Starting your business

For many aspiring entrepreneurs, there is a clear opportunity in turning a hobby or leisure activity into a small business idea. Many highly profitable businesses begin life this way. Anita Roddick, founder of the Body Shop, began by making skincare products on her kitchen table to give to friends. Don't write off your interests as something that you do just for fun - you may have a skill that other people would be happy to pay for.

If you want to run your own business but are unsure of what you want to do, there are a number of ways to identify a sound business idea, including:

• Look at your current job. If you work for a business where people are constantly complaining about one aspect of their work, there may be an opportunity to create a solution to their problem and market it through a new business.
  
• Do you have money to invest but no idea what you would like to do? Purchasing a franchise may be the solution for you. Franchises are members of existing business networks (many of them popular high street outlets), which provide a packaged business opportunity with marketing, stock supply and administration taken care of.
• Is there a business idea that you are really interested in, but you don't have any experience? Carefully researching the market and developing a small business in this area may be the ideal solution.
• Do you have any hobbies that could be turned into part- or full-time business opportunities?

Buying an existing business is possible, although it can have some pitfalls. You must be clear why the previous owner is selling the business and have all documentation thoroughly checked by your accountant and lawyer. 

There are specialist agencies that deal with the sale of businesses and they can advise you on the availability of commercial businesses in your area. In addition, trade journals and local papers can be a good source of information on existing businesses for sale.

Business information is available from a variety of sources, much of which is free of charge. 

Sources of market information include:

• Your local library's reference section will carry market reports, Government statistics, trade publications and local business directories, all of which can provide information on competitors and market trends.
• The Internet is a good source of market and trend-related information. However, you must take care to check that the sites used are providing up-to-date, UK-based material and that it is from a reputable source, such as a trade association or leading business journal.
• Local business directories such as your local telephone directory can be trawled for details of direct local competitors.
• Trade publications and directories specific to your particular business sector are another useful resource. See www.tradepub.com for a directory.

Once you have identified your business idea, you will need to find out whether it will work as a business. At this point it will be useful to carry out some local research to find out whether there is a market for the goods or services you plan to offer. 

Points to consider include:

• Competitor information: find out whether anyone else offers the same goods and services locally. These businesses will be your direct competitors and could have an adverse effect on your business.
• Indirect competitors: such as businesses offering similar goods and services to those you plan to provide.
• Customer information: who will buy the goods or services you plan to offer, and what market share must you achieve if your business is going to survive?
• Market sector information: this will enable you to build up a picture of trends and issues that may affect the market you plan to work in. You should consider whether the market is growing or shrinking, and if it is near saturation point. Any trends that may increase or decrease demand should also be considered.

Businesses are funded through four main types of finance:

• Private equity, which is money that is invested in the business in return for a share of the business.
• Debt, which is an overdraft, loan or credit card finance.
• Grants and awards, which are normally given for a specific project or to reward a particular achievement, and do not usually have to be paid back
• Retained earnings, or funding that is carried over from the previous year's profits.

Start up businesses don't have access to retained earnings, so normally rely on equity or debt funding. However, some businesses may be eligible for grant aid and business advisers should be able to provide details of any locally available funding.

What are the main sources of equity funding?

Equity funding, or money invested in the business, is available from a number of sources, including:

• Personal savings or the money you have available to invest in the business raised from family and friends. Most investors will expect to see you investing in your business before they are willing to support you. This is the most common source of funding for businesses just starting up.
• Business angels are personal investors who invest relatively small amounts of money (usually between £10,000 - £100,000), in helping a business reach a level of turnover where other investors aren't willing to support the enterprise.
• Venture capitalists provide businesses with access to large amounts of money, often in excess of £1 million. In return they expect a share in the business, rapid growth and a detailed exit strategy.

Where can I find out more about equity funding?

Contact your business bank manager who will be able to offer advice on making the most of your capital. He or she will also be able to offer advice on business angels and venture capitalists that may be willing to support your business.

What type of debt finance is available to a business start up?

Debt finance can range from short-term solutions such as an overdraft, to long or medium-term loans. You should consider the length of the loan period, the interest rate charged and the need for security, before committing yourself to any form of debt finance. Soft loans are an attractive alternative to the traditional bank loan and are usually provided by business support organisations and other agencies working to encourage small business development.

Where can I find out more about debt finance?

Banks are usually the first stop for anyone considering debt finance. They provide a range of financial solutions from overdrafts to loans and mortgages, all of which can be useful sources of working capital. For information on non-bank loans, contact your business adviser who will provide information on soft loan schemes in your area.

Where can I find out more about grants and awards?

Grants are usually available for a specific purpose, such as training or marketing costs. Awards are often made to reward a specific achievement. Grants and awards do not normally need to be paid back and are only available to businesses that meet certain criteria. Your business adviser and local business support organisations are the ideal starting point for information on grants and awards in your area.

Preparation is vital before approaching anyone for grant aid or financial assistance. Before anyone provides funding, they will expect to see evidence that you have thoroughly researched your business idea and that it has the potential to lead to a viable business. The best way of demonstrating that you have done this is to produce a business plan. The information included should include a cash flow forecast, balance sheet forecast, profit and loss forecast, business plan and personal budget. Your business adviser or local business banker will be able to provide more details on preparing and presenting this information.

What is a cash flow forecast?

A cash flow forecast will show the expected receipts of money coming into the business and payments of cash going out. The forecast will then indicate how much cash will be available in the business. You must demonstrate that you are monitoring cash flow carefully. If you are paying your suppliers, but your customers are failing to pay you, you will quickly run out of money.

What is a balance sheet forecast?

A balance sheet forecast shows fixed assets, such as equipment, and current assets, such as stock and debtors - people who owe your business money. The balance sheet forecast should also show how your assets are financed - equity, loans and current liabilities such as creditors. This will show your business' net worth and whether the business is solvent.

What is a profit and loss forecast?

This gives an indication of your predicted income, usually as a result of sales, and the likely expenditure on a month-by-month basis. This is different from cash flow as it takes into account any outstanding invoices for money owed to you and any invoices that you need to pay. It also shows non-cash expenditure such as depreciation. The difference between income and expenditure is profit - something anyone considering investing in your business will be keen to see.

Why do I need a business plan?

This will provide evidence that your business has the potential to be a success. A good business plan will contain:

• An overview of the business and what it will do.
• Details about the business, such as its legal status, aims and objectives and key personnel.
• Details of the products or services your business will supply.
• Details of your target customers and estimated numbers.
• Assessment of your competitors and their strengths and weaknesses.
• How your business is different from the competition.
• Details of how you intend to market your business.
• How and where the business will operate.
• Financial requirements - including how much money is needed, and, crucially, when it will be needed.

What is a personal budget?

You must work out all your personal expenditure, such as your mortgage repayments or rent, gas, electricity, telephone bills, water rates and council tax bills. Anyone offering additional finance to your business will want to see that you have considered how much you must earn from the business in order to meet your living expenses. As the business develops, you will probably be able to take more out of it. However, initially it is a good idea to reinvest the profits, further funding your own business development.

1. Be realistic when preparing financial forecasts, as potential investors will want to see evidence backing up your claims.
2. Without a good cash flow and credit control system your business could fail.
3. Be thorough when estimating financial requirements - forgetting or leaving out a budgetary area to make your forecasts look better could lead to serious cash flow problems.
4. Be sure that you can afford to meet repayments before taking on any loans or debt finance arrangements.
5. It often takes longer than predicted to get a business running on a sound financial basis, so make sure that you have sufficient revenue to keep you going while the business is growing.
6. Take professional financial advice before setting up your financial management systems.