Introduction

As boring as it may seem, legislation governs quite a lot to do with business and you need to be careful to comply with relevant legislation in the jurisdiction within which you operate.

As a basic introduction, Commercial law, also known as business law is a body of law that regulates the conduct of persons, merchants and businesses who are engaged in trade, sales and commerce. Even at the inception of your business there are laws of compliance with regard to incorporation (which vary depending on what legal structure you choose), business registration and tax registration and this then leads into some of the main strands of commercial law, namely: consumer protection, employment law, contract law and intellectual property laws. Whilst you don’t need to be an expert in these areas, it pays to understand some of the basic concepts and to understand that dependent on the country and jurisdiction in which you are looking to set up in, the obligations can range from almost non-existent to very restrictive and onerous.

Business registration, tax and incorporation

One of the first steps on your journey into business would be to register the company within the jurisdiction you choose. Dependent on where this is, there may be rules around the name which you can choose and you will often need to submit a request with the related governmental body for approval. This is designed to ensure that your business name is:

1. Not directly copying the name of another business
2. Not overly similar to an existing business, or designed to confuse or mislead
3. Not offensive

Once registered, this business name can then be linked to the ownership of the company and will ensure the governmental body of the jurisdiction in which your business exists is aware of your operations.

Through this registration process you will also be given a tax identification number which enables your business to be taxed appropriately. Each jurisdiction has different approaches to corporate tax and the treatment will also depend on which business structure you select. It is therefore worth reading into in order to be aware of the basic tax rules in the jurisdiction in which you operate in order to ensure you are in compliance.

If you go down the route of incorporating your company, there will be additional legal requirements to consider and you will need to prepare and submit your articles of incorporation. The articles of incorporation essentially stipulate the set of rules that govern the company as well as providing an overview of the capital and share structure that underpins it. It is strongly recommended that you get the advice of a professional during this stage as a qualified Lawyer will be able to amend generic articles to suit the intricacies of your business and a tax accountant would be able to advise on the optimal structure for tax purposes. Further to this, should your organisation trade shares on a public stock exchange, you should also be aware of the laws governing insider trading.

Commercial Law and Consumer Protection

When operating a business, there will always be some consumer protection legislation that you will need to be aware of that will govern how your company must act in order to be fair and equitable to the customer for your product or service. Such legislation is usually devised by the governmental body overseeing the jurisdiction and can therefore vary a little, but in general the legislation usually governs the following:

• Data Protection and Privacy – Data protection and privacy is a very hot topic in today’s commercial law market with a significant amount of our lives moving online and big data becoming big business. As a result legislation has needed to catch up to regulate the usage of consumer data that is constantly being mined through consumer interaction with online services. It is now law in most countries for organisations to have a privacy policy that clearly discloses how any consumer information that is collected is used. Penalties for not complying with commercial law in the area of privacy and data protection can be significant, so depending on the nature and types of data on customers that you are looking to collect, it may be worth getting legal advice to ensure your privacy policy is sufficient to protect you.
• Consumer product safety – Should you be selling products to customers, then product safety is paramount. Commercial law here can govern areas such as electrical hazards, mechanical hazards and material usage and it really depends on the nature of the product you are producing as to which standards you will need to comply with.
• Food safety – Should you be selling or producing food or beverages for customers, then you will be governed by the specific government’s legislation around food safety. This typically encompasses areas such as quality and safety along with food handling and storage. Typically the governments health authorities tasked with monitoring food safety will have the authority to conduct investigations at your place of business to ensure you are in compliance with applicable law and big penalties and even prosecution can ensue. It also pays to know that in most jurisdictions you will need to acquire a permit in order to be involved in a business which concerns the production and resale of food and beverages and such permits typically require annual renewal.
• Product packaging and labeling – The packaging and labeling for your products needs to be clear and precise and not be misleading to the customer or difficult to find. Packaging will also need to be safe and in the modern era compliant with any environmental legislation.
• Anti-competitive practices such as price fixing and misleading advertisements – A pretty obvious one, but price fixing and uncompetitive practices to exploit a dominant market position can be quite common in certain industries and thus needs to be legislated against in order to support effective competition to drive value for the customer. Misleading or offensive advertisements are also a no go.
• Terms and conditions – I don’t know about you, but as a consumer I am typically quite negligent when I see an organisations terms and conditions. As a busy customer I simply don’t have time to read through pages of complex legal terms governing the business transaction and simply assume they are reasonable so that I can make my purchase and move happily along with my day safe in the knowledge that I haven’t just signed my entire portfolio of assets away by purchasing a Game of Thrones box-set. Fortunately the government knows we as customers don’t have the time, nor the knowledge or even the capacity (I can’t imagine negotiating my individual terms of sale with Amazon) to deal with these terms and they have therefore introduced legislation that governs areas such as returns and unfair contract terms that seek to protect customers.

Tip – When it comes to consumer protection, this protects individual consumers. Business to Business transactions have far less protection as a business is considered to have competency and resource to be able to negotiate their position from a contractual perspective.  

Commercial Law and Employment Law

Employment law governs how you hire, manage and dismiss any employees in your organisation. Again such legislation can vary dependent on the jurisdiction within which you do business, so it is important to read up on the basics using articles from the relevant governmental body in order to ensure you set up employment contracts in a compliant manner.

Employment law and standards is not only different across different jurisdictions, but it is also a body of law that is ever-changing and one body with which your HR department should be well versed in. It is highly recommended that you seek the advice of a professional lawyer before drafting up employment contracts and hiring employees as this will ensure you have the appropriate contractual terms and conditions template in place to govern the behavior of your staff. Without a good contractual template, the terms may be too vague and thus interpreted in a court of law differently to how you had originally envisaged which could spell potential disaster.

Employment law covers a pretty vast area of different regulations, but some of the main topics covered are as follows:

• Maternity and parental leave – This area covers the law regarding the length of maternity and paternity leave along with the rates of pay and rules around the protection of the roles availability to the employee once the period of leave is over
• Vacations with pay – A pretty self explanatory area which covers the amount of paid vacation days that need to be offered to the employee.
• Harassment – Harassment law is becoming more and more significant in the workplace with regulations and policies adapting to eliminate harassment that has become commonplace in certain industries or organisations
• Termination – Termination governs the law around how you must act when looking to terminate an employment contract. You must be careful to be in compliance with the law in this regard in order to avoid any wrongful dismissal cases in future
• Minimum wage and overtime – This governs the pay conditions of your employees and the right to additional pay for any overtime worked. You should have a clear policy around overtime and ensure that the wage/salary offered to the employee in question is clearly documented and agreed between both parties whilst also meeting the minimum value required by law.
• Hours of work – Different jurisdictions will have different rules around the amount of hours an employee can work each week, along with rules around breaks and working on consecutive days.
• Privacy – Employees like customers will need a policy governing their personal and private information which is held by the organisation and be fully aware and accepting of how this information is processed, stored and used.
• Sickness and leaves of absence – There will always be rules around paid sick days and leaves of absence and generally by law a number of paid days will need to be offered
• Non-competition – This is an important clause to protect your business in the event that one of your employees with insider knowledge seeks to leave the organisation for a competitor
• Occupational health and safety – Health and safety has rapidly become a significant area in business and ensuring you offer a safe work environment to your employees is paramount in any circumstances.

Contract Law

Contract Law is probably one of the most synonymous areas with commercial law and is often found at the heart of most legal cases concerning business. This is because contractual documentation governs a lot of the fundamental operations and underpins many of the relationships that a business holds. For example, contracts for sale will cover your business to customer relationship, contracts for supply will govern your supplier relationships and contracts for employment will govern your organisations’ relationship with staff.

So what is a contract?

Contracts can be both written or verbal (although written is always preferable for enforceability) and essentially act as a legally binding agreement between 2 or more parties who intend to exchange goods, services, money or property. For a contract to be legally derived, it must have 4 basic elements:

1. Offer – There must be a promise from one party to enter into a contract on certain terms. For example, offering a personal training service for £30 per hour would be an offer to contract.
2. Acceptance – Once an offer is on the table, it must be accepted by another party to create a contract. For example if somebody accepted the contract above to retrieve 1 hour of personal training, that would create a contract and the party will need to pay £30 and the personal trainer would need to deliver the service. If the party wishes to negotiate the terms, this is known as a counter-offer and is effectively a rejection of the original offer and would then need to be accepted by the other party before a contract could be made.
3. Consideration – This essentially means that a party cannot enforce a contract unless they have given or promised something in return. A court does not look behind the value of consideration even if it is inadequate as it is up to the parties contracting to ensure consideration meets expectation
4. Intention to create legal relations – The parties involved must be intending to create a legally binding agreement for a contract to be created. For example asking a supplier for a quote or putting together an offer that is “subject to contract” would not create a legally binding contractual relationship as it is clear to the courts that the parties had at that stage not entered legal relations.

Once a contract is created between two parties, it becomes legally binding and the relationship of the parties will be governed by the agreed terms. It definitely pays to have these terms in writing as should an issue occur a clear written contract can establish what a breach would be and what remedy the party seeking damages could expect.

In the event one party fails to deliver on their obligations under the contract or otherwise breaks the contract then the party that has been harmed will be able to bring a lawsuit against the party they believe to have broken (breached) the contract. The legal process litigation then determines whether the contract has in fact been breached or whether there are circumstances that mean this is not the case.

In the event of a breach there is often a number of remedies the party that has been harmed can seek to realise including:

• Monetary damages for losses
• Contract rescission
• Equitable remedies such as an injunction
• Business mediation or other alternative dispute resolution methods

Often remedies will be determined within the contractual wording and the degree of remedy will vary with the nature of the breach and the level of damaged caused. In the event that remedies are not determined within the contractual wording, the courts will have to decide on an equitable remedy given the nature of the breach and the extent of loss incurred by the party affected.

It typically pays to consult a legal professional when writing or negotiating a contract, but there are certain elements that should be included:

• Term – You should look to define the length of the contract and define what would happen to the contract following the expiry of the term e.g. would it continue on a rolling monthly basis?
• Termination – You should include clauses around termination including how a party would go about terminating the contract and whether there would be any penalties to do so.
• Scope of work and deliverables – Defining what services, products etc should be provided in the contract in exchange for respective payment is a necessity. This can get especially complex in supplier contracts in which there may be Key performance indicators and related service credits established in order to monitor and manage performance
• Payment and Payment terms – It is necessary to define how the party is expected to pay and whether there is any credit facility in place (e.g. net 30-day payment terms). This section should also define penalties should payments be late and/or discounts as a result of earl payments.
• Liability and Limitations of Liability – Liability is typically a big section in any contract and you would want to ensure you map out exactly what each party would be liable for in the event of an issue as well as the caps on that level of liability
• Change Control – Should you wish to make changes to the contract in future, there should be a fair and structured process for doing so requiring the signature of both parties.
• Confidentiality – In many business relationships there is often situations in which a party is privy to confidential information. Clauses for this need to be designed in order to provide protection against the other party using or selling your confidential information
• Intellectual property – Intellectual property clauses are intended to put safeguards in place to ensure the other party doesn’t use your IP in a manner that you don’t intend (e.g. using it for resale). Clauses concerning IP can also be used to safeguard potential future outputs e.g. if you hired a consultant to work with you in creating a new product, you would want to ensure it was clear as to which party held the rights to the output.
• Data protection – Data protection has been a hot topic for a while with General Data Protection Regulations coming into place in many countries. Essentially this section of a contract should spell out what personal data may be shared under the contract between the two parties, how this will be stored, managed and processed and what if any third parties would have access to it
• Force majeure – A force majeure clause intends to free the parties form liability in the event of an unforeseeable circumstance that would prevent a party from fulfilling its obligations (e.g. an earthquake).

Intellectual Property Law

Intellectual Property Law is designed to protect and enforce the rights of the creators and/or owners of inventions, writing, music, designs or other works. It essentially has 4 main areas:

• Copyright Law – Protects the rights of the creators of art, publishing, entertainment, software etc. The laws essentially protect the owner from their work being copied, presented, displayed or resold without permission
• Patent law – A patent grants protection for a new invention such as a product, design or process and ensures the specifics of how it works cannot be copied. The patent owner then had the right to license, sell, mortgage or assign these rights to use the invention.
• Trade secrets – As above, a business may wish to protect its trade secrets when creating a contractual relationship with another party in order to ensure such secrets cannot be resold or given away to others. For example, contracting with an organisation such as Coca Cola may provide insight into their formula and as such, information which provides such significant competitive advantage would need to be protected and kept confidential

Business insurance

In addition to law, it is also important to take a risk averse approach, not only knowing the legal guidelines, but also retaining the appropriate protections so that in the event there is a case against you, you can avoid bankrupting your company or yourself!

This is where business insurance comes in. Business insurance coverage is designed to protect businesses from losses that may occur during the normal course of business activity and can therefore include a multitude of areas ranging from property damage to employee related risks.  The following are the main types of business insurance:

• Professional liability insurance – This insurance protects against negligence by you or your employees during the course of delivery. This could include mistakes and/or a failure to perform and adequate insurance will vary dependent upon the nature of the business. It pays to look at this from a risk perspective and fully understand what could go wrong (e.g. food poisoning in the case of a restaurant) so that you can insure against that risk.
• Property insurance – Covering property, equipment and inventory in the event of fire, storm or theft.
• Home-based business insurance – Home owners’ insurance does not cover home-based business and a separate insurance policy will be needed to insure the commercial operation.
• Product liability insurance – If your business manufactures a product to sell then product liability insurance is very important to protect against lawsuits should the product cause damages
• Vehicle insurance – Any company vehicles need to be fully insured
• Business interruption insurance – This is a type of insurance that is especially applicable to businesses with a physical location such as retail stores or manufacturing plants. Such insurance compensates a business for lost income during events that cause disruption to the normal course of business.

Sales

Sales can solve quite a lot of business issues, if you are selling, then it shows there is a market for what you are delivering and if the numbers are there then you are a decent way in to running a successful organisation. Obviously sales go hand in hand with other areas of the business which also need to operate efficiently (e.g. Accounts receivable – ensuring your customers are actually paying for what they are buying), but it is important at least that your business is attracting enough of the market to generate sustainable revenue.

Sales Strategy

In regard to sales it is good practice to ensure you have a resolute plan and this should go hand-in-hand with your marketing strategy.

You need to have a solid idea of who you are going to target, how you are going to target them and what sales tactics could be used to attract their attention. This is the same for both a business to business organisation and a business to consumer organisation – it is a necessity to know who your target base is, whether that is a particular customer segment or a specific target vertical, the sales planning process will also help you identify which products and/or services could be targeted at each of your target customer bases in order to maximize sales.

The keys to developing a successful sales strategy are therefore as follows:

1. Identify the right customer

Often when you start a business there will be a disconnect from who you thought was going to buy from you and who is actually buying from you. It’s important to refine that customer profile and verse your sales team on their characteristics, that way they can tailor their approach to target the customers that are more likely to convert from a lead to a sale.

2. Unify Sales and Marketing

In many organisations, the Sales and Marketing functions work in silos, however a unified approach is needed. Feedback loops between the two areas will create a more targeted marketing solution giving the sales team the fuel they need to grow revenue and increase market share.

3. Hire the Right Team

You need to hire the right people that are going to fit with your brand and ethos. Creating a list of qualities in your ideal salesperson and using it during the interview process is a good start when looking for the right individuals. On an ongoing basis the environment should be challenging, but not overwhelming and provide the arsenal of templates, tools and training to keep the sales engine running.

4. Put the right process in place

Defining a sales process will create a structured set of repeatable actions that lead to a sales conversion. Initially you might not have a set definition, but it is important to track your actions and understand what worked, how you initially approached the customer and what steps (free samples, demos, trials, meetings etc) worked to turn that prospect into a paying customer.

5. Refine and adapt your strategy if needed

From your cash flow and financial forecasting you should have a rough idea of the level of sales to break-even and subsequently turn a profit and from such analysis you should set specific and measurable objectives as to where your sales need to be at particular time horizons in order to keep you on track. If sales are not reaching these target levels then you may need to switch up your strategy to ensure the level of growth you had forecast is met or exceeded in order to keep you on a path toward success.

Take care with the use of sales promotions

Often when sales aren’t quite on track companies tend to race for sales promotions and discount periods to boost sales in the short term in order to hit targets, however frequenting such a strategy is typically a recipe for disaster.

Companies who do this on a consistent basis are essentially borrowing against their future, accepting significantly cut margins in the short term to artificially boost sales data, this also causes a requisite increase in spend on inventory to manage against the demand and if the promotion isn’t as successful as initially anticipated then the organisation will have tied up significant capital in needless inventory.

Even if customers do buy at the promotion price, it generally means that they will buy less in future as they are “stocking up” at a discounted price meaning the companies’ sales in future will suffer as a result and they will have sold more in the short term at a cut margin rather than selling consistently at a higher margin over the longer term.

Promotions also have a requisite impact on the purchasing side, as attempting to extrapolate prospective increases in demand is near impossible and generally leads to a company over purchasing and thus being in a situation in which further discounts are required to move excess inventory levels. Companies who get sales promotions right typically stick to very regimented sections of the year e.g. around holidays such as Christmas.

A Focused Offering

Building your product/service range organically is also a necessity from a sales perspective, you want your products and services to have focus and be pushed strategically rather than trying to sell everything and anything.

Smaller concentrated product/service ranges initially can give your business not only focus, but identity, your marketing can be more targeted and your sales department will be able to keep track and push concentrated programs to the market, purchasing will also be able to concentrate its efforts on managing a smaller range of products/services and investing the capital where it needs to be.

A broad wide ranging catalogue or products and/or services can be cumbersome for even the largest organisations, so for a smaller business it is definitely wise to have a small concentrated range to reduce waste and from there build organically.

Human Resources

It’s likely that in the early stages of your idea you won’t need to think too much about human resources as you’ll need to build up a market of paying customers and have exhausted your capacity to deal with any further custom before investing in new employees.

Once you reach that tipping point however, you need to start thinking about Human Resource Management (HRM). HRM deals with your employees, from recruitment and performance management to benefits and payroll by implementing and governing the policies and regulations that govern how your employees should behave, perform and be rewarded. In essence the main areas of HRM are:

• Hiring and firing
• Performance management and employee reviews
• Employee development, motivation and training
• Safety and wellness
• Salary and benefits
• Setting guidelines for communication channels throughout the organisation

Human resource management therefore will have a significant impact on the culture of your organisation and you should think carefully about what staff policies and benefits etc you should put in place in order to be able to attract the right candidates to suit the nature and culture of the business you are running.

Legal documentation and Employee handbooks

Human resource management also has an important protective role to play for the organisation by maintaining paperwork to ensure your organisation is compliant with any related labor laws in the jurisdiction you operate in. In many jurisdictions there are certain rules and standard forms that need to be maintained and updated on a regular basis so it pays to be diligent when considering the volume and types of paperwork that will be required to ensure you comply with the law.

Aside from standard forms to comply with legislation it is also important from an HRM perspective to establish an employee handbook that sets the expectations of a new hire as they enter the business. Employee handbooks vary dependent on the nature of the organisation but can include areas such as the following:

• Code of conduct
• Anti-discrimination policy
• Non-disclosure agreement (if needed)
• Safety and security policies
• Job descriptions
• Organisational chart/ hierarchy
• Compensation and benefits descriptions
• Schedule, vacation, sick time, and leave policy
• Recruitment and hiring policy
• Discipline policy

The handbook essentially provides a foundation for your business from an employee perspective and acts as a guide for a new hire to understand what is expected of them and the rules that govern their activities.

Compliance

All of this documentation not only provides the foundation for your employees and guides them to adhere to the policies and culture of your business, but it also helps with another key factor, compliance. As you can see when we touched on the basics of commercial law there are plenty of legislative acts that your organsation needs to be aware of and abide by. From an HRM perspective the key ones are as follows:

• Anti-discrimination laws
• Wage and hour laws
• Leave laws
• Benefits laws
• Safety laws
• Union laws

So overall when we look at HRM there is a significant amount to cover. There are definitely templates and tools out there to help you on your way in developing something yourself from scratch, however as your organisation grows you may wish to look at employing a full time HR role or alternatively considering an outsourcing solution.

Market Analysis – Tips and tricks to sizing a market

When you begin conducting a market analysis, you would be forgiven for feeling a little lost and not knowing where to start, at its core, market and industry analysis is big business and takes a lot of work, however you can use some simple rules of thumb to garner an idea of the potential size of a market and its makeup.

Do you even need a Market Analysis?

Information that goes into a market analysis often isn’t publicly available and therefore the process of putting together an in depth analysis can be frustrating and time consuming with reports from credible sources costing a fortune. So you may wonder, is it even worth conducting a market analysis?

In short, it is always worth conducting some form of research even if you only intend to be a small business in a particular niche. You don’t need to put together consultant worthy documentation and in depth statistics, but you should at least understand the main competition and a rough estimate of the size of the market and its respective growth rates. Even a very brief analysis will give you insight into the customers in the market, their buying habits and their price sensitivity which is all invaluable information when setting off on your business journey.

More in depth analysis will however be required should you wish to attract external investment and/or if you are looking at a wider market. Investors will want to ensure you understand the market and its growth rates and have done sufficient research to prove that your concept can not only be successful in the short term, but also expand into a growing market and produce above average returns.

What should be included?

Your market analysis needs to consider the key aspects of the landscape within which your business will operate. This can include:

1. The size and growth rates of the market – Understanding the size of the market currently and its projected future growth will provide insight into whether your business is sitting in an attractive market with a viable future. If you find your business is tailored toward a large, but stagnant/declining market, it may not be worth significant investment and perhaps a business fitting into a smaller growing market would be a better venture to invest in.
2. Your target market – A market tends to be made up of a number of different customers, each with different budgets and different requirements. In this section you need to focus in on exactly who you are targeting, what is their budget? And how does your solution solve their problem? Knowing this information will allow you to tailor your marketing and sales strategy and therefore maximise your return. With a target market analysis you should use characteristics such as age, income and location to fully understand who your customer is along with their psychographics such as buying habits and interests. Knowing who exactly your customer is will enable you to understand why your solution is perfect for them and allow you to get the message out there.
3. Competitor analysis – Understanding your competitors is a vital step when setting up a business. It allows you to understand the landscape, their strengths and weaknesses, barriers to entry and your unique selling points. When you first enter a market, the competition is likely to react, especially if you start building a following. You need to understand what separates you from them and how you can keep pushing your concept over theirs should they try to pivot their strategy. Even when you are an established player in a market, knowing your competitors and their innovations is still vital and will ensure you keep up with trends and stay relevant to your customer base.
4. Projections – You will have an idea of the size of the market from research and its prospective growth rate, but it is important to put this information into context. For instance how much of this initial market are you likely to be able to take? How are you going to do it (Marketing/sales strategy)? Make sure to be realistic in this projection and note that entering a market will often come with a competitor reaction.
5. Regulations – The market analysis should also cover regulations and other legal considerations with the market. You will need to understand what these regulations are and how you are going to comply with them. Following that, you will also need to understand the cost of compliance, both initially and ongoing and ensure you have budgeted appropriately for it.

Where can you find information for your Market Analysis?

• Search engines – Simply using a search engine to identify websites that size a market for you is a reasonable first step, however you should be careful as to the credibility of the source. If you can find 3-4 sources that are all saying similar or the same thing and one or more of these is credible such as a large consultancy/accountancy/industry publisher, then you should have a relative amount of confidence as to it’s accuracy.
• Professional publications – The big 4 accounting firms (PWC, KPMG, Deloitte and Ernst and Young) or large consultancy firms often publish articles and reports on certain markets and these would be a reliable source to begin conducting your own analysis. Such reports provide key insights and analysis based on reliable sources of data.
• Competitor annual reports – Often competitors may cite the total value of the market and its respective growth rates in its annual report which you can verify with further research. If not, you can also garner this through other information in the report for example a competitor may stipulate it has 20% market share on revenues of $500m meaning the total value of the market would be estimated at $2.5bn.
• Extrapolating – Knowing the average spend per customer and the volume of customers is also a way to derive an estimated total market value and you can also derive a total potential market value if you consider census data and population growth trends in addition. Whilst this may not give you a completely accurate picture, it can be a good reference point when conducting further research.

Tips and Tricks to measuring Return On Investment

What is Return on Investment?

Return on Investment is a mathematical formula that investors use to evaluate potential investments and their attractiveness in comparison to alternatives ways of using that capital/resource.

Dependent upon the nature of the investment proposal, returns could be more than just a simple profit/cost saving calculation and can stretch to areas such as realising efficiencies, gaining market share and building infrastructure. The calculation therefore is not always as simple as net income divided by the cost of investment and can get a little complicated when there are multiple facets of return versus the cost (e.g. cost efficiencies, additional market share and higher social media traction). However calculating a form of ROI will allow you to ensure you are putting your capital and resource to the best use, on projects that are going to return profits at a rate that is acceptable to you and any of your investors/partners.

How To Calculate Return on Investment

The formula to calculate Return on Investment is as follows:

The answer is then multiplied by 100 in order to express the value as a percentage. Such a percentage can be positive or negative and represents the percentage rate of return of a particular investment proposal.

With return on investment, we ideally want this number to be as high as possible, or at least greater than or equal to a risk free (bond or fixed savings account) investment rate. A negative percentage indicates that the investment, from a financial perspective, will lose money and consequently it will be unlikely to be put forward unless it held some qualitative aspects that were not picked up in a purely financial ratio.

Comparing ROI rates

We would typically use Return on Investment to consider a number of alternative projects/investments in order to decipher which one was the most attractive from a financial return perspective. For example, let us consider two investments: Investment A and Investment B.

1. Investment A – Has a cost of £8,000 and returns £10,000 meaning our return would be £2.000
2. Investment B – Has a cost of £500 and returns £900 meaning our return would be £400

Looking at the figures purely from a return perspective, we would believe that Investment A was the most attractive as it returns 5x that of Investment B. However our ROI calculation is designed to express this as a percentage in order to give us an idea of the most efficient use of investment, so if we apply our formula to the above two scenarios:

1. Investment A = (£10,000-£8,000)/£8,000 = 25%
2. Investment B = (£900-£500)/£500 = 80%

From an ROI perspective therefore, investment B is actually more attractive with an 80% return versus investment A which only returns 25%.

In reality both investments are positive percentages, so both will generate a financial return on the investment and the organisation may therefore move forward with both. However, if the organisation had multiple projects in the pipeline and a finite budget then a large £10,000 outlay for only a 25% return may not be deemed attractive amid smaller projects with higher percentage return.

Taking into account the Time Horizon

In the event you are comparing projects with different time horizons you will need to adjust the calculated percentage return by the time that the investment takes to realize. For example If Investment X returns 10% in one year and Investment Y returns 25% in 2 years in order to accurately compare the two you need to adjust Investment Y to the same time horizon as Investment X.

We do this by using the following formula to calculate the average annual rate of return:

Where:

X= Annualized rate of return

T = Time horizon

So for investment Y the formula is:

(1+X)^2 -1 = 25%

Solving for X

(1+X)^2 = 1.25

1+X = 1.118

X = 0.118 or 11.8%.

Investment Y therefore has an annualized rate of return of 11.8% in comparison to Investment X with 10%.

See, all that Algebra at school came in useful after all!

Return On Investment – Marketing

Measuring Return on Investment concerning marketing is a notoriously difficult concept and often the competing views of finance and marketing clash within an organisation. Marketing and promotion is a big investment and with such an extensive outlay you will need to track and measure exactly what you are getting for your money.

At a basic level you should measure the return on investment, which in its simplest form can be calculated as follows:

As with any ROI calculation you want to be looking at a positive number and ideally as high as possible, this would then indicate that the investment is worthwhile.

However despite the equation looking relatively straightforward the reality of a calculation is difficult. Whilst the cost of the marketing investment can be calculated relatively easily (and should include staff time and resource) the reality of measuring its return is a little more difficult. This is because tying a particular purchase to a particular marketing activity is almost impossible, many organisations attempt to do this through targeted questions at the time of purchase (the where did you hear about us question), but these could be inaccurate or usually left blank as the customer is really just interested in completing the purchase as oppose to filling in any sort of questionnaire.

The reality therefore is that you need to set objectives for your marketing spend and tie them to a specific time horizon. For example if the goal of your promotion is to gain 20,000 more visitors to your website within 3 months then this becomes something you can track in order to measure success. So when putting together a marketing strategy you should have a specific set of objectives, all tied to realistic time horizons, which you can measure in order to ensure that your marketing efforts are returning to the level you expect.

Business Plan

A failure to plan is a plan to fail. As the old adage goes, we’ve all heard it and of course the countless variations which basically stipulate the same. You are destined to lose/fail without a plan.

On the contrary this isn’t strictly true. Ideas without resolute plans have a gone on to be a great success. However such ideas have often had a significant amount of luck underpinning their journey and may well have made it to their destination faster should a plan have been in place.

Typically however the hypothesis holds and many entrepreneurs/businesses fail to plan their ideas comprehensively enough. Missing key pieces in the business puzzle and ultimately ending with an unsuccessful outcome.

This section is designed to guide you through the key areas of a business plan, including:

1. What should be included and the key information required in each area
2. The key uses of the business plan
3. Tips on displaying information clearly and concisely

What should be included in your Business Plan?

Your business plan is a key aspect in not only fully exploring your idea and the various potential opportunities and pitfalls, but it is also vital in attracting any outside investment that may be required. From that regard your business plan needs to be concise, well-structured and easy to follow. Along with having the necessary level of detail for a would-be investor to make an informed decision.

Executive Summary

Those versed in the art of writing an executive summary will be familiar with the format and the typical trick of always writing this section last. The executive summary provides a concise overview of all of the key material. From the perspective of a business plan therefore the executive summary should cover the key details and conclusions. Which should include conclusions relating to the opportunity, the market, the competitive landscape, the strategy, the risks and the financial forecasts.

Relevant skills and experience

Typically when you come across an idea it will be within a field that you are familiar with. Therefore it is important to try and demonstrate your knowledge and transferable skills in this section. That’s not to say you need very significant experience in the particular market/area your idea is in and it really depends on the nature of the business idea as to how much weight this section needs to have. Having direct and significant experience in the relevant sector is vital for certain concepts. For example, setting up and attracting investment for a new construction firm would be pretty difficult without prior experience in the construction industry. However, other markets do not necessarily require such experience. Instead, this section should focus on how your relevant skills will contribute to the success of the idea.

Business Plan – Market analysis 

A market analysis is vital in helping you to understand the dynamics of the market you are looking to enter including the size, market potential, growth rates, key players and customer demographics.

Market sizing:

With market sizing, you always want to start at the very top and dilute down to where your niche sits, this gives a thorough overview of the total market and enables you to easily assess the overarching potential as well as other niches you can look to expand into in future.

For example if I was attempting to launch a new piece of fitness equipment I would initially look at the size and growth rates of the global market for health and wellness , from this you can then derive the size and growth rates of the  geographical market within which you wish to locate and from there derive the fitness equipment segment.

Market sizing like this will give you full scope of the entire market and with the respective growth rates in your arsenal you will be able to see the emerging niches and how your company fits. Having that knowledge will ensure you are aware of the risk of related market niches which may impact on your market and/or present a good opportunity for partnerships. For more information on market sizing and some tips and tricks on finding and presenting information please visit our cheat sheets tips and tricks to sizing a market here.

Market Dynamics:

When we talk about the dynamics of a particular market. We are generally considering a number of key variables that underpin the makeup of the business environment. It is important within your business plan to provide a summary of these market dynamics. along with a consideration and key conclusions as to how you will operate within the market from a strategic point of view.

• Growth rates – The projected future growth of the market is an extremely important aspect to analyse when assessing your idea. A market characterised by high growth rates and high future growth potential is a far more attractive prospect to enter than one with stifled growth or worse still, one in decline. High growth rates will generally mean there is potential for new market entrants to not only enter the environment, but also gain some traction and market share with plenty of opportunities to attract a growing customer base. A market characterised by slow growth rates or a declining market base is going to be very difficult to enter. The large players will employ strategies to protect their existing market position and a decreasing or stagnant customer base presents little to no opportunities for traction.
• Key customers – Depending on the nature of the market, there can often be some significant key customers you should target. This is especially true for organisations specialising in business to business operations. A clear overview of who these customers are, their budgets, their requirements and their key contacts will all be useful information when attempting to build a strategy to get them buying from you rather than any competition.
• Customer niches/Market segmentation – Market segmentation is vital to understand the full dynamics of the environment. Generally market segmentation focuses on large consumer markets in which core customer characteristics such as age, wealth, education, values etc (demographics) make up various niches. Specific organisations and/or targeted marketing material can address such niches. For organisations specialising more in business to business operations, they can employ similar exercises.. Such exercises would need to focus on areas such as size, industry function and values.
• Key partners – Is the market characterised by many mergers, acquisitions or joint ventures? If so look at the key deals that have taken place and understand whether more market consolidation is likely. Such deals can present significant opportunity, but also create bigger risks if an organization creates a monopoly in the market.
• Key players/nature of competition – Knowing who you are up against in the market as well as their key products/services is vital. Understanding and tracking what your key competitors are doing will keep you ahead of the game and also provide significant potential opportunity to outmaneuver them on various market developments.
• Key trends and future trends – Knowing the key and future trends both in terms of services/products directly attributable. As well as other innovations which could make existing processes in non-core areas more efficient e.g. automation software. Is essential when keeping informed on market developments.

Business Plan – Assessing the Competition

When thinking through a new idea, you definitely need to know your enemy. Fully assessing the nature of the competitive environment and the size and resources of your direct competition is therefore a very useful exercise both initially and on an ongoing basis.

Such an exercise will allow you to understand their position in the market and frequently benchmark your organisation. This can make for quick reassessment of your market position and strategy in order to react to the competitions maneuvers. The following key areas provide a useful template of what you should be looking for when assessing your competition:

Market reach – Revenue and Profit (if possible segmental breakdown of current revenue streams)

Current Clients – If applicable and as far as possible – often information may not publicly available

Service Offering – Main products/service offerings along with omissions (what don’t they address?)

Market segments – What are competitors focusing on (any upcoming areas that seem to be a trend?)

Contract Wins – If applicable, what, if any major contracts have your competitors won in previous months

Mergers/Acquisitions and Partnerships – Has your competition shown appetite to invest in such activity? Is the market consolidating in any way?

Portfolio Innovations – Have there been any key portfolio innovations by competitors in the recent past? Do they have any in the pipeline?

Business plan – Sales and Marketing

Once you have completed a thorough market and competitor analysis as per the above steps. You should be in a pretty strong position to understand which customer profiles will find your offer most appealing.

This is then when a strong Sales and Marketing strategy needs to be developed. Such strategy should be designed to specifically target the sections of the market that are most likely to purchase. If your customers are big social media and technology users, there is probably little point in throwing out a Newspaper article. Likewise if your target customers are less tech savvy, a digital marketing strategy may not be the best idea.

This is definitely a core component of your offer, if the right people aren’t aware of it, you will never get any custom. Marketing is imperative in getting the word out there. That being said however care needs to be taken to ensure you are getting return on investment from marketing materials. Often many organisations waste money on somewhat useless material. See our Marketing section for tips and tricks on how to get things right.

Business plan – Operational and legal considerations

It goes without saying that you are going to need to think through exactly how your business will operate on a daily basis. Especially from the perspective of software and systems, logistics, HR, locations and of course cash management. In addition to those general considerations you will also need to understand and plan out any legal considerations. For example copyrights, trademarks, customer contract templates, supplier contract templates etc. Have a look at our Basics of Commercial Law section to find a more detailed view of the legal considerations.

Business Plan – Business Risks

A risk section is also a core component in a well-developed business plan. Good risk planning ensures you consider both the direct risks and the potential risks concerned with your business concept.

For example, you may decipher that seasonality will impact your business and, consequently, inhibit your revenue. As a result you may look to relieve the burden on cash flow by securing the use of a suitable financial instrument e.g. an overdraft facility.

Business Plan – Structure

From a structure perspective you need to consider two elements, company structure and managerial structure.

Company structure is a vital aspect to consider and can affect a wide range of core areas. Including how much you pay in taxes, your ability to secure financing, the paperwork you need to file and your personal liability. Researching how to secure any relevant permits, licenses and tax information is a key first step in deciphering the company structure you wish to choose and careful consideration needs to be taken when understanding the advantages and disadvantages of the various business structures that can be adopted. See our Business Structure section for further details on the types of structure you can go for.

From the perspective of managerial structure, this is more concerned with Human Resources and how you manage staff. Here, you can adopt hierarchical or a more fluid matrix solution. Again there are advantages and disadvantages of the various managerial structures on offer. Careful consideration should be taken before deciding therefore.

Financial plan and pricing model

Naturally everybody’s favourite topic…But it is absolutely essential that you have a hold on the numbers when planning your idea.

There are many considerations when putting together your forecast financials and you will need a firm understanding on areas such as break-even, ROI and cash flow. In basic terms though, you will need to understand whether your idea has the potential to generate a return and the level of cash reserves that will be needed to function on a day-to-day basis.

For some tips and tricks on how to go about forecasting and the typical statements you will be looking to produce see our Financial Forecasting and Price Modeling section.

From Business Plan to Reality

So you have carefully crafted the perfect business plan and now have a good understanding of the potential customer you want to go after as well as the competition and opportunities in your market

….What now?

Use your business plan as a guide

Your business plan should act as an initial guide to get your ideas structure in place. Throughout the research you have conducted. You should have identified what your goals are and have a much more detailed knowledge of the market and competition. The plan will also help you with the following:

• What business structure is best – From here you can then research how to go about setting up such a structure in the area you wish ensuring you abide by legislation and tax rules
• How to market to your target customer base
• What legal considerations you need to be mindful of e.g. Copyright, trademarks, standard terms and conditions etc
• What assistance you may require (e.g. consultancy) and what help for new business or SME’s exists in the area.

Adapt your business plan to suit reality

Things change and can change very quickly so being flexible is paramount in business and you need to set aside time each month to review progress against your forecast and plan. This will allow you to identify issues and pivot quickly to alleviate any issues or take advantage of opportunities.

With that in mind your business plan is a “living document” which you need to regularly review to match reality. Through the process of review you will have time to gather your thoughts and analyse what is working and what isn’t. In turn this will ensure you can continuously point your business onto the path of success.

Next Section: Creating a Business website