Existing arrangements, history, personnel, skills, premises, etc.

In starting a new company you will not be setting out from scratch. You may already have established links with potential clients and other useful contacts. You will certainly have valuable qualifications, skills and experience and you are likely to have a background that will prove useful in launching a new venture. You may even already have premises – even if it is simply space in your own home.

Lay all this out in written form, partly to establish where you are starting from, but also to remind you, your colleagues and advisers what you have to base your business on and to build from. You may want to do something very different in your new business, but begin by knowing yourself better. This may also be helpful for learning more about your proposed partners, and will be especially important if several of you are coming together to set up a new firm. You may not know each other as well as you thought, and sharing background information may not only be helpful to the business but key to developing and maintaining good personal relationships.

Note: If your firm is already established, this becomes an even more essential element of your plan and you can, and should, include copious information on your performance and track record to date.

Business objectives

Carefully consider your business goals, and set them out either as a list or in diagrammatic form. You should already have begun to articulate these goals in your brief to yourself in Stage 1. They may be high-level aspirations or very specific achievement targets, but they should be relatively few in number and expressed in a straightforward way. They will need to be agreed among all the principal players, but buy-in from employees (if you have any) will be important and you may also want to consult on, test and explain them more widely among clients, friends and family. Your business goals need to be forward-looking, robust and capable of standing the test of time.

Peter Barber of Peter Barber Architects defined his objectives (albeit several years after establishing his practice) as:

• to create delightful and beautiful architecture
• to maintain an adequate level of living
• to grow without threatening the quality of the work.

Alternatively you may have more specific aims, such as:

• winning a certain number or value of jobs each quarter
• achieving predetermined client satisfaction levels
• delivering minimum added value on identified projects
• achieving exemplary targets of design and in-use performance
• innovating and establishing new concepts in the industry
• winning at least one industry award per year
• achieving employee satisfaction targets
• growing to a significant size in the industry.

Some of the goals may be aspirational, others ruthlessly practical. They are needed so that your planning can be focused on achieving them, and later on you can assess whether they have been reached. All goals should have a timescale. Some may be permanent features of a long-term plan and progress towards them must be measured on a regular basis. Others will have a limited shelf life and will eventually have to be replaced by new goals.

In general keep your general business goals separate from your financial ones. Financial success may figure as an essential business aim(financial survival certainly should), but making money is a different level of concern to other business objectives and focusing on financial objectives may serve to obscure them.

Advisers

The importance of good advice and advisers has already been discussed, and in the eyes of potential investors or clients the credibility of your business proposition may depend on the backing of heavyweight advisers. Depending on the size and nature of your business, some advisers will be an absolute necessity, others a good idea and strongly recommended and still others a (potentially worthwhile) luxury. Be warned though that many who call themselves advisers may have little to offer you. Seek out those who will genuinely help your business.

Your bank manager is likely to be one of your essential advisers and may well be needed as an ally in the years ahead. Banks have a wealth of experience of both successful and unsuccessful businesses and have a vested interest in ensuring that their customers are successful. Use their support to help your company grow and to avoid the numerous pitfalls in your way. But first you need to choose your bank. Use the time before you start up to get recommendations on and to interview different banks to see what they can offer you, how sympathetic they are likely to be to design businesses and whether they will have appropriate staff available to be of useful assistance when needed.

Many architectural practices go through patches when the fees are not coming in as expected, maybe because projects have become delayed or because clients have their own problems with cash flow. At these times having your bank manager on your side may well decide your financial survival. Your manager or bank business adviser needs to understand the way your business works and that you know what you are doing. Be prepared to keep them, as individuals, regularly updated on your situation and your projected cash flow, especially when you can see rocky times ahead.

But recognise that banks are businesses as well, and are not by nature altruistic. They can pull the plug on you or make life difficult if they suspect that you are not a good prospect. It is also their role to make money by selling you a variety of services. Some of these you will actively want, but others may be superfluous or can be obtained at better rates elsewhere. It is in your interest to build a good working relationship with your bank and its staff, but know the limitations of the relationship and be prepared to start again elsewhere if necessary.

The market

What and where is the market for your services? How large and how widespread might it be? You may already have a feel for this if you have been working for a company practising in the same area or have lived in the locality of your proposed new firm. But you need to dig deeper and do your homework on where your work will come from. This will include the geographical area you want to work in, the types of projects and range of clients. If you are proposing to sell a specialist service you may have to travel to access a wider market than if you are planning a broad-based local service. You also need to check on your competition and the potential for collaboration with others.

Architecture is inevitably a business about places and people. It cannot all be done at the end of a phone or via computer networks. You have to meet your clients, visit building sites and discuss matters directly with local planners and builders. In any area there will be a level of current and likely future building activity. Will it be enough to keep you, and any likely competitors, busy? How large might that area be? Alternatively, how far, or for how long, are you willing to travel to carry out work? This may in turn depend on the size of the project and the fees and expenses it will carry.

Look at where you can easily travel to from your chosen base. Draw one hour, two hour and greater travel areas on maps. These are unlikely to be simple circles as good roads and rail connections, or even local airports, may radically extend your reach in certain directions. Alternatively, turn this around to work out where to locate your firm in relation to good market locations.

Research

In assessing the potential for selling your services in the marketplace, you should be prepared to spend time and effort doing research. If well directed it is unlikely to be wasted.

Speak to any existing or potential clients. Make contact with individuals who commission design and who require buildings. Find out how they choose their architects or procure their buildings and how they plan to do so in future. What are they looking for when they make their selection? Talk to other architects in the area, and also to engineers, surveyors and other construction consultants, planners and estate agents, etc. The regional office of the RIBA may well be a useful source of information, or consider attending RIBA regional or branch events and meetings. Identify from magazines and the local press the types of clients that are appointing architects you would consider your peers and likely competitors. Try to develop as full a picture of the building design and construction activity in your chosen area as possible. Who are the key firms and individuals? Where and how are decisions made? What are the lines of communication?

All of this is much easier to do before you set up your business and before you develop business relationships or are in competition with your potential informants. It is also easier to ask the innocent question when you are new and are not already selling a service. Do not waste the opportunity.

Try to discover whether any likely building programmes are coming up. Are the local authorities considering capital spending or repair programmes? Will there be business investment in the area? How is the local housing market? Are any areas due for regeneration? Find out the likely procurement routes – if design and build looks like an option then this may be the time to meet potential bidding contractors. Make sure you get a good working knowledge of the economy and how it relates to potential design work.

Become familiar with the press and media and with other sources of local information, such as local authority websites. Find out where decision-makers get their information and advice. Make contact with journalists and opinion formers, locate and read relevant blogs and Twitter accounts. Attend local events and meetings, join groups and organisations. Put your ear to the ground and gather information.

Clients

Clients come in many guises; from private individuals extending their houses and with little experience of architects, to large organisations with books of rules and guidelines as to what, where and how their consultants should do what they do. Equally, there are very organised small clients and there are large bodies with no idea of how to commission or work with architects. One of the most significant sources of potential clients are now construction contractors working on design and build work, in public-private partnerships (PPPs) or acting as a single point of contact for commissioning clients. You might also want to become your own client and acting as a developer or producing proposals to sell on to others. In formulating your business plan you need to decide who are the right clients and contacts for your company.

You should aim to establish a broad client base. Few architects would survive for long on work from only one client, however good, or even from a single client sector – there would be too many peaks and troughs in demand to maintain a reasonably regular workflow. An ideal mix contains both private and public sector clients and, that highly desirable commodity, the regular provider of background bread-and-butter commissions. A diversity of clients, and therefore jobs, is also useful in order to avoid pigeonholing, which can threaten the development of a practice’s reputation. The RIBA benchmark study suggests that no more than 40% of fee income should come from any one client sector or for small practices from a single client. The RIBA Business Benchmarking 2013-14 report notes that over half of practices failed to meet this level of client diversity.

As you research potential clients also investigate their advisers. Who is preparing shortlists for them to select from? Do the local authorities maintain preselected lists of consultants or do they operate framework agreements? How do they maintain these lists – can anyone apply or is there a selection and qualification procedure?

For your initial business plan you will need to decide on the sectors in which you plan to pitch for work, and ensure that there is a match between your skills and experience and the requirements and needs of your likely client base. The public sector has become more difficult to get work from as new public procurement regimes have taken hold, but there are nonetheless opportunities if you persevere. Some public sector organisations have a regular need for architects to work on small (and sometimes very small) projects.

Consider that almost all your existing clients can become repeat clients in time. They may also be a vital source of both recommendations and referrals, and should be the best advertisement for your practice. Treat them with respect from the outset. Factor looking after them into your business plan, and do not neglect them, even when there are other, more alluring, clients in prospect.

The competition

Uncovering the potential competition will probably be a great deal easier than working out who the potential clients are. Remember that competitors may also become collaborators or advisers on some projects, or even friends with whom you can commiserate when things have gone disastrously wrong. Competitors may have a range of approaches and come from different professional backgrounds. You may be as much in competition with a local builder as with another firm of architects. Examine each competitor’s place in the market for design and other services and establish how you will differentiate your practice from theirs.

The services you plan to provide

If you were about to start a small manufacturing or service business the most important issue would be the product or service you intended to sell. The same is true for setting up an architectural firm. There is a core service that you are likely to offer, but you may not want to do the very smallest of jobs and you are unlikely to be offered the largest. Similarly you may prefer to concentrate on just part of the standard service – many architects choose to go as far as obtaining planning consent for projects but no further – or you may have other services or specialisms you wish to sell. There is no standard model, or at least there should not be.

You need to do:

• what you do best and are competent at;
• what you can offer economically or at profit to the practice;
• what you feel confident you can sell;
• what there is, or will be, a market for.

This part of the business plan will take some work, including gathering intelligence on your likely market, but you will be in a far better position once you have developed it. You may even be introduced to potential clients in the course of your investigations.

Start with what you know you can do and what you want to continue with. Add potential services that you feel confident you can develop or know how to obtain. Finally, list those services you would like to provide in the future but have yet to develop the capacity or experience to offer. The same exercise can be done for sectors and specialisms. It may be useful to start from a basic document, such as the RIBA Plan of Work, but list enthusiasms, skills and abilities that are outside standard frameworks, as they may suggest directions for your practice that are particular to you and that will make it stand out from the crowd.

It will also be important to assess the opportunities for selling your services, and to find those elusive gaps in the market. Discover which sectors are in growth or decline, and be clear on procurement routes and selection criteria and whether your firm can become a provider to clients using them. The considerations for a public sector-led programme are very different from private sector or developer markets. You may need to develop your services accordingly.

As a result of the liberalisation of professional barriers that has occurred over recent decades and the widening of market opportunities, an architect can choose to provide many more services than are shown on the conventional schedule of architectural services, or listed in the curriculum of an architecture course. Technology, in turn, has greatly assisted this. Consider the full range of options available to you, from the material to the virtual and the physical to the cerebral. Put together a plan that contains not only what you really want to produce, but what your customers will want to buy from you. You need to achieve a match between the services you can or want to offer, the value they provide (which justifies your fee), the demand and the competition.

Distinctiveness

Having started to develop your offer of services you may hope and expect that clients will beat a path to your door to buy them. But they may find it disappointingly difficult to differentiate you from your competitors, who are offering a similar, or an apparently similar, package of activities and potentially a lower price. You will need to ensure that your offer has an added edge and that you mark yourself out as being identifiably different. Clients and customers need a good reason to come to you rather than go to one of the many other architectural firms they could have chosen.

Marketeers have developed an entire language to describe this area, including advanced concepts of ‘brand’, ‘reputation’ and ‘unique selling points’ (USPs). Issues of branding and reputation are discussed in Stage 5, but as you develop your potential schedule of services, consider what you have to offer that would make you stand out from the pack of your competitors. What do you have to offer that is an advance on the norm or that might be otherwise difficult to find in your business area?

Possible USPs might include a specialism that you can already offer or are prepared to develop, a particular understanding or interest that you can bring to your work, or the integration of your architectural skills with another area, such as development or manufacture. Note that architects tend to have a far stronger belief than their customers in the value of design quality and style to mark them out from the herd. You cannot rely on this alone, especially in the early days, before you have developed your carefully nurtured reputation.

Approach this from a client’s point of view. They will be looking for an excellent service that offers them a business advantage or a better home; they are very unlikely to be considering appointing you to further your career or to give you the opportunity to exercise your creative talent. Your selling points have to be ones that appeal to your clients first and foremost. It is a bonus if they also appeal to you and your peers.

Pricing structure

As part of your business plan you will need to consider how much you intend to sell your services for. Pricing tends to be largely dependent on what the market will bear, but you also need to be aware of how much the production and delivery of a service is costing you: in time, resources and overheads. There is often very little relationship between the value of a service to a client and the expense to you as supplier. You therefore need to have a position on how to quote and to charge for your work.

There are three traditional approaches to calculating fees: as a percentage of construction costs, on a time basis (at an agreed rate per hour) or as a lump sum quoted for a service, and it is common for fees to be expressed as a combination of two or all three of these approaches. All of these methods are problematic as they neither reflect the value of the service, nor (with the exception of the time charge) the cost of providing it. Certainly they do not help you to cost or value your service. You may want to consider fresh ways of valuing and charging for what you do.

Research the market; find out how others charge for their work and how their work is valued by paying customers. Discuss alternative methods of charging with clients and find out where they consider that architects provide the greatest value.

The RIBA and the Fees Bureau conduct an annual survey on fees charged for architects’ services across a range of sectors. This is available in detail, at a cost, from the Fees Bureau although headline figures may be found in presentations and press articles. The RIBA has also developed two spreadsheets for calculating fees that are available to members on its website along with notes on fee calculation and some model answers to common client questions. A worked example of a fee calculation is given in Stage 5 - Part 3.

Transparency in charging is important, especially if there is a dispute at a later date. Some firms charge on the basis of a pre-published schedule of charges. For example, the franchise network Architect Your Home has a menu of services that potential clients are invited to select from at a predetermined cost. Alternatively, some firms have successfully charged on the basis of value delivered to their clients or shared with them in the risk of a development.

Take care not to undersell yourself – if you develop a reputation for giving design ideas away cheaply, or even for free, it can be difficult to charge effectively for providing more of the same. Unfortunately, the UK is full of badly paid architecture practices, who are not charging adequate fees or valuing their services highly enough – do not let your practice join them.

Most clients will have very little idea of what an architect does all day to justify apparently enormous fees. When it comes to negotiating your fee agreement with your client, consider explaining in detail the tasks you will undertake on their behalf. It may come as a shock to you too when you consider how long it takes to fill in standard documents or write contractual correspondence. It may also be worthwhile offering some clients the opportunity to do part of the work themselves – they are likely to value your contribution all the more.

Capacity

As part of your offer you will need to consider the resource and capacity level you intend to make available and, most importantly, the perception of that capacity by a potential client. In recent decades there has been a trend for clients to choose larger than necessary companies for their projects, possibly because they overestimate the staff numbers required for a project (and architects do not generally seek to disabuse clients of the sense of importance that a project has in their minds) and maybe because they want a resource ‘safety net’ in case of accident, illness, etc. They are also likely to be looking for the tried and tested over the one-off and interesting, and this too relates to size.

There is clearly some correlation between the size of a practice and its ability to deal with its workload – whether a multiplicity of small jobs or a single project that has to be completed within weeks, rather than months or years – but it tends to be exaggerated. A well-motivated small team can achieve prodigious amounts of work if needs be. Plan to be large enough so that you can attract the jobs you want and know how to handle them when they do come in. Obtaining the capacity to cope can generally be dealt with, if necessary through a mixture of hiring, growth and contracting out workload. The most difficult part is getting the job in the first place.

Being and staying the right size is one of the more intractable problems of running an architectural practice – the expression ‘feast or famine’ comes up a lot in discussion between practitioners. Beware of expanding to deal with a peak in workflow only to shrink rapidly afterwards; it can be very damaging to office morale. Similarly, periods of underemployment of staff, such as while waiting for that vital project go-ahead, are not only bad for the cash flow but can also lead to contagious disaffection. If you do plan for growth, steady expansion and a sustained workload to match should be built into your plan, but you should also assume a high degree of volatility in your workflow.

Size and growth

What size of company do you want to be and by when? The right size may be suggested by the kind of work you want to win, but this is not necessarily conclusive. The number of founding partners or directors might equally suggest a size, once you have established a reasonable partner to staff ratio, and group dynamics may suggest an ideal working size. Management gurus often wax lyrical about the perfect size for an effective team. This is not to suggest you can accurately control the size of the company, which will fluctuate with workload and other influencing factors, but you need to plan for the future and it will be an important feature of how your business runs.

A two or three person company needs a very different approach from a six to ten person firm or bigger concern. Some of the issues of growth can be dealt with over time, but it is very difficult to retrofit office management routines once you are underway – projects still have to be delivered while a new management system is being introduced. If you are planning to grow relatively quickly then run your firm that way from the start, ensure you have office space to grow into and that your systems can adapt as you do so. This may mean higher overheads and more elaborate procedures than necessary during the growth period, but it will be worth it.

Alternatively, if you are planning to stay small from the start then choose simpler systems and keep your overheads down. You are less likely to need complex filing procedures, elaborate accounting programs or lengthy human resources and quality assurance policies. You may need versions of all the things that larger practices have but they can be kept much more straightforward and relatively inexpensive, despite what the sales people tell you.

Company structure

You are setting up a business. You will need to decide how to operate legally. What business vehicle are you going to travel in? You have four main options (although there are some other choices, such as becoming a charity, co-operative, employee-owned trust, community interest company (CIC) or operating from overseas, which are not discussed further but are easily researched). The four options – all of which have pros and cons, depending on the approach and size of your practice - are as follows:

• Sole trader – the most simple and straightforward arrangement with a minimum of form filling. You are in charge and directly responsible for everything, which means that all your possessions and home are at risk if you cannot pay your debts. You can also be made bankrupt. Despite the title, a sole trader can take on employees. Your most likely tax status will be as self-employed, although this will need to be confirmed.
• Partnership – a fairly traditional arrangement for an architects’ firm with two or more people setting up a business together. Partners share personal responsibility, but like the sole trader they also carry all the risk. In a partnership this comes with the added onus of joint and several liability, meaning that any one partner can be liable for all the debts of the partnership, should the other partners not be able to pay their share. As one partner can make business decisions on behalf of all the other partners they can also leave them, unknowingly, with all the risk and responsibility. Liability remains after a partnership is dissolved or when partners retire, or even die (when it will fall upon the partners’ estates). Under the Partnership Act 1890 there is no legal requirement for a written partnership agreement, however it is usual for a formal agreement or ‘deed of partnership’ to be drawn up, setting out rights and responsibilities. A deed would normally be prepared by a solicitor, but the bones of it should be agreed in advance by the proposed partners. The deed should deal with issues such as:

• – the individual responsibilities of partners
• – apportioning of profits and losses
• – repayment and interest on capital invested
• – retirement of and pension arrangements for partners
• – the admission of new partners.

Even such issues as the amount of annual holiday to be taken should be considered. Ensure the deed includes clauses to deal with dispute resolution, just in case arguments develop and processes such as arbitration are required. Take professional advice on the contents and preparation of a partnership agreement/deed.

• Limited Liability Partnership (LLP) – a form of partnership brought in by the Limited Liability Partnerships Act of 2000. It is part way between a partnership and a limited liability company and combines aspects of both. The key aspect that has made it a relatively popular trading structure for architects is that it restricts the liability of the partners to the combined amount that each has invested or personally guaranteed to raise. Management and tax responsibilities are much the same as for partnerships and, similarly, a deed of partnership is strongly recommended, but otherwise LLPs are almost identical to limited liability companies.

  An LLP is regarded as a separate legal entity from the individual partners and externally will be treated as such. It is necessary to register it with the Registrar of Companies by filling out a standard form and payment of a small fee. Annual accounts must be sent to the Registrar and they will be available for public inspection. Auditing of the accounts is formally required, but most small companies are likely to be exempt from this. No directors are required, but at least two designated partners (or ‘members’ in the language of the Limited Liability Partnerships Act) will be required to act in roles similar to those of company secretary and director.

• Limited Liability Company (Ltd) – a legal entity owned by its shareholders that protects both individual members and shareholders from personal responsibility for the debts of the company beyond the notional value of the shareholding and any personal guarantees. A company has a formal structure, with a board of directors (at least one) and a company secretary. Although generally protected from the debts and obligations of the company, directors are required to show a duty of care to the company, and if they fail in this they may be found liable for debts or be disqualified from acting as a company director in other companies.

  This structure allows for capital to be raised by selling shares in the company to external investors. It also allows non-shareholders to be appointed as directors, allowing younger (and poorer) employees of practices to be appointed to senior positions. The management structure of the company allows for directors and similar appointees to be changed relatively easily, without having to dissolve and reform or for new agreements to be drawn up. Companies must submit annual accounts and tax returns to HM Revenue and Customs and will be required to pay the resultant corporation tax. Annual accounts and further details on the company must also be sent to Companies House. Before setting up a company take legal and financial advice. A memorandum of association and articles of association need to be prepared to cover a number of essential issues, and registration documents must be submitted along with the standard fees.

  Over 60% of practices surveyed by the RIBA 2013-14 Benchmarking Survey operate as limited companies. This form of business organisation offers significant advantages, especially around risk management, but does require complying with a formal pre-set structure and does not have the immediate management flexibility and low-level bureaucracy of a partnership. Most business start-ups in the UK have no hesitation in adopting the limited company structure and as professional consultancies slowly become like other businesses this form of trading is set to become an increasingly likely choice.

  Note: Company directors and secretaries have wide legal responsibilities. See guidance prepared by Companies House, in particular the latest version of GP1 on Incorporation and Names at www.companieshouse.gov.uk.

Any decision on which business structure to use needs careful consideration. Take advice and research the advantages and disadvantages of the alternatives. There is nothing stopping you changing company structure at a later date, but this can be awkward and may affect client confidence. Start with a company structure that you think will last you for at least the first five to ten years of practice.

Management

Along with a business structure and general legal and tax regulations come a variety of management requirements. A business has to keep accounts, a company needs to appoint directors, health and safety regulations must be adhered to, insurance has to be maintained and so on. But the real management requirement is to run the practice in such a way that:

• it achieves its aims
• skills and resources are well organised
• it has the capacity to develop and grow.

Whatever the size of the practice, both the overall business and any individual projects need some degree of planning and allocation of resources. This will be as critical for a one-person practice, where time can be short supply, as a multi-person firm, where different activities are the responsibilities of defined groups or individuals. If the practice has or will have staff, they need to be led and inspired and their ambitions recognised and accommodated.

Do not underestimate the amount of time that business management can take. A great deal of time will be spent on tasks that are not essentially productive, but which are necessary in order for the practice to be so. It is an activity that is not traditionally popular with architects: their training rarely equips them for the role and it can keep them away from designing. If you are starting a new business and have not had experience of taking responsibility for either running projects or a business unit, or managing staff or teams, then discuss this with those who have. Build up a picture of what may be required, whether it is preparing VAT accounts or filing documents, or interviewing, managing and even firing staff. Individual management issues are dealt with in Stage 5.

Rules and regulations

Starting a new business means signing up to a wide range of rules and regulations, many of which you will be only broadly aware of. As well as legal requirements, you may also have to comply with the requirements of insurers, clients and landlords and the codes issued by professional institutes and registration bodies.

Some of the regulations will be dealt with further in the sections on insurance, tax and premises, and in the various parts of the guide that cover employment issues, but it is worth considering at the early stages the framework in which you need to operate and how this affects your approach to starting up. Some regulations affect all business, regardless of size, but the greatest regulatory impact will be felt when you become an employer and will need to familiarise yourself with employment legislation before taking on your first employee. Business regulation will tend to affect you more as the firm gets larger and the structure more complex, but there are plenty of regulations to trip up even the smallest firm.

It is rare that you will need to consult the original, primary legislation behind many of the statutory regulations, but you do need to know how they will affect you and your business, and you should keep a watchful eye on new developments. Your advisers will help you within their areas of expertise, but it will be up to you to generally be aware and to stay up to date. If in any doubt, seek specialist advice.

Financial forecast

Having spent time on researching your business objectives, the saleability of your own skills and services, the market, your USPs, the size and structure of your business and so on; all this needs to be consolidated in a plan and a forecast of your financial needs, profits and losses. You are likely to need advice from a range of sources to achieve this and you should be aiming to end up with a short and fairly cogent financial forecast for up to the next five years. The forecast should show whether you need to raise capital to fund your business and, if so, how you will repay any loans. It should also provide the core evidence to convince a lender to provide you with that capital.

As you start to run your business the financial plan should become a regular reference to guide your real performance, with targets both to achieve and to measure progress against. It must be reviewed and updated regularly as your true position becomes known, and any departure from the plan should provide you with adequate warning to take corrective action. Given the uncertain nature of architectural business a forecast of much more than a year is likely to be largely speculative and not of great use, but treat six months as a minimum. This tends to result in a need to review and revise your financial plan about once a month.

Financial forecast – worked example

This fictional example of a financial forecast is for a five-person practice, which has to grow to a six/seven-person practice by the fourth quarter to deal with a rapidly expanding workload.

Overheads

Your practice overheads will loom large in the debit column of both the financial forecasts and your budget so you will need to plan carefully for them. They will vary from the large, in particular staff salaries and premises and equipment costs, to the small, such as stationery, utility bills, etc. You can be fairly sure, however, that they will not have much relationship to activity level or, more especially, to income, as outgoings tend to be fairly regular and consistent while payments into your bank account will fluctuate wildly from month to month.

Investment early on in good quality, long-lasting premises, equipment and promotion may turn out to be money well spent – but only if you are successful. It can equally drag you down with unsustainable debt if you do not generate the income to support it. You need to assess and calculate the risks involved as part of your entire investment strategy. Take advice if necessary to help with this and seek to compare your own with others’ experience, if possible consulting any available benchmarking studies.

Despite taking advice and being cautious, it is still easy to generate unnecessary overhead commitments early on. Invest in the parts of your business that are critical to your business plan and not elsewhere. Consider leasing equipment, at least at the start, and hiring staff only when you have work to give them and not before. Shared workspaces may provide you with many of the facilities you require at low cost and will allow you to expand later on.

Funding

Unless you have your own capital to invest in your new business or are prepared to subsist on fresh air, debt is likely to figure prominently in the first years of running the company. This will be a mixture of long-term debt with structured repayment and short-term borrowing to tide you through more immediate spending commitments. Some long-term debt may relate directly to acquisitions in the form of hire purchase agreements or other asset-based financing, with the debt secured against the equipment, but if you need to raise significant capital this is likely to be from a bank or a venture capital provider. The importance of having a bank to advise you has already been noted earlier in this work stage, but see also Stage 4, Part 2.