Chapter 12

Operating Effectively

In This Chapter

Selecting premises

Opting to make it yourself or buy from outside

Choosing and using suppliers

Deciding on key business advisers

Dealing with cyber security

Although you’ve decided to go into business, it doesn’t necessarily mean that you have to make your own product, carry out every aspect of the business yourself or even work from dedicated premises. The best use of your time may be to outsource the most time-consuming and least valuable aspect of your business. For example, I bet you can’t get a package from Milton Keynes to Penzance in under 24 hours and see change from a £20 note! But a delivery service can.

Whether you buy in most of what you sell, or just components and assemble them yourself, you have to choose between the dozens if not hundreds of suppliers in the market. Price alone is rarely a good enough guide to which supplier to choose. If they can’t deliver on time, price is irrelevant. You may also find it expedient to consider their green credentials and how those fit with yours.

You have to face risks in your business, including those in areas you might not at first consider, such as cybersecurity, and not all of which you want to or are able to shoulder yourself. For these, you have to make choices about insurance types and levels to cover you. Even if you’re a director of your limited company, some of those company risks fall on you and the consequences of getting things wrong can be serious, even catastrophic.

Fortunately, you don’t have to face all these decisions alone. Plenty of advisers are there to help. This chapter looks at the decisions and risks involved in running a business and helps you to choose someone to assist you through the minefield.

Proposing Premises

If you can avoid taking on premises when starting up your business, perhaps by working from home, so much the better. (See ‘Working from home’ in Chapter 3 for more information.) If that’s not an option, read on.

Buying or leasing, the term used for renting a business premises, entails navigating through a number of important and often complex regulations, as well as the practical nuts and bolts of finding, fitting out and settling in to the premises. These regulations go way beyond the scope of the physical premises into areas such as opening hours and health and safety.

The key decisions to make are how much space you need, whether you want to rent or buy and what equipment you need to fit into your premises.

Calculating requirements

The first decision to make is how much space you actually require and what other facilities you need. The space is the easy bit. You can take the steam age route and make cut-out scale models of the various items you need – chairs, desks, tables and so forth – and set them out on scaled drawings of the premises. By a process of trial and error, you should be able to arrive at an arrangement that’s flexible, convenient to work in and meets the needs of customers and staff alike. You can also take the high-tech route and use a software program to save on the scissor work. Try Google’s free program Sketchup (www.sketchup.com), a 3D-modelling software tool that’s easy to learn and simple to use. Alternatively, for around £90 you can buy a package from Smart Draw (www.smartdraw.com/specials/officeplanning.asp); you can try it for free before you buy.

Finding the right premises

As soon as you know where you want to be, how much space you need and any special requirements, you can hit the trail visiting local estate agents, reading the local press and generally keeping your ear to the ground. You can, of course, get someone else to do much of the donkey work for you and put your valuable time to more productive work such as finding customers or raising dosh. Office Planet (www.office-planet.net) and Official Space (www.officialspace.co.uk), for example, provide free office-finding services. You can search through their databases of available properties and create a shortlist of solutions that meet your needs, or simply call an adviser.

If you’re looking for a workshop, warehouse or showroom that doesn’t have to be in the centre of a town, Ashtenne (www.ashtenne-online.co.uk; an Industrial Fund Unit Trust that owns 500 industrial estates around the UK ranging in size from 500 to 50,000 square feet) and Comproperty (www.comproperty.com) operate online databases for buying, selling or leasing commercial property and businesses in the UK.

For retail premises, Shop Property (www.shopproperty.co.uk) and Daltons Business (www.daltonsbusiness.com) have online databases of shops for sale and rent, searchable by price, size and location throughout the UK.

Renting or owning?

This question is another imponderable one. Buying a premises gives you all sorts of advantages, not least that you can make any alterations you want (if the law allows) without going cap in hand to a landlord, and of course no one can kick you out. On the downside, you have to invest a substantial amount of money upfront and you have to sell up if you outgrow the premises. You of course enjoy any rise in the value of the property, but if you really believe that property is a better bet than investing in your own business, perhaps you should rethink your business proposition.

Renting isn’t without its problems, however. You have to take on the property for a number of years, and even if you sublet with the landlord’s permission, you’re liable for rent for the full period should the person you sublet to default. Rents are reviewed, almost invariably upwards, every three to seven years. You’re expected to keep the property in good repair and return it to the landlord at the end of the lease period in the condition it was in at the outset. That can prove expensive if the landlord doesn’t share your opinion that any changes you’ve made constitute an improvement.

Net Lawman (www.netlawman.co.uk/ia/business-property-lease) provides free advice and information to both landlords and tenants about business leases. Also, the Department for Communities and Local Government website has a guide to the law governing commercial property leases (www.gov.uk/government/publications/renewing-and-ending-business-leases-a-guide-for-tenants-and-landlords).

Sorting out equipment

After you’ve found the right premises, you need to furnish them. A number of items such as furniture, shelving, filing and computing equipment are common to many types of business. Some require more specialised items, including cookers, commercial printers and machine tools. Only in the most exceptional cases should a start-up business buy new equipment. Aside from the basic economics – new may cost two to three times as much as used – until you get trading, you’ve no real idea of what you actually need.

The following are useful sites, apart from the ubiquitous eBay, on which to search out second-hand business equipment:

• Auction Guide (www.auctionguide.com)
• Greasy Machines (www.greasymachines.com)
• MM Börse Online (www.gebrauchtmaschinen.de/en/1284) for used machines
• Office Furniture Desks and Chairs (www.officefurnituredesksandchairs.co.uk)

Searching for suppliers of new products is best done using a business-to-business directory, such as those provided by Business Magnet (www.businessmagnet.co.uk), Kelly Search (www.kellysearch.co.uk) and Kompass (http://gb.kompass.com), which between them have global databases of over 2 million industrial and commercial companies in 200 countries, listing over 200,000 product categories. You can search by category, country and brand name.

Taking the Make-or-Buy Decision

If your business involves making or constructing products, you should address the issue of whether to make the product yourself or to buy it, ready to sell or as components for assembly.

Making it yourself – pros and cons

If you decide to make the whole of your product yourself, or at least a major part of it, you need to decide exactly what plant and equipment you need and how many pieces you can produce at what rate. Then you have to consider such factors as what engineering support, if any, you need and how to monitor and control quality.

The great advantage of manufacturing your product yourself is that you have control over every aspect of the business and its products. You can, in theory at least, step up production to meet extra demand, make minor modifications to a product to meet a customer’s particular needs and have the resources in-house to develop prototypes of new products to respond to changing market conditions.

However, some possible disadvantages of making products yourself in a start-up business are

• The large outlay of money needed from day one
• The deflection of management time, mostly your own, to looking inwards at processes rather than outwards at the market place
• Established manufacturers being better and cheaper than you are at various elements of the production process – after all, they’ve been at it longer than you and have the benefit of being farther up the learning curve and farther down the cost curve than any start-up can realistically expect to be

Outsourcing – a low investment option

Outsourcing, contracting out the production of your product or the supply of your service, has become a buzzword. Thousands of articles and hundreds of books have been written on the subject and you can attend countless related seminars. An Internet search on outsourcing brings up more links than you can ever hope to handle.

Outsourcing work means that you don’t always have to take on premises big enough to meet your peak requirements, as this story shows. Lean and mean were key watchwords for Nick Jenkins, the Cranfield MBA founder of Moonpig, the online greetings cards business. Capacity proved problematic in the early years because of the ebb and flow of Moonpig’s business. The business typically sold up to 15,000 cards a day in the run-up to Christmas, for example, but at other times of the year it sold only between 1,500 and 2,000 cards a day. So Nick had to be flexible and creative when it came to office space. At Moonpig’s busiest times, when its office was near capacity with people stuffing envelopes, many other employees worked from home to free up desk space. This outsourcing strategy clearly worked. Moonpig now accounts for over 90 per cent of the online greetings card market and sells more than 10 million cards a year (which, if laid out end to end, would stretch from London to Moscow!). In July 2011 the company was bought out by PhotoBox, a digital photo service provider, for £120 million.

One way to set the boundaries for outsourcing is to decide what you’re good at, and then outsource everything else. In other words, focus your company on your core competency, and ‘stick to the knitting’. That logic is sound in theory, and to a certain degree in practice, but like everything else you can take it too far. The key is to understand your business and its goals and decide how outsourcing can help you attain them.

Some things are central to your business and you shouldn’t outsource them, at least at the outset. You need to keep an eye (your eye!) on such things until you have them fully under control. These things include cash-flow management and most aspects of customer relations. Later on you may consider, for example, outsourcing collecting cash from customers to an invoice discounter or factoring service (which I talk about in Chapter 8), which may have better processes in place to handle larger volumes of invoices than you can afford.

Some tasks make sense to outsource initially and bring them in-house later. If you plan to offer a product or service that you’re not expert at, you may benefit from contracting out this core function, at least until you gain confidence and expertise. For example, if you plan to start an upmarket soup kitchen but aren’t experienced at making soup, you can turn to an established soup chef to cook for you. The outside expert charges you a premium, but for that you get significant value – the contractor understands your requirements, produces the product and delivers it to your site with little risk to you. If the quality is wrong, you send it back. If you need more product, you order it. You don’t have to wait for your new equipment to arrive before you can step up production.

Setting quality standards

Quality may well be, like beauty, in the eye of the beholder, but you’re wise to set clear standards that you expect every aspect of your end product or service to conform to. You need to set these standards whether you make in-house or outsource.

A number of well-regarded quality standards may help you monitor and control your quality. The BS EN ISO 9000 series provides perhaps the best-known standards. They can ensure that your operating procedure delivers a consistent and acceptable standard of products or services. If you’re supplying to large firms, they may insist on your meeting one of these quality standards, or on auditing your premises to satisfy themselves. The British Standards Institute (www.bsigroup.com) can provide details of quality standards.

A number of commercial organisations provide user-friendly guidelines and systems to help you reach the necessary standard. Searching the Web using keywords such as ‘Quality standards’ or ‘Measurement’ brings up some useful sites.

Choosing a Supplier

Selecting the wrong supplier for your business can be a stressful and expensive experience. This section offers pointers on how to find a supplier and make sure that your supplier can meet your business needs. (Chapter 4 talks about similar issues, so you may want to consult that chapter too.)

Look for value in the service a supplier offers rather than just the price you pay. Here are the key questions you should ask about any prospective suppliers to your business:

• Do they offer a guaranteed level of service?
• Do they have a strong business track record and evidence of financial stability? Check out their accounts at Companies House (www.companieshouse.gov.uk).
• Do they have clients in your business sector and local area?
• Can they provide you with client references and impartial evidence of their quality? You should check out references to make sure that suppliers are reliable and can meet deadlines.
• Can they meet rushed deliveries in case of emergency?
• What level of after-sales support do they provide?
• Do they offer value for money when compared to competitive services?
• Do you think that you can enjoy working with them? If so, the relationship is going to be more productive.

Thomas’s Register (www.thomasnet.com), Kelly’s (www.kelly.co.uk) and Kompass (http://gb.kompass.com) between them have details on over 1.6 million British companies and hundreds of thousands of US and Canadian manufacturers, covering 23 million key products and 744,000 trade and brand names. If someone makes a particular product, you can find their details in one of these directories.

Some free search facilities are available online. Your local business library also holds hard copies of directories and may even have Internet access to all the key data you’ll ever need on suppliers.

Evaluating trading terms

Buying is the mirror image of selling. Remember that as you negotiate with suppliers, who are essentially selling their services. Even if they have no deliberate intention to mislead, you may be left thinking that a supplier isn’t committed to doing what you want in the way you want it. So get any agreement in writing.

The starting point in establishing trading terms is to make sure that suppliers can actually do what you want and what they claim to be able to do. You do so by checking them out and taking up references.

The next crunch point is price. As a small business, you may feel you’re fairly short on buying power. That may be true, but room for negotiation always exists. All suppliers want more customers and sometimes they want them badly enough to shift on price.

If you do your research by contacting several suppliers so that you’ve a good idea of the price parameters before you talk seriously to any supplier, set yourself a target discount price and start negotiating 10 per cent or so below that. In any negotiation you may well have to give ground, so if you start at your target price you end up paying more.

The supplier’s opening claim is likely to be that it never negotiates on price. Don’t be deterred. Many ways exist to get your costs down without changing the headline price. Here are a few examples:

• Allowing a certain percentage of free product, along the line of a free bottle of wine with every half case, can nudge the price down by15 per cent.
• Agreeing to hold stock in the supplier’s warehouse saves you from the need to rent your own warehouse.
• Benefiting from an extra 30 days’ credit eases your cash flow and may be the difference between growing your young business and standing still.

You need to examine all the contract terms, such as delivery, payment terms, risk and ownership (the point at which title to the goods passes from the maker to you), warranties and guarantees, termination, arbitration rules if you fall out and the governing law in dealings with overseas suppliers. These issues are the same ones you deal with when you set your own terms of trade, so turn to Chapter 5 for a detailed review.

Building a relationship

To ensure that you handle any problems you have with your suppliers effectively, you need to build relationships with them. That means talking to them and keeping them informed of your plans and intentions. If you’re planning a sales drive, new price list or other similar activity, let suppliers know so that they can anticipate the possible impact on them. Keeping them informed doesn’t commit you to buying extra product, or indeed any product beyond what you’ve contracted for, but it does make your suppliers feel part of the value chain between you and your customers. By involving suppliers, you’re indirectly encouraging them to commit to helping you meet your goals.

Many businesspeople pay too much for the goods or services they purchase, which shows up as lower gross margins and poorer performance than the competition. Many of these people don’t raise the issue with their supplier but instead start looking elsewhere for an alternative source. Don’t make this mistake. More often than not, your supplier will prefers to discuss the terms of your arrangement than lose your business. In many cases, you both end up with a better deal than before.

Buying online

Buying online has a range of important benefits for a small firm. Big companies have buying departments whose job is to find the best suppliers in the world with the most competitive prices and trading terms. A small firm can achieve much the same at a fraction of the cost by buying online – doing so can lower costs, save scarce management time and get supplies just in time, hence speeding up cash flow and reducing stock space, along with many other benefits.

The range of goods and services that you can buy online is vast and getting larger. As well as office supplies you can buy computer equipment, software, motor vehicles, machine tools, vending equipment, insurance, hotel accommodation, airline tickets, business education, building materials, tractors, work clothing and cleaning equipment, to name but a few.

You can use several methods to buy business supplies online. I explain the most useful methods in the following sections.

Joining an e-buying group

Online buying groups go by various names, including trading hubs, e-marketplaces, online communities, aggregators and cost reducers.

Buying in this way allows you to collect information from potential vendors quickly and easily. These online markets gather multiple suppliers in one place so that you can comparison shop without leaving your office or picking up the phone. For example, if you need to buy toner cartridges for your office laser printer, you can go to an online marketplace and search the catalogues of multiple office supplies vendors, buying from the one that offers the best deal. You can also use the same method for bigger-ticket items such as office furniture or photocopiers. No more calling a handful of potential suppliers, sitting through sales presentations and negotiating prices. Comparison shopping saves you time for more valuable business activities and gets you a better rate.

Buying Groups (www.buyinggroups.co.uk) offers an online guide to British buying groups and purchasing consortia. Also, Enrich (http://enrich.com/what-we-do/procurement-in-a-box) offers a service to facilitate collaboration with other organisations to leverage purchasing volumes and so secure more competitive prices and terms.

Going in for auctions

You can buy supplies online through online auctions. The advantage is that you pay only as much as you’re willing to. The disadvantage is that you may have to wait for the right deal to come up.

Auctions are a great way to significantly reduce the funds you need to purchase items on your business wish list – items you want now or need eventually but that aren’t a current necessity. (See ‘Sorting out equipment’, earlier in this chapter.)

Bartering online

You can avoid using hard cash by taking advantage of online barter exchanges. These e-exchanges let you trade your company’s products and services for those of other businesses. You can swap ad space for accounting services, or consulting for computers. For start-ups or cash-strapped companies, barter can be an effective way to get products or services you may otherwise be unable to afford. An organisation that can help you get started with bartering is Bartercard (www.bartercard.co.uk).

Minimising Risk and Assessing Liability

As the saying goes, no pain, no gain. Some of the pain is routine and you can allow for it in the normal course of events. Employees come and go, you have to pay suppliers, you have to move into and out of premises. But some events are less easy to predict and can have serious if not disastrous consequences for your business. What happens if the warehouse burns down or your pizzas send a few customers to hospital?

You can’t be expected to know that such things will happen ahead of time, but you can be reasonably sure that something will happen sometime. The laws of probability point to it and the law of averages gives you a basis for estimating your chances. You have to be prepared to deal with the unexpected, which is what this section helps you do.

Insurance forms a guarantee against loss. You must weigh up to what extent your business assets are exposed to risk and what effect a particular event may have on the business if it occurs.

One simple way to assess risk is to get an insurance quote to cover the risk. Insuring against an earthquake in London is cheap, but the same cover in Istanbul costs a significant sum, which tells you a lot.

Insurance is an overhead, producing no benefit until a calamity occurs. How much insurance to carry is therefore a commercial decision, and although the temptation exists to minimise cover, you should resist it. You must carry some insurance cover, by employment law or as an obligation that a mortgager imposes.

Establish your insurance needs by discussing your business plans with an insurance broker. Make sure that you know exactly what insurance you’re buying; and, because insurance is a competitive business, get at least three quotations before making up your mind.

The Association of British Insurers (ABI; www.abi.org.uk) and the British Insurance Brokers’ Association (BIBA; www.biba.org.uk) can put you in touch with a qualified insurance expert.

Protecting your employees

You must carry at least £2 million of liability insurance to meet your legal liabilities for death or bodily injury incurred by an employee during the course of business. In practice, this cover is usually unlimited, with the premiums directly related to your wage bill.

Employer’s liability covers only those accidents in which the employer is held to be legally responsible. You may want to extend this cover to any accident to an employee while on your business, whoever is at fault. You may also have to cover your own financial security, particularly if the business depends on your being fit and well.

Covering yourself against an employee suing

The growing burden of employment legislation facing small firms is forcing more and more businesses to take out legal expense insurance as the risk for being prosecuted for breaking the law rises.

One area of concern to small business owners is the cost of unfair dismissal. The maximum penalty in 2012 was £72,300; however, the average actually paid out was less than £5,000 for each successful case. Trade unions represented 5,500 claimants (down from 10,000 in 2010/11), and lawyers represented 72,600 (down from 142,700 in 2010/11). An additional 34,900 claimants represented themselves (down from 40,400 in 2010/11).

The Job Rights website has an unfair dismissal calculator. (www.jobrights.co.uk/unfair-dismissal-calculator.htm). Just put in age, years of service, pay and a number of other factors, including how long it maytake for the person to get another job, and – hey presto! – a number appears. The figure may not match the actual bill when it comes in, because the law is an uncertain arena. But it gives you something to work with from a budgeting perspective.

The remedy for the small firm without its own human resources department to keep it operating clearly within legal boundaries and a legal department to fend off any legal threats is to take out legal expenses insurance. Firms that sign up for this type of insurance can expect the insurance company to pay not only any fines and awards they incur but also their costs associated with defending themselves against allegations.

Protecting assets

Obviously, you need to insure your business premises, plant and equipment. However, you can choose between a couple of ways to do that:

• Reinstatement provides for full replacement cost.
• Indemnity meets only the current market value of your asset.

You also have to consider related costs and coverage. For example, who pays for removing debris? Who pays the architect to design the structure if you have to rebuild? Who reimburses employees for any damaged or destroyed personal effects? And potentially the most expensive of all: who covers the cost of making sure that a replacement building meets current, possibly more stringent and more expensive, standards?

The small print of your insurance policy covers these factors, so if they matter to your business, check them out.

From raw materials through to finished goods, stock is as exposed as your buildings and plant in the event of hazards such as fire and theft. Theft from commercial property runs to hundreds of millions of pounds per annum. When you’re in business, you can expect threats from within and without. You can take out a fidelity guarantee to protect you from fraud or dishonesty on the part of key employees. You can also take out normal theft cover to protect your business premises and their contents.

Covering loss of profits

Meeting the replacement costs of buildings, plant, equipment and stock doesn’t compensate you for the loss of business and profit arising out of a fire or other disaster. Your overheads, employees’ wages and so on may have to continue during the period of interruption. You may incur expenses such as getting subcontracted work done. Insurance for consequential loss, as this type of insurance is known, is intended to restore your business’s finances to the position they were in before the interruption occurred.

Goods in transit

Until your goods reach your customers and they accept them, the goods are still at your risk. You may need to protect yourself from loss or damage in transit.

Protecting yourself

Anyone who puts a substantial amount of money into your business – a bank or a venture capitalist, for example – may require you to have key man insurance. This type of insurance provides a substantial cash cushion in the event of your death or incapacity – you being the key man (even if you’re a woman) on whom the business’s success depends.

Key man insurance is particularly important in small and new firms where one person is disproportionately vital in the early stages. In a partnership, your partners may also consider this a prudent protection.

Guaranteeing goods and services

As well as your own specifications confirming how your products or services perform, you may have legal obligations under the Consumer Protection Act, which sets out safety rules and prohibits the sale of unsafe goods, and the Sale of Goods Acts, which govern your contractual relationship with your customer. In addition, the common-law rules of negligence apply to business dealings.

If you’re a principal in a partnership with unlimited liability, a lawsuit concerning product liability is quite likely to bankrupt you. Even if you carry out the business through a limited company, although the directors may escape personal bankruptcy, the company doesn’t. If you believe that real risks are associated with your product, then you need to consider taking out product liability insurance.

If your business involves foodstuffs, you must also pay close attention to the stringent hygiene regulations that now encompass all food manufacture, preparation and handling. If you’ve thoroughly examined and identified all the hazard points yet something unforeseen goes wrong, you can claim the defence of ‘due diligence’, insofar as you’ve done everything you could reasonably have been expected to do. Trading Standards (www.tradingstandards.gov.uk) and environmental health officers based in your local government office are there to help and advise you in a free consultative capacity.

Producers or importers of certain types of goods face obligations under both the Consumer Protection Act 1987 and the Sale of Goods Act 1979. Importers can be sued for defects; they can’t disclaim liability simply because they haven’t been involved in manufacture.

The Office of Fair Trading has produced a no-nonsense guide to the sale of goods legislation. Download a copy at www.oft.gov.uk/shared_oft/738369/738375/OFT002_SOGA_explained.pdf. Here are other liabilities you should consider taking insurance cover against:

• Public liability: A legal liability to pay damages for bodily injury, illness or disease contracted by any other person, other than employees, or loss of or damage to their property caused by the insured.
• Professional indemnity: Provides protection against any legal action by clients who believe they received bad or negligent services, and incurred a loss as a result. Most professional companies have professional indemnity cover – in some industries this cover is compulsory. Anyone who supplies advice or services such as consultancy should consider professional indemnity insurance.

The main points of liability law in the UK are as follows:

• Don’t make claims such as, ‘So simple a child could understand.’ You’re laying yourself wide open to rebuttal.
• Instructions should be crystal clear both on the packet and on the article if possible.
• Textiles must carry fibre content, labelling and washing instructions.
• Because the Acts cover the European Union, if you’re exporting to another country in the Union you must double-check translations. It can now happen, for example, that a German person sues you as manufacturer in a German court for goods exported to Germany that have a product defect.
• You must keep records for ten years and be ready to institute a product recall operation if necessary.

Dissecting Directors

If you decide to trade as a limited liability company (see Chapter 5), then in all probability you have to become a director of the business. You may be the only director, or you may be one of several, but as well as the status you have responsibilities.

Here are a few of a director’s duties, responsibilities and potential liabilities:

• To act in good faith in the interests of the company; this duty includes carrying out duties diligently and honestly
• Not to carry on the business of the company with intent to defraud creditors or for any fraudulent purpose
• Not knowingly to allow the company to trade while insolvent (‘wrongful trading’); directors who do so may have to pay for the debts incurred by the company while insolvent
• Not to deceive shareholders
• To have regard for the interests of employees in general
• To comply with the requirements of the Companies Acts, such as providing what’s needed in accounting records or filing accounts

In practice, a director’s general responsibilities are much the same as those for a sole trader or partner (outlined in Chapter 5). By forming a company, you can separate your own assets from the business assets (in theory at any rate, unless they’re covered by your personal guarantee). However, a director also has to cope with more technical and detailed requirements; for example, sending your accounts to Companies House. More onerous than just signing them, a director is expected and required in law to understand the significance of the balance sheet and profit and loss account and the key performance ratios.

You can insure directors’ risks using directors’ insurance, which covers negligent performance of duties and breach of the Companies Acts – particularly the Insolvency Act, which can hold directors personally liable to a company’s creditors. The company bears the cost of the insurance because the directors are acting on its behalf.

The most dangerous areas of a director’s responsibilities are ones that can get you disqualified. In summary, the following are areas to avoid at all costs:

• Trading while insolvent occurs when your liabilities exceed your assets. At this point the shareholders’ equity in the business has effectively ceased to exist, which puts directors personally at risk. Directors owe a duty of care to creditors – not shareholders. If you find yourself even approaching this area, you need the prompt advice of an insolvency practitioner. Directors who act properly aren’t penalised, and live to fight another day.
• Wrongful trading can apply if, after a company goes into insolvent liquidation, the liquidator believes that the directors ought to have concluded earlier that the company had no realistic chance of survival. In these circumstances the courts can make directors personally liable for the company’s debts.
• Fraudulent trading is rather more serious than wrongful trading. Here the proposition is that the director(s) were knowingly party to fraud on their creditors. The full shelter of limited liability can be removed in these circumstances.

Former directors of insolvent companies can be banned from holding office as a company director for periods of up to 15 years. Fraud, fraudulent trading, wrongful trading or a failure to comply with company law may result in disqualification.

If you’re concerned about anyone you’re going to do business with and believe they are or have been a company director, you can check in the Disqualified Directors Register on the Companies House website (http://wck2.companieshouse.gov.uk//dirsec).

Finding and Choosing Business Advisers

You need lots of help to get started in business, and even more when you’re successful – and this help can come from accountants, banks, lawyers and management consultants, as well as possibly tax consultants, advertising and public relations consultants, technology and IT advisers, and so on. The rules and tips in the following sections should steer you through dealing with most situations involving choosing and using outside advisers.

Tallying up an accountant

Keeping your financial affairs in good order is the key to staying legal and winning any disputes. A good accountant inside or outside your company can keep you on track. A bad accountant is in the ideal position to defraud you at worst, or to derail you through negligence or incompetence.

What attributes should you look for and how can you find the right accountant for your business? Here are the key steps to choosing a good accountant:

• Check that the accountant is a member of one of the recognised accounting bodies such as the Chartered Institute of Management Accountants (www.cimaglobal.com) or the Institute of Chartered Accountants in England and Wales (www.icaew.com).
• Have a clear idea of what services you require. You need to consider how complete your bookkeeping records are likely to be, whether you need your value added tax (VAT) returns completed or budgets and cash-flow forecasts prepared and updated, as well as whether you require an annual audit.
• Clarify the charges scale at the outset. Spending a little more on bookkeeping, both staff and systems, may make more sense than leaving it all to a much higher-charging qualified accountant.
• Use personal recommendations from respected fellow businesspeople, particularly fellow clients of the accountant you’re considering. Pay rather less attention to the recommendation of bankers, government agencies or family and friends, without totally ignoring their advice.
• Take references from the accountant’s clients as well as from the person who recommended the accountant. They may just get on well – they may even be related!
• Find out what back-up the accountant has for both systems and people. The tax authorities aren’t sympathetic if you’re late with your records, whatever the reason. It would be doubly annoying to be fined for someone else’s tardiness.
• See at least three accountants before making your choice, ensuring that they deal with companies of your size and a bit bigger – not so much bigger that they’ve no relevant advice and help to offer, but big enough for you to have room for growth without having to change accountants too quickly.
• Find out which other companies the accountant acts for. You don’t want the accountant to be so busy she can’t service your needs properly, or to be working for potential competitors.
• Make the accounting appointment for a trial period only, and set a specific task to see how the accountant gets on.
• Give the accountant the latest accounts of your business and ask for her comments based on her analysis of the figures. You can quickly see whether she’s grasped the basics of your financial position.

Investing in a bank

You may wonder why I list selecting a bank in a section covering choosing business advisers. The answer, crazy as it may seem, is that your banker is almost invariably the first person you turn to when the chips are down. You may not find this answer so surprising when you think about it. After all, most big business problems turn on money, and bankers are the people who turn the money on.

Go for the wrong bank and you can lose more than your overdraft. You may lose the chance to acquire a free, or at least nearly free, business adviser.

Here are the top ten questions to ask before taking on a bank manager:

• How quickly can you make decisions about lending? Anything longer than ten days is too long.
• What rate of interest do you charge? Around 2 or 3 per cent above the Bank of England base rate is fairly normal. Above 4 per cent is on the high side.
• What factors do you take into consideration in arriving at that rate? If the bank proposes a high rate of interest, say 4 per cent above the Bank of England base rate or higher, then you need to know why. It may be that all the bank is asking for is further security for its loan, which you may think worth giving in return for a lower interest rate.
• What other charges are there? For example, does the bank charge for every transaction in and out of an account and if so how much?
• Do you visit your clients and get to know their business? If the bank doesn’t visit, how can it ever get to understand your business in depth?
• Under what circumstances does the bank want a personal guarantee? When the bank is feeling exposed to greater risk than it wants to take, it may ask you to shoulder some of that risk personally. Under the terms of a bank’s loan to your business, it may state that its lending shouldn’t exceed a certain sum. You need to be clear what that sum is.
• What help and advisory services do you have that may be useful to me? Banks often provide advice on export trade, currency dealing, insurance and a range of other related services.
• What’s unique about your banking services that may make me want to use you rather than any other bank? This factor rather depends on what you consider to be valuable. A bank that delivers all its services on the Internet may be attractive to one person and anathema and a turnoff to another.
• How long may it be before my present manager moves on? If the bank routinely moves managers every few years, forming personal relationships may not be particularly valuable.
• Do any situations exist when you’re likely to ask for early repayment of a loan? A bank may insist that if you break any major condition of the loan, such as the overdraft limit or repayment schedule, the whole loan is repayable. You need to find out whether this condition applies, and what sum or event may cause this to happen.

Soliciting for a lawyer

Lawyers or solicitors are people you hope never to have to use and when you do need one you need her yesterday. Even if you don’t appoint a company lawyer, you may well require one for basic stuff if you’re forming a company or setting up a partnership agreement. Follow the same rules as you do for choosing an accountant (refer to ‘Tallying up an accountant’, earlier in this chapter).

The fact is that, in business, one day you’re going to need a lawyer. The complexity of commercial life means that sooner or later you may find yourself initiating or defending legal action. It may be a contract dispute with a customer or supplier, or perhaps the lease on your premises turns out to give you far fewer rights than you hoped. A former employee may claim that you fired her without reason. Or the health and safety inspector may find some aspect of your machinery or working practices less than satisfactory. When things do go wrong, the time and money required to put them right can be an unexpected and unwelcome drain. By doing things right from the start, you can avoid at least some of the most common disputes and cope more easily with catastrophes.

In addition to ensuring that contracts are correctly drawn up, that leases are free from nasty surprises and that you’re following the right health and safety procedures, a solicitor can also advise on choosing the best structure for your company, on protecting your intellectual property and on how to go about raising money.

It makes sense to see your solicitor before your problems arise and find out what she can do for you, or, at least, to make yourself conversant with the relevant laws. Taking timely action on legal issues may help you gain an advantage over competitors and almost certainly saves you money in the long run.

If you’re going to see a lawyer, make sure that you’re well prepared. Have all the facts to hand and know what you want help with.

Lawyers For Your Business (www.lawsociety.org.uk/for-the-public/common-legal-issues/setting-up-business) represents some 1,400 firms of solicitors in England and Wales that have come together to help ensure that all businesses, especially the smaller owner-managed ones, get access to sound legal advice whenever they need it.

Managing a consultant

If you’re facing a new major problem in which you have no expertise, particularly a problem you don’t expect to experience again, then hiring a consultant is an option worth considering. For example, if you’re moving premises, changing your computing or accounting system, starting to do business overseas or designing an employee share-ownership scheme, getting the help of someone who’s covered that area several times before and who’s an expert in the field may well make sense.

The time a consultant takes to carry out most tasks a small business may require is likely to be between a fortnight and three months. Anything much longer is too expensive for most small firms and anything much shorter is unlikely to have much of an impact on the business. However, the consultant isn’t working continuously on your project for that time. After an initial meeting, a consultant may do much of the work off site and in chunks of time. Costs vary depending on both the skill of the consultant and the topic covered. A tax consultant, for example, can cost upwards of £450 an hour, and a training consultant may cost the same sum for a day.

Take on a consultant using the same procedures as for a key employee (see Chapter 11). Brief the consultant thoroughly, and don’t expect to dump the problem on the consultant’s doorstep and walk away. Set the consultant a small, measurable part of the task first to see how she performs. Never give the consultant a long-term contract or an open-ended commitment.

You can’t delegate decision making, you can only delegate the analysis of problems and the presentation of options. In the end, you have to choose which way to go. Don’t let consultants implement decisions on their own. The line of responsibility between yourself and your staff needs to be preserved. Seeing someone else giving orders undermines the chain of command. If the consultant’s solution is so complex it needs her expertise to implement, you have the wrong solution.

The Institute of Consulting (www.iconsulting.org.uk) provides guidelines for choosing a consultant as well as a fully searchable database of consultants providing information by region and specialisation.

Taking Cyber Security Seriously

The government ranks hostile attacks upon UK cyber space as a Tier One Priority Risk, just after international terrorism and well ahead of disruption to oil or gas supplies. The government claims that cyber crime costs as much as $1 trillion per year globally, with untold human cost. Implementing cyber security means taking measures to protect websites, networks, computers, programs and data from such attacks, and from damage and theft.

Major British companies are increasingly anxious about the impact of cyber crime on their bottom line and the resilience of the networks upon which commerce relies. But small businesses are also at risk. In 2012, the Federation of Small Businesses published findings of a survey that showed

• Around three in ten members had been a victim of online crime over the last year. Businesses had particularly had issues with virus infections (20 per cent), hacking or electronic intrusions (8 per cent) and system security breach or loss of availability (5 per cent).
• The average annual cost to small businesses of fraud and online crime was just under £4,000 per year.
• In terms of action to minimise online crime, four in five members had acted in some way, including regular updates of virus scanning software (59 per cent), using a firewall (47 per cent) and using spam filtering software (43 per cent). Written formal information security plans and the introduction of information security standards were less common.

The following sections help you understand and protect your business against the risks.

Recognising common types of cyber crime

The following are some of dangers that you should be ready for when working and doing business online:

• Bring your own devices (BYOD): Mobile phones, laptops and tablets used by employees on or away from business premises pose a serious risk because they usually lack the professional security protection used on business-owned hardware.
• Card not present (CNP): Fraudsters steal genuine card details to make a purchase, usually over the phone or Internet, both circumstances where the card isn’t present at the point of sale. This fraud accounts for more than half of all card fraud, but has been diminishing since 2008 with the introduction of MasterCard SecureCode and Verified by Visa.
• Network access control (NAC): With the explosion of devices regularly in use, you can’t really know with certainty who’s accessing your network, where, when and how. Fraudsters can use USB memory sticks, laptops, tablets and smartphones to access your network, so you need a security system that protects your business network.
• Spoofing, phishing and pharming: These dangers are varieties of the same generic fraud whose aim is to lure the recipient into believing she’s dealing with the genuine article – a website or email. Fraudulent emails or web links that appear to be from genuine individuals or companies try to persuade people to reveal personal financial information such as card numbers, account information, PINs or passwords.
• Spyware: This malicious software is designed to penetrate data, applications or operating systems to get through to sensitive data. The software may be a
  • Virus: Computer viruses are software programs that can get into your computer when you operate online. They’re designed to interfere with your computer’s operations in some harmful way, such as diverting traffic to another website, hacking into data or causing computer programmes and systems to fail.
  • Keystroke logger: Sneakily installed on a computer, often by a virus, and used to capture and record a user’s keystrokes when she enters confidential data, such as passwords or bank details, and transmit that to a fraudster’s computer.
  • Trojan: Like the Trojan horse of Greek mythology, it masquerades as a legitimate program but it contains an invisible program that gives hackers a secret way into a computer system to gain access to information or take control in some way.

Adopting preventative measures

Use these measures to ensure that you’re not the victim of cyber crime:

• Employ a blend of security protection solutions, including anti-virus and firewalls, and carry out security updates on all software and hardware regularly. Most security software comes with a program that regularly updates, so keeps abreast of the latest threats. Check at least once a month that updates are taking place.

  A firewall is a cordon around your PC or network, sitting between it and the Internet, designed to prevent unauthorised access to your PC or network and hide your Internet-connected PC from prying online eyes.

• Have a robust password policy, ideally using a combination of letters and numbers, changing at least twice a year. You can use sites such as Password Meter (www.passwordmeter.com) to get a feel for the strength of certain types of password, without, of course, actually putting in the password you’ll be using finally.

  Passwords should be in place at every point where your hardware comes in contact with the Internet, from your servers or wireless connection through to individual areas such as your website transaction areas.

• Have clear, documented security procedures for email, Internet and mobile devices, and train your staff in good security practices.
• Carry out regular security testing on your email systems and website. You may consider doing a live test, as did Tom Cochran, Chief Technical Officer (CTO) at Atlantic Media and former director of new media technologies at the White House. One Friday afternoon he sent a phishing email to his entire company. Within two hours almost half of the company had opened the email, and 58 per cent of those employees had clicked the false malicious link designed to lure them into the hacker’s clutches. Cochran’s phishing experiment got the crucial buy-in of employees who now personally understand the dangers online.

Cloud computer services may open your business up to cyber risks. Along with the benefits of the cloud – ease of access to data and constantly updated software – comes the additional risk of having all your sensitive data away from your in-house computer and your own security systems. Satisfy yourself that your cloud provider is on top of security. Check out Intel’s guide to cloud security planning at www.intel.co.uk/content/www/uk/en/cloud-computing/cloud-security-planning-guide-infographic.html.

Making a Virtue Out of Going Green

Over the past decade, the business community has experienced what amounts to a green revolution. Pressures on business abound: to produce less waste, use less energy, consume less water, encourage employees to walk or cycle to work, or to facilitate working from home for at least part of the time. That this green wave has received the enthusiastic support of business is in large measure because many of these activities are consistent with aggressive long-term cost cutting.

The beauty, from a business perspective, is that this pressure to go green comes from outside and is supported in many cases by legislation. Companies such as 3M, DuPont, IBM and, latterly, Google, Cisco and Microsoft are enthusiastic green cost cutters. They’ve even managed to save billions as a result of measures to reduce waste and energy consumption. Toyota, with innovative hybrids such as the Prius, has created what amounts to new streams of revenue while greatly enhancing the value of its brand.

And the evidence is that employees like working for green businesses. A global study by corporate communications firm Hill & Knowlton revealed that four in every ten MBA students wouldn’t take ‘a great offer’ from a company with a poor environmental reputation. Another survey covering college students found that 92 per cent want to work for a green company.

Under the Climate Change Act, the government has introduced carbon reporting across all businesses. So get to grips with your business’s carbon footprint. Here are some tips for doing so:

• Get greener vehicles. Low-emission vehicles cost less to tax and insure, are fuel efficient and attract fast tax write-down rates, in some cases as much as 100 per cent of the purchase price in the first year.
• Buy from businesses with good green credentials where possible.
• Recycle paper and take measures to reduce paper use in your business, such as by putting technical literature and other material on your website.
• Review your packaging and use only biodegradable materials where possible.
• Improve the insulation of your premises and consider using solar panels or other forms of low-carbon heating.

Look at GreenWise (www.greenwisebusiness.co.uk), an independent daily information service for businesses – large and small – that want to find out more about the opportunities and challenges of moving to a low-carbon economy. And if you’re thinking of basing your business on a green product or service, check out the Carbon Trust’s Entrepreneurs Fast Track service (www.carbontrust.com), which helps early-stage companies make the transition from low-carbon concepts to commercialisation. Often such ventures are high risk in nature and find it difficult to attract finance and managerial talent. As well as expert advice and networking opportunities, the Fast Track service channels £5 million a year into clean-tech ventures with the highest growth potential.