It might sound a bit dry, but being well organized is vital when you are starting a business. Even the most flamboyant and bohemian artist needs to send out invoices, pay the bills and stay the right side of the taxman – not very glamorous perhaps, but very necessary. Before you raise your eyebrows to the heavens and turn over the page, do consider one vital point: most of the tedium of administration can be offset by doing it once properly at the beginning. Thousands of businesses have wasted huge amounts of time trying to fix something they didn’t set up properly in the first place, so it’s worth taking the time to get it right first time.

It is very difficult to generalize about systems because they are highly specific to the type of business you are setting up. Broadly speaking, you will need to make sure that everything your company does is legal, that you get paid properly for what you do, pay the right tax, and have accounts that are appropriately organized. You will then need systems that ensure you can keep track of all this.

LEGAL REQUIREMENTS

Knowing what you need to run an effective business is vital. Start as you mean to go on with a good working knowledge of the law, and appropriate systems to enable you to report business performance accurately. At the very beginning, you need to decide whether you will be a sole trader or a limited company. A sole trader can be ‘Tom Jones trading as Tom’s Garage’ and does not require any particular registration other than a bank account that is clearly separate from his personal bank account. This is a necessity to ensure that money moving from one to the other is correctly monitored for tax purposes. It also helps you know where you stand. Sole trader status effectively allows the individual to get on and earn a living with the minimum of fuss and administration. It is a perfectly viable employment status for anyone who has an uncomplicated business with little in the way of staff, employees, or any other elements that make life more complicated.

A limited company doesn’t have to be as grand as it sounds. As a rough guide, anyone expecting to earn over £ 50,000 a year should look at the possibility. Although there is a slight correlation between a business being larger and the benefits of being a limited company, it is not the only consideration. It is more likely to be beneficial if you want the kudos of being limited, if you can see tax efficiency as a result, and if you are happy to have your report and accounts available for anyone to examine at Companies House. Smaller businesses that do not want the hassle of two tax returns and who value their privacy highly may prefer to be sole traders. Anyone can register a company at Companies House for a small fee, and there can be as little as just one director and employee – in other words, just you. As the director, you are responsible for filing the report and accounts each year, and for paying both corporation tax and your personal tax. Although this involves two types of tax, it can actually work out as a lower grand total if your trading circumstances are suitable.

There are of course lots of different types of company. Community Interest Companies (CICs), for example, are limited companies with special additional features, created for people who want to conduct a business for community benefit, and not purely for private advantage. This is achieved by a ‘community interest test’ and an ‘asset lock’, which ensure that the CIC truly is established for community purposes and the assets and profits are dedicated to those purposes. Registration of a company as a CIC has to be approved by the regulator who also has a monitoring and enforcement role. That’s a pretty special case, as is Limited Liability Partnership, in which business partners protect themselves against personal loss whilst at the same time trading together. If you are unsure, ask your accountant about the differences between the types, and whether any apply to you.

Tax laws change over time, but typically corporation tax will be less than half that of the higher rate personal tax band, such as 20% versus 40%. This means that if the sole owner of a limited company runs legitimate costs through the business and doesn’t take out too much money at any one time, having a limited company could be beneficial. Owners can take their money out of the business in two ways. They can pay themselves a dividend at any time, or they can put themselves on the payroll, in which case all the normal rules applicable to an employee of a corporation will apply, such as National Insurance. We will cover this more in the next chapter.

As well as financial matters, there may be legal requirements with regard to how the business conducts itself and interacts with the public. Sandwich shops and coffee shops will be subject to food standards and need to ensure they adhere to all the necessary requirements. Those businesses open to the public will need to meet all appropriate Health and Safety standards required by law, and be aware of the need for disabled facilities, fire regulations, security, and so on. If the business you plan to start is subject to any of these, then you need to find out what all the legal requirements are and prepare for them. This preparation includes knowing what is needed, finding out the associated costs, and building those into the business plan.

For service businesses – a very broad category that could include anything from advice and consultancy to design and anything remotely creative – another important legal area is that of intellectual property (IP). This is the fraught area of having a stock in trade based on ideas that your business generates. How do you mitigate against the possibility of your ideas being copied? It’s a difficult business. Clearly, if a tangible product is taken without permission or payment, then it is illegal and identifiable as theft. This is harder to prove with ideas. So if the business you plan to start will be dealing in such an area, it is important to look at any mechanisms that can protect your work. Patents may be applied for to cover new product ideas. IP may be asserted if you register your work in advance in suitable places – your website, your bank, with a trade association, on your terms of business – that can prove your ownership of them. The law of the land stretches to almost every corner of a business. The list of requirements naturally lengthens the more complex, large and interactive your business is. Online resources explaining all these laws and what they mean are at the end of this chapter.

GETTING THE ACCOUNTS RIGHT

Setting up a good accounting system is crucial for lots of reasons. First, as the owner of the business you need to know the true state of your finances at any given moment so that you can make sensible decisions. Second, it is paramount that you know if you are working hard but not being paid on time, or at all. Third, you need to know if you are making a profit for all your effort. Fourth, you need a good working knowledge of what tax obligations and other major bills are coming up. Fifth, the accounts will be the first thing that any prospective purchaser of your business in the future asks for, so they need to be in good order. And sixth, you must keep it all legal.

The list is probably longer but the message is clear: you need well-organized accounts to run a good business. So they need to be set up properly when you start out. The best way to do this is to employ an accountant. They can advise you on how to establish your financial systems, and in all probability they will have their own that you can use. This is by far the best approach, but if you cannot afford an accountant or you decide not to engage one, then at the very least you must have a decent bookkeeping system. Again, you can employ a bookkeeper who will arrange and record everything for you, but if you choose not to you can buy or download software to set your system up. Putting all your financial information into such software is not complicated, but it does require discipline on your part. It’s no use having brilliant software and then stuffing all your expense receipts in a drawer somewhere and hoping everything will be all right. You need to discipline yourself to log all your financial transactions in a methodical way. This means setting aside a certain time once a week, or month, or whatever frequency suits the nature of your business. Alternatively, design or buy a computer system that does all this for you electronically. One way or another, make sure it is all right up to date to avoid nasty surprises.

To summarize the basics of what you will need to ensure your accounts are in order, at a bare minimum you will need a system that accurately records:

• All outgoing expenditure: costs, salaries and expenses
• All income
• All tax due and paid (including VAT if relevant)
• How much cash there is in the business
• All costs due to be paid soon
• Any debtors, what they owe and how long they are overdue

Without becoming obsessed with the minutiae, as the owner of the business you should have a good working knowledge of all these figures at any given moment during the year. Should you fail to do this, there may be financial surprises lurking that could surface when you are least expecting it.

SETTING UP SYSTEMS AND TECHNOLOGY

Money systems are vital, but there is so much more to getting your business organized, and much of it is not financial. Consider for example information technology (IT). There are thousands of different systems to choose from, and between them they can probably solve almost any problem you may have, or provide an organizational format to suit your business. Don’t just dive in and pick the first one you come across, or one that’s free. Take the time to work out what your needs are, and then find IT that fits the bill. This will effectively become your IT strategy. Ask yourself these types of questions:

• Which aspects of my business could benefit from IT?
• How many systems do I need?
• Can all my needs be handled by one system?
• What would happen if I needed to change the system in the future?
• How do I prevent failure or collapse of any vital functions?
• What back-up facilities do I need?
• How much can I justify paying for an IT system?

Naturally, the fewer systems you have, the better. You may need software for a wide range of needs such as stock keeping, supplier management, sales ledger, customer database, accounting, prospecting, and so on. If you plan to run a high frequency but low margin business such as a sandwich shop, then you will need detailed customer transaction information, but may require less knowledge of your customers. In other words, you need to know exactly how much you are selling of what, but not so much to whom. For higher margin but lower frequency businesses, such as clothes shops, travel agents, hotels and garages, longer-term customer records will be vital so that you can stay in touch, prompt further sales and market to your customer base at the appropriate frequency.

Customer Relationship Management (CRM) is the modern phrase that encompasses all this. The idea is to have a comprehensive system for building a decent customer base, ensuring that you look after them properly in the future, and marketing your products and services to them at suitable intervals. We will look at this in greater detail in Chapter 5, but for the moment consider the scale of what this might involve and whether a suitable IT system could help. The most obvious example in which a software system could be of use is where you anticipate that your business will be involved in hundreds or thousands of transactions. Clearly no single individual could keep track of them all, so that’s where you need a system to do it for you.

Also bear in mind that the same principles apply to your suppliers and any partners or colleagues you may have. If you are expecting to have a large number of suppliers, you will need to have all their details in one place, with a clear method for renewing stock, logging invoices and payments, receiving orders, and generally keeping on top of everything. It’s also good to review your relationship with them from time to time to make sure both parties are happy, and getting what they want from the arrangement. If you plan to have a business partner, or staff, then you need to work out how you are going to keep them informed. With one or two people this may not be an issue, but as soon as the numbers rise, you will need a system of some kind. Many collaboration tools can be bought online. These can cover everything from file sharing systems and coordinated diary management to free telephony and online conferencing facilities. Work out the best method of keeping people informed and in touch, and set up a system to facilitate it.

INSURANCE

There is almost no limit to the different types of insurance that you might need for your business, and your needs will differ wildly depending on the nature of it. Starting with the simplest possible set-up, consider the sole trader working from home. At base level, you may not legally require any insurance at all, but this may not be a wise approach. Bricks and mortar insurance is a legal requirement, and so your home should be insured already, but do consider whether any aspect of your proposed business will change that. For example, do you intend to make any alterations to accommodate your new business? Most homes have contents insurance, but not all. If any aspect of your new life means changes in this area, then change your insurance. This could be as simple as taking out extra cover for your new computer, printer and hard-drive back up, or more complex if you plan to store any stock at home. If so, what is the cost to you of losing any or all of it?

Then consider yourself. What happens if you cannot work for a significant period such as more than a couple of weeks? If this would be severely detrimental to the business, then you will need some form of key man insurance. For a monthly payment, this will pay out an agreed annual amount if you are incapacitated mentally or physically. If the new business is to become the cornerstone of your livelihood, or that of any dependents, then you may also want to investigate health insurance and life insurance. On the pure financial front, you might also want to consider loss of income insurance to cover book debts, and the additional expenses of a VAT or tax inspection. They all cost and may never be required, but it is as well to consider them all in your new life.

As soon as you propose to run a business from specific premises other than your home, a whole new complicated world opens up. Having offices or any place of work where the public have access means you are liable for much more. Consider some of the following:

• employers liability – a legal requirement if you have staff
• public liability – if something happens in your work place
• product liability – if something happens with a product you provide
• product insurance – protecting items such as stock and equipment against fire, theft and malicious damage
• vehicle insurance – cars, vans, fleets, and anything else automotive

This is not an exhaustive list. Your bank manager can advise on insurance products to cover most of these in detail. Make sure that you consider every aspect of how your proposed business will interact with the world, and what all the implications are for insurance. Don’t depress yourself, but do create a disaster planning scenario in which you envisage everything that could possibly go wrong, and then make provision for it as best as you can. Even if you cannot afford to insure all of it at the beginning, make a note to review your needs after a year to see if you want to upgrade or introduce more cover as cash flow improves.

Finding out about the law is a vital part of starting a business. Any shortcuts taken at this stage are likely to rebound nastily later in the life of your company. So do make sure that you fully understand your obligations and take the necessary steps to build the costs into your plan, and take the right action. The same goes for setting up suitable systems. Careful thought at the beginning about the right way in which to organize your accounts and purchase the most suitable technology will stand you in good stead later on.