Turning On The Lights
Fun From The Start
For those with the will to start a new business the rewards, both financial and emotional, can be excellent, but the risks can also be significant to both sanity and mortgage. Of course, the chance of success increases if a company has a good, well thought through strategy before they strike out.
Any business has processes with lead-time, and the longer the lead-time from receipt of an order to despatch of goods or services, the more money will be tied up in the business in the form of materials, salaries and overheads. Therefore, one of the earliest things to think about is how you will finance the operation and the key investments you need to make, which in turn requires you to have a detailed breakdown of the processes required to deliver value to your customers, which will allow you to determine the types of assets you will require, both human, financial and technical.
Financing The Beast
Obviously, your financing choices at this point depend very much on both the risk associated with your product (or service) and your own approach to risk. If you are determined to ‘own the assets’ you will need a completely different financing plan from a strategy based on having your products/services managed by a sub-contractor who has already made the investment in equipment, premises and people. Whilst the former strategy will significantly increase the risk of overstretching your finances, the latter has a number of associated risks, not least of which are the selection of the right supplier and ownership of intellectual property as well as possible risks the sub-contractor may pass onto you through the contracting process.
Having said this, unless the risks are very low or you are extremely confident about the minimum sales level (which is a function of the marketing/sales element of your strategy), it is often better to use a sub-contractor to start with as the overall start up costs and time to ‘first despatched sale’ are much reduced. Consider the converse of this in that you ‘own the assets’ and, for most new products, you will need to finance premises, recruit people and purchase materials before realising any revenue from sales.
If you do decide to purchase your own assets, having a good understanding of the sales demand for your product will help determine the amount of capacity required, which in turn will help determine the amount of finance you require for your investment. Because calculations for capacity impact directly on the amount of finance tied up in the business, it is prudent to get some advice on how to increase capacity and decrease lead-time for delivery as this will directly impact on the financing requirements.
Marketing Madness
Your ability to predict demand will depend on whether you are delivering a ‘radical new’ or ‘me too’ service or product, meaning is it an innovative new product on the market (such as the first Sony Walkman) that no-one has seen before or an update of an existing product (such as an improved washing-up liquid).
Obviously, for a product that is an upgrade to an existing product the size, shape and channels to market should be well understood, although your competitors in this market may have created ‘barriers to entry’ through regulation or ownership of some of the channels. However, you should be able to determine how much demand there will be, although your strategy will need to focus on taking market share from your competitors (if the market is not growing) or how you will get customers to ‘switch’ to your product. A subsidiary benefit is that a ‘me too’ product with a well thought through marketing strategy will often get a better reception from financiers.
For a ‘radical new’ product you may find it impossible to find out any information on the size of the market without significant investment (which by the way should have been done before you started developing the product or service). You could consider doing product testing on sample customers to determine their levels of interest, at the risk of losing your intellectual property. Whatever approach you take to determining the reception your product will get from customers, your strategy for marketing must focus on establishing channels to market (ie how will your customers get your product, who are your customers etc). Unless you can clearly show how your product will be put before the customer and how you will create a market for your product, you may get a hostile reception from financiers.
Managing The Customers & Suppliers
Having determined your marketing and financial strategies, and before you visit the financier, you should have thought through how you will establish and manage your value chain, in this case taken to mean your suppliers and customers.
What terms will your suppliers require (or what terms can you get away with) and vice versa for customers. The ideal scenario is that operated by the supermarkets where the suppliers are often paid 90 days after receipt of goods whilst the products are purchased within days and the supermarket then is able to earn interest on both the profits of the sale and the money to pay for the goods for up to 85 days before having to pay to supplier. Suffice to say it is unlikely that you will be able to extract such terms from your value chain and you may actually be on the receiving end of such an agreement, which places a different slant on your financing strategy.
A further consideration in this area are your terms and conditions for sale and purchase and an understanding of contracts and credit rating of customers and suppliers to determine their ability to pay (in the case of a supplier, if they go bankrupt what impact will it have on your business?).
In addition to the legal aspects of managing customers, you should also think heavily about the emotional aspects of customer management, for example how you will handle complaints, warranty claims or even after-sales service. It can be shown that the way that these aspects of business are handled will result in greater customer retention and improved profitability.
Having said everything above, it is worth looking at some of the common problems new businesses encounter in their early years.
Typical Start-Up Issues
One of the biggest problems encountered by new businesses is the time taken from investment to sales (lead-time) and an under-estimation of the financing requirements of this operation.
Significant over estimation of demand is another big problem, especially if this had led to investment in redundant equipment or the purchase of excess materials. Conversely, an under estimation of demand can cause the business to go bust even though it has a full order book as they fall foul of the cash impact of servicing runaway demand. A better strategy in the latter case is to create your own growth strategy by limiting the customers you introduce the product/service to or even raising prices to limit demand.
Selection of people and the adoption of the ‘right’ management style is another cause of problems for new businesses. In the early days the focus is on minimising costs, so you hire people who you can afford by who may not be as skilled as you need and then remain stuck with them when the business takes off. In terms of management style, a new start-up requires a style based on drive, responsiveness and the use of an intuitive management style, whilst growing businesses need to look at their processes and introduce structure to their operations. It is often the case that the management style used for the start-up is still used as the business starts to become established with the resultant effect of stifling progress or even worse, encouraging failure.
Being tied into premises that rapidly become too small, or too large, for the operation is a major problem for small businesses, although with the former problem, looking at the layout of your facility will often release significant amounts of floor-space and may help to ‘put off’ the day when you need to find bigger premises.
Lastly, although there will always be a need for a sense of urgency in starting up a new manufacturing business, trying to do too much, too quickly, will result in over-stretching your finances and your emotions. It is not essential for most businesses to have an IT system installed on day 1, a PC with email and a fax machine is as much technology as the average start-up business needs – so keep cool, stay focused and plan strategically if you want to be wealthy!
Mark is an experienced business advisor and was formerly the Director of the UK Government's Manufacturing Advisory Service in London and South East England.
In 2004, Mark was awarded the Viscount Nuffield Medal for his contribution to UK Industry and now runs a specialist consultancy focused on helping businesses both public and private to become better at innovating.
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