Is this a good time to set up a business

We appear to be in the last quarter of the worst world economic recession in living memory but market conditions are still very bad. Some of the larger economies have officially turned out of recession: the United States, France and Germany for example and some even avoided recession: China, India and to a great extent Brazil. So is this a good time to set up a business? There is as always no correct answer as whether this is a good time for you is very specific to your circumstances. However, there are a few considerations:

• Not all industries are as affected by recessions as others. For example, outsourcing has probably done well in the last two years. Is your industry recession proof, if so, then this may be the ideal time to strike out in business.
• Another issue is what markets are you trading into? If you are trading into markets that have turned out of recession then these are markets that should be seeing growth and opportunities for new businesses. Remember, over the past 2 years many potential competitors have failed and are no longer in the market and thus opportunities may be available.
• Do you have a specific market niche? Customers still need to buy essentials, even in a recession. So, if you have a specific market niche or expertise then you may still be able to generate sales and market growth.
• If, however, you are still looking to trade into a market that is still contracting then it may make sense to hold off just that little bit longer.

Overall, it is the product or service offering that you can present to customers that is more important than the general state of a market. Many competitors are by now battle weary after the hammering that most businesses have taken in this recession and a certain amount of positive mental attitude may at this moment be a unique selling point. But ultimately, it is down to you, your product and the market niche you can make that should be the deciding factor in whether to set up at the current time.

Always remember, we are at the beginning of an economic upturn. Are you going to be on the wave as it surges or will you miss this one? Well, that is down to you.

How to calculate your breakeven sales figure

One of the most important figures required by any business is the breakeven sales figure. Breakeven sales calculates what sales/turnover figure the company needs to cover all of its overheads. For a start-up business having this figure early on is crucial as it effectively sets the minimum sales target for the new business. The breakeven sales formula is short and relatively simple if you have the three figures that you need.
What complicates the calculation is that the cost of sales must be removed from the equation. The cost of sales is the amount spent on input costs for the final products sold, what was once called the cost of materials. So here are the three figures you need to calculate the breakeven sales:
1. The percentage of turnover/projected turnover/product sales that is made up by the materials/wholesale purchase/raw materials used in making a product, buying a product for resale or the core costs of delivering a programme/project. In other words, if the projected turnover is €100,000 and the cost of materials/goods for resale etc is €40,000, then the percentage of turnover made up by the cost of sales is 40%
2. The remainder of the turnover is available to pay overheads and when you exceed the breakeven sales figure is available as profit. This is the percentage of turnover not made up by cost of sales. In the above example it is 60%. This is one of the 3 figures you need in order to calculate breakeven sales.
3. The total overheads in currency value. Overheads are the expenses you incur which are not made up of actual cost of sales. Thus total expenses less cost of sales = overheads. These include salaries/wages, insurance, electricity, rent and rates, phone costs etc.
4. The last figure is 100.

Thus to calculate the breakeven sales figure you put your figures in to the following formula:

Total overheads in currency value                       X 100
________________________________

% of turnover not made up by cost of sales

 

Thus if overheads are €90,000, then the breakeven sales figure for the above example would be:

 

90,000      X 100    =       150,000
______

60

 

Thus your sales target to breakeven in the year would be €150,000 to cover €90,000 in overheads.

It is absolutely critical for start-up and early-stage businesses to have a clear understanding of their breakeven sales. A word of warning. Many start-up entrepreneurs say that I will not put in a proper salary for myself and I will take what is left over. This is very dangerous. Your salary costs are included in the overheads figure. If you do not put in a proper salary for yourself and you work out the breakeven sales on this basis, you will aim to achieve a breakeven sales figure that makes you nothing. Thus always put in a projection as to the salary that you need/want realistically when calculating the breakeven sales or everybody else will be happy but not you.

How to write a cash flow

A cash flow is nothing more than a running monthly projection of income and expenditure. However, the format of the final annual cash flow seems quite intimidating to someone who has never seen one before. The trick to understanding the cash flow is to build one up from scratch. The following is a made-up example.

The first table shows the income and expenditure statement for a start-up confectionary business in month one. Sales are all cash with no credit sales and account to €13,500. Expenses account for €18,542.70. Materials are stock for resale and account for €15,500 of this and other overheads make up €3,042.70.

Table 2 shows table 1 plus the addition of a running total to the end of the income/expenditure statement. As the company started up with a balance of €0.00 and made a loss of €5,042.70, the position at the end of month 1 is a loss of €5,042.70. Now, if this is quite simple then building up the rest of the cash flow will be equally as simple.

Let us now work out a cash flow for the first quarter (first 3 months). As can be seen month 1 is exactly the same as before. Month 2 shows an income of €13,950 and expenses of €14,443.23, thus generating an operating loss in Month 2 of €493.23. At the end of Month 2 the business has accumulated a cash flow loss of €5,535.93. In Month 3 income of €13,950 is generated and expenses incurred are €12,461.16, resulting in an operating profit of €1,488.84. Thus, at the end of Month 3 having had two months of losses and one month of profit, the running cash flow position from the start of the quarter to the end of the quarter is a negative €4,047.09.

Sales are holding steady as are overheads in the main, but as the shop stocks it shelves over time, less stock is required to be added every month and the cost of materials (goods for resale) is falling to a sustainable level month on month. Now if we extend this exercise for 12 months we get the final cash flow.

As can be seen the figures for the first quarter are exactly the same. As the year progresses sales increase and overheads and cost of materials balance out. By the end of the year the company is in profit and has a healthy cash flow position, ultimately making a profit of €17,481.42. If you were to look at the last table first, then this exercise might seem daunting. However, if you build up from month one, the final 12-month cash flow seems far more doable.

How to do financial projections

When making assumptions and estimates the most important thing to remember is to bring the base information down to the lowest common denominator. Nobody can project a sales figure for a year off the top of their heads, but most people could project the sales for a specific week. Here are a few suggestions to start you off:
 Try and project figures over a short period of time and then extrapolate these figures up. For example, work out figures by the week and then multiply up to month and years. In this way it is easier to estimate as most people have a good idea of figures on a weekly basis.
 Try to think in quarters. Remember that there are thirteen weeks in a quarter. Thus in every three month cycle there are two months with four weeks and one month with five weeks. This extra week can make a difference particularly when working from a weekly basis. If you forget to cover this thirteenth week you can get into difficulties as you have thirteen weeks of overheads.
 We don’t work fifty-two weeks a year. You lose time from Christmas or other religious holidays, summer holidays and sick leave. Factor in a number of weeks of non-earning, but remember bills tend to run over the whole year. Therefore leave at least four weeks per year with no income to cover sickness and other eventualities.
 Learn the business cycle in your business. Every business has a business cycle. In any year there are good, bad and average weeks. It usually takes time to find these cycles out, but they are very important, especially when projecting income and cash flow.
 Cash flow is about exactly that, cash! Remember that it is time when bills or receipts are paid from the bank that counts, not when invoiced. Thus if you have to wait sixty days for payment, January invoices do not actually appear in the cash flow until March. If you get credit from suppliers you enter the cash flow payment when the cheques are paid not when the invoice is received.
 On the subject of invoices and statements, remember that few businesses actually pay out on invoices anymore. The norm is to pay out on monthly statements. Thus there are two things to remember. One if you do not send out monthly statements you don’t get paid. Secondly, most businesses will take their thirty days credit from receipt of the monthly statement. Thus to be safe, if you invoice at the beginning of the month and send the statement at the beginning of the next month, the customer will take another month to pay, and it will take several days to draw up invoices and send payments. Therefore an invoice in early January will be sent in the January statement in early February. The customer will look to pay this in early March and will take up to two weeks to get the payment to you. This is now mid to late March. Remember this is quick payment in the modern business environment.
 As a rule be realistic, it is better to be conservative with the sales estimates (slightly underestimate) and liberal with the payment estimates (slightly overestimate).
 Try to compare figures with similar ventures. A shop of a certain size, on average uses the same amount of electricity no matter what it is used for. Thus compare your figures with a similar size shop that is not in competition with you.

What influences buyers

In general people focus too much on understanding ‘selling’ rather than why customers ‘buy’. Ultimately, it is the buyer’s mental processes during a sales presentation that is the most important thing. Buyers are influenced by several factors:

You – there is no doubt that peoples reaction to the salesperson is a primary factor in the buying process. People simply will not do business with people they dislike and, conversely, people want to do business with people they like. You cannot control how you come over to a new person but you can learn from your mistakes. We all make mistakes, it is part of the learning process and in many ways it is the best way to learn assuming the negative consequences are not too great. Try to empathise with people, understand where they are coming from and how they are thinking about the things you are presenting. Again, people are not buying from your company or organisation, they are buying from you.

Previous history – people have good and bad experiences with different companies and different sectors. Prejudice is a hard thing to break down. Finding out why a person is not warming to you or your company is important. Remember, you are the ambassador not just for your company but for the sector you work in. You get the chance to undo a negative or reinforce a positive every time you talk to a client.

Satisfaction with present situation – the vast majority of businesses will only change supplier if they are very unhappy with the current service being provided. Changing supplier can be very costly. The company has to break in a new accounts payable department, get new people used to your systems and it takes time to build the rapport necessary for a long-term business relationship. There is a high opportunity cost in changing supplier. The message here is very simple. If you keep your customers happy they are unlikely to want to change. Mess them around and they will be out the door and to your competition.

Price & Credit – everybody has a bottom line. I always emphasise that price is the perceived value the customers is willing to pay for a good or service and as a perception it can be built up. But you also must live in the current market situation. My advice, where possible, is not to reduce your main price but to give concessions around the edge of the deal. Thus, give better or longer credit terms, guarantees or additional peripherals. These all add value to the deal but maintain your price integrity.

But if I am going to ask you to do one thing different it is to focus on the ‘buying process’ and stop focusing on the ‘selling process’. Focus on the customer.

The emotional side of buying

When people make a final buying decision they are prompted to do so by one of only two triggers: rational buying motives and emotional buying motives. A salesperson can really only sell if they understand the psychology of buying; the process that the buyer is going through when they make a final buying decision. So what are the factors that affect buying motives.

Examples of rational buying motives are:
Profit – people buy stocks and shares mainly to make money from the increased valuation of these equities over time. Most people buy equities to make money from them not out of any emotional bond they might have with the particular company.
Health – people buy health insurance not because they have an emotional attachment with the health company but rather that they want to ensure that they will get treatment no matter what might happen to them.
Security – people buy car and house alarms mainly to ensure peace of mind when they are away from their property or because it gets them cheaper insurance, not normally because they have an emotional attachment to the alarm or alarm company.
Utility – people buy batteries when they need them and for purely utilitarian reasons, people do not get much emotional attachment from a battery.
Caution – again the peace of mind argument made by every insurance company and insurance salesperson in the world. People buy insurance ‘just in case’.
All of these buying motives are rational and made for utilitarian and practical reasons. There is very little emotional content to the purchase.

Examples of emotional buying motives are:
Envy – this is a powerful buying motive. ‘If he/she/they have x, I must have x’. Plasma screens, sports cars, women’s handbags etc etc.
Vanity – everybody is surely guilty of this buying motive. Why buy the latest football jersey even though you already have the last 3 styles. Vanity is related to self esteem and is a very powerful buying motive.
Love/sentiment – Hallmark is accredited with building up St Valentine’s Day as it sold millions of St. Valentine’s Day cards. If you ever want to see the power of love/sentiment as a buying motive ask a husband or boyfriend about the dangers of forgetting St. Valentine’s Day!
Entertainment – This is a guy buying motive. Car accessories, plasma screens, stereo systems etc etc. Do we buy these things because we need them…no. We buy them because we want them,
Pride – Another powerful buying motive. How many football jerseys are bought during a World Cup year as compared to an ordinary year? Lots. Why? Pride!
There are many other emotional triggers but what is the point here?

In start your own businesses classes I quote a figure that 84% of all purchases influenced by emotional motives. Even apparently rational decisions are finally influenced by emotion. Let me give an example. A friend of mine went out to buy a new fridge freezer for her apartment. Having spent a few hours wandering around stores she noted that most of the fridge freezers were similar, white on the outside and white on the inside. Eventually she arrived at an electrical store and looked at 3 models. All did exactly the same job and were of similar size and specification. Two were white on the inside and white on the outside. The third was white on the outside but had a nice turquoise on the inside. She made her buying decision there and then. The final reason for buying the fridge freezer, a normally utilitarian purchase, was that she liked the turquoise interior. That was the only difference between the different models. The final buying decision is normally influenced by emotional factors.

So if you are selling your product/service to clients look for the emotional buying motives and sell to them. Remember, people do not buy furniture per se, rather they are buying a particular style that will fit in their home or are buying something comfortable to watch television. People don’t just buy cars, they are buying status, image etc. Most people don’t buy clothes to cover themselves up, rather they are buying a style or image based upon their personal self image. And if you really still don’t believe me then who ever bought a lotto ticket so that they could help charities and needful causes? If you are not selling to the emotional triggers then you are missing the point of why people actually buy.

Buying signals

How can you tell if someone is interested in buying something from you? Well, the answer relates to understanding buying signals. Buying signals come in two forms: verbal and non-verbal, or what and how people say things and how they react to certain questions or responses. When a customer takes an interest in a presentation it shows that either:
 They recognised a solution to a problem they have identified
 They are interested, but have not decided yet to act
 They have made a mental decision to buy
Either way, its good news – you have connected with the client. So how can you identify verbal and non-verbal buying signals? The first thing to remember is that during a sales presentation the client is having an internal conversation with themselves and are asking questions of themselves like ‘do I need this?’, ‘can I afford this?’ etc. The verbal and non-verbal buying signals are the external manifestation of this internal discussion. If you don’t believe me think of a time when you went into a store to look and buy something electronic.

A verbal buying signal is usually a question asked by the client during the sales presentation, usually a question they would not ask if they were not interested in buying. Examples are:
 ‘what kind of guarantee do you give?’
 ‘do I have to pay right away?’
 ‘do you have quantity discounts?’
 ‘what colours does it come in?’
 ‘how much is it going to cost?’
 ‘can we take this on lease?’
 ‘do you have a maintenance contract?’
All these questions have one thing in common, they would only be asked by someone actively considering making a purchase. So you should always ask yourself during the sales presentation, ‘why did they ask that question?’

Examples of non-verbal buying signals are actions done by the client during the presentation. For example:
 Picking up a product to read instructions
 Going back to something you have covered
 Eyes staying on a particular item
 Moving closer to get a better look
 Suddenly sitting up in the middle of a presentation
Again, why would someone do one of these things if they were not interested? So again you should ask yourself, ‘why did they do that?’ during a sales presentation.

Now, I am quite happy to concede that reading body language and being able to process questions like this in the middle of a sales presentation takes practice, time and experience. However, the more times you do a sales presentation the more likely you are to pick up on the buying signals. There are several books on how to read body language and these are a good place to start understanding the process.

The selling process

Many people have a dislike, or in some cases a fear, of selling. This is caused because many people do not understand the selling process and have some basic understanding of sales. Selling is generally a simple process: find out what someone wants/needs and present a solution that meets their want/need. However, there is a process that sales people must go through in order to reach the desired goal. The following are the main steps involved:

Personal Motivation – if you are not personally motivated to sell, or if you believe that you cannot sell, then you will not sell. Selling requires a positive mindset and a degree of personal belief that you are helping, serving or assisting the client.

Understanding People / Empathy Skills – You must be able to understand how people communicate and what thought process they are going through. Many of these skills come under verbal and non-verbal communication skills. Reading up on subjects such as body language and motivation is important if you are going to be able to communicate your message to a client.

Prospecting – this is finding the customers and can be made more effective by clearly working out your marketing strategy and only talking to people who you can be of benefit to.

Making Appointments – This is the part of getting the personal attention of a potential client. There are many ways of making an appointment. I have previously talked about the power of networking in accessing people and making an appointment.

Good Introduction – Talk about things that interest the client. You should try to tailor your introduction to the client, not just use the same patter in all cases. Use news items, personal history, common interests to focus your presentation and get the persons attention.

Presentation of Benefits – people do not buy the features of a product/service but rather they buy the benefits they get from the good/service. This is important because if you are not presenting the benefits to the client you are missing the point of the sales presentation.

Address Areas of Concern – people who are actively considering making a purchase decision will have questions. If you are not getting questions then it is likely that the person is not engaged with the conversation. So do not overreact to a question asked by a client. Questions and objections are good news as they indicate at minimum an engagement with you.

Customer Commitment – this is the only part of the process you actually get paid for. Always ask for the business. It is surprising how many salespeople actually get to the final hurdle and do not ask for the sale.

After-Care Service – this is crucial as if managed properly, after-care service can lead to repeat sales. Always follow up on a client who has purchased and accept responsibility to sort out any problems that may arise.

You may note that I didn’t use the term ‘closing the sale’ but rather asked for customer commitment. This is an important thought process. Closing a sale indicates the end of a process, rather than the establishment of a long-term business relationship with the new client. Be careful about your use of words, they can have negative effects on your mindset.

The power of networking

There is a lot of talk in the business community about networking. There are, as already pointed out, many different types of business-to-business networking available. Unfortunately, many people think that walking into a room full of other people you have never met is ‘networking’ but if you are going to get any benefit out of networking you must have a ‘strategy’. Here are a few tips:

• Pick the right network. Too many people wander from network to network without giving much thought to the types of businesses that you might meet there. Talk to the coordinator of the network in advance and make sure there are businesses that you want to meet.
• Get introductions from key network members. In every network there are people who know everybody else. Get these people to introduce you.
• Have an ‘elevator pitch’. This is a 25 word statement about who you are and what you are able to provide/looking for. Having a pre-prepared statement means that you are less likely to fumble your introduction.
• Give as well as take. The best networkers I know give as much help, information, introductions and contacts as they get. Being of assistance to others gets you a positive reputation and people are very likely to want to return the complement.
• Follow up. Even if it is by an e-mail to say how pleased you were to meet the other person and attach a list of your contacts and website etc. If you do not follow up then no business can be possibly generated.

Here is a key point for new networkers to understand. Business-to-business networks are full of business people. To get to the meeting you have to be a business: even a one-person business. When you are in the room you are one of the club. People in a networking meeting assume that the other people there are business people and there to do business. It doesn’t matter whether you are a one-person business or a large multinational; once you are in the room you are assumed by all to be the equal to everybody else there. All you have to do is get in the room!

Now this refers to general networking. You can also use networking strategically. Let us assume there is a company you want to do business with, possibly even a large company. Getting appointments with senior management can be very difficult, apart from the process of getting past ‘gatekeepers’ (PAs, receptionists etc.). Also, whilst in the office, senior people have many calls on their time. Now, from your research you know the person you need to talk to and want an opportunity to meet this specific person. If you ask the right questions, or in many cases google the person, you can find out what networks this person is a member of. High profile executives tend also to be senior members (Presidents, chairpersons etc) of business networks. If you can get an introduction to the network that the person you wish to meet is a member of, it is likely that you will be able to have an introduction directly to the person, in a relaxed atmosphere where they have the time and the inclination to listen. I have seen senior executives from large multinational companies standing at the door of networking events formally welcoming members, especially new or potential members. These are local chambers of commerce for example, so if you are prepared and organized, you can get to the right person directly, cheaply and effectively through the use of networking.

Advertising and promotion

I am a very hard person to sell advertising to as I will not spend hard-earned money on advertising that does not show a real rate of return. Promotion is the section of marketing relating to advertising and networking. Picking the right channels of communication is vital for any business. The first part of picking your channel is to define as accurately as possible your target market. The broader your message gets dispersed the more diluted it becomes. But if you can closely define your target customers then the more influential will be your message. This is the trick to cost-effective promotion. Always ask the question of any promotional opportunity of how targeted is this to my target markets.

Of course there is now a wide range of advertising media. The following is an arbitrary categorisation.
1. General Advertising. This is aimed at increasing your product or company’s general awareness in the publics eye. Posters campaigns and door to door leaflet drops are examples of this. Information stands for the general public is also included here. Again as this is a broad spectrum message the return on this communication medium can be extremely diluted.
2. Classified advertising. These are the lists of people engaged in particular sectors. The Golden Pages, Independent Directory and many smaller local publications exist. There are also industry specific listings available for specific issues. Again measure the cost effectiveness of these mediums. It may be necessary to be in the Golden Pages but it may not be necessary to have a large ad. Remember people tend to look for local businesses and if you are nearer than someone with a large ad then you may still get the business. So think out what you want from this medium and then measure its cost effectiveness.
3. Trade Fairs and Trade Magazines. The beauty of trade-specific promotion is that they are aimed exclusively at your target market. Specifically trade only fairs. But remember that there is also a high cost attaching to these events or publications. The more specific they are the higher the cost. So only engage with your eyes wide open. You are going to these events to sell not raise product awareness. But on the other hand you have to speculate to accumulate.
4. Direct Advertising. This is where you write to specific individuals and promote your product. Most direct mail is seen as ‘junk mail’ and is dispatched to the bin. But it depends on how you approach it. This is best used as part of a sales strategy where you are looking not to sell the product but get an appointment.
5. Networking. There are many business-to-business networks now in existence. These can range from social networking for business people (www.facebook.com), more professionally-focused networking online (www.linkedin.com) and a wide range of event-driven networking organizations (Chambers of Commerce, BNI etc).
6. Word of Mouth. The most effective promotional method of all. Unfortunately, the one that you cannot control or direct. But also remember if it is bad news it can also kill your business. One useful method is personal recommendations. Here you ask a satisfied customer if they know anybody else who might benefit from your product. You can then go to the other prospect and say “ Mr. X suggested that I give you a call”. If you have the selling skills this is the best form of sales entry you can get.

Advertising and promotion cost time and money. So the general rules are target your customers directly, do a cost-benefit analysis on every method of promotion you use and get value for money and time.