Small businesses and start-ups are often held up as the key factor that will bring the UK out of its current economic slump. And, with numerous Government initiatives and loan schemes currently in place to encourage people to start their own business, it’s a tempting prospect to start out on your own.
So, if you’re considering taking the plunge to go into business for yourself, what are the most important things to consider if you want to ensure your venture gets off to the best possible start? Emily Coltman FCA, Chief Accountant to FreeAgent - who provide an award-winning online accounting system designed to meet the needs of small businesses and freelancers - gives her thoughts on how to best prepare for starting a new businesses.
Get your funding sorted
If you’re setting out in business on your own, you’re going to have to pay for everything from equipment and materials through to internet subscription charges and the cost of transport to get to and from jobs - and it all adds up.
Make sure you properly estimate your start-up costs and thoroughly research your funding options. Will a bank loan be the best way to get credit for your business, or can you borrow from friends or family? Do you qualify for any other finance, such as the Government-run StartUp Loans scheme or a local small business award?
Even if you have a product or service that you think will change the world, you’ll still need to set a clear business plan. It’s vital that you work out, as far as possible, what the potential demand will be from your customers - and whether there’s even a market for what you want to do. And you’ll also need to identify your potential suppliers and set the foundations for your first sale long before you officially start trading.
When you're sure your business plan is viable, you should start putting all of the infrastructure in place for your venture, which could include creating your website, setting up social media channels, printing business cards and - if necessary - branding your business to make it stand out against the competition. Just watch your costs: spending too little or too much could be harmful to your business in the long run.
Forecast your cash flow
Before your business gets started, you’ll need to have some idea of how you think it will perform, so draft a simple forecast that you can use to work towards. Calculate what your revenue will be and contrast it with your projected costs - and if you’re not making a profit, work out how to address the balance.
But don’t be over-optimistic with your estimates. There’s no point in saying your business will be making tens of thousands of pounds in a matter of months unless it’s actually likely to do so, as this will dramatically skew your figures. Remember - wishful thinking has no place in your forecast, because if you overestimate your potential earnings, you may risk running out of cash.
Keep your books in order
It’s tempting to get sidetracked by the day-to-day running of your business and ignore the less interesting parts, such as bookkeeping. Don’t do this! You need to stay on top of your books so that you have all of the necessary information at hand about how your business is performing.
Make sure you keep your receipts and log your expenses properly, otherwise you’ll face a nightmare when you’re doing your tax return. If you have the resources, you may want to consider hiring a professional bookkeeper - or alternatively use an online accounting system, so you can input your financial data regularly and have a regular at-a-glance overview of how your business is performing.
If you need to incur any expenses when setting up your business, make sure you review your options. Don’t be tempted to just go with the cheapest price, but it’s also unwise to pay top-of-the-range prices unless you’re 100% certain your business can afford to do so. It could be that a lower cost alternative would work just as well without having any negative effect on your business.
For example, you may think those state-of-the-art business cards are essential, but are there less costly options that look just as good? Obviously it’s important not to scrimp and opt for something cheap that could be detrimental to your business’s reputation, but is there a good quality alternative to the top-of-the-range option?
And instead of paying £2,000 for a new flat screen computer monitor, is anyone selling a high quality used one? You can put the money you save to use elsewhere in your business, so it pays to shop smart.
Stay on top of your tax
If you’re in business, you’ll have a range of taxes to keep on top of. Depending on whether you’re a sole trader, partnership or limited company, there’ll be National Insurance, income tax, capital gains tax, corporation tax, PAYE and VAT to consider.
And remember to keep track of when your tax is due. You’ll need to file a self assessment tax return each year and potentially also VAT returns each quarter - and failure to do so could result in you being liable for strict penalties and fines from HMRC.
Monitor your cash flow
It’s vital for any business to receive payment for the work it does, but the reality for many start ups is that customers don’t necessarily pay you on time. This creates a big hole in your cash flow, and can give you a major headache when you have bills to pay.
Make sure you’re invoicing properly for the work you do and chase up these invoices with your clients to make sure they pay you on time. You may even want to consider implementing an automated invoicing system, such as the one used in FreeAgent, to send out email reminders for you.
Don’t undervalue yourself
You may feel you need to charge a lower price than your competitors in order to get a foothold in your target market. That’s all well and good, but don’t undervalue yourself - there’s no point in setting a price that’s not going to cover your costs, as you’ll either end up losing money or not being able to grow your business.
Focus on highlighting the things that make you different from your competitors and the high quality of service that you offer, rather than just focusing on setting the lowest price. Remember that many customers will pay a reasonable amount for a high quality service - they’re not always looking for the cheapest option.
Get a good accountant
Even if you’re doing all of your business bookkeeping and financial management yourself, it can be beneficial to get the opinion of a professional accountant. They’ll not only be able to check and make sure the records you’re keeping are in order, but also to use their expertise to give you additional advice on specialist financial issues that your business will face.
Think of it as an investment - you pay the fee for their service, so that your business can benefit in the long run.
Organising your finances and forecasting your cash flow isn’t just important for when you start your business - it’s a vital element of managing your long-term business strategy, so don’t put it at the bottom of your to-do list every month.
Even if you don’t enjoy your bookkeeping, remember it’s one of the most important parts of running a business. If it’s not done properly, you won’t fully understand how profitable your business is, which product lines - or which customers - are costing you money and where you could invest for profitable growth.
So make sure you keep revisiting your figures regularly and ensure your forecasts are always up to date. That way you’ll know whether you can afford to grow in the future, or take on new staff, or even branch out by starting to sell a different product.
Emily Coltman FCA is Chief Accountant to FreeAgent, who provide an award-winning online accounting system designed to meet the needs of small businesses and freelancers. Try it for free at www.freeagent.com