Enterprise Planning and Development

David Butler

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781136405778
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Enterprise Planning and Development outlines the options and risks involved in setting up a business. It shows how to avoid this failure by focusing on the planning stage and building on this framework as the business develops. The book contains all the underpinning factual information required to prepare a successful Business Plan for presentation to a bank manager, or an alternative potential source of finance, or for use in an NVQ portfolio. It is in line with the major syllabuses for Business Start-Up, and can be used as a course book for anyone completing a formal NVQ level 3 and 4 qualification in this area, with tips on NVQ structure and assessment. Enterprise Planning and Development shows how to make the most of business growth and also how to deal with the different types of problems that are encountered along the way. All businesses pass through several stages of growth and it occurs for a number of reasons, such as change in the commercial market, increased customer demand for services or product and higher numbers of customers. The book is structured to follow a logical sequence of questions that makes it readily accessible: Where are we now? Where do we want to go? What resources are needed to get there? What sales and marketing policies do we need to develop? It examines the personnel and staffing implications, the efficiency of the current financial management process and the owner's own abilities to make it all happen

CHAPTER 1

The Entrepreneurial Ethos and Environment

Finding a Way Through the Maze

With the sheer number of small- and medium-sized firms or enterprises (SMEs) in existence, and the very diversity of the goods and services that they offer, it is little wonder that no one has been able to create a meaningful taxonomy to classify them, although it seems to be part of human nature that we insist on keep trying. In the process of trying, successive governments, research and educational institutions, have developed a range of overlapping and contradictory definitions, which vary from country to country.

Back in 1971 the British government had shown a little interest in the structure of small businesses when the Bolton Committee Report (1971) attempted, rather haphazardly to define the sizes of small firms across a number of key industries. For example, a “small” manufacturing firm had less than 200 staff whereas “small” mines and quarries had only 25 or less. In the motor trade a “small” firm had a turnover of under £100 k but in the wholesale trade the turnover was £200k. “Small” transport firms had less than five vehicles, and catering businesses were small so long as they were not multiple outlets or brewery managed. With such vague definitions it was not surprising that the government had no clear or positive policies towards small firms, although the New Enterprise Programme of the 1970s was the first, albeit unsatisfactory, attempt to support small firms by encouraging them to undertake training and development to improve their staff and management skills.

It was only in the mid-1980s that the true importance of the small firms sector began to attract real government attention, particularly when larger organisations began to shed staff, and the skilled workers looked to use their redundancy packages to create opportunities in self-employment. As a result, the small firms sector emerged as the potential alternative to the large employers, and an alternative which could help to reduce the politically sensitive high and rising levels of unemployment. It was a solution to a big threat which could lose the controlling political party the next election. Various initiatives and support mechanisms were developed to assist small firms to start up and to grow, including the Department of Trade and Industry (DTI) Enterprise Initiative, and the Business Growth Training Option of the early 1990s.

In 1998, the DTI estimated that there were 3.75 million small firms providing 7.7 million jobs, and that of all UK firms, 84% had less than 10 staff, and 89% had less than 5 staff. This broadly correlates with the Small Firms Lead Body (now the Small Firms Enterprise Development Initiative) figures from 1998 stating that 96% of all UK firms employ less than 20 staff. This implies that the big companies, whose needs dominate the content of accredited management training provision throughout the UK, constitute only 1–2% of the total number of private sector employer organisations in the UK.

In the following 6 years that number of small businesses had grown to an officially recognised figure of 4.3 million in 2004. Interestingly, much of that data is based on registrations and de-registrations for value-added tax (VAT) and taxation, and that invariably overlooks the large number of self-employed individuals who fall below the VAT registration threshold and those operating in the grey economy who simply do not want to be known to any government agency. Butler (2004) reported on a survey in which over 7500 businesses were contacted, many of which simply refused to discuss their operations as they did not wish to appear on any database, “official” or otherwise. Realistically, the true number of “entrepreneurial” businesses and self-employed individuals could be as much as 40% higher than the government figures suggest.

The Political Context

One problem that still persists is the insistence of the government in using the term “SME”. The DTI definition of a small- or medium-sized enterprise was that of having less than 250 employees or an annual turnover below £5 million. Unfortunately there is a continuing and confusing implication within this definition that prompts the assumption that the needs of a new small firm with just 5 to 10 staff are similar, or just a scaled down version of a firm employing 200 staff that may have been established for 20 or 30 years. With the current high value of new technology, a very small firm with just a handful of staff can be involved in high-value contracts exceeding £5 million or more, whilst another much larger business employing substantial numbers of unskilled staff on low-paid labour-intensive work, can have a turnover below that figure. In this context, annual sales turnover has become largely irrelevant, and it would make much more sense to subdivide the sector, e.g. into micro-firms (with under 20 full-time equivalent staff), small firms (with 20 to 50 full-time equivalent staff), and medium-sized firms as having 50 to 100 staff. In effect most firms with 100 to 250 staff are relatively large and well established these days, and certainly tend to employ the necessary specialist management skills that are usually found in larger companies. The difference in size also becomes critical in more rural counties where there are significantly fewer businesses in the 100- to 250-employee bracket, but a great deal more micro-firms which form the bulk of potential local employment. On this basis the current government definitions certainly need to be reviewed to focus support funding into the parts of the small firms sector which is likely to produce the most long-term growth and potential employment – which the government continuously tells us are the newly established and nursery businesses. It is these to which Part II of this book will apply most.

In 2003 in what many critics would regard as a rare example of common sense, the European Union (EU) came up with a framework definition of SMEs that will hopefully achieve general acceptance and credibility. Broadly, from January 2005 a micro-firm will be defined as having 10 or less staff, a turnover of no more than €2m, and an annual balance sheet total of no more than €2m. A small firm will have a maximum of 20 staff, €10m turnover, and €10m on its balance sheet. A medium-sized firm will have no more than 250 staff, a €50m turnover, and a balance sheet not exceeding €43m. Whilst these definitions will be accepted across Europe, two issues arise. First, with quite widely varying inflation rates amongst the EU member states it will be interesting to see how the thresholds are adjusted as time goes on. Second and more important, the new definitions still do not overcome the fact that a “medium-sized firm” with 51 staff and €10m turnover will be substantially different in terms of management skills and structure, access to resources, market influence, etc., than a firm with 249 staff and a turnover of €50m. Those differences are exacerbated with the insistence of bankers, government agencies, politicians, academics, and policymakers of lumping the three very different groups together and treating them as a homogenous group called SMEs.

The Training and Education Context

The provision of management and business training really started to expand in the 1970s, primarily through the polytechnics and some of the more technically focused UK universities (it was then still not quite a respectable academic subject at that time – except of course in the USA). This provision has expanded over the years both upwards to postgraduate level at most universities, and downwards through colleges of further education. One of the key problems however, is that the majority of the demand for such training is on a part-time basis, e.g. where employees are given day-release from work to attend college, or by distance learning through the Open University, Open College Network, or similar institutions. The major drawback is that historically this type of education or training does not attract the same levels of funding as full-time education, and as a consequence students are normally charged quite substantial course fees which in the vast majority of cases are paid for by their employers. In 2005 the funding structure for further education in the UK was revised to focus on the 14 to 19 age group, with reductions in funding for “demand-led” training and education, e.g. management training. This will have the further effect of increasing costs of essential training for the business sector that the government favours as the employment growth sector of the future.

In a survey of part-time business and management students carried out at South Kent College between 1997 and 1999 (Butler, 2000) less than 5% came from small firms, and the majority (75%) of that group were paying their own fees as their employers would not or could not afford to sponsor them. If, as is suggested above, the remaining 95% of students on these courses are derived from the 1–2% of large private sector employer organisations plus the public sector, whose training needs dominate the management education provision in the UK, then clearly there is a major imbalance and lack of proper direction in management training provision. In simple terms, there is a substantial and almost critical need for business and management training in the small-business sector, but central funding for this within the further and higher educational system is not readily available. Those who need it most can least afford to pay for it, and the educational funding systems are not designed to facilitate the provision of the sort of short, flexible, convenient training programmes that small firms need because they are invariably not qualification related! Added to this is the issue that college and university marketing budgets can achieve higher rates of return by focussing on larger institutions, whereas targeting the multitude of small firms can be a time-consuming and relatively unproductive process.

The predominance of students from large companies on management programmes has inevitably resulted in those programmes being directed towards the needs and interests of large organisations, with little or usually no reference to the needs or interests of their smaller counterparts. Corporate planning, public sector finance and international marketing are great subject options for employees of large organisations, but the big-company model of management training is woefully inadequate for the owner-manager, and it is only in very recent years that this problem has started to be redressed. In the mid-1990s there were only a handful of UK universities offering small-business programmes or options (Durham and Warwick being two examples also notable for their SME-related research) but the number is now steadily growing.

The Owner-Manager Culture

Not only is the large organisation model inappropriate for business and management training, it fails to acknowledge the fundamental cultural differences between large and small organisations:

• Large organisations can afford to employ specialists to provide particular management or administrative functions, e.g. personnel, payroll, sales, marketing, purchasing, distribution, and accounts, etc. The owner-manager generally has, at least in the formative years of the business, to fulfil the majority of these roles without specialist support. In the small firm the emphasis is on breadth of knowledge and skills, in contrast to the specialist expertise and knowledge available in large organisations.
• Medium-sized and large organisations tend to produce corporate plans specifying their aims and objectives over a 3 to 5-year period. These “strategic” plans are produced at senior or Board level, and are implemented by middle managers at the “tactical” level. Below them, the middle managers have junior managers or supervisors to whom the day-to-day “operational” decisions are made. As the company has grown, its culture will have evolved to the point where it is less dominated by the entrepreneur who initially created it. In contrast, in the small firm strategic thinking or planning rarely takes place in the early stages of its development (see Figure 13.2), and the firm’s culture may be heavily influenced by the motivations, attitudes and management style of its owner-manager.
• Until a small firm has reached a level of stability, the whole of its existence is a matter of and concern for survival, and consequently its focus is on the short-term measures that will enable it to achieve survival. Long-term or strategic planning is non-existent, and in truth is often irrelevant – after all, what is the point in planning for next year if the business may have to close next month? Whereas large firms can afford to invest in staff development and training, this will only happen in small firms, and particularly the newer ones, where that training will offer a short-term payback for the time and effort invested, e.g. a very rapid increase in sales, or substantial cost savings. Similarly if the owner of a small firm takes time off, or sends a member of staff for training, it is highly unlikely that anyone will be available to cover for the absence. Lost time is lost revenue for the owner-manager, so compared with the big-company counterpart, the actual cost to the business of sending staff away for training is much more critical as it results in the loss of a higher percentage proportion of revenue income. Conversely however, it can be argued that as a matter of survival, the small firm owner cannot afford not to invest in training if that training provides the skills to survive. This is the Philistine view that if they don’t take the trouble to arm themselves with the basic skills and knowledge to survive in business, then they don’t deserve to survive anyway – an attitude totally contrasting with basic principles of quality management and customer care.
• Owner-managers, in particular those who have previously been employed as managers, tend to be fiercely independent and often reluctant to take advice, which may be fine if they actually have the necessary skills and expertise to establish a business. However, unlike the situation in large firms, when they hit problems there is often no one to consult or to provide expert advice. Again the tendency in such circumstances is to opt for the most immediate practical solution, or the cheapest short- term solution, perhaps to the detriment of the longer-term needs of the business.
• The finances available from lending banks and financial institutions tend to be much more restricted than for big companies. Interest rates tend to be higher, and the sums offered are frequently lower in proportion to the equity required to secure them. True, this is not a problem for well-established and profitable small businesses, but the financial system as it stands, makes the achievement of that condition much harder to achieve anyway. New small firms simply do not have any negotiating power when it comes to interest rates and terms of borrowing, and are often faced with a take it or leave it choice.
• The political, legal and fiscal environment in which small firms operate is constantly changing, and in recent years has resulted in an ever-growing burden of bureaucracy. Whilst big companies may have the resources (if not the inclination) to handle these burdens, the pressure put on small firms is disproportionate to their size, turnover, and profitability. Unpaid tax collection responsibilities (VAT, PAYE (pay as you earn), etc.) in particular impose a disproportionate burden on smaller firms. In spite of frequent government pledges to reduce red-tape the burden continues to grow, largely due to our association with the European Community and its central-control culture. Compliance with the continuous influx of new legislation has become a primary issue for lobbying bodies representing small firms. Once again we see government policies having a negative effect on the sector most valued to create future growth and employment.

Enterprise, Entrepreneurs and Entrepreneurship

Not surprisingly with ...

Table of contents

• Cover Page
• Half Title Page
• Frontmatter
• Title Page
• Copyright Page
• Contents
• Acknowledgements
• Preface
• Chapter 1 The Entrepreneurial Ethos and Environment
• Part 1 Start-up and Survival
• Chapter 2 The Importance of Planning for Start-ups
• Chapter 3 Structuring the Business Plan
• Chapter 4 Developing the Business Idea
• Chapter 5 Developing Entrepreneurial Skills
• Chapter 6 Market Research and Planning
• Chapter 7 Identifying Relevant Legislation
• Chapter 8 Resource Requirements
• Chapter 9 Recruiting and Employing Staff
• Chapter 10 Planning and Managing the Business Finances
• Chapter 11 Integrating and Maintaining Quality
• Chapter 12 Putting the Business Plan Together
• Part 2 Developing Strategies for Growth
• Chapter 13 The Culture Shift
• Chapter 14 Reviewing the Performance of the Business
• Chapter 15 Identifying Growth and Development Options
• Chapter 16 Additional Resource Implications of Growth
• Chapter 17 Financial Planning for Growth
• Chapter 18 Sales and Marketing for Growth
• Chapter 19 Innovation and Intellectual Property
• Chapter 20 Developing and Implementing the Growth Strategy
• Chapter 21 Exit Strategies and Succession Planning
• Appendix Business Review Questionnaire
• Index