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The Independent: Turn your big idea into a money-making business

The Independent: Turn your big idea into a money-making business

Got a great business concept, but need some sound advice?

Nicola McCormack explains the secrets of going it alone

26 June 2004

Whether it’s a bolt from the blue or an invention that’s taken decades to perfect, if you are convinced your Big Idea will make you your fortune as a business, you then have to turn your creative genius to the more mundane tasks of planning and finance.

Markus Clavin, Marketing Director of Business Link, a business support, advice and information service managed by the Department of Trade and Industry, says there are a number of ways for those who have the concept but lack the business acumen to survive in the cut-throat world of start-ups.

“Making the transition into an entrepreneur may not be as scary as you think. Go to a seminar on setting up in business or talk to an enterprise agency. Or find a business partner who will complement your skills.

“You may be the ideas person or inventor but one way of building a successful business could be to set up with someone who is good at running things,” says Mr Clavin, who adds that the partnership option always comes with a warning that they often fail due to personality clashes; so make sure your choice of partner is the Yin to your Yang.

The third option is to sell or licence your idea to another company which is in a position to take advantage of it. “Before you embark on this route it is important to ensure that you have legally registered and protected your idea,” says Mr Clavin.

Once you have established that your concept is a viable business proposition with a market big enough to sustain it, you then have to go about funding it. Budding entrepreneurs should get their business plan in order before they set foot inside any financial institution in the hope of securing an overdraft or start up capital.

Fraser Mackay, head of Marketing Planning, Small Business at Barclays, explains that having a robust business plan with as clear projections as possible is important for any bank.

“It means the customer knows where he is going and has a reasonably good idea of his working capital and how much he has to borrow relating to his cash flow projections.

If a customer has to keep coming back to borrow more, it doesn’t instill confidence in the bank. Businesses tend to go under not because they aren’t profitable but because they’ve run out of cash to pay the bills.”

When it came to financing their gallery, White Space Contemporary Art, which they opened last year in Totnes, Devon, Jolyon and Sarah White found getting a commercial mortgage wasn’t easy, des- pite already working on a business plan.

“Initially, we went to the local business enterprise and an advisor helped us with a business plan and cash flow forecast. We then tried to get a mortgage, which proved to be pretty difficult as it was our first business venture,” says Jolyon. “All the main banks wanted a 40 per cent deposit, which we couldn’t afford. It’s much easier to arrange a personal mortgage than a commercial one, as the banks are a lot more stringent on financial requirements when it’s a business.

“Eventually we went to a financial advisor for more advice before deciding on the Bank of Scotland, which was prepared to give us a commercial mortgage for a 30 per cent deposit. At that point we had to beg, borrow and steal to get the money together.”

The Whites’ method of getting enough cash for their deposit is not uncommon when it comes to small business start- ups. In many cases funding comes from a mix of redundancy, savings, investments by family and friends and releasing equity from the family home. Mr Clavin adds that entrepreneurs should also consider local funding. “In some regions, and for certain types of new businesses, there may also be other forms of low-cost finance such as grants and soft loans.”

Initially, the Whites were advised to avoid buying their gallery. “A lot of banks tried to encourage us to rent commercial premises first and get a trading history, but we knew we couldn’t afford to do it that way. Our plan was to buy somewhere big enough for living quarters, a gallery and a studio, then we could both live there and work part-time in the gallery, while I freelanced part-time as a graphic designer and my wife Sarah could paint, says Mr White

Whether to lease or buy your premises and any equipment required to run your business isn’t a clear-cut decision. Buying obviously gives you more freedom and flexibility in what you do with your premises, as well as being an investment in itself.

However, it will tie up a lot of your capital which is often required for your new venture. Mr Clavin agrees that start-ups have to make every penny count. “When you are setting up in business it will be quite likely that you will be spending a lot of money buying stock, fitting out premises and investing in equipment well before you get any money in from sales. Running out of cash can be fatal so make sure you budget carefully, spend your precious cash only on things that are vital to the business and get a good bookkeeper or accountant.”

Mr Mackay agrees: “Always make sure there is some contingency to deal with the unexpected, such as a customer deciding to cut back on buying. The key thing is to try as far as possible not to overstretch yourself. Even if you have an unused overdraft facility set up, because you never know when you might need it.”

Finally, you should always be aware that there is an element of risk when you start up your own business. While you can get as much expert advice as possible – and research shows that it’s the owners who ask for help and advice whose businesses tend to survive longer and do better – you have to weigh up whether the gamble you are taking is worth the potential rewards.

The most recent figures from Barclays Starts and Closures report states that while the number of business start ups reached record levels last year (465,000 new firms), it was also a record low for business closures (down by 9 per cent). But before you tell your boss your leaving, Mr Mackay says that’s likely to calm down this year.

“Barclays attributes those figures partly to government legislation on tax incentives of limited companies. Projections indicate that the number of start-ups seems to be steadying and look likely to revert back to a more stable level.

“The two key times of risk come at 12 months and 18 months into a new business. But that doesn’t mean they have failed. It could be that they have looked at the figures for their first year and aren’t happy with the levels of performance and have decided to do something else. It could also mean they’ve found it to be a lot of work for little reward. But people should be aware that start- ups are a reasonably high risk business to be in, with 60 per cent ceasing to trade within three years,” warns Mr Mackay.

After their first year, despite the fact they’ve had to deal with a few unexpected twists and turns, the “gamble”‘ of their new venture seems to have paid off for Jolyon and Sarah White.

“Our plan to both be working part time in the gallery hasn’t worked out as we’ve had a baby daughter Jessica, and Sarah’s painting has really taken off. So basically she spends most of her time in the studio while I work in the gallery and look after Jess. But financially we’re on track.”

FACTFILE HOW TO MIND YOUR OWN BUSINESS

WHAT IS A BUSINESS PLAN?

* Your business plan should provide details of how you are going to develop your business, when you are going to do it, who is going to play a part and how you will manage the money.

It should be clear and concise so that it will be understood if you are using it to help you secure finance. It is also a useful tool to help you focus your mind on how your business will work.

WHAT YOUR PLAN SHOULD INCLUDE:

* An executive summary – this is an overview of the business you want to start. It is vital. Many lenders and investors make judgments about your business based on this section of the plan alone.

* A short description of the business opportunity – who you are, what you plan to sell or offer, why and to whom.

* Your marketing and sales strategy – why you think people will buy what you want to sell and how you plan to sell to them.

* Your management team and personnel – your credentials and the people you plan to recruit to work with you.

* Your operations – your premises, production facilities, your management information systems and IT.

* Financial forecasts – this section translates everything you have said in the previous sections into numbers.

WHO CAN HELP:

* Business Link is an advice and support service managed by the DTI. Identifies business support services across government, voluntary and private sectors.

* Barclays Start-up Package offers free initial consultations with a solicitor, accountant and marketing and business adviser. www.business.barclays.co.uk

* Shell LiveWIRE International promotes the spirit of business enterprises amongst young people. www.shell-livewire.com

The Prince’s Trust scheme can help fund a good idea for a business.

www.princes-trust.org.uk

CASE STUDY #1 THE SMOOTH OPERATOR

‘Making our own product gives us more control’

Harry Cragoe is the founder and owner/manager of PJ Smoothies, which makes fruit-based chilled drinks – after 11 years in business, the company now sells a quarter of a million smoothies a week.

“I spent a couple of years in California and lived one block from the beach. Having a smoothie every day from a juice bar fitted into that lifestyle. When I was 29, I returned to the UK with a few ideas for a new company, the smoothie idea being one of them. When I went to Sainsbury’s what was available in the chilled drinks cabinet was so boring in comparison, so there was nothing similar available here.

“So I joined forces with a friend, Patrick Folkes and sold everything I had – including my car and my flat – to raise £100,000 to set the company up. I didn’t take a salary for two to three years.

“We put projections and business plans forward to get the whole thing off the ground, but I think if I had to show a bank or marketing expert what I was planning, the reaction would have been a negative because the challenges were stacked against the company. No-one knew about smoothies and the pricing was higher than other soft drinks.

“Initially I approached a large company in California to make the product, which continued for three years. I then found a small fresh juice manufacturer then we bought our own manufacturers.

“It has paid off because making our own product gives us more control. We’ve continued to reinvest every penny into the business to expand and are looking at new markets in the rest of Europe. I never thought the company was ever going to be anything other than a success”.

CASE STUDY #2 THE SPA THAT WENT UNDER

‘The bank’s refusal of more cash crippled us’

Deborah and Steven Ross opened Serenity Spa in Edinburgh in August 2003, but after 10 months their business failed. Mr Ross explains what went wrong:

“We’d both been working in TV for 20 years – I was an associate producer and Deborah was a make-up artist – and we felt enough was enough.

“We decided to open up a day spa and employ beauty therapists to work in it. I used some redundancy money to fund the business and we went to the bank with a business proposal but got turned down three times. Eventually, we got in touch with Barclays and talked to a business manager. We made an hour-and-a-half pitch, which he accepted. We provided 60 per cent of the money for the venture and the bank provided the other 40 per cent.

“When we opened things went really well. August was one of our best months and while business started to level out a little after that, it really picked up again in December.

“We were OK until the end of March and then in May we got lots of bills. We went back to the bank, where there was a new business manager who had to send our request for more cash to a sanctioning unit. Our request was turned down and that crippled us. Our last option was to put the house up but we have two kids and we couldn’t take that chance. We’d already invested £65,000 and we now owe the bank £32,000.

“We had staffing issues in that all our staff had to be sent down to London for specific beauty product training, which was quite an expense. We also had cash flow issues when all those bills came in. I think we overspent at the start because we wanted the spa to look great. We were also advised by beauty product specialists who gave us the sales figures we’d hit, but we didn’t get anywhere near them.

“In retrospect I think we were a bit naive. We were very excited by it all and believed what we were told rather than question how we could support the company.

“Although Debbie’s a healer trained in reiki, reflexology and sekhem [an ancient Egyptian energy-boosting technique], neither of us are beauty therapists so we couldn’t lay-off staff and get on the shop floor ourselves. All we could do was look at the books and worry about the money.

“When I went back to the spa, after we closed, there were so many messages looking for appointments that it was heartbreaking. We’d been paying off our loan every month and we had plans to expand. If we could have held on for another three months more we would have cracked it.”

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