Start-Up In A Slow-Down With Neil Hughes, accountant & business advisor with Hughes Blake July 23rd 2008 With all this talk of doom and gloom and recessions, is there any financial good news out there at all, we wonder? Oil is down at a six-week low ... will the oil companies cheer us up? Well you have to look fairly hard for it to be honest, in my view not because it is not out there: despite the fact that many businesses in Ireland are still doing very well, talk of recession and the fallout from the construction slowdown is now dominating every media outlet. 60/70 people to be laid off in Davys, 145 people to be employed by Citibank in Belfast and 100 people to taken on in technology companies in Limerick: which story makes the front of the Irish Times? I'm not going to keep going on about it but I understand that there are multi billion euro announcements going to be made in the coming months regarding investment in Ireland and I don't think people should panic just yet. And I don't think they will. A Silver Lining: An Opportunity To Own Your Own Business We have a culture of hard work in Ireland which I believe will see us out the far end of the recession, and in my view many people should take this opportunity to think entrepreneurial: would I like to run my own business? If someone is unfortunate to be made redundant many are going to think about becoming their own boss. What skills do you need to be in business? In my view anyone with an appetite for hard work will succeed with their own business. The decision to be your own boss is a leap of faith: and the faith you need is faith in yourself. Being your own boss can bring emotional fulfillment as well as financial independence if the business is a success but it takes confidence in your own ability. Once you make the decision to leave the security of paid employment and go out on your own, as far as I'm concerned anyone of average intelligence should be able to master the necessary business skills to get you through if they follow a few simple rules. You don't just 'find' yourself self employed: If you are thinking about going into business, sooner or later though Aonghus there will come a time that you just have to close your eyes and jump. You can talk about it forever and I have met a lot of people caught in paralysis by analysis. Once you have your business plan in place, you have to go for it. Preparation is critical for success in business start-ups, no less than in any other aspect of life; we are going to have a look a bit later on at preparing a business plan: but its ambition, energy, industry and perseverance that are all required after you take the leap. The single best piece of advice I ever got in relation to business was whatever problem you are faced with in business, you always need to remember there is someone out there who knows more than you do about that problem or issue. Your success in business will not be measured by how much information you can cram into your own head regarding the day to day problems you are going to face: operational, legal, financial; but rather your ability to immediately get in touch with the person who can solve the problem or issue for you that allows you to come out the other end on top. To delegate your problems to people who can solve them rather than taking everything on yourself and saying 'Im the captain of this ship and Im solving this my way'. And even now, 20 odd years since hearing that advice, it still dominates my day to day work; people come into me with a problem and I am saying to myself I know who can sort that problem out, except sometimes I email them now instead of calling. In my view if you don't use that one rule, if you go off on a solo run with your business, unless you are particularly brilliant, you are more likely to fail than succeed. People might ask what sort of form should my new business take? Ok... back to basics: The first thing you need to do if you want to set up a business is work out what form the business is going to take, and there are three main forms of business: A Sole-tradership: You automatically become a sole trader by starting up a business on your own. Setting up as a sole trader needs almost nothing by way of legal formality, apart from registering with the Registrar of Business Names at the Companies Registration Office (www.cro.ie), which is optional. An advantage of being a sole trader is that apart from normal tax returns, which every taxable person must make, a sole trader is not required to make public any information about the business. The downside of being a sole trader is that you have no protection if your business fails. All your assets become available to pay off your creditors Partnership: A partnership, essentially, is an agreement between two or more people to go into business together. It may be no more formal than a handshake or may run to a multi-page legal document. Whichever route you take, build the following points into your planning: In a partnership, each partner is liable for all the liabilities of the business. If the business fails, and your partner(s) abandon(s) you, you could be left to pay for everything out of your own pocket. Before entering a partnership, decide whether you trust your partner(s)-to-be with everything you own - because that's essentially what you will be doing. If you write down nothing else, write down and have all the partners sign a partnership agreement setting out how the business is to be financed, how profits and losses are to be shared, and what will happen if one of the partners decides to leave. These are important points. Failure to agree on them at an early stage can lead to difficulty later. Limited Company: This is becoming the most popular form of business in Ireland now. A limited liability company is a legal entity separate from its shareholders. The shareholders are only liable, in the event of the business becoming unable to pay its debts, for any amount outstanding on their subscribed shareholdings. The veil of incorporation allows shareholder directors to just walk away from a company if it not a success. Some limited companies are limited by guarantee - the guarantee being the amount that the members agree to pay in the event of the company going into liquidation. This form of company is more suitable for clubs and associations than for trading businesses. The advantages of a limited liability company over a sole trader or partnership are: Just about the lowest tax rate in Europe (the single biggest reason for the Celtic Tiger economy of the last ten years, there is no mystery to the economy's success, it is because we have one of the lowest tax regimes in Ireland). Limited liability status: hugely important as it protects your personal assets if the business fails. Expectation on the part of suppliers and indeed customers, it is almost expected that you are a Limited entity. The only income taxable on the owners of the business is any salaries or dividends taken from the business Business Expansion Scheme relief for a qualifying company (to end 2001 only) Scope for tax planning. The disadvantages of a limited liability company include: The cost of formation expenses, a minor one, probably only costs around 500 euro The requirement for an annual audit (not required for companies limited by shares where turnover is under €7,300,000) The public filing of information with the Companies Registration Office You can now form private limited companies with only one member (as against the previous requirement for two members), although two directors are still required. Registration and other forms are available for download from the Companies Registration Office web-site (www.cro.ie). Taking Advice: Every successful business has three people who they have that they can call at any time for advice, we are talking three mobile numbers you need to get a hold of: Your bank manager, regarding facilities for the business, overdraft, a term loan, some leasing for machinery or equipment, or a commercial loan for the purchase of a premises. By the way Aonhgus, the days are gone now of approaching the banks cap in hand, there are a lot of players in the market now and despite the credit crunch for someone with a good business plan, some security and the ability to repay the facilities there should be a deal out there for you for your business idea. Your accountant, to firstly register you for all taxes and ensure you stay compliant with the Revenue, ensure you know how the business is performing at regular stages and guide you with financial advice at every step of the way. And finally your solicitor, for legal advice possibly at the outset for a shareholders or partnership agreements, for dealing with franchise or license agreements, dealing with leasing or buying your business premises or for when something goes wrong, when you need to sue someone or someone sues you. Should everyone prepare a business plan? Absolutely! Your Business Plan Required by: The bank Investors Most importantly: YOU! The purpose of a business plan is to help you in: Thinking it through This is perhaps the most important role of the business plan. Writing down your thoughts exposes their clarity (or lack of it). It's difficult to fudge just how your business is going to operate when you have to write it down. The business plan should cover as many eventualities as possible: What happens if you can't get enough raw materials? At the right price? Delivered at the right time? What happens if …? Whichever approach to business planning you use, make sure that you give yourself sufficient time to think before writing - about 50% thinking, 20% writing and 30% rewriting/polishing is one common suggestion. Fund-raising Unless you are exceptionally lucky, you are likely to have to raise funds for your business - either to start it or to develop it. You will find it next to impossible to raise money without a business plan. Investors and lenders will not know you personally, they will be faced with many alternative investments and (quite reasonably) will be unwilling to take unnecessary risks. They will want to know why they should invest in or lend to your business, what you plan to do, how and why you believe you will succeed, your track record (if any), the foreseeable risks involved and what you have done to overcome them, and what return they can expect. Communicating - internally and externally Sharing your business plan with potential investors or lenders is a good example of external communication. But you may also want to share it - or parts of it, at least - with your key staff. If they don't know what you are trying to achieve, how can they help you achieve it? If your plan is to communicate, it must be written to do so. Measuring progress It's easy to be a winner when no one's keeping score. Your business plan helps you to keep score - have you met the targets you set? If not, why not? And what are you doing about it? And, where you have met targets, it's easy to show. Steering your business At the start-up stage, the business plan is used for setting out what you plan to do, fund-raising and communicating. Move the clock on six months or a year and, as time passes and your business develops, it is very easy to become embroiled in the day-to-day and forget your original targets and aims. A business plan can help keep you on track by reminding you of what you set out to do. The 4 "P"s of Business: what are they all about? Product What do you sell? The customer also wants a choice. What you have to offer consists of a range, a selection of choices, products that complement each other and make it attractive for the customer to come and buy. A pub also sells meals, a clothes shop also sells accessories, a flower shop also sells earthenware. What range of choices do you give your customers? Customers also want to know what extras come with your product. What do you do that the others do not do? Think about packaging, service, personal attention, brand articles, originality, creativity and so on. What extras do you offer? Price How much will you charge and is it competitive? Place Where is your market and how are you going to get your product or service to market? Promotion Advertising/ PR, referrals, word of mouth, how will people know you exist? Getting to market: Customers are essential for a successful start-up! It sounds obvious, but it's amazing the number of people who start businesses without considering who is going to buy their products/services and why. Consider three key aspects: Who are your customers? What are your customers worth to you? Customer service. Who are your customers? First, decide who are your customers. Can you write a profile of your typical customer? Can you distinguish your customers from those of your competitors? How can you identify your customers from among the many people in the town, city or country in which you are located? This is critical because, unless you can identify your customers, how will you know how to reach them? What are the defining characteristics of your customers: Are they old or young? Are they rich or poor? Do they have children? Babies or teenagers? Where do they live? What kinds of cars do they drive? Do they take foreign holidays? How often? And where? Do they use the Internet? Have they credit cards? Which ones? How much do they use them? And for what? Do they buy locally or will they buy by post or over the telephone? Do they respond to television advertising? Without this customer profile firmly in your mind, most of your marketing effort will be no more than random shots into the dark. What are your customers worth to you? This is an interesting concept, highly developed in the USA and only slowly beginning to catch on in Europe. It rests on two principles: It's easier to retain a satisfied customer than to find a new one Satisfied customers not only buy again (and again and again …) but they encourage others to become customers. To test the first principle, think of your own shopping habits. When you are buying something you buy regularly, from a shop you use regularly - the daily newspaper from your local corner-shop - how much thought goes into the purchase decision? Almost none. You simply add the newspaper to whatever else you are buying. But, if you are buying some thing expensive from a supplier you do not know, you spend time checking them and the product out, before you finally make the commitment. Most people are the same: regular purchases from familiar sources are quickly made, while new purchase relationships take longer to establish. Customers build up a trust with their regular suppliers. And once the trust is established, repeat sales follow easily. Thus, it is easier to develop new sales based on that trust than to develop new customers from scratch. So when you win a new customer, do not think of them in terms of that single first purchase only. Think of all the repeat sales you will make to them. For example, a customer who buys £20 of petrol in your garage every Saturday morning will buy over £1,000 of petrol in a year. If he lives in the area for 10 years, and continues to buy petrol from you, he will buy £10,000 of petrol over that 10-year period. If someone offered to buy £10,000 petrol from you, wouldn't you be extra nice to them? This man is offering to do just that - but not all at once. Everyone wants big-spending customers, not small-purchase customers. But, looked at over the longer-term, your small-purchase customers are high-spenders too. To calculate what your customers are worth to you, multiply their average purchase by the frequency of purchase (in the example above of £20 of petrol a week, £20 x 52 = £1,040), and then again by the length of time that you expect to hold them (again, over a 10-year period, £1,040 a year becomes £10,400). This puts a clear money value on retaining your customers. The second principle again can be tested against your own experience. When you are pleased with a purchase, particularly a significant purchase, you tell other people about your experience and recommend them to use your supplier. Research shows that satisfied customers tell four other people. So you can take your customer value calculated above and multiply this by four, since you expect that one satisfied customer will generate four new customers. And you could multiply further since, if these new customers are satisfied, they will each tell four more, who will become new customers and so on. But, if you disappoint a customer, they tell nine others, probably exaggerating the seriousness of the problem and they almost never come back themselves. So you have lost 10 customers. So it's very clear that satisfied customers are valuable creatures and should be looked after. What are your customers worth to you? Customer service So now you know what your customers are worth to you, what do you do to show it? Customer service is probably the primary means of creating repeat customers. In most cases, the customer can buy a similar product or one that does the same job elsewhere, probably for around the same price. That's the competitive world in which we live. So customer service is the feature that can distinguish your business from your competitors. Again consider your own shopping experiences. How often do you return to a store where the staff are surly, unhelpful or downright rude? Not any more often than you can help. But how often will you visit a store where staff are friendly, eager to help and appear to value your business however small it may be? A lot more often - sometimes you will even go out of your way to visit that store over others that are closer or perhaps even cheaper. Look at the buying experience from your customers' point of view. What can you do as the seller to make that experience as pleasant, as easy and as uncomplicated as possible? Decide and then do it. And keep on doing it. Good customer service is not a once-off! Competition A competitor is a business that provides the same goods or services as yours - or an alternative. Your competition can be local, national or, increasingly, international. Ask yourself these to identify and assess your competitors: What are the alternatives for your products or services? Who makes/sells these alternatives? What range of products or services do they have? What kind of choices do they offer customers? How broad is their range? What are their target groups? What are their future prospects? What are they good at and what are they not so good at? If you have a question for Neil, please e-mail mooney@rte.ie, or write to Mooney, RTÉ Radio Centre, Donnybrook, Dublin 4 marking your correspondence 'FAO Neil Hughes'.

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