Tax & admin · 14 December 2016

Establish a new business – get the basics right so failure isn’t an option

Establishing a new business
Establishing a new business

For anyone looking to establish a new business, it is imperative to draw up a business plan and nail the fundamentals as early as possible.

Recognising that there are a number of key stages associated with growing a business, Business Advice has partnered with KPMG Small Business Accounting and broken it down into establishing a new business, expanding, evolving and exiting.

We’ve also produced some valuable video insights, providing quick and accessible business advice snippets for on-the-go entrepreneurs.

Leveraging the expertise of KPMG Small Business Accounting head Bivek Sharma, we start with establishing and acknowledge there are questions every business owner should ask themselves. How much cash do I need? What are my commitments going to be? When will I need to recruit? If you don’t work this out at the start, you risk your business unravelling at a later date.

Bivek puts it: “Businesses need to have a direction of travel – you wake up one morning and you have an idea, but then you need some meat to the bone.”

He went on to explain that a when people look to an establish a new business, often they want to take their great idea and run with it – spending their time drawing up nice logos and perfecting the product. But, in the process of establishing a new business, it’s important not to get distracted with the wrong things. If the time comes that the business needs a cash injection, any lender or investor is going to want to see cash flow forecasts and evidence that the business owner understands their potential outgoings over a two or three-year period.

“It’s almost about not being a complete perfectionist but having a common sense approach. You have to do some planning.”

Establish a new business: Market research

One of the most important aspects of new-business planning is the market research.

“You’ve got to test your idea and your product,” says Sharma. “There is a danger sometimes if you’re working in isolation that you’ve come up with an idea that you think is great but it might not test so well outside your immediate circle.”

“Don’t just test it with friends or people who are just going to nod along, but try to get a proper objective view. Kick the tyres a bit on your delivery model.”

There are a number of ways you can do this – you can organise a focus group, or pay a firm to organise one for you. If you don’t have the money for this, you can just go out and canvass your customer base directly.

Sometimes there will be reports and other market research available to you on your target demographic or industry, but if you’re offering a disruptive service you must proceed with caution.

“You’ve got to be really careful about using old market research. If you’ve found a new way of doing something and you pin your market research on stuff that’s been pinned more towards the old way of doing something then it can sometimes give you a really skewed view,” explained Sharma.

Something else to keep in mind during the market research phase is to try your best to be open to criticism.

“You find quite a lot that when people have launched a startup everything is really personal, and I get that, because they’ve invested so much time and effort and it’s their baby. If you point out some fundamental flaw or something that will stop them scaling, there is this natural push to be quite defensive about it, and that’s not helpful,” said Sharma.

“You’ve got to be really open and take it on board and if it’s good solid feedback use that as a way of improving.”

The sweet spot

During the market research stage, that is so key when an entrepreneur wants to establish a new business, a startup needs to nail down is unique selling point (USP) and its pricing. In some instances, these two things will overlap, but this is of course not always the case.

“In terms of pricing, first of all you’ve got to be really honest about it. Is what you’re selling a commodity or is it a luxury item, because clearly that’s going to change your pricing,” explained Sharma.

“If it’s something with a lot of competition and it’s a bit more commoditised, you’ve got to look at the market because there is a ceiling to what you can charge.”

At the same time however, you need to be careful about under-pricing. If you end up in a loss leader situation, you might get lots of customers through the door, but the more you sell the bigger the loss overall.

In instances where a company’s USP is its luxury or aspirational branding, that is a different kind of market and people are often happy to pay a bit more. For some disruptive businesses, the USP might be the convenience of its service.

Setting achievable goals

How quickly can you get out there and start selling your product or service to customers? This should be the main goal for most entrepreneurs establishing a new business, according to Sharma.

“Some small businesses over-engineer, so rather than getting out there they keep on trying to perfect it and adjust it.

“Sometimes the only way you’re going to know if your product works is to get out to the market and start selling something to customers. Then you can learn what things are and aren’t working and tweak.”

The other goal people establishing a new business should set for themselves is to get in a cash flow positive situation as soon as possible.

“How quickly can you get to the point where the cash you’re generating is sustaining the business?” asked Sharma. However, he also acknowledged that for some businesses, profit may not be the be-all and end-all.

“If you’re a tech business, your goals may not be about profitability. Maybe you’ve got the investment you need and your goal is linked to how many subscribers you have and then your goal would be how quickly can I get to my target subscriber base.”

Every business is unique, and so for every startup the goals set will be different. It’s about working sustainably towards achieving those goals when setting out on the path to establish a new business.

A stable foundation

For many, establishing a new business is a daunting prospect. You might have a great idea, but if you’ve never run a business before, the associated work with remaining compliant might seem like a headache.

For this reason, Sharma recommends taking on professional advice, and ensuring you have a really good accountant.

“You’ve got to use your time wisely, if you’re the creative force and responsible for the business development, then just get rid of the work and get someone else to pore over receipts and organise your VAT returns.”

However, this doesn’t mean you can just delegate all your work and turn a blind eye to the accounts. Every startup owner needs to keep up to date with bookkeeping and monthly management reporting – in other words, you need to understand where your money is going.

“The quicker you can get that information, the quicker you can tweak things and the more confident you’re going to be about making decisions. Otherwise, you are kind of operating in a black hole.

“There’s always the fear of whether you can afford things, or alternatively you act recklessly and spend all your money moving in to fancy offices with exposed brickwork and you end up with cash flow problems.”

Overall, establishing a new business is all about finding a happy medium. You don’t want to rush your product or service out to market, but you don’t want to waste time over-engineering; you don’t want to over-price or under-price; and you don’t want to get bogged down in compliance and miss all the fun.”

Strike the right balance and get a business plan in place to avoid unwanted surprises later down the line.

Make sure you don’t miss our expand, evolve and exit articles, all put together in partnership with KPMG Small Business Accounting. If you’d like to receive an alert, please register here.

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ABOUT THE EXPERT

Letitia Booty is a special projects journalist for Business Advice. She has a BA in English Literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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