LESSON 1

Market Research is key to a new business becoming a profitable entity. It

anticipates and minimises risk, identifies potential customers and helps
ensure success. Only about half of new small businesses will survive 5 years.
To ensure yours is a survivor, learn how to research your market, identify
potential clients and have a strategy for attracting them.

Market Research, or Business Intelligence as it is sometimes called, is a vital

weapon in ensuring your new business survives to become a strong
profitable entity.

It is about anticipating and minimising risk, understanding your potential

customers and so helping to ensure success for your new venture. Dont skip
this important step in the rush to get your product to market.
Finding customers is the most difficult part of running a business. So it is vital
to research your market, identify potential clients and have a strategy for
attracting them before you invest your time and money in a new venture.

Only about half of new small businesses will survive 5 years. Here are some
of the factors that often contribute to a new businesss failure;-

Lack of capital, often due to poor planning or unexpected costs

Poor cash flow management
Unexpected market factors-growth or reduction in market size
Underestimating the competition
New entrants to the market
Technological problems
Not having a strong business plan in place
Lack of understanding of the market
Poor advertising or marketing
Weak product
lack of selling and marketing expertise
over trading or over expansion

According to First Research, a Dun & Bradstreet firm, the global market
research industry produces about $50 billion in annual revenue.

Quality, professional market research helps you to ask the right questions for
your business. Good market research reports will use a mixture of primary
and secondary research to provide accurate information and conclusions.

Primary research is information gathered through surveys, interviews and

other direct contact with industry experts and participants. For example by
contacting industry leaders and canvasing their opinions.
Secondary research is information gathered from company reports, trade
association documents and industry journals, and published market research
reports.

It is a good plan to carry out both Primary and Secondary research. Then you
should check out competition and assess your potential consumer base. This
should give you a fair idea of the viability of your business.

If you commission professional advice, you can expect a report that will
cover the following points;-

Context/Background: This is a review of the recent history of the market; how

it has developed into its current size and shape. It will also consider the
market in the context of factors such as the economy, social and cultural
changes, globalization, and technology, and consider how these factors are
affecting the market.

Detailed Market Data: While context and analysis are critical, this section will
look at hard numbers. It will use whatever data is available.

Competitor Information: Players, products, profiles, competitive analysis and

other information on the market.

Trend Analysis: This will look at what the data indicates about the health of
the market and opportunities for future growth. It should cover emerging
markets, and new forms of competition.

An understanding of the market potential should be gained from the

information above. The size of the market and its possible growth will
determine the viability of opening up a business in the sector.

So from this report, or from your own research, you should be able to
consider the following types of questions.

Assume your intended business is selling potted plants:-

How many people buy potted plants?
What is the market value?
What is your cost price?
What is the likely gross profit you could make selling a potted plants?
How many potted plants must you sell to run a successful business
Is this a realistic number for your business model?
Is the market already saturated or near saturation?

Can you enhance your business model-for example can you offer other
products, services, sell online, open other outlets?

Market research should answer key questions, expose risks, and will probably
throw up other questions. Professional analysts who study markets, products,
industries, sectors, and consumer demographics are trained to provide
unbiased factual information, clearly stating the risks associated with a
market.

If you plan to conduct your own research rather than commissioning a

professional Market Research project, be careful that you dont seize on
information and data to back up what you are hoping to find that your
business is a great idea!!

But take care to be open to market realities and factors that may even
enhance your business plans. Keep a look out for niche markets that may
present better opportunities than mainstream, where there is more
competition.

Carefully assess market factors. There are many factors which can affect the
size of a market and its pace and direction of growth. They include:

Regional economics, politics, culture, geography and weather

Seasonal and cyclical trends

Fashionability and trends
Customer wants and needs
Competing markets
Technological advances
Educational opportunities
Employment
Regulatory requirements
Financial incentives, grants and programmes
Company schemes and productivity.

Also look carefully at competition:

Is there a lot of competition in your market?

Who are the players?
Is the market dominated by a few large companies or is it mostly small
operators?
What are the strengths and weaknesses of your competitors?
What is the market scope of your competitors?
How profitable are they?
What types of problems do they face?
What is your Unique Selling Point (USP)? What can you offer customers
that your competitors do not?
Finding customers is the most difficult part of running a business. But without
them you dont have a business, so do some demographics research as well,
to establish who your customer is.

Make sure you know as much as possible about who will be buying from you.

For example, if youre marketing to consumers:

What is their gender, age, marital status, religion, ethnicity

Where do they live?
What is their economic status?
Do they already buy the product or service youll be offering?
How are they purchasing these products or services?
What issues do they have with your competition?
What do they like about your competition?
How much are they paying now, and will be willing to pay for your
products or services?
What do they do for a living?
What are their lifestyles like?
What do they think of your product or service?
Why will they buy from you and no one else?
How will you tell them about your business?

Knowing the answers to these questions will help you promote your business
much more effectively.

Then you need to consider marketing and advertising .How will you attract
consumers attention, get them to purchase your product, and come back to
you for repeat purchases.

What is your USP how should you transmit that message?

What can you do to assure customer retention?
How can you exceed customers expectations?
Can you offer some type of guarantee?
What are the best advertising routes to reach customers?

Some of the more common advertising routes include Websites, Social

networking sites (such as Facebook), Radio, Television, E-mail marketing, E-
bay, You Tube, Internet, magazines, newspapers. Trade magazines, Forums
and Billboards.
Social media advertising, blogging, and use of other online social forums, has
rapidly become one of the biggest platforms on which to advertise your
business.

What type of advertising will work best for your business depends on who
you are trying to reach, your budget, and your product. You need to find the
most cost effective method for you.

All of this information will be valuable in formulating your business plan,

which we will discuss in another lesson. Having all this information at your
fingertips will give you an edge over your competitors, an understanding of
your client base and will improve your businesses chances of survival.

DEVELOPING A BUSINESS PLAN

Most people starting a new business will need to develop a formal business
plan in order to access finance. But actually it is a very good discipline in
itself to have an up to date business plan, whether you are starting a
business, or have been trading a while. If you use a good template it will
force you to go through the whole rationale for your business, look at every
aspect of it, and examine or re-examine it in terms of likely profitability
-which for most people is the objective.

Once you have a plan, it is relatively simple, and a good discipline, to review
each year and check you are still on track. Your management team can
review short, medium and long term objectives. You will also be asked to
submit a business plan regularly if you have successfully accessed funding
from a bank or investors.

When banks and other financial institutions are considering a loan

application, they will be looking for businesses that have good cash flow
management, a strong balance sheet, a sound business plan, a well-
balanced management team, a good business record, and who are looking to
develop and grow. A business plan is a key first step.

Also if you make an application for a grant or any other State Aid, they will
inevitably ask to see your business plan. It is always easier to update an
existing plan that to start from scratch.

As always there are several different formats, none of which is right or

wrong. A good small business plan defines exactly what you want to achieve
and how you plan to achieve it.

As a minimum your small business plan should clearly state:

Business Plan

What your business will do

The products or services it will provide
 How customers will access your products or services ( e.g. online, by
phone, in a high street shop)
Your approach to pricing

You may also consider including the mission and objectives of a business,
development plan, market strategies, competitive analysis, operations and
management structure, employee need and financial details.

Many banks will have a template you can use, and there are free templates
available on the Internet.

The format I like to use is to have a cover page listing contents, like this
example. These are the sections I like to use, you can use what suits you
best.

Example Business Plan

Taking each of these in turn;

Executive summary.

Although this will be the first section in your plan, it is easiest to write it last,
as with all summaries.

Introduce the company, its geographical location, provide an overview of

product and market, legal status and sector

Clarify your vision, objectives and aims.

Mention planned launch date.

Then, depending on the reason for writing the plan, you will probably
mention the rationale for the funding you are seeking whether it is start-up
funding, working capital, or for an expansion plan.

Summary of Background

Provide some background. Explain why the business was established, its
history to date, what the goals are and how you plan to get there. Are you
looking for steady growth or fast expansion? Why do you need to expand, or
secure more capital?

Description of your products and services

USP
 Target customer
Outline of the business aims (SMART)
Mention any patent, copyright, design registration
Accreditations
Clients
Legal obligations H&S, licenses, insurance

Business Environment

Start by describing your business what does it do and what makes it

different from rivals? (USP)

Review your market and competitors -ideally backed up by Research

Profile of your target market and analysis of demand
Size of target market, market potential, market trends
Potential clients, or customers target demographic
Proposed Pricing again ideally backed up by research

Business background

Analysis of your sector.

Who are your key competitors?
Assessments of your competitors

SWOT analysis showing the strengths, weaknesses, opportunities and

threats in your sector and facing your business.

Operations

Information about your management team and resources

Give details of key personnel and their roles.

Describe important assets such as premises and equipment.

Staffing policy will you hire or outsource?

Go to Market Plan

Outline your sales and marketing strategy.

Include information on pricing

Cost of product

Market price

Margin

Route to market internet, store, and phone?

mention product launch dates , seasonality

Investment

Include details of any start-up investment, made by Directors

Any bank loans or overdrafts

Set up costs

Equipment

Premises

Materials

Transport

Stock

Data on your current financial situation

How new funding sought will be used

Cash Flow forecast

CashflowThis should be a spread sheet, covering at least a year, month by

month.

It should show;-

Projected sales (different income streams with their own line of information)

Cost of sale, Rent, rates, utilities, insurances, fuel, loan repayments,

salaries, any other overheads. These should be totalled monthly.
Example Cash Flow Forecast

The monthly sales figure, less the costs and overheads, all shown month by
month, will form a monthly sales and cash flow forecasts, profit and loss
projections and will flag up a funding requirement.

Lesson 3

Company Structure

The Company structure you select for your business is critical. It influences
the Directors personal liability, the ability to raise funding, impacts the
liability for tax and the paperwork required. Learn which structure is the best
for you, as we review the different types of company structure, and the
advantages and disadvantages of each.

Common structures are;-

The legal structure of the company influences the liability for tax, the
paperwork your business has to complete, the personal liability for the
directors and your ability to raise funding for the business. So this is an
important decision.

Sole partner or proprietor, or sole trader

Partnership
Limited company
The limited liability company (LLC)
Limited liability partnership (LLP).
Employee ownership
Not for profit
Charity
Sole trader

The most basic structure is the sole trader or proprietorship, which usually
involves just one person who owns and operates the business. You have
complete control over your business and make all the decisions.

If you decide to start your business as a sole trader but later decide to take
on partners, you can reorganize as a partnership or other entity.

The tax aspects of a sole proprietorship are simple. The income and
expenses are included on your personal income tax return. This means that
any business losses you suffer may offset the income you have earned from
other sources.

The disadvantage is that you are personally responsible for your companys
liabilities. As a result, you are placing your assets at risk, and they could be
seized to satisfy a business debt or a legal claim filed against you.

Raising money may be difficult. Banks and other financing sources may be
reluctant to make business loans to sole traders, so you will have to depend
on your own financing sources, such as savings, home equity or family loans.

Partnership

If your business will be owned and run by several people, structuring your
business as a partnership may be right for you.

Partnerships can be general partnerships or limited partnerships. General

partners are liable for all debts and obligations of the company, limited
partners can contribute capital and are not liable for debts and obligations
over that amount as long as they do not receive back their contribution or
take part in the management of the business.

Limited partnerships are more complex administratively; a general

partnership is much easier to form.

One of the major advantages of a partnership is the tax treatment. A

partnership does not pay tax on its income but passes any profits or losses to
the individual partners.

But personal liability is an issue if you use a general partnership. General

partners are personally liable for the partnerships obligations and debts.
Unless the partnership agreement forbids it, each general partner can act on
behalf of the partnership, and may take out loans and make decisions that
will affect and be legally binding on all the partners.

Partnerships are more expensive to establish than sole proprietorships

because they require more legal and accounting services.

Corporation or limited company

The corporate structure is more complex and expensive than most other
business structures. A corporation or limited company is an independent
legal entity, separate from its owners; it has to comply with more regulations
and tax requirements.

The biggest benefit for a business that is incorporated is the liability

protection. A corporations debt is not considered that of its owners, so if you
organize your business as a corporation, your personal assets are not at risk.

A corporation can retain some of its profits without the owner paying tax on
them. However many banks and finance companies will often insist on
Directors offering personal guarantees for business loans.

Limited companies or corporations can be privately or publicly owned.

It is also easier for a public corporation to raise money, by selling stock to

raise funds. Corporations do not depend on the involvement of named
partners but can continue to trade, even if one of the shareholders retires,
dies or sells the shares.

Disadvantages are higher costs, and more complex rules and regulations.
You will probably need the services of accountants and lawyers.
Another drawback to forming a public corporation is the tax situation.
Companies pay corporate income tax but earnings distributed to
shareholders as dividends are taxed as personal income. However salaries
and compensation are paid before corporation tax.

A shareholders agreement can provide for and deal with other important
issues, including:

board constitution and control of the management of the business

contributions of each party and how those contributions may be
applied
agreeing and amending a business plan
terms on which shares can be transferred
distribution policy
reserved matters to protect any minority shareholders
confidentiality and restrictive covenants
ownership of intellectual property rights

Although these points can be included in the companys articles of

association, most of them will not be included by default on the incorporation
of a company, so would need to be amended. The articles of association is a
public document and any provisions included would be subject to company
law, limiting the scope of bespoke provisions.

The shareholders agreement is a private document, enforceable only

between the parties. This affords flexibility to tailor the provisions according
to personal requirements and circumstances.

The parties exit strategies should be considered when drawing up these

documents, and may be factored into agreements.

Employee ownership

This a business model in which employees totally or significantly own the

company.

There are several formats:

The workforce directly own most or all of the share capital

The share capital held in trust for the benefit of the employees;
A hybrid of these two formats.

Employee ownership is becoming a popular alternative business structure for

start-ups seeking employee commitment, long-established businesses
dealing with a succession challenge, or new forms of public service delivery
vehicles.

In the UK, employee ownership already contributes more than 30bn each
year to GDP. Growing interest in this form of business structure in both the
private and public sector led to a 10% increase in the number of employee
owned companies created in the UK in 2012.

Economic competitiveness and high performance are a feature of employee

owned business, which tend to have higher productivity, greater levels of
innovation, better resilience to economic turbulence and more engaged
workers than externally owned organisations. Shares in employee owned
businesses have significantly outperformed those in the FTSE All-Share Index
over the last 15 years.
The implementation of employee ownership can be simple and
straightforward. The costs of creating an employee owned business from the
outset or achieving an employee buyout are modest compared with other
types of company formations or mergers and acquisitions.

Building a structure that creates a genuine sense of ownership amongst

employees is one of the considerations when selecting the model.

Other issues to be considered include;-

How the transfer to employee ownership will be funded

long term safeguards for employees?

How will the voice of the employees be heard?

How will senior managers be free to commercially drive the business, and
still be properly accountable to the employee owners?

The sense of purpose and commitment that employee ownership delivers

makes this an attractive option. It encourages retention of the very best
talent to enable businesses to compete successfully.

A practical guide to setting up employee owned businesses in the UK is

published by the Employee Ownership Association.

The non-profit and charity sector

The purpose of the non-profit sector is to improve and enrich society, and
create social wealth rather than material wealth. Firms in this sector exists to
make a difference to society rather than to make financial profits.
This is also referred to as the third sector, the Voluntary and Community
Sector (VCS), the not-for-profit sector, the charity sector, the social sector. It
is made up of many different types of activity affecting many aspects of
society.

The term, the third sector, indicates that it sits between government (the
public sector) and the private or commercial sector.

These companies can exist in a range of formats from social enterprises,

trades unions, public arts organisations, community interest companies,
voluntary and community organisations, independent schools, faith groups,
housing associations, friendly societies, and mutual societies.

They must be registered and approved by the relevant governing body and
abide by their regulations. Because they broadly exist for public benefit they
are usually eligible for a range of income and property tax exemptions.

Whatever option you choose for your structure, the name you choose for
your business should reflect the image you want to project to your market.
Select one thats easy to pronounce and remember. And make sure that its
not already in use, that it is available as a web address and will work on your
business stationery.

LESSON 4

Directors Duties

Do you understand the implications of accepting a directorship? Directors are

personally liable for actions or omissions, can be disqualified from acting as a
Director and can be made personally liable for the companys debts.

Did you know that as a director of a limited company, you have a duty to try
to make the company a success, using your skills, experience and judgment?

Company Directors have responsibilities which include ensuring that the

company trades lawfully and complies with all legislation and regulation.

Their responsibilities are a series of statutory, common law and equitable

obligations owed by members of the Board of Directors to the organisation
that employs them.

Statutory and regulatory responsibility varies in different jurisdictions, but

there are a number of similarities in the framework for directors duties.

Directors owe duties to the company , not to individual shareholders,

employees or creditors except in exceptional circumstances.
 Directors core duty is to remain loyal to the company, and avoid
conflicts of interest
Directors are expected to display a high standard of care, skill or
diligence
Directors are expected to act in good faith to promote the success of
the corporation

While this system works well in many countries, some countries have a
weaker culture and tradition of enforcing these values, and a greater cultural
tolerance for conflict-of-interest. Judges may be less likely to review
transactions to decide whether they are fair to minority shareholders.

As a director of a limited company, you have a duty to try to make the

company a success, using your skills, experience and judgment. You must
also follow the companys rules, make decisions for the benefit of the
company, not yourself, and declare to other shareholders if you personally
benefit from a company transaction or contract.

The board of directors of a company is primarily responsible for:-

setting the companys strategic objectives and policies

monitoring progress towards achieving the objectives and policies
appointing senior management
Accounting for the companys activities to owners or shareholders.

The Chief Executive Officer, or Managing Director if there is no CEO, is

responsible for the performance of the company, in line with the Boards
overall strategy. He or she reports to the Chairman or Board of Directors.

The first directors of a company are appointed at the time of its registration.
Subsequent appointments are governed by the companys Articles of
Association or Shareholders Agreements.

On appointment a new director will be asked to provide certain personal

information for registration. They will normally give notice of any interests in
contracts involving the company and their interest in the companys shares.

A newly appointed Director should make themselves familiar with the

companys Memorandum and Articles of Association, details of the business
e.g. recent board minutes and management accounts, and the statutory
reports and accounts for at least the past two years.

The Directors are responsible for the management of the company within the
relevant legal system and the articles of association. For example, articles of
association may include restrictions on borrowing by the company.
The directors must act collectively as a board but the articles usually allow
the board to delegate powers to individual directors as appropriate.

Directors need to be aware that they are personally subject to statutory

duties in their capacity as directors of a company. In addition the company,
as a separate legal entity, is subject to statutory controls and the Directors
are responsible for ensuring that the company complies with them.

In the UK the Companies Act 2006 sets out seven general duties of directors
which are:-

to act within powers in accordance with the companys constitution

and to use those powers only for the purposes for which they were
conferred
to promote the success of the company for the benefit of its members
to exercise independent judgment
to exercise reasonable care, skill and diligence
to avoid conflicts of interest
not to accept benefits from third parties
to declare an interest in a proposed transaction or arrangement

In the UK these statutory duties are interpreted in accordance with previous

case law which remains relevant.

In addition to the seven general duties listed above, a director will be subject
to other regulation and legislation including the Insolvency Act 1986, the
Company Directors Disqualification Act 1986, the Health and Safety at Work
Act 1974 and the Corporate Manslaughter and Corporate Homicide Act 2007.

Directors may be liable to penalties if the company fails to carry out its
statutory duties. If they had reasonable grounds to believe that a competent
person, such as another director or third party, had been given the duty to
see that the statutory provisions were complied with, then they may use that
as a defence.

Another responsibility of the directors is to ensure that the company

maintains full and accurate accounting records. A balance sheet and a profit
and loss account for each financial period must be presented to shareholders
and filed with the Registrar of Companies.

Directors are personally liability, both civilly and criminally, for their actions
or omissions, when directing the company. They can also be disqualified from
acting as a director of a company, and can in certain circumstances be made
personally liable for the companys debts.
They also need to ensure Health and Safety at Work is complied with and can
be charged with Corporate Manslaughter and Corporate Homicide. If a
director is found guilty of these acts or omissions they can be fined and
imprisoned and disqualified.

You can ask other people to manage some of these things day-to-day. For
example, an accountant can manage your accounts for you but youre still
legally responsible for them.

LESSON 5

How to raise finance for your business

What are potential investors looking for in a company? They want to see
research and establish the potential risks and returns involved in investing.
Do you know who to approach for finance, and how? What do they expect
from you, what are the legal issues, what documentation will you be
expected to sign? Should you offer personal guarantees or other security?

Nearly every business being launched will require some investment capital. If
you can rely on savings or family and friends for seed financing that is a
great start. Many banks and investors will expect to see that you and your
family have invested in the venture.

But, most entrepreneurs will need additional financing to get a business

started.

Check if there are any starts up or support grants in your area.

If you have a business idea that could benefit from an injection of capital, the
most usual financing route is Banks or venture capitalists. Angel investors
are becoming more common, and crowd funding is a growing source of
investment.

In these days of austerity, raising finance is more difficult and expensive

than ever. You should have a business plan in place that will enable potential
investors to see you have a realistic grasp of the costs of the business and a
commercial plan in place to offer them a return on their investment.

Ideally, Investors will want to support firms with good cash flow
management, a strong balance sheet, a sound business plan, a well-
balanced management team, a good business record, and who are looking to
develop and grow.
If you are a start-up, there are limits to which of these boxes you can tick,
but at least put yourself in the best light by having the others ticked!!

You need to put some real effort into preparing a business plan. Dont just
mindlessly fill in a template. This needs to be a well thought out document,
with particular emphasis on how you are going to achieve projected sales.

Venture capitalists and financial institutions need to ensure that their money
will be well invested. They will expect you to pitch your product or service
to them. They will want to establish the potential risks and returns involved
in doing business with you.

Having your market research and business plan well prepared demonstrates
to potential lenders that you are serious, have thoroughly studied your
market sector, your potential customer-base, and your competitors. And that
you are prepared for the possible financial hurdles ahead.

When it comes to raising debt or equity finance there are a number of legal
issues to consider carefully You will be asked to sign standard documents,
the small print must be read and understood before you sign them. Be aware
of the fees you are accepting.

Investors will expect you to check carefully what you are committing yourself
to. So if you are not clear what something means, ask for clarification. Be
clear at the outset about any strings attached to the finance that are
mentioned in the documentation. Ask for a detailed term sheet early on in
the process.

They may ask for personal guarantees or other security, and may set
financial covenants. You should be wary of using your home as security, and
be sure covenants are achievable and clearly understood.

Crowd funding is the current alternative trend in raising finance. While banks
are still reluctant to offer competitive finance, small businesses are searching
for alternative sources of investment.

Similar to Angel Investment, Crowd Funding is a way of raising finances by

selling part of your equity. The main difference is that instead of there being
just one investor, you sell your investment idea to a crowd.

The success of Crowd Funding has disrupted the investment business, giving
entrepreneurs the opportunity to access funding from the masses, without
the usual upfront fees. The winners seem to be those with the highest social
capital or largest database. It demonstrates the value of trusted relationships
and an engaged network.

Business investors want to put their capital behind exciting new projects.
Many are finding that more traditional forms of investment are showing very
poor returns. They appreciate that with new businesses sometimes an
exceptional Return on Investment (ROI) is achievable. Some enjoy the spirit
of adventure.

All of them will be successful business people in their own right, they are
often strong-willed, determined, dedicated and hard-nosed. These days it is
as much about the entrepreneur choosing their investor as the other way
around.

Currently in the UK the Financial Services Authority (FSA) views Crowd

Funding as a raising money for funding from the public, which is currently
illegal unless approved by the FSA.

So check that your chosen Crowd Funding platform complies with the
relevant authorities, or you could put your business and yourself outside the
law.
Be aware that investors will want to see some detail of your business before
investing. This could leave your idea vulnerable to copying, so when you
are drafting your business pitch for potential investors, provide enough
information to attract attention and interest, without giving any vital
information away. Then, when potential investors come forward, ask them to
sign a NDA (non-disclosure agreement) before you provide further
information.

A common error Entrepreneurs seeking additional investment often make is

underestimating their funding requirement. Then when the finance is agreed
and provided, they may find that they need more capital. This can be very
damaging to the relationship with the investor and will leave you short of
funds to complete your plans. So ask for a little more than you think you
actually need so that you have a reserve or contingency fund.

If used properly, Crowd Funding can be more successful than sourcing the full
investment required from a single individual or organization. But make sure
you have done your research and taken precautions to protect your business
and yourself.

LESSON 6

Managing your Cash Flow

Profitability is important in the long run; in the short run, cash flow has to be
carefully managed to avoid running out of cash and potentially being forced
into liquidation. What processes can you put in place to manage the
situation, what tools are available? Learn to forecast when the business may
run out of cash and take preventative action, in the form of chasing
payments, speaking to your bank manager, or raising a private injection of
cash.

Inability to stay on top of cash-flow is a common downfall of companies who

can then no longer cover their required outgoings such as salaries, rent, or
raw material supplies.

Running out of cash is the reason for the majority of companies being forced
into liquidation. Although profitability is important in the long run for a
company, in the short run, cash flow has to be very carefully managed.

It is important to ensure that you have a regular payment run with processes
that are set up correctly. If you dont send your invoices out to the right
contact, at the right time and chase payment when appropriate, you will
probably not be paid on time. Remember to allow time for the payment to
clear in the bank as well.

One of the biggest problems for Small and Medium Enterprises (SMEs) is that
many large companies are increasing their standard payment terms, which
are sometimes up to 90 days. Smaller companies may have no option other
than to wait for payment.

The best you can do is invoice clients early, ensure your payments are in
their systems and confirm politely with the accounts department that your
invoice will be paid on time.

Be very wary of driving down prices in order to win work. By working to low
margins you are having to work much harder to break even, and it is difficult
to put prices up.

Try not to be too dependent on an overdraft. Dont see it as part of your cash
flow funding, but as a fall back if funds are tight. If you are likely to breach
your overdraft, the best bet is to advise your bank manager in advance. Tell
them why there is a problem, when it will be resolved, and what other
monies you are expecting into the account.

Banks much prefer to work with a management team that has control of their
finances, even if there is a temporary problem, than with people who have
no control over their financial affairs.

Send your lender regular copies of your management accounts with a

summary of your performance. Then if you need to extend loan facilities, you
have already demonstrated you are in control.

Think of your cash-flow as the most important aspect of your business,

possibly as important as sales activity.

Know how much it is going to cost to run the company over the next 6
months.
 Know where and when the money will come from
Be wary of hidden costs. Build everything in to your plan including
professional fees, insurance, and interest on your overdraft,
contingency for sickness
Remember that every time you give credit to your customers it is
costing you cash-flow.

Carry out regular cash-flow forecasts. This will vary according to your
business, but weekly is probably a good idea if finances are shaky. The tricky
part is predicting payments accurately for the current week, and future sales.
Plan expenses carefully, and be aware of what has to be paid regularly, as
well as one off payments.

Review this every week or month and look at your actual position against
your budgeted position. If you are not on target, then find out why and do
something about it. Are payments late? Do you need to call and chase
payment? Are you buying stock at the right price? Are you making your profit
margins on sales?

If your accounting records are well maintained, this becomes a relatively

simple task. They will give you a base for your calculations, combining the
sales you believe you will have, and the costs you know are likely to occur.

By doing this you are able to see clearly when the business may run out of
cash and take preventative action, in the form of chasing payments,
speaking to your bank manager, or raising a private injection of cash.

Some tips:

Keep your financial forecasts simple and up to date.

Try to have contracts lined up before you start your business.
Negotiate hard for prices and payment terms with suppliers.
If possible negotiate credit terms when you negotiate your sales price,
in your initial sales meetings.
Do credit searches on anyone who will owe you money.
Dont give clients credit , try to get a percentage payment upfront
For new customers ask them to pay on invoice, or in 14 days, before
you go to 30 days.
To encourage customers to pay quickly, offer them discounts for early
settlement and consider penalties for late payment. Mark these
penalties on your invoice template, and enforce them if you need to.
Get professional advice on whether to register for taxes
Make sure your company systems and inventory management are
efficient.
Turn your financial management into a habit.
 Take a proactive approach to managing debtors and keep credit
management near the top of your list.

Today, simply invoicing a client for a product or service is no longer a

guarantee of payment. Chasing payment is time consuming time which
could otherwise be used building up important business and customer
relations.

There is a point where the cost of chasing customers outweighs the benefits
of keeping them. A good credit manager can reduce the wasted resources
invested in such customers and ultimately prevent write-offs.

At a time when cash counts, companies with the foresight to integrate credit
management systems and procedures into their business processes will find
themselves first in line when it comes to being paid, and being paid on time.

Good credit control is consistent, and works to a system of statements,

letters, and telephone calls with legal action as a last resort. Most small
companies allocate too little resource to it, and often it will be the owner-
manager who chases payment. This can make relationships with suppliers
difficult, so try to employ a credit controller to do that.

A Credit controller will implement a system of consistent and regular contact

with the customer, and focus on actively building relationships with
customers finance departments, encourage customers to communicate with
them about their cash flow situation, keeping them informed of any
problems. At least if you know about them you can deal with them!

Unless you are dealing with your State Department, consider debt protection.
It will cover you if a suppliers business fails, but check prices carefully.
Sometimes cost are prohibitive and outweigh benefits.