Embarking on the journey of starting a business can be both thrilling and daunting. The initial stages are often filled with excitement, but they can also present unexpected challenges and steep learning curves.
In this discussion between myself and Faith Liversedge, a marketing expert, we share our experiences and lessons learned from setting up our own ventures. From the complexities of legal structures to the nuances of financial management, I hope we provide valuable insights and practical advice for entrepreneurs in the early stages of business formation. Join us as we delve into their candid conversation and explore the pitfalls to avoid when venturing into the world of entrepreneurship.
Tom: I’m Tom Skinner, managing director of Barnaby Cecil, a small financial planning firm that specialises in advising digital execs and doctors. In 2019 I set up BC aged 37, having last run a limited company as a sole trader at 26.
Faith: I work with financial advisors and provide them with marketing. That's content from websites to blogging to social media to anything else really. It's all financial services based, so it's all about trying to have a creative approach to talking about the benefits of financial advice.
Tom: Faith and I meet up once a month and we chat through some ideas for our marketing content. I use Faith as a sounding board to find out what she thinks will work and then Faith goes away and it comes back a lot more polished than my idea in the first place.
In one of those brainstorming sessions we began talking about the pitfalls when you set up a business. We realised after about five minutes of chatting about the things that we'd wish we known and the mistakes we made, that this might make a useful little video for somebody either in the early stages of setting up their business or thinking of doing.
Faith: I started off in journalism and then moved up to Edinburgh about 20 years ago and moved into marketing then. Six years ago I decided to leave and set up my own consultancy. I wasn't sure whether to say: ‘I'm setting myself up as a freelancer or setting up my own business’ because the idea of saying: ‘I'm setting up my own business’ felt a lot more serious than just saying: ‘I’m now going freelance’. So I think in my mind, I got to a stage where I just wanted to develop a lot more. I wasn't able to do that within the corporate world. I think you have to be slightly naive to do it because if you thought about it too much you probably wouldn't do it. It's such a scary idea because there’s just so much to factor in. What you think you need to look for and prepare for isn’t necessarily what’s important or helpful once you get there.
Tom: Yeah. It's utterly overwhelming to begin with. Did you initially set up with a co-owner or did you start out alone?
Faith: I just started out alone.
Tom: That's really difficult at the start because you've just so much to do. There’s not enough hours in the day. I started the business with somebody and we divided up all the things we’d have to do each day. I'm impressed that you started out alone.
There are two ways of starting out. The first is on your own, as a sole trader. The second is to set up a limited company. Starting out on your own is pretty straightforward. You can use any bank account. You could use the same bank account you’ve had since you were 16. You can call yourself anything too, but you can't use the word ‘Limited’ in the title.
And then you have the limited company in which that is a legal entity. But it comes with a lot of complexities. So, did you set up as a self-employed person initially or as a limited company?
Faith: I was self-employed initially and then moved to a limited company when I got to the stage where it becomes more profitable to do so. I was really tentative about it and not really thinking ‘I'm a business owner’. It wasn't until I started working on my laptop that I suddenly realised I didn't have Word or Microsoft or a team to help me with this. There was a lot of naivety going into it. I think it might be useful for people to think ‘Actually, am I doing this as a business, as a consultant, or a freelancer? What am I doing? And do I want to become a limited company at some stage? Or am I just going to fall into it?’
Like you say, you could just use your personal account you don't necessarily have to use a business account and then someone says ‘now you should really do that’ but because everyone’s business is different you can only really take what they are saying with a pinch of salt.
Tom: Yeah, every sector and every business is different.
Faith: You think you’re getting good advice and you think you're speaking to the right people. I spoke to somebody who set up a consultancy years before, but his consultancy was massive. We were kind of similar in that I was starting off on the road that he had started off on. He recommended an accountant to me and so I thought: ‘Brilliant. I'll just go with them’, not realising that you don't really need an accountant when you start, because you don’t really have any money! What you really need is a bookkeeper to manage the transactional aspect. And so I was paying this ridiculous amount for this company that was up the road from me. And then a financial advisor suggested: ‘Why don’t you just have a bookkeeper?’. I went back to having a bookkeeper. I sort of went backwards. And then when I got more profitable and bigger I did actually need an accountant then. There's a lot of these things you just have to do, I think, and then find out that you've done it wrong.
Tom: I don't think that any number of business books or ‘companies for dummies’ books would help. You only know the problem exists when it slams you in the face. They’re usually not massive problems. Say for example you walk into an office and you don’t have a telephone. You think: ‘I don’t need a telephone because I'll use my mobile.’ But then you need a telephone to get broadband. And then you’ve got to ring BT and say: ‘How do you get a phone line?’ And they’ll say: ‘Well we can come out three weeks on Tuesday.’ So you think: ‘What the hell am I gonna do for three weeks without internet?’
I think the key message there is to expect to be solving lots of little problems all the time to begin with. At the start you're just constantly walking around going to meet one person to the next to set things up.
I think the setting up of the company can be quite fiddly. Did you actually go online and do that yourself or did you pay somebody else to set that up?
Faith: I think I set up as a limited company with Companies House myself. I got told that an accountant could do it for you but it's really easy and I think it was fairly easy. But apart from that, I would outsource to an accountant. Because I'm a marketer I was very excited about doing the marketing. I thought: ‘That’s the thing I’m most interested in and then I'll get someone else to do the numbers thing.’
I'd also always been aware of this horrendous deadline where you have to do your self assessment by the 31st of January and everyone gets very panicky about it. I didn't want to be in that situation so I thought: ‘Right I'll just make sure from day one I don't have to do that.’ But yes, I think the company's house thing, all of those fiddly things, once that's done that's done. You don't have to worry about it. Apart from the yearly confirmation statement, that they send you emails about. That you have to hit a deadline for. These things can sound very scary.
Tom: And the fines are quite high as well. They take it very seriously. You’ve gone from the self-employed world, where it's like a £100 fine and no one cares. You might pay a little bit of interest. I think they say like 2.1 million people miss that deadline a year. It's a big number and it's not very serious. But for a limited company, since it's a legal entity, it's pretty serious stuff if you miss it.
If I go back to when I was 26 (and first set up a company), I didn't realise that I had to do things nine months after the establishment of the company. And that's where an accountant is really good. Because I remember that the fine for it, I think, was £600 for missing this particular deadline. I wrote them a letter with a bit of a sob story explaining that it was my first year of the company and they rescinded it. But it was quite stressful getting the letter in the first place.
And so I found lots of little things that you can go back and do but it's a pain. So we paid an accountant I think about £300 to set up the company and it was money well spent at the start.
The next thing that was tricky then is you can't then trade from your bank account that you've been paying your pocket money into since you were 10-years-old. You need a business account. So I went to NatWest and set up an account with them and it wasn't that straightforward. Did you go to your existing bank and set up an account with them?
Faith: Initially I went with Santander. I was with them for my personal account and I think they offered 12 months free for the first year. So I thought that would be good, and the people seemed really nice. It seemed quite straightforward.
What I found difficult about the limited company thing was the mental approach to being an employee of your own company. It's not your money anymore, so you are paying yourself as an employee. It was very confusing. I paid something from the wrong account and my accountant said: ‘You can't do that from your company account because they'll think that you're trying to do something bad deliberately.’ I could not get my head around what I was doing. You could fall foul of so many things that HMRC thinks you're doing deliberately, just by accident.
The trouble with HMRC is they don't tell you these things until 8 months later when you get a letter in the post and you can't remember what you did. Then you have to work it out and speak to them. You’ve got to try and get someone sensible to talk to after being on hold for an hour. And that's, I would say the most stressful part, is dealing with these things that you didn't do maliciously that they don't understand and you can't even remember. There's all sorts of things to do with HMRC, for example you'll pay them a massive amount of money every month in tax and you don't get any confirmation or anything.
Tom: Yeah. That's stressful.
Faith: And you think: ‘Has that gone to the right place?’
Tom: They’ve got to be exactly the right codes and exactly the right account and they’ll change just one number at the end of the whole reference number. They do it for us when we have to pay our National Insurance. In any other walk of life you get a notification that it’s been paid and you didn't get anything back. You just have to hope. The cash is gone.
When I pay something, I email myself to say ‘paid’. I drag it into a HMRC folder so that I know.
So if anyone challenges it in the future - because it's always like nine months afterwards - I'd now know: ‘I wouldn't have written that email to say I’d paid it.’ Again, it's all these little mistakes you make that you learn from.
Usually your accountant will suggest it's a good idea to pay yourself a small salary such as £12,000 a year and then you won't pay any PAYE tax. So lots of directors pay themselves a little salary. That has implications when you try to get a mortgage and they see a small salary, and you have to wait several years (maybe three years) of paying yourself a dividend for them to take the dividend into account. You might also pay yourself a dividend on a regular basis. But the dividend is paid gross. So that money comes out the company account, into your personal account, and then the tax comes out the personal accounts. But then you might pay yourself monthly or quarterly or yearly a dividend. But that dividend comes out of the company gross, into your personal account. And then what I do, I don't know if you do the same thing, there's lots of websites where you can work out the dividend tax you've got to pay for the year.
I always add on a bit more, so it ends up working out like a savings scheme. In case something I've forgotten later on in the year comes out, there’s a little bit left over. Then of course you've got to pay a ‘payment on account’ in July as well, which is a percentage of your January payment. They get half of it upfront. Lots of people forget that, so thankfully I've got my dividend cash pots to pay my dividend tax.
The third thing on my note to talk about is the importance of budgeting. Work out what's coming in and what's going out. Basic financial stuff. Have lots of pots so that when that tax charge comes, be it your business rates or be it your council tax.
If you're really really bad at it, personally, then I would say get somebody to do that for you.
If you've been an employee and you’ve run out of money a week before the end of the month and you put on your credit card or you’ve rung mum and dad to bail you out, and that's how you've always lived and there's millions of people who live like that because they always get paid a salary the following month all the bills come out at the start the month, you get like institutionalised by that. If you don't solve that, and I was a bit like that, particularly when I was 26. If you don't solve that, you'll get yourself into a real mess. You have to really sort of sharpen up and become a bit of a budgeter and if that means you've got no money at the start, that means you've got no money at the start.
So do you have different little pots that you use to cover things?
Faith: I don't. I really want to though, but I have this image in my head, that this amount that's in my business account isn’t mine. I know that that's not my money. I think of it as: ‘A third of that will be all the different things I have to do at various different stages throughout the year.’ And I've got a spreadsheet of the different dates for VAT, corporation tax, and PAYE and all of that. But it's very complex because they don't all refer to the same time scale. I never think of it as my money to spend or my money to put into my pension. I always think of it as: ‘a tiny bit of that at the end will be mine.’
Tom: That’s the other killer, isn’t it? You've paid your employee PAYE tax. You’ve paid your dividend tax, you think: ‘Well I’ve paid all my taxes’ and then the company owes corporation tax and then there's a fourth one. A really key decision for business owners is that when you get to, I think, £82,000, you’ve got to decide whether you're going to increase past that. And a lot of people will sit at that level of turnover as a business, but then and this catches a lot of businesses out, once you go above that threshold you've got to charge everybody VAT at 20% across the whole amount thereafter. So suddenly either you're taking a 20% cut on your revenue because you can't pass that onto clients or you've got to work 20% harder or slightly more than 20% harder to get back to the same point.
Faith: At the beginning, the first accountant I had recommended that I register for VAT because it would look more professional. That was a really bad piece of advice because my clients are financial advisers and they don't charge VAT so they can't claim it back. So it's automatically 20% more expensive. And I didn't realise that until a while ago. So I deregistered myself. Then I registered myself back again. Then I deregistered myself again because I lost a contract and it was the pandemic and I didn't want to scare off new clients by having to suddenly say: ‘Right it's 20% more.’ But that deregistration didn't go through to HMRC. They thought that I should have been charging VAT for six months when I wasn't. And that's the biggest mistake ever.
They don’t like it when you don't pay them VAT because that's seen as their money. Whereas I get the feeling that with other things, if you're a little bit late with your tax or whatever, they don’t mind as much. But they see VAT as always being theirs, which it is. You’re collecting it on their behalf. So if they don't get that when they expect, they get really unhappy about it. But trying to explain the little intricacies of what have gone on to them is still actually an ongoing conversation.
They don't accept that I filled in this form but I didn't screen grab to say that I've done it and it didn't go through. For all they know, I was still charging VAT and keeping the money - but I wasn't. So that's another thing: just take screen grabs of absolutely everything that you ever do.
Tom: Screen grab it and drop in a file. It's often months or years after the event and you've got absolutely no memory of what they're talking about.
Do you use any accounting software?
Faith: I use Xero. I used to look at it a lot to see what was going on and what was coming out. I was obsessed with that. You can see things at a snapshot and that's really helpful. If your accountant uses it then you both sort of plug into it and everything is recorded in there.
Tom: Our accountant uses Sage and just provides us with very very basic info. In financial services we have to link up payments but they're only really for us tracking what they are and what they're for. Because the FCA, our regulator, requires some information but not from a tax perspective. They just want to know what the investment was, how risky it was, and to classify what we're doing as a company more.
So we don't really have high level accounts from our accountant and we have all of our transactions recorded in this one format, a simple Excel format.
I haven't seen how Xero interacts but I gather from other clients in other sectors and businesses that Xero seems to be the market leader. And they also seem to say it's absolutely great. It pulls data across from your bank account, your business bank account, links into the software, and you can chat with your accountant about it.
So for anyone watching, if your accountant is using Xero then you may as well get yourself fairly familiar with it and decide whether you can do it yourself. If you then decide you need more help, you're using the same tech as your accountant. So when they’re explaining things it’ll make a bit more sense if you've understood a bit about the software.
Faith: It links in with Stripe as well, which is always handy to have if you want to offer credit card payments to people.
Tom: Does it? Okay. We use GoCardless. You can’t accept credit card payments through it. It's really good for just pinging out invoices. We use it for setting up direct debits for clients who pay us on a monthly retainer but once or twice we've had clients ask to pay us our invoice with a credit card and you can't with GoCardless, but you can through Stripe.
Faith: And some people like to do that but then you’ve got to take the hit on the fees.
Tom: Yes. There's always fees. It reminds me of a wedding. Once you say you're a business they're like: ‘Alright. Well add another 0 on then.’ You think: ‘Why does this phone line cost so much money? It's like £11 in my house and £130 here.’ Then they say: ‘Well it's a business line!’ Well it doesn't know it's a business line. It just looks and sounds like every other phone.
I hope anybody who's set up a business recently or is thinking of doing so finds this helpful. If you need any help on the financial planning side, drop me a line.
If you need any help on the marketing side, speak to Faith.
Take a look at the full video here.