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Thinking about working for yourself? Looking to turn a hobby or passion into an income? Is the time right to turn that great idea into a money spinner? Maybe your'e a professional moving outside of employment for the first time? Good for you! Here's a rundown of some things to consider.
Where do I start?
Write you idea down. Then start to expand on it by considering:
The what, why, how and when of what your business does
Your potential customers - who are they and how will you reach them?
Your competitors - do you know who they are? What makes them successful?
Money - how much do you need to get started? How much do you need your business to generate as income for you? What costs will I need to factor in?
Do this and you have an outline business plan. At first this will be a working document which you will adapt and expand on as your business starts to take shape. In time you may need it in order to obtain finance - demonstrating the potential worth of your business idea to a bank or investor. There are some great online guides and templates out there to help you develop your business plan - here's one from Intuit's Quickbooks https://quickbooks.intuit.com/r/business-planning/business-plan-template/
The money part
There are a number of questions you will need to ask yourself:
How much will I need up front to get started? Consider do you need equipment and tools, software, maybe a premises or a vehicle.
How will I pay for this initial investment? Perhaps you have the funds or maybe you need to approach your bank or other potential investors. Consider the relative pro's and con's of each, including how much influence you want an investor to have over your business, how much the funding will cost you etc
How much income do I need my business to generate for me on an ongoing basis?
Will the business, as I have planned it, meet my income expectation? This is a clincher. You want to have a reasonable idea from the start as to how well your business can sustain you, where and when the lean patches might fall and what strategies you have ready to face them.
How much money will I need?
Most new businesses need some up-front funds to get started. Whether that's investing in equipment and tools, software, maybe a premises. On top of that there may be a time lag between starting your business and getting paid. How much money do you need to survive on whilst your business gets going? A good business plan will factor in your start up and running costs, and make a budget plan for all income and expenditure. Don't forget to factor in things like insurance, marketing and your potential tax bill.
Get in the habit of good record keeping
You need to record all your business income and expenditure. Good bookkeeping from the start will not only help you to keep on track of your finances, you will need to be able to demonstrate your financial position for any loans, overdrafts or grants you may want to apply for, and of course you will need it to work out how much tax you have to declare and pay. Our top tips for good record keeping are:
Have a separate bank account for your business. This ensures your business transactions are kept apart from your personal ones - you will need to separate these for your accounts and tax returns.
Use technology to help you. There are great receipt & invoice capture apps and integrated bookkeeping software which make this really simple. There is no need to hoard shoe boxes full of receipts all year long - you can keep track of your financial position real-time, all year long - and your accountant can monitor it too. We use Xero and Hubdoc together to keep our clients books tip top and fully automated.
Don't get caught out by unexpected costs. For example, you will need to plan for your tax bill. Keeping a simple budget and forecast means no nasty surprises.
Keep your records safe. Again online accounting software can help here as all your records are safe in the cloud meaning you (and your accountant) can access them anywhere. They can also ensure you are ready for 'Making Tax Digital' - the governments programme for automating tax collection.
Legal Obligations
Once you start trading you need to tell HMRC (and also Companies House if you go down the Limited Company route). You will need to register for taxes - self assessment for a sole trader or freelancer and corporation tax for a Limited Company. If you expect your sales to be near to the £85,000 threshold you will also need to think about VAT. You may also need to think about data protection (if you handle any personal data - e.g. for your customers). Finally don't forget about insurance.
Operating as a sole trader is the simplest model. You will need to register with HMRC and complete self assessment tax returns to pay tax on your business profits. You will also remain personally liable for any debts of your business. A limited company model means your personal finances are separated from your businesses, but there are more responsibilities. Companies are taxed via Corporation Tax at different rates to Personal Self-Assessment. It's worth taking a little time to look into the pro's and con's of each model before deciding. See our related article for more.
Are you going to have anyone else working with you?
If yes, then you need to consider whether they are employees and how you will handle a payroll. There are also rules to consider around contractors which may mean you need to deduct tax before paying invoices (IR35 rules).
Ready to go?
Don't be put off by the list of things above, with the right help at the right time they are easily manageable and there's nothing like the satisfaction of building something from the bottom up and being your own boss. Enlisting an accountant early on can really help as they can guide you through the key start-up decisions and keep you compliant with the necessary regulations - as well as champion your new business.
The information contained within in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice specific to your own circumstances from your own adviser.