How to… start a business

As part of Small Business Advice Week we are running a series of articles and guides with helpful advice and tips for SMEs. Today, Leel de Silva‘s guide to starting a business.

starting a business

What do Steve Jobs, Bill Gates and Eric Schmidt (the founders of Apple, Microsoft and Google respectively) have in common?  Other than becoming billionaires during the internet age, they were all born in the year 1955.  Was there something special about that year, were the stars aligned right and a comet appeared in the sky?  No, they became interested in computing young and reached their late teens exactly at the time when the computers became easier to program.  Many of the current internet giants were born between 1954 and 56.  Those born later missed the boat and those born earlier were intimidated by the complexity of programming.

We all know success in business takes luck, hard work and intelligence.  Luck cannot be controlled but we have all heard the mantras “luck comes to those who are prepared” or “fail to prepare and prepare to fail”.

In the UK, small to medium enterprises (SMEs) account for 99.9 per cent of all private-sector businesses.  But after four years almost 50 per cent no longer exist. So, how do you stop your business becoming a statistic in the business graveyard?  You cannot control luck but can be prepared to take advantage.

A recent survey of failed businesses has shown “owner’s incompetence” to be the biggest factor in business failure.  Specifically the owners were:

  • Too emotionally attached to an idea
  • Lacked planning before starting
  • Had poor grasp of accounting and finance
  • Kept poor records
  • Neglected tax payments
  • Lived above their means or drew too much income from the business for day-to-day living

10 points to remember when starting a new business

1. Make a business plan

A good business plan allows you to think through all of your ideas.  Think of it as a road map for the business.  You can download many free business plan templates from the internet.  It should cover business expenditure and potential income, cash flow, marketing, local and national competition and why your business is unique compared to all the others.

2. Sole trader, partnership or a limited company?

There are four business entities you can use:

Sole trader or the ‘one man band’: the business belongs and controlled by just one person and without separate legal existence.  Therefore, the owner has unlimited liability on business debts including personal assets.  All the profit belongs to one person and tax is levied on the net profit and not on any drawings by the owner.  A common mistake by many sole traders is to think, when it comes to a mortgage, the lender will take drawings as income, which is not the case, it is the net profit that matter to the lender.

Partnership: think of it as a band of sole traders coming together to run a business.  The partnership deed will note different owner’s share when it comes to profit, capital invested etc.  Still, when it comes to debts all the partners will have unlimited liability.

Limited company: is incorporated, which means it is a separate legal entity when it comes to the law.  The ownership can be equally divided between many shareholders and none of the owners may work in the business.  As a separate legal entity the business is liable for debt and the shareholder’s will only have a limited liability.  A limited company has to maintain a record at Companies House which give details of the owners of the business.  A limited company also needs to submit annual accounts to the Companies House, where they are available for public viewing.

Setting up as a non-profit organisation: You can be a charity, social enterprise or a company limited by guarantee.  There are different implications for each, for both accounting purposes, administration and when approaching for funding for the organisation.

3. Learn basics of accounting

Cogs: You don’t need to have a degree in accounting, but it is vitally important the owner have an understanding of basic principles of business accounting.  Do you know your Cogs (cost of goods sold) from expenses and net profit?

If you find yourself in the Den, standing in front of the Dragons, can you tell them these fundamentals?  If not, buy a book on business accounting and make it your bible.

How many times have you seen business owner’s with clever ideas walking away with no investment from the Dragons, because they don’t know their own fundamentals?

A book I would recommend highly is The Accounting Game by Darrell Mullis & Judith Orloff, the book that probably influenced the HSBC’s little girl and the lemonade stand ad.  The Accounting Game takes you through the basics of business accounting in simple steps but in an entertaining way, through the eyes of a little boy running a lemonade stand.

If you want to further consolidate your accounting skills you can learn to use the software, Quickbooks (cheaper) or Sage (dearer).  Just the day to day or weekly inputting of finances in to the software makes you aware of where the business stands financially.  You will find a course for these for around £90 in the local adult education college

Record keeping: Keep all your receipts and a record of business expenses.  Understand what you can claim for tax.  Find a professional accountant or go to www.hmrc.gov.uk, which has a comprehensive breakdown of what are allowable expenses for tax purposes.

You may then rely on your accountant to do the final submissions to the Inland Revenue. Better records also saves on accountant’s fees as they have to do less preparatory work.

It’s also important to open a separate bank account for the business.  The bank will ask for your proof of ID and proof of address where the business is based.

4. Marketing

Do you go for an advert in a local newspaper, leaflets through the letterbox, word of mouth, networking or Google searches?  It all takes time and money.  A good marketing plan can be crucial.  If your customers don’t know you exist, how will they find you?

A website is obligatory these days. There are many providers e.g. Go Daddy, 1and1, WordPress that can guide you to develop your own site.  You may even get a volunteer from the local volunteer or job centre (usually someone looking for work experience) to design one for you for free.  If your budget can stretch you can improve the ranking of your website on a web search engine through using a SEO specialists.

5. Be on top of your own personal finance

One of the biggest mistake business owners make is that, they are so focused on using all available finances to make the business work they neglect their own personal finances.  In the long term this can be very detrimental, especially when it comes to buying your own home or applying for credit.  No matter how successful your business, if you have defaulted on personal finance most high street lenders / banks would reject you as a customer when it comes to mortgages and loans.  If not, better to make your business successful enough to purchase everything in cash.

6. Save for a rainy day or the taxman

Don’t wait for the end of the tax year to scramble around to find funds to pay the tax man. Put away monthly amount based on the projected profit (if there will be one) to pay the tax man.

For many businesses the income can be seasonal or need to make hay whilst the sun shines.  Some retailers make 80 per cent of their annual profit just from the Christmas and New Year period.  Many large corporations and even countries have gone bankrupt or closed down because they could not pay their workers or creditors, as they have run out of cash.  That is why they say “cash is king” and managing cashflow is vital for any business. Make sure to put away enough funds to maintain your business throughout downturns or quieter periods.

7. Gearing or borrowing money

You need to carefully consider when to borrow money to expand the business and when to use the profit generated.  Despite the best words of the business secretary Vince Cable and the pumping of money in to banks through quantitative easing and the low interest rates, many banks have tightened their purse strings when it comes to lending to small businesses.

8. Pensions

Pension is a good way to use some of the profit for your own benefit rather than giving away to the taxman.  All pension payments are tax deductable.

Sipps – you may even use a self invested personal pension to buy land or property for the business.  The business then pay rent to the pension plan to use the property.

9. Insurance

There are several types of business insurance to consider:

  • Business buildings and contents – if you have premises and tools or equipment.
  • Public liability – in the event a member of the public suffers an injury within your premises.
  • Employer’s liability – if you have employees and they are hurt or killed.
  • Professional indemnity – in the event of a claim due to your mistakes or misconduct.
  • Key man insurance – you can insure the life of a key person in your business, such as a director or the best sales person; whose death would be a significant loss to the business.  Key man insurance can also be used to buy shares of a partner from the partner’s family who may have no interest or no skills to run the business. Find out more about business protection by speaking to a financial adviser.

Most business building and/or content will automatically include liability insurances.

10. Hire the right people and look after them

Employees can be the biggest asset or the biggest drawback to the business.  Labour is also the biggest expenditure.  Happy employees provide better customer experience and more sales.  Help them to develop as people and make sure they all have equal opportunities to succeed.

Finally, keep learning yourself.  Study how other business leaders have succeeded and hope that luck will also come your way.

Get on the right path by finding a solicitor, financial adviser, accountant or mortgage adviser to help your business flourish. Find an adviser.