Before any attempt can be made at financial planning, it is essential to identify the capital investment requirements of the business (premises, transport, plant and equipment), other resources required (personnel, raw materials, consumables etc.) and the reasons why they are all needed. The process of identifying and listing them will also assist the potential owner-manager to distinguish between those resources which are desirable and those which are essential. It is surprising how many resources initially perceived as being ‘essential’ suddenly become regarded as luxury items when the full cost is identi- fied, especially if the money needed to buy them has to be borrowed at high interest rates.
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3.1 Inventory of required plant, equipment and materials This is a list of all the necessary machinery, equipment and materials which might be needed to start up the business, including not just essential production equipment, but also the administrative systems (computers, office furniture), ancillary furniture and fittings (burglar alarms, safes, chairs, tables, toilets, fire extinguishers), raw materials, consumables, etc. It is only when the list is complete, and costs have started to be allocated to the various items on the list, that questions start to be asked about the necessity for individual items: ‘Do I really need a Rembrandt on the wall of the executive toilet?’
or, on a more practical level, ‘Does the business really need two computers, or can I make do with one for the first few months?’
Once the list has been compiled costs can be allocated to each item, and a differentiation made between essential items and those that are nice to have if we can afford them. These costs need to be carefully researched with potential suppliers as they must be realistic and accurate in order to feed into the budgetary planning process. Without an accurate basis for calculating expenditure, the whole budgeting process becomes a waste of time as there is no credible or realistic basis against which subse- quent expenditure and performance can be measured.
3.2 Schedule of available resources
Many people who are starting a new business have already had some partial involvement in their trade or activity, and may perhaps possess some of the resources needed to start the busi- ness. For example, if equipment has been progressively acquired whilst working on a part-time basis, the additional resources needed to turn the business into a full-time activity may not be too great. It is important, therefore, to be able to list any resources which are already available, and to put a value on 1111
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these, as they will constitute part of the business owner’s capital.
Bank managers are always reluctant to lend money unless they can see a corresponding investment on the part of the borrower.
Whilst the person setting up the business may not have a lot of spare cash to invest, the possession of equipment, materials, a car or van, or the goodwill of an existing customer base, can form part of their equity in the business, and often a very significant part. Again, it is important for the purpose of the budgetary plan to identify just how much of the cost of neces- sary equipment is already available, as this will reduce the net outflow of cash in the early stages.
3.3 Premises requirements, availability, necessary modifications etc.
Identifying the required premises, and finding and preparing suitable premises, is a major and time-consuming part of setting up a new business. Chapter 12 examines the various alterna- tive forms of acquiring a suitable site, and the various contractual and legal implications involved therein. If anything, this is the aspect of establishing a new business that can have the single biggest impact (usually in terms of delay) on the commence- ment of a new venture, as so many of the factors are beyond the control of the owner, particularly when solicitors and town planners become involved, and more so when they decide to go on holiday, invariably one after the other. Obtaining approval for change of use or for modifications to premises can often add months to the start-up timetable.
3.4 Transport requirements
For any new business, transport is a major item of medium to long-term investment and, so, it is of paramount impor- tance to ensure that any transport which is used or acquired will be both suitable and adequate during the lifetime for which
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it has been purchased. It is no good taking out a four-year hire purchase agreement on a small van if that van is likely to be too small for the needs of the business within twelve to eighteen months. So, not only must we ask the question
‘What do I need right now?’ but also ‘Will the same thing still be suitable in a few months time?’
Finding the right vehicle will involve a number of considera- tions. For example:
● Is it to be used for sales and/or deliveries?
● What physical dimensions are needed or what payload is required?
● Who will drive it? Does the driver need a Heavy Goods or Public Service Licence?
● Will it incur high mileage usage and, if so, what is most economical, petrol or diesel?
● Should I buy a new or second-hand vehicle, and can I really afford a new vehicle?
● How easy is it to load and unload?
● What are the expected maintenance and running costs?
● Does it create the right image for my business?
The answers to these questions will largely determine the choice of suitable transport and the appropriate method of purchase or acquisition. Again, this information will feed into the budgetary plans and cash flow forecasts for the business.
3.5 Personnel requirements
This section will be determined to a great extent by the infor- mation gathered in the skills gap analysis in subsection 2.5 of the business plan; but the skills gap analysis will only identify 1111
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the range of skills in deficit, and not the numbers of individ- uals needed to perform each role. Assessment of the personnel and staffing needs of the business reflects not just the range of skills needed to operate the business, but also the numbers of individuals required to work within the business. There may be a need for one person with supervisory management skills, but several with identical basic production skills to do the same job as each other, under the watchful eye of that supervisor.
The numbers of each type of worker, and the associated costs of employing these must be identified in order to be fed into the budgetary plan.
3.6 Insurance requirements
The precise insurance policy requirements of the business will depend on the type of business which is proposed. As a very minimum, the owners will need to consider public liability insurance; as well as cover for theft or damage to equipment, fixtures and fittings, and possibly stock or goods in transit. If any staff are employed, albeit just a part-time cleaner, it is a legal requirement to take out employer’s liability cover against accident or injury to employees. These and other insurance options are examined in more detail in Chapter 13.