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The basics of starting a business

How to get your idea off the ground

Female business owner smiling with arms crossed in her office
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Starting a business has become something anybody can do. In today’s changeable economy, being a small business owner is no longer the preserve of the risk-taker. All you need to start your own enterprise is a great idea and the nous to see it through. And maybe some cash. And good contacts. And a business plan. Oh, and a marketing strategy…

Some of us are guilty of having serial epiphanies and mentally retiring for the next 20 years before we’ve actually done anything about it. But before you throw everything at your wonderful idea, it’s crucial to do some research. Sometimes you can get so excited about the dream that you lose all objectivity. 

The best way to stay productive is to be really clear about what you want to achieve, and put something into action immediately. Clarify your goals as soon as you can in order to get your mind focused. Put your idea down on paper to make it more manageable. Then you need to question your idea as much as possible. Be ruthless. Do thorough research into the industry. If you don’t know the industry well, engage the services of someone who does, sharpish.

A Google search for similar-sounding products simply isn’t enough. Don’t fall into the trap of thinking that just because something’s not on the internet it doesn’t exist. Go to the trade associations, look in industry magazines, and attend trade shows. Zoom in and then zoom out. Make sure you see your idea from as many different angles as possible. What does your idea look like as an insider, a consumer, an employee, a competitor, a critic? How can you make it better? Then get a second opinion.

Sourcing an office

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When you’re looking for a workspace, be realistic about where you think you’ll be in five years’ time. Consult your business plan carefully and look at your projected growth. Will the space you choose be right for the business as you see it in five or ten years’ time? If not, will you be able to cope with the upheaval of a move if you’re expanding? 

Always get a break clause built into your contract and push for a rent-free period. Never be afraid to negotiate to get the space on the terms you want. Is the location right for the employees you have and the employees you want? Is it going to be a turn-off for the talent you hope to attract? What’s public transport like? Is it safe? Will security cost more than anything you might save? 

If you can, get a space near like-minded businesses. This could be good for your enterprise’s productivity, morale and general networking.

Writing a business plan

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Your research into the market and your product should form the backbone of your business plan. If you haven’t got time to research and write your business plan, you haven’t got time to run a business. Not only does a business plan serve as a reference document for you, for investors and for future staff, it also helps you focus your mind and strategy. It enables you to see the figures written down, too. 

Your executive summary is the first thing people read. Sometimes it’s the only bit they read. So it needs to be clear, precise and jargon-free. The summary will be read by potential investors, so it’s also important not to assume too much prior knowledge of the industry. The summary should feature the most important points of your business or product and should sum up the following: 

  •  Your service or product and what its strengths are
  •  Where your opportunity is in the market
  •  Who your management team is and how it’s structured
  •  Your track record in business and what your experience in the field is
  •  What your financial projections are
  •  What your funding requirements are and what returns are expected

The rest of the plan should comprise an extrapolation of each of the points above, and include a background to the idea, work carried out to date, experience, and the proposed ownership structure of the business. It is really important to cover any disadvantages or weak points you feel the business may have. 

Being honest about these inspires confidence. Explain key features of the industry, like applicable regulations, and effective cartels. Explain the market segments you want to target (identify the size of each segment and the direction it’s heading in). Here, you should also put how many customers you have lined up and sales you’ve already made. 

Quote minimum order figures, if you can. You need to demonstrate how long you predict each sale or transaction will take. Also, discuss the likelihood of repeat orders and how this works with volume. Include details of the contributions each part of your business will make. Identify where you expect to make your profits and where there might be scope to increase. 

The business plan is designed to attract investors, so remember to list the reasons buyers will come to you over your competitors. If you can’t do this, then you might want to think about your business idea again. You also need to include a bit in your plan about how you expect to promote your product and what marketing plan you have in place. Once you’ve finished your business plan, read it. Does it give you a comprehensive overview of your idea and business? Show it to a friend and ask them for comments.

Demand your supply

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Get your supply chain right and your business will run a lot more smoothly. Henry Freeman, commercial director at TradeRiver, an online provider of supply-chain finance, says, “Being a cash buyer can help you to negotiate better rates with suppliers because they benefit from immediate cash-flow, the life blood of any business. Using this as leverage can save you hundreds or even thousands of pounds in purchasing and service costs. We have also found that, in the long term, relationships between companies using supply-chain finance are strengthened as suppliers like to sell to companies that can immediately settle their trades.”

Use local suppliers where you can. This isn’t only good for your green credentials, but it’s good for quality, too. Using smaller, local suppliers can mean they are passionate about their work and put in extra effort. 

It’s also always better to be able to meet and talk to your suppliers and makes life easier if you have issues to iron out. If you’re going to go further afield, consider the challenges of working overseas before choosing new suppliers in far-flung climes. Be sure to think carefully about shipping costs, timing issues, supply chain complexity and cultural differences, and make sure they don’t negate your labor costs.

If you are going overseas, make sure you keep up to date with localized supplier needs, rules and regulations, as well as global events, which could cause disruptions down the line. Gen up on all major festivals and holidays in the country you choose.

Using protection

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Once you are satisfied that your idea is a sound one, you need to protect it. There are many ways to protect a new business idea and the best approach for you will really depend on what you are doing. Some ideas can be protected by a patent, which is a form of intellectual property registration, for which it may be possible to apply where there is a new invention. 

This is most obviously true of physical products, although software can be patented, too, in some cases. Registration of a patent can give its owner exclusive rights for a long period, which can obviously be a great benefit. However, many good ideas do not involve an invention – for instance, a new method of doing something, which it may not be possible to protect under intellectual property law but simply needs to be kept quiet in the development phase. In that case, the best course of action is to reveal the confidential aspects to as few people as possible, and to do so only where the other party is trusted and has signed a non-disclosure agreement (NDA) prepared by a lawyer. 

Tim Summers, partner at Temple Bright, says, “The first legal issue to consider is the fundamental one: could the business be entirely prevented, or else made impractical, by a requirement of the law?” 

This is more likely to be a possibility in the context of business activities that are regulated, such as financial services. However, says Summers, “There may be laws you don’t know about in other, more general contexts, and these may need to be factored into your strategic planning. So it’s worth talking to a firm of solicitors early on, confidentially describing your plans and asking if there are any fundamental legal obstacles they can foresee.” 

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If there is nothing fundamental that requires you to rethink the business plan, the rest of the detail (for example, setting up the trading vehicle, terms and conditions, employment contracts) may be able to wait a while. However, if you have a name in mind for your business, you should ask an intellectual property lawyer to run some checks and advise you whether it’s a problem if someone else is using a similar name.

Summers says, “If the name is available for you to use, there are ways of securing it before you start trading – for instance, setting up a company, registering a trademark and buying a domain name.” It’s natural for a start-up to have legal matters a little way down the list of priorities, but, says Summers, “Having legal matters such as the small print of your customer terms in pristine form on day one may seem like a counsel of perfection, particularly given that lawyers can be expensive and start-up funds are often limited, but the big two early-stage oversights are, firstly, a poor or non-existent founders’ agreement, and secondly, not properly securing intellectual property used in the business – in particular, that which is created for the business by other people.”

When everyone is good friends at the start, it may seem that having a founders’ agreement (such as a partnership agreement or shareholders agreement) is unnecessary. But once you start building the business, you may find that this pressing and perhaps rather uncomfortable matter is deferred so that by the time problems start to emerge among the founders, it is too late to agree a framework for resolving them.

As for intellectual property, it’s possible to have a false start with a name or logo because you have not done the checks for use by others or have not registered your own trademark. Where written text or designs have been created by others, it’s all too common for a young business to appoint creative contractors informally, without realizing that ownership of intellectual property may remain with the creator rather than passing to the business – even when the business is paying for it. Should you take the chance?

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Says Summers, “Of course, entrepreneurship involves risk-taking. However, I’d make a distinction between the calculated commercial risks that are inherent to a new venture, and the kind of recklessness that could result in a good business being destroyed for avoidable causes. Not taking legal advice on important things early on is in the reckless category, and I hope most successful entrepreneurs would say the same.”

However, if you want to keep things friendly, it’s worth shopping around for a lawyer who can create legal documents which are short, user-friendly and attractive. Says Summers, “This is a much better course than relying on a combination of cut-and-pastes from the internet, items passed to you by friends and nothing at all.”

Instructing lawyers is in itself a potential minefield. It’s worth considering price (but don’t make it the only consideration). You should also consider quality and expertise, location and personal rapport, and you should talk to several firms before choosing one. The best indicators of quality and expertise will be the firm’s presentation and reputation, the testimonies of others who have used it for similar work, and its answers to searching questions put by you.

“The temptation for solicitors,” warns Summers, “particularly junior ones, is to present every aspect of your situation as needing urgent attention. This may result from the cautious legal temperament, the fear of being sued unless every possible risk is dealt with, or the fact that more legal work generally means more fees. However, the reality may be that there are relatively few tasks requiring immediate work.

A commercial view is one that measures the real risks against the size of your budget. A good solicitor is one that gives you such a commercial view, and not simply an expensive wish list to ensure that you are 100 percent watertight on all points, however obscure, and establish the price.”

Work-life balance

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It can be really hard to achieve work-life balance in the early days of a start-up, especially if there’s only one of you working on everything. But there are ways of making sure you don’t let your business rule your personal life. 

Monica Parker of workplace specialist Morgan Lovell says, “Make sure you keep certain things sacrosanct, such as the school run, the ballet recital and date night. You will have your family longer than you’ll have this job.” Learn early on what you can control and what you can’t. “Instead, create processes,” says Parker. “Schedule and time-keep the aspects of your life you can control. Then release the aspects you can’t so they don’t make you crazy.” 

Get to know your rhythm. Are you an owl or a lark? Learn this about yourself before you start, so you can tackle jobs when you know you are at your most productive. Studies have shown that a 20-minute nap in the afternoon has a bigger impact on your energy levels than an extra 20 minutes of sleep in the morning. 

Learn the power of a quick kip. Be vulnerable and share your fears and failures with those closest to you. You will spring back more easily from the lows, and your friends and family won’t feel alienated from what’s going on.

Learn to use advisors

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You might want to go it alone entirely but never underestimate the power of the right advice. Kathleen Saxton is the founder of The Lighthouse Company and chair of the advisory board Advertising Week Europe. She says, “Within any SME, investing in consultancy or external advisors is always a serious consideration. Any capital expenditure needs to have a positive impact on the business almost immediately. Whilst most businesses have a breadth of skillset within the leadership team, there will always be specialist areas or indeed blind spots that need careful consideration, so identify them early and be honest and open about where you need to seek counsel.” 

Saxton adds, “Don’t be tempted to only rely on your most immediate network. Trusting outside advisors with your deepest company issues or concerns is always daunting and sometimes exposing, but seeking, finding and engaging with the best advisors you can afford is always the smarter option.” And don’t balk at the idea of going straight to the top, either. 

Human nature dictates that we fundamentally like to be respected and needed, says Saxton, so you will probably find that even the most senior or high profile people enjoy being consulted or asked their opinion: “Don’t be daunted by stature or profile – you will be surprised how many people want to help you to succeed, paid for or otherwise.” 

Once you have asked for help, Saxton says it’s crucial to listen to it. “Be willing and ready to take the advice you are given,” she says, adding, “When we put our heart and soul into a business, it can be without, and what your overheads will be). When trying to make this decision, make sure you weigh very carefully the profits you might make against the risk that you will be taking. If you’re going to be required to charge your home to the bank in order to raise the money, can you survive if it all goes down the proverbial?

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It’s worth doing a bit of basic research into the different types of financing available on the market. Business finance falls into two categories: debt and equity. Debt is, in short, borrowing money that will be paid back over time with interest. Equity is finance provided by you or your investors and doesn’t have to be repaid as such (though investors usually expect some sort of return). 

The ratio of debt to equity is called gearing, and the terms highly geared or highly leveraged mean that the business has a higher proportion of debt compared with equity. Banks and finance companies offer a range of debt financing, including overdrafts and loans. 

An overdraft is a borrowing facility linked to an existing account and is designed to help with short-term borrowing needs. It’s worth being aware that a bank can demand repayment on an overdraft in full at any time (although if you’re keeping up repayments and your credit rating is stable, then it’s unlikely). 

Overdrafts are usually agreed for six to twelve months, and then renewed by negotiation. Overdrafts are also usually more cost-effective than credit cards, because the interest is only paid on the amount borrowed at a margin above the Bank of England base rate. 

Most banks offer business loans – a large amount of money repayable over an agreed period. These are obviously better than overdrafts and can be more cost-effective if interest is fixed. Business credit cards operate in a similar way to personal credit cards, and are a useful way to help with cash flow (if managed properly). 

The advantage of debt funding is that you don’t have to give up a share in your business to a lender, and your obligation is only to pay back the amount borrowed, with interest, so if you become a zillionaire, you don’t have to do any depressing maths about how much less you will actually be getting. Another thing to consider is that interest payments might be deductible against tax. 

One great finance initiative for smaller businesses is invoice finance, a way of freeing up cash from invoices raised. The amount of money available can grow automatically as sales increase. How it works is that you submit invoices to a factoring company, which advances a pre-agreed percentage of the invoice amount. 

The factoring company then collects the payment from the customer once it falls due, then releases the balance back to you.

Going for growth

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So it’s all going swimmingly but how do you make the leap from a small business to a medium business? Daniel Callaghan is founder of MBA & Company, which connects large and small businesses with highly skilled professionals for project work. “Expand carefully,” he says. “Demand for your product or service is fantastic but there’s always a danger you simply won’t be about to fulfil orders, or deliver the level of service your clients expect.” 

If you can’t meet demand, you’ll lose clients and, in turn, demand will plummet. Some small businesses find they can accommodate an uplift but they can’t provide a service to a high enough standard, which creates customer service issues. “Quality can really set your firm apart from the competition,” says Callaghan, “So businesses need to ensure they can deliver the same quality service whether they have 5 employees or 500.” 

One potential problem is that most SMEs don’t have concrete systems or hierarchies in place. This is, of course, fine when you have 12 members of staff, but add 12 more into the mix and suddenly you need to clarify lines of communications, and implement structure and processes. You also need someone to check people are following these processes, something that SME owners commonly overlook. If your goal in setting up a business is simply to free up time and improve your quality of life, you shouldn’t feel pressurized to go for growth. 

Says Callaghan, “Entrepreneurs with big ambitions work round the clock to reach the dizzy heights, so growing a business is not for the faint-hearted. Lifestyle businesses can still be lucrative.” But if you do want to expand, you will have to hand over some responsibility at some point.

Get your head in the cloud

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Cloud computing is where it’s at. Lori Williams, general manager, Europe, at cloud services company Appirio, says, “Small businesses were among the earliest adopters of cloud technology and first to witness its business benefits.” 

She says that cloud technology frees SMEs from the restraints of on-premise technologies. “They can purchase IT application services on demand, which helps them spend less, manage their cash flow and innovate more quickly without having to expend significant start-up costs on hardware or perpetual licenses. Crucially for companies wanting to grow and differentiate themselves, the cloud enables business agility by immediate provisioning of the functionality of core business needs, such as email and CRM, as well as access to cutting-edge social and mobile functionality.”

Company Types

Presentation

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Limited Company:
If you know from the start that you’re likely to be making more than £20,000 of profit (not turnover), you should probably consider setting up as a limited structure, simply because it’s more tax efficient. If you run a limited company and want to take money out, it’s worth operating on a mixture of dividends and salary. 

You can set your own salary to whatever you want, and you don’t have to comply with minimum wage. The smaller the salary you take, the less tax you pay on it. Then take the rest as dividends (effectively making you a shareholder and director).

Sole Trader:
If, for whatever reason, you can’t be a limited company (if you’ve been bankrupt recently or been disqualified as a director) or simply want to start small, you can register as a sole trader. As a sole trader, you’ll pay income tax and National Insurance contributions on your respective shares of the profits and gains of your business. 

If you are a sole trader and you want to continue using a personal bank account, it’s a good idea to keep any bank account you use for your business separate, just to make it easier for yourself. It’s completely legal to use a personal bank account if you are a sole trader, but some banks won’t allow you if they discover that you have a lot of trade income. However, if you are a limited company, you must use a business account by law.

LLP:
If there’s more than one of you and you’re a limited company, you could also set up as an LLP (Limited Liability Partnership). This means that one partner is not responsible or liable for another partner’s misconduct or negligence. Any new or existing firm of two or more people can incorporate as an LLP.