WHY NOW’S THE TIME TO START THAT NEW VENTURE
Get your business plan ready this year
If you’ve always dreamed of being your own boss, join the club. According to a survey carried out at the start of 2020, two-thirds of UK workers (64%) said they would prefer to quit the nine-to-five and start their own business*. Of course, that was before the Covid-19 pandemic, which considerably changed the landscape for many small businesses. By October 2020, just under a third (29%) of small business owners said they didn’t feel confident about the future of their company**. That paints just one part of the picture, though. While some have struggled, other small businesses have benefitted from a surge in support, with four in five** Brits shopping with small firms more during the pandemic.
If you found yourself with time on your hands during lockdown to start honing the business idea that’s been stuck in your head, this could be the time to put it into action. But before you embark, make sure you’re fully prepared. If you’re looking to set up a business now, these are the questions you need to ask yourself – and some tips for how to go about answering them.
‘What should I include in my business plan?’
Writing a business plan before you do anything else will help you decide how you will run your business, set objectives and work out your finances. Download a free business plan template to help you. Try The Prince’s Trust (princes-trust.org.uk) or Start Up Loans (startuploans.co.uk).
Include short-, medium- and long-term goals. Short-term goals should focus on the next six to 12 months. ‘This could be increasing your social media following so you have a larger, engaged audience to market your business to, developing skills that you need now that you’re self-employed or writing weekly blog posts to encourage people to visit your website,’ explains Carol Stewart, business and career coach and author of Quietly Visible. For social media training, check out Futurelearn, which offers free social media courses (futurelearn.com).
Google Digital Garage also provides some free resources (learndigital. withgoogle.com/digitalgarage).
Medium-term goals should focus on what you want to achieve in three to five years. ‘Ensure your goals are SMART: specific, measurable, achievable, realistic and timebound,’ says Carol. For long-term plans, think
about where you want to be in five to 10 years, such as offering a range of products or services, employing staff and generating a significant income.
‘What sort of company will I set up?’
One of the first things you need to think about is whether you’ll operate as a sole trader (run your business as an individual) or as a limited company (you’re the owner and an employee of the company). There are pros and cons to each.
‘It’s pretty straightforward to set yourself up as a sole trader,’ says
Liz Wild from accountancy firm Wild & Co Chartered Accountants. ‘Just inform HMRC of your intention to go self-employed and you can start trading straightaway,’ she explains. ‘Do this within three months of starting your business to avoid paying a £100 fine.’ Be aware, though, that as a sole trader, if someone took your business to court and won, your own personal savings (even your house) could be included in the settlement.
‘The benefit of setting up a limited company is that your personal and business finances are separate,’ adds Liz. ‘So, if a claim is made against your company, you won’t be personally liable providing nothing illegal has taken place. The downside is there’s more paperwork to deal with and company directors have various legal and statutory obligations.’
If you decide to operate as a sole trader, put 20% of the money your business makes on average each month into a savings account to pay your tax bill through self-assessment.
If your business makes a profit of £6,475 or more a year, you’ll also need to pay Class 2 National Insurance Contributions (NICS) of £3.05 per week. If you make profits of £9,501, you’ll also need to pay Class 4 NICS of 9% on your profit, this reduces to 2% when your profits reach £50,000***.
‘How will I reach my customers?’
Coronavirus has driven us online to spend our hard-earned cash, with more than half of shoppers worldwide saying they shop online more frequently now than they did pre-pandemic†. So what does this mean for your small business? To raise its profile with potential customers, you’ll need to make sure your business is visible on the web by creating (and marketing) a website or using online marketplaces (see next page).
‘With so many of us using mobile devices, it has become extremely important for businesses to be seen at the right time by the right person,’ says Allen Betchley, creative director at web design agency Progression (part of the Una-collective). ‘There is certainly now more of an expectation from the consumer that business information will be available on the web.’
When you set up a website, you’ll need to buy a domain name from a company such as 123-reg.co.uk. The cost of designing and building a website varies
Short-term goals should focus on the next six to 12 months
but expect to pay at least £8,000 +VAT for a basic e-commerce site (through which you can sell products directly to the customer). If you just want a site that tells customers about your goods and services with a contact form and a blog, expect to pay around £3,000 +VAT for someone to design and build it for you.
‘How can I calculate my start-up costs?’
‘When you’re working out how much cash you are likely to need to start your business, break costs into three categories,’ advises Emma Jones of Enterprise Nation, a company that provides support for entrepreneurs and small businesses. ‘First, look at operational costs. What kind of kit do you need to start the business? This could include machinery, storage space and stock. There’s also the cost of your time to make or produce the product or service. Look at sales costs second. These will include any costs for designing a logo or promoting your business, building a website and social media activity. If you plan to sell from a shop or market, factor in these costs, too.’
‘Finally, look at the costs of managing the finances of your business,’ adds Emma. ‘This could include cloud accounting software, although I would advise every start-up to find a good accountant as soon as they can.’
Find one at the Institute of Chartered Accountants in England and Wales, which also has lots of resources for new businesses (icaew.com).
‘How will I raise funds?’
When you’re looking to raise cash, you could apply for a government Start Up Loan (gov.uk/apply-start-up-loan). If you’re successful, you’ll be awarded a loan of between £500 and £25,000 to start or grow your business. To be eligible, your business can’t have been trading for more than 24 months, and the loan has to be paid back over one to five years at a fixed interest rate of 6%. There are no application or early repayment fees and you’ll get free business mentoring for up to 12 months, as well as free access to other help and advice.
These days, there are more creative ways to raise capital. Crowdfunding lets you pitch your idea to the public. You might offer potential investors an equity stake or benefits and discounts using a site like Kickstarter. For details, visit the UK Crowdfunding Association at ukcfa.org.uk.
Peer-to-peer lending works slightly differently, allowing investors to lend funds to borrowers with interest rates usually comparable to those offered on bank loans. For more info, visit moneyadviceservice.org.uk, zopa.com, fundingcircle.com and ratesetter.com.
‘What about covering my living costs?’
More than two-thirds of us say financial concerns are the biggest obstacle to striking out in a new direction professionally‡. Tackle them head-on by getting to grips with your living costs. Go through your bank account and credit card statements for the past six months to work out your total spend on housing, food, travel and bills, plus any loan or credit card payments in this period. Once you’ve done this, find the monthly average. Don’t forget to include things that are deducted straight from your salary if you’re currently employed, such as pension and NI contributions.
If you think there will be a period when your new business won’t bring in enough cash to meet your living costs, work out how much you will need to tide you over until you can. If you can plan in advance how you will top up your monthly income, you’re less likely to need to fall back on pricey borrowing.
It’s vital to understand the costs of running your business
How much will you need? ‘This is fairly easy to work out, based on the amount you will need to cover an average month and the number of months you expect there to be a shortfall,’ explains Becky O’connor, a personal finance specialist at Royal London. ‘Aim to save at least this amount before you take the plunge, but preferably more, to cover any pricey emergencies.’ Work out what you can afford to put aside each month and set up a standing order into a savings account. If you think you will need to borrow money to cover living costs, shop around for the lowest interest rate.
To boost the money your business makes, aim to keep costs to a minimum. ‘Embrace low-cost digital platforms to make sales and keep costs low by basing the business at home and using social media to reach customers,’ advises Emma Jones. ‘As your income builds, this will give you confidence to outlay more costs on hiring, investing more in stock or maybe paying for advertising.’
‘How do I protect my business from the unexpected?’
If there’s one thing we all learned in 2020, it’s to expect the unexpected. For this reason, you should try to always have enough money in the bank to cover at least three months worth of operating costs (the amount you spend running your business each month).
‘Businesses that went into the pandemic with a strong understanding of their finances and with cash reserves have fared better,’ says Emma. ‘It’s vital to understand the costs of running your business and feeling confident that cash coming into the bank is greater than money going out of the bank.’
Until you are ready to appoint an accountant, keep a record of everything you spend and all the money you make. This will give you a feel for your cashflow and help you plan ahead (download a free Cash Flow Forecast template from the Start Up Loans website).
It’s also important to stay close to your customers and let them know of any changes. Create a communication plan early on. If you want to have a newsletter or an alert service that customers can sign up to, talk to your website developer about how you can collect email addresses via your website.
‘What about my pension?’
Not sure what pension is right for you if you’re self-employed? Charlotte Jackson, head of pensions operations and consumer protection at The Money and Pensions Service, explains there are a variety of options to consider, including a self-invested personal pension (SIPP) and small self-administered pension scheme (SSAS). ‘If you already have a pension from a previous employer, a good place to start is to get in touch with that scheme and ask what your options are as someone who is newly self-employed,’ she says. ‘Many pension providers offer self-employed options that you could switch to.’ Alternatively, you could open a pension with Nest if you’re self-employed or the sole director of a company that doesn’t employ anyone (nestpensions.org.uk).
If you’re setting yourself up as a sole director of a company, The Money and Pensions Service recommends seeking regulated advice from a financial adviser who specialises in pensions (find one at moneyadviceservice.org.uk). The Pensions Advisory Service also offers plenty of resources, from guides on how to choose a pension to Midlife Review telephone appointments, a specialist guidance service for self-employed people that takes into account current finances, work, family and health to help with pension planning. Go to pensionsadvisoryservice.org.uk or call 0800 011 3797 for more information.