How sole traders go for growth
In the second of a series of articles looking at the issues facing micro-business, LSCA Business Board member Vicky Andrew looks at how sole traders can expand their businesses.
In a previous article for London Accountant, Diverse micro-businesses face challenges together, I reviewed the position of micro-businesses in the UK, highlighting issues such as modernisation and late payment. This month I’m looking at expansion.
Going for growth
There is a limit to the amount of net profit after tax a sole trader without staff can earn. There are only so many hours in the week, many of which disappear in administration time, including finding new customers.Growing a business from a one-person home-based operation needs an owner-manager able to adjust to new ways of operating, able and willing to get out of their comfort zone, and prepared to accept a certain level of risk. They need to be able to answer the question: “Why am I doing this?”
Roughly three out of four businesses in the UK never make the leap.
Bad growth versus good growth
Growth that happens too quickly and in an uncontrolled way can lead to various undesirable consequences: losing touch with customers and employees; losing control because of the amount and speed of change; becoming less profitable for more effort, because costs are increasing more than turnover; underestimating the amount of cash needed to fund growth: for a manufacturing business, this could be as much as 20-25% of projected additional sales.
Successful growth needs careful planning, both short-term and long-term, together with control and regular review.
People for growth
In order to scale up, the business owner will need other people working for them, who will (hopefully) generate more turnover than the costs of employing them. The downside is the additional administration involved in recruitment, payroll and human resource management.
Initially, if an owner-manager is worried about being able to guarantee regular work, using freelancers or subcontractors is an option, although this is subject to IR35/HMRC rules about off-payroll working. If a freelancer is working regularly in the business, even if not full time, the owner-manager needs to consider employing them.
Before starting the recruitment process, thought should be given to what the business actually needs; an administrator, salesperson or someone to produce the product or deliver the service? Funding may be needed for an employee until that person can generate additional sales and actual money in the bank.
Funding for growth
Growing a business will inevitably involve additional cost - staff, premises and equipment - much of which will be incurred before funds are received from additional sales.
Every business, however small, needs a business plan, whether or not they are currently looking for funding. The plan needs to be reviewed and adjusted on a regular basis.
A good plan will highlight the amount and timing of additional funding required. Traditional banks may not be willing to lend to a small business, which may fall foul of their risk models and systems (“computer says no”).
The owner-manager may need to consider alternative forms of finance; for example family and friends or crowdfunding. There are also new “community banks” in the pipeline, which aim to view small businesses more sympathetically.
The majority of sole traders decide that they are happy as they are, but for those who decide to scale up, the rewards of expansion can far outweigh the risks.
Vicky Andrew is a London member of ICAEW Council, a member of the LSCA Business Board and director of Millcove Solutions, trading as Vicky Andrew and Associates, a consultancy providing advice to small businesses and accountancy firms throughout the UK.
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