Valuable advice you should read before setting up your business

By Edward Scott, Founder of Ambro Partners

Just as people say there is never a good time to have children, you probably can’t afford to start a company. So you might as well get on with it, right?

There are a couple of approaches you could take here: you could charge in blindly and hope for the best (ignorance is bliss, right?) or you could take the time to prepare for this brave new world – like I wish I had when I started out.

 

It might feel like adding tedious homework to the already stressful task of building something from scratch, but there are a few concepts that, if you can get your head around them early on, can save you a lot of pain and difficulties later on.

In this short guide, I’ll be using my experience both as a consultant and a business founder to shed light on the following areas that are absolutely crucial for new entrants to get right:

1. Learning the ropes before getting started

2. Conducting effective research to make useful predictions

3. Working out how to best focus your sales efforts

4. Dealing with cash flow in the early stages

You can read this guide in order, or just click on the section link to jump to the area that most interests you.

1. Learning the ropes

This is probably the most reliable path to success – build up your experience and your professional network while being employed by someone else. If you view this as an ‘industry apprenticeship’ (i.e. an opportunity to learn the skills you’ll need when you start your own venture rather than just another job) then you will be in a much stronger position when you finally get going.

Getting a job in the industry may not be practical or realistic and there are a few alternatives, but networking is the key to all of them.

Get in touch with the relevant industry body, get to some events and really gain an understanding of where the industry is from, is at and is going.

Internships

Mostly useful for those in the earlier stages in their career, but many companies will offer paid internships for younger people looking to gain their first experience in a particular environment.

I found my internship immensely valuable during university and would definitely encourage anyone to apply for both formal and speculative opportunities. 

Mentoring

This can be immensely difficult to obtain, as the sort of person you need as your mentor will not have any time to mentor you. 

Get out there and network, meet the relevant people and build relationships with them. It’s the only way.

 

Industry courses

This can be a minefield. There are a few good courses in every industry but you’ll need to do your research before committing.

Importantly, beware courses where the tutor offers to become a consultant afterwards.

It is just about possible to enter into a new space, learn as you go and be successful, but you’ll be making it infinitely harder for yourself If you choose this route. If you instead dedicate the time to learn the industry inside out before you begin, you will reap the rewards.

I recently spoke to a successful business-person who wanted to start a brewery – a sector they had no previous experience of. They had decided to start a ‘craft lager’ brewery on the erroneous belief that nothing existed in this space. Their plan was to contract brew 800 litres of beer per batch and use this to build awareness for a tap room.

Had they taken the time to understand the industry better, they would have had a very different idea as to what the space was for a new entrant, and why this was a non-starter as a concept.

2. Conducting effective market research

When I started out, I didn’t believe it was possible to make any realistic projections of future sales, because I didn’t recognise that current and past indicators can be used to predict future customer behaviour.

It turns out that I was a muppet. It’s totally possible to make projections and predictions about your business and, while they will never be 100% accurate, they can be very useful and help you orient your business – as long as your expectations are based on solid facts.

There are three key approaches to conducting market research that will help to make your projections more accurate and reliable:

Gain in-depth market knowledge so you know what is possible.
If you’ve worked in the industry before, then this will be easier. If not then you’ve likely got your work cut out for you (see Section One) and you’ll want to draft in knowledge from someone who does know the industry well.
Understand where you sit in the market and who you are selling to.
Who is your customer? Often, it’s not who you think it is. In my experience I’ve found that people will often opt for the solution that isn’t the best solution for them personally, as a combination of factors (including naivety and placing trust in the wrong people) will convince them to invest poorly.
Work out the scenario(s) for when people will need your products/services
You can do this by finding out how often your target projects crop up in the life cycle of a business and look for indicators as to when such purchases are likely to occur – and when they will first be considered by a business.

For example, a company selling malt mills to brewers would want to dedicate more time approaching new brewhouses being put in to find out if they want to add a malt mill when they can afford it, rather than approaching established brewers who might have already committed to another supplier or already decided such equipment isn’t right for them.

Once you’ve ascertained the state of your market and where you’re likely to fit in, then you can determine when people are likely to need your product or service.

From this you can extrapolate an educated guess on your future sales, as well as your likelihood of winning each potential sale (see Section Three for more on this).

 

3. Focusing your sales efforts

Your sales team is the most important resource in your business. You need to communicate the strengths, weaknesses and goals of your business to your team and always make sure that the lines of communication are open. I have learned the expensive way that sales people who act autonomously (and often arrogantly!) can ruin a relationship and cost you money very quickly.

If you ensure that your sales team clearly understands your business, you will avoid situations like the one I experienced earlier in my career. In this case, a sales person ended up travelling for ten hours for a one-hour meeting from which they emerged with precisely no useful information. Had I briefed them properly, I wouldn’t have hesitated in firing that person; however, in that case the error was also mine.

If you can ensure that your sales team is focused largely on worthwhile targets, rather than shooting blindly into the mist, then the time your team wastes can come down significantly and your income should rise as a result. The key to this is putting in place a structure that allows you to vet potential customers before you start spending money trying to acquire them.

Taking my equipment business, Ambro Systems, as an example: I know Ambro won’t win everything we quote. I also know that we won’t get to quote on all the projects taking place out there. Because of this, I rate all of the opportunities that come in and use this to determine where to expend my efforts, rather than spending all my time living out of my car and travelling 50,000 miles a year.

My methodology for rating incoming enquiries is as follows:

Stage One

Work out the likelihood of the project going ahead

In the relatively recent past (maybe 2015) this was challenging. The first time I spoke to the guys at Beavertown they were super friendly but were point-blank in no position to buy anything large. Ten months later I was meeting them again in their Stour Rd Barrell store, and eighteen months later we were commissioning their canning line.

Nowadays this is easier. The default position is that any position will likely not happen, but every project is worth consideration. To help rationalise this, I use a standard system based on 25% increments to rank how likely I think it is that a potential project will come to fruition depending on reputation of the customer, the certainty of their market position, their prospects and their financial position.

 

This gives enough range to differentiate while giving few enough values that they can easily be sorted. There is little worse than becoming bogged down in inconsequential details while trying to get organised, so really, stick to 10% increments as a minimum, but I prefer 25%. 

Stage Two

Work out the likelihood that you’ll win the business

The poker cliché of ‘play the man, not the cards’ is irritatingly useful here. You can make the best sales pitch ever and, while logically you should then win the job, customers will often make illogical, emotional and sometimes all-out daft decisions.

The rule here is that no project is ever a 100% cert. As before I use 25% increments to help me separate and sort, based primarily on gut feeling. I often have meetings where customers and I are working together to find their best solution – these are the projects we usually win.

Stage Three

Prioritise customers using a simple ranking system

Once this is inputted into my CRM system (you could use Excel if you don’t use a CRM), then I take my projected margin from each project and multiply it by the % likelihood of it taking place and the % likelihood of Ambro winning. This figure is then used to rank customers in order of priority – which is then used to determine the order in which I visit them. I use ‘high’, ‘average’, ‘low’ and ‘none’ – but you could use anything from a traffic light system to a numbering scheme to an interpretive dance. Literally anything is fine, so long as the metric is clear, and it serves to help you employ your time wisely.

If used consistently and using realistic assumptions, then you will be able to focus your sales efforts in the most effective manner, ensure you win more projects and have happier customers at the end of it.

4. Predicting cash flow

It’s fair to say that cash-flow predictions are more an educated guess than a fine science; however, that’s not to say that they aren’t an incredibly valuable tool that all start-ups should engage with. 82% of businesses fail due to a lack of working capital: a huge number, but thoroughly believable when you consider how many businesses fail within their first years of trading. The question is, how best can this be approached? In my experience, dialling in on a few key areas can help rationalise your thinking and make it a more useful exercise for your business.

Fixed business costs

First, work out which of your business costs will remain consistent throughout the fiscal year (i.e. rent, software subscriptions) and work out when these fixed costs will come out of your account.

Tally these for an overall picture of your fixed outgoings.

Real cost of employment

For each role, start off with the cost of your time at market rates (i.e. for what salary would you do the job for someone else?). Take a salesperson who earns £50K a year and has a company car costing £350 per month. Their time then breaks down as follows on an annual basis:

  • £50,000 salary
  • £7,000 National Insurance
  • £1,000 minimum pension payments
  • £4,200 company car expenses


This gives you a total of £62,000 per year.

From this, you can start to work out the daily cost for this employee. Start with the cost per revenue generating day: assuming five weeks of holiday, this means 225 working days a year. Include an inevitable day for admin work each week and you’re down to 180 days.

Divide £62K (annual salary) by 180 (days worked directly on sales) and you get to £334 per day. Add in the fuel, hotel and daily expenses and you end up with £666 per day.

Apply the real cost of employment against cash flow prediction

As an example, Ambro is quoting a CIP set, DAL plant and carbonator in a brewery about 4 ½ hours drive from the office. This necessitates an overnight trip, so it would take 1 ½ days if someone went there and back just for that one meeting.

According to my customer ranking system (see Section Three), the project’s value is £10K, there is a 50% chance of it happening and there is a 50% chance of Ambro winning it. When calculated (value x % likelihood of occurrence x % likelihood of wining), the cash flow prediction for this project is £2,500.

If this salesperson takes five trips to see the customer, then this would cost the business £3,300 (compared to a cash flow predicted profit of £2,500 from the job). This clearly makes no sense from a business point of view and the salesperson would be using their time badly if this happened. However, a rough calculation such as this can help to inform how much time you team should dedicate to a project, and when an opportunity is not worth pursuing further. It also indicates that visits to several customers should be combined to lower the costs attributed to each one.

Income and cashflow

Knowing when you’re likely to be paid is hugely important if you’re going to keep your cashflow stable. My equipment business, Ambro Systems, is the most stupidly unpredictable creature in this respect; as a sales agency, we are typically paid over two years after we first make contact with a customer.

Our workflow tends to go as follows: initial phone call, a face-to-face meeting then a quotation to prep, then another meeting. Then the customer goes quiet while they raise the money, before another meeting leads to a revised quote and – finally – after eighteen months, we receive a confirmed order. From there, you have a four-month lead time, one month for installation and commissioning.

Only then will the principal invoice the customer. The customer, who had been pretending to be best friends so they can get the best price possible, will then refuse to pay until they receive a threatening letter. Their justification? As one muppet said, ‘all suppliers are rich’, so apparently we exist as an unofficial credit line for our customers.

This usually means the principal is paid around a month late. At that point, we are able to invoice and – assuming the principal pays on time – we receive the return on the money we’ve spent, after twenty-seven months.

Your business might not have as convoluted a cashflow as Ambro Systems, but taking the time to learn how your company is paid by customers and the potential bottlenecks will help you to work out when you’re likely to be paid, and help you to manage your outgoings more effectively as a result.

Tally these for an overall picture of your fixed outgoings.

Potential for lost income

Just as not every potential sale will happen, you won’t always receive all of the money you’re owed. Annual corporate insolvencies have been increasing since 2015, so you will need to prepare for some of your customers going under. Ambro Systems has lost a significant amount of money to insolvent customers over the years, as well as to those who seem to be running on fumes.

In 2017 (I think) I had a London-based customer who bought a kegging machine. There was some confusion around the transaction (with fault on both sides) and they simply decided that they weren’t going to pay us for the equipment they’d purchased.

Letters were exchanged, some truly bizarre threats were made and, at one point, the customer admitted that they couldn’t afford the cost of the machine. Simply put, it wasn’t fun. Fast forward eighteen months and we offered a small discount and a six-month payment plan, after which they finally paid up.

Working out the reality of your potential business’s cash flow can be a really tough job. The key to staying motivated during the gruelling task of cashflow projection is realising that it’s just a first step – you can change the model until you find something that works for you.

The takeaway

Learning the ropes before getting started

Get industry and business experience working for someone else before you start your own business. Network yourself silly, read everything you can get your hands on and make sure that you really want to do the job not just be in the industry.

Conducting effective market research to make useful predictions

Look at what happened in the past to judge what will happen in the future. Patterns in customer and market behaviour will always exist, so it’s worth taking the time to look for them.

Working out how to best focus your sales efforts

Understand your business and explain it very clearly to your sales staff. They will help you rate and rank opportunities using the methods I describe in this section.

Dealing with cash flow in the early stages

Map your workflow, be honest with yourself, cynical about how quickly your opportunities turn into customers, and doubly cynical about how quickly they will pay. Hopefully this will leave you pleasantly surprised!

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