Monthly Archives: June 2016

Guide to Starting a Business

unduhan-38Starting a new business is a very exciting time – however, it is also very challenging. Luckily there is plenty of help at hand for those who are clever enough to look for it. Did I say clever? Yes, I did, because many entrepreneurs charge headlong into their pet projects without giving due consideration to the resources available to them. While the energy levels for all entrepreneurs tend to be very high, it is important to step back, when appropriate, to ensure that the proper advice is being obtained. For many people, a new business is like a boat sailing in uncharted territory. One can reduce the inherent uncertainty and risk with good advice, appropriate planning and a dollop of experience. The following article contains some advice and recommendations for those starting up in the UK. While not a ‘bootstrappers’ guide per se, the assumed audience are UK-based entrepreneurs looking to set up with fewer than five employees and limited funding at their disposal.

Where to Start?

Given that one area of particular interest for us is business planning, it seems like a very good place to start. You must resist all temptation to skip writing a business plan. Preparing a business plan is a vital first step on the journey of all entrepreneurs. Sure, it may seem like a difficult proposition, especially if it’s the first time you have to write a business plan. However, the business planning process will really help you get a feel for the various elements that will determine your success, from cash flow, to sales forecasting to your personnel structure. You skip this critical process at your own peril.

Naturally, we recommend Business Plan Pro (RRP £79.99) as the best means available to write business plans. Business Plan Pro helps you to structure your business plan, is exhaustive (meaning you cover everything) and offers help at every step. Alternative methods include writing the plan yourself, using products such as Microsoft Word and Excel, or paying someone to write it for you. Unfortunately, these other methods either leave you staring at a blank screen, or simply help you avoid thinking through the conceptual and financial issues critical to your business. Whatever method you choose, you will find more information on writing a business plan at our business plan site.

If the industry is relatively new to you, I’d recommend you purchase a Business Information Factsheet or Business Opportunity Profile from Cobweb. These fact sheets will help you understand some of the live issues within your sector. These profiles include options such as ‘How to Start a Coffee Shop’ to ‘How to Start a Restaurant’ and cost about £5.

I cannot stress enough at this point the importance of getting advice. The great thing about starting a business is that there are lots of experts who may be blogging about their experiences or have written about the issues they faced and some of the hurdles they have overcome. Here are some of my personal tips for some key areas in getting started:

Accountant

Speak to an accountant early on in the process. They can help you decide the best legal structure for your business, explain VAT and also advise you on other financial obligations. Aims Accountants are a group of accountants that are scattered around the UK and are ideal for start-ups.

How To Success on Business Planning

images-41In the past few weeks we have witnessed a period of unprecedented economic turbulence and instability. Of course this uncertainty is not just affecting us here in the U.K., but in a globalised economy it is affecting people right across the world. Years of consistent economic growth have given way to rising unemployment, increased costs, reduced disposable income and a greater number of risks. In this short article, I will describe some courses of action that may help to reduce the sense of helplessness businesses are currently experiencing.

1. Stay abreast of economic indicators

The global credit crunch and the increased uncertainty affect almost everyone. Very few UK businesses are immune to the effects of reduced credit, devaluing housing stock and the greater perceived risk we all feel. These are clearly very difficult times and potential solutions are occupying the minds of economists, bankers and ministers alike. Hence it is important to stay abreast of developments to ensure that management decisions are made in the context of the most up-to-date economic indicators and forecasts.

2. Revisit your business plan

It is perfectly acceptable to revise your business plan more frequently than once a year. If you have not done so for some time, it is worth revisiting it now. Business plans are written with certain assumptions built-in and these assumptions are context sensitive. If your business plan is over 6 months old, then it is likely that you will need to revise revenue figures downwards and costs upwards.  Do this as soon as you can, and revisit key indicators such as current cash burn rates, debtor days etc.  An up-to-date business plan can help ensure everyone is aligned towards the strategic goal of the company; ensure the cash flow is monitored and that the impact of changing assumptions is reflected in the numbers.

3. Review current projects and plans

Most businesses have a number of projects and initiatives on the go at any one time. These projects will consume resources over a number of months and years, and will typically involvement investment of time, people and money. The end goal of the completed project will often be designed to help your company generate additional revenue streams or to protect current streams. Again projects that have been planned over 6 months ago, and that take a number of months to complete should be reappraised. It may be more appropriate to defer projects or put them on hold until the economic conditions are more favourable or until the level of perceived risk and uncertainty declines. Any new contracts with third parties need to have additional safe guards built-in. For example, if exchange rates move outside certain agreed bands, it would trigger a renegotiation of the terms or an option to break the agreement etc

4. Communicate Effectively

It is not just management that feel the pinch when economic conditions deteriorate. It is likely some employees may be saddled with credit card debt, or may be sitting on properties with negative equity and may be worried about their futures. Management need to ensure their employees are aware of issues with implications for them. It is also important that employees are fully aware of the wider context so that any legitimate change initiatives designed to reduce costs are accepted rather than resisted.

5. Consider outsourcing some activities

In most industries it is possible to outsource non-core activities. There are many pro’s and con’s for outsourcing, however, if cash flows are under pressure, the inherent flexibility of outsourcing may be more appropriate until economic conditions improve.

6. Assess exposure to known risks and dependencies

In times of uncertainty it is important to step back and identify risks and to appraise key relationships. Is the company over-reliant on one particular company or industry? While this reliance may have been fine in periods of economic growth, it is important to recognise that a dependency on one supplier or customer dramatically increases the risk. Any vulnerability in one particular industry sector can lead to knock-on effects in the most unexpected of places (as well as in the more obvious areas). A diversification strategy can help to mitigate against an over-reliance on one supplier or customer.

7. Consider Scenarios

The importance of scenario planning grows when uncertainty increases. Scenario planningconsists of management considering a range of plausible future outcomes ranging from a ‘small stretch of the imagination’ to the ‘outlandish’. The aim is to think through the implications for the company if certain scenarios came into effect. So for example what would happen if sales decline by 20% or if oil doubled in price in 2009? By thinking through a number of plausible scenarios, and designing strategies to deal with such eventualities, companies will be better prepared if indeed one of the scenarios does in fact occur.

Success without external funding

Economic downturns tend to be self fulfilling. We all help to drive market conditions, so if we all decide to ‘batten down the hatches’, and become more risk averse we all contribute to prolonging a downturn. However though it may sound counterintuitive, an economic downturn is as good a time as any to start a new business.  This short article discusses how entrepreneurs can bootstrap their way to success, by describing what it means in practise and suggesting some benefits to bootstrapping.

While certain businesses will struggle to get off the ground in a recession (in particular ones that require significant investment), for others, the time is as good as any to take the plunge. For a start, there tends to be a wider pool of qualified candidates available to work as unemployment rates increase. Similarly some companies may reign in marketing spend so there is a greater opportunity to market at more competitive rates. Finally, there are also stronger disciplining forces at play when conditions are tougher as people keep a much closer eye on outgoings. In short, it is a perfect time to bootstrap a start-up.

What is bootstrapping?

The phenomenon of bootstrapping is simply starting a business without external funding such as venture capital (VC) funding. The aim is to maintain a strict discipline on cash flow by managing costs very closely and trying to get the company up and running as cheaply as possible. By ensuring as low a cash burn rate (rate at which a company uses up cash) as is feasible, you increase the chances of your business succeeding. Similarly, without any debt repayments or obligations to shareholders you can afford to be more flexible with your idea. Other commentators, such as Seth Godin, believe bootstrapping is as much a state of mind (1) as anything.

Of course, bootstrapping is not possible for all start-ups as it will depend on a number of factors ranging from the nature of the product or service, whether the business is capital intensive or not, and whether low-cost guerrilla-marketing techniques are suitable in the industry context, etc.

What does it mean in practise?

For me, bootstrapping means behaving very smartly at every cost point, given there is no external investment in the business.  It means entrepreneurs consume business essentials only and are constantly looking for innovative means to substitute costs out of operations.  It means resourcefulness, and plays to the fact that larger companies are less nimble than start-ups.

The phenomenon of bootstrapping can be viewed in stark contrast to the excesses of the ‘Dot-com’ boom.  During this period, companies secured significant funds from financiers and some of these investments were squandered or invested in non-revenue-generating assets such as perks. This profligacy typified a classic case of the ‘Principal Agent problem’ (2), which occurs when the incentives of management and investors are not aligned and management (agents) spends money on items (perks) which are not aligned to generating a return for investors. These included water features in receptions, chill-out rooms replete with table football, offices in prime locations and generous expense accounts. With bootstrapping there is no scope for excess. The sole focus is getting the company running without incurring any non-essential costs.

What are the benefits of bootstrapping?

One immediate benefit of bootstrapping is that you are not reliant on outsiders for funding. As a result there is greater flexibility afforded you, the entrepreneur, as you put your ideas into practise.

Similarly, if the business fails to take off it is less painful to exit as the cash burn rate will have been low, so there are no significant losers. However, if the business takes off the rewards are not dispersed to third parties.  Once there is proof of concept and evidence of demand, it is a lot easier to secure financing at more favourable rates.

Finally, with bootstrapping, incentives tend to be aligned so those that invest their time are rewarded accordingly, which typically leads to greater focus and reduced agency costs (see Principal Agent problem above).

Bootstrapping ideas

Bootstrapping includes outsourcing certain activities, so you pay on a usage basis rather than bearing the full cost. It also means negotiating hard with every supplier you deal with and eschewing capital expenditure in favour of renting or leasing. The following represents a list of some typical bootstrapping behaviour:

* Purchasing office equipment on eBay
* Using a virtual office assistant system rather than a full-time secretary
* Choosing efax solutions rather than buying a physical fax machine
* Using Open Office or Google Docs for word processing instead of Microsoft Office
* Promoting your offering through blogs, commenting on blogs and other relevant forums
* Hiring staff that are generalists and are happy undertaking a range of varied tasks
* Remunerating staff with stock options rather than high salaries

Additional examples can be found in Jason Calacanis’ excellent article called ‘How to Save Money running a Start-up’ and the article by Guy Kawasaki entitled ‘The Art of Bootstrapping’.

The Starbucks office

A major cost for any new business is rent. However, increasingly it is becoming more popular for people to start from their home or a small, flexible rental arrangement.  As a result of these trends and the increased ubiquity of wireless, more and more companies are bootstrapping by using Starbucks as their meeting rooms.

Dangers of bootstrapping

While certain aspects of bootstrapping are clearly useful, it is important not to overstep the line. There needs to be some reasonable amount of cash available. Excessive thrift can be counterproductive and can send out the wrong signals to staff, customers and prospects alike. The objective is not to become compulsive in managing the costs or to expect a company to successfully develop on nothing. As always it is a question of balance. You do not want to lose credibility by being noticeably focused on bootstrapping, but you do want to manage your cash position to move the company forward.

Summary

Bootstrapping is an increasingly popular way to start a business, regardless of the economic conditions. Naturally it is more conducive to certain businesses, such as Internet based businesses, where initial costs can be managed until there is clear evidence of demand. Once the idea you are bootstrapping gains traction and revenue begins to increase, you may then need to switch out of bootstrapping mode. At this point it may be appropriate to seek external funding from the likes of VCs. However once you have proven the concept, the risk for investors reduces a little and hence you should capture more of the upside as you need to give away less equity. In short, the aim of bootstrapping is to keep a low cost base to ensure you can gain a foothold in some market and to generate a sufficient return so you can then assess how best to proceed.