Britain is a nation of fearless entrepreneurs, but the likes of Richard Branson and James Dyson didn’t go from rags to riches instantly. Branson needed a £300 loan to get his first magazine up and running after dropping out of school at the age of 16, while Dyson produced 5,127 prototypes before finalising the design for his bag-less dust-buster.
In fact, Government statistics revealed that more than half of businesses founded in 2014 had folded within five years, so the lesson here is to think before you commit. If you have a bright idea and believe you’ve spotted a gap in the market, you’ll need to test, prepare and assess the risks and opportunities before jumping in, to give your new business the best chance of survival.
Testing your idea
Thoroughly testing your idea before building a business around it can save you time and money if things don’t turn out as planned. Conducting market research before starting your business will enable you to gauge interest in your product or service, and how much consumers may be willing to pay for it. Living in an increasingly digital age means you can do much of this online. For example, you could visit the websites of potential rivals, or those of trade groups and industry publications. It would also be highly beneficial for you to identify your ideal customers – i.e. those who would be most interested in buying your product or service. Think about who they are, what they do, what they buy, where they go and what they need.
Selecting a business structure
In 2019, there were around 6 million private sector businesses in the UK. Sole traders accounted for 60% of that figure, with the rest of those businesses being companies or partnerships.
If you opt to become a sole trader, you will run your business as an individual and be entitled to keep all of the profits it makes. You’ll also carry the can for any losses it makes. You must pay income tax and national insurance contributions (NICs) on any profits, by completing an annual self-assessment tax return.
Partnerships are another form of unincorporated business, where profits are shared between partners who are responsible for paying tax on them in an agreed ratio. Partners in a general partnership can be personally responsible for a partnership’s debts.
With a limited company, the finances are separate from your personal finances, so your personal assets will usually be protected if your business gets into trouble, but doesn’t break the law. As a limited company director, you must provide statutory accounts, send Companies House a confirmation statement, and complete a company tax return. As a director or shareholder of the company, you will not be personally taxed on the profits of the company; however, you will be taxed on dividends drawn.
No matter which business structure you opt for, you will have to register for VAT if your annual turnover exceeds £85,000.
Writing a business plan
Once you’ve conducted market research and selected a business structure to suit your needs, the next stage is to come up with a business plan.
A good business plan will help sell your idea to investors or banks, while also enabling you to think through every detail to plan for every eventuality. Considerations include what your business will sell or supply, its structure, how your products will be sold and how much they’ll cost, your short-term and long-term targets, and what the specific timelines for meeting them are.
Wherever possible, analyse your customers and your competitors. Who are they? Where are they based? How does your product differ from those offered by your competitors? How will you attract customers?
Also, you should factor in any financial forecasts you have, along with your marketing or contingency plans.
Written by: James Twigger at www.accounting4everything.com