If you are looking into how to start a small business this article is designed to give you some pointers of what you should be looking at in the Start-up stage of a business – at this stage in the life cycle of a business the considerations and planning needed fall into the following categories:

- Decide on whether to should I buy a business or set up a business from scratch or even buy a franchise business. There are relative merits of each route, as discuss in the article link here. A franchise is a good route to take where you are seeking banking finance, as banks like franchises.

- Decide on a name for the business - if you are starting from scratch, you must then consider protecting your name and of course your idea if it is an invention by using the patent protection process. Be very careful with this, as you cannot protect an invention via a patent if the idea is within the “Public Domain”, so don’t go telling people down the pub about your idea until it has been protected, this that would be deemed in the public domain.

- Decide on business bankers – I always suggest that you begin this with meeting up with your personal bankers, as you have a track record with them, which can help in the process here. However, always check around for the best deals on free banking for new businesses.

- Start-up finance required and do your business plans and cash flow forecasts. Whether or not you are looking for start-up finance you should prepare business plans for your business together with some cash flow forecasts. However, if you are looking to seek finance from a bank then a well written business plan is important which must be accompanied by properly prepared cash flow forecasts.

- Choose your business location – depending upon the type of business you are setting up the location may or may not be crucial or you may even be able to start it from your living room at home. However, if you are going into retail the location is one of the most critical decisions you make to get the necessary foot-fall.

- Decide upon a business structure – there are various trading structures for a business ranging from a sole trader to a limited company and the best route to take is discussed in types of businesses and setting up in business.

- Equipment for the business – even the smallest of small businesses requires some equipment and you need to decide how you buy or lease this. If you are looking at some major capital acquisitions you might need to lease or finance these to help with business cash flow. There are tax implications with how you acquire assets and you might want to take these into consideration, but never let the tax tail wag the commercial dog – in other words make your decisions based upon the commerciality of the idea and not the tax implication, but consider it within the overall commerciality of what you are doing. For example, governments sometimes encourage business to buy assets by giving away what is called first year allowances of up to 100% of the capital cost. This means that you would get 100% tax relief in this example for the purchase, whereas if you lease the item you would only get tax relief on the lease payments paid in the year.

- Get Licenses and Permits – certain businesses require licences and some need to have a permit before trading commences. For example if you are about to set up a pub or restaurant with a drinks licence (or buy one) then you will need to obtain a drinks licence.

- You might want to find a Mentor – A business mentor is invaluable and to have someone as a sounding board is a great asset to have. Never under-estimate the learning curve when first starting out on the “Going into business route” and to have someone to talk to is always a bonus. I used to spend many hours talking with my clients in my accounting practice about business “Problems” and how best to expand or how to finance assets or whether to move premises etc. Running a business on your own can be a lonely experience, so any support you can get from fellow businesses owners should be taken up.

Getting the money for starting a business is a stumbling block that many budding entrepreneurs face at the out set.

The first question to answer is should I buy a business or set up a business from scratch with each route having its own complications from a fund raising perspective. If you are starting out from scratch you have the added problem that you have no track-record in business and the business itself will have not trading history.

However, if you are looking to buy a business or perhaps set up a franchise then this is a slightly different proposition in that and existing business will have a trading history and franchise are liked by banks because they are a know quantity. You do still have the slight problem that you have no business track record, but this can be overcome with a sound business proposal.

There are many ways to find finance using No Money Down principles and in addition to this there is also the Enterprise Finance Guarantee (EFG) (Formerly the Government Small Firms Loan Guarantee Scheme, SFLG) to secure any loans, where you don’t have any of your own security. However, the proposal must be robust that would get a loan from a bank except for the lack of security. The EFG is for small businesses with a turnover of less than £25 million in the last 12 months and can be for existing businesses as well as start up ones, so long as they start to trade in the near future.

For a list of the banks that lend using the EFG you can visit the BERR – The Governments Department for Business Enterprise & Regulatory Reform.

The EFG will guarantee loans of between £1,000 and £1,000,000 and will only provide security for 75% of the loan and comes with a 2% premium payable to the BERR on the balance of the loan on a reducing balance basis. However, this premium has been reduced to 1.5% of the loan outstanding for 2009. EFG loans can be used to replace existing overdraft facilities or provide new finance for working capital, equipment and business expansion, with a minimum term of three months and a maximum of ten years.

Click here for a list of EFG restrictions

If you run a business or if you are looking to buy a business then it is not only important to understand the Profit and Loss Statement, but also to understand the Balance Sheet. This post is about understanding the basics of a balance sheet.

So whether you are in the UK or America, which have differing ways of representing a balance sheet, it does not matter really, but what does matter is the figures on the report and what they mean.

Essentially a Balance Sheet is made up on three elements – Assets, Liabilities and the Capital and Reserves – each of which I will explain further.

Balance Sheet Assets

Assets can be broken down into two sections and on a balance sheet these are termed – Fixed Assets and Current Assets. Fixed assets tend to be long-term assets and would include such things as freehold property and long-term leases (normally a lease of over 50-years). Other fixed assets include the assets needed to run the business, like plant and machinery, vehicles and office furniture, fixtures and fittings.

Essentially, Fixed Assets are those assets that cannot be converted into cash too easily or are termed illiquid – we all recognise that to convert a property into cash may take several months and especially with commercial property. Smaller assets, like motor vehicles are a bit easier to convert to cash, but it may still take some time to do so.

Current Assets are those assets that are more readily converted into cash and are term “Liquid Assets” and of course does include cash itself, which is either in the bank or cash in hand in the petty cash tin. Other current assets include “Trade Debtors”, which is the amount owed by the businesses customers and stock.

Balance sheet liabilities

Liabilities or creditors are those amounts that are owed by the business to a third party and are normally broken down into two types – Amounts Falling Due within One Year and Amounts Falling Due After One Year.

Amounts falling due within one year or short-term liabilities would include amounts owed to the businesses suppliers or “Trade Creditors”, as these are usually paid within weeks or months or when the liability is incurred so are deemed to be short-term. Other short-term liabilities would include payroll liabilities, short-term loans, the amounts of hire purchase agreements contracts falling due within the next 12-months and so on.

Amounts falling due after one year would include, longer-term loans and the amounts due on hire purchase agreements due after one year, plus any other liabilities that do not fall due until after 12-months.

Balance sheet capital and reserves

The reserves on the balance sheet would mostly include the cumulative profit and loss that the business has made to date and the capital is represented by in the case of a limited company the share capital or the amount put into the business in the first place when it is set up.

An example balance sheet is shown below:

XYZ Company Balance Sheet as at 30 April 2009
	£	£
Fixed Assets		75,000
Current assets
Debtors	25,000
Stock	12,000
Cash at bank and in hand	45,000
	________
	82,000
Creditors:
Amounts falling due within one year	38,000
	_______
Net current assets		44,000
		______
Total assets less current liabilities		119,000
Creditors:
Amounts falling due after more than one year		25,000
		_______
		94,000
		======
Capital and reserves
Share capital		100
Profit and loss account		93,900
		_______
Shareholders funds		94,000
		======

Understanding a balance sheet

In the above example balance sheet there are a few things to explain and understand, as follows:

This particular company has fixed assets of £75,000 and if you were looking at this business with a view to buy it you will need to get a breakdown of these fixed assets and what they are and are they in fact worth the amount shown on the balance sheet.

The next important figure and one that is pivotal to a business and its balance sheet is the “Net Current Assets” figure, which in the above example balance sheet is £44,000. This is the difference between the businesses total current assets and total short-term liabilities (or those falling due within one year) and defines whether or not the business is solvent or not.

You would need to be worried if the current liabilities exceed the current assets – i.e. Net Current Liabilities and would imply that the business is in real difficulty and should all the short-term liabilities be called in the business would not be able to meet these and might then fold or be forced into liquidation. The term “Liquidation” is referring to the converting of assets in to cash – as noted above it was discussed about either illiquid or liquid assets and in general termed “Liquidity“, which itself refers to the ease at which an asset can be turned into cash.

You would also need to be a bit concerned if the net current assets figure was very low, as this might be an indication of a business starting to get into trouble. I would suggest that in our example XYZ company has not only got a comparatively high level of net current assets in relation to the short-term liabilities, but the cash balance of £45,000 is good.

The other relationship to pay attention to is the difference between Total Assets (Fixed assets added to current assets) and Total Liabilities (liabilities dues in less than one year added to liabilities due in more than one year) and in the above example this is £94,000 and is equal to the total capital and reserves. It is essential for a healthy business to have its total assets exceeding its total liabilities, which would normally indicate a profitable business or one whereby the owners have put in sufficient capital for the business to continue through start-up.

A profit and loss statement explained so that if you are new to business you can understand how this works.

The basics of a Profit and Loss Statement is that the report begins with “Total Sales” disclosed net of Value Added Tax (VAT). The next figure to appear on the report is Cost of Sales or in other words, the amount that it cost you directly to make the “Total Sales” in the period under review, net of VAT and net of opening and closing stock.

The resulting figure after deducting Cost of Sales from Total sales is the businesses Gross Profit and these figures are referred to as the “Top Line” – an example of the “Top Line” figures is, as follows:

 

XYZ Company Profit and Loss Statement for the period ended 30 April 2009
	£	£
Total sales		340,000
Cost of sales
Opening stock	11,000
Purchases	120,000
Closing stock	(13,500)
	_________
Cost of sales		117,500
		________
Gross profit		222,500
		======
Gross profit margin		65%

In this example XYZ Company’s gross profit is £222,500 and the Gross Profit Margin is 65%, which is calculated as £222,500/£340,000 and means that for every £100 worth of product or services sold the business makes £65.

The company’s gross profit is the profit that goes towards paying the overheads and expenses of the business, so it is crucial that a business makes a gross profit otherwise the owners might as well shut up shop and go home. This might be like stating the obvious to some people, but believe it or not, in my time of consulting with businesses I have come across businesses that are making a gross loss and they wonder why they are in so much debt!

The second part of your Profit and Loss Statement is what is known as the bottom line figures, which includes the businesses overheads or expenses. The overheads include expenses such as employee wages, rent and rates, telephone charges, marketing and advertising costs, printing and stationery costs, bank charges and loan interest and so on.

The overheads are those expenses that arise whether or not the business makes any sales – so for example, where the business rents it premises the rent will need to be paid each month regardless of whether the company makes any sales or not. This is how these costs are distinguished from the businesses cost of sales, whereby the cost of sales are only incurred as the business makes sales and except for buying the initial stock, if no sales are made then the business will not make any purchases.

A further example of a profit and loss statement which includes overheads is shown below:

XYZ Company Profit and Loss Statement for the period ended 30 April 2009
	£	£
Total sales		340,000
Cost of sales
Opening stock	11,000
Purchases	120,000
Closing stock	(13,500)
	________
Cost of sales		117,500
		________
Gross profit		222,500
Overheads*		150,000
		________
Net profit		72,500
		======
Net profit margin		21.3%

* Normally the overheads would be split out to show each expense as a list, but for simplicity in this example I have amalgamated this figure into one total.

When you deduct the overheads from the Gross Profit you get the businesses Net Profit or if the overheads are in excess of the gross profit the business would be suffering a net loss. This is okay and is normally expected with a new business for the first year or so, until the sales are to a level that produces a high enough gross profit which exceeds the overheads.

The businesses Net Profit Margin in this example is 21.3% which is calculated as £72,500/£340,000. You should really be aiming at a Net Profit Margin of upward of 10% really, especially in a small business scenario. To learn how to improve your businesses Net Profit Margin you can take a look at the Profit Increase Software.

If you are new to business and need some help then by all means email me at info@in-business.org.uk and I will try to answer any questions you might have. Alternatively, you can visit my Business Forum and post your question there and join the business discussion.

The American franchise chain Subway has announced that it plans on opening 600 new stores across the UK.

This is both an opportunity for those who have lost their jobs and who might be looking for a new business venture in setting up a franchise and good news for the UK economy, as it will create up to 7,000 new jobs.

If you have been made redundant you might think about using your redundancy money (if you received any that is) to set up in business. A good opportunity in this is to set up a franchise, as you are setting up a business which is a known quantity and one that the market already recognises, which not only means a higher likelihood on making it a success, but also the banks would look on this type of business more favourably.

Every cloud has a silver lining; as does every downside have its upside.

During this down-turn there will be many people that are made redundant, but this does not have to be the end and could lead you to better things – much better things, as this video demonstrates…

Starting a business in a downturn from the BBC

In the last recession back in the 1990′s, thousands lost their jobs back then too. I hope that this video will give you inspiration.

Have you ever considered buying a business or are you in the process of buying a business? Or perhaps you are considering or have thought about setting up your own business from scratch.

If your answer to any of these questions is yes, then you will probably recognise how difficult and daunting this process might be. This article is therefore directed to help you with that decision process.

So the first question you need to answer is:

Do I set up a new business from scratch or do I buy an existing business?

There are pros and cons for both and you will need to weigh these up when deciding upon which route to embark upon. If for example, you have invented the next best product that does not presently exist on the market, then clearly, if you consider this to be a product that does indeed have a market, then setting up from scratch is the route to take, subject to patenting the idea and then doing some initial market research.

However, if you are not the inventor of the next TV or telephone etc. then you need to weigh up whether it will be easier for you to buy a business or start one in a field that you already know. To help you consider the answer to this question it is important to consider the following advantages and disadvantages:

Advantages and disadvantages of buying an existing business:

Advantages

- Some of the groundwork will already have been done in getting the business up and running.

- It might be easier for you to get finance as the business will have a proven track record.

- A market for the product or service will have already been demonstrated.

- There are established customers, a reliable income, a reputation to capitalise and build on, and a useful network of contacts.

- A business plan and marketing method should already be in place.

- Existing employees should have experience you can draw on.

- Many of the problems will have been discovered and solved already.

Disadvantages

- The present owner may have close relationships with the existing customers and therefore when they sell and leave you need to ask the question, will the customers leave as well? This is one of the important question you must ask, when you do your initial checks on a business for sale.

- You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc.

- If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.

- You will need to honour or renegotiate any outstanding contracts the previous owner leaves in place.

- You also need to consider why the current owner is selling up. Normally if they are selling for genuine retirement reasons or ill health this is okay, but always check the reasons for the sale of their business!

- Think about the feelings of current staff – it’s possible they may not be happy with a new boss, or the business might have been run badly and staff morale may be low.

Having listed a number of advantages and disadvantages attached to buying an existing business, I would you to consider the following further points:

If you buy an existing business you know for a fact that a market exists for the product or service that it sells…

You might be saying, however, that the new business I had intended to set up from scratch has an existing market because there are other companies already selling the product or service.

That might be true, however, you must recognise that it takes time and money to gain market share and when you start from scratch you are starting from zero. Whereas, if you buy an already established business, you are buying both customers and an income stream so most of the hard work has been done for you. That is not to say however, that the business you are buying is in a shrinking market or in a market that is badly affected by a recession.

So you need to consider the economic cycle you are in when you buy a business, because you might not want to buy a company that sells televisions and other luxuries in the middle of a recession, for example.

When you buy a business most of the hard work has been done for you…

There is no doubt that the hardest part of any business is the early days and getting it set up, getting your first clients and getting your initial cash flow. Setting up from scratch requires you to find premises; employing staff; setting up computer systems; deciding on the marketing; getting to be known in the market place; finding suppliers; getting accounts with suppliers; etc. all of which takes time and can in some cases mean a steep learning curve.

Other areas of setting up a new business that you might require is funding and sorting out banks and finance; accountants and other financial advisers; setting up systems and processes within the business; business insurance; telephone systems; etc. whereas most of these will have already been sorted out by the present owner of the business you are considering to buy (not always correctly mind you!)

When you buy an existing business, most of the hard work has already been done for you and whilst you will probably want to appoint your own accountants and financial advisers, most of the other points will have been addressed by the previous owners. Once you have your feet under the table, as it were, you will very likely want to change the way the business is run, especially on the marketing front, however, it is probably much easier to change an existing set up than to start from scratch, because the existing business will already have clients, but more importantly have cash flow.

This existing client base is something that you can go to work on and to build upon and it is important to recognise the value of a client database. Most businesses forget to market to their existing client base so this will probably be your easiest route to growth, by marketing to the businesses existing clients. It costs much more to gain new customers than to sell to an existing one! Which is point missed by most business owners.

If you are swaying towards buying an existing business then it would be better to look to one where the marketing is being done very well right now. This way you are buying “Potential” in the business and can make “Easy” profits and faster gains, let me explain:

When I mention the word marketing – I mean this in the widest possible sense of the word. So for example, does the business make full use of its existing customer base for other products or services that it sells or could sell? Are the premises of the business presentable and the employees welcoming and well dressed? What forms of advertising is the business using and are these being optimised?

There are many more questions of this type you could ask, which are all linked to the marketing of a business. There are some businesses that trade and survive despite themselves and the way in which they are run. You must have been to buy something from a company in the past and received a shoddy customer service! Did you ask the question; how on earth does this business survive?

The truth is that if this is a business you are considering to buy, they are surviving, they sometimes do and these types of businesses come on the market for sale all of the time. So I commend you to buying this type of business and with a little bit of tweaking here and there you will likely turn a loss or a small profit into a good profit in no time. What’s more you should be able to pick up a company like this for a cheap price because of the low profits and of how it is run. A more profitable business is worth more and will be easier to sell again in the future.

My final consideration in this article is in terms of assets at a discount…

If you were to set up a business from scratch, it is likely that you will need to purchase the assets to run the company, at full retail price! For example, all businesses will have computers, telephone systems, office desks and chairs, together with the specific assets needed to run the type of business you might be looking to set up. However, when you purchase an already existing company you will get the assets thrown in for “FREE” because the business cannot be run without them. Admittedly, some of these assets might need to be replaced, but on the whole they work and will come within the value of the business you are buying.