2017 set a new record for private sector business with a recorded 5.7 million businesses at the beginning of the year and the trend looks set to continue. It seems we’re more confident and more able to go it alone and with a whopping 99.9% of the private sector being classed as SME (Small and Medium Enterprises) it’s clear that we’re in the middle of a business revolution.
But not all of these businesses succeed. Although many start, many close too, with records for 2017 also showing that 80% of start-ups fail within the first year.
So what’s going on here? Are new businesses folding because there’s a relatively low entry point and no essential qualifications to run a business? Is it too easy to get a website, domain, brand, business cards, and then business owners don’t know how to get actual paying customers? Perhaps the SME owners are simply unprepared for what lies ahead of them.
It may sound harsh, but starting a business purely on the strength that you’re really great at something isn’t the only factor you need to consider. Failure to plan the business and get the right infrastructure in place could well be the downfall of these 8 out of 10 businesses that fail. Research shows that cashflow, or a lack of understanding of the competitive markets, are often the cause of the business failure.
So what DO you need to start and continue your business?
We’ve created a list to help you. It’s far from an exhaustive one and it’s not going to mention a fancy logo or some posh expensive business cards either. It’s more about the areas we know that really matter when you run your business – the numbers and the planning.
Sole Trader, Partnership or VAT registered?
Of the 5.7 million private sector businesses registered in the UK in 2017, around 60% of them were sole traders. The others were made up of companies or general partnerships.
A sole trader doesn’t have to be a sole person trading. It simply means that you’ll take on the responsibility of running your business as an individual, and you’re also entitled to keep all (or any!) of the profits it makes.
Sounds ideal. Well yes, until you realise that you’ll also have to cover any losses it makes too.
Many people choose this option initially as it suits them and their business goals. Of course it suits their tax liabilities and the amount of money they can earn from it.
The other area that gets a lot of conversation and discussion are VAT registered businesses. At the time of writing, UK VAT (Value Added Tax) is set at 20%, meaning that a business that is VAT registered will have to add 20% on top of their products or services and thus collect TAX for HMRC.
This can work in your favour in many ways and some businesses under certain circumstances can make a little back from the VAT collection, too. Registering for VAT can ensure that you are ready to grow as a business, creating a positive impression about your plans. You can claim VAT back on purchases you make in your business, too.
The potential downside is that the VAT will make your products or services more expensive, so many people opt to be a sole trader to enjoy the extra profit and more competitive pricing. There is also more admin to do as a limited company, which can add to your workload.
Get too good at what you do and the choice is taken away. The VAT threshold is currently set to kick in if your VAT taxable turnover is likely to exceed £85,000 a year. This figure is likely to change.
There are many pros and cons for both sides and it’s advisable to speak to your financial advisor or accountant about the options so you can choose the business structure that best suits you and your business.
Do you need a Business Plan?
Years ago a business plan was more essential than it is now. With the cost of a start-up ranging from £10s of £1,000s right down to virtually nothing, the days of walking into the bank manager’s office with a freshly prepared bank loan request are nowhere near as common.
You can start a business right now without any plan. You could. But first a quick word of warning.
The business plan is actually still a very good idea and having a road map can be the difference between being in the 20% who make it past the first year, and the 80% who don’t. We know how important it is to understand the numbers in your business and make constant decisions on the future growth (or shrinkage) of your business, and we also know that a good plan can help with that. Your plan doesn’t commit you to one course of action forever, and you can change it as and when you make business decisions on your products and services.
Registering your Business
There are millions of companies registered in the UK and with so many joining them year on year you’d think it would be simple to do, but naming your business is not as simple as it sounds.
Firstly your name needs to be unique and you should also check that your name doesn’t look too similar to others in your industry to help you with branding and identity later on.
The first step would be to compile a list of names you like and then head to Companies House name register and make sure it’s available. You may also want to check it’s not trademarked.
It’s also very wise to check that a suitable web domain is available for the name too. We’ve seen this happen many times, but there are people out there with very similar business names, or pirates on the internet who have bought the domains and are ‘squatting’ on them in wait for you to try and buy it.
Don’t get caught out; check the register and then the web to make sure you’re creating something unique and something that you can claim on the web, and of course on social media. Remember you’re looking for something people can search for, so it shouldn’t be too hard to pronounce or remember. It may be worth testing your ideas on your target audience to make sure it gives the image you want.
Managing your Business
Now you’re set up with the main cornerstones of business you’ll want to put in place some strategy to ensure you keep trading. Obviously you should only start a business if you’re really good at what you do or have something amazing to offer to the world. That’s a given. But after that you need to put in place structure to keep the inner workings of the business…. working!
Here are a few areas you should consider:
Business insurance is an area many avoid initially and unlike motor insurance it’s not always seen as obligatory for an SME. But what happens if?
- Do you have the potential to ruin someone’s reputation?
- Do you visit your clients on location?
- Do you run meetings or seminars in remote locations?
- Do you sell products or services or use the postal service?
Whatever you do, there is the potential for you to upset someone you work with or employ someone who makes a mistake that’s costly.
There are several types of essential insurance coverage for small professional service providers: public liability insurance, professional indemnity insurance, and you’ll also need to think about buildings, contents, accident and legal protection. If you have employees you’ll want to consider employer’s liability insurance too.
Insurance is a worthy investment so speak to an expert who can make sure you get the coverage you need for the type of business you have.
Even if you’re a sole trader you need to get a separate bank account to help you manage your finances separately. It’s simple to set up and many business bank accounts offer you free insurance, holidays, or other gifts as incentives to join them. There are many products out there and you should do your due diligence with them all.
One thing to consider is how you use your bank:
- Do you have to go in to a branch? Is there one nearby? Will it close like many are?
- Do you need a really reliable app?
- Does your bank integrate with your cloud accounting package?
- Do you need support banking abroad?
- Will you need to dip into your overdraft and what will this cost?
- Do they have a specialist advisor to talk to?
- Will there be high fees?
- Are you entitled to a credit card or savings accounts?
Work out how you need to use the bank and then find the bank that suits you.
Late Payments and Cash Flow
Cash flow is king. You’ve heard that before, we’re sure. So many businesses simply fail to grow through lack of cash even though they have ample customers. Managing the flow of money and chasing late payments is a discipline and cloud accounting packages can help do all this for you, so check first.
It might also be worth considering your payment terms and how you enforce them or who enforces them for you. Having your payment terms clearly indicated (along with your bank details) on invoices should help.
Projections and Long Term Goals
Plan ahead and get some long term goals in place to drive your business forward.
Having a focus on where you’re going is so powerful and if you’ve been in business for a while then you’ll know this, but if you’re new to this remember this advice from thought-leader and author, Napoleon Hill:
“Focus on the possibilities for success, not on the potential for failure.”
Focus your goals and work towards them. Sense-checking them with your accounts and projections is key to growth also. A good business coach can be a worthwhile investment to make sure you have a strong future and some accountability for your goals.
Spending in the right areas and claiming for the tax that’s available to you
A final area that we’ll leave you to think about is intelligent spending and tax relief. There are some great ways to save tax, or at least pay only what you’re required to, with good advice and a flexible strategy for growth.
Keeping your eye on the latest Budget, the VAT changes, or employment laws can mean the difference between running a successful and cash rich business rather than one that struggles and fizzles out.
Combining all of the above and setting out a clear plan and being honest and realistic with your goals is a great way to be. If you need help, financial advice, or some more information on starting a business then do give us a call.
It’s an exciting time, but don’t let that excitement let you get carried away and become lost in the moment and lead yourself onto the road with the doomed 80%.
We’d love to help contribute towards your success and be in the 20% who make it. With that comes structure, experience, and planning. Do get in touch if you’d like support.