Small Business: Planning, Finance and Control

417 Pages·1989·20.014 MB·English

by  Jim Dewhurst, Paul Burns (auth.)

MACMILLAN SMALL BUSINESS SERIES
The books in this series present their subject-matter comprehensively
and in a sophisticated manner with more conceptual underpinning
than has previously been provided.
The series is intended primarily for undergraduate and postgraduate
students taking small business and related courses at universities and
polytechnics. Books in the series will also be suitable for those
working for professional examinations and for well-informed man
agers of small and growing businesses.
PUBLISHED
Paul Burns and Jim Dewhurst (eds): Small Business and Entrepreneurship
Paul Burns and Jim Dewhurst (eds): Small Business in Europe
Jim Dewhurst and Paul Burns: Small Business: Planning, Finance and
Control
Terry Hill: Small Business: Production/Operations Management
Derek Waterworth: Small Business: Marketing for the Small Business
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SMALL BUSINESS
Planning, Finance and Control
SECOND EDITION
Jim Dewhurst and Paul Burns
M
MACMILLAN
EDUCATION
©Jim Dewhurst and Paul Burns 1983, 1989
All rights reserved. No reproduction, copy or transmission
of this publication may be made without written permission.
No paragraph of this publication may be reproduced, copied
or transmitted save with written permission or in accordance
with the provisions of the Copyright Act 1956 (as amended),
or under the terms of any licence permitting limited copying
issued by the Copyright Licensing Agency, 33-4 Alfred Place,
London WC1E 7DP.
Any person who does any unauthorised act in relation to
this publication may be liable to criminal prosecution and
civil claims for damages.
First edition 1983
Reprinted 1985, 1986
Second edition 1989
Published by
British Library Cataloguing in Publication Data
Dewhurst, Jim
Small business.-2nd ed.
1. Great Britain. Small firms. Financial
management
I. Title II. Burns, Paul, 1949-
658.1'592'0941
ISBN 978-0-333-46719-0 ISBN 978-1-349-19657-9 (eBook)
DOI10.1007/978-1-349-19657-9
Contents
Preface to the Second Edition vi
1 Ave 1
2 The Genesis of a Business 9
3 Setting Up a Business 28
4 Strategy and Planning 43
5 The Business Plan 60
6 Bank Finance 101
7 Bank Services for Small Business 116
8 Risk Capital 132
9 Taxation and Allowances 156
10 An Introduction to Accounting and the Companies Acts 190
11 Costs and Profit 206
12 Controlling Costs 228
13 Financial Planning and Budgeting 236
14 Control and Delegation Through Budgets 253
15 Accounting Systems 269
16 Understanding Financial Information 293
17 Alternative Choice Decisions 315
18 Capital Investment Appraisal 337
19 The Management of Working Capital: Inventory and
Cash 365
20 Credit Control 377
21 Vale 389
Select Bibliography 406
v
Preface to the Second
Edition
Since the book was first published (1983) a number of measures -
many initiated by the government-relating to the supply of funds to
small businesses have come into effect. The position now is that the
UK businessman is no longer disadvantaged vis-a-vis his counterpart
in the common market in terms of the provision of finance. It is
probably true to say that a good business idea, properly planned and
presented, need never be short of risk capital.
The problem indeed is more one of proper planning and presenta
tion. More and more the small business manager must be able to plan
ahead, preferably with the use of a micro-computer and a suitable
spreadsheet. Our first edition has been completely updated; in this
new edition the emphasis is on the steps that need to be taken for
effective overall planning.
We have had a great deal of help from colleagues and friends in the
preparation of this book. We would like, especially, to mention Sue
Burns, and her work on Chapter 9. For all practical purposes this
represents a complete rewrite of the Chapter 6 on taxation in our
earlier edition. National Westminster, Midland, Barclays and Lloyds
Bank plc have all supplied us with useful information: Lloyds Bank
has allowed us to reproduce their structure chart.
We would also like to thank Carolyn Jane Claridge and Susan Anne
Claridge for giving us permission to use their business plan. We wish
them every success with their restaurant.
We may, at times, use sexist words and phrases, though only, we
hope, where predominant usage sanctions it (an example would be
'businessman' rather than 'businessperson'). Throughout we ask
readers to accept that 'he' or 'him' subsumes 'she' or 'her'. Other
wise, to put it bluntly, this book would be inordinately long!
January 1988 JIM DEWHURST
PAUL BURNS
vi
CHAPTER 1
Ave
INTRODUCTION 1
SIZE 3
THE NUMBERS OF SMALL BUSINESSES 5
THE BOOK 8
Introduction
In all the short history of modern business there is nothing so strange
as this. On the one hand we have the traditional belief in the
rightness and power of size. Rationalisation, standardisation and
concentration are the watchwords. Economies of scale rule the in
dustrial world. In the United Kingdom we say we must be big to
stand up against the ruthless cost-effective multinational corporations
based in the USA and Japan. And indeed in the United Kingdom we
have gone further along this road of concentration than any other
country in the world. Yet this predilection for economic orthodoxy
has not brought us economic success. And even some economic
theory is now emphasising the diseconomies of scale.
There is another viewpoint which has a growing number of adher
ents. Perhaps, these people argue, economic success is not the sole
criterion by which we should judge all things. Perhaps people matter.
Perhaps a society should be concerned to some extent with the
quality of life, job satisfaction and good human relationships. Much
evidence is now produced that some primitive races are more relaxed,
more caring and (unbelievably!) apparently happier than we are.
Some evidence has been produced recently that people working in
small business units in a civilised society are more committed than
those working in large, amorphous, corporations.
One extreme conclusion we might draw from this is that we should
reject our modern way of life and try a return to some primitive
pre-industrial society. This is absurd. Man (but please see the sexual
1
2 Small business: planning, finance and control
disclaimer earlier in the preface!) has competitive, striving, basic
urges in his make-up. Put another way the average man in the United
Kingdom-in so far as he exists-does not want to see us 'deteriorate'
back into some third-rate primitive society.
What are the alternatives? One solution, ably put by Fritz Schuma
cher, was that an intermediate technology should be developed. To use
his own words, this would be a technology that is 'simpler, very
much cheaper, very much easier to maintain than the highly sophisti
cated technology of the modern West'. But the question to which he
gave this answer was: 'What would be the appropriate technology for
Rural India or Rural Latin America or maybe the City slums?' Now it
may well be that for a comparatively rurat primitive society, inter
mediate technology (rather than a sudden forced transformation to
high technology) may be the answer. But we are neither a primitive
society nor all city slums.
The situation in the United Kingdom is indeed almost the complete
reverse. The Industrial Revolution started here and we have already
gone further along the road of industrial success and then apparent
rigidity and relative decline than any other country. What can we do?
How can we combine our present state of industrial homeostasis with
an enlightened approach? The clue must surely lie in our difficulty in
seeing that size and technological/managerial efficiency are not the
same, or at any rate are not hopelessly interlocked. The arguments
against an undue concern with size (except in certain parts of the
economy) are strong. The arguments in favour of applying modern
technological and managerial control techniques are equally strong.
What this book is concerned to show is that in a free-thinking,
democratic society it is possible to use sophisticated, sometimes
highly quantitative, techniques in the control of small businesses
without impairing those special characteristics of a small business
which we (and particularly those who work with it) admire so much.
This book therefore develops the theme that small business is
beneficial, that it is flexible, that it can adapt to new situations more
easily than large corporations, that it is innovative, that it already
probably makes a larger contribution pro rata than large business, and
that with efficient control and management techniques the benefit it
gives can be much greater.
We do not use the words 'small' or 'smaller' here or throughout in
any tight restrictive sense. We are not trying to keep businesses
small. We are seeking to make small businesses more effective and
efficient in the very broadest senses (at one extreme this does include
human aspects such as job satisfaction). In many cases increase in
efficiency may mean growth. There is nothing wrong with this. All
we are arguing here is that size does not necessarily lead to efficiency.
Ave 3
More precisely efficiency comes as the result of making good deci
sions and implementing them properly.
Size
In 1969 a Committee of Inquiry on Small Firms (the 'Bolton' Com
mittee) was set up. It reported in November 1971 (Cmnd 4811). The
Committee, sensibly realised that its first job was to define a small
business. It made heavy weather of it. Recognising that one single
definition would not cover industries as divergent as manufacturing
and service, the Committee used eight definitions for varying indus
try groups. These ranged from under 200 employees for manufac
turing, to under £50,000 turnover for retailing, and up to 5 vehicles or
less for road transport. But any definition which was based on
turnover, or indeed any other measure of size expressed in financial
terms (such as capital employed or net assets) suffered from terrible
inherent disadvantages in times of inflation. A firm which is selling
the same number of units from one year to the next, and so, in real
terms, is staying exactly still, may, because of inflation, move up
from being a small firm to being classed as a large firm.
The 'Wilson' Committee on the Financing of Small Firms, March
1979 (Cmnd 7503), updated the Bolton turnover requirements for
small firms by an index based on the general index of retail prices.
This brought the definitions temporarily in line but it in no way
solved this particular problem. In the EEC small firms are usually
categorised by employees, but there is no general agreement on the
number that is covered by the term 'small'. Probably the most
common definitions are that those firms with less than 100 em
ployees are small and those with 100 to 500 are medium. But many
countries (e.g. West Germany) regard 10 employees as the top limit
for small firms, and France and Sweden agree with the Bolton
(manufacturing) 200 employees limit! In any case, Bolton was cer
tainly right in arguing that one definition will not work easily right
across the board. As it says, 'in retail distribution a firm employing
200 people would typically have at least 10 shops with a total
turnover of several million pounds and would be a very large
organisation in terms of the distributive trades'.
However, the advantages from having a definition which some
how covers all industries are obviously very great. The 1981 Com
panies Act laid down, for the first time in British history, formats for
the balance-sheets and profit-and-loss accounts, and, though not of
importance here, these proscriptive formats apply to all companies,
4 Small business: planning, finance and control
but only for the copies of their accounts filed with the Registrar of
Companies. There were certain size exemptions. These were re
peated in the 1985 Companies Act. Businesses were split into medium
sized and small (though in practical terms both would normally be
regarded as small). These definitions are:
1. MEDIUM
A company may be classified as medium-sized if, for the financial
year and the one imm~Cdiately preceding it, two (at least) out of the
following three conditions apply:
(a) turnover did not exceed £5.75m
(b) balance-sheet total did not exceed £2.8m
(c) average weekly number of employees did not exceed 250
2. SMALL
A company may be classified as small if, for the financial year and the
one immediately preceding it, two (at least) of the following three
conditions apply:
(a) turnover did not exceed £1.4m
(b) balance-sheet total did not exceed £0.7m
(c) average weekly number of employees did not exceed 50
For both categories the 'balance-sheet total' means the total of all its
assets (as specified in the prescribed formats) without deduction of
any liabilities.
Although comparisons are obviously difficult, these definitions
cover firms appreciably larger than those that the Wilson Committee
gave. They tie up better, however, with EEC definitions and they do
allow a little extra to cover inflationary growth and also to give some
flexibility.
The Bolton report was rightly very conscious of the necessity but
also the inadequacy of quantitative definitions, such as the one we
have discussed. It contrasted the 'statistical' definition (such as its
own of one for each of the eight industrial sectors!) with what it called
the 'economic' definition.
This economic definition makes a great deal of sense. It has three
parts:
1. MARKET SHARE
2. INDEPENDENCE
3. PERSONALISED MANAGEMENT