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.
Our guide to starting a business
Choosing the right idea can signal the success or failure of your business. A great place to start is by looking at your skills and interests.
Where can I look for an idea?
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?
Can I buy an existing business?
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.
How do I know if my idea will work as a business?
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
Where can I find this market information?
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
Hints and tips
- Choose an idea that you are passionate about, as you will need to sustain your interest over a long period of time.
- Don't write off your interests as something you do for fun - it may be possible to turn a hobby into a thriving business.
- Make sure there is a market for your idea and carry out thorough local market research.
- Consider other options like buying an existing business or operating a franchise.
- Talk through your ideas with an impartial third party, such as a business adviser.
Access a wealth of knowledge and experience available to help you set up in business.
There are hundreds of business advice services, yet many people are still unaware of the wealth of knowledge and experience available to help them set up in business, much of it free. Business advisers help potential, new and established businesses.
They can offer general advice based on their experience and knowledge of business matters, as well as focusing on specific areas of expertise such as finance or marketing.
Who can give me advice on starting a business?
Advice on starting a business is available from a variety of sources, including:
- Business advisers
- Trade associations
Advice is also available in a variety of specialist areas, including public relations, management, IT, health and safety, and environmental issues.
Why should I consult a business adviser?
There are a number of reasons for consulting an independent business adviser, as they can provide new ideas and ways of looking at issues that will help you to develop your business. A business adviser can offer:
- Objectivity - it is easy to get so involved in developing your business idea that the ability to be objective can be lost.
- Business concepts and methods - an adviser can provide advice on methods of business analysis and new management techniques that may help you to structure and run your business effectively.
- Contacts and local knowledge - an adviser will know a great deal about the local market conditions and commercial networks that can help you carry out your market research and set up your business.
- Experience - advisers have normally worked in industry or run their own small business, and will be able to pass on practical experience, insights and strategies that have worked for them.
- Access to additional resources - advisers will have information about local grant schemes, business publications, research material and reports, all of which can be useful when setting up a new business.
Why should I consult an accountant?
An accountant can provide advice and assistance on a variety of issues affecting the start up of your business, including:
- What type of accounting system is needed and how to set it up.
- Keeping proper books of accounts to meet relevant legal requirements. Many firms use accountants or bookkeepers to prepare their accounts for them, although there is a danger that managers of small firms can lose touch with up-to-date financial information if they pass on all of the responsibility.
- How to organise the Pay As You Earn (PAYE) income tax contributions for yourself and any staff.
- Whether you will need to register for Goods & Services Tax and the procedures involved.
- The tax implications of running a business from home.
- The tax implications of employing family members
Why should I consult a solicitor?
There are a number of reasons for consulting a solicitor when setting up a business. Solicitors can provide advice on a range of legal issues, including:
- Company formation and administration - a solicitor can draw up the articles of association or deeds of partnership, and assist in making sure that your business complies with necessary legal requirements.
- Contracts- expert help will be required in drawing up effective terms and conditions of trading.
- Premises - when buying or leasing premises, a solicitor is essential. They will give advice on contracts and on how to avoid contravening planning law.
- Franchises - if you are considering taking on a franchise, the agreement may be quite complex. It will be worth having a solicitor study the contract before making a commitment.
Why should I consult a trade association?
Trade associations have always been a fundamental part of business life. Their strength and importance continues to grow, with many associations regulating the industry or offering specialist legal and insurance services. They often offer a range of services that can be useful when starting up a business, including:
- Information services - including up-to-date developments within the industry, market research and trends that may affect the future development of your business. During the start up or planning phase of your business, they can provide a range of material that will be useful when drawing up your marketing plan.
- Industry standards - many trade associations set standards and have a code of conduct with which members must comply. They often have a complaints service offering independent arbitration over grievances between members and their customers.
- Training - the availability of short courses or Continual Professional Development (CPD) will ensure that your skills remain up-to-date and that you are aware of changes within your industry.
- Networking - many associations have regional branches that meet on a regular basis, offering you the chance to meet and talk to other people working in the same business, sharing ideas and resolving difficulties common to the industry.
Hints and tips
- You should not hesitate to ask your business adviser, in an informal way, about their qualifications and background. The adviser should feel comfortable about disclosing this type of information.
- It is important not to allow an adviser to undermine your opinions. They can only offer advice and will not have all the answers.
- Different agencies will be able to offer different levels of advice. It may be useful for you to contact a number of organisations before committing to an adviser.
- An accountant should be recruited during the planning phase of your business. Receiving advice from the start can prevent problems in the future.
- It is important to shop around to find the accountancy firm best suited to your business' needs.
- Before choosing an accountant, you should find out the basis on which fees are calculated. You should not be afraid to question and negotiate fees.
- The level of services required must be agreed with the accountant. If this is not clearly specified, they may end up doing more or less work than they expected.
- A directory of legal firms and individual solicitors that are affiliated to the Law Society can be found on the website www.solicitors-online.com and can be searched by name, area and specialisation. The printed version, entitled The Law Society's Directory of Barristers and Solicitors, should be available through your local library.
- The Law Society also operates a scheme called Lawyers For Your Business (LFYB), a network of 1,400 independent legal firms that specialise in commercial legal problems.
- It is advisable to talk with other businesses in the industry to find out about associations and professional bodies that have been particularly useful to them.
- Anyone looking at options for starting their own business can receive invaluable information about particular business ideas from trade associations by contacting them by phone, post or e-mail.
Before you begin trading you may need finance, both to set the business up and cover initial running costs.
What type of finance is available?
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 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.
What financial information do I need to prepare?
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 or not 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.
Hints and tips
- Be realistic when preparing financial forecasts, as potential investors will want to see evidence backing up your claims.
- Without a good cash flow and credit control system your business could fail.
- 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.
- Be sure that you can afford to meet repayments before taking on any loans or debt finance arrangements.
- 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.
- Take professional financial advice before setting up your financial management systems.
Starting a business can be an exciting, but at the same time rather daunting, experience. Good planning and detailed research can remove some of the pressures and help you get your new venture up and running.
Do I have the right personality to run my own business?
While anyone running their own business must have some skills or knowledge of the market in which they plan to work, there are a number of personality traits that will make it easier for you to succeed. These 'softer' skills include:
- The ability to handle pressure - you will have to rely on your own abilities and motivation in meeting deadlines and making decisions.
- Perseverance - starting a business demands determination and hard work, and at the outset this can often be for little financial reward. You must have the personal drive to keep going if your business is to succeed.
- Dealing with other people - as a self-employed business owner you will need tact and diplomacy to deal with other people and negotiate effectively.
- Self-confidence - you must feel comfortable promoting your business and the services or products it offers to a wide range of people.
- Organisational skills - you will have to manage your time, carry out administrative tasks, handle the bookkeeping and find new customers, while still delivering goods or services to existing customers.
What specific skills will I need?
As well as a range of softer personal attributes that will help you run your business, it is advisable to have some knowledge of the market in which you intend to work. Relevant skills include:
- Professional qualifications - as some trades require professional qualifications or standards from people working in that field, you must check that you have the necessary qualifications in order to obtain licences or accreditation. A good starting point to research this is the Sector Skills Development Agency website at www.ssda.org.uk.
- Business skills - such as bookkeeping or knowledge of employment legislation, may be useful. If you have no prior experience of running a business, it may be worth taking a business start up or management course. Learn Direct provides information on courses aimed at new entrepreneurs: see www.learndirect-business.co.uk for details.
Have I got the right motivation?
You need to be clear as to why you want to run your own business and what you want out of it. There is no right or wrong reason for running a business, but by understanding your motivation, you can create a business that is more likely to meet your aims and objectives. For example, will the business be your main source of income, or will it supplement the income from another job? Is the business an investment that you intend to build up and sell off, or is it a long-term commitment that you see providing financial security for your family? The answers to these questions will help you get the planning for your business right at the outset.
Hints and tips
- Honestly assess your reasons for starting a business and plan accordingly.
- Look at your own personality, your strengths and weaknesses and create a business that suits you.
- Assess your existing skills and areas where you may have gaps in your knowledge and consider training to fill these gaps.
- Make sure you have the necessary professional qualifications to run a business in your chosen field.