Generally, venture capitalists are looking for businesses with high growth potential. They are not looking for short-term returns, but prefer to work with the entrepreneur to secure substantial long-term returns on their investment.
Outside investment can bridge an important gap in your initial finances. For example, when Anita Roddick was putting together money to start her first shop in Brighton she sold a share in the company to a local garage owner for £4,000 - the share is now worth £95 million. The garage owner is one of many people with sometimes possess substantial amounts of money which they would like to invest in new businesses. Research by the ESRC, DTI and NatWest suggests that there are 200,000 to 400,000 informal investors (labeled 'business angels') who would like to invest between £200,000 and £500,000 in unquoted companies.
Outside investors fall into a number of categories.
- Virgins. Those with no experience. It may seem a good idea to receive backing from an elderly spinster in Eastbourne who is prepared to lend you her life savings. But it is unlikely that such an investor will be able to offer constructive support or have a full understanding of what they are letting themselves in for. They may begin to fret early on and put pressure on for a return on their investment. Managing them can become as large a headache as managing the business.
- Wealth-maximizers. These investors want to make the most of their wealth. Ideally the source of their wealth is a business related in some way to your own.
- Income-seekers Rather than putting their money in building societies these investors seek a steady source of income through investing in a small business. They may become disenchanted when the returns fail to match the consistency or security of those from savings accounts.
- Corporate venturers. 'Corporate venturing' involves large companies investing in private businesses. While popular in the United States, it is largely untested in the United Kingdom. Engineering company. JCB recently invited designers, inventors and companies with under-funded engineering projects to contact JCB with ideas which required backing. JCB has suggested that up to £1 million could be available. Despite such offers, corporate venturing has a poor track record of converting offers into cash for small businesses.
- Entrepreneurs. These investors make their living from using their instincts to spot business opportunities. Success can depend on establishing a close and mutually beneficial relationship with them. It tends to be highly personal.
- Dealing with the tax man. Anyone whose job entails taking money from you is automatically associated with a faceless uncaring bureaucracy. This is understandable. Tax offices are generally huge buildings filled with bulging and ragged files. Somewhere, one has your name on. This is not a comforting thought but, unless we believe certain politicians, taxation is unlikely to be abolished.
There is no avoiding dealing with the tax man or woman. Death and taxes are still certainties. In fact, as soon as you begin your business you have to inform your local tax office as well as the local Social Security Office. As a self-employed person you are responsible for your own tax and National Insurance. For those used to working for a company where tax and National Insurance are handled by another department this can be a daunting prospect.
From Day One you have to keep 'full and accurate records and proper accounts'. If your turnover is less than £15,000 you don't have to submit detailed accounts - a summary is acceptable - but you still need to be able to back this up with records of all your business transactions if necessary. The summary should show your turnover, purchases and expenses, and your net profits. It is worth examining the money you spent before actually starting the business. You might be able to claim some tax relief on this if it would have been an allowable expense once your business had started. (This does not, however, apply to capital expenditure.)
Not preparing your accounts means that the Inland Revenue will estimate your income and charge you tax on this amount. This could be way in excess of the amount you actually earned, so it is worthwhile avoiding. Similarly, if you fail to pay your tax on time you begin to pay interest.
If you employ people you may also have to deduct tax and National Insurance under the Pay As You Earn system if the person earns over a certain amount.
The complexity of your accounts depends largely on the complexity of the business. The basic information you need to include is:
- takings
- expenses - all your business expenses including rent, rates, lighting, heating, insurance, repairs to premises, fixtures and fittings, car running costs, gross wages and salaries, stationery, postage, telephone and many more. In some instances, such as using your car or telephone, there will be a split between personal and business use. You need to keep records so the split between the two can be accurately calculated. If you determine that 60 per cent of your phone calls are for business, then this amount of your bill and rental is a legitimate business expense.
- any private money introduced into the business
- cash taken from the business - the money you have extracted to pay yourself
- details of checks drawn from your business account and what they were for
- market value of any goods taken from the business if they weren't paid for at the correct retail price
- money owed to you by customers at the end of the accounting period
- amounts owed by you to suppliers.
When the accounting period comes to an end you may well have stocks, raw materials or partly completed work. This needs to be accounted for.
The tax situation changes almost constantly. The basic principles are: be honest, be able to back up figures with receipts and, if you are unsure about something, contact your local Tax Office or your accountant.
