Chapter 12
In This Chapter
Selecting premises
Opting to make it yourself or buy from outside
Choosing and using suppliers
Deciding on key business advisers
Dealing with cyber security
Although you’ve decided to go into business, it doesn’t necessarily mean that you have to make your own product, carry out every aspect of the business yourself or even work from dedicated premises. The best use of your time may be to outsource the most time-consuming and least valuable aspect of your business. For example, I bet you can’t get a package from Milton Keynes to Penzance in under 24 hours and see change from a £20 note! But a delivery service can.
Whether you buy in most of what you sell, or just components and assemble them yourself, you have to choose between the dozens if not hundreds of suppliers in the market. Price alone is rarely a good enough guide to which supplier to choose. If they can’t deliver on time, price is irrelevant. You may also find it expedient to consider their green credentials and how those fit with yours.
Fortunately, you don’t have to face all these decisions alone. Plenty of advisers are there to help. This chapter looks at the decisions and risks involved in running a business and helps you to choose someone to assist you through the minefield.
If you can avoid taking on premises when starting up your business, perhaps by working from home, so much the better. (See ‘Working from home’ in Chapter 3 for more information.) If that’s not an option, read on.
Buying or leasing, the term used for renting a business premises, entails navigating through a number of important and often complex regulations, as well as the practical nuts and bolts of finding, fitting out and settling in to the premises. These regulations go way beyond the scope of the physical premises into areas such as opening hours and health and safety.
The key decisions to make are how much space you need, whether you want to rent or buy and what equipment you need to fit into your premises.
The first decision to make is how much space you actually require and what other facilities you need. The space is the easy bit. You can take the steam age route and make cut-out scale models of the various items you need – chairs, desks, tables and so forth – and set them out on scaled drawings of the premises. By a process of trial and error, you should be able to arrive at an arrangement that’s flexible, convenient to work in and meets the needs of customers and staff alike. You can also take the high-tech route and use a software program to save on the scissor work. Try Google’s free program Sketchup (www.sketchup.com), a 3D-modelling software tool that’s easy to learn and simple to use. Alternatively, for around £90 you can buy a package from Smart Draw (www.smartdraw.com/specials/officeplanning.asp); you can try it for free before you buy.
As soon as you know where you want to be, how much space you need and any special requirements, you can hit the trail visiting local estate agents, reading the local press and generally keeping your ear to the ground. You can, of course, get someone else to do much of the donkey work for you and put your valuable time to more productive work such as finding customers or raising dosh. Office Planet (www.office-planet.net) and Official Space (www.officialspace.co.uk), for example, provide free office-finding services. You can search through their databases of available properties and create a shortlist of solutions that meet your needs, or simply call an adviser.
If you’re looking for a workshop, warehouse or showroom that doesn’t have to be in the centre of a town, Ashtenne (www.ashtenne-online.co.uk; an Industrial Fund Unit Trust that owns 500 industrial estates around the UK ranging in size from 500 to 50,000 square feet) and Comproperty (www.comproperty.com) operate online databases for buying, selling or leasing commercial property and businesses in the UK.
For retail premises, Shop Property (www.shopproperty.co.uk) and Daltons Business (www.daltonsbusiness.com) have online databases of shops for sale and rent, searchable by price, size and location throughout the UK.
This question is another imponderable one. Buying a premises gives you all sorts of advantages, not least that you can make any alterations you want (if the law allows) without going cap in hand to a landlord, and of course no one can kick you out. On the downside, you have to invest a substantial amount of money upfront and you have to sell up if you outgrow the premises. You of course enjoy any rise in the value of the property, but if you really believe that property is a better bet than investing in your own business, perhaps you should rethink your business proposition.
Renting isn’t without its problems, however. You have to take on the property for a number of years, and even if you sublet with the landlord’s permission, you’re liable for rent for the full period should the person you sublet to default. Rents are reviewed, almost invariably upwards, every three to seven years. You’re expected to keep the property in good repair and return it to the landlord at the end of the lease period in the condition it was in at the outset. That can prove expensive if the landlord doesn’t share your opinion that any changes you’ve made constitute an improvement.
Net Lawman (www.netlawman.co.uk/ia/business-property-lease) provides free advice and information to both landlords and tenants about business leases. Also, the Department for Communities and Local Government website has a guide to the law governing commercial property leases (www.gov.uk/government/publications/renewing-and-ending-business-leases-a-guide-for-tenants-and-landlords).
After you’ve found the right premises, you need to furnish them. A number of items such as furniture, shelving, filing and computing equipment are common to many types of business. Some require more specialised items, including cookers, commercial printers and machine tools. Only in the most exceptional cases should a start-up business buy new equipment. Aside from the basic economics – new may cost two to three times as much as used – until you get trading, you’ve no real idea of what you actually need.
The following are useful sites, apart from the ubiquitous eBay, on which to search out second-hand business equipment:
Searching for suppliers of new products is best done using a business-to-business directory, such as those provided by Business Magnet (www.businessmagnet.co.uk), Kelly Search (www.kellysearch.co.uk) and Kompass (http://gb.kompass.com), which between them have global databases of over 2 million industrial and commercial companies in 200 countries, listing over 200,000 product categories. You can search by category, country and brand name.
If your business involves making or constructing products, you should address the issue of whether to make the product yourself or to buy it, ready to sell or as components for assembly.
If you decide to make the whole of your product yourself, or at least a major part of it, you need to decide exactly what plant and equipment you need and how many pieces you can produce at what rate. Then you have to consider such factors as what engineering support, if any, you need and how to monitor and control quality.
The great advantage of manufacturing your product yourself is that you have control over every aspect of the business and its products. You can, in theory at least, step up production to meet extra demand, make minor modifications to a product to meet a customer’s particular needs and have the resources in-house to develop prototypes of new products to respond to changing market conditions.
However, some possible disadvantages of making products yourself in a start-up business are
Outsourcing, contracting out the production of your product or the supply of your service, has become a buzzword. Thousands of articles and hundreds of books have been written on the subject and you can attend countless related seminars. An Internet search on outsourcing brings up more links than you can ever hope to handle.
One way to set the boundaries for outsourcing is to decide what you’re good at, and then outsource everything else. In other words, focus your company on your core competency, and ‘stick to the knitting’. That logic is sound in theory, and to a certain degree in practice, but like everything else you can take it too far. The key is to understand your business and its goals and decide how outsourcing can help you attain them.
Some things are central to your business and you shouldn’t outsource them, at least at the outset. You need to keep an eye (your eye!) on such things until you have them fully under control. These things include cash-flow management and most aspects of customer relations. Later on you may consider, for example, outsourcing collecting cash from customers to an invoice discounter or factoring service (which I talk about in Chapter 8), which may have better processes in place to handle larger volumes of invoices than you can afford.
Some tasks make sense to outsource initially and bring them in-house later. If you plan to offer a product or service that you’re not expert at, you may benefit from contracting out this core function, at least until you gain confidence and expertise. For example, if you plan to start an upmarket soup kitchen but aren’t experienced at making soup, you can turn to an established soup chef to cook for you. The outside expert charges you a premium, but for that you get significant value – the contractor understands your requirements, produces the product and delivers it to your site with little risk to you. If the quality is wrong, you send it back. If you need more product, you order it. You don’t have to wait for your new equipment to arrive before you can step up production.
Quality may well be, like beauty, in the eye of the beholder, but you’re wise to set clear standards that you expect every aspect of your end product or service to conform to. You need to set these standards whether you make in-house or outsource.
A number of commercial organisations provide user-friendly guidelines and systems to help you reach the necessary standard. Searching the Web using keywords such as ‘Quality standards’ or ‘Measurement’ brings up some useful sites.
Selecting the wrong supplier for your business can be a stressful and expensive experience. This section offers pointers on how to find a supplier and make sure that your supplier can meet your business needs. (Chapter 4 talks about similar issues, so you may want to consult that chapter too.)
Look for value in the service a supplier offers rather than just the price you pay. Here are the key questions you should ask about any prospective suppliers to your business:
Thomas’s Register (www.thomasnet.com), Kelly’s (www.kelly.co.uk) and Kompass (http://gb.kompass.com) between them have details on over 1.6 million British companies and hundreds of thousands of US and Canadian manufacturers, covering 23 million key products and 744,000 trade and brand names. If someone makes a particular product, you can find their details in one of these directories.
Some free search facilities are available online. Your local business library also holds hard copies of directories and may even have Internet access to all the key data you’ll ever need on suppliers.
Buying is the mirror image of selling. Remember that as you negotiate with suppliers, who are essentially selling their services. Even if they have no deliberate intention to mislead, you may be left thinking that a supplier isn’t committed to doing what you want in the way you want it. So get any agreement in writing.
The starting point in establishing trading terms is to make sure that suppliers can actually do what you want and what they claim to be able to do. You do so by checking them out and taking up references.
The next crunch point is price. As a small business, you may feel you’re fairly short on buying power. That may be true, but room for negotiation always exists. All suppliers want more customers and sometimes they want them badly enough to shift on price.
The supplier’s opening claim is likely to be that it never negotiates on price. Don’t be deterred. Many ways exist to get your costs down without changing the headline price. Here are a few examples:
You need to examine all the contract terms, such as delivery, payment terms, risk and ownership (the point at which title to the goods passes from the maker to you), warranties and guarantees, termination, arbitration rules if you fall out and the governing law in dealings with overseas suppliers. These issues are the same ones you deal with when you set your own terms of trade, so turn to Chapter 5 for a detailed review.
To ensure that you handle any problems you have with your suppliers effectively, you need to build relationships with them. That means talking to them and keeping them informed of your plans and intentions. If you’re planning a sales drive, new price list or other similar activity, let suppliers know so that they can anticipate the possible impact on them. Keeping them informed doesn’t commit you to buying extra product, or indeed any product beyond what you’ve contracted for, but it does make your suppliers feel part of the value chain between you and your customers. By involving suppliers, you’re indirectly encouraging them to commit to helping you meet your goals.
Many businesspeople pay too much for the goods or services they purchase, which shows up as lower gross margins and poorer performance than the competition. Many of these people don’t raise the issue with their supplier but instead start looking elsewhere for an alternative source. Don’t make this mistake. More often than not, your supplier will prefers to discuss the terms of your arrangement than lose your business. In many cases, you both end up with a better deal than before.
Buying online has a range of important benefits for a small firm. Big companies have buying departments whose job is to find the best suppliers in the world with the most competitive prices and trading terms. A small firm can achieve much the same at a fraction of the cost by buying online – doing so can lower costs, save scarce management time and get supplies just in time, hence speeding up cash flow and reducing stock space, along with many other benefits.
The range of goods and services that you can buy online is vast and getting larger. As well as office supplies you can buy computer equipment, software, motor vehicles, machine tools, vending equipment, insurance, hotel accommodation, airline tickets, business education, building materials, tractors, work clothing and cleaning equipment, to name but a few.
You can use several methods to buy business supplies online. I explain the most useful methods in the following sections.
Online buying groups go by various names, including trading hubs, e-marketplaces, online communities, aggregators and cost reducers.
Buying in this way allows you to collect information from potential vendors quickly and easily. These online markets gather multiple suppliers in one place so that you can comparison shop without leaving your office or picking up the phone. For example, if you need to buy toner cartridges for your office laser printer, you can go to an online marketplace and search the catalogues of multiple office supplies vendors, buying from the one that offers the best deal. You can also use the same method for bigger-ticket items such as office furniture or photocopiers. No more calling a handful of potential suppliers, sitting through sales presentations and negotiating prices. Comparison shopping saves you time for more valuable business activities and gets you a better rate.
You can buy supplies online through online auctions. The advantage is that you pay only as much as you’re willing to. The disadvantage is that you may have to wait for the right deal to come up.
Auctions are a great way to significantly reduce the funds you need to purchase items on your business wish list – items you want now or need eventually but that aren’t a current necessity. (See ‘Sorting out equipment’, earlier in this chapter.)
You can avoid using hard cash by taking advantage of online barter exchanges. These e-exchanges let you trade your company’s products and services for those of other businesses. You can swap ad space for accounting services, or consulting for computers. For start-ups or cash-strapped companies, barter can be an effective way to get products or services you may otherwise be unable to afford. An organisation that can help you get started with bartering is Bartercard (www.bartercard.co.uk).
As the saying goes, no pain, no gain. Some of the pain is routine and you can allow for it in the normal course of events. Employees come and go, you have to pay suppliers, you have to move into and out of premises. But some events are less easy to predict and can have serious if not disastrous consequences for your business. What happens if the warehouse burns down or your pizzas send a few customers to hospital?
You can’t be expected to know that such things will happen ahead of time, but you can be reasonably sure that something will happen sometime. The laws of probability point to it and the law of averages gives you a basis for estimating your chances. You have to be prepared to deal with the unexpected, which is what this section helps you do.
Insurance forms a guarantee against loss. You must weigh up to what extent your business assets are exposed to risk and what effect a particular event may have on the business if it occurs.
Insurance is an overhead, producing no benefit until a calamity occurs. How much insurance to carry is therefore a commercial decision, and although the temptation exists to minimise cover, you should resist it. You must carry some insurance cover, by employment law or as an obligation that a mortgager imposes.
Establish your insurance needs by discussing your business plans with an insurance broker. Make sure that you know exactly what insurance you’re buying; and, because insurance is a competitive business, get at least three quotations before making up your mind.
The Association of British Insurers (ABI; www.abi.org.uk) and the British Insurance Brokers’ Association (BIBA; www.biba.org.uk) can put you in touch with a qualified insurance expert.
You must carry at least £2 million of liability insurance to meet your legal liabilities for death or bodily injury incurred by an employee during the course of business. In practice, this cover is usually unlimited, with the premiums directly related to your wage bill.
Employer’s liability covers only those accidents in which the employer is held to be legally responsible. You may want to extend this cover to any accident to an employee while on your business, whoever is at fault. You may also have to cover your own financial security, particularly if the business depends on your being fit and well.
The growing burden of employment legislation facing small firms is forcing more and more businesses to take out legal expense insurance as the risk for being prosecuted for breaking the law rises.
The remedy for the small firm without its own human resources department to keep it operating clearly within legal boundaries and a legal department to fend off any legal threats is to take out legal expenses insurance. Firms that sign up for this type of insurance can expect the insurance company to pay not only any fines and awards they incur but also their costs associated with defending themselves against allegations.
Obviously, you need to insure your business premises, plant and equipment. However, you can choose between a couple of ways to do that:
You also have to consider related costs and coverage. For example, who pays for removing debris? Who pays the architect to design the structure if you have to rebuild? Who reimburses employees for any damaged or destroyed personal effects? And potentially the most expensive of all: who covers the cost of making sure that a replacement building meets current, possibly more stringent and more expensive, standards?
The small print of your insurance policy covers these factors, so if they matter to your business, check them out.
Meeting the replacement costs of buildings, plant, equipment and stock doesn’t compensate you for the loss of business and profit arising out of a fire or other disaster. Your overheads, employees’ wages and so on may have to continue during the period of interruption. You may incur expenses such as getting subcontracted work done. Insurance for consequential loss, as this type of insurance is known, is intended to restore your business’s finances to the position they were in before the interruption occurred.
Until your goods reach your customers and they accept them, the goods are still at your risk. You may need to protect yourself from loss or damage in transit.
Anyone who puts a substantial amount of money into your business – a bank or a venture capitalist, for example – may require you to have key man insurance. This type of insurance provides a substantial cash cushion in the event of your death or incapacity – you being the key man (even if you’re a woman) on whom the business’s success depends.
Key man insurance is particularly important in small and new firms where one person is disproportionately vital in the early stages. In a partnership, your partners may also consider this a prudent protection.
As well as your own specifications confirming how your products or services perform, you may have legal obligations under the Consumer Protection Act, which sets out safety rules and prohibits the sale of unsafe goods, and the Sale of Goods Acts, which govern your contractual relationship with your customer. In addition, the common-law rules of negligence apply to business dealings.
If you’re a principal in a partnership with unlimited liability, a lawsuit concerning product liability is quite likely to bankrupt you. Even if you carry out the business through a limited company, although the directors may escape personal bankruptcy, the company doesn’t. If you believe that real risks are associated with your product, then you need to consider taking out product liability insurance.
If your business involves foodstuffs, you must also pay close attention to the stringent hygiene regulations that now encompass all food manufacture, preparation and handling. If you’ve thoroughly examined and identified all the hazard points yet something unforeseen goes wrong, you can claim the defence of ‘due diligence’, insofar as you’ve done everything you could reasonably have been expected to do. Trading Standards (www.tradingstandards.gov.uk) and environmental health officers based in your local government office are there to help and advise you in a free consultative capacity.
Producers or importers of certain types of goods face obligations under both the Consumer Protection Act 1987 and the Sale of Goods Act 1979. Importers can be sued for defects; they can’t disclaim liability simply because they haven’t been involved in manufacture.
If you decide to trade as a limited liability company (see Chapter 5), then in all probability you have to become a director of the business. You may be the only director, or you may be one of several, but as well as the status you have responsibilities.
In practice, a director’s general responsibilities are much the same as those for a sole trader or partner (outlined in Chapter 5). By forming a company, you can separate your own assets from the business assets (in theory at any rate, unless they’re covered by your personal guarantee). However, a director also has to cope with more technical and detailed requirements; for example, sending your accounts to Companies House. More onerous than just signing them, a director is expected and required in law to understand the significance of the balance sheet and profit and loss account and the key performance ratios.
You can insure directors’ risks using directors’ insurance, which covers negligent performance of duties and breach of the Companies Acts – particularly the Insolvency Act, which can hold directors personally liable to a company’s creditors. The company bears the cost of the insurance because the directors are acting on its behalf.
Former directors of insolvent companies can be banned from holding office as a company director for periods of up to 15 years. Fraud, fraudulent trading, wrongful trading or a failure to comply with company law may result in disqualification.
If you’re concerned about anyone you’re going to do business with and believe they are or have been a company director, you can check in the Disqualified Directors Register on the Companies House website (http://wck2.companieshouse.gov.uk//dirsec).
You need lots of help to get started in business, and even more when you’re successful – and this help can come from accountants, banks, lawyers and management consultants, as well as possibly tax consultants, advertising and public relations consultants, technology and IT advisers, and so on. The rules and tips in the following sections should steer you through dealing with most situations involving choosing and using outside advisers.
Keeping your financial affairs in good order is the key to staying legal and winning any disputes. A good accountant inside or outside your company can keep you on track. A bad accountant is in the ideal position to defraud you at worst, or to derail you through negligence or incompetence.
What attributes should you look for and how can you find the right accountant for your business? Here are the key steps to choosing a good accountant:
You may wonder why I list selecting a bank in a section covering choosing business advisers. The answer, crazy as it may seem, is that your banker is almost invariably the first person you turn to when the chips are down. You may not find this answer so surprising when you think about it. After all, most big business problems turn on money, and bankers are the people who turn the money on.
Go for the wrong bank and you can lose more than your overdraft. You may lose the chance to acquire a free, or at least nearly free, business adviser.
Lawyers or solicitors are people you hope never to have to use and when you do need one you need her yesterday. Even if you don’t appoint a company lawyer, you may well require one for basic stuff if you’re forming a company or setting up a partnership agreement. Follow the same rules as you do for choosing an accountant (refer to ‘Tallying up an accountant’, earlier in this chapter).
The fact is that, in business, one day you’re going to need a lawyer. The complexity of commercial life means that sooner or later you may find yourself initiating or defending legal action. It may be a contract dispute with a customer or supplier, or perhaps the lease on your premises turns out to give you far fewer rights than you hoped. A former employee may claim that you fired her without reason. Or the health and safety inspector may find some aspect of your machinery or working practices less than satisfactory. When things do go wrong, the time and money required to put them right can be an unexpected and unwelcome drain. By doing things right from the start, you can avoid at least some of the most common disputes and cope more easily with catastrophes.
In addition to ensuring that contracts are correctly drawn up, that leases are free from nasty surprises and that you’re following the right health and safety procedures, a solicitor can also advise on choosing the best structure for your company, on protecting your intellectual property and on how to go about raising money.
It makes sense to see your solicitor before your problems arise and find out what she can do for you, or, at least, to make yourself conversant with the relevant laws. Taking timely action on legal issues may help you gain an advantage over competitors and almost certainly saves you money in the long run.
If you’re going to see a lawyer, make sure that you’re well prepared. Have all the facts to hand and know what you want help with.
If you’re facing a new major problem in which you have no expertise, particularly a problem you don’t expect to experience again, then hiring a consultant is an option worth considering. For example, if you’re moving premises, changing your computing or accounting system, starting to do business overseas or designing an employee share-ownership scheme, getting the help of someone who’s covered that area several times before and who’s an expert in the field may well make sense.
Take on a consultant using the same procedures as for a key employee (see Chapter 11). Brief the consultant thoroughly, and don’t expect to dump the problem on the consultant’s doorstep and walk away. Set the consultant a small, measurable part of the task first to see how she performs. Never give the consultant a long-term contract or an open-ended commitment.
The government ranks hostile attacks upon UK cyber space as a Tier One Priority Risk, just after international terrorism and well ahead of disruption to oil or gas supplies. The government claims that cyber crime costs as much as $1 trillion per year globally, with untold human cost. Implementing cyber security means taking measures to protect websites, networks, computers, programs and data from such attacks, and from damage and theft.
Major British companies are increasingly anxious about the impact of cyber crime on their bottom line and the resilience of the networks upon which commerce relies. But small businesses are also at risk. In 2012, the Federation of Small Businesses published findings of a survey that showed
The following sections help you understand and protect your business against the risks.
Use these measures to ensure that you’re not the victim of cyber crime:
A firewall is a cordon around your PC or network, sitting between it and the Internet, designed to prevent unauthorised access to your PC or network and hide your Internet-connected PC from prying online eyes.
Passwords should be in place at every point where your hardware comes in contact with the Internet, from your servers or wireless connection through to individual areas such as your website transaction areas.
Over the past decade, the business community has experienced what amounts to a green revolution. Pressures on business abound: to produce less waste, use less energy, consume less water, encourage employees to walk or cycle to work, or to facilitate working from home for at least part of the time. That this green wave has received the enthusiastic support of business is in large measure because many of these activities are consistent with aggressive long-term cost cutting.
The beauty, from a business perspective, is that this pressure to go green comes from outside and is supported in many cases by legislation. Companies such as 3M, DuPont, IBM and, latterly, Google, Cisco and Microsoft are enthusiastic green cost cutters. They’ve even managed to save billions as a result of measures to reduce waste and energy consumption. Toyota, with innovative hybrids such as the Prius, has created what amounts to new streams of revenue while greatly enhancing the value of its brand.
And the evidence is that employees like working for green businesses. A global study by corporate communications firm Hill & Knowlton revealed that four in every ten MBA students wouldn’t take ‘a great offer’ from a company with a poor environmental reputation. Another survey covering college students found that 92 per cent want to work for a green company.
Look at GreenWise (www.greenwisebusiness.co.uk), an independent daily information service for businesses – large and small – that want to find out more about the opportunities and challenges of moving to a low-carbon economy. And if you’re thinking of basing your business on a green product or service, check out the Carbon Trust’s Entrepreneurs Fast Track service (www.carbontrust.com), which helps early-stage companies make the transition from low-carbon concepts to commercialisation. Often such ventures are high risk in nature and find it difficult to attract finance and managerial talent. As well as expert advice and networking opportunities, the Fast Track service channels £5 million a year into clean-tech ventures with the highest growth potential.