Business Planning for New Ventures

A guide for start-ups and new innovations

David Butler

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317753131
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Starting a new business takes a lot of energy and organization. The failure rate is alarmingly high and the task can look herculean at the outset. This new textbook provides a simple guide to help plan a successful new business, taking entrepreneurs and students through the steps required to avoid pitfalls and get a business going.

Unlike most entrepreneurship textbooks, the author avoids dwelling on theories in favour of providing effective and practical guidance on how to start and manage a profitable business, with a focus on new ventures operating in high-growth, innovative sectors.

Written by an expert with experience in academia and business consulting, this concise textbook will be valuable reading for students of entrepreneurship, new ventures and small business. The practical focus of the book means that it will be useful both for students in the classroom and for entrepreneurs wanting to start a new business.

1 Small businesses and start-ups in the economy

Outcomes and objectives

From this chapter the reader will gain an understanding of:

● The growing relevance of small and medium-sized enterprises (SMEs) to national economies; and in particular, the importance of new businesses based on technological innovation and high-growth potential businesses as creators of capital wealth and new employment opportunities.

● The role of small businesses in the service industries in creating new jobs to replace those lost in the past three decades due to the decline of manufacturing industries, and the increased use of technology in business.

● The barriers that face potential business start-ups including issues of raising finance, skills requirements, market research, and competition.

● The pressures and motivations that influence entrepreneurs’ decision-making, and how those change during the early stages of a small business.

The importance of innovation and high-growth firms to the economy

Historical background to SME development

Throughout the nineteenth century and the first six or seven decades of the twentieth century, the standard economic model of most Western economies (in the UK, USA, Canada and most of industrialised Europe) was based on medium and large manufacturing companies that provided essential commodities such as coal, iron, steel, wool and textiles, motor vehicles, engineering plant and machinery etc. Being mainly labour-intensive, as part of that production process these industries also created the bulk of employment for working people; the only alternative to which in many towns and cities was to join the armed forces. Alongside industrial manufacturing was agriculture, which in the UK at least was largely dominated by wealthy landowners who employed local people to work the farms on low rates of pay, or rented their land out to tenant farmers. In the USA, agricultural production differed in that many farmers owned their own land, but for a good proportion of those whose farms were too small to achieve economies of scale, the rewards were low. Similarly, in parts of Europe (France for example) where land ownership was traditionally passed from one generation to another and was often sub-divided in the process, families tended small plots of land that barely generated enough for them to live on. In the UK, aside from agriculture, the small business sector mainly comprised self-employed tradesmen and shopkeepers who supplied the local working population, which led to the phrase that “England is a nation of shopkeepers” reputedly stated by Napoleon I but more correctly attributed to the economist Adam Smith earlier in 1776.

Although the large industrial conglomerates created masses of jobs, particularly for unskilled manual workers but increasingly for more skilled staff; the rates of pay for those jobs were very low, which led to the formation of trade unions to negotiate on behalf of the workers for better pay and conditions. In the UK, by the 1960s the trade unions had become very powerful and the disruption they caused through strikes and other activities was having a very destructive effect on industrial competition at a time when other countries such as Japan were becoming increasingly competitive in the markets.

The development of advanced electronics and computerised production processes in the 1970s was heralded as a social revolution, the result of which was the misconception that everyone would have much more leisure time to enjoy life. In reality, the rise of automated production became a golden opportunity for industry to replace less efficient and trade-union dominated labour with machines; and that process, combined with the competitive industries in developing countries, led to the decline of larger engineering and manufacturing industries in the UK economy over the following 20 years, coupled with increases in unemployment.

By the 1990s SMEs were becoming the alternative source of employment as larger industrial employers began to reduce staff, and the skilled workers they had previously employed looked to use their redundancy packages to create opportunities in self-employment. For politicians, the small firms sector grew in importance as the potential solution that could help to reduce the politically-sensitive problem of high and rising levels of unemployment. By 1998, it was estimated that there were 3.75 million small firms providing 7.7 million jobs, and that of all UK firms, 84 per cent had less than 10 staff, and 89 per cent had less than five staff, and by 1998, 96 per cent of all UK firms employed less than 20 staff. The numbers of SMEs have continued to grow, according to government figures reaching 4.3 million in 2004, and almost 4.8 million by 2012. However, this rapid growth in the numbers of SMEs in the UK raised a number of issues that took some years to be addressed.

First, was the issue that both politicians and educational organisations failed to fully appreciate – that small businesses were not simply scaled down versions of large corporations or public sector organisations. Not only were they significantly different in size, they also differed in terms of structure and culture, being less rigidly structured by layers of management which facilitated less formal structures, giving them the advantage of being more flexible and responsive to market demands. However, the advantage of flexibility was often hampered by the availability of business and management expertise within the SMEs, which was typically much less developed compared with larger organisations. Their relatively small size also created limitations on financial and other resources, as will be examined later in this chapter in a section on barriers to start-up and growth. Most of the formal business education and training provided by colleges and universities was traditionally geared towards large public and private sector organisations, a good deal of which did not easily relate to SMEs. This problem was exacerbated by educational theorists who continued to focus management theory on large organisations, and it took until the first years of the twenty-first century for entrepreneurship and small-business education to become established in the UK educational system; some 30 years later than the USA.

The second issue is that until the European Union in 2003 came up with a definitive and accepted definition of what constitutes an SME (distinguishing between micro firms, small firms, medium-sized enterprises and large companies) there had been a lack of clarity about just what constituted the definition of an “SME”. The legacy of this delay had been the lack of a clearly defined and co-ordinated structure of support to help SMEs survive, develop and grow. With provision spread across several different government functions (Education, Employment and Trade & Industry), each of these focused on particular aspects of support provision based on their particular departmental objectives, but with inevitable overlap and duplication. Furthermore, the confusion caused by the divided support was compounded by delivery at different levels of government – the export trade support was delivered by a national organisation, and start-up and growth support was delivered by Regional Development Agencies (RDAs) (some of which sub-contracted to small local organisations such as enterprise agencies or chambers of commerce) and supplemented by various charitable trusts providing support to particular sectors of the population e.g. under 25s and ethnic minorities. In addition, the training for SMEs was delivered on a sub-regional basis by local colleges and universities. The net result: much confusion (especially for the SMEs trying to find what they needed), duplication of effort, and wasted money.

The government’s solution to the problem of inefficiently funded overlapping support was the 2007 Business Simplification programme designed to eliminate duplicated provision and to centralise everything under government control, but by the time this programme was being rolled out in 2008, the global economy had nosedived into recession, and in the following two years the funding for much of the business support provision had disappeared; particularly that provided by the RDAs. The biggest losers were the high-growth potential and technology-based start-ups; i.e. those businesses that actually offered the best potential for capital growth and new employment creation when it was most needed, and at a time when the government was hailing small firms’ growth as the solution to the problems of economic recession.

The significance of SMEs to the national economy

Whilst large companies and multinational corporations may measure their profits in hundreds of millions, those same companies are very adept at minimising their tax liabilities, employing specialist accountants to ensure that those profits are reported in countries that offer the lowest tax rates as opposed to the countries in which the profits are generated. This has led to heavy criticism of some multinationals for tax avoidance, such as Google which generated $18 billion turnover in the UK between 2006 and 2011 but paid the equivalent of just $16 million in taxes to the UK government by claiming its sales activities operated from the Republic of Ireland; and even after a political and public outcry against this practice, Google still only paid £11.6 million tax on a turnover of £3 billion in 2012. Similarly, at the same time Amazon’s £4.2 billion UK sales were being processed via Luxembourg to avoid paying higher UK tax rates.

In contrast to the large corporations, SMEs are a much more captive audience for governments when it comes to taxation. They are important to the national economies for the tax revenues they create for the governments from their trading profits; the taxes paid on employees’ wages towards social welfare (National Insurance Contributions) and collected regularly directly from employees’ wages or salaries; and the local taxes the firms pay on premises. They also generate export trade revenue, and the foreign currency that exports bring in to help steady the country’s Balance of Payments for international trade. It is hardly surprising therefore that governments are so reliant on SME growth to sustain their economic growth and tax revenues.

SMEs also create capital value and wealth for their owners and investors, particularly through the new innovations (of both products and services) they generate, and the value of the Intellectual Property resulting from innovation, including revenue from patent licences. The economic wealth (increased capital value) of the small businesses from their profits and Balance Sheets is frequently expressed in terms of Gross Value Added (GVA): a complex measure of the growth in company profits, balance sheet value, wages and salaries paid, investment value achieved, and new jobs created.

SMEs are also important to national economies for other reasons, not least of which are the jobs and the increased employment opportunities they create as they expand and grow. This is politically one of the most important issues for governments as high levels of employment are a vote-winner at election times. There are essentially two ways in which a government can increase levels of employment in a country. One way is for the government to borrow money to spend on creating new public sector jobs in government administration, health services, military, or public services, but this just increases overall government debt without adding positive value to the national economy. The other is to create a business and commercial environment that will stimulate private sector business to invest in innovation and growth to create new jobs, and to expand their trading activities, thereby creating trading profits that can be taxed to provide government revenue.

Table 1.1, extracted from UK government SME statistics, published annually, summarises the 2012 data about the sales turnover and the numbers of staff employed by UK enterprises of differing relative sizes. Perhaps the most interesting statistic is that 74 per cent of these enterprises are classed as having zero employees, i.e. they are sole traders or partnerships that do not employ any staff; although together they only account for 6.6 per cent of the total enterprise sales turnover. Alongside those, micro enterprises (1–9 employees) account for 21.3 per cent of enterprises and 15.6 per cent of employment but just 13.2 per cent of sales turnover. Small firms (10–49 employees) form 3.8 per cent of the enterprise totals but have 14.8 per cent of employees and generate 15 per cent of sales turnover. Medium-sized enterprises with the broadest range of SME employees (50–249) constitute just 0.6 per cent of the total number of enterprises but employ 12.7 per cent of staff and generate 13.8 per cent of total sales turnover. Taken together, these four constituent parts of the SME sector amount to 99.8 per cent of total enterprises generating 58.8 per cent of employment opportunities, and 48.8 per cent of sales revenues.

Addressing the barriers to start-up and subsequent growth

Stimulating the creation of new and innovative businesses is an important factor in new job creation, and it is estimated that 95 per cent of new jobs in the USA are generated by just the three per cent of companies which have the most innovative and fastest growing ideas and technologies.

One of the most fundamental flaws in UK government thinking over...