Starting a business can be an extremely satisfying way of earning a living, which can lead to many better things, but it is not easy and can be very challenging. It takes a lot of commitment, initiative and hard work, it will probably involve longer hours than a ‘normal’ job and may take years for the benefits, financial or otherwise, to be realised.
The history books are littered with examples of businesses which have failed and statistics showing the failure rate in the first couple of years – the ‘make or break’ period – so it makes sense to plan your business. Make sure it is robust, and that you are providing a service/product which people want rather than something you want to do.
At the highest level, you need to establish what your business is going to do and what you expect from it. It may involve a series of steps, where you can see how the business will progress over the first couple of years, to a point where you can expand, and whether you need money from the business in order to live from day 1. It is important that your expectations are realistic and mapped out, which will be covered by the business plan (see later).
Also, you need to think about whether you are suited to working for yourself. You can be swept along by the excitement of starting something new, but you will need tonnes of determination to make it happen consistently, week after week. You need to be able to deal with problems, make decisions, work long hours, possibly make losses, which not only means that you may not make a living from the business is the short term, but that you are risking your own savings. Remember, when you work for yourself, you are the business and the business is you.
The Business Plan
Many businesses don’t make a business plan unless they need to raise finance. This can be a big mistake. It is essential that you consider:
- Where am I now?
- Where do I want to be?
- How am I going to get there?
When you start to plan, you are thinking about the realistic demands of your business, which may involve premises, technology, staff, and finance. It will probably involve having access to skills that you don’t already have. You will also need to think about the best business structure to operate as. Many businesses start as sole traders and incorporate later on, but there may be good reasons to start off as a limited company (see later).
The essential parts of a business plan are as follows:
The Mission Statement
This will summarise what the mission of the business is. It will provide focus, such as “to sell a certain type of widget to end user customers in the Yorkshire area” rather than something vague like “to sell as many widgets as possible through any means”.
Products and Services
This will highlight the offering of your business so that you are clear about what you want to do. You should try and identify your USP (unique selling proposition), i.e. what makes your business different from any other (apart from you, obviously!). You need to think about the location of your business, not only in respect of customers, but also suppliers, staff and transportation links. You also need to think about market research, making sure that there is sufficient demand for your business which could sustain it and enable it to grow.
Sales and Marketing
If you provide service or products, you need a means of promotion and selling which will vary greatly depending upon the target customer type. Do not expect customers to fall over themselves to find out about your business, you will learn a lot about human nature when you start marketing! For ideas, please see our article about marketing.
As accountants, we would argue that this is the most important part of the business plan. It is where you would estimate your sales (based on market research), generating a margin to cover overheads which would generate profit. The profit made, together with any funds injected by either financial institutions such as banks or you as the business owner, should be used to cover investments, working capital and any requirements you may have. By putting together forecasts, you can establish your funding requirements, and whether you need short term funding such as an overdraft.
By constructing a business plan, you are thinking seriously about all the aspects of your business and how they work together. If you are a service business, your staffing requirements may be crucial to deliver the service. If your customers pay you after 60 days, you will need financing to pay wages.
Above all, the business plan must be realistic. Ideally, it should build in some contingency, because there will always be costs arising which you don’t anticipate, and it is better to plan for this than cut everything to the bone, cross your fingers and hope for the best.
The Business Structure
There are 4 main types of business structure:
- Sole Trader
- Limited Liability Partnership
- Limited Company
A sole trader is the simplest structure, as there are no legal formalities. The business is generally not distinguishable from the proprietor’s personal affairs.
A partnership is similar to a sole trader, but is relevant where 2 or more people are in business together. It is advisable to have a partnership agreement where all partners are aware of their duties and responsibilities.
A limited liability partnership is a fairly new structure, it combines the flexibility of a partnership with the limited liability aspect of limited companies.
A limited company is a separate legal entity. It provides protection in the sense of limited liability.
The tax situation and planning possibilities differ between structure, so it is a good idea to think seriously about how you wish to trade.
This article has covered many of the most important issues encountered when starting a business. It is always good to get a lot of input from friends, family and especially other people who have already gone through the process. There are many myths, but by starting off with your eyes open, you can hopefully avoid some of the pitfalls.
We have advised many start up business over the years and can provide assistance, not just for money and taxes but for other areas. If you want a no obligation chat, please do not hesitate to contact us.