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Face your finances

Ian Cass, managing director at business support organisation Forum of Private Business, encourages shop owners to get closer to their finances

How competitive is it to set up a small business in today’s climate?

It’s never been easy to set one up, but when you’re in the service industry it’s even more difficult. The costs generally for small business owners - in terms of both money and time - have been getting a lot greater in recent years. You’ve got to consider additional things nowadays like the Living Wage and auto enrolment for pensions, while HMRC is looking at moving tax all digitally, so there are so many more things taking an owner/operator away from what they should be doing, which is running and developing their business.

How likely or unlikely is a small business to succeed today?

We know that the first three years are critical and, if a business can get through that, it’s off to a great start. Generally speaking though, about 80% of entrepreneurs starting a business fail in the first 18 months and 50% of start-ups fail after operating for four years.

Why is the failure rate so high?

Firstly, it’s not as easy as many people think to open and run their own business and, secondly, consecutive governments are placing more and more burdens on SME’s while taking away some of the rewards that were there. For example, when you start out in business you don’t always know how much to pay yourself as you don’t know how much is going to come in. What you used to be able to do was, at the end of the year if the business had done well, take a dividend and you would get a tax break on it, but the government closed the window on that. So there doesn’t seem to be a lot of reward for displaying entrepreneurial spirit at the moment but an awful lot of burden being placed on small businesses.

What is the solution?

The government needs to get closer to the small business community. It treats all businesses as one size fits all and the reality is that small business makes up about 99% of British businesses in the economy and we have different issues that we face and different opportunities. One of the main ones is that the majority of us are owner/operated so the person that opens the business tends to be the person that deals with everything. Big businesses, on the other hand, have legal departments and HR teams so a lot of the changes the government make don’t have much impact, but for small businesses those changes can have a huge impact.

What can a small businesses owner, like a fish and chip shop operator, do to get a good foothold?

The key is to get your research done at the start, you honestly can’t do enough research. Get your pricing right, be cheeky and talk to other chip shops to find out what they are doing. Look at the prices others are charging and know who you are going to be selling to. If you’re near an office and you’ve got people going past on a Friday lunchtime, they are the people you want to be marketing to. You can’t just go in, open up and expect everything to go well these days.

You mentioned pricing, how important is it that fish and chip shops get this right?

It’s vital. You’ve got to be sure you’re covering all your costs because, at the end of the day, you are in this to make a living, you’re not a charity. It’s surprising how a lot of people miss the small things. Say, for example, you don’t allow for the wooden forks, that 20p profit suddenly becomes 15p. The number of people I see setting up small businesses that are surviving but not making anything is startling.

What costs need to be taken into account?

Business rates and rentals, capital equipment, decorating, staff, all items involved in the production process, so your cooking oil, fish, paper for wrapping, bags, everything should be written down. We call it COGS - cost of goods and services. If you’re not sure of a price, overestimate it and allow yourself a margin. Even once you’ve done that, add in a 5% contingency to allow for a mistake. Then make sure those numbers stack up. It’s a lot easier to set your prices slightly too high and then reduce them than it is to set them too low and realise you didn’t allow for a couple of costs. If you do then start trading and you find business is flying and you can buy in bigger quantities which brings the price down, fine, you’ve got a margin there that you can play with and you can start offering deals. There’s nothing worse than underestimating things, your margin being tiny and, before you know it, you’re not making anything.

How important is it for shop owners to be aware of cash flow?

It’s so important as the life blood to the business is cash flow. There are some business owners that are not very close to that, they leave it all to the accountant, and I’m a great believer you should have a level of expertise so you can see your profit and loss, you can see downturns and upturns in trade. You’ve got to understand your books to be in control of your business. You can actually then start getting quite sophisticated in your business as you know when you’ve got peak people through your door and you know when you might want to get more in. If Friday and Saturday are fine but you’ve got a couple of nights a week that are a bit slow you don’t want to be running a special offer on a Friday but you might on a quiet Wednesday. It just puts you in control.

What advice would you offer to help fish and chip shops stay in control of their cash flow?

Firstly, I would say don’t try and deal with it completely on your own, so get a good accountant. If you can’t afford an accountant, look for a local bookkeeper. And then I would say keep a set of books yourself for eight or nine months. This is something I was told to do when I started up in business and, yes, it takes up time, but it means you have an understanding of what your accountant is talking about. And that gives you control over your business. There are some really good computer programmes available that can help you (HMRC is trying to get everyone to go digital anyway), but if you can do some of it yourself you’ll understand the money that’s going through the business and, because that is your main area of control, that’s how you’ll spot a problem should one arise.

How do you advise shops deal with VAT

If you’re annual turnover is over £85,000 then you’ll need to be VAT registered. If you’ve been paid the VAT, you’re going to get charged it. There’s no escape from it. In essence we are tax collectors for the government. If you put aside 16% of your taxable turnover, when the tax bill comes in, it’s there. There’s no point thinking there’s loads of money coming in because some of that belongs to the government. It’s not yours in the first place and that’s how shop owners need to look at it. And, of course, build VAT into your pricing at the start - it should be one of the COGS I mentioned earlier.

Where can businesses get help with matters to do with tax?

Again, a good accountant, but I would also say speak to HMRC. A lot of people avoid them like the plague but they are the best experts in the whole area of tax. And, remember, if you are doing something wrong HMRC is going to see it - especially with the move to digital tax - so don’t be afraid to ask for help, they will make sure you get it right from the start.

You’ve talked a lot about digital tax, what is it and will it be a good thing?

The government wants business-related transactions to be recorded digitally so everyone will have their own tax record online and will be able to see in real time where they are in terms of their VAT return - and eventually income tax and national insurance too. It means there should be no surprises. If they get it right it could be very good as it would mean you would be able to do a lot of the work yourself rather than relying on an accountant, so you may be able to cut that cost out.

There were a lot of scare stories initially with businesses thinking there were being asked to do a quarterly tax return when it was actually a quarterly report, which if you’re doing your VAT it’s the same information, so it’s very easy to give that information. The government is currently asking small businesses to get involved in a test to make sure it gets it right.

Do you have any final advice?

Be part of a community and get a support network around you. Think about joining a local trade association, you might even want to join the Forum, but get involved. Opening a fish and chip shop is hard work and when times are hard, there’s nothing better than asking someone in the trade what they are doing. Even go and say hello to the other traders in your area and see how they are doing. Don’t be isolated.

Forum of Private Business 01565 626 001

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