Faye Watts is an accountant and tax advisor with a background in creative industries. As well as working in tax consultancy and business planning, Faye sits on the advisory boards of a number of companies, including Funny Women and Sister Snog. She explains what to consider before launching your own business.

I’ve been lucky enough to work with many clients from the conception of their business idea, right through to the messy reality of running it, and one thing I can say for sure is that the clients who plan are much more likely to be flourishing years later. So, here’s my suggestion for planning a successful business.

 

The Idea

Try to put all your understandable excitement aside for the moment (but don’t lose it, you’ll never succeed without it). Let’s look if your business is actually going to make any money, or more precisely, enough money to make it worth the time and financial investment you’re going to have to pour into it.

Ask yourself:

  • Will there be enough sales opportunities to make a sustainable business? If you sell 10 mohair jumpers, are there enough people out there who want another 10, and then another 10? Will there be an opportunity for repeat business. Will the business still have sufficient opportunity to continue in years to come?
  • Are you focusing on the right margins i.e. looking at the overall gross profit amount rather than just the percentage? This doesn’t have to be ‘buy cheap, sell expensive’. A yacht that’s bought for 500k and sold for 600k still brings in a nice profit.
  • Can you multiply sales and therefore is your business scalable? How much do you actually need to sell to obtain your desired profit? By way of example, can you take on staff to take on more business and thus sell more time; can you sell more than 1 colour of mohair jumper to the same customer.
  • Can you diversify? A hypnotherapist selling their time by the hour can only see so many patients in a week so has an inevitable ceiling on their income unless they diversify into selling CDs, downloads, working with groups, or other passive income sources like subscriptions.

 

 

Your objectives?

Are you building this business as way of earning an income stream, or perhaps to become a family business with longevity to continue through the generations? Do you plan to build a brand and sell the business for a lump sum?

Having an idea of what you want from your business means that you can assess whether it has the long-term potential to do just that.

 

Can you afford your business?

Do you have enough budget for costs like advertising, PR, marketing as well as any stock? There’s no point setting up a vintage tea shop or investing in mohair jumpers if no-one’s ever going to know about them.

Do you know how much you need to live on?

 

How will you fund your business?

Women, sometimes more than men, are happier bootstrapping and funding their business as they go, often combining early days with a full-time job. This is safer financially but sometimes it won’t give you the impetus you need to get it off the ground.

If you’re looking for investment there are a number of options:

Borrowing
Traditionally this has been from a bank but crowd-founding is another choice nowadays. Here, you are not giving any of your business away but will be paying interest on a loan, sometimes secured against your home or personal assets so you need to be very confident in your business. That said if you can acquire an unsecured loan (perhaps from a rich relative) this could be a good option.

Investor
These will want a stake or share of the business so effectively you are selling part of your business. There are some investors who will be looking at this purely as a business investment and leave you alone to make future business decisions; others will want to get involved and have a say. This isn’t always a bad thing. Some investors in particular are often chosen as they bring skills and experience as well as money to the table. Think of Dragons Den and the contacts and wisdom the Dragons bring to their chosen businesses.

You need to be fully aware of what your investor wants and expects from the very beginning and have this laid out in writing.

Think very carefully about how much money you actually need for the business growth, and how much of the business you are willing to give up for this.

SEIS and EIS investment
These Government-approved schemes in the UK give investors tax relief on certain qualifying businesses. It’s an initiative to encourage enterprise and we often pair businesses looking for investment that fit this criteria with investors who are looking for opportunities.

Whoever the investor, you do have to be clear what you want the money for, and what you expect to get back, for you as much as them, as its very easy to get carried away and waste it or raise more cash than you actually need.

 

Set-up

For many years there were advantages to trading as a limited company as you could pay yourself by dividends and avoid paying NI. There was a rule of thumb that a business earning £30k upwards was better off as a limited company, saving 9 per cent on National Insurance as well as some higher rate tax savings on certain levels of income. However, from 6 April 2016 the Government is increasing the rate of tax payable on dividends by 7.5 per cent, so tax savings are less obvious.

For some, being a sole trader is simpler but can be more costly. As a sole trader you pay income tax and national insurance on what you earn (regardless of what you draw), at your appropriate rate of tax (20 per cent, 40 per cent to 45 per cent). A small company currently pays a flat rate of 20 per cent corporation tax, and you pay income tax personally when taking a salary or drawing dividends. If you only draw out a small amount of income, you will only pay a small amount of tax, but then the money stays in the company, which may not be favourable. You may need to retain business funds to repay lending or for ongoing working capital.

Mortgage lenders seem to be willing to lend higher amounts to sole traders so discuss options with a mortgage broker too if that’s relevant.

 

VAT

Current VAT registration limit is £82,000 and you must resister if your turnover exceeds this in a 12 month period. You can also voluntarily register. If you are VAT registered you have to charge 20 per cent VAT onto your customer but you can claim back the VAT on your purchases.

 

Good Records

You’ll need to keep accounting records for at least six years, including all sales and income, invoices and receipts, PAYE and VAT records and details of anything you’ve taken out as personal income. Make sure you set up a good book-keeping system from the start. Knowing your financial position early on enables you to plan more effectively for marketing campaigns at certain times of year for example.

 

What to expect

It is wise to work with your accountant to put your business plan together, which should give you an indication of when you might expect to be at least breaking even. This will be different for every business. I have some clients who are investing in technology and making no money. Their aim is to get a certain number of downloads/visitors/users and then sell making their money that way.

If you’re nowhere close to your target within the timescale, it’s time to take a strong look at your business model. A service business in particular should expect to be profitable quite early on. If it’s not, there are serious questions to be asked.

Likewise, in the future, making projections every year or six months and reassessing the business against those projections, will help you keep tabs on the health of your enterprise.

 

Final tips

  • Try to look at your business objectively. Businesses can be emotional, they are almost like your children, but this objectiveness is vital. Use others as sounding boards: your accountant, other business owners, people you trust and have an idea of your market.
  • Find a mentor that has done what you want to do. Even if there isn’t the possibility of formal mentoring, ask if you can take them out to lunch and pick their brains.
  • Don’t get hung up on spending thousands on the best website, the slickest business cards and the funkiest offices. Yes, you may have to invest in building a brand but spend realistically, because that website will go out of date, those cards will get dog-eared in your purse and that office could potentially end up a mill stone around your neck if you don’t make the profits you expected.
  • Do make your sales a priority but do remember that old adage, ‘turnover is vanity and profit is sanity’

fayewatts.com 

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