4. innovation at work self employment

Innovation At Work - Self EmploymentTUTOR’S NAME HERE

Innovation At Work - Self Employment

Learning ObjectivesMenu

Unit 1: The Pros and Cons of Self EmploymentUnit 2: Generate An Innovative IdeaUnit 3: Implementing your Action PlanUnit 4: The Practicalities Self Employment

• Introductory Slide.• In the first unit you will learn about the pros

(advantages) and cons (challenges) of self-employment. In the second unit you will learn about how innovative ideas emerge and are successfully implemented. In Unit 3 you will further develop with your understanding of methodology for implementing an innovative self-employment action plan. Unit 4 presents in detail the practicalities which those moving into self-employment need to consider and address.

Unit 1 (U. 1)

The Pros and Cons of Self Employment

The ‘Pros’You: get to be your own boss get to do what you’re interested in get to set and meet your own deadline can get to express yourself can realise your potential can be proud of what you do can gain control of your own destiny can be creative can have a second career can cut out the commute can hand on a legacy to those you care about - posterity can gain recognition from family, peers, community can deploy your skills can get sense of fulfilment in meeting the challenge can design your lifestyle rather than have it dictated to you can achieve financial independenceIt: can be profitable can be varied

The ‘Cons’

• It can be lonely • If you don’t work you don’t earn – no ‘sick leave’; holidays

cost you in time away from the business• Owner/Managers have to fulfil all roles – a huge time

commitment – long and irregular hours• Expect the unpredictable.....• Can be a long period before owner/managers can draw

wages and thereafter additional profits – or before shareholders see a dividend

• Can be ‘feast or famine’ – takes a long time to smooth out the peaks and troughs

• Over-trading (trading in business much of which won’t be delivered) can often be a bigger problem to manage than finding the sales

• Some of the challenges or the ‘cons’ of self-employment:• It can be very lonely when the self-employed person is

the primary driver of all aspects of the business particularly in its start-up phase. Such owner/managers have to fulfil several different functions and as a result the time they have to commit can be very significant (and much much more than in a classic 9 – 5 job).

• Earnings can fluctuate. Sickness or holidays will be unaffordable, possibly for several years, because time away from the business usually means that money is not being earned.

• Also self-employment carries great risks. It is not for the faint hearted. It requires resilience and self-belief.

U. 2 Generate An Innovative Idea

• To Create Value and Generate Income• Steps from idea generation through to operating

a profitable business....

• Even if someone has the ambition and drive to work for themselves this can only become a reality if there is an idea which is good enough to be profitable and sufficiently so to employ at least one person.

• So how are innovative ideas generated? That’s what you should consider.

• What is innovation?

• Think about: What is ‘innovation’?

• It is a widely used term. But what does it actually mean when it comes to setting up a business to employ at least one person?

Innovation is a Frame of mind: Always question WHERE are

you going?

• Innovation is actually the product of a way of thinking, a ‘frame of mind’.

• The first step in thinking in this way is for you to question where you as people who may become self-employed are going in their lives – what are their goals?

Creative thinking – the ‘inner innovator’

Personal motives – the ‘inner innovator’

Action

The journey of innovation

• Behind all business innovations there have been individuals who have been on a journey of innovation.

• You will have had personal motives which have inspired you to consider a different way of doing something; you will have thought creatively about this & then crucially have acted upon their idea –without action an idea will not be an innovation.

The “Inner Innovator” :

• Knowing yourself... - Self-awareness- scope for self advancement- recognise then overcome your personal barriers

• Influences good and bad...

• ‘Push and Pull’ factors ....

‘Push’ = necessity ‘Pull’ = opportunity

-

• Everyone is a potential ‘inner innovator’. • To unlock that inner innovator one needs to

understand one’s own make-up. What influences have shaped us, good and bad?

• What are the factors that push us into making a decision? Usually these factors create a situation of perceived necessity, an event such as losing one’s job for example. What are the factors that pull us towards a decision? These are usually opportunities that present themselves.

Innovative thinking:

•Observe……..

• Innovative thinking is based firstly on analytical observation…….

Imagine:

Thinking…..

•Acting on your idea…..

• …. then considering ways of doing something better or doing something completely new to achieve an end. To do this usually one needs to think outside normal parameters, to “think outside the box”.

Planning for innovative self employment.....

• Action to be effective (and achieve the hoped for goal in self-employment, profitability) needs to be planned – in steps (i.e. a strategy); then implemented.

• This is another innovation process model. • The key points here are the necessity to

prototype and pilot test in the implementation phase. Only once that process has been analysed should full implementation get underway. But just because something gets to the production or delivery stage doesn’t mean it will be successful. Profitability depends on effective selling and this requires good promotion and marketing.

WHY?

WHAT?

WHEN?

WHO? HOW?

WHERE?

A Self Employment ACTION PLAN… implementing an idea to do something new

• This conceptual framework is key to successfully implementing a Self-Employment Action Plan.

• The individual who is planning for self-employment should interrogate his or her self with these very challenging questions: Why am I doing this? What exactly am I doing? Who are my customers? Who are my collaborators (including suppliers)? When am I doing it? How exactly, will I do it? Where is my base? and where are my customers?

U. 2 Exercise:

• Devise An Action Plan For An Innovative Self Employment Proposal

• For the action plan think about What? Why? Who? How? When? and Where? Interrogate a self-employment idea that they have had using each of these questions. This will give insight into how effective this method can be in constructively critiquing any idea.

Unit (U. 3)Implementing your Action Plan

Being innovative about innovation…..

COLLABORATE…

•No individual has all the answers•Lone wolves starve!

•‘Co-opetition’ - Collaboration is an effective response to competition

• Today’s successful entrepreneurs are those who are ‘innovative about innovation’ in so far as they collaborate with others to implement and possibly to improve their ideas (i.e. to innovate). They recognise that no individual knows it all.

• You can reflect on the term ‘co-opetition’ (a term first used by Harvard Business School) is today’s effective response to competition.

• Co-opetition is collaboration with others to overcome competition and in some cases those collaborators may even be competitors.

Benefits of collaboration .... You can access resources:

Benefits

Access to ExpertiseProblem Solving

Research

Specialised Equipment

Enhanced credibility

International R&D Networks

How to make collaboration work

for you.....

• Collaboration takes time and energy

• Cultivate the RIGHT collaboration!

• But HOW?

• Draw up a formal agreement: who does what for what return

• Agree targets• Record work activity; measure progress

against targets• Agree a timetable for regular

communication• Involve a mutually trusted third party to act

as mentor/buddy/ honest broker as required

How to make collaboration work for you.....

• Now focus on the steps which need to be taken ensure that a collaboration is effective….

• An agreement should be drawn up underpinned by targets.

• Work activity should be recorded and measured against those targets.

• There must be regular communication• Ideally a mutually trusted third party should be

available to provide support (this could be an accountant or solicitor)

Distinguish good collaboration from bad by....

• estimating the return on a collaborative project... against the cost of opportunities foregone... + the ongoing costs of supporting the collaboration

• defining and agreeing your SHARED PURPOSE• Committing to transparency

• To test whether a collaboration is likely to be successful these steps are crucial

• The return on the proposed collaborative project should be assessed against the costs of supporting it.

• The collaborating parties should clearly set out and agree in advance their shared purpose

• The collaborating parties should commit to protocols to ensure transparency between them.

Managing the collaboration

• Once established, how can a collaboration be optimally managed?

• Scope out the challenge• Structure the boundaries• Sort tasks for execution• Be prepared to accept and learn from

failure

Managing the collaboration

• The key steps to ensure effective ongoing management of the collaboration are:

• That the challenge is clearly scoped out and therefore understood.

• That the who does what when and how boundaries are clear

• That the responsibilities for tasks to be completed are understood.

• That the parties are prepared for possible failures, are positive and are prepared to learn from mistakes (because everybody makes mistakes!)

Tools to ensure a successful collaboration

Step 1: Situation analysis

Step 2: Partnership formation and project design

Step 3: Consensus building ( roles/responsibilities)

Step 4: Implementation

• These are tools which you can recommend as an aid to help ensure a successful collaboration:

• Pearltrees is a curated archive of research resources; • Mind Manager is a mind mapping tool as is Popplet; • Google Docs hosts documents being work on;• Skype facilitate conference calls • Pirate Pad is a great way to record contributions made

by partners during a Skype; • Google calendar and Orchestra are shared diary work-

programming tools.

U. 4 The Practicalities Self Employment

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• Different Self Employment Options• Sources of Finance• Profit• The Importance of Cashflow

• This final unit could be a half day course on its own. However your intention in this lecture is to give your audience an overview of the practicalities of self employment. These slides can be handed out as a resource for your audience to take away and reflect upon at greater length.

• Explain that you will touch on different self employment options; sources of finance available; what profit actually means; and the importance of cashflow (making the essential point that even where there is a ‘paper profit’ if the cash isn’t coming in the business will go bust!)

Self Employment Option 1 - Sole Trader

• Advantages– Easy to set up– You have full control– No audit required– Minimal reporting

• Disadvantages– Fully liable for debts– Income tax is paid on profits not

drawings– It can prevent growth due to lack of

capital

• People who become self employed set themselves up as sole traders.

• This slide previous sets out the advantages and disadvantages of being a sole trader in most EU member states.

• The principal advantage is that it is easy, with minimum reporting required and no audit.

• However the big disadvantage is that the individual is personally liable for debts and has to pay income tax on all drawings.

Self Employment Option 2 - Partnership

• At least two partners required (but can be a larger number)

• It is advisable to seek legal advice and draw up a partnership agreement

• Partnerships have become more common as the propensity to collaborate has grown. Emphasise the importance in such cases of drawing up a formal partnership agreement at the outset.

Self Employment Option 2 - Partnership

• Advantages

– Pooling of skills– Increase in resources– The risks are shared– Easily set up

• Disadvantages

– Each partner fully responsible for all debt

– Difficult to introduce new partners– Personality clashes can become a

problem

• Most of the advantages you will have already discussed in your consideration of collaboration…. However, sharing risk is a further advantage to stress.

• A big disadvantage is that each partner will be responsible for all of the debt even if it was the other partner who generated it. Also money clashes can undermine even the strongest of relationships.

• The company is owned by ‘Shareholders’

• The Company is managed by ‘Directors/Executives’

• Company is seen as a separate legal entity from the individuals own it and the executives who manage it

Self Employment Option 3 – Limited Company

• The limited company model is an option in almost all EU jurisdictions. This is an option taken by new businesses which have greater ambitions then employing just one person and by sole traders who want to expand and employ others.

• A Limited Company is a legal entity which is separate from the individuals who own it and the executives who manage it.

• In the UK and Ireland Companies are registered with Companies Registry

• Audited accounts and can be accessed online

Self Employment Option 3 –Limited Company

• These companies are centrally registered (in the UK and Ireland with Companies Registry) and their audited accounts are publically available.

Self Employment Option 3 –Limited Company• Advantages

• Owners are not personally liable for the debts of the company

• So protection of personal assets (some exceptions)

• Simple in the UK and Ireland : Normally set up as a “Shelf company”

• Limited Company status may be a pre-requisite for certain contracts / tenders

Disadvantages• Much more legal

regulation involved

• Tax position of company separate from the Shareholders

• Subject to an annual Audit / Report – this can be a substantial expense

• The big advantage is that owners of limited companies are not personally liable for their company’s debts and often contracts are only be offered to companies with sole traders excluded from tendering.

• The main disadvantage is that limited companies are subject to a more complicated system of regulation.

Key costs for a small business

• The key cost considerations which those setting up in business need to take into account.

Key costs for a small business

• Equipment / Vehicles• Stock• Legal / Professional• Advertising• Accommodation costs• Interest and charges• Wages or drawings• Other unanticipated

costs

Sources of finance

• Personal/family investment

• Bank finance• Business Grants• Asset Finance• Alternative loans • Investors –

Equity/Angel

• Take your audience through the major generic sources of finances for a business – each of these you will deal with in turn in the next set of slides …….

Personal Investment

• Personal savings• Family & Friends• Use of equipment

• ………. the primary forms of personal investment are listed in this slide

Bank finance

• Overdraft Facility• Credit Card facility• Term Loan

The Banks will consider an application under the 5 C’s:-

- Character- Capacity - Capital - Collateral - Conditions

Bank finance

• Banks evaluate applications for financing using variations on these five criteria – the 5 ‘Cs’ in English …. This helps those who are seeking bank finance to focus on the perspective of the lender.

• Character – Good character - honesty, integrity , reliability , hard working……

• Capacity – Ability to repay: Does the business have the cash-flow to meet the repayments? Are the projections realistic?

• Capital – Extent of personal commitment (‘skin in the game’) How much has been invested by the promoter and what percentage is external debt?

• Collateral – What security is available in personal or business assets should things not work out?

• Conditions – What are the market conditions and trends in this sector and what may be their impact on this business?

Bank finance

Bank finance

• Overdraft Facility

• Overdrafts are a short term borrowing facility

• There will be ‘Arrangement Fees’• Interest rates can vary over time• Personal financial guarantees may be

required

Bank finance

• Credit Card Facility

• Very short term! This is in effect a one month borrowing facility

• Full balance should be cleared monthly • Interest rates are very high• Defaults incur high penalties & charges

Bank finance

• Term Loan

• This is a longer term borrowing arrangement – can be from 1 – 15 yrs

• Interest rates are fixed – agreed monthly payment

• Personal guarantees (security) are required in most cases

• Arrangement fees are charged

Business Grants

• UK:• Invest NI• Princes Trust• Local Councils• Department of

Agriculture and Rural Development - LEADER

•Republic of Ireland•Local Enterprise Offices•Enterprise Ireland•Local Employment Partnerhips•Bord Bia•LEADER Companies•Udarás na Gaeltachta

• In most EU member states there are grants available for business growth and business start-up projects but these are usually small in number relative to the demand and are therefore very competitive with conditions attached to grant offers such as targets for job creation or the percentage of product or service which will be exported.

• Listed are some of the main sources of business grants in the UK and Ireland….

Alternative Loans

• Credit Union Loans• Government Loan

Funds• NGO/Philanthropic• Hire Purchase/Leasing• ‘Crowd funding’

Costs Involved in a Business

• FIXED COSTS– Costs which are not affected by the

level of activity of the business: premises (rent, rates), vehicles, equipment, insurance, bank interst...

• VARIABLE COSTS– Costs which are directly affected by

the level of activity in the business: staff, inputs/raw materials, electricity, fuel (eg: delivery costs)....

Examples of Typical Profit Margins

• Low 20% - Supermarkets18% - Newsagents25% - Music Stores

• Medium 32% - Toy Store33% - Printers35% - Pet Shop

45% - Florists45% - Fast Food Outlets

• High 65% -- Opticians

• These examples of average profit margins of different types of businesses in the retail sector in the UK are useful. They show how variable are the profits which can be expected within the sector.

• The point to make in showing these figures is that to break away from these averages and to substantially increase the profit margin in a particular type of business is very difficult and requires innovation and a truly extra-normal approach.

The importance of Cashflow

• “Cash is the oil that lubricates the business

engine”

• Its important to understand that sales being greater than costs only matters if the sales generate hard cash. Getting paid is absolutely essential! Cash is the oil which lubricates the business engine (not promises or ‘I owe you’s’!)

The importance of Cashflow

• Profit with Good Cashflow

• Loss with Good Cashflow

• Profit with Poor Cashflow

• Loss with Poor Cashflow

Survival chances

Excellent

Medium Term

Short-term

Doomed to Failure

Purpose of a Cash Flow Forecast

• To identify potential cash shortfalls before they happen..... Do the sales of the business have a seasonal nature?

• To act as a management tool in making decisions.

– Example: Expenditure may be deferred until cash position has improved.

Purpose of a Cash Flow Forecast

• These financial projections are a vital management tool – they allow business owner/managers to make decisions as to whether an expenditure can or cannot be afforded.

• The Cashflow forecast confirms for the bank .... How much finance the business needs and that the business the ability to repay.

Purpose of a Cash Flow Forecast

Indications of Cashflow Problems

• Overtrading – failure to fulfil orders on time

• Returned Cheques

• Bank Letters / Fees

• Supplier problems

•Registration with Government (UK - HMRC; Ire - Revenue)•Income Tax – tax return every year - severe penalties for non-disclosure and interest on late payments •Business (Corporation) Tax – charged on the profits of Limited Companies – annual returns•National Insurance•Tax on goods and services: VAT (turnover threshold UK = £82k p.a.) – usually quarterly returns - supported by full records of all transactions – costly penalties•Accurate record-keeping is vital – sales and purchases. invoices -also allows you to monitor & control-5/6 years

MEETING YOUR LEGAL COMMITMENTS

• Self-employment is a big step – all the responsibilities that for employees reside with their employers fall in the case of self-employment to the individual who is self employed. These legal commitments have to be met otherwise the business will fail. Ideally, the support of an accountant should be secured to help to ensure compliance.

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