The expert's advice

Bartley O'Connor, associate director, strategy advisory with PricewaterhouseCoopers and Pat Millar, managing director of Clarion Consulting.

Bartley O'Connor is associate director, strategy advisory with PricewaterhouseCoopers

In Silicon Valley during the dotcom boom, it was said that if you had established an internet business and failed, venture capitalists would only be too happy to fund your next venture. The thinking was that you had learned your lesson from the first outing, ideally with somebody else's money.

Daryl and Peter can learn from the experience, which should stand to them as they endeavour to rebuild the business.

Eisenhower once said "plans are nothing: planning is everything". While Darjam did have a business plan, it is questionable how much planning went into it. The planning process should force the owners of a business to think about every aspect of it, including the target market, the service offering, the business model, the growth projections, the organisation structure and resource requirements, and all cost implications - all of which were issues in the case of DarJam.

Overall, DarJam tried to take on too much, too quickly - an easy trap to fall into with the excitement of winning a big contract from a multinational. DarJam should have put some client-acceptance procedures in place to safeguard the company.

Firstly, doing some background research may have highlighted the fact that the "blue chip" company was actually in financial difficulty. Some consideration should have been given to the demands that the contract would place on the business. An alternative would have been to sub-contract some of the work to a more established company until they had more experience of running the business. They could have requested an up-front fee upon signing the contract, and monthly payments thereafter to help cash flow.

Aside from the obvious risk, focusing on a single customer can also result in a company forgetting the importance of selling - the lifeblood of any business. Any growing business needs to have a dedicated sales person to concentrate on where the next project is coming from.

While it was not the cause of their current predicament, Daryl and Peter also had issues with their approach to resourcing. Instead of having a clearly laid out structure and people strategy with responsibilities, competencies, grades and associated reward levels, their approach was more ad-hoc. While a recruitment agency may seem expensive, it can often save a company a lot of time and the distraction of searching for and selecting suitable candidates. As the company grows, a relationship with a good recruiter can be very helpful, as they will understand the type of people the company prefers.

Daryl and Peter gave in too easily to Sally and Richard's demands for a pay rise. As they have no experience, their value to the company really comes down to their potential and their attitude. With little cash remaining, the founders will have to make a decision as to which of the four employees to keep. This will be decided by each employee's contribution to the company and their flexibility with regard to wages, given the current situation.

In terms of finance, the founders will need to re-engage with the bank to see how flexible they are willing to be during this difficult period. They should also contact whatever liquidator is appointed to the multinational to see if they can recover any of the money owed to them.

DarJam needs to do everything it can to generate work again, starting with the enquiries that came in three months earlier. It may also be worthwhile considering their business model. There may be an opportunity for them to enter into service contracts with customers to manage and update their site on an on-going basis, which would provide an ongoing revenue stream.

Pat Millar is managing director of Clarion Consulting, a business information and technology consulting company

Both inexperience and bad luck were responsible for DarJam's trouble. The founders got excited by what they saw as a business opportunity and decided to go for it. This is not uncommon and is how many businesses, including many very successful ones, start; however they made some key mistakes.

While James recognised that he needed more IT expertise to start his business, neither James nor Peter appear to have felt they needed financial help in preparing a business plan. At the start of any business it's key that a good business plan is drawn up. This is best done with the help of someone with experience in this area. The plan should spell out some basics, such as what the service offerings are, what the target market is, why the founders feel they can sell to this market and the responsibilities of the management team.

A business plan should also identify the costs that will be incurred for at least the first year and what revenue they need to generate and when.

Normally, an adviser would take the founders through a number of iterations of the revenue, cost and cash plans to see what the impact is of sales being slower then expected and to show best case and worst case scenarios.

The hiring of staff for any business, but especially a services business, is a major decision and getting the right people is key. If this takes time or costs money then that should be accepted.

I would question the rationale behind hiring inexperienced staff especially for a small business in start-up mode where everyone needs to be fully contributing. Inexperienced staff may be cheaper, but they require more management time (time that could be spent selling).

I also think that when further staff were needed the founders should have looked at either contract/temporary staff or sub-contracting. While this would have reduced their profitability on individual jobs, they would have only incurred these costs when they had chargeable work and would not be carrying fixed costs.

It was also a mistake to increase the salary of the first two staff members because they found out that the two new staff members were on higher salaries.

For their work, the founders should have paid more attention to payment terms for work done and to have looked at getting stage payments for the work, including some payment on the signing of the contract. This would not be unusual for professional services businesses.

While we all might get excited by the prospect of a large customer, it's key to grow the customer base for any business, especially at the early stages. This spreads the risk in the business and also helps to increase the chances of future revenue through repeat business and referrals. Again using a sub-contractor model might have allowed DarJam to take on the large account and chase other business.

The founders were unlucky with their large contract, but managing commercial arrangements and finances tightly is key for any business. They recognised the risk, but they did not do anything to mitigate it.

So, what should they do next? At this stage the founders need concentrate on survival. They need to aggressively cut costs and to try and generate short-term sales to keep the business alive. They should revisit their early customers looking for business as this is probably the best chance of generating sales quickly. They also need a major sales drive to try and win new business. If they put a sub-contractor model in place then they will have flexibility to take on business without increasing fixed costs.

If they can ensure their short-term survival they should look for professional advice to re-evaluate the business.