Good Small Business Guide 2013

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GOOD SMALL BUSINESS G U I D E 2013 How to start and grow your own business

Seventh edition

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CO N T E N TS A Note to the User

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Contributors

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Assess Yourself

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Acknowledgments

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Actionlists Planning Deciding Whether to Start a Business 2 Assessing Your Entrepreneurial Profile: Do You Have What It Takes?

6 Identifying the Purpose of a Business 9 Coming Up with a Business Idea 11 Networking and Marketing Yourself 14 ReďŹ ning and Protecting Your Idea Developing and Protecting an Invention An Introduction to Intellectual Property Applying for a Patent Using Copyright to Protect Your Work Complying with the Copyright of Others Registering a Trade Mark Setting Up or Acquiring a Business Understanding Business Models Running a Family Business Setting Up Your Franchise Understanding the Pros and Cons of a Mail Order Business Evaluating an Existing Business A Guide to Business Regulations When Starting Up Setting Up a Business as a Private Limited Company Setting Up a Business as a Non-profit Organisation Setting Up a Co-operative Business Starting a Business While Under 18 Choosing and Registering a Business Name Finding Premises Renting a Business Property Buying a Business Property Choosing and Using an Architect Obtaining Planning Permission Insuring a Business

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18 21 24 27 31 34

38 41 44 47 50 53 56 59 62 66 70

74 77 80 83 86

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A Guide to Health and Safety at Work Complying with Fire Safety Regulations Ergonomics at Work Setting Up and Maintaining Your Home Office Drawing Boundaries: How to Manage Working at Home

Figuring it Out Financing a New Business Understanding the Role of the Bank Understanding Loan Finance Preparing a Successful Business Plan Applying for Grants and Funding Controlling a Budget Controlling Costs Drawing Up a Budget Getting to Grips with Income Tax Getting to Grips with National Insurance Getting to Grips with Corporation Tax Getting to Grips with VAT (Value Added Tax) Completing a VAT Return and Making Payments Getting to Grips with Benefits in Kind Repaying Employees’ Student Loans Managing Creditors and Debtors Coping with Cash-flow Problems Issuing Invoices and Collecting Debts Understanding the Role of Price Setting Prices Creating a Balance Sheet Reading a Balance Sheet Creating a Profit and Loss Account Reading a Profit and Loss Account Reading a Cash-flow Statement Creating a Cash-flow Statement Calculating Accounts Receivable Turnover Calculating Acid-test Ratio Calculating Amortisation Calculating Annual Percentage Rate Calculating Asset Turnover Calculating Asset Utilisation Calculating Contribution Margin Calculating Cost of Goods Sold (COGS) Calculating Creditor and Debtor Days Calculating Current Ratio Calculating Days Sales Outstanding Ratio

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89 92 96 99 102

106 109 112 116 119 122 125 128 131 133 136 138 140 145 148 150 153 157 160 163 166 168 171 173 176 179 181 182 184 186 187 188 190 191 193 194 195

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vi Contents Calculating Depreciation Calculating EBITDA Calculating Economic Value Added Calculating Elasticity Calculating Interest Cover Calculating Marginal Cost Calculating Payback Period Calculating Return on Assets Calculating Return on Investment Calculating Return on Sales Calculating Working Capital Productivity Defining Assets

Marketing Your Idea Profiling Your Target Market Choosing Your Marketing Strategy Researching the Size of Your Market Focus On: Planning Marketing Focus On: Marketing—The Importance of Being First Profiling Your Competitors Benefiting from ‘Green’ Marketing Working with Customers Looking for Work When You Go Self-employed Carrying Out Market Research Getting More Feedback from Customers Involving Customers in Product or Service Development Converting Leads into Sales Retaining Existing Customers Extending a Product with Service Handling Customer Enquiries Handling Customer Problems Increasing Customer Lifetime Value Getting a Better Return from Customer Events Managing Key Accounts

196 199 200 201 202 203 204 205 206 207 208 209 212 215 218 221 224 227 231

236 239 243 246 249 252 255 258 261 264 267 270

Communicating with Your Customers Perfecting Your Pitch: Prepare Presentations 274 Perfecting Your Pitch: Deliver Presentations 277 Writing a Sales Letter 280 Selling by Mail Order 284 Telemarketing 287 Complying with Data Protection Legislation 290

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Raising Awareness of Your Brand Planning a Cost-effective Direct Marketing Campaign Creating Impressive Direct Mail Material Improving the Response to Direct Mail Producing Press Material Setting Advertising Objectives Planning an Advertising Campaign— The Eight Steps Selecting and Working with an Advertising Agency Preparing an Advertising Brief Working with Your Local Community

Growing Your Business Marketing Your Products or Services and Increasing Sales Surviving a Downturn Analysing Your Business’s Strengths, Weaknesses, Opportunities, and Threats Identifying Opportunities for Your Business Closing the Gap Between Lead Generation and Sales Taking the Decision to Diversify Franchising Your Business Understanding the Effects of Growth Encouraging an ‘Innovation Culture’ in Your Business Understanding the Role of Partnerships for Small Business Timing the Decision to Export Exporting—Methods of Market Entry Exporting for the First Time Export Documentation Importing for the First Time Working Online Setting Up a Basic Website Outsourcing Your IT and Website Operations Keeping on Top of E-mail Coping with Computer Viruses and Spyware Understanding the Key Principles of Internet Marketing Promoting Your Website Effectively Writing Well for the Web Using E-mail Marketing Effectively

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293 296 300 304 308 312 316 319 323 326

330 333

335 338 341 344 347 351 354 357 360 363 366 370 374

378 382 385 388 390 393 397 400

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Contents vii Applying a Viral Marketing Approach on the Internet Delivering the Benefits of Affiliate Marketing on the Web Getting the Best from E-marketplaces Getting the Best from Loyalty Programmes on the Web Building Loyalty Through Online Communities and Blogs Raising Your Company’s Profile with a Blog Podcasting for Business Updating Your Website As Your Business Grows

Selling Online Managing Payments Online Making Your Website Secure Collecting Consumer Data on the Internet Understanding Legal Issues in E-commerce Managing Yourself and Others Making Decisions Effectively Problem-Solving Efficiently Developing Your Skills and Improving Your Effectiveness Managing Your Time in a Small Business Managing Pressure Delegating without Guilt Staff Planning Focus On: Finding and Keeping Top Talent Understanding Key Elements of Employment Law Conducting Interviews and Making Job Offers Running a Payroll System Complying with the National Minimum Wage Act 1998 Setting up Job Shares Employing People with Disabilities Understanding the Working Time Regulations 1998 Developing Leadership Skills Focus On: Win-win Appraisals Focus On: Mentoring Focus On: Building Great Teams Delivering Difficult or Bad News Handling Resignations

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403 405 407 410 412 414 417 420 424 428 431 434 438 441 444 446 449 452 455 458 460 463 468 472 475 478 481 484 486 489 492 495 498

Motivating Others During Difficult Times

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Retreating with Dignity Deciding to Move On Succession Planning Deciding Whether to Sell Your Business Knowing When and How to Liquidate a Business Knowing the Value of Your Business Finding Potential Buyers for Your Business Selling Shares Understanding the Legal Ramifications of Winding Up a Business Breaking the News about Redundancy

506 509 512 515 518 521 524 527 530

ESSENTIAL INFORMATION DIRECTORY Small and Growing Businesses Accounting Advertising Bankruptcy and Business Failure Budgeting Business Plans and Planning Computers, Information Technology, and E-commerce Direct Marketing Employment Law Entrepreneurs Exporting Franchising Importing Intellectual Property Marketing Management Market Research and Competitor Intelligence Negotiation New Product Development Outsourcing Packaging Presentation and Speaking Pricing Product and Brand Management Project Management Public Relations Recruitment and Selection Selling and Salesmanship Taxation Venture Capital

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536 539 541 543 544 546 547 549 550 552 554 555 556 558 559 561 562 563 564 564 565 566 567 568 569 570 571 573 575

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A Note to the User Welcome to the seventh edition of the Good Small Business Guide. Whether you’re thinking of starting a new business or looking for help on how to grow an existing one, this book is packed with advice, ideas, and support.

Even during these challenging economic times, small businesses pack a lot of punch in the economy. The Federation of Small Businesses estimates that as of November 2011, there are 4.5 million small businesses in the UK and they account for 48% of our private sector turnover. Over 400,000 people start a new business every year, so you’re in excellent company.

Designed for readers to dip into as and when they need practical help, the Guide contains advice on: planning setting up or acquiring a business getting to grips with the figures finding premises marketing your idea working with customers communicating with customers growing your business working and selling online managing yourself and others dignified retreats succeeding as an entrepreneur All of the above topics are covered in over 160 easy-to-read actionlists, which appear in the following format: Getting Started—an overview of the main points addressed in the actionlist FAQs—a series of frequently asked questions on the topic Making It Happen—fuss-free advice on how to achieve your goal What to Avoid—tips on how to avoid common mistakes Recommended Links—a selection of the very best websites to help you investigate the topic further Not everyone who wants to set up their own company will necessarily have business experience, so this book explains all you need to know in jargon-free language. Its contents take you from the beginning of developing your idea right the way through to steps to help your business expand successfully. For more in-depth comment and advice on some key topics, look at the ‘Focus On’ series of actionlists, (for example pp. 221–226). These articles have been written by some of the world’s leading business writers, including Meredith Belbin and Al Ries, and bring together their considerable experience.

This book also contains the Essential Information Directory (p. 536 onwards). This section covers 30 key topics of interest to anyone in business, and offers carefully chosen information on the most helpful books, organisations, and a wider selection of Internet sites.

All information was correct at the time of writing.

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Assess Yourself The fact that you’re reading this now means that you must be pretty serious about setting up your own business. You’ve got an idea, you’ve done some research and you’ve picked up this book in search of some sound advice about how to take it to the next level and beyond. Or perhaps you’re already on your way and are looking to hone your entrepreneurial skills, plug any gaps in your knowledge and shore up your business acumen with some expert guidance.

Either way, you have already shown that you have one of the key attributes belonging to the entrepreneurial mindset: you are willing to question yourself, to take stock of what you do know, and then deal with what you don’t. You are here because you want to know the answer to two big questions: ‘Can I do it?’ and then, ‘How do I do it?’.

Here are some more questions to guide you towards those answers. This quick quiz is designed to help you assess your strengths and weaknesses, and in so doing, point you to the pages within this book that will be most useful to you.

YOU Would you describe yourself as an ‘ideas person’?

a) Yes—I always have a list of ideas that I am thinking about. b) I have the odd flash of inspiration, but don’t tend to dwell on it. c) Not really—I don’t like to be distracted from the job in hand.

How often do you talk to friends and family about your new ideas?

a) Regularly. b) From time to time, when something particularly interests me. c) Never.

How do you think your friends and family would react if you were to start your own business?

a) Positively—from the evidence of my past successes they will feel confident in my business abilities. b) Apprehensively—I’ve talked about setting up on my own a lot but haven’t ever done anything about it. c) Negatively—I’ve never mentioned it before, so it will come as a complete surprise.

How persistent are you?

a) I’m ready to try many new approaches until I have a successful outcome.

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b) I keep trying, but I do get discouraged. c) I’m easily discouraged, and don’t like to feel I’m ‘pestering’ people.

How do you enjoy working with people?

a) Very much—I like to get to know as many people as possible. b) I enjoy spending time with certain people, but don’t make an effort with everyone. c) I prefer to work alone and concentrate on doing my job.

How do you feel about taking risks?

a) I thrive on risk-taking—I find it exciting and stimulating. b) I will take the odd risk, but on the whole prefer to be confident about the outcome of my actions. c) I dislike not knowing what will come of the choices I make—I don’t take risks.

How many of the following attributes do you consider yourself to have: dedication, persistence, drive, stamina, intuition, courage, positive outlook, good communication skills, good ‘people’ skills, ambition, pragmatism, adaptability, financial savvy, energy, self-awareness?

a) 11–15 b) 6–10 c) 1–5

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xii Assess Yourself If you answered mostly a, you’re already in an entrepreneurial mindset. The next stage is to take time working on your business idea and researching your target market.

This book’s Refining and Protecting Your Idea (pp. 18–36) section will help you do that.

If you answered mostly b, you’re part of the way there. If you answered mostly c, you may not be sure that being your own boss is really for you. The Planning section (pp. 2–16) will give you some key pointers on evaluating your idea, yourself and your current circumstances.

YOUR IDEA Can you explain your business idea succinctly?

a) Yes, I can get the basics across in a sentence. b) Yes. A paragraph should do it. c) Not really. I need a five-page document to explain it.

feedback and I’ll adjust my plans accordingly. b) I’ll bear in mind any feedback, but I’d be reluctant to change my plans. c) No. I don’t want to compromise my idea.

How clear are you about your target market?

a) I’ve done a lot of research and I know exactly the group I am aiming at. b) I have a fair idea of who will use my product/service. c) Not very, but it’s such a good idea I just know it will appeal to a lot of people.

How do you rate research?

a) Essential. b) Useful. c) An unnecessary extra cost.

Are you ready to take on board other people’s comments?

a) Absolutely. It will be good to get some

YOUR FINANCES How do you handle your personal finances?

a) Well. I’m rarely in debt. b) I take some risks, but I’m not often out of my depth. c) I’m often in debt for prolonged periods.

How do you view your business or your business idea?

a) As a long-term source of income. b) As an investment, to sell as soon as possible for a profit. c) As a way of escaping my current job.

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Whatever your area of interest of area or expertise, thorough market research is essential when you’re thinking about starting your own business. If you answered mostly a, you’re aware of this already. The Marketing Your Idea section (pp. 212–234) will help you take your idea further.

If you answered mostly b, this section will be helpful to you too, but also look at pp. 11–13 in the Planning section (Coming Up with a Business Idea) to reinforce the importance of research.

Read this too if you answered mostly c.

Research in the early stages of your business is well worth the time and money you’ll spend on it.

How well can you cope with financial matters?

a) I have quite a lot of experience and am confident when working with figures. b) I have some experience, but some terms confuse me. c) I don’t know where to start.

Have you considered how you will cover yourself financially if things go wrong?

a) I have set aside a financial ‘bumper’ to allow for unforeseen expenses. b) I have planned my expenditure and

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Assess Yourself xiii income very carefully and do not envisage any problems. c) I’m banking on things not going wrong.

If you answered mostly a, you are already financially aware and have realised that you’ll need some funds for a ‘rainy day’.

The Figuring It Out section (pp. 106–209) offers advice on a wide range of funding issues, from understanding budgets to applying for funding from various sources.

YOU AND OTHERS How do you react to advice or complaints?

a) I see negative feedback as an opportunity to change plans and ideas for the better. I believe in being proactive. b) I do listen to and remember complaints and advice, but don’t tend to act. c) I prefer to follow my own plans, and don’t like others to interfere—no one knows my business like I do.

How do you rate your people-management skills?

a) I think they’re good. I can usually sense how people are feeling and react appropriately. b) They’re not too bad. I generally get on well with most people, but I feel I lose touch from time to time. c) They could be better. I often find it hard to connect with others.

You’ll have many demands on your time when you’re setting up or growing your business. How do organise what you need to do?

a) I prioritise tasks and build in extra time if I can. b) I get through everything in the end, but I tend to underestimate how long things will take. c) I work all night if I have to.

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The financial ratios (pp. 181–208) will be particularly helpful if you are going to be doing the book-keeping for your business.

If you answered mostly b or c, you have some financial knowledge but need a bit more support. Figuring It Out will also be helpful to you as it explains many key issues without using jargon. The Essential Information Directory (p. 536 onwards) also contains the best sources of help for you if you want to research further.

Pressure affects everyone who works, whatever their job, but if you’re the boss it can seem overwhelming at times. Can you deal with pressure?

a) Yes, I can recognise the signs and try to keep things in perspective. b) I thrive on stress, but my partner doesn’t so that can lead to extra tension. c) Sometimes, but I find it hard to say ‘no’.

Once your company is up and running, you’ll need to develop or gain management skills to get the best from yourself and your team if you employ others. Stress can also put a strain on personal and business relationships, which can make challenges harder to deal with.

If you answered mostly a, you have a good appreciation of what makes yourself and others tick. The Focus On . . . articles in the Managing Yourself and Others section will help you develop the skills you have already.

If you answered mostly b or c, the Managing Your Time (pp. 446–448), Managing Pressure (pp. 449–451), and Delegating (pp. 452–454) actionlists in this section will help you manage your day better.

If you answered c more than b, the Essential Information Directory (p. 536 onwards) will offer you further support.

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Contributors Meredith Belbin is the author of several successful business books, including the European bestseller Management Teams: Why They Succeed or Fail (3rd ed, Butterworth-Heinemann, 2010) and Team Roles at Work (2nd ed, Butterworth-Heinemann, 2010). He has acted as a consultant to the European Commission and the OECD as well as many manufacturing companies and service organisations.

Patrick Forsyth runs Touchstone Training & Consultancy, an independent firm specialising in marketing, sales and communication skills. He writes extensively on matters of marketing and management and is the author of a number of successful books, including Marketing Stripped Bare (Kogan Page, 2003.)

Jeremy Kourdi is the author of 23 business books including Surviving a Downturn (Business on a Shoestring series) and Coaching Essentials [both published by Bloomsbury Publishing Plc]. He is the founder of www.LeadershipExpertise.com—a website for business executives.

Max Landsberg is the author of The Tao of Coaching and The Tao of Motivation (both rev eds, Profile Books, 2003).

Malcolm McDonald is Emeritus professor of marketing at Cranfield School of Management.

He has written or co-written more than 30 books, including the best seller Marketing Plans: How to Prepare Them, How to Use Them (7th ed, John Wiley & Sons, 2011).

Al Ries and Laura Ries are the best-selling authors of The 22 Immutable Laws of Branding (Profile Business, 2000) and The Origin of Brands (Harper Business, 2006).

Philip Sadler is the former chief executive of Ashridge Management College, one of the world’s leading business schools. He has also written several books, including The Seamless Organization (4th ed, Kogan Page, 2000).

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The Good Small Business Guide is the ultimate resource for anyone thinking about starting a business as well as those up and running already. This new updated edition is endorsed by the Federation of Small Businesses, the UK’s leading business organisation. Visit www.fsb.org.uk for more information on the FSB. ‘Bursting with practical advice...essential reading,’ BA Business Life

The Good Small Business Guide 2013