So you’re thinking of taking the leap into business? Congratulations!
This will be a very exciting time for you. But beware, there are a bunch of things you need to think about – boring things, scary things, legal things, things that you need to nail – to make sure you kick your business off on the right foot.
You will find that everyone wants to help and offer you advice. That’s great, but it can be overwhelming, too. My advice is to find a trusted, forward-thinking accountant early in the piece, and listen closely to their advice.
Here’s a summary of the key topics our clients ask us about when going through this process.
Some of the items below should be addressed prior to taking the leap and leaving your current employment.
Others can wait until you have made that leap.
Before you leave your PAYE employment, it’s crucial that you review your current insurances. If required, take out income protection insurance.
Once you have left your job it is very difficult to get this insurance.
Accountants aren’t insurance brokers, but a good one will introduce you to brokers who will offer a free review of your existing policies and provide you with the best advice going forward.
This is critical. Statistics show that many businesses fail in their first few years. This failure is generally caused by a lack of planning. Whether that is planning for cash flow, funding or rapid growth, the result is the same – failure.
Planning can be broken down into various aspects:
- We recommend that you think about why you are going to embark on this new opportunity. If you are not passionate about what you are going to do and why you are going to do it, it is very difficult to continue with it when the times get tough.
- You simply must prepare a business plan. A good accountant can help you with the process. The plan is important as it outlines the reason for starting the business, what you are going to do, and how you are going to do it.
- What kind of entity are you going to be trading under? Sole trader? Partnership? Company? Trading Trust? Talk this over with your accountant as they can provide details as to what the best structure is for you and why. It is critical that this is set up correctly at the start as this can provide tax savings.
3. Funding and finances
In most cases starting a business or buying a business requires capital (money). How will you fund this business?
Do you have money in a savings account that you are planning on using? Are you going to borrow against your home? Or are you going to approach the bank for a business loan?
If you have money saved, how long will it last? How many months can you trade with limited income before your savings runs out?
If you are going to borrow against your home, have you spoken to a mortgage broker to see how much you can borrow? Just like insurance, your accountant isn’t a mortgage broker, but they should know experts in this area that can provide a no cost review and assist you with this process.
If you are going to approach the bank for a business loan then some mortgage brokers have experience in business lending and can assist with this. In this case the bank will ask for budgets and/or cash-flow statements to show that the company can repay this loan. In most cases they will also ask for the business plan that we have discussed above. (See how important that plan is?)
It is a good idea to prepare an initial budget. By budgeting your overhead costs and knowing your margins, we can determine what level of sales are required to break even. This provides you with a weekly number of sales that you need to achieve in order to pay your bills as they fall due.
Cash is the oxygen in any business. It is really important that from day one you are monitoring and controlling your cash flow.
The best ways to do this include:
- Asking for deposits if possible
- Using 7-day terms (not 20th of the month following)
- Invoicing as soon as the job is completed (not once a week/month)
- Following up when payment has not been made (say on day 8 or 9)
- Setting up good credit terms initially with your customers
It is essential you run your business from new separate bank accounts and do not use your personal bank accounts – even if you are trading as a sole trader.
Many people believe that you don’t pay tax in your first year of business – this is complete rubbish. This belief can result in really terrible tax planning options and often more tax than would otherwise have been payable. If you make a profit, you pay tax, regardless of what tax structure you are using.
Do you need to be registered for GST? Are your sales going to be over $60k in your first year?
If yes then you must register for GST. If you’re unsure or you think they are going to be less than $60k, it may still be worthwhile registering for GST. Your budgets will assist with this in determining the $60k threshold.
Put a percentage of all your income into a second bank account (known as a tax account). A good general rule of thumb is to put between 30 and 45 percent of all income in the tax account.
This is made up as follows:
- 15 percent for GST (if you’re not GST registered you don’t need to put this aside)
- 30 percent to cover income tax and Accident Compensation Levies
PAYE or Shareholder Salary
PAYE or Shareholder Salary will depend on your tax structure and personal situation. Your accountant should be able to advise you the best options for you and your situation.
There are many cloud-based software packages available. Your accountant can help you decide which is right for you based on your needs.
Please note that these packages do not complete all your tax calculations for you. Like any program, if the information is not entered correctly or coded correctly, this can have a significant impact on your tax position.
One final thing. You’ll have many, MANY thoughts as you prepare to make the big leap into your own business. We recommend that you start making notes about what, how, when, who and so on in a device that you carry with you so you can capture ideas as they happen.