At DKP we help many people set up their businesses. Our wealth of experience in business planning and setup will help guide you towards some of the elements that are important to keep in mind when planning your new business venture.
Having an idea is just the start of your business journey. An idea alone will not make your venture successful. Individuals who do well in business have some characteristics that will help them drive their business forward no matter what challenges are put in front of them:
- You must have a burning desire to work for yourself. It can be lonely running a business. Having a burning desire to do things yourself will help you battle through the low times.
- You must have drive and ambition. No one will build your business for you. It is down to you. To start it will all be down to you – sales, bookkeeping, operations, marketing, etc. It can be tough. Having drive and ambition is necessary no matter what business you start.
In addition to the personal characteristics you must have the foundations of a business idea:
- You have a niche identified or an audience for your product or service.
- You have worked out how you are going to service that niche. Either you have a product that would sell well in that market or helps address a problem in that market or your skills and experience in that market are valuable and you can sell your time and knowledge.
You then need to work out what type of business you are:
- Hobby / part time business – used to generate extra cash, but not trying to conquer the world.
- Lifestyle business – run to give you enough money to live the life you want to live and not be constrained to a 9-5 routine.
- Serious business builder – wants to drive high growth and value in the business and one day looks for a sale of the business.
- Family / income business – build a business for the family to provide an income for now, retirement, and future family generations.
Understanding your business model is also important for making the correct decisions about setting up your business structure:
- Are you a retailer that sells to the public?
- Are you a wholesaler, distributor or manufacturer that sells to other businesses.
- Are you a service provider that exchanges time and knowledge for money
- Are you a developer, investor, etc.
So you are sure you want to move forward, you have some ambition, you know your market, you know what your product or service will be, and you know your business model. What next?
It is worth investing a small amount of time developing a business plan. The length and details contained in your business plan will be dictated by your business idea and business model. If you need to borrow money or get external investment to get your new business off the ground, then you will need more detail in your business plan. If however you are self-financing or bootstrapping your new business, your business plan could be as short as one page.
Your business plan should help to cement your idea on paper. It will help clarify your thoughts about your business and guide you on which areas to focus. It becomes your roadmap.
Assuming you don’t need a detailed business plan, we recommend that all business owners have at least a one-page business plan that details:
- What the business is. What you sell, to whom and why.
- The market you operate in and how you are going to sell your product or service to that market.
- Financial Plan – sales projections, the cost of sales and overhead projections and hence gross and net profit predictions for the next 24 months.
- Marketing Plan – how you are going to generate demand / interest in your product and service.
- Sales Plan – how are you going to sell to people in your market that have expressed an interest in your product or service.
- Operations plan – how will you manufacture, ship, or deliver your product or service.
Having an overview document that touches the above six points will help you focus on your goals and highlight the areas where you need to dedicate your time.
Using your business plan as a guide, your next step in the business setup process should be a cashflow forecast.
A cash flow forecast is a detailed breakdown of your forecast for cash coming into and out of your business over a period. A list of all the income streams and a list of all the expenses. The cash flow forecast is usually based on a month by month basis and should ideally cover your first 24 months of trading.
Having a cash flow forecast will allow you to see how much cash you will need to achieve your business plans. This will in turn dictate if you need to invest money and borrow money to satisfy all the cash requirements of the business in the early days.
Next you need to decide on a business structure. There are three main business structures in the UK.
- Sole trader
- Limited liability company
Most small businesses we help start off life as a sole trader. This is the quickest and easiest way to start trading. Partnerships and companies have extra layers of complexity which may take a little more time to set up. Your actual structure though will be dictated by your exact requirements, anticipated size of business, borrowing requirements, etc. Your accountant will be able to help and advise on what type of structure is best for you.
If you start your business as a sole trader there is nothing to stop you changing that structure at some point in the future – so you can for example change to a limited company at any time.
VAT & PAYE
It may be worth considering registering for VAT. You can voluntarily register for VAT before reaching the mandatory VAT threshold. By registering for VAT you can claim back VAT on allowable expenditure you incur for your business setup and early trading. So if your business purchases a lot of materials or products that are subject to VAT it may be worth voluntarily registering for VAT.
Keep in mind though if you voluntarily register for VAT, you then have to charge VAT on your products and services. This may have more of an impact if your business supplies the domestic marketplace where a 20% increase in your fees may have more of an impact on your ability to sell your product or service. If you are supplying the business to business market, then most business will already be expecting VAT to be added to your fee base.
VAT is an extra administrative burden too. Your bookkeeping must be 100% accurate and up to date and you must file your VAT returns with HMRC by the specified due dates (and also pay any VAT owing).
So registering for VAT has advantages, but you should be guided by your business model and do take advice from your accountant.
If you employ people, regardless of your business structure, you will need to register for PAYE. This is the mechanism used to pay yourself and your employees. If it is just you in the business to start and you are a sole trader, you do not have to register for PAYE. You will, however, have to notify HMRC that you have started a business. You will then have any business profits assessed as part of your self assessment tax return.
You will need a bank account for your business. You should always keep your business money separate from your personal money.
Setting up a bank account is relatively straightforward and assuming that you do not need to borrow money, there are just a few guiding principles to keep in mind when choosing a business bank account:
- What are the banks giving away – e.g. free banking for two years instead of one is a nice extra bonus.
- Who do you feel comfortable doing business with? You may want to look at your personal bank as the first port of call.
- How do you want the bank to operate – e.g. do you want to bank online mainly or speak with a personal banker ?
Most banks cater well for small businesses, but it is worth shopping around to see what deals you can get and what type of bank account is going to work best for you.
If you are a sole trader, you don’t need to worry that much about accounting dates (end of your trading year for tax purposes) as your accounting year end will always usually fall at the end of the tax year – 5th April.
If you are a limited liability company, then your accounting date is usually the first anniversary of the incorporation of the company, assuming you started trading immediately.
Again if you are unsure your accountant will advise you.
You must keep records of all income and expenditure from the very start of your business and then maintain up to date financial records for going forward.
You should also keep receipts, invoices, etc. that cover pre-startup expenses. If you can justify the expense as being a legitimate startup expense, it can be taken into consideration as a business expense that can be deducted from your tax liability.
If you have purchased equipment already that you want to move across for the business to use, keep a note of this too. Your accountant will advise you on the best way to account for this type of transfer of assets.
It is also a great idea to invest in a bookkeeping software system early. It is worth getting in the habit of logging income and expenditure in a dedicated software tool to make the overall financial accounting process easier for your and your accountant.
Now you have the solid foundations in place to grow your business. By spending a small amount of time on a few basics, you will give your new business the foundations it needs. Now your work begins.
If you have any questions about setting up a new business, then please contact us. We are here to help.