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AIB – Starting a business

Introduction

One of the biggest decisions a person can make in his or her life is to start their own business. Setting up a business is a difficult decision, with plenty of risk and potential rewards. This case study will show the practical steps an entrepreneur needs to follow in order to decide whether his or her business idea is feasible, to secure finance, to structure the business and to grow and succeed.

Believe it or not, a recession can be a good time to start a business. Such giants as Disney, McDonalds and Procter & Gamble were all started during a recession. New businesses face weakened competition, can attract consumers looking for alternatives and can get a head-start on other businesses that are waiting over-cautiously for an improvement in the economy.

Small to medium size businesses are hugely important to the Irish economy. According to 2008 figures from the Central Statistics Office, half of the private sector workers in Ireland - over a million people - work for companies with less than 50 employees. Figures also show that small businesses account for 81% of all Irish industrial enterprises, 68% of construction enterprises, and almost 98% of all service enterprises.

Starting your own business

Starting a new business requires an enormous amount of work, often seven days a week. For this, entrepreneurs need to be self-motivated, enthusiastic, energetic and patient. They need to be able to work alone and be good at managing stress. They learn from mistakes but are not afraid to take risks.

Planning

Every new business should have a business plan. If a business does not plan it cannot survive. Planning ensures that a business’ resources are used effectively. If there is no plan, the business will not be prepared for ups and downs in the economy, changes in consumer patterns, increased competition and new technologies. Businesses should plan for the short, medium and long-term.

There are three types of planning:

• Tactical/functional plan - this short-term plan (usually 1-2 years) outlines short-term goals.
• Operational planning - this is short-term planning for the weeks and months ahead, e.g. scheduling, sales forecasts and budgets.
• Strategic plan - this long-term comprehensive plan (usually 2-6 years) includes marketing, production and human resources plans. Strategic planning will help put the mission statement, goals and objectives into practice. Internal and external analyses of finances and financial targets, economic trends and legislation are conducted during this form of planning. A SWOT analysis is a major part of strategic planning.

New business ideas

A feasibility study is a thorough look at whether a business idea is economically viable. The following outline shows some questions that need to be answered and steps that need to be undertaken at the outset.

Products and services

The basis of any business is the sale of products and services. What will your business sell? How will you package, design and brand your products? What makes your products or services special or unique? Do your products comply with all regulations? How and where will you make the products? How will you test them? How will you sell them?

Identifying customers

A new business will succeed only if the products/services it supplies satisfy a need. The people with that need are potential customers or the ‘market’. Market research helps to assess if there is a market for products/services, gauge the characteristics of a market and define its customer base.

Know the competition

All businesses have competitors – a business offering trips to Mars would still have to compete with other holiday destinations. It is important for every business to know its competitors – who they are, what they offer and the terms on which they do business. How can they be a threat to your business and what are their weaknesses? Having this information will make it possible for a business to prepare a more competitive presentation of its business idea.

Sourcing suppliers

Suppliers are businesses that provide other businesses with the raw materials or services. This could be anything from flour and sugar (for a bakery) to lumber and nails (for a carpenter) or computers and telephones (for a software developer). It is good business practice to use the Internet, classifieds and trade publications to research when and where to source the most cost-effective supplies and services.

Pricing

How much customers are willing to pay for a product depends on how much benefit they will get from it. Unless a product/service provides some very special or even unique benefit or unique selling point (USP), the business will not be able to charge more than the going price. If a product/service has some unique benefit, how much more would the customer pay to get that benefit? What prices are competitors charging for similar products/services?

There are several strategies to choose from when deciding on a pricing strategy:

• Price skimming - charging a high price for your product/service to skim the top of the market, e.g. the new iPhone. This strategy is used if businesses want to recover high investment quickly.
• Penetration pricing - charging a low price to win market share early, e.g. Ryanair lowers prices to drive competitors out or increase market share. This strategy is used to gain high visibility or high market share.
• Price discrimination - charging different prices in different market segments, e.g. hairdressers charging men and women different prices for a haircut or students and OAPs getting a lower price for cinema tickets.

Marketing

There are many sides to marketing - how to promote products in the market, how to package and price them. This is known as the four Ps of marketing (Product, Price, Place and Promotion) or the marketing mix.

There are three main aspects of any product promotion campaign:

• Public relations (PR) - a way of creating awareness in the marketplace of your business. It can involve writing and issuing press releases, organising product launches, building and maintaining a website, producing promotional brochures, etc.
• Advertising - a business can advertise in newspapers (local, national and/or international), on radio, on TV, on the Internet, on billboards – even in bus shelters. Advertising can be costly, so it is important to do some research on demographics to ensure that the channel you are using reaches the right audience.
• Sales promotions - competitions, giveaways, coupons and ‘buy one, get one free’ promotions are great ways to introduce your product to new customers.

If your feasibility study concludes that your business idea is viable then you are ready to form the business.

Forming the business

The most common business structures are sole traders, partnerships and limited companies.

What is a sole trader?

A sole trader is a person operating a business on his/her own. A sole trader has unlimited liability, i.e. if the business cannot afford to pay its debts the sole trader is personally responsible. They absorb all the profits as well as all the debt and risks of the business. Sole traders do not need to file financial accounts for their business.

What is a partnership?

A partnership is where 2 to 20 people form a business together. In this structure, all the partners agree ahead of time how they will share the profits, the debt and the risks of the business. Partners can also limit their liability to the amount of money they invest in the business – in other words, they cannot lose more than they have put in. This is called a limited partnership.

What is a company?

A company is a separate legal entity owned by shareholders. It is totally separate from the people who own and run the business. Companies can be bought and sold, in whole or in part, by buying or selling shares. Like partnerships, companies can be limited (so shareholders only lose the value of their shares). Companies can also be public (where shares are traded on a stock market) or private (where shares are not).

There must be 7 or more shareholders in a public company and 1-50 in private limited companies.

Managing people

Manpower planning

There is no exact science to finding the right people for a particular job. Manpower planning is an important part of any business. When hiring employees, employers must:

• Define the job - the jobholder’s title, who he/she will report to, the hours, the location, the responsibility, and the experience and attributes required from the jobseeker.
• Start the search - advertise the position using newspapers, recruitment agencies, personal recommendations and guidance counsellors from colleges and universities. Vacancy notices can also appear on the business website.
• Select applicants - to interview and set a date for the interview. Also write to everyone they will not be interviewing. Acknowledge that their application has been received and thank them for applying.
• Interview the applicant - the interview is an opportunity to meet with the candidate face-to-face and to establish whether the person is capable of doing the job, whether the job would appeal to the person and whether he/she would fit into the business.

Human Resource Management

Once the right people have been found, the business needs to work hard to keep them by:

• Making sure employees feel valued and keeping them informed on how they can help the company meet its goals.
• Recognising achievement and effort, regularly asking for feedback and discussing issues that affect staff.
• Holding exit interviews when employees leave the company to find out why.

Financing the business

Most new businesses need some financial help to get started, grow and develop. Finance for business comes in three different forms – equity, grants and bank finance/loans:

• Equity is money invested in the business by the owners or others (friends, family, business contacts, venture capitalists, etc.) in return for shares. It has no upfront cost, but the investors will want some control of the business, a share of future profits or both.
• Grants are money the state makes available to help entrepreneurs with new businesses. Grant assistance may be available to fund part of the cost of feasibility studies or capital expenditure. Employment grants may also be available for each newly-created full-time job.
• Bank finance is money borrowed from banks. Getting bank finance is essentially a selling exercise. Banks will assess the level of risk of the business proposal and need to satisfy themselves that the potential rewards match the risk, i.e. will the proposed business venture be able to repay the debt?

Managing finances

Cash is the lifeblood of every business and managing cashflow is critical to its survival. Cash is the business’ most liquid asset. If the business does not collect payment from customers for the goods it sells, it puts pressure on cashflow because there will not be enough money to pay suppliers.

Managing cashflow successfully will help to build up a good relationship with your bank. This will help if you need to get a loan at a later stage and can minimise bank charges by limiting unnecessary charges and high interest rates when using overdraft facilities. Cashflow forecasts will help predict when cash is due into the business, highlight how much cash is available on a regular basis for bills and loan repayments, show the bank that the business is properly managed and show if there is a cash surplus. It will also minimise the risk of a business running out of cash.

AIB support for new businesses

AIB is Ireland’s leading business bank* and, with a proven record of supporting existing and new/early stage businesses. It provides a range of banking facilities and supports which help businesses operate successfully.

AIB has a large range of products, services and publications for SME customers. Over the years, the bank has pioneered new initiatives that focus on the real needs of SME customers. AIB’s dedicated business website www.aib.ie/business has a large amount of valuable information on products and services for SMEs as well as Guides, including ‘A Practical Guide to Starting your own Business’ - to help SMEs develop plans and calculate financials.

*According to TNS MRBI research October 2009

Conclusion

We have looked at how an entrepreneur would go about studying and preparing to form a new business. There are many things to think about and many risks. But with the right idea, the right advice and a lot of hard work, starting a new business can be one of the best decisions a person can make.

Student activity

1. Compare sole traders, partnerships and limited companies under the following headings:
   1. Ownership
   2. Liability
   3. Control
   4. Finance
   5. Profits
   6. Examples
2. If you were setting up in business, which of the ownership options mentioned above would you choose? Prepare a short presentation outlining the reasons why.
3. Working in groups, create a presentation showing the characteristics exhibited by entrepreneurs, using examples of local, national and international entrepreneurs.
4. Create a poster (alone, in pairs or in groups of three) showing the marketing mix for a product or service of your choice.
5. Outline three
   1. short-term,
   2. medium-term,
   3. long-term sources of finance for a new business startup.
   What would a business use each source for?
6. Outline the factors a business must take into account before deciding on a source of finance.

 

Lending criteria, terms and conditions apply. Allied Irish banks p.l.c is regulated by the Financial Regulator.