A well-thought-out business idea must have considered marketing the product or service, as well as the financial implications for the survival of the business and the controls within the business.
Markets and marketing
Once you have decided on your business idea and aims, you must look at the likely market for your services.
If the idea does not seem to work straight away, think of other ways you can make it work. Talk to other people, including potential customers, to get their views on other ways. If there are no alternatives, then it is back to square one - but at least you have avoided an expensive mistake.
Effective marketing is necessary for the success of any business. Without marketing, how would you expect your customers to know about your product or service.
Who needs me? Who wants my services?
Talk to your family, friends and possible customers about your business idea. Check on market trends by looking in the trade journals in your local library. Examples of possible trends are the rise in spending on sports goods, gardening and health foods, while records, books and knitting wools could be on their way down. If your line of business is in a declining market, think whether you can still make it a success. If you appear to be in a rising market, good. But remember, you will still need to persuade customers to buy from you rather than from competitors.
Think about who is going to buy your product. If your product is very expensive, then your sales may be limited. Where you trade and advertise depends on the price of your product and your position in the market. These factors are important when comparing your product to the competition.
Do your own market research by asking people for their opinion of your business ideas. You could find out something valuable and publicise yourself at the same time even before you start.
What is my 'USP'?
The USP is a famous marketing term invented when American advertising was at is height. The idea was that a product had to have a Unique Selling Point (USP) which made it different from the competition and persuaded people to buy it. You should think about why customers might buy from you and not someone else.
If you are marketing a product which has a USP that can be easily identified (Wee-Mix - ready mix concrete in small quantities) or that can be given a USP (Just Mercs - the Mercedes-only minicab service), advertise and promote it. If you are in a business where there is not much difference between products, or you sell the same things as everybody else, your USP could be better service, more convenience, car parking, fast delivery, delivery to the door, after-sales service, a wider range of products and so on.
Be careful of just competing on price. After all, it is easy for your competitors to cut prices too.
But remember, if your USP puts your business into a small part of the market, you need to be sure you will attract enough custom to survive in that market. Even sophisticated marketing companies fall into the trap of specialising too much.
Where do I set up my business?
When Conrad Hilton was asked to give the three most important factors for the success of a hotel, he is reported to have answered 'Location, location and location'!
Location is usually the most important part of a retail business, and it can be very important to some other businesses too. Even if you are working from home, you will have to think about things like planning permission and access.
If you intend to lease or buy a retail outlet, check out the location thoroughly. Look at the number and kind of shoppers, and facilities such as car parking. Also ask the police, or people in the neighbourhood, about local conditions and about things you might not learn from the owner of the business, such as whether there is a high crime rate in the area.
Don't forget to ask the big question, 'Why are you selling?'
Who are my competitors?
Competition cuts both ways - on the one hand, it means that there is already a demand for your product, but on the other, it means you have to try harder. Direct competition comes from businesses who offer the same product or service as you. Indirect competition comes from all the other ways customers might spend their money, instead of with you.
Strengths and weaknesses
Right from the beginning, you need to be clear about why people should come to you, and how you might attract more. To do this, you need to know all about your competitors' strengths and weaknesses. If yours is the kind of business that sometimes comes on the market, go to the local business estate agent and ask for details of any relevant businesses for sale.
If an appropriate business is for sale, think about market opportunities in the area. Consider why these similar businesses are for sale. If your competitors are limited companies, you can examine their accounts in the public records of Companies House. (See Useful addresses attached).
Talk to as many people as you can. People already involved in the type of business you are interested in often enjoy talking about it.
Ask your competitor's customers how they think the business is doing. Find out what it is doing right or wrong. People love being asked for advice.
The local trade associations can give you information and you can look at statistics such as Business Monitors which the Government publishes. You can usually get these at your local reference library.
Pricing my product or service
To a large extent your prices will depend on your market and costs. To make the most profit, you need to know what the customers will pay, what competitors charge and the costs of making each product. You will soon find out if you set the wrong prices. If you set prices too high, people will not want to buy your product. If you set prices too low, your product may look cheap and you will lose money.
You will probably have to change your first prices as you discover 'true costs' and the effect of price on your particular market.
When setting your prices, remember that you need to make enough profit to pay all the costs of the business, including your own wages.
Pricing tactics
Pricing tactics can be important For instance, it is usually more effective to mark prices clearly than make customers ask. Price breaks can also be useful. For some products, it is better to break prices at 99p rather than round them up to the pound. If you study the pricing tactics of the big mail order catalogues and big stores, you will see that they rarely apply round prices.
Other tactics can also be effective. For example, the antique dealer who consults his record book before he states his price has a better chance of making a sale, than someone who seems to just pluck a figure out of thin air.
Price-cutting
Cutting prices is not normally a good idea for any business. If your profit margins are small, your cash will be tighter and you will have less room to move. It is better to sell good products at a fair price and make a decent profit. For the long-term, remember that your customers have selective memories. They will forget the good price, but they will remember the bad product forever.
5 steps to help you work out your prices
- Work out your household and personal overheads for one year.
- Work out the salary you would need to pay yourself. Make sure this is enough to cover your household and personal overheads.
- Add all your business costs for the same year to your salary.
- Divide the total by the estimated number of sales over the year. This will give you the cost per item.
- Add on the profit you want to make for each unit.
Check what price your potential customers might pay. If they are not willing to pay your price, you may need to:
- reduce your costs; or
- highlight the difference between your product or service and your competitor's - to justify the higher price.
Promoting my product
People need to know what you are selling, where you are, and why they should buy from you rather than anyone else, so you will need some form of advertising and promotion. Your advertising should create an image that attracts attention and is easy to associate with your business.
An advertising agency is likely to be too expensive, but there are individuals or other small businesses that can help. Do talk to them.
Do it yourself
There is a lot of effective advertising which you can do yourself. Start with your sign. A good sign is a great investment. A catchy slogan (WEE-MIX, YOU LAY. Just enough readymix for your job) gets you remembered.
Simple A-boards outside premises will attract customers. Try to think of ingenious ways to remind them of your name at times when they need you.
An enterprising plumber called on the homes in his area with his business stickers, and said, "You don't need me now, but stick this on your central heating boiler for when you do". A simple but effective way to get his business message over in the right place at the right time. Distributing leaflets within a certain local area is also a very good way of advertising the product or service you are offering.
Don't forget, local press, cinema and even local radio are also fairly cheap ways of advertising in many areas.
'Word of mouth' - advertising that money can't buy
Whatever your business, word of mouth is likely to be very important indeed, and especially if you are offering a personal or a specialised service. How do you encourage word of mouth? You can do it by:
- satisfying your customers with work well done;
- having a good relationship with your customers;
- building up a good reputation and protecting it, by sorting out any problems quickly; and
- getting your name mentioned in trade magazines, or by local press or radio, possibly through community public relations activities.
Creating word of mouth is not easy, but if you can do it, you will have created advertising that money can't buy - the most effective advertising of all.
The power of 'point of sale'
|
|
|
|
Number of Sales per Week |
|
|
Product |
Type of Display |
No Sign |
Handmade Sign |
Manufacturer's Sign |
|
Paper Tissues |
Floor Display |
52 |
75 |
94 |
|
Bleach |
Wire Basket |
15 |
24 |
29 |
|
Biscuits |
In Dairy Case |
6 |
22 |
38 |
|
Sponges |
Shelf Extender |
9 |
15 |
- |
|
Toothpaste |
Floor Display |
10 |
29 |
34 |
|
Doughnuts |
Table Display |
45 |
105 |
- |
In this chart, the first column of figures shows what happened when no signs were used. The second shows what happened when handmade signs were used. The third shows what happened when manufacturers' signs were used.
Displays with signs increased average sales by over 60% compared with similar displays without signs. Progressive Grocer and Great Atlantic and Pacific Tea Company (A&P) Point of Sale research, USA.
Signs at point of sale
Tests carried out by a large American supermarket produced the following results:
- Stores using simple handwritten signs with 'As advertised' on them to promote products on shelves increased their sales. This is compared to products in stores with no signs.
- Using 'New Item' signs increased sales of powdered bleach by 73%.
These are just 2 examples of point of sale tests which show the power of signs. Even if you cannot use them in your business, they prove the principle - point of sale pays.
Planning your business
You need to plan your business. Trying to run your business without planning is like floating aimlessly at sea in a fog. You will not know where you are going, any more than where you have been or where you are. What is worse, sooner or later you will hit something.
Working out the cash you expect to get is part of the planning process. It will show you whether you need more finance. If you do, it will be easier for your bank or any other organisation to help you if you can give them a Business Plan which covers all of the information in a logical way.
Writing the plan
Putting your business plan in writing can help you, especially if you need to raise finance.
A format for a Business Plan is linked from this image. To help you with your Business Plan, Operating Budget and Cashflow Forecast, which we talk about later in this chapter, you can ask a member of staff for a copy of our free 'Planner' software for your PC. ??????
However, before we go any further here are a few useful tips if you need to approach a bank or other organisation for support.
Put yourself in the shoes of the person you are making your proposal to. Would you back your business based on the information you give?
Be as clear and as brief as possible. Don't leave everything until the last minute. Give yourself plenty of time and send a copy of your plan before the meeting.
Be realistic. Look at things clearly and decide whether to include alternative plans if the best or the worst happens. Be ready to answer searching questions about the information you have put together.
Now we'll look at the various headings in your business plan document.
The business
Your bank may know some or all of the background information they need. However, they will be particularly interested in your business aims for the coming 12 months and beyond.
Be concise and realistic about these. You should be able to achieve your aims, which must agree with the figures in your Cashflow Forecast and Operating Budget
Key personnel
Include brief details in the plan itself. If necessary, add more details about experience, job responsibilities and health on separate sheets of paper. You need to give a clear summary of the experience people in your business have, including your own. The exercise will also help show whether any of your staff need training. Be ready to answer questions about your own abilities and skills.
Your product or service and marketplace
One of the most important parts of any business plan is how you see your market. It shows a banker how much you have thought about your product and its place in the market. Can you show that you know about opportunities in the market?
Premises, plant and machinery
Any lender will be interested in your premises for a number of reasons. In particular, you will have to show that your premises are in the right location. And if you need to spend a lot of money on your premises, this must be covered in the plan.
With plant and machinery, a banker will need to know how old it is, its present value and how much it will cost to replace it, its condition and whether it can cope if you expand. Be open and realistic when you give these details.
Assets you have as security
Any decision to lend you money will be based on the prospects of your proposed business and whether it will be able to pay back the loan from profits. However, there is always an element of risk. Depending on how much risk the lender thinks there is, you may need to give security as insurance against things going wrong. Be prepared to look at what business and personal assets you have.
If the lender needs security but your assets do not cover the amount you want to borrow, don't panic. The bank could still be able to help you by using the Government's Small Firms Loan Guarantee Scheme.
Finance
This is the last part of your plan.
Before you can fill in certain parts of this section, you must first work out your expected cashflow, income and costs. For example, if you think you might need an overdraft, you must check the finance you need against the Cashflow Forecast, which we discuss later.
How much finance do I need?
It is easy to underestimate the amount of money you will need to get going. No bank wants you to have a bigger loan than you need, but not having enough finance is one of the most common problems in small business, and can be fatal.
Carefully filling in your Cashflow Forecast is the best way of estimating how much you will need.
Remember that a bank will be more likely to back you if you are putting the same amount of money into the business yourself.
Asking for money
If you need to borrow money, and are already in business, your bank will want to see copies of previous years' accounts together with any other relevant financial information you have. This might include VAT records, Cashflow Forecasts, a list of your present debtors and creditors and so on.
If your business account is not already with the lender, you will need to show your previous bank statements. Your current account balance should match the opening bank figure in the Cashflow Forecast you produce for your business. It is always helpful to give your Business Plan and any other information to your bank well before your formal discussion with the manager. This gives the bank time to consider your proposal.
If your bank agrees to lend you money, they are not making a recommendation about the possibility of your business plan succeeding.
What do you want the money for?
Say exactly what you want the money for. The money you need to run your business day-to-day usually comes from an overdraft. The kind of money used to buy premises or plant and machinery is usually arranged through a bank loan. When you take out a loan make sure the repayment term is the same as the working life of the asset.
For example, if you need a machine which you think will be useful for 5 years, then plan to pay back the loan over 5 years.
The following is part of facsimile Business Plan. The figures in it are only examples. Just because we have used these figures, it does not mean we think the idea or the information are examples of a good business risk.
Operating Budgets and Cashflow Forecasts
Operating Budgets
A lot of businesses do not make a profit or have enough cash at the right time because the management has not planned ahead. Too often, they do not know how much profit or loss has been made until months after the end of the financial year. And often, cash is not properly provided for until there is a crisis.
Budgeting gives you a useful planning tool. By comparing your actual performance with the budget, you can spot difficulties early on and take action to put them right. The form gives you a useful framework for your first Operating Budget. When you fill it in, you will have a fair idea of the profit you might make. However, all forecasts are based on assumptions, so these must be specific and as realistic as possible.
Alternative plans if the worst happens
Also think about 'building in' unforeseen costs in case the worst happens. This can be shown as a separate item or by building it into the individual cost figures.
Whatever you do, you must explain your reasoning. Remember, this is a plan for your trading operations. It is to do with profit and loss, not cash. Include any item that gives a profit, or is a cost against profit. Do not include any other items, such as capital expense, if they will not directly affect your profits.
You must also be clear about the difference between the various costs of running your business. Some will vary depending on how well your business is doing (variable costs). Some will not change (fixed costs or overheads).
Before reading on, you will find it helpful to open the Operating Budget form linked here.
Variable costs
You may see the terms 'cost of sales' and 'direct costs' as well as Variable costs'. They are all similar.
Your variable costs are linked directly to producing your goods and services. They are the costs of your raw materials, components and so on, as well as the wages of any employees who actually produce the product or service.
Fixed costs
You may see the terms 'indirect costs', 'overheads' and 'expenses' as well as 'fixed costs'. They are all similar.
You will have fixed costs, even if you do not make any sales. They include rent, rates, heating, lighting, insurance and salaries, including your own.
At this point, we must explain the term 'depreciation' which appears on line 30 of the Operating Budget. Depreciation takes into account the reduction in value of an asset over its working life. It is an expense the business must pay regardless of how much business it does, and so you should include it in the Operating Budget as a fixed cost
Now that you have looked at the different costs, you can work out your break-even point which is the level of sales above which you start to make a profit.
Cashflow Forecasts
Once you have worked out your Operating Budget, you are ready to move on to your Cashflow Forecast, linked here.
Preparing a Cashflow Forecast is not just about taking the figures from your Operating Budget. We will discuss some of the differences soon. First, let's consider the reason for a Cashflow Forecast. Cash is the lifeblood of your business. Managing cash badly is one of the main reasons for business failure.
The time you spend working out your cash needs and monitoring cashflow is time well spent. This is because you can:
- find out when you might not have enough cash before it happens;
- find out when you might make extra cash and use it efficiently;
- make sure you have enough cash for any necessary capital expense; and
- find out how to use your resources more efficiently and reduce costs.
How do I work out my Cashflow Forecast
Like your Operating Budget, your Cashflow Forecast will be based upon assumptions. Again you must be realistic. Think about the best and worst cases and explain the assumptions you make. The more realistic your forecasts, the better any bank will like them.
Unlike your Operating Budget, your Cashflow Forecast is not to do with profit and loss. It is just your best estimates of how the cash will go in and out of your business over a certain period.
Things to bear in mind
- Think about the period of credit you give your customers or take from your suppliers. For example, if you can keep your customers to 30 days' credit (which will not be easy), your Operating Budget could show the sales you invoiced, say, in January. But this cash should not be in your cashflow projection until February. And then only if you are sure your customers will pay on time. If you have never had dealings with your suppliers before, you might have to settle their bills immediately. Obviously, this will affect your cashflow.
- Your forecast should show all cash you will pay and receive, including your own salary, capital spending and loans. These are all part of your cashflow. However, depreciation is not included in the cashflow because it is only a book entry. It does not mean real cash coming in or going out of the business.
- VAT will be shown in your Cashflow Forecast but not in your Operating Budget. This is because it is not a charge against profit and loss, but a cash settlement.
Please note: if your business cannot claim back VAT because it is not registered, you must include the VAT element of your costs as an expense in your Operating Budget. As you will not get it back, it will affect your projected profit.
