94. How to write a business plan and manage cash flow in year one | Emma Jones

0:00Welcome to All About Business with me, James Reed, the podcast that covers everything about business, management and leadership. Every episode, I sit down with different guests who bootstrap companies, masterminded investment models or built a business empire. They're leaders in their field and they're here to give you top insights and actionable advice so that you can apply their ideas to your own career or business venture. Welcome back to our special Summer Shorts series on how to start a business. Last time we looked at how to come up with a business idea and what it really takes to be an entrepreneur.

0:38Now it's time to turn that idea into a real business. I'm joined once again by Emma Jones, entrepreneur, founder of Enterprise Nation and the UK's Small Business Commissioner. In this episode, we'll cover the practical steps every founder needs to take when starting out, from writing a business plan and choosing the right business structure, to managing cash flow, protecting your intellectual property, and launching on a budget.

1:10Well, today on All About Business, I'm delighted to pick up episode two of our summer shorts with my guest Emma Jones. Emma, you were so brilliant about what it takes to be an entrepreneur. I want to ask you now about setting up your business and how to go about this. So the first question is, how important is it to have a business plan? Well, I think it's critical. And James, there is a divided opinion on this. There is divided opinion. I might push back. Well, so a lot of people say to me, I'm not going to write a business plan. A plan is not worth the paper. It's written on because things are changing so quickly.

1:49And I understand that, but I have long believed that having a business plan is like having a route map. So you go on a journey, you are here now, you want to get to a certain destination and you're going to have stops along the way. And I feel that the discipline of writing a plan essentially helps you say, here's where I am in my business. This is where I want my business to get to. and these are the things that I need to do to get it there. So I think starting out, it's useful to have a business plan. And I always used to say it's very easy to remember what to include in a plan because it spells I'm off.

2:23So what's the idea for your business is section number one. M is for the market that you're going to serve. So who are your customers? O is for the operations that you need to get up and running. F is for finances. So to do a basic cash flow forecast and figure out if you need to raise any funding to get going. And then the final F is for friends. So who is your team? Who's your support network? So if you write all of that down, it forces you to think, well, who is my market? How am I going to sell to them? How am I going to get my brand out there? And writing it down gives you that sense of direction.

2:59And then my advice is probably check in with your plan about every six months. And of course, things will have come in from the left hand side, from the right hand side that you didn't expect but try and stay true to that plan and review it as i say every couple of times a year i'm off i've never heard that before so i think that's very helpful that might have persuaded me to be more structured around i was going to say you look doubting on this plan idea i was always taught only fools forecast that was and a plan is a sort of forecast and the world is so unpredictable that it's you know the plans i've been involved with never come true they're either blown away because the business has outperformed them or you know they look as a wishful thinking because the business hasn't delivered but it's I think I think I don't want to contradict you because I think it is helpful to order our thoughts by putting them into a structure like that absolutely but at the same time being super conscious that things change and they and they change fast would you agree you're nodding I would agree with that and this is where you've got to have flexibility built into the plan.

4:04So know the direction in which you want to go, but also know how you're going to deal with unexpected challenges, but also hopefully opportunities. Yes. So how detailed does it need to be then? So I'm off. Well, it depends at the outset, not too detailed. So this is the thing, it doesn't have to be such a Herculean task. And this is what I think puts people off. Four pages or something? Five pages. So one page for each. And in fact, this is quite often when it comes to pitching businesses. People say, if you think of it in the form of a slide deck, it's maximum of 10 slides. So what's the problem I'm going to solve?

4:38The idea. Who's my market? What do I need to get up and running? The financials and then your team. And that's pretty much all you need when it comes to getting started. That's very helpful. So don't worry. It doesn't have to be too cumbersome. Five to 10 slides and you're done. Absolutely. And of course, if you're raising funding at an early stage of starting a business, you're going to have to do this anyway. Yes, because they'd expect you'd have a presentation. Surely. But if you're not raising funding, don't worry about it. You can finance your business from your own cash flow. So that's the ultimate freedom.

5:11It is. That is the ultimate freedom. So what about this practical stuff that nobody talks about? I want to ask you about some of these things. Sole trader or limited company? Which way should people be thinking of going? Great question. So when you're first starting out, lots of people do start as a sole trader. Now, the key difference between a sole trader and a limited company is as a sole trader, you and the business are as one. So you are super entwined because you are the sole trader. The admin burden is less when you're a sole trader. So you do have to inform HN Revenue and Customs, but there's no filing responsibilities apart from a self-assessment tax return.

5:47Do you get a number or something? You do. You get a number from HMRC. They want to know how much you're earning. And you need to do that probably within about six months of starting to earn. Limited company is where you set up a company at Companies House. And you and the company are distinct entities. So you are an employee and a director of the company. So therefore, if anything should happen to the company, you can walk away. Whereas, of course, if you're a sole trader, you're personally interconnected with it. Well, the key difference is it has limited liability. Correct. Joint stock company.

6:19Correct. Right. But limited companies, people tend to, what I see happen a lot is people will start as a sole trader. When the business gets serious enough that they feel actually I really have a legit business here, they will move it into becoming a limited company. What's serious enough in your experience? Well, it depends on whatever that person feels is right, but it's usually based on revenue. So when you get to a certain stage of generating revenue, maybe the person has started it. We spoke in the first episode about side hustles. So maybe the person has started out as a sole trader in their spare time.

6:55The business is getting traction and then they think, well, actually, maybe I am going to apply for a loan. Maybe I am going to start a business bank account. So part of that admin is actually in which case I'll start a company. The one thing I will say, James, and I know we'll talk about intellectual property and protecting your brand. And it could be worth, if you come up with a brand name for your business, it could be worth you registering the company at Companies House anyway, because it gives you extra brand protection. So if you've got all your social media handles in a brand name, you've got a domain name in that brand, you might also want to register a company.

7:32And what you can do is just essentially file dormant accounts every year. Doesn't cost too much to do, but at least it adds to your brand. I see, because actually you're trading as a sole trader, but you've got it registered. Correct. And that just helps with brand protection if people come and question it. Does it? I didn't know that. So when should you register? If you've started a side hustle? Well, as a sole trader, you should register with HM Revenue and Customs when you feel, I mean, this is a very sort of fluid answer. When you feel that you are making money from a business, that's when you should tell the taxman that you're doing it.

8:09money from it well that's more than sales then is it it well it's like so the way in which hmrc looks at this is if you are selling used things from your house on ebay and it's just you're finding odd or on vinted they don't really want to know about you because you've got a personal allowance you're not doing it for business purposes so you don't have to tell the taxman if however you are selling goods and you want to start it as a business you should really tell the taxman as soon as possible that that's what you're doing. So get registered is your advice. So as we said in episode one, if you're starting a business, you're doing everything in the company.

8:45You're making the sales, doing the marketing, doing the finance. But as budget comes in, as soon as possible, I would say find a good accountant. They can help you make the decision as when you move from sole trader to limited company, they can help you do tax returns, understand when to register for VAT. And it's really interesting because when you ask accountants, what are their fees? And I had this repeatedly when we used to run events. Accountants will say, how long is a piece of string? It depends on how big the business is. But actually, if you're a small business with not many people on the payroll, hiring an accountant is not too expensive.

9:22You could be looking at about 500 to 600 pounds a year. And I would say that that is money well spent because one of the things you have to do as a business owner as you start and grow your business is understand the value of your own time. So if you as the business owner are really good at the selling but you're spending 14 hours every month on the accounts you have to think what is the cost of that time and actually if you outsource that to someone who is an expert in that it frees up 14 hours of your time that you could instead be making the sales. If you're asking yourself as an entrepreneur, what parts of the business administration matter the most, you're saying start with accounting.

10:02Is that right? Well, I know this is not helpful. I'd say all parts of company admin matter. The big piece of advice I always used to give to founders is, as I say, for the first however long, you will do everything in the business. And that's good because as the founder, you need to understand how your business operates. You need a basic understanding of accounts. You need to understand how the marketing works. But as sales grow and as budget comes in, you of the founder then have to have some self-awareness of what your greatest contribution is to the business. And it may be that you're brilliant at creating the product or selling the product, or maybe you're brilliant at the finances and the back office.

10:44And so you need help for someone to externally promote the company. And so therefore, my advice is focus on what you do best and outsource the rest, whether that be full time hires or getting in contractors or trusted advisors. Focus on what you do best as the founder and outsource the rest as soon as you can. Very few founders are trained accountants. And that's why I say if you can sooner rather than later, hire a trained accountant, because if you're not one, they'll be able to do the job much quicker than you. Or if you're thinking of starting a business in the future, learn to be an accountant.

11:19Well, that could be another option. It might save you some money and give you some skills that would be helpful. I certainly know several accountants have been very successful entrepreneurs. So you're saying play to your strengths and fill the gaps with skills from other people. Absolutely. Hiring other people. And it's worth adding, from a recruitment perspective, you could take on temporaries. Temporary staff could help you. You might have temporary finance people or temporary sales people, which is a flexible way of managing your costs. Or you could take on contractors. It doesn't have to be the commitment of hiring someone full time necessarily when you're starting up.

11:55So what insurance should people think about? This word comes up a lot, insurance in business. What do they need? Well, it's interesting because people rarely think about it because they see it's the boring bits of business. But when starting up, it is useful to have. So if you are selling services, so you're a copywriter, you're a designer, you're a lawyer, you're an accountant, what you do need to have is professional indemnity insurance. So, of course, this protects you in the event that you give advice, somebody acts on it, something goes wrong, and then they come back to make a claim. So professional indemnity insurance you need for services.

12:31So that's if you've shown to be negligent. Correct. You get that you're covered. Professional indemnity, you're covered. So your insurance policy covers. So useful for you to have. If you're selling products, and we mentioned this in episode one, lots of young people starting food and drink, vitamins, well-being businesses that are selling product, you need essentially what's called product liability insurance. And this is in the event someone buys your product, something happens, and again, they come. You're cooking it ill or something. But the good thing is, is when you're starting out, insurance isn't that costly.

13:03So it's one of those things that people put off because they think it'll be a big expense. there's brilliant websites to name one there's one called simply business where you essentially just go on you say this is what i'm doing here's how many employees i've got and then of course you get all of these options so you can buy the insurance through simply business you can buy the insurance either direct through the insurance providers or simply business is like an aggregator that just gives you multiple options fantastic that's useful to know so great place to start and as i say not as expensive as you think but it gives you that protection from the outset so another sort of related area in this sort of practical stuff section is when should founders worry about intellectual property yeah i love this one from the start but again we we rarely do from the start from the beginning and even when you don't have any even well but everyone does and explain this is one of the first messages i give to businesses is you may think and and and I think there's a sort of a concept, and I get this, that intellectual property is just for those businesses who have world-beating patents.

14:10But it's not. It's for anyone. So anyone who starts a business is probably going to give that business a brand name. So that is a form of intellectual property. And the story actually that I tell on this, and it's interesting that we're in Hoburn because this story happened just around the corner, is years ago we used to run competitions where Sainsbury's would want new suppliers. And so it was called Pitch Up and we would get small businesses pitching to Sainsbury's to win a contract. Who were just around the corner. Who were just around the corner. So it happened just around the corner. And a wonderful little business won this contract.

14:46And it was a business started by two mums and they did iced yogurt lollies for children. And they had a certain name attached to them. They won a contract. The contract was to be stocked in 400 Sainsbury's stores. You can imagine that everyone was absolutely delighted. And a week later, I got a call from the founder and she said, Emma, you're not going to believe this. But because of the profile we've had from winning this pitch up competition, a huge company has got in touch with us and said, you can't use that brand. We own the trademark and the copyright to that brand. This company had to completely rebrand.

15:19It was called Yolly Lolly. It is not called that anymore. Anyway, it's a happy ending to the story. Sainsbury's kept the contract. they renamed it they're now selling everywhere the store message in that story is when starting out this is stuff that you can do for free go on to the intellectual property office website which is ipo.gov.uk and you can just search don't you don't have to put your brand idea in and just search to see if anyone else has got it so you can search for trademarks you put in the name if somebody else has got it that probably tells you okay somebody else is using it if they haven't you can do a first form of protection for free which is called getting a copyright so no cost for that if it's your own name you can't be stopped from using it can you well uh you must have seen the story of joe malone who sold her company to estee lauder and now cannot use her name i know it's because that's because she sold yes but if you start your business as you know with your own name if my name was yolly lolly or whatever and i started the business they can't stop me can they well i still think it's good to get it protected i'm not encouraging people to change their name by deed poll to do this but i mean it's sort of well case in point well it's an interesting i think if it's your own name it's hard for i still think it's worth having it yeah okay so well i agree i mean if you can protect your own name even better but uh i agree and so much that can be done and it's not that hard to find out is what you're saying Absolutely.

16:50So what's that website again? IPO.gov.uk, where you can search and register trademarks. So if you decide to go ahead and register a trademark, it's about£170 to do that. But you can register copyright for free. So you've given lots of useful pointers here about how to get insurance, how to get set up and started informing HMRC, getting the right trademarks. Thank you for that. Now, if you want to bootstrap a new business, how much money do you need to start a business? Let's talk a little nitty gritty now. Not much. Not much. What was not much? And it depends on the business. But this has been, I think, the other breakthrough as to why we're seeing so much enterprise in the UK is because you can now start a business for less than£100.

17:37As long as you have an internet connection. So you need Wi-Fi, some kind of internet connectivity. But of course, you can get that for free in different places. is to set up. So what lots of people are doing, setting up on social media platforms, no cost in order to do that. So of course, maybe if you're buying stock, you might need some money. But to test a concept, this concept of a minimum viable product, most businesses are starting on a bootstrap of a budget because they want to test activity first. And this is always my advice is if you can, bootstrap for as long as you can, because you as the founder gets to understand the commercials of the business, what's selling, what's not selling.

18:21So for most businesses, and this is where it goes back, dare I say, James, to having written that business plan at the beginning. If you do a cash flow forecast for your startup at the beginning, you can look at your sales, less the costs. And of course, you're going to be informed, do I need stock? Am I putting time I'm in for my own salary or am I still holding on to my day job? I don't have to pay myself whilst I'm running it as a side hustle. Do I need to pay others? Are there costs of premises? And of course, lots of startups tend not to have premises. So amazing businesses starting on a bootstrap of the budget to give themselves time to see how the revenue comes in.

18:59And then maybe at that point, they say, right, now I'm building, maybe I'll look to take on funding in order to grow what I can see is working well at this point i should stress that our entrepreneurs fund the all about business entrepreneurs fund is supporting young entrepreneurs up to the age of 26 who've actually started and have sales and have customers with grants of 20 000 pounds amazing so grant not a loan so that is to help them scale their business and anyone who's interested can apply on read.com forward slash entrepreneurs so that's to help you go beyond that first stage when you do maybe need to spend some money.

19:35So we really want to support entrepreneurs in that way. That is wonderful. Do you mind if I mention one other source of funding? Oh, no. Well, there are lots, but please do. There's lots, but a particularly popular one, and in fact, when it was first launched over a decade ago, it was focused on 18 to 24-year-olds, but it's now for people of all ages, is start-up loans. So this is run by the British Business Bank. So it's government funding, but it's a personal loan. So it's, I mean, a grant is amazing because you don't have to pay it back. No, it is a grant, not a loan. Yeah, this one you have to pay back.

20:05So it's a personal loan and it's up to£25 ,000 per director. So if you have a company that's got four directors in it, you can essentially borrow up to£100 ,000 for the company. Start-up loans have just extended. It was for businesses who have been trading up to three years, but they've just extended that for up to five years. So if you're a start-up, you've been trading up for five years, you can access start-up loans and you get money plus a mentor that comes with it. So it's quite a popular place. And what's the interest rate? Do you know? It's at 7 % now. 7%. So not punitive, but not cheap.

20:41Correct. Yeah. So that's useful to know as well. Thank you for sharing that. Do you think founders overestimate how much capital they need? I think they actually underestimate. So this is one thing that... They write out of money, you mean? Well, it's this old sort of adage that what founders tend to do is overestimate on the sales and underestimate on the costs. So therefore, a piece of advice is to kind of almost turn that around. So if you underestimate your sales, you're always going to be happy because you're going to be making more than you thought. And if you overestimate on your costs, you're also going to be happy because it's costing you less than you thought.

21:18So again, this is where it comes back to having an accountant. Accountants are brilliant at essentially playing devil's advocate. So if you say, I think I'm going to sell this much and my costs will be this, an accountant will probe that and say but have you considered national insurance have you considered you might need rent at six months in so good to get advice but yeah always be careful i would say to over egg on the cost because then you're going to come out happy if you underspend i mean the difference between in my experience costs and sales is that the costs are more certain than the sales i mean the sales are less predictable absolutely if you make a commitment on costs to spend a certain amount of money non-negotiable it usually happens and that's why i don't like giving people budgets because they'll spend it so if you say do this as economically as possible then they might be more creative around what it costs and and dare i say this is kind of what brings me into my current day job is uh when it comes to kind of costs the other thing we're super keen is that small businesses actually get paid on time when they are sending out invoices so as you say sales can be uncertain but what we want to make absolutely certain is if you have made sales you actually get paid for it.

22:27I think that should apply to all businesses whatever their size should be paid punctually. I don't like the abuse that occurs when big businesses hold back paying people who've delivered a good service or products. Well you'll hopefully be happy to know we're taking it through legislation so we've got a bill going through parliament in fact tomorrow it gets its second reading in the House of Lords, which would move the UK economy to 60 day maximum payment terms. For everybody. For everybody. Excellent. I think that's a really good thing. I think it's been abused far too long by certain people.

22:59I won't name them. Not on this podcast. You know who you are. So all right, let's carry on. So what's the difference? I mean, I know the answer to this question. And a lot of people listening will know the answer to this question. But I think it's important to explain it. What's the difference between profit and cash flow. Well, profit is what you're making at the end of the day, which is your cash coming in less your costs. But as everybody says, profit is vanity, cash is sanity. I think you have a different interpretation of that. Yeah, I do. I do. Because I was always taught that the sales number was vanity, the profit number was sanity, but cash is reality.

23:40And I do agree with that. Because you need the cash to pay people at the end of the week. You need the cash in the bank, which, dare I say, brings us back to prompt payment again, is that you can have the invoices out so it looks like you're a good business, because from a revenue perspective, you put the invoices out. But if the cash is not in the bank, it can be that one of the things that brings companies down is bad cash flow. And so the quicker we can get that cash collected and in the bank, the more that means that small businesses are able to invest it to grow. That's so important, what you just said.

24:10And it's so important to emphasise because you can be making a profit and go bust. by running out of cash. And I've seen that happen quite a lot, especially coming out of recessions, where people run out of cash. And we're in a tough environment. So coming out of recession, if your business grows fast, you could be making a profit and run out of cash. So we saw this going into COVID. And I was running Enterprise Nation at the time. And going into the pandemic, and again, we have not got statistical evidence on this. But my anecdotal view is that businesses that had a six-month cash cushion in their bank were the businesses that came out of the pandemic so it was those that had got that just cushion there who could essentially trade through those without it sadly just weren't given the time to keep on trading or had to go and raise more money somewhere else i mean in our business there were certain companies that had to go and raise more money from shareholders but it's interesting to me because i've always thought that cash is the oxygen of business you know you can't go along as a person without oxygen and a business can't go along without cash and i sounds paranoid but i look at our daily cash figures morning and evening i've done for 30 years and it's one of the things that we're really keen to see in the uk is small business owners admittedly are very busy people but some research has just come out from one of the cloud accounting providers uh saying that um a majority of business owners in the last month didn't know if they were profitable because maybe they're kind of not keeping their eyes on the figures.

25:44And I hear this a lot from business owners. And so much of what we've said in these two episodes, James, is that people start a business based on their passion. So, of course, they do in the business the thing that they love to do. And when it comes to the figures, that can be seen as the businessy bits that they don't enjoy doing. But of course, it's so critical as you say every day to be on top of the figures because if you look in the account and it's not there as you say that's sadly a reason yeah i think you should be super aware of how much cash you've got for sure i mean maybe that you can work out profitability intermittently but i think cash is a daily check that'd be my advice anyway so um last question in this section what does bootstrapping a business really mean?

26:31Well, the actual definition of bootstrapping is pulling yourself up from your bootstrap. So I think that's what bootstrapping is all about, is building something from the ground up with as little resource as possible until you've proven that it can work and then you go out and you can scale it. So bootstrapping to me is about entrepreneurs using all the entrepreneurial energy in their body to beg, borrow and barter. So when they're starting out to kind of get the resources that they need for as low a cost as possible so they can conserve cash. And as I say, what that does is it gives you time to understand your business, to know what works.

27:11And when you know what works, when you know I am solving this problem with this solution, then that's investable. Then you'll have funders wanting to back you. And if it is your choosing, that's when you can go and get surrounded by experts, put finance into your business and grow that business. Well, that's a fantastic segue into what will be episode three, which will all be about growing your business. Thank you very much, Emma. That's great.