenditure. Contact your bank to ask about their account charges and services, and shop around relentlessly for the best deals. I bank with Barclays, though in my personal opinion I have done them more favours over the years than they have done me.
I Fought the Law, and the Law Won
As a business owner, you have certain legal obligations. The most pressing are the safety of your employees and members of the public, covered by employers insurance and public liability insurance. There are many other legal obligations to consider, the disposal of controlled waste being one of them. If you are going to produce any waste at your premises, you will need to have this disposed of properly by a licensed carrier who provides you with the correct documentation. Breaking the law and incurring a sizeable fine will not help your finances. You can read more about this here……shameless plug over.
The Talk and the Chalk
You can have the best sales and marketing tactics in history, and have customers queuing at the door, but the law still states you must maintain accurate financial records. You must also retain annual records for six years. Using software is quick and convenient way of doing this, and the good ones provide additional features that can help you stay in touch with your finances and run your business more effectively. The only software I would recommend is Sage, which is the accounting industry standard. The last place I want to be cutting corners is in my finance department. Finally, make sure you find out about any expenses you can deduct from your business income to minimise your tax liability. While it can be tedious, this makes retaining all your receipts and invoices as proof of purchase worthwhile.
Like anyone starting out in business for the first time, you will most definitely need some luck. I also believe that genius is not a prerequisite for business success, so don’t worry if you aren’t in the runnings for Brain of Britain. Dogged determination, adaptability, and pure grit will be of more use to you. A lot of it comes down to having the balls to do it. Never forget that preparing well is the biggest difference you can make to your chances of success, so hit those books hard – especially the one that can teach you how to read accounts and forecast properly.
Make no mistake about the fact that there will be dark moments when things seem pretty hopeless. This is normal. Knowing exactly what you are working towards and keeping your eyes on the prize is the only thing that will get you through those times. Nothing happens overnight, so be patient, hunker down, and think of the hare and the tortoise. Above all, have fun. While it’s true that running a business is pointless if the aim is not to turn a profit, the sole motivation should never be plain old money. My personal motivation is freedom and the satisfaction that I derive from creation. The money is a welcome by-product, but in truth, I could find less enjoyable ways to make far more of it if I wanted to. This is reflected in the fact that I enjoy myself most in the first few years of the businesses life when everything is touch and go and I’m trying desperately to get the airplane off the ground before I run out of runway. Once it’s cruising along nicely, I get restless, hand over the controls to my co-pilot, and start looking for the next venture. In other words, I suspect that the period you’re about to enter into will be some of the best (and possibly worst) years of your life. Savour it and work as hard as you can, because this is as good as it gets.