The Complete Guide to Starting a Small Business
If you sequence the steps to starting a small business right, you could be more than halfway to small business success. We discuss the steps to starting a small business in the UK, in the sequence to be followed. These steps can be adapted to different countries also, however.
Assessing yourself is the first step to starting a small business.
- Would you enjoy doing this business?
- Would you be able to face the inevitable frustrations and delays involved in running a business?
- Do you have the basic business knowhow – marketing, selling, planning, organizing, communicating and controlling?
- Could you learn, or get competent help with, what you do not know?
Assess the Market
The second of the key steps to starting a small business is looking at the market for your product or service. This small business start step has two dimensions:
- Does the product or service have a significant enough demand to base a business upon?
- Have existing suppliers left any gap for you, or would you have to compete with them head-on?
With a clear insight into both these aspects, you could go into the most important step of starting a small business – developing an effective marketing strategy. This strategy has four elements: Product, Price, Place, and Promotion.
The product includes not just the physical product or your specific service but the total package that you offer. It would include packaging, warranty, and after-sales support.
The price can be a competitively low price or an image-building premium price. Pricing would also include discounted pricing for large volume customers.
Places are where customers get the product and are concerned with the distribution channels you use to deliver the product or service to customers.
Promotion includes advertising, public relations, exhibitions, trade shows, and direct mail. If you are facing serious competition, you would also have to develop a Unique Selling Proposition that attracts customers to you instead of a competitor.
Start on the Business Plan
After the marketing study, the next key step to starting a small business is to develop a complete business plan. You start on the core plan by forecasting your sales. The information gathered in the previous step would be used for doing this.
Three approaches are used to develop forecasts:
- Assume that what happened in the past will continue into the future and project future sales from past sales history;
- Learn what customers and prospects plan to do in the forecast period, by talking to them or using published surveys;
- Understand what customers are doing and use this understanding to project their future buying behavior.
Based on the sales forecast, you develop production budgets, revenue and expenditure budgets, and projected financial statements. These core documents would help you assess the implications of what you plan to achieve. You would answer questions like the following in the process:
- What kind of premises would you need for the business? Where?
- What production capacities need to be added?
- Where would you source all the requirements, and at what costs?
- How would you deliver to customers? What channels of distribution would you use?
- What would be the working capital requirements, considering the credit you would have to extend and you might receive?
- What would be your profit margins and net profits?
- How much funding would you need till cash inflows equal outflows?
You might have to rework the estimates a few times till a satisfactory and feasible alternative is found. With the implications made clear, you would go to the next step to starting a small business – preparing the business plan document.
The Business Plan Document
Your business plan document is much more than the budgets you prepared above. In this most important step to starting a small business, you have to outline your vision and show in detail how you would achieve this vision. It would be a concisely and clearly written document, supported by factual evidence that would enthuse bankers and investors about your business idea.
The final result would be a neatly bound document of less than, say, 20 pages that would contain:
- A table of contents page with page numbers;
- A cover sheet identifying yourself – business name, address, contact details, owners’ names, addresses and contact details;
- An executive summary of about two pages bringing out the essence of the business idea – current position, products, and competitive advantages, readable summaries of forecasts and business objectives and the funding proposal;
- The body of the document, with narrative descriptions of existing and proposed activities, marketing strategy, manpower development, capacity creation and assumptions used in forecasts;
- Cash flow patterns and funding requirements showing funds available from owners, operations, and borrowings (and how the borrowings would be repaid);
- Supporting statements as appendices, evidencing what you have stated in the narrative part, and in particular, showing how any borrowings would be repaid.
This step to starting a small business is not complete until you have thoroughly digested the contents of the plan document. You should now be able to make an oral presentation with supporting details.
Forming Your Business
Around this stage, another step to starting a small business would begin to emerge. You would need to decide on the form in which you do business, and then attend to incidental regulations.
You can do business as a sole trader, in partnership with others or as a limited liability partnership/company. A quick comparison of these alternatives is given below:
Sole Trader: A minimum of formalities and easy to start. However, you would be responsible for all aspects of business, and your personal assets would be at risk if the business fails.
Partnership: Agreeing to terms of the partnership, and drawing up a deed evidencing these, would be the major formality. Partners could attend to those aspects of business in which they have experience. More money could be raised. Personal assets of partners would be at risk in case of failure.
Limited Liability Company/Partnership: You have to comply with a number of formalities, both during establishment and subsequent operations. Business must be done under a name that is available. However, your liabilities are limited to the amounts you have agreed to invest or loans you have guaranteed. A company form also gives greater ‘respectability’.
In addition to the formation, you would also need to register your business under Tax and National Insurance regulations. You would also have to comply with health and safety procedures and employment laws.
Funding Your Small Business
Finding finance is a key step in starting a small business. You can finance your small business start with:
Equity: Equity means the owner’s funds. This can come from your savings or you might borrow from relatives and friends. For an existing business, profits plowed back into the business also constitute equity. There are also venture capitalists and business angels who might take shares in your business.
Debt: Debt is the more formal kind of borrowings from banks and other financiers. In addition to loans and overdrafts, you could also go in for factoring or invoice discounting, hire purchase or leasing to meet your funding needs.
Grants: To encourage the development of certain regions or industries, or for other purposes, governments and others might provide grants. These are not repayable but are subject to strict conditions, and your business must also meet eligibility conditions.
You can make this step to starting a small business more meaningful by following a systematic approach.
- Check if a grant is available in your area for your kind of business.
- If your business is already operating successfully and following good credit management policies, you could get money against your credit invoices from factors or invoice discounters.
- If your business is successful and growing, and you are willing to share control to some extent, you could get equity financing from venture capitalists or business angels.
- If you need rolling funding for working capital and have good security to offer, you could obtain overdraft facilities from banks.
- If the funding is needed for fixed assets or other long term commitments, you could obtain a term loan from banks against business assets.
- If banks decline your loan requests, you could approach Small Business Service for a Loan Guarantee.
- If you do not want to incur heavy monetary expenditure immediately, you could go in for hire purchase or leasing of equipment and machinery.
And Now the Final Step
The final step to starting a small business is going ahead and implementing your plans.
- Complete the required registrations and other regulatory formalities
- Open your business bank account, submit loan proposal and do the necessary follow-up
- Make arrangements to keep proper records of your business transactions – cash payments and receipts, purchases and sales, materials receipts and utilization, employee payroll
- Assemble the tools to carry on your business – premises, equipment, power supply, communication facilities, and materials
- Recruit any employees with requisite skills
- Get things going with an acceptable degree of effectiveness
- Publicize your offer and get customers
- Monitor results and improve