Financing a start up
Once you have researched the market and, assuming it still looks like you have got a good idea, you will need to raise some money to actually start the business. If you are lucky, you may have some savings. However, this many not be very much and you may be worried about risking all your savings in a new venture. So, where else can you get money?
Borrowing from family and friends
In many cases, people setting up in business have to borrow from family and friends. This has its advantages - the people who have lent you money may be willing for some time to be repaid. On the other hand, you may feel worried about borrowing money from friends and family in case you cannot pay them back. You may also find that they want to become more involved in the business than you would like and this can put a strain on your relationship with them.
The bank
Another alternative is to borrow money from a bank. This has the advantage of being a formal arrangement (sometimes borrowing from friends and family causes problems because the arrangement is not clearly set out). However, banks will charge interest on any money they lend. This means you have to pay them a fee in return for them lending you the money. Banks will usually leave you to run the business for yourself, but they will insist on being paid, whereas you may be able to delay payment to friends and family.
Raising money may be particularly difficult for a few firms especially if the person involved has no previous experience of running a business. Banks may be wary of lending to them. Also, the business may only have a few assets to use as a guarantee for a loan - this is called collateral. The interest charges on any loans may be high because of the risk that the business may fail.
Investment
Yet another way of raising finance is to bring in outside investors. In return for putting money into the business, they gain some control over it. You may not want to raise money this way if you want to remain totally in charge.
This decision on how to raise business finance will depend on a combination of factors:
- Where can you get money from?
- What will it cost?
- When and how will you have to repay?
- Siting a business
The location of a business can be crucial to its survival. The location of an hotel, a restaurant or a new shop can make all the difference between success and failure. It is important that the business is in a suitable place for employees and suppliers and especially customers. Even in the case of a manufacturer, the location can be important because it can affect the costs of production and the ease of getting the product to the market.
However, small firms often lack the money to afford the best location. For example, someone setting up a few shop may not be able to pay high street rents and so many end up in a side street, away from most of the customers. Also, the best locations may already have been taken, meaning that the new business is immediately at a disadvantage compared to existing firms.
The first few years
New businesses are particularly likely to fail early on - over 50% do so in the first 5 years. If a business can survive this period, it will usually continue for many more years afterwards. One reason why firms often fail in their early years Is because it takes time to build up a base of regular customers.
For your first few months or even years, customers may be unaware that your business exists. Even if they do know you are there, they may be uncertain about using your business because you are relatively new. Over time, providing you offer good value for money, you are likely to build up a reputation and attract more people by word of mouth. You should also be building up customer loyalty, meaning that the same people come back again and again. This should mean that you have a more steady flow of income and that you can predict what you will be earning more easily. In the early stages of the business however, income may be slow to come in, even though costs may be relatively high !
This leads us on to the problem of cash flow. Cash flow refers to the timing of receipts of money from customers and money paid out. If businesses customers are slow to pay, it may have cash flow problems and be unable to pay its suppliers. In the early days, a businesses suppliers may expect to be paid promptly, making it a more difficult to manage cash flow.
A business plan
If you are thinking of starting up a business, one of the tings you should always do is produce a business plan. This sets out what you are hoping achieve over the coming few years and how you will achieve these targets.
The plan should include:
1) Your objectives - what do you hope to achieve with this business? How much money do you expect to make? How much time do you want to spend working?
2) Information on the market and competitors.
3) Sales estimates
4) Estimates of costs, revenues and profits
5) Research on customer needs and how you think your business will meet those needs.
6) Information on what makes your business unique. Selling proposition.
Producing a business plan is a very useful exercise for anyone who is setting up in business because it makes them thing carefully about what they are doing. Too many people rush into it without thinking through their idea. Planning makes you look in some detail at the different aspects of the idea and consider some of the potential problems.
A business plan is also a useful document if you are hoping o raise money. Banks nearly always insist on seeing a business plan. If you have idea where you want the business to go, it is unlikely you are going to succeed and so the bank is unlikely to lend to you. In comparison, someone who produces well thought out well researched plan of what they want to achieve, and how they intent to achieve it … is more likely to be successful. As a result the bank is more likely to lend money.
Corporate aims and goals
The corporate aim is the overall purpose of the business. Imagine you have set up your own business. What is it that you really want to achieve? Do you want to become the biggest business in the world? Or the best known? Do you want it to be the bu siness marking the largest profits? Or is the most important thing that iy have fun and enjoy the work, regardless of how much you earn? Would you be happy if it made you just enough money to live on?
The answers to these questions are all business aims. We tend to assume that the aim of all firms is simply to make profit. In fact, the aims are likely to be far more complex than this. Profit may be one of the aims. However, those involved in the business also may be looking for a range of other things, such as a good quality of life, a motivating job or the chance to contribute to society.
The mission statement
Organisations often produce their aims in the form of a mission statement. Mission statements set out in writing what the firm wants to achieve and often include information on the values of the business, i.e. what it believes in and how it wants to act. Mission statements make the corporate aims of the organisation clear for everyone to see.
Aims can vary greatly between organisations. Just look at the examples below:
‘Our purpose in the UK is to meet the everyday needs of people everywhere to anticipate the aspirations of out consumers and customers and to respond creatively and competitively with branded products and services which raise the quality of live.’ Unilever.
‘ICI is a science based chemicals company which produces consistently outstanding performance through market leadership, technological edge and a world competitive cost base. The company’s vision is to be the industry leader in creating value for customers and shareholders. It aims to achieve this by market driven innovation in products and services.’ ICI
‘Oxfam works with others to overcome poverty and suffering’. Oxfam.
What determines a firms aims?
The aims of a firm will be determined by its owners and its managers. The owners will have certain aims of their own, such as a desire for the business to grow, a desire to establish the firm as the leading provider of a particular type of product or service of even to keep the business within the family. However, their aims might be influenced by what the managers think is realistic given the existing sate of the firm and the market conditions.
The aims of a firm may well change over time. When people first set up in business they sometimes think it will be their path to fame and fortune (and for some it is!). However, as the years go by, people often find they have other aims in life: they want more time to bring up their families, to travel, to take part in a sport or hobby; they are often prepared to accept less profits from their business provided they can fulfil these other ambitions.
Social considerations
Many organisations have social objectives. These set out what they hope to do for society in general, or for their local community. Targets may include recruiting more women or people from different ethnic groups, creating more jobs in the local area, reducing pollution levels or ensuring the fair treatment of disadvantaged groups.
Employee welfare
Many organisations appreciate the importance of people to their success and their responsibilities to their employees. After all, an employee spends much of his or her day working for the organisation. In return, the organisation may consider the type of work it provides how it threats people and the career and social opportunities available within the firm.
Short term and long term objectives
When deciding what they want to achieve firms can set both short-term and long term objectives. If firms are aiming to grow in the long term they may want to invest in training their stag, building up their brands, expanding into new markets and putting money into developing new products. All these activities may prove effective in the long run but cost money, in the short term profits may fall.
By comparison, a firm which wanted to maximise its rewards in the short run and was not concerned about the long term might cut back on all these activities. Imagine, for example that you took over a business and were determined to make as much profit as you could in the next year. What could you do to achieve this objective? You could stop moist of the repairs to the buildings and facilities, you could stop all research into new products, you could stop training people you could end most of your advertising. In the short run profits may increase, but in the long run your business may be in a much weaker position.
UK firms are often criticised for setting objectives which are ’short-termist’ and do not involve long term planning. Critics say that UK businesses fail to invest enough to ensure they are strong enough in the long term. Instead, they often go for short-term rewards. In their defence, UK managers often blame their investors for insisting on short term rewards.
Many shareholders in the UK are companies such as pension finds and banks. These companies need to make money for their own investors and often want there earnings quickly; if a firm cannot deliver, they simply move their investment elsewhere. By comparison in some other countries, such as Japan, investors and often other firms involved in the same industry (E.G. suppliers and distributors); these firms are more willing to wait for long term gains and have an interest in the long term survival and success of the company.
Now you have gathered your information and set up a business, and have your priorities set straight, the only way is up. Marketing your product is coming up next.
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