ITS Educational News

The art of starting and running your own business 

 When anyone talks to me about a business idea I always start by asking them 3 questions. 

 1)     What is your growth strategy?

 2)     What is your exit strategy?

 3)     What is your critical risk? 

If people cannot answer these three questions then I am not very interested in talking about their business idea anymore as they have not thought it through themselves.   So I will start by asking you to think about these questions.  If you do not have answers then my advice is that you reconsider your plans…… 

Raising money for a business venture in Hong Kong

Questions one and two – 1. Why?  2. How much? 

From both my own personal experience, and working as a consultant for small business for many years these two questions are the most important start and end points of the search for funds. It is not enough to have the concept or idea.  You must have a clear plan.  People cannot help you achieve your goals if they are vague and lack detail.  Do Not even bother starting to try to raise funds until you have clearly thought out and answered these questions.  The importance of a good business plan cannot be emphasised enough as a starting point in raising funds.  Its role is not just to convince others to lend or invest money in your venture.  It is much more important than that. What a good business plan does for you: 

• Gives a clear idea of a business’s direction and operation
• Brings clarity and detail to your ideas
• Gives the idea depth
• Helps focus all involved in exactly what the goals are
• Reduces potential for future conflict
• Gives a much more realistic base to the level of finance that is needed
• Is a marketing point for potential lenders and investors as it shows the business’s likely financial position and its ability to pay back a loan or pay dividends
• Helps reduce stress and uncertainty
• Identifies problems before they occur and allows a business to deal with them before they become a problem
• Highlights a business’s strengths and weaknesses
• Gives comfort and reassurance to family

A good business plan is the single biggest challenge in raising funds.  If you cannot produce this yourself then consider paying someone to help you.   Producing a business plan is not really that difficult.  If you start with a pro-forma and basically fill in the blanks you will come up with something pretty reasonable.  The next step is to show people whose opinions you respect and incorporate constructive criticism.  A respected mentor of mine once told me  “The only person you do not want to be in business with is someone who knows everything”. The financial plan is extremely important and if your knowledge of accounting is limited this may be an area that you should seek help on. Remember you must be able to justify and support any and every aspect of your plan. 

Also remember to THINK BIG – no one is interested in small. An outline of a business plan is included at the end of these notes.  

Once the plan is completed. Once you have a plan and know exactly what you want the next steps are quite easy and straightforward. Sources of funds: Before I speak about these I have a couple of warnings. I am sure you have all heard the story of Goldilocks and the three bears. The theme of this children’s story is about seeking what is just right, not too big, not too small.  If you try to start your venture with the bare minimum of funds you are setting yourself up for stress and failure.  Things will go wrong. If you raise more funds than you need you are likely to overspend and therefore waste money.  You may have to give up too much of future earnings or the business to get funds that just sit in a bank account.  Wasted money can be hard to recover.  Also staff, if they see things done in a wasteful and glamorous style, are likely to be much more demanding. Only raise what you need.  But be realistic about this and make sure you have enough for contingencies. Borrowing money or finding investors for a businessWhen considering how you should raise the necessary money for your business it is extremely important to start with a plan. Many new businesses fail because they are under-capitalised. It is easier to raise / borrow money at the start of your new business venture than when things begin to go wrong.Your options for funds are

1. Put your own savings into the business
2. Borrow funds
3. Find investors for your business

• Put your own savings into the business

The two sources of own funds are really savings or selling of unused or under used assets.  I think it is very important to contribute some of your own funds as it helps to convince lenders/investors that you believe in the project.  It also tends to make a project less risky if the portion of borrowed or outside funds is less.
 

• Borrow funds

This in my opinion is the most difficult way to raise any significant level of money.There are some easy options here.  Personal loan – In Hong Kong even if you have a reasonably low level of income a personal loan of up to $200,000 is fairly easy to obtain from the bank.  Just do not mention you want to borrow it for a business venture.  It is on the other hand quite easy to get a loan to; renovate you apartment or go on a holiday etc. Credit cards – Not, in my opinion, the best way to raise funds as the interest rates are very high.  But a very easy source of loan capital.  Youtube was largely financed by the guys that set it up on credit cards.  Family – Here you do not have the trust issue.  But there are a range of other possible complications.  Very good if it an option but I would recommend considering selling them part of the business venture rather than borrowing money from them  SME Loan guarantee scheme – Excellent.  The Hong Kong Government rocks in operating a business here. 

These loans are largely available to cover the cost of fixed assets.   The Government Website: http://www.smefund.tid.gov.hk/eng/sgs.html

 Business loan from bank/financial institution – On the whole Forget it.  (Unless you are a large well established business or are willing to put up personal collateral).  In my experience banks do not lend money to small business startups.  Banks do not lend money for new ventures.  If you want a loan from a bank do not even mention business start up or new venture.Leasing – Consider what equipmet/machinery you may be able to lease.  This can keep your initial cash requirements down. Factoring – When you sell goods on credit the invoice provides evidence of the sale and the money owed to the company.  Debt factoring is when a financial institution provides finance against the unpaid invoices.  This can be very useful for a trading company. 

• Find investors for your business

In my opinion this is a much better option than borrowing.  Many people want the opportunity to get in on the ground floor of something new. With a good plan and a good vision it is quite easy to find investors.

 Talk about your plan and vision to everyone and let it be known you are looking for potential investors.  You will be amazed at how many people will want to talk to you about the possibility.  My advice – ask family first.  Two main reasons – One: they may be upset if you do not give them the opportunity & Two: It makes drawing up shareholder agreements etc so much easier. Business Angels/Venture Capitalists -  A Business Angel is an affluent individual who provides capital for a business start-up.  Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund.Both of these are possible sources of finance for a business start up.  For most SMEs an Angel is probably more appropriate as Venture Capital firms are more into larger amounts of money (ie US $ millions).  You may have a wealthy friend/aquantaince who can be convinced about the potential of your business.  This is the benefit of talking about your business idea to everyone and asking for advice/suggestions.  Someone will know someone….   But consider carefully if you want this source of finance.  Normally these people will want substantial ownership and input in the business to protect their investment.  VC do not invest in a business for a 10% return they typically will only invest if they believe they can make 100%, 200% return plus.  If then they are willing to invest in your business, ask yourself if you really need their money.  It can end up being a very expensive way to finance a business.  You can also end up seeing control of a business being taken out of your hands.THE HARDEST PART – By far the most difficult part about an investor is exactly what they will get and the level of say they will have in your business.  A detailed and comprehensive shareholder agreement MUST be written up.  
 I have included a basic outline and format with suggestions about how to go about approaching lenders or investors and a basic outline of what should be included in a Business Plan. Planning your case 

• Your success will largely depend on a well thought out business plan and on your reputation.
• The more comprehensive your plan the better your chances of getting an investor or loan for your business.
• Prepare a background statement about your business, setting out objectives, ownership, assets, staffing, location, markets and services.
• Persuade lenders/investors that their money will be safe. Show that it will be used to earn a good profit and you will be able to repay capital and interest or dividends on time.
• Budget for contingencies.  Produce evidence of the demand for your products and services. Market survey figures will help your case.  (IF the plan is for expansion – Include copies of your accounts for the last three years if available.
• For new ventures prepare a feasibility study giving a cash flow analysis showing your predicted income and profit and loss figures.
• Get reports to support your case from your accountant and other appropriate professionals.

Lenders or investors will look for: 1. Your assets so they can get their money back if things go wrong2. A commitment from you3. A realistic budget allowing for all possible contingencies4. Your ability to pay dividends or repay loans. 

Information you should give the lender or investor: 1. The reasons for borrowing/raising the money2. The amount you need3. Your marketing plans4. Your pricing formula5. Your starting budget6. Your cash flow forecast for the next three years 7. Your audited profit and loss and balance sheets for the last three years. Preparing your business plan A plan is absolutely essential.  Not only will it help you raise the money you need but it will help you to clarify your ideas and assess the project more objectively. Once you have your ideas on paper it will help you to raise money and permit you to monitor the project once you start. 

• If you are using your plan to raise money the document should be crisp, neat and free from errors, with an attractive cover.
• It should contain all relevant names and addresses including those of your accountant, solicitor and bank.
• It should be well set out, easy to read and written in the third person.
• Make a clear statement outlining the project and its objectives.
• Include the reasons for wishing to raise / borrow the money.
• Give the business history of the firm and the management. Include the date of incorporation (if a limited company) and the qualifications and experience of management and staff.
• Give the budgeted plans for the next three years (If the plan is for expansion the company’s financial position with audited figures for the last three years).
• Describe the product or services your business will be offering. Include photos if appropriate.
• Summarise your market research. Give the size of the market. What competition is there? What advantages do you have over your competitors? The more accurate the figures the better.
• How do you intend to advertise, promote and sell your product and services?
• Name your distributors, suppliers and subcontractors.
• State the type of premises you have or require, with geogra­phical location.
• List the equipment you have or need, and the age of your machinery.
• Describe the vehicles you have or need for transport.
• Do you need planning permission or a license to get started?
   

A Basic pro forma of a business plan should include the following: 

 Financial Plan: OutlineThe following is a basic outline of the main financial reports that should be included in a business plan. There are three types of financial statements essential in business.  1. Profit and loss accounts2. Cash flow forecasts3. Balance sheets. You should seek advice from an accountant to help and advise you during their preparation. 1. Profit and loss account This summarises your income and expenses over a set time and should include the following items:·         Income from sales or services·         Cost of goods or services sold (include the stock you had at the start less the stock at the end).·         Gross profit or gross margin. (This is the difference between your sale profits and the cost of the goods or services.)·         Operating expenses (include all your costs).·         Profit before income taxes·         Income taxes·         Net profit (your actual profit or loss after paying tax).
 2. Cash flow forecast This is a summary of the money you expect to receive and pay out during a set time. Here is an example:     

 3. Balance sheet This is a summary of assets, liabilities and your equity in the business at a specific date. It shows what the business is worth. You can have a great plan and work very hard but if you can’t get backing, if you can’t get money when you need it, you can’t get anywhere.  Good Luck 

Prepared by Gary Hadler, B.Ec, Dip.Ed, MBA.

Principal: ITS Tutorial School. Director: International Tuition Services Ltd 

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