Starting a Business
Information that may be of Interest to Someone thinking of Starting a Business
Setting up a Business
Setting up your own business is always going to be a risk; there is no way this can be denied. Steady full time employment means security. You can plan for occasions and special events with a degree of confidence, knowing that you are able to pay the bills. Self-employment removes that guarantee and therefore turns some people off. There may be stories of friends or relatives who have tried and failed to run their own business, and as a consequence have been left with a sizeable debt to pay back. But it need not be like this. There are many examples of successful small businesses which have developed good markets and have a strong customer base. Often people are uninformed, they do not know were to get help or ask for assistance. Over the following weeks Newry & Mourne Enterprise Agency will provide a practical guide to the basic requirements of business start-up for those considering being their own boss. In our new fortnightly column we will examine issues and explain them in layman’s terms. One of the first things to be decided upon when starting up is what the legal status of the business should be. This can depend on the nature of the business venture, which in turn can determine what government regulations are applicable. There are three broad definitions: Sole Trader, Partnership and Limited Company. This week we will look at one option, setting up as a “Sole Trader”.
Sole Trader: This is the person who owns the business. Setting up as a Sole Trader removes most of the legal formalities of establishing a business. There is no need for example to register with the Companies House in Belfast when you are a Sole Trader. The Sole Trader is bound by certain regulations which (s)he must abide by. Sole Traders are responsible for contacting the Inland Revenue and declaring that they are no longer employed or unemployed. It is important to note that as a Sole Trader you pay Income Tax on the full profits of the business, regardless of what you take out as drawings. It is also advisable for Sole Traders to establish a separate Business Bank Account to control the receipts and payments of the business. This will make it easier to monitor personal expenditure. In addition anyone who is unemployed must also sign off from any benefits for which they have been previously eligible. One of the key issues when you set up as a Sole Trader is that you have “unlimited liability”. This means that personal assets could be at risk if the business fails. In the next few weeks we will look at issues associated with setting up as a Partnership and as a Limited Company.
The Partnership Option
Sometimes friends and/or relatives feel that they can successfully run a business together, and two or more heads can certainly be better than one. Responsibilities and risks are typically shared, and a wider range of talents and skills can be used in various ways for the benefit of the business. But there are several important points to consider before you choose this option. A “partnership” involves two or more people owning a business together. However, as with a sole trader, the partners within the arrangement are personally liable for the business activities of the company. Like sole traders they must contact the Inland Revenue to inform them that they are starting a business and each partner is responsible for the payment and submission of his or her own tax, and the submission of a tax return. There is also a need for the completion of a separate partnership tax return.
Management of the business can be shared between the various partners, but in practice the extent of this can vary. For instance there may be a ‘sleeping’ partner who may have contributed cash to the business but is happy to let the other partner(s) run the business on a day-to-day basis. It is advisable to have an agreement drawn up that establishes the exact nature of the partnership i.e. who exactly does what, how is ownership, profit and liability shared, and what will happen in the event of a break-up of the partnership. The prospective partners should contact a solicitor with a view to drafting a “Partnership Agreement” that suits all parties. In most partnerships the profit can be divided equally among the partners or as otherwise determined in the partnership agreement. Like sole traders, partnerships have “unlimited liability”, and all partners are liable for all transactions or contracts entered into by any of the individual partners. This situation highlights the importance of a partnership agreement, as all partners are held accountable for any negligence or wrong doing by any one partner.
The Company Option
A company when set up is a separate legal body. This may sound strange but what it means is that individuals are not personally liable for the company’s debts, as long as the business has traded legally. If you establish a limited company it means that you are limiting your personal liabilities (unlike sole traders and partnerships). If things go wrong the creditors are paid out of the company’s assets and not from your own personal assets, a major benefit when setting up a business. Setting up a company in Northern Ireland is a relatively straightforward process, but there are a number of specific legal requirements to be carried out and forms to be filled in. Why? Because there are regulations regarding payment of tax, the use of business names, Directors responsibilities and so on. The Registrar of Companies will check if a particular name, which you want to attach to the company, can be used. Once you have chosen and registered your company name no other company can use the same name, a useful marketing tool.
There are several different types of company structure available, but the most popular type is the Private Company Limited by Shares. We will focus on this type. As we mentioned, to set up a company you need to submit documents to the Registrar of Companies. These documents determine the nature of the company, how it will be run, who will be involved etc. The most important of these documents are:
- Memorandum of Association (which sets out the company’s name, registered office, where the company is situated and its purpose)
- Articles of Association (which outlines the internal arrangements of the company, such as the rights of the shareholders, the powers of the directors of the company).
When these forms have been completed and signed, the documentation is forwarded to Companies House who will issue a Certificate of Incorporation. If you find the process of registration too complicated you have another option: Ready-made companies (Shelf Companies) are available from company formation agents throughout the UK. They prepare all the documentation for the owners of the company. The only downfall is that it costs in the region of £300 for the service. Companies registered in the UK have to submit accounts as well as details of directors and share holders (annual shuttle return). The accounts must be professionally audited and lodged with Companies Registry in Belfast. An important point to remember is that a company has to pay corporation tax (unlike a sole trader or a partnerships). Usually directors will also be classed as employees and will be subject to PAYE rules.
Advantages of a limited company:
- Formal business status;
- The company takes on the liability, not the person.
- Access to investment capital is increased due to the structure of the company and the ability to issue shares to investors;
- Is independent legal entity;
- There can be lower tax rates levied on owners than when trading as a sole trader or partnership.
Disadvantages of a limited company:
- The formal registration procedure and compliance with legislation;
- AGMs have to be held and notices sent out and resolutions passed to deal with certain matters e.g. to change the company name;
- A professional annual audit is mandatory (unless you qualify for exemption);
- There is public disclosure of your trading information and personal information about directors and members; and there are director’s duties, responsibilities, obligations and liabilities;
- Sometimes it is harder to secure credit if the company is new and does not have a proven track record.;
- The Directors may need to give guarantees if the company is raising funds through borrowing.
Inland Revenue, Newry: 028 3025 5570
Companies House, Belfast: 028 9023 4488
Once you have decided on the best option for your particular business, what’s next? How, for example are you going to attract customers, how are going to create awareness of your particular product or service? You need in other words to have plan as to how you will market, i.e. promote and sell your product or service. The aim of any business is to create profit and to do this you need to sell your product to customers. “Marketing” is the way we gather and use information about the customer, enabling the business to meet their needs in a profitable way. The focus of every business must be the customer or client. This is true for all types of business, be it painting, a sandwich bar or an engineering firm. You must be continually asking yourself what do my customers want? Because if your customers are unhappy they will go somewhere else and if asked will have no problem telling others about they gave their custom to somebody else. For managers or owners of a business to create a pool of customers, retain them and generate new clients they must ask themselves some basic questions. The first step is to carry out market research. Market research simply describes the process by which these questions can be answered; and all businesses, large and small must carry it out. The thought of doing this may frighten people off because it conjures up images of expensive reports, surveys and statistics, which they may not feel comfortable with. In reality, the key to effective marketing research is finding useful information, relevant to your business. One easy way of getting this information is to talk to friends or relatives, and to listen to the complaints customers make in other businesses you may know off. You need to know what the level of customer expectation will be. You can assume it will be high. Customers will be demanding they want value for money.
What you basically want to find out about your potential customers is:
- What products are they currently buying?
- What is it that they want from this product?
- Where would be the most convenient place for them to buy it?
- When would be the most convenient time for them to buy it?
- How much would they be willing to pay for it?
- What is it you could do to satisfy their needs?
This information will indicate how you should promote your business Your research will allow you to decide who you want to sell your product to; What these people specifically want; Who currently provides this service; and where will your business fits into this picture. You will be able to judge if your product will be cheaper, better, faster etc. When you have identified these aspects of your market, you will be better placed to make decisions about your product, price, where you are located, what is the best way of promoting the business and how you can deal with customer likes and dislikes? Which takes us back to the core issue, understanding the needs of customers, which are constantly shifting; using this information and being prepared to adapt your business in line with customer needs (or, to be continuously attractive to customers).
Market research will determine whether or not the Product will sell. Product represents one of four basic planks of marketing otherwise known to Marketing professionals as the Four P’s (Product, Price, Place and Promotion). Product design must be based on research which shows what customers are looking for, how much they will pay and what else they expect you to offer. Together with the other ‘P’s’ this information will help focus attention and dictate the direction your business will take. Fixing a Price is the next stage in marketing the business. Price should take into account several factors: How much will it take to manufacture your product (supplies and raw material etc)? You need to examine the prices of your competitors, consider whether you can charge less, and if so will you still make a profit? What do you realistically need to live on, taking account of things like your mortgage and car repayments. How and where will you sell your product i.e. Place, should be a very important part of your marketing strategy. This will depend very much on the type of business you intend to operate. If you want to sell shoes then you probably should sell from a retail unit. Or, if you manufacture engineering components then you may use salesmen or contact clients through mailshots or word of mouth. One other method of selling to the public is through the Internet, though this is (at the moment) more suited to products easily distributed by post, i.e. books, videos or where deals can be closed over the phone or computer screen e.g. booking holidays.
A point to remember is that if you are able to sell directly to the customer your profits will be greater. Why? Because, you don’t have to employ salesmen to help sell the product. Even large multinational corporations like Dell Computers focus on selling directly to the public using the internet and other methods such as tailoring the product specifically to the customers needs and not selling a one size fits all type of product. So lets assume you have decided on what you are going to sell, who you are going to sell to, what you will charge them and where you will be based, does this mean you have nothing left to worry about? Well the answer is no! You must consider how potential customers will know what you sell, where you are based, or even what your telephone number is? It is essential therefore that you Promote your business, to create awareness of your business and your product(s). But to advertise and promote will cost money, your money. You have to think long and hard about what will be an effective way of promoting you and the business without resorting to mortgaging your house for a second time! You may have to work out what magazines and newspapers your customers will read and whether they will look at the advertising section? Will they pick up and keep business cards or flyers if they are left in public places for example. Or would they respond to someone phoning out of the blue? Remember that marketing is the method by which you get and keep customers. If you listen to what your potential customers want you will be able to keep them, to build and develop your business and secure more profit. You must concentrate as much on keeping your existing customers as on looking for new ones.
The Business Plan
You need cash to buy materials and equipment or maybe finance to rent or buy property. You will also need money to pay the bills before you start generating an income. Therefore in order to attract potential investors you will need to develop a strategy based on your market research, taking into account what we discussed in the last edition i.e. the Four P’s Product, Price Place and Promotion. By doing this you will get a clear picture of what business will cost to run and what it will need to generate a profit. You then take this information, in the form of a Business Plan, to prospective funders to negotiate investing cash in the business. The Business Plan should be and usually is a flexible document that is amended to take into account the changes that will occur through out the life of any business. For the owner, it acts as a guide, which they refer to time and time again. It should indicate targets that you set for the business, which you review to see if they are being achieved. If they are not, you can see what part of the business needs to be examined. When presenting a plan to potential funders it should contain several key sections:
An Executive Summary: This section will briefly describe the business and highlight issues such as the current position of the business, potential and existing customers, and a summary of financials (company accounts or projected figures).
Business Details: This section will cover basic information about the business, i.e. the legal status of the business, mission statement, the company’s objectives. It should also contain brief market information such as trends, competitors etc.
Product or Service: Information about what you sell should be input here. You should focus on basic issues such as what the product does, its advantages over competitors and any legal requirements such as patents.
The Market and Marketing Plan: Information gleaned during the market research stage should be included here; Size of the market, potential demand, target customers and how products will be priced and promoted.
Operations: This segment details the day to day running of the business. Location of the business, equipment used, personnel requirements and skills. Also details about quality and safety standards will be highlighted.
Management and Organisation: Information about the key personnel, their track record and their CV’s will be attached here.
Financial Data: It is useful to include in this section full accounts such as profit and loss accounts, balance sheets and sources of funding. This will give potential investors an insight into how the company has been operating up to that point. It follows naturally on that you would also include financial requirements.
Financial Requirements: Why do we need the money? What’s it for? New equipment, or new premises? This information must be included, along with break-even estimates and potential risks involved. There will also be details of other assets that are available to the company.
A key point to remember when devising the plan is that you must be honest. You will find out that potential investors are not stupid and are able to read between the lines. Therefore it is vital that the numbers in the account section add up. Information presented in the plan should be clear. It’s best not to include too much high tech information as you run the risk of being the only one who understands it.
As previously mentioned the business plan is the first step in formalising the direction of the business, working out costs and attracting potential investors. It is therefore a tool that most businesses will use in order to obtain capital to launch the business. Getting the money to start up any venture is probably the most important and most difficult aspect of initially running your own business. A key reason why many businesses fail is because of cash-flow issues. Therefore, based on your business plan and the market research, you will have identified what exact finance is needed to start up and what you need as a personal income to allow you to run the business. So, with this in mind prospective entrepreneurs should consider the sources of funding that are available. The most important of these is personal investment as this shows a degree of commitment to the business. You must consider therefore, can you afford to use cash from savings? If you can’t, can you get backing from family and friends? Although this may create awkward situations, it may be an alternative to borrowing from other sources, which may place a financial burden on the business in the form of interest.
For people who want to start up on their own business in Northern Ireland there are a number of grants available which are intended to ease the immediate burden of setting up or help in the development of the business. The level of grant will depend on a number of factors, including employment level, the business sector, and the ability to export. Business Start assistance is open to anyone intending to establish a new business in Northern Ireland, on a full or part time basis. For more information on what is available you can contact Invest NI, or your local Enterprise Agency. You can also contact the Princes Youth Business Trust in relation to the packages for young entrepreneurs aged under 30. However, you may find that you can’t raise the necessary capital yourself or the grant provided does not meet all your needs, so another source may be the bank. Your business plan will play a very important part when the bank reviews your application for a loan, as banks will review how much is required and they will examine factors such as the business’s ability to meet the monthly repayments plus interest. It is in your best interest to contact all banks to find out what is the best package for a new business. The bank may also seek security on any borrowings. You may also wish to contact your local Credit Union to obtain a personal loan to start the business. If you contacted the bank and found that, for whatever reason they were not prepared to lend you the necessary capital you could contact the Northern Ireland Small Business Loan Fund. This is body set up to help small businesses finance their development, be it at the start up stage or aiding in growth and expansion. There are certain criteria involved. For more information contact your local Enterprise Agency. Another point to consider when reviewing sources of finance is the option of hire purchase or leasing equipment, thus spreading the payments and reducing potential cash flow problems.
Cash is King
Most sole traders and small businesses when they begin trading will have fairly basic accounting knowledge, i.e. Cash in – Cash out. For most people that’s where the interest in accounts will begin and end. But as we have noted throughout the Business Essentials column many businesses will fail because of a lack of cash. Therefore it’s vital for the business to set up from the very start, accounting systems so that you can track the money and see how the business is doing at any given time. Therefore a number of accounting reports are required. Monitoring the cash on a day-to-day basis is vital in helping you the business owner to make informed decisions about the direction of the business. Therefore you will need to monitor your Cash Flow Statement. This is used on a weekly or monthly basis depending on how many transactions the business is involved in. It will show you what cash you have to begin with (opening account), then there are usually two more columns, the first outlining what’s coming in i.e. sales, and the second what’s going out, i.e. paying the bills. From this information you can work out the total cash flowing in and out of the business for the week/month. A Profit and Loss Account shows the total amount of sales less the total business costs the business incurred. Actual sales are recorded, including sales that still have not been paid for. This will, as the name suggests highlight either the profit the business generated or the extent of the loss. This type of account is based on a specific period of time (usually one year), and will include debtors (money owed) to the business, as well the money the business owes to its suppliers (Creditors) etc.
Businesses will also use a Balance Sheet as a snap shot of the business at a precise moment e.g. at the end of the year. It will contain information such as what money is tied up in the business and how that money has been used, i.e. to purchase equipment or stock. It will also review the current level of borrowings of the business, which need to be monitored closely. It is very important for any business in managing its affairs to keep a good filing system. For example, if cash is paid for a business expense, you must have the necessary documentation to prove that this was a legitimate business expense otherwise the money you took out will be taxed as personal income. All this information helps you pinpoint if action needs to be taken in relation to the financial health of the business, for example if cash going out exceeds cash coming in. You can then take the necessary steps to ensure that the gaps are closed, or at least narrowed. These steps include, reducing costs, increasing sales via targeted advertising, looking for outside sources of cash, such as a short-term loan, more efficient collection of debts, or whatever steps are necessary to maximise profit. If you are uncomfortable dealing with figures most computers have some form of basic spreadsheet package that you can use to help you keep track of the money. There are more sophisticated software packages available that can be used to help small businesses get a grip with effective book-keeping and also the ins and outs of issues such as Tax, VAT or even PAYE (Pay As You Earn). Issues we will deal with next time.
Working from Home
Now that I have piqued your interest the title of the article should really read ‘Working form Home’ (but I had to do something to catch your attention). When you begin thinking about starting and running your own business you will find that one of the biggest overheads a business will incur is that of renting or leasing its premises. That’s why, for some another option is that of operating from home. As advances in technology increase the prospect of operating a “virtual office” i.e. using the Internet and email as a means of working from home, is a real choice for potential businesses. Although this option is not open to all business sectors (ever try welding a sheet of metal in the bathroom?) it will suit certain types of business, such as hair dressing, software programming, painter decorator, crèche. The advantages of working from home, other than the cost savings, include: Flexible working hours; you are able to work according to your own clock i.e. instead of trudging into the office at nine you can start at 10.15 and work into the evening, or all day Saturday according, to your preferences. A comfortable working environment is usually another advantage, when the alternative may be working in a small airless unit with no natural light.
There are also tax advantages for a self-employed person working form home. A proportion of costs for rooms used for work or a share of the telephone and electricity bills can be treated as business expenditure and can be offset against your profit when calculating tax. While this may seem very tempting there are disadvantages (really!) to be considered. You have to consider whether you are disciplined enough to work on your own. Can you cope with temptations of TV, radio or the Playstation? Many people do need that structure of getting up at 7.30 and leaving for work. What if there are other people living in the house? Isn’t there a danger of interruptions and distractions? Alternatively if you are on your own you may run the risk of becoming isolated without other people to interact and review ideas with. You may find that due to the nature of your business you need to renovate the building, so what happens then? You will have to contact the local planning authority to see if you can obtain planning permission. Some neighbours complain when the comings and goings to and from a residential house increase significantly. Other points to consider include legal and insurance issues. Check with a solicitor and check your deeds, mortgage, or lease to see what the implications of setting up at home are. All businesses need to have insurance to cover risks. So if you are working from home be prepared for increased premiums if you are using expensive equipment and tools.
Buying a Franchise
Building up a successful business takes time effort, investment and a certain amount of risk. There is an alternative method of setting up which will minimise the gamble i.e. buying a franchise. You can profit from the assistance and experience of an already established business using tried and tested business strategies thereby minimising the dangers of self-employment. Franchising is the term used to describe the granting of a licence by one business (the franchisor) to another (the franchisee, i.e. you). Successful franchise operations have a much lower failure rate than completely new businesses. You pay the franchisor for a package that gives you an exclusive ‘territory’ and allows you to use its brand name, trademarks, and methods of operation, technology or products for a certain period on a renewable contract. The use of often well-known, well-established products and brands e.g. McDonalds or Dominos Pizza will give you an immediate market advantage. Once accepted as franchisee you get technical and/or business training, operation manuals, often marketing help and sometimes accounting or other administration services. The benefits include:
- You can have a nationally known name from day one.
- You get help setting up and running the business from people who know how.
- Some tasks may be done for you, like finding your first customers, setting up accounting or stock control systems.
- Benefit from economies of scale, as you will operate as part of a large operation.
Costs will include an up front fee to cover the initial set up. Then there is a ‘management services fee’ or ‘royalty fee’ for continued services, which the franchisor will supply. While it is great to have all this assistance it’s still important to research the idea to see how viable it will be. You must ask yourself basic questions: Who is the competition? Who is the franchisor and what is their track record? Given that the buying of a franchise can be a costly affair you must know up front how the royalty payments are calculated. Is it a percentage of annual turnover or is it based on the cost of supplies? What exactly will you get for your money in relation to continued services? This method of establishing your own business is obviously not for every one as one of the benefits of being self-employed is being your own boss and setting your own pace. Being part of a franchise arrangement means that you are bound by certain obligations. Other disadvantages include:
- You are working to someone else’s standards and usually under their name
- The franchisee may suffer from bad publicity surrounding the particular name due to problems not within your control.
- You have to hand over a lump sum to start up.
- There are difficulties when you go to sell the business, as the franchisor will often have a say in who takes over the name.
Franchising offers you an alternative way to establish your own operation and there is a wide range of franchises available that will suit most people’s tastes. For more information you can contact The British Franchise Association, telephone 01491 578049.
For most businesses starting off, buying property is not an option. Usually rental of unit space is the preferred choice. But if you go this route you have to be sure you know what the implications for you and your business will be. Leases are hefty and complex contracts and can tie a business to payments far into the future and limit the occupants as to what they can do with the property. So it is vitally important before you sign anything that your solicitor checks the lease or rental agreement to see what exactly you are binding yourself to. Next, as when buying or selling a house, location will be a key factor in any decision you come to. This is very same when you are looking for a base of operations for your business. The market research you carried out will indicate the best region for your product. It will have identified who is your main competition in the area and whether or not you can you successfully establish yourself in that vicinity. The precise position of your business will be determined by the sector that you operate in. For example a retail business that requires passing trade (selling clothes or mobile phones for instance) will not set up in a rural location with little passing traffic. Similarly an engineering firm will not look for a unit located in the middle of a shopping centre.
You have to assess what are the precise needs of the business. For the retail trade, considerations about units will include the image of the building or the cleanliness of the particular site. This is especially true for those involved in catering where health and safety have a huge bearing on the success of the business. Manufacturing businesses will have concerns that include ease of access for customers or suppliers as well as the need for a lot of parking space. The running costs of a unit will a have an impact on the running of the business. Will the unit be efficient in terms of heating and electricity? With this in mind you have to be specific about the size you require and the energy costs involved. If the running costs of the unit are high this will be reflected in the cost of the product, which may result in uncompetitive prices and the loss of custom. Other points to consider when choosing premises will include local environmental considerations that may affect your business, i.e. noise or other forms of pollution. What will happen if the business grows, and you have to consider expansion? If the unit needs alterations to cope with the growth of the business or to bring it up to date with fire and building regulations how will this affect your agreement with the landlord? This brings us back to our first point, studying your rental agreement and considering how it will affect your business.