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Your EnterQuest Bulletin - 2 March 2004

In this week's issue:

• the perils of financial management 'denial'
• a factsheet to help you understand your business financial ratios
• the importance of testing your mailshots first
• information about changes to the Minimum Wage

The perils of financial management 'denial'

In last week's bulletin, we were discussing the importance of cash and cashflow, both keeping an eye on it and making sure you've got enough of it.

Managing business finance, or more like not managing it, is an area of small business management where we see too many entrepreneurs guilty of 'denial' behaviour.

By this we mean they refuse to accept that there may be a potential problem, or if they do, they just bury their heads in the sand and hope that it will go away.

Not a very bright approach to take, you might say. But in our experience, and when you consider business failure rates, this denial approach to financial management indicates that four out of every five business owners are not totally in control of their business finances.

This suggests that the majority of small business owners, and that probably includes you, may need a financial wake-up call.

Management denial is a recipe for disaster.

It's a bit like setting off on a bus journey without checking your pockets to see if you've got enough for the fare, and jumping on any bus that comes along without checking to see where it's headed.

Dumb, isn't it? Nobody in their right mind would do that, would they? But too many business owners do exactly that with the management of their finances. And guess what? They get a big shock when they realise they haven't got enough cash to pay for the journey.

Entrepreneurs that are naïve enough to do this invariably end up on a very short trip to the same destination. The small business scrap heap.

So before you start up in business, or if you're already trading, you must appreciate that you can't make any serious business decisions without first of all being in complete control of your finances. Every activity you get involved in will have a financial implication or need a financial commitment, which you can only make if you have your cash and other aspects of your finances under control.

Be honest. Are you in total control of your finances right now? Or are you confident enough that you will be by the time you start up?

At least if you recognise your limitations, you can do something about it - get some training, seek professional advice, or employ someone that can help.

This week, we've produced a quick test to help you assess whether your financial acumen is up to speed. You should really be able to answer all of these questions correctly, but any fewer than three correct answers probably spells trouble.

1) What is the correct definition of business liquidity?

• the amount of cash you have available
• the amount of working capital you have available
• the amount of money you are owed by debtors
• the amount of money you can borrow or overdraw from the bank

2) Liquidity ratios indicate your ability to meet liabilities. Can you explain the difference between your current ratio and your quick ratio (acid test)?

3) What is gross contribution?

• the difference between price charged and variable costs to make a product
• your profits before tax
• costs you can directly attribute to production of a product or service
• your profits after tax and interest have been deducted

4) True or false? It is an offence to allow yourself to become insolvent.

You will find the answers at the end of this bulletin, or in this week's factsheet, which will also help you understand financial ratios and how to use them to manage your business.

Here is the factsheet:

A Guide to Understanding Financial Ratios

Weekly business tip

The importance of testing your mailshots first.

Direct response mailshots are one of the most cost-effective and rewarding ways of selling a product or service - if done properly.

But for many people, they end up being a costly experiment. A marketing 'stab in the dark' where absolutely nothing is achieved and nothing is learned.

Consider this scenario. A small firm decides that a direct mailing campaign is their preferred method to reach their target audience, and they have bought a list of thousands of names of potential buyers who are proven to buy their type of product.

They construct a compelling sales letter, with a very attractive introductory offer, an easy-to-send-back response card, and a professionally designed leaflet. They stuff all of these into envelopes, or get a mailing house to do this for them, and mail them out to twenty thousand prospects.

And what happens? They get a trickle of orders, amounting to about a 0.3% response rate, when they were expecting at least 3%. That's 60 orders instead of at least 600.

So what went wrong? It might have been the headline in the letter, which didn't compel the recipient to read on. Maybe the letter itself didn't recognise and highlight enough how the product would solve customers' particular problems. Or it could have been the introductory offer, or the leaflet just didn't do enough to illustrate the benefits of the product.

Whatever the reason for the poor response, the point is that SOMETHING wasn't right. And by mailing out the offer to the entire list, they didn't just waste their valuable marketing budget. They also failed to realise that they should have tested the offer first, avoiding an expensive flop.

By sending out a sample mailing to a few hundred prospects first, they would have been able to test the response rate. When it came back lower than expected, they could have adjusted the letter, headline or special offer, and then sent further sample mailings out until they started to see the returns they were expecting. When they finally felt the formula was right, they could start cranking up the volume of mailings.

By testing your direct mail campaigns this way, you are not only avoiding a drain on your cash without a profitable return, but you're also giving yourself an opportunity to fine tune your offer, until you work out exactly what is going to produce the volume of returns you are aiming for.

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New business ideas

Each week we provide you with summaries of some popular or emerging business ideas in the UK.

Here are this week's ideas:

• E-Mentor
• Raw Food Café

Just one word

Regularly improving your vocabulary is not just about learning a new word and its meaning. It will improve your general knowledge and make you feel and act smarter in all sorts of personal and business situations.

What is the meaning of the word "fatuous"?

a) ridiculous
b) selfish
c) irrelevant
d) arrogant

Answer at the end of Bulletin.