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Useful Tips / Guide

We produce a wide range of articles on generic approach towards better management and finances for newly startup and growing business owners. Listed below are some of our recent publications for your reference. If you would like to receive regular updates via email, please REGISTER with us.

The First Lesson in Brainstorming your Business Ideas

Most of those who succeed in starting their own businesses have planned for every phase of their success. Thomas Edison, the great American inventor, once said, "Genius is 1 percent inspiration and 99 percent perspiration." That same philosophy also applies to success in business.

To enhance your chances for success, first generate a little bit of that perspiration to eliminate the most common mistakes new business owners make. According to the experts, most novices should spend a great deal of time researching their potential businesses and the marketplace.

But, before your business start-up, carefully research and answer these basic questions:

- What niche or void will my business fill?
- What services or products will I sell?
- Is my idea practical, and will it fill a need?
- Who is my competitor?
- What is my business's advantage over existing firms?
- Can I deliver a better quality service?
- Can I create a demand for my business?

Once you've determined that your business idea is feasible, answer these questions:

- What skills and experience do I bring to the business?
- What will be my legal structure?
- How will my company's business records be maintained?
- What insurance coverage will I need?
- What equipment or supplies will I need?
- How will I compensate myself?
- What are my resources?
- What financing will I need?
- Where will my business be located?
- What will I name my business?

If you are starting a home-based business, you should answer these additional questions:

• Does my home have the space (preferably separate) for a business?
• Can I successfully run the business from my home?
• Can I deal with the isolation of working from home?

Your answers to these questions will help you create a focused, well -researched business plan that should serve as a blueprint. The plan should detail how the business will be operated, managed and capitalized.

The Business Plan

Your business plan should cover the business basics from goals to management, from marketing to operations. A business plan is a blueprint for success, so don't scrimp on the details. A good business plan covers the following areas:

Executive Summary

Describe in detail the business and its goals.
Identify the business ownership and the legal structure.
Discuss skills and experience you and your partners have.
Identify advantages you and your business have over your competitors.

Operations

• Explain how the business will be managed on a day-to-day basis.
• Discuss hiring and personnel procedures.
• Discuss insurance, lease or rent agreements, and issues pertinent to your business.
• Account for the equipment necessary to produce your products or services.
• Account for production and delivery of products and services.

Marketing

• Describe your product or service.
• Identify the customer demand for your product or service.
• Identify your market, including its size, location and demographics.
• Explain how your product or service will be advertised and marketed.
• Explain your pricing strategy.

Financial Management

• Explain the source and amount of initial capital.
• Estimate start-up costs.
• Project operating expenses.
• Develop a monthly operating budget for the first year.
• Develop an expected return on investment and monthly cash flow for the first year.
• Provide projected income statements and balance sheets for a two-year period.
• Discuss your break-even point.
• Explain your personal balance sheet and method of compensation.
• Discuss who will maintain your accounting records and how the records will be kept.
• Provide "what if" statements that address alternative approaches to problems that may develop.

Legal Requirements

Small businesses must comply with local laws and regulations. You need to know the legal requirements affecting your business. You may want to consult with a lawyer or accountant for additional compliance assistance.

Registration and accounting requirements:

You will need a -

- company and business registration,
- separate business bank account.

If your business has employees, you are responsible for -

- filing proper tax returns, and
- complying with laws covering employee safety and insurance.

Understanding Your Market

Market evaluation is critical and provides the basic data that will determine if and where you can successfully sell your product or service. This process involves defining your goals, scrutinizing your competition and your customer base, and interviewing potential suppliers. The information collected can help you, if necessary, adapt your product or service to better meet customer needs.

Market research can help you -

• create primary and alternative sales approaches to a given market,
• make profit projections from a more accurate database,
• organize marketing activities,
• develop critical short to medium-term sales goals and establish the market's profit boundaries, and
• identify what makes your business different from similar businesses with similar products.

Questions To Ask -

Your research should answer these basic questions:

• Who are your customers?
• Where are they located?
• What are their needs and resources?
• Is the service or product essential in their operations or activities?
• Can the customer afford the service or product?
• Where can you create a demand for the service or product?
• Can you compete effectively in price, quality and delivery?
• How many competitors provide the same service or product?
• What is the general economy of your service or product area?
• What areas within your market are declining or growing?

Research on competitors is extremely important. Visit industry trade shows to find out what your competitors are selling and how they are marketing their products. Similarly, stay current on industry magazines and publications.

Market research isn't a one-time activity. Once you establish your business, you should stay in touch with your customers. You may have to adapt your product or service and alter your marketing strategy to keep up with your customers' changing needs.

Pricing Your Products and Services

There are several pricing strategies. Select the approach that will make your goods or services the most competitive and will help you reach your profit goals.

Retail Cost and Pricing

A common pricing practice among small businesses is to follow the manufacturer's suggested retail price. The suggested retail price is easy to use, but it doesn't adequately account for the element of competition.

Pricing Below Competition

This strategy reduces the profit margin per sale.

It requires you to reduce your costs and -

- obtain the best prices possible for raw materials or inventory,
- locate the business in an inexpensive area or facility,
- closely control inventory,
- limit product lines to fast-moving items,
- design advertising to concentrate on price specials, and
- limit non-essential services.

One word of caution: pricing goods below the competition can be difficult to sustain because every cost component must be constantly monitored and adjusted. It also exposes you to pricing wars. A competitor can match the lower price, leaving you out in the cold.

Pricing Above Competition

This strategy is possible when price is not the customer's greatest concern. Factors important enough for customers to justify paying higher prices include -

• service considerations, including delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, and helpful, friendly employees;
• a convenient or exclusive location; and
• exclusive merchandise.

Price Lining

This strategy targets a precise segment of the buying public by carrying products in a specific price range only. For example, a store may wish to attract customers willing to pay more than $50 for a purse. Price lining has certain advantages:

- ease of selection for customers, and
- reduced inventory and storage costs.

Multiple Pricing

This approach involves selling a number of units for a single price, for example, two items for $1.98. This is useful for low-cost consumer products, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.

Cost Factors and Pricing

Every component of a service or product has a different, specific cost. Many small businesses fail to analyze each component of their commodity's total cost and, therefore, fail to price profitably. Once you do this analysis, set your prices to maximize profits and eliminate any unprofitable services.

Cost components include material, labor and overhead costs. Material costs are the costs of all materials found in the final product, such as the wood, glue and coverings used in manufacturing a chair.

Labor costs are the costs of the work that goes into manufacturing a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include MPF, pension, workers' compensation, unemployment compensation, insurance and retirement benefits.

Overhead costs are those not readily identifiable with a particular product. These costs include indirect materials such as supplies, heat and light, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs such as clerical, legal and janitorial services. Be sure to include shipping, handling and/or storage as well as other cost components. Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is also important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs semiannually, including increased executive salaries and other costs.

Understanding Cash Flow

Failure to properly plan cash flow is one of the leading causes of small business failures. Understanding the basics will help you better manage your cash flow.

Your business's monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash.

For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable credit sales, usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, increasing your cash. Now your cash has completed its flow through the operating cycle, and the process is ready to begin again.

Current Assets

Cash and other balance-sheet items that convert into cash within 12 months are referred to as current assets. Typical current assets include cash, marketable securities, receivables and prepaid expenses.

Cash-flow Analysis

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flow and will allow adequate time to plan and prepare for the growth of your business.

It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

Planning a Positive Cash Flow

Your business can increase cash reserves in a number of ways.

• Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. You stand to lose revenues if your collection policies are not aggressive. The longer your customer's balance remains unpaid, the less likely it is that you will receive full payment.
• Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services. You should measure, however, any consequent increase in sales against a possible increase in bad-debt expenses.
• Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are types of credit used in this situation.
• Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your company's cash reserves.

Finding an Accountant

If you hire an accountant, find someone who is knowledgeable, capable and discreet. With the ever-changing complexities of tax laws and developments in accounting methods, it is important to look for an accountant who takes advantage of educational seminars, professional publications and other continuing-education opportunities.

Raising Money for a Small Business

One key to a successful business start-up or expansion is your ability to obtain appropriate financing. Raising capital is the most basic of all business activities.

There are several sources to consider when looking for financing. Explore all your options before making a decision. These include -

- personal savings,
- friends and relatives,
- banks and,
- venture-capital firms.

Borrowing Money

To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be aware of the bank's loan policies. Many financial institutions require fully secured loans and sufficient commitment of capital by the borrower.

Types of Business Loans

Short-term loans: Short-term loans are paid back in less than one year. Types of short-term loans include -

- working-capital,
- accounts receivable and
- revolving lines of credit.

Long-term loans: Long-term loans generally have maturities of more than one year but less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as

- equipment,
- furniture and fixtures,
- vehicles,
- commercial mortgages and
- real estate.

Applying For a Loan

Approval of your loan request depends on how well you present yourself, your business plan and your financial needs to a lender or investor. The best way to improve your chances of obtaining a loan is to prepare a thoughtful and professional-looking proposal. The proposal is your business plan with a few important additions:

• In the executive summary, state the purpose of the loan and the exact amount required. Explain specifically what the loan will be used for and why it is needed.
• In the financial information section, include personal financial statements on yourself and other principal owners of the business, if this will be a partnership. Also identify the collateral you would be willing to pledge as security for the loan.

What Lenders Look For

Many loan officers will order a copy of your credit report from a credit-reporting agency. The lender will also look at your work history and bank reference. Using the credit report and the information you have provided, the lending officer will consider the following issues:

• Do you have a sound record of credit-worthiness?
• Do you have sufficient experience and training to operate a successful business?
• Have you prepared a loan proposal and business plan that demonstrate your understanding of, and commitment to, the success of the business?

Basically, we cover all the major generic areas you should think of during your business start-up phrase. Of course, you are always welcome to contact us and discuss your requirements in a more detail manner.

Small Business Financial Status Checklist

Keeping your financial records up to date won't be a problem if you do what is necessary on a regular basis. Though particular accounting needs may vary somewhat, the following checklist will help you understand the most common tasks required to maintain accurate accounting records.

Daily:

1. Total all cash on hand.
2. Record income. Enter a summary of sales and cash receipts in an income ledger.
3. Record all payments made by cash or check.
4. Enter deposits in your business checkbook to keep the balance current.
5. Record inventory, adding any new items received.

Weekly:

1. Review accounts receivable, and take action to collect from slow payers.
2. Review accounts payable, remembering to take advantage of discounts.
3. Deduct items sold from inventory, adjusting records to reflect the week's sales.

Monthly:

1. Balance checkbook. Reconcile your checking account records to your bank statements to ensure that both sets of records are in agreement.
2. Total all ledgers. Compute monthly totals for sales, expenses and payroll.
3. Prepare payroll.
4. Age accounts receivable. Update your unpaid accounts, listing them by length of time on the books, i.e., 30, 60 or 90 days. Use this list to discover which accounts require extra collection attention.
5. Review inventory. Check inventory levels to see which items aren't moving so you can replace them with new stock.
6. Reconcile petty cash. Make sure the actual cash, plus the total of the paid-out receipts for expenses from petty cash, are equal to the starting balance. Replenish if necessary.

Quarterly:

1. Prepare income statement. This will reflect the sales, expenses and profit for that quarter and for the year to date. Many larger businesses generate this report (as well as the balance sheet and cash flow statement below) monthly as well as quarterly.
2. Prepare balance sheet. This will indicate the financial position of the business at the end of the quarter.
3. Prepare cash flow statement. This will reflect the cash activity and ending position for the quarter.

Annually:

1. Total all ledgers. Compute yearly totals for sales, expenses and payroll.
2. Prepare income statement. This will reflect the sales, expenses and profit for the year.
3. Prepare balance sheet. This will indicate the financial position of the business at the end of the year.
4. Prepare cash flow statement. This will indicate the cash activity and ending position of the business at the end of the year.
5. Assemble tax papers. Pull together all the documentation you're going to need for filing your Profits Tax Return.
6. Meet with your accountant. Turn over your tax documentation and set up a time to discuss your financial condition and tax strategy for the coming year.
7. Set up new books. Prepare for the coming year by setting up your ledgers.
   

10 Simple Steps towards Succession Planning

When Hong Kong people think of succession planning, they think only of a will. There's much more to consider. The following will give you an outline of what we need to make your estate plan complete. We will discuss with you to apply the most current tax, trust, estate and family laws to your personal situation.

1. Designate a team of professional

The complexity of your situation will determine the assistance you will require from professionals to create your estate plan. Your team may include a financial adviser, lawyer and tax planner.

2. Draw up a household balance sheet

A household balance sheet is a summary of your financial situation that ultimately determines your overall net worth. The balance sheet will help you see how vulnerable you might be to shifts in your circumstances. It assists you to guard against the effects of tragedy by letting you review income that will be available to support your family, including insurance proceeds from policies.

It also helps to understand how risk tolerant and comfortable you are with handling your debt. And it reflects on your lifestyle and considers what is important to you. This will help in long-term financial planning.

3. Understand your insurance needs

Life insurance is crucial to estate planning. It's important to match your long-term financial objectives with your insurance needs. Proceeds from insurance policies can be used to provide income, pay estate expenses and leave an inheritance.

4. Formulate your tax and investment strategies

While insurance is protecting your wealth and beneficiaries, you should have your investment and tax plan to build your wealth. The key objective is to maximize growth in the long term, which supposes a degree of risk or volatility. The nature and extent of your investments will have a substantial impact on the rest of your financial planning. For example, the greater your investments, the less life cover you may need.

5. Draw up a Will

A will designates an executor (or personal representative) to administer your affairs on death and a guardian for any minor children. We will advise you the practical considerations in selecting appropriate individual to carry out the terms of your will.

Your will won't become effective until your death. Until then, you can change the terms or revoke it completely - as long as you are mentally competent. Your will should be reviewed at least once every three years to ensure it has not been affected by changes in legislation or your personal situation.

6. Establish power of attorney for property and personal care

At some point in the future you may be unable to make your own financial or medical decisions. But you can prearrange for someone to make these decisions according to your wishes by having a lawyer draft a separate power of attorney for property and personal care.

A power of attorney for property gives one or more people the authority to manage your financial affairs if you cannot do so - the person you appoint should be someone you would literally trust with your life. A power of attorney can be general or limited. All powers of attorney terminate on death, or on death of the person you have appointed as attorney. You can revoke a power of attorney at any time, as long as you are mentally competent.

7. Minimize taxes and administration fees

Your estate may encounter certain obligations for income tax and estate duty on your death, which may reduce the proceeds intended for the beneficiaries of your estate. We will explore the opportunities to avoid estate duty and the cost/benefit of establishing a family trust.

8. Keep track of accounts and important information

One of the most difficult roles for an executor and family members is gathering the information required to settle the estate. Eliminate this concern by centralizing all household information from birth certificates, passports and other legal documents to bank accounts and insurance policy numbers. Once you have documented your important information, store a copy in a safe place and let someone close to you know where it is.

9. Review and update regularly

Review and, if necessary, update all information at least once a year. By updating your estate plan, you will get a snapshot of where you are on an annual basis. This gives you the opportunity to trace your progress and, if need be, to revise your financial plan to get where you want to go. This should include a review of your company's benefit statement for coverage and beneficiary designations for MPF and life insurance.

10. Let someone know

The final piece of the puzzle is communication. It is really important to communicate your plans to a family member or close friend whom you can trust, and who is capable to work with your lawyer or adviser to execute your estate plan. Finally, by working closely with our team of experts, it will provide you peace of mind that comes from knowing your loved ones will not be burdened by resolving your personal and financial affairs.

Ten Golden Rules of Investing

1. Keep some money aside for rainy days

Ensure that you have adequate savings to cover your possible short-term needs. An emergency fund is the first pillar of any investment portfolio, and should be in place before investing in fixed income or growth.

2. Other aspects of financial planning are also important

If you have financial dependants, nothing is more important than life and disability assurance. Your investments are unlikely to provide financial security for your dependents, no matter how well they perform.

3. Invest for growth

Invest in what you know or what you use or what you believe to be a long-term trend. Buy only what interests you. Choose assets that offer good long-term growth. Equities have historically outperformed everything else over the longer term. Look for companies that have great barriers to entry or whose products or services would be extremely costly to be replicated or replaced in the market.

Don't buy stock solely on someone else's recommendation. Whether it comes from your broker, your uncle, your high-school fans, or some Fool, if you don't know anything about the recommended company and don't have a natural interest in learning more about it, don't buy. Resist that temptation.

4. Spread your investments

Diversification reduces risk. No matter how good a particular share, unit trust or individual stock market might seem, the less the spread of your investments, the greater the risk you are taking. It makes sense, therefore, to spread your risk not only amongst the different asset classes but also among different companies, countries and currencies.

5. Guarantees can cost

There is nothing more attractive than a guarantee, especially an investment that offers stock market-type returns without any risk to your capital. Guarantees can cost and the price can result in a possible reduction in returns, especially when the investment horizon for principal guaranteed products is too short.

6. Invest regularly

The surest way to protect your investment is to establish the discipline of investing to the market on a monthly basis. Repeat-purchasing investor is buying stock during the market's incline and decline. This minimizes the real risk. With a long-term perspective and frequent savings, it pushes an investor portfolio back to break-even sooner than the one-time-upfront investor.

7. Don't forget about inflation

If you are not protected from it, inflation will eat into your capital and income. Prices will go up over time and you should ensure that your investments and the income they produce have the ability to do likewise.

8. Discipline

Avoid the temptation to chop and change your portfolio - give shares and unit trusts time to perform. Switching from one investment to another, especially chasing yesterday's winners is one of the quickest ways to destroy wealth. There may also be cost implications in the form of investment and disinvestment fees. Bear in mind if you develop the habit of day trade, week trade or month trade, you are not investing. You are gambling.

9. Invest early and for long term

Timing the market doesn't work. To our knowledge, there are no proven approaches or human in history (known to public so far!) that are able to time the financial market movement consistently and accurately. The best investment is time - understand the benefits of compound interest, and use it to your advantage. The sooner you start with your financial and investment planning, the better.

10. Don't panic!

You can't live in fear of stock market crashes, because if you don't play, you don't win. The market has a "must be present to win" criterion. There will always be artificial reasons that someone will tell you why you should sell stocks and go to cash. Ignore it! The most money that has ever been lost in the stock market is that which sat on the sidelines because of fear.

And finally¡Kthere are no get-rich-quick strategies that work. If you know it, everyone knows it. The best advice you get is in the mirror. Use your common sense and judge why you buy, what you buy and when you buy.