By John Foster FCCA Business Advisor Tel 01202 428228 Email: mail@jtfosterco.uk INTRODUCTION There are many of us every year who decide to set up
our own business Maybe its to be your own boss, Or you expect to make more money. The ideas and processes presented in this booklet will benefit you in the following ways: § You will have a checklist of the important tasks This should help to lesson some of the avoidable errors on the way, but will not provide all the answers, as every business is different, run by individual personalities, so do not expect a quick fix. This booklet should be used as a guide/ an aide memoir
to remind you of the key events needed in coming to a decision about setting
up a new business. Contents 1.Starting your business 2.Business Plan 3.Franchises 4.Buying an existing business 5.Business Structures 6.What are your compliance requirements? 7.Who can help? 8.Cash flow 9.The first year 10.Budgeting 11.VAT and other financial matters So you want to start a business? 1. To launch a new business successfully require a particular type of individual. It will help if you are:- · Ambitious 2. Starting your own business can be like climbing a mountain - you start with the desire, and the exhilaration of getting going. The obstacles, the challenges, the successes, the real stories, the could do better. The real stories, need a sound business strategy for success. The Idea 4. However to put ideas into action takes time and careful planning. Take time to do this properly. A half based idea not thought through can be a disaster. 5. You have the idea - what do I do now? How can I tell if my idea could work in business? The Business Plan 6. First step is to put together a business plan. This is a plan for the future and the preparation will help you focus on just what you need to do to start the business and where you want to go with this venture. 7.Preparing a business plan has many advantages, not least that you will have to think carefully about every aspect of the business. The steps taken in this process will maximize your chance of success if taken seriously. 8. A business Plan should include the following key
topics: -
10. These include asking your own bank for a business plan pack. This will normally include a computer disc, which asks you questions about your business. This will cover the key topics above and from your answers produce a plan. 11. Information packs or support is also available from Accountants Solicitors and Business Links. 12. The most important part of any plan is not the figures. 13. The words you use to describe your business vision really tell the story. This is the part that is spoken from within you, only you know this so spend time developing, say what you see and want. 14. This then tells your bank or advisors the real business. 15. The financial figures are developed from your vision, not the other way around. 16. Executive Summary is a resume of the plan itself. It is the last section to be written and it will highlight why you want to do this business, the enthusiasm for the business should definitely be evident. The reader should be drawn into that enthusiasm. This can be the one of the most important sections, always bear in mind, who is going to read this. If it is going to a bank or venture capital company to raise finance then it must demonstrate the attractiveness of the business. Do not however make this too long, a second page should be adequate. 17. Index makes it easy for a third party to find the way around the document. 18.The service or product.. Here provides the detail of what the business is to provide and why you consider it will be successful. The main characteristics and perhaps unique selling points that sets you out from the rest. This is where the idea should take on an identity, and be specific about al aspects. 19.The market. Provide some information about the marketplace you are just about to enter. Demonstrate your understanding of that, its size, what market share you want and how that can be achieved. This should therefore include details of your marketing strategy, how are you going to penetrate the market, advertising, promotions etc. Have you any competitive advantage, maybe because you are late into the market you are taking advantage of the latest technology, putting you ahead well say so. 20.Pricing strategy. How are you going to price your business, have you considered the effect upon your gross margins, do you know what margin you need. How does this compare to others, is this a limiting factor or is that up to you because of your competitive advantage. If you have needed funding then demonstrating gross margin management will be important to your proposal. 21.Business Structure, why have you chosen the business structure, the simplest being a sole trader. This may be the right solution but why, show the reasoning to demonstrate you have looked at the options. To look at options and discount them is a good management philosophy, not to look at them can lead to disasters and therefore it is a good discipline. 22.Premises and location. This is one of the most crucial factors particularly if it is a retail business. However this choice will need to be made taking account of § will your customers come to you Are the premises just big enough for now, what about tomorrow. Lease terms, is is long or short, what are your commitments, break clauses, it is a real drain on the business? 23. Management & CV’s. For potential lenders
this section ranks very high in importance. The plan should demonstrate
that you and any staff members have the variety if skills needed to run
a business like yours. Additionally if you have identified any shortcomings,
what you are going to do to address this. 24. Financial Information. All the above must now be quantified into real financial information to show how the idea can turn into reality, into profit particularly if outside finance is involved. This still matters even if you are funding the business yourself, will you ever get your money back. Remember businesses swallow money very rapidly if not controlled , there must be payback or why do it. 25. The following financial information would be expected: § Year 1 Monthly profit and loss together with
cash flow projections. 26. The overall capital requirement should be mapped out. This would include the following: § Purchase price or set up costs 27. Assumptions underlying. By carefully detailing these
and building your projections in that way, you then can identify correct
assumptions as well as badly judged ones against actual trading. § Assume cash received in 30 days from date of
sale. Once trading has begun monitor the business performance
against these. What is correct, were is it wrong, so what happens to the
plan if the assumptions are changed. Franchises
29. A franchise is where you purchase into an existing business, with a business structure already in place. It will usually involve a Cash payment up front to buy into the business idea. After all you are buying into someone else’s business idea and experience. 30. This should provide a business on a tried and tested formula. How effective this is depends upon the franchisers business experience. 31. However you must make extensive enquiries into the
strength of the business being purchased and to the business support provided
to you. It is your responsibility to ensure you know what you are buying
into. 32. It is important to take professional advice when
looking at franchise purchase, there are some very good ones but unfortunately
there are others that will not suit you and/or provide the support 33.Make sure you understand all the obligations, e.g. royalties etc. 34. Franchises is a business option that may be the way you feel comfortable with, a business structure and strategy already in place, the initial set up usually done for you, - but it is your choice and decision. Purchasing an existing business 35. Find an existing business that is for sale. 36. There are always businesses for sale in your area: § people want to retire 37. This may suit you but will usually need more. Capital available from the outset. 38. If a business looks to be what you are looking for then it can provide the answer, you will need to check: § the local business reputation 39. What is actually being sold? Some parts of the business
will be of real value to you, such as the customer list, its stocks but
other parts may have little value, leases or property or its existing
liabilities. Ensure these are all checked and understood or you risk a
rapid drain on your resources. 40. Be careful not to limit yourself with the old business problems, you may be able to ‘cherry pick’ the valuable parts to you, but this will probably cost more. 41. Advantages of buying an existing business include:
43. When negotiating try to get an agreement for a deposit with some being tied into the continuing profitability of the business. Need to establish this before purchase in principal has been agreed, when you are in the strongest bargaining position. Business Structures 44. The options you have in establishing business structures are: § A Sole Trader
45. The Sole Trader is the most common and simplest business structure. 46. You can trade in your own name and manage yourself as a self-employed individual, employ staff, work from home, and an office. 47. You should notify the Contributions agency and the Tax office when you start the business, as it is a change of circumstance. 48. The main disadvantage is that you have unlimited personal liability, you are responsible for the business debts and your personal assets can be taken to pay your creditors in the case of bankruptcy. 49. You are the business, it can take time to build up a reputation with customers, suppliers if you are not known in the area, industry. Partnership 50. Very similar to sole traders except this is where two or more people are involved in the business itself. This includes shared responsibility. 51. Partners are treated as self employed and taxed as such, the profits being shared in proportion to your agreement, either verbal or written. 52. The main disadvantage is that each partner can commit the partnership contractually. 53. It is strongly recommended that a solicitor at the beginning of the partnership formally draw up a partnership agreement; this would cover the legal obligations of the partners and what happens in case of disputes. 54. The agreement will also covers the profit share agreement so there can be no doubt about what was meant from the outset of the business. 55. There is unlimited personal liability, the partners are responsible for the business debts and their personal assets can be taken to pay your creditors in the case of bankruptcy. Limited Company 56. A limited company can be the business structure your business requires. This could be for: - § Credibility – it can be regarded by some as more reliable than sole traders or partnerships for various reasons. There is public information available on companies, which is not available for other types of business, which are very private. Raising of finance can be easier for companies than for sole traders etc. Issuing of shares is one example. 57. The company can complete all the transactions that a sole trader can, contracting, own property etc. the big difference that in most cases if the company goes into liquidation the directors have no personal liability. 58. The main disadvantage revolves around the compliance with the legal aspects of the Companies Act that the directors of the company must adhere to. This includes the filing of accounts in strict timescales. 59. Note that for new businesses banks will often ask for director’s personal guarantees against loans and overdrafts, thereby making you as director personally liable for those debts in the case of liquidation. The limited liability would not then apply. Compliance Requirements
Sole Trader/Partnerships:- Register as self-employed with the Inland Revenue and Contributions Agency. Check that if you are not using your own name that the name is not going to give problems because someone else uses it. After all you do not want someone else benefiting from your hard work in getting established. The places to check to be sure are: § Local telephone directory This would be the usual checks, however to be certain you should also check with Companies House and the Trademark registry. Limited Company 61. You must register the name when setting up a company
with the Registrar of Companies in either Cardiff or Edinburgh. 62. There is an obligation upon all businesses to maintain proper books and records to comply with either the self-assessment rules or the Companies Act. Ensure you understand what is required. Help and advice with this can be obtained from either the Inland Revenue or an Accountant. Stationery § Name of Limited company Insurance Who Can Help?
65. There is not much available in financial assistance for starting new businesses. However in all parts of the country Business Links are available and can assist you in various aspects. However this does vary from place to place. Business Link is a nationwide network of advice centers. It provides advice to all small to medium sized companies. 66. They have access to advice and guidance to most aspects of business often at reduced rates via DTI funding. Such areas covered are: § Grant advice Bank Manager 67. Most people’s first port of call when considering a business venture is to the local bank, to see a business advisor. Usually they will ask for a business plan and will provide a useful book and software for preparing one. 68. They will provide you with a list of the various services that are available from that bank, these will generally include: - § Deposit accounts Accountants 69. Having the right financial advice is an asset businesses need to prosper. Having all the relevant information on which to base that decision makes good business decisions. 70. Having an accountant working with you sounds easy, however choosing the right one is important. It is very personal and therefore there must be a good level of trust, get on with each other and respect. After all you will probably tell your accountant more about your personal affairs than anyone else. 71.Using an accountant from one of the recognized professional bodies probably means he has experience of other start up situations, use that to your benefit. 72. The right accountant will be able to provide advise on business matters, taxation, VAT and assistance in dealing with the various authorities, e.g. VAT and Inland Revenue. Solicitor 73. A solicitor can be helpful with key aspects when establishing a business. Such as terms of Trade, Partnership contracts, shareholders agreements are all necessary part in the early stages. 74. There will also be circumstances in your trading life when advice will be needed and having established a relationship with one who knows something about your business will be helpful. 75. Compliance issues and regulation are part of our everyday lives, unfortunately these keep changing and you need someone to advise you. A commercial solicitor is required, check their experience in that marketplace, if all they do is domestic then will they be up to date in what is required. Cash Flow
77. Orders are very important to any business, it is the future cash flow but what can you do with orders, nothing until they are produced and dispatched to your customer. Cash today can be used in many different aspects of the business. 78. As part of your business plan a cash flow is an important element. This will show the peaks and troughs of the demand for cash in the business and whether there will be a need to have an overdraft facility, borrow money for working capital, dip into your savings etc. 79. In its simplest terms cash flow is the sum of the business receipts less the payments made in the period or cash inflows less cash outflows. 80. Cash Inflows are: - § Receipts from income or sales Cash outflows are: - § Purchase of stock 81. Remember your working capital and how important the management of this is: always look to retain the correct level of liquidity ( it is not always possible but you must aim for that) Net working capital is made up of the following: Debtors + cash + stock - creditors. Cash is still King!! The First Year 82. Now you are trading, well done, after all the planning and listening to advice, all will be well: WRONG 83. Remember never be complacent about your business, do not take it for granted. Successful businesses take a lot of hard work and effort, everyday.. A complacent business manager is tomorrow’s failure. The needs of the business are forever changing, we live in a changing dynamic marketplace and we must keep up with it. 84. Now you are trading, do not expect too much too soon, building the trade up is a matter of building block approach, one step at a time. 85.At the start your potential customers probably do not know you exist, make sure all your steps along the way are with an aim in mind. Build upon the successes and learn from the failures. 86. Keep faith in what you are doing, do not deviate from the plan, revisit the reason why you started your business 87. At the end of the first year take stock of what you have achieved, well done for getting that far, now are you ready to carry on building in year 2. Budgeting 88. A business plan was produced for the start of the business that changed your life. Now is the time to take that plan a stage further. 89. Prepare a budget for the next year of trading, - learn from the best of last year and do not repeat the mistakes. The budget needs to be assumption driven just like the business plan was. Firstly review your original assumptions, retain those that worked, adjust or discard those that did not work out 90. Once the assumptions have been updated remember to show last year’s comparative figures as a guide. Look at the actual figures achieved against that which was forecast. Adjust the projections for the new assumptions. 91. Recalculate the budget starting with known established costs, i.e. Rent, wages etc and build the budget up from there. VAT and other Financial Matters.
93. Additionally it may be in your interest to register for VAT even if you are below the limit. The reasons for doing this would be: § Integrity factor - the customers you are dealing
with would expect you to be registered, if not it sends out a signal that
you are a very small business If you deal business to business then it probably would not make any difference, as they would be able to recover the VAT. 94. There are two basic VAT schemes for accounting for the VAT, cash accounting and the standard scheme. Cash accounting is where your turnover is below the prescribed limit you only pay and reclaim the VAT on what you have been paid, therefore if a customer has not paid your invoice in the quarter then you do not need to account for the VAT until they do. Standard scheme is where you account for all VAT on your invoices, this time it does not matter whether you have been paid for the goods or not. By raising the invoice within the quarter dates the liability up on you to account for the VAT to Customs & Excise. 95. If during the year your turnover exceeds the prescribed limit then in the relevant quarter you must account for VAT on the standard scheme plus pay any items not previously accounted for, unless you get an agreement with Customs & Excise. The details of the limits referred to above can be found on the following websites: http://www.customsexcise.gov/ 96. It can be a good idea to have a separate bank account specifically to retain your VAT. I know many businesses do this to avoid sudden cash flow problems when the dreaded Vat bill is due, this also stops you relying on this money as business funds. If you are able to use this money and still pay the bills on time without too much pain then fine, but otherwise I would suggest the above. Taxation 97. In all your planning and projections remember to budget for tax payments. |