Once you have decided to start your own design practice you have taken the first bold step down a road that can lead you to fame and fortune. However without good management this first bold step can be over a precipice to disaster. In writing this series I assume (maybe wrongly) that you have your area of expertise identified, and that you have a client or two. I dealt with fee charging in outline in the Guide to Hotel Design Pt.2, but will go into it in more depth in the future in this occasional series. You must register your business as a limited company and take out Professional Indemnity Insurance to protect yourself from liability if things go wrong. If you are not a limited company then you can be personally held responsible for the debts of your company. In the 1980\’s when interest rates were raised to 16% I found myself selling house, shares, cars etc. to pay business debts from my partnership. Bad financial advice led to us trading simply as a partnership not a limited company. Don\’t get caught in the same way, get limited – your liability (unless you behave criminally or with intent to deceive) is the share capital, usually £1.
When you start in business you need to be able to finance the first few weeks, or maybe even months. Most people line up a Client before they go on their own. *Be careful – your contract of employment with an employer may include a non-compete clause, and clauses on copyright which mean you can neither take a client from your employers\’ business nor help yourself to unlicensed copies of your employers\’ software without risk of prosecution and possible imprisonment.*
When proposing a fee to the Client you should understand several things:-
1. You may not be able to resolve issues between you, or come up with a satisfactory solution to problems, so you can get fired (no employment protection here). So your fee proposal should make sure payments are made to cover work to date
2. It is rare for Clients to make immediate payment, and time between invoice and money in the bank can be lengthy
3. VAT etc. must be paid on schedule. HMRC takes the view that tax you collect on their behalf is their money and you cannot hang on to it without risking prosecution. I\’m sure the same can be said of state taxes in the USA or elsewhere
So run a tight financial ship, do not give in to temptation when the big cheques come in!
You can see from the attached downloadable cashflow example how you can look at fee income predictions in harness with expenditure to predict that status of your bank account. You should of course do a monthly reconciliation of the bank account against your cashflow forecast (yeah, like you are going to have time for that – not!). Without a formal reconciliation just a check at the end of the month of the rough figures should tell you whether all is under control or not.
Most find the one flexible element in running a business is their own salary, but remember when struggling that you are in this to make money, so your income needs to be a focus. By all means hold back if you are struggling but don\’t forget your fixed expenses such as food, rent etc. demand an income.
You will find using this system the assistance you need from a financial guru is limited. It can be advisable to take a minimum income and the remainder in dividends from the declared profit at year end. You need to submit accounts to the State annually. The advantage of taking a dividend is that it is paid without deduction of PAYE and at a fixed tax rate.
©Patrick Goff September 2012
