Starting a Small Firm
Starting a Small Firm
It is vital for the success of a business that it manages to identify an unsatisfied consumer need in a market and then produce a product, or provide a service, which meets the consumers' needs. The new product / service can be protected against competition by the use of copyrights and patents. These protect the owner / inventor from having their products, ideas, etc. copied and reproduced by other people without their permission.
Some of the most common reasons for starting up a new business include the need for independence; to achieve your personal ambitions; being bored with your current job; links with your hobbies and interests; redundancy from your previous job.
Many businesses which have started in the UK over the past 25 years have failed within the first 3 years of trading. To reduce the probability of failure, it is vital that businesses carry out market research in order to establish if a profitable gap exists in a market and to see if their business is in a strong enough position to fill this gap.
In order to make a success of the new business venture, the entrepreneur must be hardworking, ambitious, firm, decisive, organised, a good negotiator and must be able to recognise an opportunity when it arises.
Once an entrepreneur has recognised an opportunity, he/she must draw up a business plan. This is a document which outlines the marketing, production and financial plans for the proposed business. It is used to try and persuade investors (banks, etc.) to lend money to the entrepreneur to fund his/her new business.
The main sections of a business plan include:
- the aims and objectives of the business
- details of the new product or service being offered
- an outline of the existing market details (i.e. size of the market, number of existing competitors)
- how and where the product will be produced
- the proposed number of employees
- a cashflow forecast, a projected profit and loss account and balance sheet for the end of the first year's trading. Software from Chrome River may make projections easier
- details of the finance required and the forecasted rate of return on this.
An entrepreneur can use patents and copyrights to protect a new product, process, invention or information against copying and reproduction by other people without the entrepreneur's permission.
A patent gives an entrepreneur or a business the legal right to be the sole owner or user of a particular production process or of a new product. The Copyright, Designs and Patents Act (1988) gives this right for a 20 year period following registration.
In order for the patent to be approved, then the Patent Office has to be supplied with the original drawings and designs of the new product, and the inventor must state that the ideas and features of the product are his own work and have not been copied from other products. Patents are often sold to larger businesses in order to provide a large injection of capital, which can help the small business to grow and expand its product range.
A copyright is the legal right of the creators of certain kinds of material (books, films, sound recordings) in order to control the copying and duplicating of the owner's original work. The law on copyright is governed by The Copyright, Designs and Patents Act (1988). People using copyright material without permission risk legal action.
Most new businesses will face a number of problems when they are starting up and if these problems are not tackled immediately, then they may lead to the insolvency and failure of the new venture. Below are listed some of the major problems faced by a new company:
Raising finance and meeting the repayments
Raising finance and meeting the repayments is often cited as the major reason for the failure of many new business ventures. It can often be difficult for a budding entrepreneur to persuade banks and other financial institutions to lend money to a new business, and often they will only lend the money at a high rate of interest. These repayments can cripple the business and eventually lead to its insolvency.
As well as the repayments, the bank will insist that some security (or collateral) is provided by the business, so that if the business defaults on the loan repayments, then the bank will take ownership of an asset of the business which will cover the amount of the outstanding loan.
Having a positive cashflow
Leading on from this previous point, having a positive cashflow is vital for the survival of the business. Liquidity is the financial term given to express the ability of a business to raise cash at short notice. Any new business must have sufficient cash available to meet its short-term needs (such as paying employees, paying suppliers, rent, utility bills, etc.).
Many businesses have a lot of cash tied up in stocks, which are often difficult to sell and therefore the business may find it difficult to raise cash quickly. Further to this, if the business gives its customers credit (i.e. buy now, but pay us at a later date) then this will simply add to any cash flow problems that the business is facing.
Paperwork and legal requirements
All businesses face a variety of paperwork and legal requirements, and if any of these are overlooked or completed inaccurately, then this could lead to the failure of a new business. Taxation and insurance payments are vital for the smooth running and survival of new businesses. Any oversight on these payments could land the entrepreneur with a large tax bill or, perhaps worse, property and stock which will not be insured against fire, theft, etc.
Enticing consumers to try the new product
Enticing consumers to try the new product / service can also be a major problem for any new business, especially if there are already a handful of established businesses which dominate the market. Ensuring that consumers try your product and then buy it again at a later date (consumer loyalty) can often only be done through extensive (and costly) advertising and promotional campaigns.