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What Aspects Investors Should Consider in Starting a Business?

Background to the study

The concept of entrepreneurship is increasingly being appreciated by investors in an effort to maximize their wealth. According to Kuratko (2008, p.9), the financial school of thought in relation to entrepreneurship asserts that investors seek for growth of their capital and hence the emphasis on entrepreneurial practices. One of the investment destinations that investors are considering relates to venturing into business. This result from the high returns associated with business investment. Kuratko (2008, p.271) asserts that conducting a feasibility study is paramount in determining the potential of a particular investment. After scanning the environment to determine the feasibility of success, the investor decided to start a new business. The firm will be established within the UK retail industry. A Findings of a market research conducted revealed a high potential of the retail industry. According to Retail: overview (2008, Para. 1), UK retail industry was generally expected to grow with a margin of 15% by 2011. The firm will operate as a private limited company. Decision regarding the firm’s business structure as a private limited company resulted from the benefits associated such a business entity. Some of the advantages which were considered include business continuity, limited liability, ease of accessing capital and the separate legal entity. This paper entails a report regarding new business establishment.

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Aim

The report is aimed at analyzing the various aspects that investors should consider in starting a business.

Scope

The report gives the desired location for the firm and the initial set up cost to be incurred. The products that the firm will deal with and the target customers are outlined. The pricing and competitive strategies to be adopted by the firm in developing a competitive advantage are also analyzed. In addition, communication and motivation strategies to be incorporated are discussed. Finally a conclusion and recommendation are made.

Location

The firm’s store will be located at London. London was considered due to its population density. According to a 2008 report, London had a population of 7,556,900. In addition, the population is growing at a fast rate (View, 2008, para. 1-3). This represents a high potential of the firm attracting a large number of customers.

Initial set up cost

According to Tie (2005, para. 2), there are various costs which are involved in the process of starting a business. Joel (1998, para. 1), asserts that start up costs are inherent in a business and should be expensed as they are incurred. This means that some of the initial sets up costs are incurred in the process of the firm’s operation. In establishing the private company, the investor appreciated the importance of estimating the expected start up cost prior to its establishment. This is due to the fact that such estimation enables the investor to determine the financial requirement to start and maintain the firm. The initial set up cost should sustain the firm until it develops a capacity to generate enough revenue to cover its operating expenses. The following expenses are expected to be incurred within the first year of operation.

Requirement for start up Amount in $
Professional services, accounting and legal fees 800
Furniture and fixtures 2,000
Machines and equipments (Office stationery) 2,500
Premises (Annual Rent ) 150,000
Starting inventory 1,500,000
Distribution trucks and vehicles 2,000,000
Building improvement 100,000
Salaries and wages 500,000
Insurance policy 30,000
Improvement of building 3,000
Advertising and promotion 300,000
Deposit for utilities 10,000
Total expected cost 4,601,100

The cost of accounting, legal and professional services relate to expenses which will be incurred in registering the firm as a legal entity. Professional services relate to expenses such as consultancy fees and reviewing of contracts. Creating market awareness is paramount in the success of the firm. This is due to the fact that a wide range of potential customers will be able to know about the existence of the firm. Certain utilities such as electricity, telephone, sewer and water are necessary in the operation of the firm. To ensure constant supply of these utilities, a deposit will be made. Insurance cost will relate to securing policies to protect the firm against potential risks and specifically theft, fire and other losses. Initially, firm will operate on rented premises. This decision was arrived at by considering the high cost involved in setting up a new business. However, the premises will be improved to fit the firm’s operation.

A financial forecast for the first year of operation is given in the appendices.

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Product

The firm will deal with marketing and distribution of wide range of consumer products. This will enable the firm to integrate the concept of product diversity in its operation. As a result, consumers will find it convenient to make their purchases in the firm. The firm will be divided into a number of departments with each sector specializing in a given range of products. Some of the products that the firm will deal with include electrical products, computer and mobile phone accessories, food products, attires, furniture and glassware. Electrical products will form a significant proportion of the firm’s merchandise. This decision resulted from identification of the associated growth potential. UK electrical sector is expected to grow with a margin of 24% (Retail: overview, 2008, para.1). To ensure that the customers are satisfied, the firm will obtain its supplies from suppliers who have incorporated the concept of quality control.

Potential customers

In its operation, the firm has targeted both individual and institutional customers in an effort to maximize the profit levels. Findings of a market research revealed that individual and organizational customers are major consumers of products offered in the retail industry. This is due to the fact that firms within this industry mainly deal with provision of final products. The investors realized the importance of targeting these customers due to their repeat purchase behavior.

Pricing and competition strategy

Considering the competition characterizing firms in different economic sector, it is paramount for firms to develop and sustain a high competitive advantage. From a consumer market research, it has been realized that consumers are price sensitive in their consumption pattern. In entering the UK retail industry, the firm is committed at developing a competitive edge in relation to pricing. To attain this, penetration pricing strategy will be utilized. This will entail setting the price of its products at a relatively low point compared to the competitors (Bovay, 2008, para. 1-3). Penetration pricing strategy was considered due to the price sensitive nature of the retail industry. In setting the price of the products, psychological pricing will be incorporated. This will entail setting the price points which will appeal to the consumers in making their purchase decision. The firm will also incorporate price and quantity discount in setting the price. Through effective pricing, the firm will attain a high competitive advantage.

The firm will also deal with competition by ensuring conducting continuous market awareness. Promotion will be conducted by utilizing both traditional and emerging market awareness mediums. Traditional mediums will entail use of print media, television and radio. On the other hand, emerging mediums to be considered include use of blogs, wikis and you tube.

Staff motivation

The success of a firm is dependent on the effectiveness of the management team in motivating the employees. In its operation, both financial and non-financial methods will be used in motivating the employees. The financial element will entail remunerations in forms of salaries and wages. The salaries and wages will be based on the employee’s performance. On the other hand, non financial forms of remuneration will entail promotions which will be conducted through performance appraisal.

Communication strategy

It has been realized that information flow plays a key role in the success of the firm. Efficient internal communication will be ensured. This will be achieved through adoption of a bottom-top organization structure. This will ensure that the employees can raise their concerns regarding the operation of the firm. Bottom-top form of communication within the firm will be enhanced by integration of intranet. In addition, the firm will be committed at establishing a good relationship with the customers. This will be achieved by integrating the concept of customer relationship management which will be enhanced by use of internet. As a result, the firm will be able to know whether its operation culminates into the intended customer satisfaction.

Conclusion

In establishing a new business, investors should consider the initial cost of the set up. This will enable the firm to determine the financial capital required to sustain the firm until develops capacity to generate sufficient revenue. In addition, other aspects such as the product, pricing, competition, communication and motivation should also be considered.

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Recommendation

  • The investor should venture the industry due to its growth and profitability potential.
  • Continuous market research should be conducted to establish the trend within the external environment.

Reference List

Bovay, K.2008. Market penetration pricing: a quick market entry pricing strategy. (On-line). New York: Enzine Aricles. Web.

Prospects. 2010. Retail: overview.(On-line). Web.

Joel, S. 1998. New standard on accounting for start up costs. (On-line). New York: American Express Tax and Business Services of New York, Incorporation.

Kuratko, D.2008. Entrepreneurship: theory process and practice. (E-book). London: Cengage Learning. Web.

Tie,R. 2005. The case for a private company GAAP. (On-line). Journal of accountancy. Vol. 199. London: Questia. Web.

View. 2008. London population rising fast. (On-line). Adfero Limited. Web.

Appendices

Projected financial statement for the 1st year

1styear (Amount in $)
Total sales 8,000,000
Less cost of goods sold 4,000,000
Gross profit 4,000,000
Expenses
Salaries and wages
Office supplies
Rent
Telephone
Utilities
Total depreciation
Advertising and promotion
Taxes, permits and licenses
Insurance
Repair and maintenances
Total expenses
500,000
10,000
150,000
5,000
10,000
7,000
500,000
2,400
30,000
10,000
724,400
Projected net profit 3,275,600

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