Raising Finance

We now need to consider how we are going to fund our business venture. I'm going to take a slight guess and assume that you haven't got a few thousand pounds just sat in your back pocket?? So where can we get this money from? What issues might we face?

Why do we actually need finance?

• Well we need to cover our start-up costs. 
• So before we even start trading we need to pay for raw materials, market research... you gotta spend money to make money!
• Then we have the set-up costs. 
• Are we going to sell from a shop front or do we need to pay for a domain online?
• We need finance to cover the day-to-day workings of the business. This is known as working capital.
• We may need finance because we want to take a risk and expand our business. 
• Finally, we may need a contingency fund for any unforeseen events.
• A large customer may not pay us or we may face a sudden decline in sales. 

But as an entrepreneur it's not just as easy as rocking up to the bank and walking away with the funds you require. We are likely to face some issues in raising the capital because we aren't trusted yet. You guys are in the prime and you may have some genius ideas bubbling away in those beautiful minds of yours... but you're fresh outta college... who in their right mind is going to lend you money? Who is to say that you won't just spend it all on McFlurry's?!

Another issue may be that you might not know where to look. Maybe you aren't aware of all the available sources of finance. So the bank turns you down... where else could we turn? 

Research for yourself...

• https://www.gov.uk/business-finance-explained

• https://www.kickstarter.com/

• http://startups.co.uk/raising-finance/

• http://www.smallbusiness.co.uk/starting-a-business/start-up-funding/2466737/the-five-mand39s-of-choosing-an-investment.thtml

Even if you are approved for a loan, banks and venture capitalists have to minimise their risk. Most loans will come attached with strict conditions and requirements. Check out hunky man below...

There are going to be certain factors that will affect our choice of finance:

• Cost - e.g. interest charge, equity (shares) given away, least expensive source
• Amount of money needed: £5,000 or £5,000,000
• Use of Finance - e.g. start up, temporary need due to supplier not paying on time, purchase a building.
• Status and Size - e.g. sole trader, limited company
• Financial Situation - e.g. your company accounts, security you can put up
• How long it will take to repay
• Consequences: interference from lender? Do you really want Nana to start asking where you're spending her pennies?! Or could you do with some advice from the bank?

Choosing the Right Legal Structure

As promised... Legal Structures! As an entrepreneur we have to decide the most appropriate legal structure for our business. There are several different types of ownership and each will come with their own separate implications on the business. 
Let's take a look...

(By being an entrepreneur we only have to concern ourselves with the unincorporated businesses and Private Limited. We will briefly look at PLC's but this is more for your A2 course.)

There are two main categories of businesses:

• Unincorporated - unregistered
• Incorporated - registered at Companies House

Our unincorporated businesses are:

• Sole Trader - owned and run by one person

As a sole trader you can one day decide to start trading. You may have made some cute Christmas cards and decide to take them to a local craft fayre. You have a good day and we sell all the cards that you took! Brilliant! All that profit made is yours to keep. Now you can decide whether you are going to reinvest your profit to buy more raw materials and therefore make more Christmas cards OR you can decide to spend your profits on a pair on new shoes!!! The choice is entirely yours.

However, things may be going swimmingly and you've started making some money (as well as treating yourself to the shoes!) and you decide that you think you want to open an actual store to sell your cards from. Things start off okay but then Christmas has passed and people aren't so keen to pay for greetings cards. The rent on your storefront still needs to be paid... uh ohh... 

As a sole trader any debts you incur are entirely YOUR responsibility - you have unlimited liability. You have no separate legal identity to your business which means your personal assets can be seized to cover the debts. (Hide the car, cat and kids!!!)

So maybe a sole trader isn't for you, it's okay, you could decide to bring in your best mate - two heads are always better than one! We can bring in both our skillset and operate as a:

• Partnership - owned and run by two to 20 people. Before we begin trading we can draw up a Deed of Partnership which legally states the responsibilities of both parties involved.

As a partnership we can again one day decide to start trading. We may have made some wicked Tee's all from recycled materials and there is a student event on in the local town. We have a good day and we sell all our tee's that we took! Brilliant! All that profit made is ours to keep. Now we have to make a joint decision as to what we do with our profits. Do we reinvest our profit to buy more raw materials and therefore make more tee's OR do we split the profit 50/50 and we can decide how to spend our individual cut - maybe a new Xbox? The choice must be unanimous which means it is very easy for conflict to occur.

However, things may be going swimmingly and you've started making some money (as well as treating yourself to the Xbox!) and you both decide that you think you want to open an actual store to sell your tee's from. Things start off okay but then winter has finally come and people aren't so keen to pay for tee's. The rent on your storefront still needs to be paid... uh ohh...

As a partnership any debts you incur are entirely YOUR responsibility - you have unlimited liability. You have no separate legal identity to your business which means both your personal assets can be seized to cover the debts. (Hide the car, cat and kids!!!)

                                                        

Phew... that's a lot to take in!!! Maybe this unlimited liability is scary you a little and you wonder if there is a way you can remove this risk... aha... read on my lovelies...

Incorporated businesses

• Private Limited Company or Ltd - this is registered at Companies House (no - it's no longer a physical house - it is all done online!). You will provide Companies House with all your accounts, your Memorandum of Association and your Articles of Association. The Registrar will check through and hopefully give you the "nod" and HEY PRESTO! you become a company!

So as a Ltd we privately invite shareholders to join our business. We may get to a point where things are working as a sole trader but we feel now is the time to grow. We may have a bit of retained profit but ideally we could do with a cash injection. By registering as a Ltd we are allowing ourselves to access these pools of finance.

As a bonus of becoming a Ltd we also give ourselves limited liability. This means that should the business get into any debts, we are not personally responsible to repay the sum. Our personal assets are safe and we only lose the money we have invested in the business... (you can go get the car, cat and kids back now!)

However... our shareholders aren't going to just give you their money in exchange for nothing... oh no... they're going to want something in return.

You need to look after your shareholders because they are the ones allowing you to expand. To keep shareholders happy we must offer them the following:

• a share of the profit known as a dividend
• a 'say' in the running of the business and a right to vote

Transforming Resources into Goods and Services

So I've fallen a bit behind with the posts but it's because you guys have been working so hard!!!!

Let's crack on... so there are four main industrial sectors;

Primary: if the business' activity is extracting raw materials from the earth (e.g. mining, farming)
  

Secondary: if the business' activity uses raw materials to transform them into a product (e.g. manufacturer)
  

Tertiary: if the business does not produce a tangible product but provides a service (e.g. taxi firm, architect)
  

Quaternary: if the business' activity is to provide IT related services (e.g. IT consultant)
                              

Once we have decided which industrial sector suits our business, we must then design our transformation process. This is where we take our inputs and we find a way to add value to those in order to create our outputs.

Inputs are required to make a product or provide a service. These can be:

• raw materials
• finance
• capital (equipment)
• people
• land
• entrepreneurship

BUT ALSO...

• ideas 
• talent

So outputs are what the customers will get for their money.

• product (tangible / physical)
• service (intangible / non-physical - remember... you can't hold a massage!)

However, with the making of any product or service you will always have some form of waste.

Adding Value

So how on earth do we add value to our inputs?!?! I'm glad you asked...

 Take these mere peanut butter cups... try not to reach into the screen and steal them! Now these little beauties are "delish" on their own, BUT...

 Now consider this cold, scrummy bowlful of ice-creamy goodness. I can sense you all craving it. We love a little treat of ice cream, it's so yummy, BUT...

WHAT IF...

Oh no they didn't!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I promise there is a point to this... Ben & Jerry's took products that already exist but have made them better than what they were. By combining the flavours, B&J's are able to charge over £4 per tub of ice cream.

So we can add value by creating new versions of existing products. We can also:

• Create a brand - we pay more for well known and prestigious labels
• Introduce marketing - build brand awareness, offer deals, make a memorable moment
• Offer impeccable customer service - we pay more if we are treated well
• Operate efficiently - if we fulfill our orders on time without any errors, customers will return and stay loyal

How would you add value to this little bundle of gorgeousness?

                                              

Businesses want to add value to their products. It may be time consuming to design or maintain but it ultimately benefits them. By adding value they can:

• charge a higher price
• create a USP (unique selling point)
• give themselves protection from competitors offer the same/similar products at a lower price
• focus on who their target market are and what they need from the product/service
• create customer loyalty

Up next... Legal Structures...

Understanding Markets

A market can be anywhere physical or non-physical where buyers and sellers come together to exchange goods and services.

The markets can be:

• Physical --> real
• Virtual  --> online
• Local --> only supply to a local town / region
• National --> supply all across the UK
• International --> supply to various countries

Businesses may decide to operate either as B2B (Business to Business) or B2C (Business to Consumer).

Let's get to the mathsy stuff...

Markets can be measured in two ways;

 Volume

Value

C'mon... this is all for the good of learning!!!

One of our first calculations looks at how the market is due to grow. This is where our good ol' friend Homer Simpson comes to the rescue.

Market Growth

Difference in market sizes (units or value)
---------------------------------------------------         x100
Original size








Market Share

This calculation allows us to see how well we are doing in comparison to the rest of the market.

Sales of a business (units or value)

               -----------------------------------------------        x100

Total sales (units or value) in the market

These are all very well but we are nothing without a little thing called DEMAND!

Demand is the amount of goods / services customers are willing and able to spend over a period of time.

This can be affected by things like income, price of a product, what the competitors are offering. Demand is very vulnerable to change.

Market Segmentation

The market is broken into four segments:

• Geographic --> where do you live, where are you from
• Demographic --> your profile; age, gender, socio-economic background
• Psychographic --> our values, beliefs
• Behavioural --> why do we buy the products that we do, are there any patterns?

This segmentation allows for businesses to tailor their marketing and really find ways to develop their products into new market segments.

However there may be a concern that we become so focused on specific market segments that we miss out on entire audiences.

Niche Marketing

I'm a video!!!

Niche marketing is all about finding that gap in the market and then exploiting it. Niche marketing is good for a start-up because it is likely that we will have fewer competitors BUT is there a large enough market for our product or service to make it viable?!

Tune in next time for Transforming Resources... ooooooh....

Conducting Start-Up Market Research

You guys are becoming more and more like Business men and women every day! You guys could well and truly be on the way to starting up your own businesses!!! Except we need to spend a little time now thinking about our product and the information we need to know before we invest too heavily in our venture. 

What is our market?
What are our target audience?
Do they even like our product?

Don't panic little ones... we shall conduct some Market Research...

Market research is the gathering and analysis of data that is relevant to your target market. The data should be on your customers and competitors.

So what information do we want to find out from our market research?

• The size of the market - is it a mass market or have we found our niche?
• Key market trends - are we entering a growing market? How quickly is the market growing?
• What the customer really wants - you might think your product is genius... others... may not!!!
• How much are customers willing and prepared to pay

(I'm not even jealous of this woman!!!)

Why would businesses bother to use market research?? 

• Research can allow us to identify market opportunities. Maybe we missed a gap within the market - now is our chance to get first "dibs"!
• We can look at ensuring our product truly meets the needs of our customers. If suggestions have come out from our research we can put these into action ready to officially sell our product on the street.
• Finally, we can assess the effectiveness of our marketing. Which stream is bringing in more consumers? Those that generate sales will be reinvested in compared to those that aren't.

Now be very careful when it comes to your essays! Consider the TYPE of business - how the market research change to suit the specific business? A hairdresser would be very different to a pizza franchise.

TYPES OF MARKET RESEARCH

So there are two types of research that we can collect:

The data that we collect can either be:

• Qualitative: providing us with opinions and "soft" data
• Quantitative: numerical and "hard" data

We need to have a good mixture of both Qualitative and Quantitative data in order to make informed decisions.

SAMPLING

Sampling is a subgroup of the target population - the people selected for a sample should be representative of the entire target market.

There are three sampling methods you need to worry about:

• RANDOM: this is a small group of people that are representative of the entire target market. Every member of the target market have an equal chance of being selected.

• QUOTA: this is a small group of people that are representative of the entire target market. The proportions of the target market are reflected in the sample e.g. is the market is 60% male and 40% female then the sample should reflect this.

• STRATIFIED: this is a small group of people that are representative of the entire target market. The sample are chosen based on a specific characteristic e.g. black women aged 35 - 55.

What factors will determine the choice of sampling method, I hear you scream?

• the nature of the product
• the risk involved
• you knowledge of the target market
• the extent to which the target market has clearly differentiated groups of buyers
• the time available
• your budget