Barclays-supporting new business start-ups

Case summary Starting up a business is an exciting challenge. However it is necessary to have a good idea, a clear understanding of the market and financial knowledge and skills to support the business development. Barclays as a major bank provides a wide range of services to support new businesses from initial idea to running the business. This case study looks at the challenges of setting up a new business. It also talks about some of the services and support that are offered to business start-ups by financial institutions like Barclays. It outlines the process of starting up a business which are: 1. 2. 3. 4. Get business idea (market research) Decide upon what type of business organization Do budgeting and business planning Financing a new business

Questions and solutions Question 1 Set out the differences between sole traders, partnership and limited companies. What are the benefits of each type of ownership? What are the drawbacks? Solution Difference between sole traders, partnership and limited companies.
Sole trader Partnership It consists of two to 20 partners. Limited company It is a legal entity and owned by its shareholders.

1. 2.

It is run by a man.

Include unlimited personal liability of the owner. If you get sued your personal assets are at risk. The owner has to bear all losses and profits.

Include unlimited personal liability of all partners.

Liability is generally limited to your investment in the business. If you get sued your personal assets are not at risk. The shareholders share profit and losses according to the number of shares they hold.

3.

If you get sued your personal assets are at risk. The partners share all losses and profits equally.

4.

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Benefits of Sole trading Business Profit retention Sole traders retain all the profits of their business. There is no need of dividing profit of the business as he or she is the only owner of the business.

Control Sole traders maintain full control of their business. Running it how they please without the interference of others. Proprietor has full control regarding the operation and maintenance of the business.

Simple set up and operation Unlike the other form of business, it is very easy to operate and set up. It need not comply with lots of legal formalities like other form of business.

Personal As he or she is the only person running the business there is no need of any kind of discussion with decision makers. Sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers. Private data Disclosure of information is not needed like the other form of business. Information about sole traders is kept private. Hence it prevents from disclosing methods and techniques followed by him to run the business.

Drawbacks of sole trading Finance Sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future.

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Liability Sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. Therefore if you get sued your personal assets are at risk. Discontinuity There may be issues of discontinuity of business in the event of death or illness. If the sole proprietor is having problem with health or domestic problem, then there is no one to continue the business. Decision making All decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person. Benefits of Partnership Flexibility A partnership is generally easier to form, manage and run. They are less strictly regulated than companies, in terms of the laws governing the formation. Because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management. Capital Due to the nature of the business, the partners will fund the business with startup capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. Decision Making Partners share the decision making and can help each other out when they need to. More partners mean more ideas and hence the problems can be solved properly. Shared Responsibility Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills. So if one partner is Page 3

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good with figures, they might deal with the book keeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business. Drawbacks of Partnership Disagreements One of the most obvious disadvantages of partnership is the chances of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. Agreement Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. So before beginning of the partnership all the partners have to agree on some matters and put it down in written. since you need to work according to the agreement there is no flexibility. Liability Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. Therefore if you get sued your personal assets are at risk. Profit Sharing Partners share the profits equally. This can lead to inconsistency where one or more partners arent putting a fair share of effort into the running or management of the business, but still reaping the rewards. Benefits of Limited companies Separate Entity Due to its very nature, a limited company is deemed to be a separate legal entity from its owners. This has several advantages, including the fact that the company will exist beyond the life of its members. If they retire or die, the company will continue to exist and operate.

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Limited Liability The obvious advantage of a Limited Liability Company is the financial security that comes with business. As already mentioned, the Companys shareholders will only be liable for any debt the company accrues according to the levels of their own investment and no more. This can provide a comfortable feeling of security for investors in the Company. Taxation and Tax Advantages Limited Companies are only taxed on their profits (usually at a rate of 21%) and as such are not subject to the higher (personal) tax rates placed on sole traders or partnerships which can reach 40%. Employee Shareholders In some instances employees can purchase shares (or be granted shares via a company share scheme) and become shareholders of the company. This is good as it rewards the employees for their work, providing extra motivation beyond a mere salary. Not only will they have a vested interest in seeing the business succeed, but they will have a say in how it is run.

Drawbacks of limited Companies Restricted Capital Raising For Private Limited Companies, there is a restriction on the raising of capital via sale of shares. As mentioned, Public Ltd. Companies can gain further funding by the sale of shares, but this ability is lost to Private Limited Companies whose shares are restricted. Dilution of Powers Due to the nature of Public Limited Companies, sometimes disputes will arise between Directors and Shareholders as their ideas of what is best for the company vary. Sale of shares to increase company funds will further dilute the management, as more and more people have a say in how the company is run. There is also a risk (since Companies can buy shares) that a takeover might occur this way.

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Complex Accounts There are more complex and restrictive rules governing the accounts and bookkeeping of Limited Companies .The Company is expected to produce yearly accounts incorporating a double entry format, balance sheets and other notes. With the (generally) larger nature of a Limited Companies business this can be a time consuming and costly.

Question 2 What are the main budget factors that a new business should take into consideration? What factors would Tim ONeill, the founder of T&T Vision, have considered? Solution The main budget factors, that a new business should take into consideration depends upon the nature and size of the business and objectives of the business. The key budget factors like what amount of money is needed or for what purpose it is needed and from where it will come from should be taken into consideration for a new business. Factors like cash, credit policy, market demand and capital should be taken into account by the new business. A budget also considers the assumptions a business may need to make about variable factors, such as interest rate changes or volume of sales. A detailed budget plan with clear targets will help give a business control by: Ensuring money is spent on the right activities. Drawing attention to waste or loss. Focusing on areas of the business that need review, for example, if revenue is not meeting target or if costs are rising. A budget should also take into account expected cash flow so the business can assess if its income will cover its expenditure. The founder Tim ONeill of T&T Vision would have considered all these factors since his business has established its name in the market and now his business is selling very well.

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Question 3
What are the key sources of finance for business start-ups? Suggest an idea that could turn into a business proposition. How would it be possible to finance the new business? Solution Some of the key sources of finance for business start up are as follows:

Personal Savings Loans from financial institutions

Barrowings from friends and families A business credit card

Overdraft Facilities May be we can set up a private library, since in Bhutan there is no such facilities available. These days most of the people especially the youngsters like to read different sorts of books and the only resources is school libraries. Some book shops sells but it is too expensive for most of the people to afford. So if we can just set up a library we can rent it to the interested people at a very reasonable rate. If this idea is preceded further I am sure the business will be profitable. For financing the new business we can resort to any of the above mentioned sources. They are all very applicable to the business.
Question 4

Based on the idea produced in answer to question 3, what are the main difficulties that might arise in trying to establish a new business?
Solution

Establishing a new business is not very easy. There are many difficulties or obstacles that may arise in the process. Likewise in the above mentioned business proposal there can arise several difficulties like:

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Since a library business is new to our society there is a big chance that we may not be able to attract customers. We may face financial problems because the financial institutions may not like our plan and do not provide sufficient funds. And also Investors will not give much credence to our business as we are entering in the market for the first time. They will not have interest to invest in our business as investors always look for investing in reputed business as they provide with good amount of reward. As we are entering into the market for first time we have to make awareness among the public about our service. For making advertisement like through news paper, television and so on.we have to spend large amount of money for advertisement. We may not find the right employee to run the business and thereby run in loss.

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