Set up a business that will stand the test of time
Got a great business idea?
There are more routes to making it a reality than appearing on Dragons' Den.
It is one thing setting up a business, quite another to set up one that will last. Having a good concept is the beginning of what will be a long journey and whatever happens to your business along the way, you can be sure of one thing: there will be a lot of administration.
A new business technically starts with administration - the filing of registration forms. The actual set-up is easy and involves informing HM Revenue & Customs of your new income source and registering as a limited company with Companies House, if applicable.
Sole trader or limited company?
You might want to spend some time deciding what would be the most suitable status for your business: soletrader or limited company. There are other options, such as partnerships or social enterprises, but these are the two main options.
"The status you choose will mostly depend on the profile of your business," says Harriet Finch, who runs Fincello Finance, an accountancy practice in Sevenoaks.
"Operating as a sole trader is generally better for people who don't take many risks, for example, those who sell their own services (such as therapists or writers), or have a trade such as gardening or plumbing.
"Whereas a limited company would be better for businesses requiring greater capital investment and risk, as you would only be liable for the assets in the company should it fail."
It also depends on the type of business. If you do not anticipate earning much income or having a lot of big overheads at first, the sole trader option might be the better route for you.
Owning a limited company can involve a bit more work, for instance, setting yourself up as an employee on payroll and paying corporation tax and VAT.
Tax and accountancy
You will need to set aside a proportion of your income for tax. How much will again depend on your projected earnings but aim to reserve about 25%.
It is a good idea to hire an accountant, as unforeseen tax bills are the last thing you want. Finch explains: "If someone turned up at your door and said, 'I see you’ve put a £500 expense bill in, can you prove it?' Ask yourself, would you be able to say yes?".
The website unbiased.co.uk allows you to search for local accountants by postcode. The Institute of Chartered Accountants also has a finder service, at icaewfirms.co.uk. Expect to pay a few hundred pounds.
Simple but effective
There are other practical matters that can save you time and money later on.
"Simple things like using Excel spreadsheets and remembering to take half an hour to update them every week can help," Finch says.
"Setting up your accounts so that the year end is 31 March makes it much easier to do your accounts, as this brings the company accounts into line with the end of the tax year."
Understand what counts as a business expense, so that you may deduct these from your income before tax is calculated. For instance, a desk, a phone contract and mileage can all be classed as expenses on which no tax would be payable if they are used for business purposes.
Having a business bank account is also a useful way of keeping business income and outgoings separate from personal. There is usually a monthly charge for these, but it is worth paying.
Moneyfacts.co.uk and moneysupermarket.com both have business bank account comparison tables. Consider how quick transfers would be from this account to your personal one.
Write a business plan
Writing a business plan is a prerequisite if you need external investors. It must be easy to understand, jargonfree and easy to update.
Start with the basics - the name, address, web address and legal status of your business.
Say when you aim to start, which sector your product or service is in and how you will develop it. Describe what you’ll offer and include your 'unique selling point' or USP, comparing the product or service with the competition.
Explain where you will sell it, who the customers are and what it will cost and why. What is your route to market? The internet? A shop on the high street? You can include key findings from market research here. Include a few lines on how you will market your product.
Set business aims. These will include financial details, particularly the first year. This should include realistic projected earnings and detail on how any investment or loan will be used.
Profit and loss forecast and cashflow projections must be given.
Equipment, premises, materials, staff, transport and insurance are some of the main expenditures.
Estimate sales forecasts for the first month. How long will it take to break even, then make a profit?
Highlight risks you are aware of and how you will try to minimise them.
Look at restrictions you are aware of, such as legal responsibilities - insurance, health and safety regulations and so on.
Include copyright details (seek legal advice if you believe your product or service is something that needs to be protected by copyright).
Loans, investment or funding
Consider how much money you need to get off the ground and whether you will need external sources of investment or a loan. There are a range of options open to small businesses beyond your bank. Most start-ups begin with loans from family and friends.
Alternatively, try crowd funding on websites such as crowdcube.com, explore whether you would be eligible for a grant and look at peer-to-peer lending sites such as fundingcircle.com.
There are some useful websites for more information on how to set up a business. Businesslink.gov.uk has information on everything from business plans to trading abroad. But any entrepreneur will tell you that even if your record-keeping is perfect and your business plan flawless, you won't go far without willpower, determination and a lot of hard work.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.