Chapter 15: Assessing business start-ups

 

 

Why Start-ups can be risky and why many fail?

 

1/6 of new products succeed in the market place

Failure rate = 80%

 

Reasons for business failure=

• Poor cash flow management
• Lack of effective market research
• Lack of effective planning
• Lack of skills needed to run a business and lack of business training
• Problems in coordinating all the different aspects of the business
• Failure to turn what looks like a good idea into a profitable business
• Lack of finance to fund the business
• The actions of bigger competitors
• Difficulties in developing a solid customer base
• Difficulties in acquiring affordable premises
• Unexpected changes in demand for the product/service
• Unexpected changes in costs
• Delays and unavailability of supplies

Financial Difficulties: Raising Finance

The main issues are:

• It can be difficult to raise sufficient finance to get started. A new business has no 'track record', so lenders see it as much more of a risk than an established business.
• This 'risk' leads to higher interest rates being charged in order to balance the risk to the lender.
• Banks want collateral or security. This means owners putting up personal guarantees for any loans, offering their own assets (such as their homes or business premises). In effect, the owner is taking the risk rather than the lender.

These financial issues can:

- Slow growth of the business

- Threaten the survival of the business

- Affect the productivity of the business

- Affect the ability of the business to invest (e.g. in new machinery or premises)

 

Financial Difficulties: Cash Flow

• Profitable firms --> Impossible to keep trading --> Unable to meet current debts
• Cash tied up in stock that cannot be used immediately to pay bills
• Creditors slow to pay for its debts
• Business start-ups make a cash-flow forecast as part of the business plan --> Shows expected variation in working capital needed over time --> Indicate when overdraft facilities required to cover shortfalls.

Competition and the difficulties of building a customer base

 

The success of a business start-up will be determined by its ability to attract and retain customers. To do this, it will have to offer something more than any of its competitors and to gain customer loyalty.

 

Factors to consider when trying to encourage customer loyalty:

• Providing customers with service that is efficient and meets their expectations
• Providing a good after-sales service and dealing effectively and positively with customer complaints.
• Understanding customers' buying habits and ensuring that stock and staff availability are appropriate
• Ensuring that contact between customers and staff is always friendly and efficient.

 



Chapter 4: Developing business plans

Definition of a business plan: A report describing the marketing strategy, operational issues and financial implications of a business start-up.
 
Benefits/Purposes of a Business Plan:
 

• To help the entrepreneur set clear objectives
• To guide the entrepreneur towards strategies/actions needed to meet these objectives
• To encourage entrepreneurs to think plan through thoroughly therefore increasing likelihood of success
• To persuade lenders to invest capital in to their business by demonstrating why they are likely to succeed - banks will require a business plan to look at before giving bank loans or overdrafts.
• Can aid the overall running of the business as the working document can be used to monitor progress and progress can be reviewed regularly.

Disadvantages of a Business Plan:

• Weaknesses must be recorded for accuracy.
• Plans often underestimate start-up and operating costs.
• Overly optimistic on potential.
• Competitor information can be too vague.
• Overly optimistic in financial forecasts.
• Do not always allow for delayed payments or bad debts.

Contents of a Business Plan:

 

     1. Details about the business
Includes: Name, Location, Legal structure of business, Trade Description

     2.Personal Information

Details of the owner and those managing the business.
Includes Their: CVs, skills, experience, financial commitments, training, staff

     3. Objectives

Must be SMART (Specific, measurable, agreed, realistic and time-bound)

    4. Marketing Plan

Shows: The gap in the market, Results of market research, Market analysis (e.g. type, size), Pricing strategies, USPs, competitor details, details of potential customers, promotional/selling techniques

    5. Production Plan

Includes: How goods/services will be made, day-to-day practical details of activities involved (e.g. materials, staff, equipment, capacity)

    6. Fixed Assets

e.g. Premises and Equipment

    7. Financial Forecasts

Includes: Sales and Cash-flow Forecasts, Projected profit and loss account, balance sheet for 3 years, breakeven.

    8. Finance Needed

Includes: How Much?, When?, What form?, How it will be used, forecast speed of repayment/rate of return on investor's capital.

    9. Collateral

What security is being offered? How much is it worth?

   10. Long term Plans

   11. SWOT Analysis

How the business intends to build their strengths, exploit their opportunities, reduce its weaknesses in order to overcome any threats.

Here is an example of a SWOT Analysis below:

Sources of information for a business plan:

• Market Research
• The owner's business experience
• Bank managers for financial advice
• Accountants for financial advice
• Local enterprise agencies
• The Prince's Trust - offer help and funding for entrepreneurs aged 18-30 and those over 50 respectively
• Business Link - a government funded service that provides general advice and support to start ups.

Q: Explain how any start-up business might benefit from an organisation such as Business Link. (5)

A: Any start-up business might benefit from an organisation such as Business Link as they provide information, advice and support needed to start, maintain and grow a business. They can help with making your business plan. This would be very beneficial as the business may not have large teams or all  the skills necessary to plan and run a business. Business Link can also help you to raise finance by providing information on loans and grants that they may be able to access. They can also give you advice about the most appropriate bank accounts to open, information on trademarks and advice on exporting etc.. They can also support you when you are going to meetings with your bank managers as the advisors will accompany you to these meetings.



Points of analysis when discussing the importance/helpfulness of a business plan:

Clarifying Objectives=
- Clarifying objectives is important because otherwise you would not know if you have made any progress.
- Can compare progress against targets allowing you to see if business is succeeding or failing.
- If they fall short of an objective then action can be taken to rectify the problem.
- Objectives can give direction.
- Objectives can allow you to monitor the company to check it is on track, its employees and the departments.
- Clarifying objectives could be seen as a waste of time as you do not need to write it down to know your objectives.

Bank Loan=
- You have to have a GOOD business plan in order to gain a bank loan. Could they still set up the business without the bank loan? Would the business have succeeded without the bank loan?
-The bank loan can help expansion. Leading to more customers, more revenue.
- You could argue that bank loans are not essential as you could use other sources of finance like your own savings.

Thinking Plans through thoroughly=
- Allows business to think through their plans thoroughly and so reducing risks.
- SWOT analysis can help to make improvements, expand, find opportunities etc...

Overall=
- Depends on the size of the business
- Elements of the business plan are vital for future success of the business.
- Key to success is not the business plan but how well the entrepreneur implements their business plan.
- Other factors influence its final success